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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 0-17162
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KEY PRODUCTION COMPANY, INC.
A Delaware Corporation IRS Employer No. 84-1089744
One Norwest Center, 20th Floor
1700 Lincoln Street
Denver, CO 80203-4520
Telephone Number (303) 837-0779
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.25 PER SHARE
Indicate by check mark whether the registrant (1) has filed all annual,
quarterly, and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for at least the past 90 days. Yes [X]
No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
Aggregate market value of the voting stock held by non-affiliates of
Key Production Company, Inc. as of March 13, 1995.......... $42,096,362
Number of shares of Key Production Company, Inc. common stock
outstanding as of March 13, 1995............................ 9,171,999
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its 1995 Annual Meeting of
Stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
DESCRIPTION
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<C> <S> <C>
PART I................................................................... 1
1. BUSINESS........................................................... 1
2. PROPERTIES......................................................... 3
3. LEGAL PROCEEDINGS.................................................. 5
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 5
EXECUTIVE OFFICERS OF THE REGISTRANT............................... 5
PART II.................................................................. 6
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 6
6. SELECTED FINANCIAL DATA............................................ 6
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 6
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 11
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 27
PART III................................................................. 27
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*................ 27
11. EXECUTIVE COMPENSATION*............................................ 27
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*.... 27
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 27
PART IV.................................................................. 28
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.... 28
</TABLE>
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* This information is incorporated herein by reference from the Company's Proxy
Statement for its 1995 Annual Meeting of Stockholders.
All defined terms under Rule 4-10(a) of Regulation S-X shall have their
statutorily-prescribed meanings when used in this report. Quantities of natural
gas are expressed in this report in terms of thousand cubic feet (Mcf), million
cubic feet (MMcf) or billion cubic feet (Bcf). Oil is quantified in terms of
barrels (bbls), thousands of barrels (Mbbls) and millions of barrels (MMbbls).
Oil is compared to natural gas in terms of equivalent thousand cubic feet
(EMcf). One barrel of oil is the energy equivalent of six Mcf of natural gas.
With respect to information relating to the Company's working interest in wells
or acreage, "net" oil and gas wells or acreage is determined by multiplying
gross wells or acreage by the Company's working interest therein. Unless
otherwise specified, all references to wells and acres are gross.
<PAGE>
PART I
ITEM 1.BUSINESS
GENERAL
Key Production Company, Inc. (Key or the Company) is an independent oil and
gas company engaged in oil and gas exploration, development and production in
the continental United States. The Company's exploration interests are spread
over 13 states with primary focus areas in the Rocky Mountain region, the
Anadarko Basin of Oklahoma and the Gulf Coast. The Company was incorporated in
Delaware on June 22, 1988, and maintains its corporate offices in Denver,
Colorado. Key opened regional exploration offices in Tulsa, Oklahoma and
Houston, Texas in October 1994 and March 1995, respectively. The Company's
common stock trades on The Nasdaq Stock Market under the symbol KPCI.
BUSINESS DURING 1994
Production during 1994 totaled 504 Mbbls of oil and 4,522 MMcf of gas. Oil
and gas production increased 142 percent and 18 percent, respectively, as a
result of the acquisition of producing properties on April 29, 1994, and due to
production from new drilling. Product prices averaged $14.27 per barrel of oil
and $1.98 per Mcf of gas.
The majority of Key's spot market gas production is marketed by Apache
Corporation (Apache) and is sold to Natural Gas Clearinghouse (NGC). Sales to
NGC accounted for 38 percent of Key's 1994 oil and gas revenues. Eighty-Eight
Oil Company (Eighty-Eight Oil) was the largest purchaser of Key's crude oil
production. Approximately 19 percent of 1994 revenues resulted from crude oil
sales to Eighty-Eight Oil. No other single purchaser accounted for more than 10
percent of revenues in 1994.
Key has working interests in approximately 1,258 gross (89 net) wells located
primarily in the Anadarko Basin of Oklahoma, Wyoming, southern Texas, Louisiana
and offshore Gulf of Mexico. In addition, Key has royalty or overriding royalty
interests in approximately 60 properties in the Midcontinent region,
60 properties in the Gulf Coast region and 1,750 properties in the Rocky
Mountain region. At year end, Key held approximately 90,800 net acres of
developed leasehold located primarily in Oklahoma, Wyoming, Texas and
Louisiana. Key also held approximately 533,000 net acres of undeveloped
leasehold located in the Rocky Mountain region.
In 1994, the Company spent $23 million on acquisitions of producing and non-
producing oil and gas properties and $6.9 million on exploration and
development activities. Key participated in drilling 45 gross (6.25 net) wells
in 1994. During 1994, 38 gross (3.95 net) wells were completed as producers and
7 gross (2.29 net) wells were dry. Sales of producing properties were not
significant in 1994.
COMPETITION
The oil and gas industry is highly competitive. As an independent oil and gas
company, Key must compete against companies with substantially larger financial
and other resources for a variety of opportunities including reserve and lease
acquisitions and marketing agreements.
NATURAL GAS AND OIL PRICES
Key's gas price averaged $1.98 per Mcf in 1994, $.21 lower than the prior
year average of $2.19 per Mcf. Key's average realized oil price fell to $14.27
per barrel in 1994, down from $15.36 in the prior year. Key's business will
continue to be affected by future changes in domestic and international oil and
gas prices. No assurances can be given as to the trend in, or level of, future
oil and gas prices.
RESERVE VALUE CEILING TEST
Key reviews the carrying value of its oil and gas properties on a quarterly
basis under the full cost accounting rules of the Securities and Exchange
Commission (SEC or the Commission). Under the full cost
1
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accounting rules, capitalized costs of oil and gas properties may not exceed
the present value of estimated future net revenues from proved reserves,
discounted at 10 percent, plus the lower of cost or fair market value of
unproved properties, as adjusted for related tax effects and deferred tax
reserves. Application of this rule generally requires pricing future revenues
at the unescalated prices in effect at the end of each fiscal quarter and
requires a write-down if the "ceiling" is exceeded, even if prices declined for
only a short period of time. If a write-down were required, the one-time charge
to earnings would not impact cash flow from operating activities. Key did not
record any write-downs in the three years ended December 31, 1994.
REGULATION OF OIL AND GAS
Key's exploration, production and marketing are regulated extensively at the
federal, state and local levels. Oil and gas exploration, development and
production activities are subject to various laws and regulations governing a
wide variety of matters. For example, the states in which Key produces oil and
gas have statutes or regulations addressing production practices that may
affect Key's operations and limit the quantity of hydrocarbons Key may produce
and sell. Other regulated matters include the marketing and transportation of
oil and gas and the valuation of royalty payments.
Among other regulated matters on the federal level, the Federal Energy
Regulatory Commission (FERC) regulates interstate transportation of natural gas
under the Natural Gas Act. Key's gas sales are affected by regulation of
intrastate and interstate gas transportation. In an attempt to promote
competition, FERC has issued a series of orders which have significantly
altered the marketing and transportation of natural gas. To date, Key has not
experienced any material adverse effect on gas marketing as a result of these
FERC orders. However, the Company cannot predict what effect subsequent
regulations may have on its future gas marketing.
ENVIRONMENTAL
Key, as an owner of interests in oil and gas properties, is subject to
various federal, state, and local laws and regulations relating to discharge of
materials into, and protection of, the environment. These laws and regulations
may, among other things, impose liability on the lessee under an oil and gas
lease for the cost of pollution clean-up resulting from operations, subject the
lessee to liability for pollution damages, require suspension or cessation of
operations in affected areas and impose restrictions on the injection of
liquids into subsurface aquifers that may contaminate groundwater.
Key has made and will continue to make expenditures in its efforts to comply
with these requirements, which it believes are necessary business costs in the
oil and gas industry. These costs are inextricably connected to normal
operating expenses such that the Company is unable to separate the expenses
related to environmental matters. However, the Company does not believe any
such additional expenses will materially affect its business. Although
environmental requirements do have a substantial impact upon the energy
industry, generally these requirements do not appear to affect Key any
differently or to any greater or lesser extent than other companies in the
industry.
The Company is not aware of any environmental claims existing as of December
31, 1994, which would have a material impact upon the Company's financial
condition or the results of operations. Key does not believe that compliance
with federal, state or local provisions regulating the discharge of materials
into the environment, or otherwise relating to the protection of the
environment, will have such an impact.
EMPLOYEES
On December 31, 1994, Key had 21 full-time employees.
OFFICES
Key's principal executive offices are located at One Norwest Center, 20th
Floor, 1700 Lincoln Street, Denver, Colorado 80203-4520.
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ITEM 2.PROPERTIES
PRODUCTIVE WELLS AND ACREAGE
The number of productive gas and oil wells in which Key has working interests
as of December 31, 1994, is set forth below. All of these properties are
operated by other owners.
<TABLE>
<CAPTION>
GAS OIL
---------- ----------
GROSS NET GROSS NET
----- ---- ----- ----
<S> <C> <C> <C> <C>
Midcontinent.............................................. 289 11.4 32 1.8
Gulf Coast................................................ 125 12.6 47 4.1
Rocky Mountains........................................... 102 3.9 663 55.2
--- ---- --- ----
516 27.9 742 61.1
=== ==== === ====
</TABLE>
In addition, Key has royalty or overriding royalty interests in approximately
60 properties in the Midcontinent region, 60 properties in the Gulf Coast
region and 1,750 properties in the Rocky Mountain region. As of December 31,
1994, Key held approximately 90,800 net developed acres. Approximately
70,500 net acres are located in the Rocky Mountains with the remainder located
in the Midcontinent and Gulf Coast regions.
GROSS WELLS DRILLED
The following table sets forth the number of wells drilled during 1994 and
1993 in which the Company participated. Drilling in 1992 was not significant.
<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENTAL
-------------------- --------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
1994
Midcontinent.......................... -- -- -- 16 1 17
Gulf Coast............................ -- -- -- 10 1 11
Rocky Mountains....................... 1 2 3 11 3 14
--- --- --- --- --- ---
1 2 3 37 5 42
=== === === === === ===
1993
Midcontinent.......................... -- -- -- 18 -- 18
Gulf Coast............................ -- -- -- 1 -- 1
Rocky Mountains....................... -- -- -- 8 -- 8
--- --- --- --- --- ---
-- -- -- 27 -- 27
=== === === === === ===
</TABLE>
At December 31, 1994, 9 gross (.95 net) wells were in the process of being
drilled.
UNDEVELOPED ACREAGE
As of December 31, 1994, Key held an interest in approximately 533,000 net
undeveloped acres located in the Rocky Mountain region.
3
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PRODUCTION AND PRICING INFORMATION
The following table describes, for each of the last three fiscal years, oil
and gas production and pricing data for the Company.
<TABLE>
<CAPTION>
AVERAGE
PRODUCTION AVERAGE SALES PRICE
OIL GAS COST -------------------
YEAR ENDED DECEMBER 31, MBBLS MMCF PER EMCF PER BBL PER MCF
- ----------------------- ----- ----- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
1994................................ 504 4,522 $.68 $ 14.27 $ 1.98
1993................................ 208 3,822 $.63 $ 15.36 $ 2.19
1992................................ 352 6,224 $.69 $ 17.18 $ 1.83
</TABLE>
RESERVE VALUE INFORMATION
The estimated proved oil and gas reserves of Key, as of December 31, 1994,
1993 and 1992, and the standardized measure of discounted future net cash flows
attributable thereto at December 31, 1994, 1993 and 1992, are included in
Supplemental Oil and Gas Disclosures to Financial Statements appearing on
pages 24 through 26 of this Form 10-K. Supplemental Oil and Gas Disclosures
also include Key's net revenues from production (including royalty and working
interest production) of oil and natural gas for the three years ended December
31, 1994.
Future reserve values are based on year-end prices except in those instances
where the sale of gas is covered by contract terms providing for determinable
escalations. Operating costs, production and ad valorem taxes and future
development costs are based on current costs with no escalations.
<TABLE>
<CAPTION>
PRESENT VALUE OF ESTIMATED
FUTURE NET CASH FLOWS BEFORE
ESTIMATED FUTURE INCOME TAX
NET CASH FLOWS (DISCOUNTED AT 10 PERCENT)
------------------------ -----------------------------
PROVED PROVED
YEAR ENDED DECEMBER 31, PROVED DEVELOPED PROVED DEVELOPED
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(IN THOUSANDS)
<S> <C> <C> <C> <C>
1994..................... $77,106 $72,404 $ 51,328 $ 49,015
1993..................... $54,872 $54,323 $ 38,577 $ 38,211
1992..................... $68,730 $67,572 $ 43,662 $ 42,913
</TABLE>
Estimated future net cash flows at December 31, 1994, are expected to be
received as shown in the following years:
<TABLE>
<CAPTION>
PROVED
YEAR ENDED DECEMBER 31, PROVED DEVELOPED
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(IN THOUSANDS)
<S> <C> <C>
1995.......................................................... $12,602 $12,683
1996.......................................................... 9,761 10,567
1997.......................................................... 10,557 9,226
Thereafter.................................................... 44,186 39,928
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Total......................................................... $77,106 $72,404
======= =======
</TABLE>
No major discovery or other favorable or adverse event is believed to have
occurred since December 31, 1994, which would cause significant change in the
estimated proved reserves reported herein. The above estimates are based on
year-end pricing in accordance with Commission guidelines and do not reflect
current prices. Since January 1, 1994, no oil or gas reserve information has
been filed with, or included in any report to, any federal authority or agency
other than the SEC and/or the Energy Information Administration.
4
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ITEM 3.LEGAL PROCEEDINGS
The Company is not subject to any pending litigation that, in the opinion of
the Company's management, will materially affect the financial position or
results of operations of the Company.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANCIS H. MERELLI, 59, has been chairman of the board of directors,
president and chief executive officer of the Company since September 9, 1992.
From July 1991 to September 1992, Mr. Merelli was engaged as a private
consultant in the oil and gas industry. Mr. Merelli was president and chief
operating officer of Apache Corporation, and president, chief operating officer
and a director of Key from June 1988 to July 1991, at which time he resigned
from those positions in both companies. He was president of Terra Resources,
Inc. from 1979 to 1988.
MONROE W. ROBERTSON, 45, has been with the Company since September 10, 1992.
Since February 1994, he has served as senior vice president and corporate
secretary and prior to that time as vice president and corporate secretary.
From August 1988 to July 1992, he was employed by Apache Corporation in various
capacities, the most recent of which was director of operational planning. From
1986 to 1988, Mr. Robertson was director of corporate planning for Terra
Resources, Inc. From 1973 to 1986, Mr. Robertson was employed by Gulf Oil
Corporation.
CATHY L. ANDERSON, 39, has been controller of the Company since January 15,
1993. From July 1985 to January 1993, Ms. Anderson was employed by Arthur
Andersen & Co., a public accounting firm, in various capacities, the most
recent of which was audit manager.
STEPHEN P. BELL, 40, has been vice president--land of the Company since
February 2, 1994. From March 1991 to February 1994, he was president of Concord
Reserve, Inc., a privately-held independent oil and gas company. He was
employed by Pacific Enterprises Oil Company (formerly Terra Resources, Inc.) as
midcontinent regional manager from February 1990 to February 1991 and as land
manager from August 1985 to January 1990.
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PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Key's common stock, par value $.25 per share, trades on The Nasdaq Stock
Market under the symbol KPCI. No dividends were paid in 1994 or in 1993. The
table below shows the market price of the common stock for 1994 and 1993:
<TABLE>
<CAPTION>
MARKET PRICE
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1994 1993
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HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter....................................... $4.000 $2.750 $3.125 $2.500
Second Quarter...................................... $4.750 $3.000 $5.000 $2.750
Third Quarter....................................... $4.750 $3.625 $4.750 $3.875
Fourth Quarter...................................... $5.375 $3.500 $4.250 $2.875
</TABLE>
The closing price of Key's common stock as reported on The Nasdaq Stock
Market for March 13, 1995, was $4.75. At March 13, 1995, the Company's
9,171,999 shares of common stock outstanding were held by 6,074 stockholders of
record and approximately 5,100 beneficial owners.
ITEM 6.SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the years in the five-year period ended December 31, 1994, which
information has been derived from the Company's audited financial statements.
This information should be read in connection with and is qualified in its
entirety by the more detailed information and financial statements under Item 8
below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................................ $16,637 $11,735 $17,641 $23,444 $31,211
Net income(a)........................... 2,943 3,495 267 2,437 3,473
Per share(a).......................... .30 .34 .03 .22 .30
Cash dividends.......................... -- -- 1,598 4,345 3,198
Per share............................. -- -- .150 .385 .275
Oil and gas expenditures................ 29,966 1,885 1,371 1,600 1,615
Total assets............................ 52,611 39,805 41,040 46,995 62,558
Long-term debt.......................... 10,000 -- 2,708 4,661 14,193
Stockholders' equity ................... 34,257 35,918 32,400 35,393 40,467
</TABLE>
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(a) Net income for 1993 includes a non-recurring gain of $1,603,000 ($.16 per
share) due to a change in the method of accounting for income taxes and an
extraordinary loss on early extinguishment of debt of $122,000 ($.01 per
share).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL RESULTS
Key is reporting 1994 net income of $2.9 million, or $.30 per share. On a per
share basis, this represents a 58 percent increase from the $2 million income
from continuing operations ($.19 per share) reported in 1993, and is eleven
times the $267,000 net income reported in 1992. Earnings for 1994, 1993 and
1992 are based on oil and gas revenues of $16.3, $11.7 and $17.6 million,
respectively.
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Net income for 1993 was $3.5 million ($.34 per share) and includes a $1.6
million non-recurring benefit resulting from the adoption of Statement of
Financial Accounting Standards No. 109 in January 1993 and $122,000 loss on
early extinguishment of debt.
REVENUES
Oil and gas revenues increased by $4.6 million, or 40 percent to reach $16.3
million in 1994. The increase is the result of the Company's second quarter
1994 acquisition and the positive impact that wells drilled or recompleted
since last year are having on oil and gas production.
Between 1993 and 1992, oil and gas revenues dropped by 34 percent to $11.7
million. The decrease in 1993 was the result of sizeable property sales made in
1993 and 1992 and normal production declines on the remaining properties.
Gas sales for 1994 increased by 7 percent to $9.0 million. The increase in
gas sales is the result of gas volumes climbing 18 percent between 1994 and
1993. Daily production volumes went from 10,470 Mcf per day in 1993 to 12,389
Mcf per day in 1994 and had a positive impact of $1.5 million. This was more
than enough to offset the effect of falling prices in the latter part of 1994.
Key's average gas price dropped from $2.19 per Mcf in 1993 to $1.98 per Mcf in
1994.
Key's 1993 gas sales of $8.4 million reflected a 26 percent decrease from the
previous year. While prices increased by $.36 to $2.19 per Mcf in 1993 and had
a positive impact of $1.4 million, it was not enough to offset the effect of
declining volumes. The average daily gas volume was 10,470 Mcf in 1993 versus
17,006 Mcf in 1992. Lower volumes account for $4.4 million of the $3 million
total decline in gas sales.
Spurred on by the acquisition, 1994 oil sales increased by $4 million to $7.2
million. Daily oil production more than doubled, going from 569 barrels per day
in 1993 to 1,382 barrels per day in 1994. Production increases added $4.6
million to sales, while a 7 percent dip in prices reduced sales by $.6 million.
The average price for oil was $14.27 per barrel in 1994 compared to $15.36 per
barrel in 1993.
The Company's oil sales for 1993 dropped 47 percent to $3.2 million. Key
received an average price of $15.36 per barrel in 1993 compared to $17.18 per
barrel in 1992. Price contributed a negative $.4 million to the overall
decline. The effect of production declines was more significant than pricing.
Daily volumes fell from 960 barrels per day in 1992 to 569 barrels per day in
1993 and reduced sales by $2.4 million.
Product sales from gas processing plants contributed $140,000, $106,000 and
$198,000 to oil and gas production revenues in 1994, 1993 and 1992,
respectively. In terms of product mix, Key derived 55 percent of its 1994 oil
and gas revenues from gas, 44 percent from oil and the balance from plant
product sales.
Other revenues for 1994 include proceeds from a gas contract settlement in
the amount of $300,000.
COSTS AND EXPENSES
Depreciation, depletion and amortization (DD&A) expense increased by 37
percent between 1994 and 1993. The increase is due to relatively higher oil and
gas sales and net properties in 1994. Reserve additions from the acquisition
and drilling helped reduce the amortization rate to 32.1 percent of revenue
from 33.1 percent in the prior year. DD&A expense for 1993 declined 48 percent
from the previous year to $3.9 million as a result of reduced oil and gas sales
and a lower amortization rate. Key's amortization rate for 1993 was 33.1
percent of sales compared to 42.5 percent in 1992. The lower rate in 1993 was
due to improved pricing, property sales and the addition of reserves from
revisions and drilling.
Key's operating expenses for 1994 increased by 59 percent to $5.1 million.
The increase is largely due to the second quarter acquisition and is in line
with the boost to oil and gas revenues. On a unit of production basis,
operating expenses for 1994 are $.68 per EMcf, up from $.63 per EMcf in 1993.
This increase is due to
7
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the fact that the acquired properties have a higher oil percentage than the
other Key properties and oil properties generally have higher lifting costs
than gas properties. Operating expenses decreased $2.5 million between 1993 and
1992 primarily due to reduced lease operating expense resulting from the sale
of oil and gas properties. Production taxes also declined in direct correlation
with the drop in oil and gas revenues. Based on units of production, operating
expenses decreased to $.63 per EMcf in 1993, down from $.69 in 1992. The
decrease on an EMcf basis is largely attributable to the sale of lower-value
properties in the first quarter of 1993.
Administrative, selling and other costs in 1994 declined 7 percent from a
year ago to $1.4 million, while comparable costs in 1993 declined 59 percent
from 1992. The slight decline in administrative expenses occurred in 1994
despite the costs associated with administering a larger asset base. On a units
of production basis, administrative expense decreased to $.19 per EMcf,
compared to $.30 per EMcf in 1993. In 1993, Apache provided accounting and
administrative services to Key for the first four months. Key paid Apache
$300,000 for services provided and this amount is included in the 1993 total.
The dramatic drop in expenses between 1992 and 1993 is attributable to the sale
of lower-value properties in the first quarter of 1993 and the assumption of
all administrative and accounting duties by Key.
In the second quarter of 1994, Key entered into a $50 million credit facility
with NationsBank of Texas, N.A. The Company elected an $18 million borrowing
base and drew $12.5 million to fund the acquisition. The Company had repaid
$2.5 million as of December 31, 1994. Annual interest for 1994 increased from
$125,000 to $446,000 as a result of this new borrowing. Interest expense
decreased significantly between 1992 and 1993 as a result of Key's aggressive,
pre-acquisition plan of debt reduction. Interest was reduced from $461,000 in
1992 to $125,000 in 1993.
Interest was capitalized for borrowings associated with the undeveloped
leasehold recently acquired. No capitalized interest was recorded for 1993 or
1992.
Interest income of $110,000, $282,000 and $40,000 was recorded for the years
1994, 1993 and 1992, respectively. The high interest income in 1993 reflects
the investment of property sales proceeds from the first quarter of 1993.
Interest income for 1994 declined due to a decrease in the average cash
balance. Available cash was used to partially fund the acquisition.
CASH FLOW AND LIQUIDITY
Liquidity refers to the ability of an enterprise to generate adequate amounts
of cash to satisfy its financial commitments. Key's primary needs for cash are
to fund oil and gas exploration, development and acquisition activities and for
payment of existing obligations and trade commitments related to oil and gas
operations. The Company's primary sources of liquidity are cash flows from
operating activities and proceeds from financing activities. Management
believes that the overall sources of funds available to Key will continue to be
more than sufficient to satisfy the Company's financial obligations.
Cash from operating activities increased $4.9 million to $11.6 million in
1994. Most of this increase can be traced to Key's 1994 acquisition and active
drilling program. The resulting higher oil and gas production translates into
elevated oil and gas revenues and a boost to cash from operating activities.
Between 1992 and 1993, cash from operating activities fell by $1 million, or 13
percent. The decrease was consistent with the declines in oil and gas revenues
in 1993.
Cash expenditures for exploration and development for 1994 totaled $6.1
million, or 53 percent of cash from operating activities. This compares to $1.9
million and 29 percent of cash from operating activities expended on drilling
activity in 1993. Beginning in the second quarter of 1993, the Company
implemented its strategy to increase production and reserves through selective
drilling. In 1992, Key spent only $1.4 million
8
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or 18 percent of cash from operating activities and primarily focused on
recompletions and maintaining production on older wells. During 1994, Key
expanded its drilling program to 45 gross wells (6.25 net) compared to 27 gross
wells (.6 net) drilled in 1993.
In the second quarter of 1994, Key completed a transaction to acquire assets
in the Rocky Mountain region for $22.75 million. As of the October 1, 1993
effective date, the acquisition included 2.6 million barrels of oil, 8 billion
cubic feet of natural gas and approximately 980,000 net undeveloped acres.
Prior to January 1, 1993, Key was a limited partner in Apache Petroleum
Company Operating Partnership (APCOP). Apache Corporation (Apache) was general
partner of APCOP. On January 1, 1993, APCOP was dissolved and Key was assigned
its pro-rata interest in the oil and gas properties and certain other assets
and liabilities of APCOP.
At December 31, 1992, long-term debt, including current maturities, totaled
almost $3 million. In connection with the dissolution transaction, Apache
assumed APCOP's share of the "1986 Limited Recourse Notes" and "Offshore
Venture Financing" which had the effect of reducing Key's long-term debt by
approximately $800,000. Subsequent to the dissolution, Key's total outstanding
debt was comprised of its share of the 9 percent convertible subordinated
debentures due 2001. The debentures were redeemed at 101 percent of par value
on July 15, 1993, using cash on hand. In the second quarter of 1994, Key drew
$12.5 million on its credit facility with NationsBank to partially fund the
acquisition. The Company repaid $2.5 million of the loan using cash from
operations in the second half of 1994.
In 1993, the Company received $3.9 million in proceeds from the sale of
approximately 1,100 low value oil and gas properties, the sale of a net profit
reversionary interest and the sale of a negative reversionary interest. The
properties and net profit interests were sold to Apache to reduce the
administrative expense Key would incur accounting for numerous low-value
properties. Key sold selected oil and gas properties in 1992 for $3.7 million.
In 1994, Key purchased 292,171 shares of its own stock for $1.3 million, or
an average of $4.58 per share. In addition, in a non-cash transaction, Key re-
acquired 800,000 shares of its own stock from Apache in exchange for
approximately 200,000 net undeveloped acres that Key owned in the Green River
Basin of Wyoming. During 1992, Key purchased 528,929 shares of its own stock on
the open market for $1.7 million, an average of $3.14 per share. The purchases
were primarily made using cash from operations and proceeds from property
sales. Transactions for the purchase of shares in 1993 were immaterial.
In September 1992, Key's Board of Directors discontinued the payment of
semiannual dividends and redirected cash flow to increase its reserve base. The
Company paid cash dividends of $1.6 million ($.15 per share) in 1992.
The Company's cash balance is down substantially from the $9.2 million
carried at December 31, 1993. Cash combined with bank financing was used to
complete the second quarter 1994 property acquisition. The Company's ratio of
current assets to current liabilities at year-end was 1 to 1, down from 7.4 to
1 at year-end 1993.
Management believes that cash on hand at year-end, net cash generated from
operations and remaining amounts available under the existing line of credit
will be adequate to meet future liquidity needs, including satisfying the
Company's financial obligations and funding operations, exploration and
development activities.
FUTURE TRENDS
The Company intends to continue to expand its exploration and development
activities. In October 1994, Key opened a regional exploration office in Tulsa,
Oklahoma. Four employees are currently assigned to this
9
<PAGE>
office. Their focus is to identify opportunities associated with Key's existing
acreage position in Oklahoma and to find additional exploration opportunities
in this region. In March 1995, Key opened a regional exploration office in
Houston, Texas. Personnel in this office will be looking for ways to expand
Key's exploration activities in the Gulf Coast area.
Expanded exploration and development activities in the Rocky Mountain area
are also being pursued. In connection with its 1994 acquisition, the Company
acquired working and royalty interests in producing properties in the Rocky
Mountain region, as well as a significant undeveloped leasehold position in
that region. At December 31, 1994, Key held interests in approximately 533,000
net undeveloped acres in the Rocky Mountains. The Company intends to pursue
various methods of maximizing the value of this acreage including drilling for
its own account and participating with others to develop the acreage. Sales of
portions of the acreage will be pursued and acreage in areas where the Company
does not see significant development potential will be allowed to expire.
At December 31, 1994, Key did not operate any oil and gas properties. As the
Rocky Mountain acreage is developed and as opportunities arise in other areas,
Key intends to assume an operating role in those situations where it feels
controlling operations is advantageous.
The Company intends to continue to consider acquisition and joint venture
opportunities as they arise. As in the past, transactions of this type may be
consummated if the economic and strategic factors appear favorable.
Key experienced significant growth in personnel during 1994. The Company
employed 21 full-time employees at December 31, 1994, compared to only 9
employees at the same point a year ago. The Company expects the number of
employees to continue to increase as its exploration program grows and as it
takes on operations.
The currently depressed price of natural gas will impact the cash provided by
operations. However the Company still expects that cash on hand, net cash
generated by operating activities and amounts available under the credit
facility will be adequate to meet future liquidity needs under current
corporate policies. Management believes that the overall sources of funds
available to Key will continue to be sufficient to satisfy the Company's
financial obligations and to provide resources for exploration, development and
acquisition activities.
10
<PAGE>
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See following Index
KEY PRODUCTION COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statement of income for each of the three years in the period ended Decem-
ber 31, 1994............................................................. 12
Statement of cash flows for each of the three years in the period ended
December 31, 1994........................................................ 13
Balance sheet as of December 31, 1994 and 1993............................ 14
Statement of stockholders' equity for each of the three years in the pe-
riod ended December 31, 1994............................................. 15
Summary of significant accounting policies................................ 16
Notes to financial statements............................................. 18
Report of independent public accountants.................................. 23
Supplemental oil and gas disclosures...................................... 24
Supplemental quarterly financial data..................................... 27
</TABLE>
All other supplemental information and schedules have been omitted because
they are not applicable or the information required is shown in the financial
statements or related notes thereto.
11
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Oil and gas production revenues.... $ 16,307 $ 11,658 $ 17,598
Other revenues..................... 330 77 43
------------ ------------ ------------
16,637 11,735 17,641
------------ ------------ ------------
OPERATING EXPENSES:
Depreciation, depletion and amorti-
zation ........................... 5,328 3,902 7,476
Operating costs.................... 5,103 3,207 5,732
Administrative, selling and other.. 1,432 1,535 3,707
Financing costs:
Interest expense................. 137 125 461
Interest income.................. (110) (282) (40)
------------ ------------ ------------
11,890 8,487 17,336
------------ ------------ ------------
INCOME BEFORE INCOME TAXES, EXTRAOR-
DINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRIN-
CIPLE............................... 4,747 3,248 305
PROVISION FOR INCOME TAXES........... 1,804 1,234 38
------------ ------------ ------------
NET INCOME BEFORE EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE...... 2,943 2,014 267
Extraordinary item (loss on early
extinguishment of debt, net of
related income tax benefit of
$74,000).......................... -- (122) --
Cumulative effect of change in ac-
counting for income taxes......... -- 1,603 --
------------ ------------ ------------
NET INCOME........................... $ 2,943 $ 3,495 $ 267
============ ============ ============
NET INCOME PER COMMON SHARE:
Before extraordinary item and cumu-
lative effect of change in
accounting principle.............. $ .30 $ .19 $ .03
Extraordinary item................. -- (.01) --
Cumulative effect of change in ac-
counting for income taxes......... -- .16 --
------------ ------------ ------------
NET INCOME PER SHARE................. $ .30 $ .34 $ .03
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING.. 9,808 10,252 10,427
============ ============ ============
</TABLE>
The accompanying Summary of Significant Accounting Policies and
Notes to Financial Statements are integral parts of this statement.
12
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,943 $ 3,495 $ 267
Adjustment to reconcile net income
to net cash provided by
operating activities:
Depreciation, depletion and amor-
tization......................... 5,328 3,902 7,476
Deferred income taxes............. 1,552 1,104 (139)
Cumulative effect of change in
method of accounting for income
taxes............................ -- (1,603) --
Loss on early extinguishment of
debt, net of taxes............... -- 122 --
Changes in operating assets and li-
abilities:
(Increase) decrease in receiv-
ables............................ (426) 763 232
(Increase) decrease in prepaid ex-
penses........................... 86 25 (217)
Increase (decrease) in accounts
payable and accrued expenses..... 1,308 (214) 107
Increase (decrease) in long-term
property liabilities and other... 823 (912) (55)
------------ ------------ ------------
Net cash provided by operating
activities...................... 11,614 6,682 7,671
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas exploration and devel-
opment expenditures............... (6,128) (1,928) (1,371)
Acquisition of oil and gas proper-
ties.............................. (23,021) -- --
Proceeds from sale of oil and gas
properties........................ 321 3,859 3,680
Other capital expenditures......... (383) (241) (3)
------------ ------------ ------------
Net cash provided (used) by in-
vesting activities.............. (29,211) 1,690 2,306
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings............... 12,500 -- 230
Payments on long-term debt......... (2,500) (3,183) (3,105)
Payments to acquire treasury stock. (1,337) (1) (1,662)
Dividends paid..................... -- -- (1,598)
------------ ------------ ------------
Net cash provided (used) by fi-
nancing activities.............. 8,663 (3,184) (6,135)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... (8,934) 5,188 3,842
CASH AND CASH EQUIVALENTS AT BEGIN-
NING OF YEAR........................ 9,215 4,027 185
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................ $ 281 $ 9,215 $ 4,027
============ ============ ============
</TABLE>
The accompanying Summary of Significant Accounting Policies and Notes to
Financial Statements are integral parts of this statement.
13
<PAGE>
KEY PRODUCTION COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1993
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 281 $ 9,215
Receivables.............................. 3,376 2,950
Prepaid expenses......................... 160 246
---------------- ----------------
3,817 12,411
---------------- ----------------
OIL AND GAS PROPERTIES, ON THE BASIS OF
FULL COST ACCOUNTING:
Proved properties........................ 49,381 30,899
Unproved properties and properties under
development, not being
amortized............................... 7,953 90
---------------- ----------------
57,334 30,989
Less--accumulated depreciation, depletion
and amortization........................ (9,105) (3,864)
---------------- ----------------
48,229 27,125
---------------- ----------------
OTHER ASSETS, NET.......................... 565 269
---------------- ----------------
$ 52,611 $ 39,805
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................... $ 2,193 $ 1,223
Accrued lease operating expense and other
........................................ 1,565 443
---------------- ----------------
3,758 1,666
---------------- ----------------
LONG-TERM DEBT............................. 10,000 --
---------------- ----------------
DEFERRED CREDIT AND OTHER NON-CURRENT LIA-
BILITIES:
Income taxes............................. 2,656 1,104
Long-term property liabilities and other.
........................................ 1,940 1,117
---------------- ----------------
4,596 2,221
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Common stock, $.25 par value, 50,000,000
shares authorized,
11,656,350 shares issued................ 2,914 2,914
Paid-in capital.......................... 34,388 34,385
Retained earnings........................ 6,435 3,492
Treasury stock at cost, 2,484,351 and
1,400,413 shares, respectively.......... (9,480) (4,873)
---------------- ----------------
34,257 35,918
---------------- ----------------
$ 52,611 $ 39,805
================ ================
</TABLE>
The accompanying Summary of Significant Accounting Policies and
Notes to Financial Statements are integral parts of this statement.
14
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
PAID-IN RETAINED TREASURY STOCKHOLDERS'
COMMON STOCK CAPITAL EARNINGS STOCK EQUITY
------------ ------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1991.................... $2,914 $35,712 $ -- $(3,233) $35,393
Net income............. -- -- 267 -- 267
Dividends ($.15/share). -- (1,331) (267) -- (1,598)
Treasury stock pur-
chased................ -- -- -- (1,662) (1,662)
------ ------- ------ ------- -------
BALANCE, DECEMBER 31,
1992.................... 2,914 34,381 -- (4,895) 32,400
Net income............. -- -- 3,495 -- 3,495
Treasury stock issued.. -- 1 -- 23 24
Treasury stock pur-
chased................ -- 3 (3) (1) (1)
------ ------- ------ ------- -------
BALANCE, DECEMBER 31,
1993.................... 2,914 34,385 3,492 (4,873) 35,918
Net income............. -- -- 2,943 -- 2,943
Treasury stock issued.. -- 3 -- 30 33
Treasury stock pur-
chased................ -- -- -- (4,637) (4,637)
------ ------- ------ ------- -------
BALANCE, DECEMBER 31,
1994.................... $2,914 $34,388 $6,435 $(9,480) $34,257
====== ======= ====== ======= =======
</TABLE>
The accompanying Summary of Significant Accounting Policies and
Notes to Financial Statements are integral parts of this statement.
15
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF KEY PRODUCTION COMPANY, INC.
Key Production Company, Inc. (Key or the Company) was formed in 1988 to
succeed to a portion of the assets and liabilities of Apache Petroleum Company
L.P. (APC). From 1988 through the third quarter of 1992, the Company used
operating cash flow and property sales proceeds to reduce debt, repurchase
shares of its common stock and pay dividends. In light of its depleting
reserves and increasingly disproportionate general and administrative costs,
the Company began evaluating strategic alternatives for its future.
Since inception, all of Key's operating and managerial functions had been
performed by Apache Corporation (Apache) under the terms of a management
agreement between Key and Apache. On September 9, 1992, Key's board of
directors announced its intention to establish a management team independent of
Apache and to engage the Company in active operations. They elected a board of
directors unrelated to Apache. The newly-elected board announced its intention
to discontinue semiannual dividend payments and use the Company's cash flows to
actively pursue alternatives for increasing its reserve base.
Apache subsequently gave Key notice of its intent to dissolve APC Operating
Partnership L.P. (APCOP) and, effective January 1, 1993, the parties entered
into an agreement covering the distribution of APCOP's assets. Under the terms
of the agreement, Apache assumed the majority of APCOP's trade payables and
accrued liabilities plus a portion of its long-term debt in exchange for a
portion of APCOP's current assets. In addition, Key sold its interest in
approximately 1,100 properties to Apache. The properties sold were primarily
those with low individual values. These properties were sold to reduce the
overhead Key would subsequently incur by accounting for numerous low-value
properties. APCOP's remaining assets were distributed to Apache and Key in
accordance with their respective partnership interests.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Key for 1994,
1993 and 1992 and its proportionate share of APCOP for 1992.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for its investment in
oil and gas properties and, accordingly, capitalizes all exploration and
development costs incurred for the purposes of finding oil and gas reserves,
including dry hole costs, geological and geophysical costs and direct overhead
related to exploration and development activities. Payroll and other internal
costs capitalized include salaries and related benefits paid to employees
directly engaged in the acquisition, exploration and development of oil and gas
properties, as well as other specifically identifiable internal costs. No gains
or losses are normally recognized on the sale or disposition of oil and gas
properties under full cost accounting.
Key computes the provision for depreciation, depletion and amortization
(DD&A) of oil and gas properties on a quarterly basis using the future gross
revenue method. The quarterly provision is calculated by multiplying the
quarter's oil and gas revenues by an overall rate determined by dividing the
total unamortized cost of oil and gas properties (excluding the cost of
investments in unproved and unevaluated properties) by the total estimated
future oil and gas revenues.
Key limits the capitalized costs of oil and gas properties, net of
accumulated DD&A, to the estimated future net cash flows from proved oil and
gas reserves discounted at ten percent, plus the lower of cost or fair market
value of unproved properties as adjusted for related tax effects. If
capitalized costs exceed this limit, the excess is charged to DD&A expense. The
Company has not recorded any such write-downs of capitalized costs for the
three years ended December 31, 1994.
16
<PAGE>
The costs of certain unevaluated leasehold acreage and wells in the process
of being drilled are not being amortized. Amortization will commence when such
costs are evaluated or upon completion of wells in progress. Costs not being
amortized are periodically assessed for possible impairments or reductions in
value. If a reduction in value has occurred, the portion of the carrying cost
in excess of the current value is included in the costs subject to
amortization. Interest costs related to undeveloped properties are also
capitalized. Financing costs were reduced by capitalized interest totaling
$309,000 in 1994. No interest was capitalized during 1993 and 1992.
Office furniture and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets which range
from five to ten years.
REVENUE RECOGNITION
Key uses the sales method of accounting for natural gas revenues. Under this
method, revenues are recognized based on actual volumes of gas sold to
purchasers. The volumes of gas sold may differ from the volumes to which Key is
entitled based on its interests in the properties. Differences between volumes
sold and volumes based on entitlements create gas imbalances which are
reflected as adjustments to reported gas reserves and future cash flows.
Adjustments for gas imbalances reduced Key's proved gas reserves by
approximately 9 percent at December 31, 1994.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 requires an asset and liability approach to accounting for income taxes. A
deferred tax liability or asset is determined based on the temporary
differences between the financial reporting and tax basis of assets and
liabilities as measured by the enacted tax rates. A valuation allowance must be
established for any portion of a deferred tax asset for which it is more likely
than not that a tax benefit will not be realized. In 1993, the Company
recognized a one-time cumulative benefit of the accounting change on prior
years of $1,603,000 and established a valuation allowance for its deferred tax
assets.
NET INCOME PER SHARE
Net income per share amounts are based on the weighted average number of
common shares outstanding during each year. The effects of common stock
equivalents, which includes shares issued upon the exercise of outstanding
stock options, are considered in this calculation. For all the periods
presented, the common stock equivalents were either antidilutive or their
inclusion did not materially effect the net income per share amounts.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments earned 5.3 percent and 3.1 percent rates of interest at December
31, 1994 and 1993, respectively, with cost approximating market.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the 1994
presentation.
TREASURY STOCK
Treasury shares were acquired in 1994 and 1992 under the Company's policy of
repurchasing shares when market conditions appear favorable. Treasury stock is
recorded at cost.
17
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1.ACQUISITIONS AND DIVESTITURES
On April 29, 1994, Key completed a transaction to purchase all the assets of
a privately-held independent oil and gas company for $22.75 million. As of the
effective date, October 1, 1993, the assets included 2.6 million barrels of
oil, 8 billion cubic feet of natural gas and approximately 980,000 net
undeveloped acres. Key used cash on hand and a $12.5 million draw on its credit
facility to fund the acquisition.
Effective January 1, 1993, Key sold its interest in approximately 1,100
properties to Apache for $3.9 million. The properties sold were those with low
individual values. During 1992, APCOP sold selected oil and gas properties for
which Key received $3.7 million.
The following unaudited pro forma information was prepared as if the
acquisition and property sales occurred on January 1, 1992. The pro forma data
presented is based on numerous assumptions and is not necessarily indicative of
future operations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues................................. $ 19,148 $ 21,809 $ 23,729
Net income............................... $ 3,154 $ 5,339 $ 969
Net income per share..................... $ .32 $ .52 $ .09
</TABLE>
2.DEBT
Bank Financing--The bank financing is a $50 million revolving credit facility
with NationsBank of Texas, N.A. The Company entered into the agreement on April
25, 1994, to fund the above-mentioned acquisition and any future acquisition
and drilling opportunities. The Company elected an $18 million borrowing base,
which was significantly less than the total borrowing base that could have been
requested under the terms of the agreement.
Interest on amounts borrowed is charged at NationsBank's prime rate or at
London Interbank Offered Rates (LIBOR) plus .5 to 1.125 percent, at the
Company's option. The factor added to LIBOR rates is determined by the
Company's debt to capitalization ratio at the time of borrowing. The average
interest rate on the various maturities of debt outstanding at December 31,
1994, was 6.41 percent. Key pays a .25 percent fee on the unused portion of the
borrowing base, as well as other fees of approximately $10,000 per year in
return for the bank's commitment to maintain the availability of those funds.
On April 1, 1997, the borrowing converts from a revolver to a term note. At
that point, if not renegotiated before then, the Company must commence
quarterly principal payments in addition to paying interest. The entire
facility matures on January 1, 2000.
Aggregate maturities of long-term debt outstanding at December 31, 1994, are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1995.......................................................... $ --
1996.......................................................... --
1997.......................................................... 2,500
1998.......................................................... 3,333
1999.......................................................... 3,333
Thereafter.................................................... 834
-------
$10,000
=======
</TABLE>
18
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company had no outstanding debt at December 31, 1993.
3.INCOME TAXES
The cumulative effect of the change in the method of accounting for income
taxes attributable to fiscal years prior to 1993 was an increase in net
earnings of $1,603,000 or $.16 per share, which has been reflected as a change
in accounting method in the accompanying financial statements.
Deferred tax liabilities and assets are comprised of the following components
at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Long-term deferred tax assets
Operating loss carryforwards............................ $ 1,462 $ 2,651
Other................................................... 65 84
------- -------
1,527 2,735
Valuation allowance..................................... (581) (581)
------- -------
946 2,154
Long-term deferred tax liabilities:
Depreciation, depletion and amortization................ (3,602) (3,258)
------- -------
Deferred income tax liability........................... $(2,656) $(1,104)
======= =======
</TABLE>
The Company had net tax operating loss carryforwards of approximately $3.3
million at December 31, 1994, which expire in the years 2003 through 2008. The
Company has provided a valuation allowance to the extent it may not be able to
fully utilize its net operating loss carryforwards due to the possible tax
effect of future exploratory drilling costs.
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Taxes:
Federal................................ $ 182 $ -- $ --
State.................................. 70 56 177
Deferred Taxes:.......................... 1,552 1,104 (139)
---------- ---------- ---------
1,804 1,160 38
Tax benefit of extraordinary item........ -- 74 --
---------- ---------- ---------
Total tax provision on income from con-
tinuing
operations.............................. $ 1,804 $ 1,234 $ 38
========== ========== =========
A reconciliation of the statutory income tax rate to the effective rate is as
follows:
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Statutory income tax rate.............. 34.0% 34.0% 34.0%
State income tax....................... 4.0 4.0 12.5
Amortization of excess tax basis....... -- -- (34.0)
---------- ---------- ---------
38.0% 38.0% 12.5%
========== ========== =========
</TABLE>
19
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At inception, the Company's tax basis in its assets exceeded the basis
reported for financial purposes. Through December 31, 1992, this excess basis
was being amortized which resulted in a combined effective rate which was less
than the statutory rate.
4.NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capital-
ized)............................... $ 74 $ 217 $ 487
Income taxes (net of refunds re-
ceived)............................. $ 79 $ 109 $ 183
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities
On July 19, 1994, the Company exchanged approximately 200,000 net undeveloped
acres in the Green River Basin in Wyoming for 800,000 shares of Key common
stock held by Apache and the formation of an exploration joint venture which
gives Key the right to explore on all of Apache's non-Green River Basin acreage
in Wyoming and access to all of Apache's seismic and other data in Wyoming. The
trade involved approximately 25 percent of Key's Rocky Mountain acreage. The
transaction value was based on the price for the Company's common stock at that
date and, accordingly, Key reduced the carrying value of its undeveloped
properties by $3.3 million.
5.STOCK OPTIONS
The Key Production Company, Inc. 1992 Stock Option Plan reserves 1,000,000
shares of common stock for issuance to the Company's officers and employees. A
total of 480,000 options were outstanding at year end. The options expire at
various dates through 2004 and are at prices ranging from $2.50 to $4.125 per
share with an aggregate exercise price of $1,501,250.
The Key Production Company, Inc. Stock Option Plan for Non-Employee Directors
reserves 180,000 shares of common stock for issuance to the Company's non-
employee directors. There were 90,000 options outstanding at year-end at an
aggregate exercise price of $258,750. These options expire in 2002. No options
were granted in 1994 or 1993.
The Company's president was granted options for 500,000 shares of the
Company's common stock in 1992 in accordance with the terms of his employment
agreement. These outstanding options were granted at an exercise price of $3.00
and expire in 2002.
All options granted had an exercise price equal to or above fair market value
on the date of grant. Subject to accelerated vesting under certain
circumstances such as death of the employee or change in control of the
Company, one-third of the options vest in each of the three years following the
date of grant. At December 31, 1994, a total of 483,333 outstanding options
were vested.
20
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes the changes in stock options for the year and
the number of common shares available for grant at year-end.
<TABLE>
<CAPTION>
1994 1993 1992
--------- ------- ---------
<S> <C> <C> <C>
Outstanding, beginning of year................... 860,000 590,000 --
Granted.......................................... 210,000 270,000 590,000
--------- ------- ---------
Outstanding, end of year......................... 1,070,000 860,000 590,000
========= ======= =========
Available for grant, end of year................. 610,000 820,000 1,090,000
========= ======= =========
</TABLE>
6.EMPLOYEE BENEFIT PLANS
Retirement Plan--The Company provides a 401(k) retirement/savings plan for
all employees. This plan allows participants to contribute up to 10 percent of
their compensation, with Key matching contributions up to a maximum of 4
percent of their compensation. The Company's contribution is made in the form
of Key common stock. Employees vest in the Company's contribution at the rate
of 25 percent per year. Total expenses for the Company's matching contribution
were $33,029, $18,505 and $3,533 in 1994, 1993 and 1992, respectively. In
connection with the annual testing required on all 401(k) plans, Key made an
$11,980 qualified non-elective contribution for the benefit of all non-highly
compensated employees. The contribution was required to keep the plan qualified
due to the top heavy status of the plan. No comparable contributions were
required for 1993 or 1992.
Deferred Compensation Plan--Effective December 1, 1993, the Company
established the Key Production Company, Inc. Deferred Compensation Plan. This
plan is intended to provide a mechanism whereby certain management employees of
the Company may defer compensation. The Company intends this plan to provide
the eligible employees with the opportunity to defer compensation in cases
where deferrals under the 401(k) plan may be limited by applicable provisions
of the Internal Revenue Code of 1986.
Income Continuance Plan--Effective June 1, 1994, the Company established the
Key Production Company, Inc. Income Continuance Plan. This plan provides for
the continuation of salary and benefits for certain employees in the event of a
change in control of the Company.
The administrative, compliance, and legal costs associated with administering
these plans are paid by Key. Such expenses were not significant in 1994, 1993
or 1992.
7.COMMITMENTS AND CONTINGENCIES
Lease Commitments--The Company has leases for office space with varying
expiration dates through 1997. Rental expense was $52,683 and $13,746 for 1994
and 1993, respectively.
As of December 31, 1994, minimum rental commitments under these leases are
payable in the following years:
<TABLE>
<S> <C>
1995............................................................ $ 83,587
1996............................................................ 72,992
1997............................................................ 27,811
--------
$184,390
========
</TABLE>
Litigation--The Company is involved in litigation claims and is subject to
governmental and regulatory controls arising in the ordinary course of
business. It is the opinion of the Company's management that all
21
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
claims and litigation involving the Company are not likely to have a material
adverse effect on its financial position or results of operations.
Environmental--The Company is not aware of any environmental claims existing
as of December 31, 1994, which would have a material impact upon the Company's
financial condition or the results of operations. Key does not believe that
compliance with federal, state or local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have such an impact.
8.TRANSACTIONS WITH RELATED PARTIES
In connection with the APCOP dissolution, Key entered into an agreement with
Apache whereby Apache provided accounting and administrative services to Key
for the first four months of 1993. Key paid Apache $300,000 for services
provided under this agreement. Prior to 1993, Apache was entitled to one or
more types of compensation and reimbursements for defined costs from APCOP in
accordance with predecessor agreements. Key's share of this compensation was
$3.8 million in 1992.
During 1994, Key entered into three other transactions with Apache. As
discussed in Note 4, in July 1994, Key exchanged approximately 200,000 net
undeveloped acres in the Green River Basin of Wyoming for 800,000 shares of
Key's common stock held by Apache. Later in July, 1994, Key purchased 200,000
shares of its common stock from Apache at a price of $4.50 per share and in
December, 1994, Key purchased an additional 91,000 shares from Apache at $4.75
per share.
9.CUSTOMER INFORMATION
The following parties purchased 10 percent or more of Key's oil and gas
production:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
PURCHASER 1994 1993 1992
--------- ------ ------ ------
<S> <C> <C> <C>
Natural Gas Clearinghouse......................... 38% 32% 37%
Dow Chemical Company.............................. -- 12% 17%
Eighty-Eight Oil Company.......................... 19% -- --
</TABLE>
Effective January 1, 1993, Key entered into an agreement with Apache under
which Key pays Apache a fee to market the majority of its gas production that
is not subject to traditional gas contract arrangements. During 1994 and 1993,
the majority of Key's gas production marketed by Apache was sold to Natural Gas
Clearinghouse (NGC). In 1992, Key's spot market production was either sold to,
or marketed by NGC. NGC was an affiliate of Apache through May 1992.
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Key Production Company, Inc.:
We have audited the accompanying balance sheet of Key Production Company,
Inc. (a Delaware corporation) as of December 31, 1994 and 1993, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Key Production Company, Inc.
as of December 31, 1994 and 1993, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles.
As explained in Note 3 to the financial statements, effective January 1,
1993, the Company changed its method of accounting for income taxes.
Arthur Andersen LLP
Denver, Colorado,
February 24, 1995.
23
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUPPLEMENTAL OIL AND GAS DISCLOSURES
Oil and Gas Operations--The following tables contain revenues and direct cost
information relating to the Company's oil and gas exploration and production
activities for the periods indicated. Key has no long-term supply or purchase
agreements with governments or authorities in which it acts as producer.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas revenues from production....... $ 16,307 $ 11,658 $ 17,598
---------- ---------- ----------
Operating costs:
Depreciation, depletion and amortization. 5,241 3,864 7,476
Lease operating.......................... 4,086 2,469 4,548
Production taxes......................... 1,017 738 1,184
Income tax............................... 2,266 1,743 549
---------- ---------- ----------
12,610 8,814 13,757
---------- ---------- ----------
Results of operations from oil and gas pro-
ducing activities......................... $ 3,697 $ 2,844 $ 3,841
========== ========== ==========
Amortization rate as a percentage of reve-
nues...................................... 32.1% 33.1% 42.5%
========== ========== ==========
</TABLE>
Capitalized Costs--The following table sets forth the capitalized costs and
related accumulated depreciation, depletion and amortization relating to the
Company's oil and gas production, exploration and development activities.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
----------- ----------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Balance, beginning of year............. $ 30,989 $ 32,963 $ 332,554
Costs incurred during the year:
Exploration.......................... 2,657 -- --
Development.......................... 4,288 1,885 1,371
Acquisition of properties
Proved............................. 12,948 -- --
Unproved........................... 10,073 -- --
Property sales
Proved............................. (10) (3,859) (3,680)
Unproved........................... (3,611) -- --
----------- ----------- ------------
Balance, end of year................... 57,334 30,989 330,245
Less--costs not being amortized........ (7,953) (90) (23)
----------- ----------- ------------
Costs being amortized.................. 49,381 30,899 330,222
Less--accumulated depreciation, deple-
tion and amortization................. (9,105) (3,864) (297,282)
----------- ----------- ------------
Capitalized costs being amortized, net. $ 40,276 $ 27,035 $ 32,940
=========== =========== ============
</TABLE>
Costs Not Being Amortized--Oil and gas property costs not being amortized at
December 31, 1994, consist of $7,953,000 of leasehold cost. Of the total,
approximately $74,000 was incurred in 1993 and the balance was incurred in
1994.
Oil and Gas Reserve Information--Proved oil and gas reserve quantities are
based on estimates prepared by the Company's engineers, and were audited by
Ryder Scott Company Petroleum Engineers, independent
24
<PAGE>
petroleum engineers, in accordance with guidelines established by the
Securities and Exchange Commission (SEC). Reserve estimates are based on
economic and operating conditions existing at December 31 of each year
presented.
There are numerous uncertainties inherent in estimating quantities of proved
reserves and projecting future rates of production and timing of development
expenditures. The following reserve data represents estimates only and should
not be construed as being exact. All of the Company's reserves are located in
the continental or offshore United States.
<TABLE>
<CAPTION>
GAS IN MILLION CUBIC FEET OIL IN THOUSANDS OF BARRELS
---------------------------- -------------------------------
1994 1993 1992 1994 1993 1992
-------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total proved reserves--
Developed and undevel-
oped
Beginning of year..... 24,240 28,721 36,505 1,048 1,513 1,975
Revisions of previous
estimates............ 140 2,691 685 38 (50) 122
Improved Recovery..... -- -- -- 112 -- --
Extensions and discov-
eries................ 4,587 1,199 1,095 617 20 65
Purchases of reserves. 9,152 -- -- 2,312 -- --
Production............ (4,522) (3,822) (6,224) (504) (208) (352)
Sales of properties... -- (4,549) (3,340) -- (227) (297)
-------- -------- -------- --------- --------- ---------
End of year........... 33,597 24,240 28,721 3,623 1,048 1,513
======== ======== ======== ========= ========= =========
Proved developed re-
serves--
Beginning of year..... 24,140 28,532 36,059 1,004 1,450 1,897
End of year........... 31,967 24,140 28,532 3,099 1,004 1,450
</TABLE>
Future Net Cash Flows--Future revenues are based on year-end prices except in
those instances where the sale of gas is covered by contract terms providing
for determinable escalations. Operating costs, production and ad valorem taxes
and future development costs are based on current costs with no escalation.
The following table presents information concerning future net cash flows
from the production of oil and gas reserves net of income tax expense. Income
tax expense has been computed using expected future tax rates and giving effect
to permanent differences and credits which, under current laws, relate to oil
and gas producing activities. This information does not purport to present the
fair market value of Key's oil and gas assets, but does present a standardized
disclosure concerning possible future net cash flows that will result under the
assumptions used.
DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES
RELATING TO PROVED RESERVES AT DECEMBER 31,
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash inflows........................................ $122,228 $77,215 $95,190
Production and development costs.................... (45,122) (22,344) (26,460)
Income tax expense.................................. (12,864) (9,999) (10,950)
-------- ------- -------
Net cash flows...................................... 64,242 44,872 57,780
10% annual discount rate............................ (21,520) (12,762) (20,735)
-------- ------- -------
Discounted future net cash flows.................... $ 42,722 $32,110 $37,045
======== ======= =======
</TABLE>
25
<PAGE>
The following are the principal sources of change in the discounted future
net cash flows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales, net of production costs.............. $ (11,204) $(8,451) $ (11,866)
Net change in prices and production costs... (2,163) (3,029) (2,636)
Extensions, discoveries and improved recov-
ery, net of related costs.................. 5,692 1,582 1,678
Change in future development costs.......... (22) 270 460
Revision of quantities...................... 461 2,747 1,750
Accretion of discount....................... 3,858 4,366 5,463
Change in income taxes...................... (2,139) 150 2,881
Purchases of reserves in place.............. 18,458 -- --
Sales of properties......................... -- (5,432) (3,037)
Change in production rates and other........ (2,329) 2,862 (2,781)
---------- --------- ----------
$ 10,612 $ (4,935) $ (8,088)
========== ========= ==========
</TABLE>
Impact of Pricing--The estimates of cash flows and reserve quantities shown
above are based on year-end oil and gas prices, except in those cases where
future gas sales are covered by contracts at specified prices. Fluctuations are
largely due to the seasonal pricing nature of natural gas, supply perceptions
for natural gas and significant worldwide volatility in oil prices.
Under SEC rules, companies that follow full cost accounting methods are
required to make quarterly "ceiling test" calculations. Under this test,
capitalized costs of oil and gas properties may not exceed the present value of
estimated future net revenues from proved reserves, discounted at 10 percent,
plus the lower of cost or fair market value of unproved properties, as adjusted
for related tax effects and deferred tax reserves. Application of these rules
during periods of relatively low oil and gas prices, even if of short-term
duration, may result in write-downs.
26
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1994
Revenues.......................... $ 2,785 $ 4,109 $ 4,844 $ 4,899 $ 16,637
Expenses, net..................... 2,268 3,402 3,954 4,070 13,694
------- ------- ------- ------- --------
Net income........................ $ 517 $ 707 $ 890 $ 829 $ 2,943
======= ======= ======= ======= ========
Net income per common share....... $ .05 $ .07 $ .09 $ .09 $ .30
======= ======= ======= ======= ========
1993
Revenues.......................... $ 2,869 $ 3,129 $ 2,830 $ 2,907 $ 11,735
Expenses, net..................... 2,461 2,670 2,231 2,359 9,721
------- ------- ------- ------- --------
Net income before extraordinary
item and
cumulative effect of change in
accounting
principle........................ 408 459 599 548 2,014
Extraordinary item ............... -- -- (122) -- (122)
Cumulative effect of change in ac-
counting for
income taxes..................... 1,603 -- -- -- 1,603
------- ------- ------- ------- --------
Net income........................ $ 2,011 $ 459 $ 477 $ 548 $ 3,495
======= ======= ======= ======= ========
Net income per common share....... $ .20 $ .04 $ .05 $ .05 $ .34
======= ======= ======= ======= ========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Information About Nominees for
Election as Directors" in the Company's proxy statement relating to the
Company's 1995 annual meeting of stockholders (Proxy Statement) is incorporated
herein by reference. Certain information with regard to the executive officers
of the Company is set forth under the caption "Executive Officers of the
Registrant" in Part I of this report.
ITEM 11.EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table,"
"Aggregated Option Exercises In The Last Fiscal Year and Fiscal Year-End Option
Values," "Director Compensation," "Employment Agreements" and "Board
Compensation Committee Report on Executive Compensation" in the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions with Affiliates" in
the Proxy Statement is incorporated herein by reference.
27
<PAGE>
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1.The following financial statements are included in Item 8 to this 10-K.
Statement of income for each of the three years in the period ended
December 31, 1994.
Statement of cash flows for each of the three years in the period
ended December 31, 1994.
Balance sheet as of December 31, 1994 and 1993.
Statement of changes in stockholders' equity for each of the three
years in the period ended December 31, 1994.
Summary of significant accounting policies.
Notes to financial statements.
Report of independent public accountants.
Supplemental oil and gas disclosures.
Supplemental quarterly financial data.
2.Schedules: None.
3.Exhibits:
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk (*) and are filed herewith; all exhibits
not so designated are incorporated by reference to a prior SEC filing
as indicated.
Exhibits designated by a plus sign (+) are management contracts or
compensatory plans or arrangements required to be filed herewith pursuant
to Item 14.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1 -- Dissolution Agreement and Quitclaim Assignment between APC Operating
Partnership L.P., Apache Corporation and the Registrant, dated as of January
1, 1993 (incorporated by reference to Exhibit 2.1 to the Registrant's Form
10-Q for the period ended March 31, 1993, file no. 0-17162).
3.1 -- Certificate of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-4,
registration no. 33-23533 filed with the SEC on August 5, 1988).
3.2 -- Amendment to Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration Statement on
Form S-4, registration no. 33-23533 filed with the SEC on August 5, 1988).
3.3 -- Bylaws of the Registrant, dated March 1, 1993 (incorporated by reference to
Exhibit 3.3 to the Registrant's Form 10-K for the fiscal year ended December
31, 1992, file no. 0-17162).
4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.12
to the Registrant's Amendment No. 1 to Registration Statement on Form S-4,
registration no. 33-23533 filed with the SEC on August 15, 1988).
10.6 -- Standstill Agreement between Registrant and Apache Corporation dated March
1, 1990, effective February 1, 1990 (incorporated by reference to Exhibit
10.6 to the Registrant's Form 10-K for the fiscal year ended December 31,
1991, SEC file no. 0-17162).
+ 10.7 -- Key Production Company, Inc. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.7 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1992, file no. 0-17162).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
+ 10.8 -- Key Production Company, Inc. Stock Option Plan for Non-Employee Directors,
(incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1992, file no. 0-17162).
+ 10.9 -- Stock Option Agreement between the Registrant and Francis H. Merelli, dated
September 1, 1992 (incorporated by reference to Exhibit 10.9 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no.
0-17162).
+ 10.10 -- Key Production Company, Inc. 401(k) Plan (incorporated by reference to
Exhibit 10.10 to the Registrant's Form 10-K for the fiscal year ended
December 31, 1992, file no. 0-17162).
+ 10.11 -- Employment Agreement between the Registrant and Francis H. Merelli, dated as
of September 1, 1992 (incorporated by reference to Exhibit 10.11 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no.
0-17162).
+ 10.12 -- Employment Agreement between the Registrant and Monroe W. Robertson, dated
as of September 1, 1992 (incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no.
0-17162).
10.13 -- Stock Appreciation Rights Agreement between Apache Corporation and Francis
H. Merelli, dated September 1, 1992 (incorporated by reference to Exhibit
10.13 to the Registrant's Form 10-K for the fiscal year ended December 31,
1992, file no. 0-17162).
10.14 -- Stock Purchase Agreements between Apache Corporation and Francis H. Merelli,
dated September 1, 1992 (incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no.
0-17162).
10.15 -- Purchase and Sale Agreement between Chorney Oil Company, The Estate of
Raymond Chorney, Joan Chorney, Lancaster Corporation and Seabrook
Corporation, collectively as seller, and Key Production Company, Inc., as
buyer, dated April 29, 1994, effective October 1, 1993 (incorporated by
reference to Exhibit 10.15 to the Registrant's Form 8-K dated April 29,
1994, file no. 0-17162).
10.16 -- Credit Agreement between Key Production Company, Inc. and NationsBank of
Texas, N.A., dated April 25, 1994 (incorporated by reference to Exhibit
10.16 to the Registrant's Form 8-K dated April 29, 1994, file no. 0-17162).
10.17 -- Purchase and Sale Agreement between Key Production Company, Inc., as seller;
and Apache Corporation, as buyer, dated effective June 30, 1994
(incorporated by reference to Exhibit 10.17 to the Registrant's Form 10-Q
for the quarter ended September 30, 1994, file no. 0-17162).
+* 10.18 -- Key Production Company, Inc. Income Continuance Plan, dated effective June
1, 1994.
* 27.1 -- Financial Data Schedule for Commercial and Industrial Companies per Article
5 of Regulation S-X for the year ended December 31, 1994.
</TABLE>
(b)Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
December 31, 1994.
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.
Key Production Company, Inc.
/s/ F. H. MERELLI
By: _________________________________
F. H. MERELLI CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Date: March 27, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ F. H. MERELLI Director, Chairman, March 27, 1995
- ------------------------------------- President and Chief
F. H. MERELLI Executive Officer
(Principal
Executive Officer)
/s/ MONROE W. ROBERTSON Senior Vice March 27, 1995
- ------------------------------------- President and
MONROE W. ROBERTSON Secretary
(Principal
Financial Officer)
/s/ CATHY L. ANDERSON Controller March 27, 1995
- ------------------------------------- (Principal
CATHY L. ANDERSON Accounting Officer)
/s/ CORTLANDT S. DIETLER Director March 20, 1995
- -------------------------------------
CORTLANDT S. DIETLER
/s/ TIMOTHY J. MOYLAN Director March 20, 1995
- -------------------------------------
TIMOTHY J. MOYLAN
30
<PAGE>
[LOGO OF KEY PRODUCTION COMPANY, INC. APPEARS HERE]
INCOME CONTINUANCE PLAN
Key Production Company, Inc. (the "Company") desires to provide income
continuance benefits to the following groups of its employees if the Company is
taken over by another company, for the reasons indicated:
(a) Those 40 years of age and older, a protected class under federal and
state age discrimination laws, because it has been determined that they
typically have more difficulty finding new employment than younger persons;
(b ) Those who have been continuously employed by the Company for 10 years
or more, because they have demonstrated their personal commitment to the
success of the Company;
(c) Those whose special skills, experience or potential justify their
inclusion in order to acquire or retain their services; and
(d) Those who are officers of the Company.
The Company has adopted this Income Continuance Plan (the "Plan") effective
June 1, 1994, to protect the income and other employee benefits of the Company's
Employees (as defined below in paragraph 1) and in order to induce the Employees
to remain in the employ of the Company for the ultimate benefit of the Company
and its shareholders.
The Plan is intended to create a binding legal relationship between the
Company and each Employee, and a copy of the Plan together with applicable
conditions will be given to each Employee.
1. DEFINITIONS. Capitalized terms used herein shall have the following
-----------
meanings:
(a) "Base Compensation" shall mean the total of all compensation, including
wages, salary, and any other incentive compensation, bonuses, commissions and
non-salary and non-wage cash compensation, which was paid as consideration for
the Employee's service during the twelve month period immediately preceding the
Termination Date, or which would have been so paid at the Employee's usual rate
of compensation if the Employee had worked a full twelve months.
<PAGE>
(b) "Benefit Period" shall mean a period commencing on the Termination Date
of the Employee and ending 24 months thereafter except as otherwise provided in
paragraph 4(a) or paragraph 7 of this Plan.
(c) "Change of Control" shall mean the occurrence, after June 1, 1994 of
any of the following:
(1) the acquisition by any person or group of beneficial ownership of
securities (including securities convertible into or exchangeable for or
options or other rights to acquire securities) of the Company, representing
in the aggregate 25% or more of the combined voting power of all securities
of the Company entitled to vote in the election of directors, without the
prior approval of the acquisition resulting in such person or group
acquiring such percentage by at least two-thirds of the directors of the
Company who are not affiliates or associates of such person or group;
(2) during any period of up to 24 consecutive months, commencing after
June 1, 1994, individuals who at the beginning of such 24-month period were
directors of the Company ceasing for any reason to constitute two-thirds of
the total number of directors of the Company unless the individuals serving
as new or replacement directors were nominated by at least a majority of
the directors of the Company in office immediately prior to such period;
(3) the adoption of any plan or proposal to liquidate or dissolve the
Company; or
(4) any merger or consolidation of the Company unless thereafter (i)
directors of the Company immediately prior thereto continue to constitute
at least two-thirds of the directors of the surviving entity or transferee
or (ii) the Company's securities continue to represent or are converted
into securities that represent more than 80% of the combined voting power
of the surviving entity or transferee.
As applicable, all terms used in this definition of "Change of Control"
shall be given their meanings as used in Section 13(d) of the Securities
Exchange Act of 1934 as in effect on the date of this Plan or Rule 13d-3 or Rule
12b-2 issued thereunder as in effect on June 1, 1994.
(d) "Company" shall mean Key Production Company, Inc., a Delaware
corporation, whose headquarters is in Denver, Colorado, and its wholly-owned
subsidiaries and affiliates.
(e) "Effective Date" shall mean the date on which a Change of Control takes
place.
(f) "Employee" shall mean each regular exempt or non-exempt employee of the
Company on the Effective Date or the Termination Date who:
(1) is 40 years of age or older; or
-2-
<PAGE>
(2) has been continuously employed by the Company for 10 years or more;
or
(3) has been designated by the Board of Directors of the Company as
having special skills, experience or potential which warrant extension of
the benefits of the Plan to them; or
(4) is an officer of the Company.
(g) "Plan" shall mean the Income Continuance Plan of the Company.
(h) "Termination Date" shall mean:
(1) if termination is by the Company or its successor, the date on
which an authorized written or oral statement is conveyed to the Employee
indicating that the Employee's employment is terminated; or
(2) if termination is by the Employee, the date on which the Employee
delivers a written notice to the Company or its successor advising of
termination of employment.
2. EFFECTIVE DATE OF PLAN. The income protection benefits described in this
----------------------
Plan shall be effective only if the employment of an Employee is terminated on
or after the Effective Date.
3. TERMINATION OF EMPLOYMENT. The employment of an Employee shall be deemed to
-------------------------
have been terminated within the meaning of this Plan if one of the following
events occur:
(a) The Company or its successor terminates the employment relationship on
or after the Effective Date unless the termination results from an act of the
Employee that is materially detrimental to the best interests of the Company or
its successor and the act constitutes common law fraud, a felony or a gross
malfeasance of duty; or
(b) The Employee on his or her own volition terminates the employment
relationship on or after the Effective Date due to changed circumstances
occurring on or after the Effective Date, which are adverse to the best interest
of the Employee, including without limitation:
(1) a significant change in the title, duties, authority or
compensation of the Employee; or
(2) the assignment of the Employee to a regular work place which is
more than 50 miles distant from the Employee's regular work place on the
Effective Date.
4. INCOME PROTECTION BENEFITS. During the Benefit Period, the Company or its
--------------------------
successor shall pay and provide to the Employee the following income
continuation and fringe benefits:
-3-
<PAGE>
(a) A monthly payment on or about the fifteenth day of each month (or, in
the case of the initial payment, as soon thereafter as is reasonably
practicable), which shall equal 1/12 of the Base Compensation of the Employee;
provided, that such payments may be accelerated in accordance with the terms of
any arrangement adopted by the Company to fund the Company's obligations
hereunder; and provided further, that
(1) For an Employee other than an officer of the Company whose
continuous service with the Company on the Termination Date is less than 48
months, the Benefit Period shall be reduced to one-half the number of
months of the Employee's continuous service; and
(2) The Benefit Period for an Employee can be extended to the full
Benefit Period term of 24 months, if the Board of Directors of the Company
by majority vote concludes it is reasonably required in order to induce an
individual to accept employment with the Company, or in order to retain an
existing Employee of the Company.
(b) Continued comparable health and life insurance benefits as of the
Effective Date at no increase in cost to the Employee; and
(c) All expenses, including attorneys' fees, which may be incurred by the
Employee in enforcing the Employee's rights against the Company or its successor
under this Plan, whether or not the Employee is successful.
The foregoing payments and benefits shall be paid and provided to the Employee
by the Company or its successor whether or not they are deductible by the
Company or its successor for federal or state income tax purposes. In case of
death of an Employee during the Benefit Period, all payments and benefits
hereunder which have not yet been paid shall be paid to the beneficiary
designated by the Employee in a written beneficiary designation delivered to the
Company prior to the death of the Employee. If the Employee has failed to
designate a beneficiary, such payments and benefits shall be paid to the
Employee's surviving spouse, or if there is not surviving spouse, to the
Employee's estate.
5. TERMS OF PLAN; TERMINATION. This Plan is terminable at any time by the
--------------------------
majority vote of the Board of Directors of the Company or its successor upon six
month's prior written notice delivered to all Employees, provided that the
Company or its successor shall be prohibited from delivering notice of
termination of the Plan during the two year period immediately subsequent to the
Effective Date. Upon termination of the Plan, benefits shall continue to be
paid to any Employee whose Termination Date occurred prior to the date of the
termination of the Plan.
6. AMENDMENT. This Plan can be amended at any time by the Company by a
---------
majority vote of the Board of Directors of the Company and execution of a
written amendment to the Plan by an officer duly authorized by the Board of
Directors on the following conditions:
-4-
<PAGE>
(a) No amendment shall be adopted by the Company or its successor
subsequent to the Effective Date.
(b) Immediately after adopting any amendment, the Company shall provide to
the Employees a written statement of this Plan, as amended, and no amendments
shall be effective as to any Employee, until the Employee has received the
statement. An Employee will be deemed to have received the written statement of
the Plan if it is delivered in person or after 48 hours of dispatch by mail or
other suitable means of delivery to the last known address of the Employee.
7. OTHER PLANS AND CONTRACTS. It is the intention of the Company that the
-------------------------
benefits provided for in this Plan are in addition to, and not in lieu of any
other rights, privileges or benefits to which any Employee may now or hereafter
be entitled under any contract, arrangement, plan or other policy applicable to
any Employee with the Company or any other employer; provided, however, that if
an Employee is entitled to receive a payment or payments based upon annual
salary pursuant to the terms of an employment agreement between the Company and
such Employee, that amount shall operate to postpone commencement of income
continuation payments pursuant to paragraph 4(a). For example, if an Employee
is entitled to six months compensation pursuant to the terms of an employment
agreement, payments made hereunder for such Employee shall commence seven months
from the Termination Date and continue for the remaining term of the Benefit
Period and if an Employee is entitled to payments pursuant to an employment
agreement which have a duration greater than the Benefit Period such Employee
shall not be entitled to any income continuation payments hereunder.
8. APPLICABLE lAW. This Plan shall be interpreted to have been made in the
--------------
State of Colorado and the laws of the State of Colorado shall control to the
extent not preempted by federal law.
IN WITNESS WHEREOF, the Company has adopted this Plan effective June 1,
1994.
KEY PRODUCTION COMPANY, INC.
By: /s/ F. H. MERELLI
----------------------------------
F. H. Merelli, President
-5-
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
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<RECEIVABLES> 3376
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<PP&E> 57334
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<BONDS> 10000
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0
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<OTHER-SE> 31343
<TOTAL-LIABILITY-AND-EQUITY> 52611
<SALES> 16307
<TOTAL-REVENUES> 16637
<CGS> 10344
<TOTAL-COSTS> 10344
<OTHER-EXPENSES> 1519
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