<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
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, 1995
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
------------
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. X
---
Aggregate market value of the voting stock held by non-affiliates of
Key Production Company, Inc. as of March 22, 1996....$46,877,556
Number of shares of Key Production Company, Inc. common stock
outstanding as of March 22, 1996..................... 8,849,468
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its 1996 Annual Meeting
of Stockholders are incorporated by reference into Part III.
================================================================================
<PAGE>
TABLE OF CONTENTS
DESCRIPTION
<TABLE>
<CAPTION>
ITEM PAGE
- -------- ----
<S> <C>
PART I ............................................................... 1
1. BUSINESS ..................................................... 1
2. PROPERTIES ................................................... 4
3. LEGAL PROCEEDINGS ............................................ 6
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .......... 6
EXECUTIVE OFFICERS OF THE REGISTRANT ....................... 6
PART II ............................................................... 8
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ........................................ 8
6. SELECTED FINANCIAL DATA ...................................... 8
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 9
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................. 15
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................ 34
PART III ............................................................... 34
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT* .......... 34
11. EXECUTIVE COMPENSATION* ..................................... 34
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT* ............................................. 34
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 35
PART IV ............................................................... 35
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K ................................................... 35
</TABLE>
* 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 14 states with primary focus areas in the Anadarko Basin of Oklahoma,
California, the Rocky Mountain region 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 National Market tier of The Nasdaq Stock
Market under the symbol KPCI.
BUSINESS DURING 1995
Production during 1995 totaled 633 Mbbls of oil and 5,262 MMcf of gas. Oil
and gas production increased 26 percent and 16 percent, respectively, primarily
as a result of production from new drilling. Product prices averaged $15.70 per
barrel of oil and $1.71 per Mcf of gas.
In 1995, the Company spent $13 million on exploration and development
activities. Key participated in drilling 56 gross (8.35 net) wells in 1995.
During 1995, 48 gross (6.36 net) wells were completed as producers and 8 gross
(1.99 net) wells were dry. Sales of producing properties were not significant
in 1995.
Key has working interests in approximately 1,286 gross (94 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 1,775 properties in the Rocky
Mountain region. At year end, Key held approximately 92,900 net acres of
developed leasehold located primarily in Oklahoma, Wyoming, Texas and Louisiana.
Key also held approximately 353,000 net acres of undeveloped leasehold located
primarily in the Rocky Mountain region.
During 1995, the majority of Key's spot market gas production was marketed
by Apache Corporation (Apache) and sold to Natural Gas Clearinghouse (NGC).
Sales to NGC accounted for 37 percent of Key's 1995 oil and gas revenues.
Eighty-Eight Oil Company (Eighty-Eight Oil) was the largest purchaser of Key's
crude oil production. Approximately 29 percent of 1995 revenues resulted from
crude oil sales to Eighty-Eight Oil. No other single purchaser accounted for
more than 10 percent of revenues in 1995.
On December 21, 1995, the Company announced that Key and Brock Exploration
Corporation (Brock) had entered into a definitive merger agreement that would
combine the two companies. The merger will be structured as a tax-
1
<PAGE>
free exchange with each Brock shareholder receving one share of Key stock for
each 1.45 Brock share held. The proposed transaction is subject to approval by
the stockholders of both Key and Brock and certain other conditions. Both Key
and Brock will submit the merger to their respective stockholders for approval
at special meetings on March 28, 1996. Subject to stockholder approval and other
conditions, the transaction will be consummated as soon as practicable in the
Spring of 1996.
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 $1.71 per Mcf in 1995, $.27 lower than the prior
year average of $1.98 per Mcf. Key's average realized oil price rose to $15.70
per barrel in 1995, up from $14.27 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 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 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, 1995.
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.
2
<PAGE>
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, 1995, which would have a material impact upon the Company's
financial condition or 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, 1995, Key had 28 full-time employees.
OFFICES
Key's principal executive offices are located at One Norwest Center, 20th
Floor, 1700 Lincoln Street, Denver, Colorado 80203-4520.
3
<PAGE>
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, 1995, is set forth below. Substantially all of
these properties are operated by other owners.
<TABLE>
<CAPTION>
Gas Oil
----- ----
Gross Net Gross Net
----- ---- ----- ----
<S> <C> <C> <C> <C>
Midcontinent 320 14.8 32 1.7
Gulf Coast 114 3.2 47 12.6
Rocky Mountains 105 4.7 667 55.5
California 1 1.0 - -
--- ---- --- ----
540 23.7 746 69.8
=== ==== === ====
</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 1,775 properties in the Rocky Mountain region. As of
December 31, 1995, Key held approximately 92,900 net developed acres.
Approximately 70,700 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
1995, 1994 and 1993 in which the Company participated.
<TABLE>
<CAPTION>
Exploratory Developmental
----------- -------------
Productive Dry Total Productive Dry Total
---------- ------- ----------- ---------- --- -------------
<S> <C> <C> <C> <C> <C> <C>
1995
----------
Midcontinent 9 5 14 19 - 19
Gulf Coast - - - 1 - 1
Rocky Mountains 1 2 3 17 - 17
California 1 1 2 - - -
---------- ------- ----------- ---------- --- -------------
11 8 19 37 - 37
========== ======= =========== ========== === =============
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>
4
<PAGE>
At December 31, 1995, 7 gross (1.36 net) wells were in the process of
being drilled.
UNDEVELOPED ACREAGE
As of December 31, 1995, Key held an interest in approximately 353,000
net undeveloped acres located in the Rocky Mountain region.
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
Year Ended December 31, Oil Gas Cost Average Sales Price
- ------------------------- -------------------
Mbbls Mmcf Per Emcf Per Bbl Per Mcf
----- ----- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
1995..................... 633 5,262 $.70 $15.70 $1.71
1994..................... 504 4,522 $.68 $14.27 $1.98
1993..................... 208 3,822 $.63 $15.36 $2.19
</TABLE>
RESERVE VALUE INFORMATION
The estimated proved oil and gas reserves of Key, as of December 31, 1995,
1994 and 1993, and the standardized measure of discounted future net cash flows
attributable thereto at December 31, 1995, 1994 and 1993, are included in
Supplemental Oil and Gas Disclosures to Financial Statements appearing on pages
31 through 33 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, 1995.
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
- ------------------------- ------- --------- ------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
1995..................... $88,016 $86,299 $61,201 $60,296
1994..................... $77,106 $72,404 $51,328 $49,015
1993..................... $54,871 $54,323 $38,577 $38,211
</TABLE>
The present value of estimated future net cash flows from proved reserves
after income taxes are $50,758,000, $42,722,000 and $32,110,000 for 1995, 1994
and 1993, respectively.
5
<PAGE>
Estimated future net cash flows at December 31, 1995, are expected to be
received as shown in the following years:
<TABLE>
<CAPTION>
Proved
Year Ended December 31, Proved Developed
- ------------------------- -------- ---------
(In thousands)
<S> <C> <C>
1996..................... $15,957 $15,933
1997..................... 13,260 13,373
1998..................... 10,363 10,139
Thereafter............... 48,436 46,854
------- -------
Total.................... $88,016 $86,299
======= =======
</TABLE>
Other than the proposed merger described in Item 7 on page 13, no
major discovery or other favorable or adverse event is believed to have occurred
since December 31, 1995, 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, 1995, 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.
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 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANCIS H. MERELLI, 60, 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, 46, 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
6
<PAGE>
corporate planning for Terra Resources, Inc. From 1973 to 1986, Mr. Robertson
was employed by Gulf Oil Corporation.
CATHY L. ANDERSON, 40, has been controller of the Company since
January 15, 1993. From July 1985 to January 1993, Ms. Anderson was employed by
Arthur Andersen LLP, a public accounting firm, in various capacities, the most
recent of which was audit manager.
STEPHEN P. BELL, 41, 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.
7
<PAGE>
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
National Market tier of The Nasdaq Stock Market under the symbol KPCI. No
dividends were paid in 1995 or in 1994. The table below shows the market price
of the common stock for 1995 and 1994:
<TABLE>
<CAPTION>
MARKET PRICE
----------------------------------
1995 1994
---------------- ----------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter $5.000 $4.500 $4.000 $2.750
Second Quarter $6.375 $4.625 $4.750 $3.000
Third Quarter $5.750 $5.000 $4.750 $3.625
Fourth Quarter $5.750 $4.625 $5.375 $3.500
</TABLE>
The closing price of Key's common stock as reported on The Nasdaq
Stock Market for March 22, 1996, was $5.50. At March 22, 1996, the Company's
8,849,468 shares of common stock outstanding were held by 5,323 stockholders of
record and approximately 5,400 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, 1995, 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,
-------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues.................. $19,297 $16,637 $11,735 $17,641 $23,444
Net income/(a)/........... 3,054 2,943 3,495 267 2,437
Per share/(a)/........... .32 .30 .34 .03 .22
Cash dividends............ - - - 1,598 4,345
Per share................ - - - .150 .385
Oil and gas expenditures.. 13,591 29,966 1,885 1,371 1,600
Total assets.............. 59,199 52,611 39,805 41,040 46,995
Long-term debt............ 14,600 10,000 - 2,708 4,661
Stockholders' equity...... 35,699 34,257 35,918 32,400 35,393
</TABLE>
/(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).
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL RESULTS
Key is reporting 1995 net income of $3.1 million, or $.32 per share. On a
per share basis, net income rose 7 percent over the $.30 per share reported in
1994, and 68 percent over the $.19 per share from continuing operations reported
in 1993. Earnings for 1995, 1994 and 1993 are based on oil and gas revenues of
$19.3, $16.3, and $11.7 million, respectively.
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
In 1995, oil and gas revenues climbed 18 percent to $19.3 million. The
surge in revenues is primarily the result of production increases. Sales for
1995 reflect a full year of production from the Company's 1994 acquisition and
additional volumes from successful drilling projects.
Between 1994 and 1993, oil and gas revenues rose by $4.6 million, or 40
percent to reach $16.3 million. The significant increase to 1994 sales
encompasses eight months of production from the Company's second quarter 1994
acquisition of producing properties and the positive impact that wells drilled
or recompleted since 1993 had on oil and gas production.
Gas sales between 1995 and 1994 remained relatively flat at $9.0 million.
Daily gas volumes climbed 16 percent from 12,389 Mcf per day in 1994 to 14,416
Mcf per day in 1995, adding approximately $1.5 million in value. Increased gas
production from new drilling and the 1994 acquisition were just enough to offset
a drop in Key's average gas price. Average gas prices fell from $1.98 per Mcf
in 1994 to $1.71 per Mcf in 1995.
Gas sales increased 7 percent between 1994 and 1993. 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 production increase
was more than enough to counteract 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.
Oil sales of $9.9 million in 1995 increased $2.7 million, or 38 percent,
over the comparable 1994 sales. Increases to both price and production volumes
account for the substantial gain. Daily production volumes increased 26 percent
from 1,382 barrels per day in 1994 to 1,736 barrels per day in 1995. Additional
volume in 1995 added approximately $1.8 million to oil sales. Key's average oil
price increased 10 percent from $14.27 per barrel in 1994 to $15.70 per barrel
in 1995. The favorable price variance had a positive impact of $.9 million.
9
<PAGE>
Spurred on by the acquisition, 1994 oil sales increased by $4 million over
1993 oil sales. 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.
Product sales from gas processing plants contributed $301,000, $140,000 and
$106,000 to oil and gas production revenues in 1995, 1994 and 1993,
respectively. In 1995, Key's oil and gas revenues are derived from the
following product mix: 52 percent oil, 47 percent gas and the balance from
plant product sales. This compares to the following components for 1994: 44
percent oil, 55 percent gas and 1 percent plant products.
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 40
percent to $7.5 million for 1995. The increase to DD&A expense was triggered by
higher oil and gas revenues as discussed above, and an increase to the
amortization rate. Key's annualized amortization rate as a percentage of revenue
increased from 32.1 percent in 1994 to 38.0 percent in 1995. The rate increase
was a consequence of significantly lower gas prices and their effect on the
future gross revenue component of the DD&A calculation. DD&A expense increased
between 1994 and 1993. The 1994 increase was 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.
As anticipated, operating expenses for 1995 rose 25 percent to $6.4
million. The increase can be attributed to the Company's 1994 acquisition and
the numerous workovers performed in 1995 to maintain production on older,
declining wells. On a unit of production basis, 1995 operating expenses are
$.70 per EMcf, compared to $.68 per EMcf in 1994. Key's expenses on a unit of
production basis increased in 1995 because the newly acquired properties have a
greater oil percentage than Key's pre-acquisition properties and oil properties
generally have higher lifting costs than gas properties. Key's operating
expenses increased 1.9 million, or 59 percent, between 1994 and 1993. This
increase was 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 the $.63 per EMcf in 1993.
Administrative, selling and other costs held steady with just a 2 percent
increase to reach $1.5 million for 1995. Between 1995 and 1994, administrative
expense dropped from $.19 per EMcf to $.16 per EMcf. Due to certain economies
of scale and full cost accounting rules which provide for the capitalization of
direct overhead related to exploration and development activities, the Company
was able to maintain levels of administrative expense while managing a larger
asset base. Administrative expenses declined seven
10
<PAGE>
percent between 1994 and 1993. On a units of production basis, administrative
expense decreased to $.19 per Emcf in 1994, compared to $.30 per EMcf in 1993.
Apache Corporation provided accounting and administrative services to Key for
the first four months of 1993. Key paid Apache $300,000 for the services
provided and this amount is included in the 1993 total.
Key has a $50 million credit facility with NationsBank of Texas, N.A. In
1995, the Company elected to increase its borrowing base from $18 million to $22
million. During the year, an additional $4.6 million was borrowed to fund
various exploration and development projects. Annual interest for 1995
increased from $446,000 to $828,000. Interest expense for 1995 includes
interest on the additional $4.6 million borrowing and twelve months of interest
versus eight months in 1994. Interest expense was only $125,000 in 1993 and
reflects the Company's pre-acquisition debt levels.
Interest of $574,000 was capitalized in 1995 for borrowings associated with
the undeveloped leasehold acquired in 1994. Capitalized interest of $309,000
was recorded for the same period of 1994. No interest was capitalized for 1993.
Interest income of $16,000, $110,000 and $282,000 was recorded for the
years 1995, 1994 and 1993, respectively. The higher interest income in 1994 and
1993 reflects the investment of property sales proceeds received in the first
quarter of 1993 and held until the second quarter of 1994. Available cash was
used to partially fund the acquisition.
As discussed in more detail in Footnote 3, "Income Taxes", the Company has
determined that it is no longer necessary to maintain a valuation allowance
against its deferred tax asset. This adjustment decreased the combined federal
and state effective tax rate from 38 percent to approximately 19 percent for
1995.
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 declined slightly from $11.6 million in 1994
to $11.3 million in 1995. An increase to net income between the two years added
$.1 million to cash from operating activities, and the increase in DD&A added
another $2.1 million. These 1995 increases were offset by a $1 million decrease
in deferred taxes and normal fluctuations in the other balance sheet components.
Cash from operating activities soared from $6.7 million in 1993 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
11
<PAGE>
oil and gas production translates into elevated oil and gas revenues and a boost
to cash from operating activities.
Cash expenditures for exploration and development for 1995 totaled $13.5
million, or 119 percent of cash from operating activities. This compares to
$6.1 million and 53 percent of cash from operating activities in 1994, and $1.9
million and 29 percent of cash from operating activities in 1993. The Company
implemented a strategy to increase production and reserves through selective
drilling in the second quarter of 1993. Since that time, the Company has
steadily expanded its exploration and development activities. Key drilled 56
gross wells (8.35 net) in 1995, 45 gross wells (6.25 net) in 1994 and 27 gross
wells (.6 net) 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. Only minor acquisitions of oil and gas properties were made in 1995 and
no acquisitions were made in 1993.
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 received proceeds for small property sales in 1995 and 1994.
In the second quarter of 1994, Key borrowed $12.5 million against its
credit facility with NationsBank to partially fund the acquisition. In the
second half of 1994, the Company repaid $2.5 million of the loan using cash from
operations. In 1995, the Company borrowed a net of $4.6 million against its
NationsBank credit facility to finance exploration and drilling activities and
stock repurchases in excess of cash generated by operating activities.
In the fourth quarter of 1995, Key purchased 331,000 shares of its own
stock from Apache Corporation for $1.7 million, or $5.00 per share. In 1994,
Key purchased 292,171 shares of its own stock for $1.3 million, or an average of
$4.58 per share. In a non-cash transaction in 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. Transactions for the
purchase of shares in 1993 were immaterial.
The Company's ratio of current assets to current liabilities was 1.1 to 1
at December 31, 1995, an increase from the 1 to 1 ratio calculated at December
31, 1994.
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.
12
<PAGE>
FUTURE TRENDS
Consistent with its stated objective over the last several years, the
Company will continue to pursue expansion of its exploration and development
activities in 1996. As discussed above, cash expenditures for exploration and
development activities totaled $1.9 million, $6.1 million and $13.5 million in
fiscal 1993, 1994 and 1995, respectively.
Total reserve additions in 1995 replaced 154% of that year's production
and, on a year-end comparative basis, reserve quantities increased approximately
9% to 60.2 EBcf. Production for the year increased approximately 20% on an EMcf
basis. These production and reserve quantity increases are primarily
attributable to the results of successful drilling projects. The Company
intends to continue to increase exploration and development expenditures.
However, as in the past, Key will invest only in those projects that meet its
economic investment criteria. Depending on the number and quality of drilling
opportunities identified, total cash available under the credit facility
combined with cash from operating activities may exceed the dollar amount of the
investment opportunities identified. This has been the case in each of the last
three fiscal years.
In December 1995, Key and Brock Exploration Corporation (Brock) entered
into a definitive merger agreement that would combine the two companies. The
agreement provides that each Brock stockholder will receive one share of Key
common stock for each 1.45 Brock shares held. The transaction is subject to
approval by stockholders of both companies and will be voted upon at special
meetings of the respective stockholders on March 28, 1996. If the requisite
approval is received, the merger will be close as soon as reasonably practicable
thereafter. Based on information currently available, Key expects the
transaction to be consummated.
Details of the merger and pro forma information about the combined
companies is contained in a Joint Proxy Statement/Prospectus that was mailed to
stockholders of both companies on or about February 16, 1996. As described
therein, subsequent to the merger, Brock would be a wholly-owned subsidiary of
Key. Administrative and accounting functions previously performed by Brock
employees in Brock's offices in New Orleans, LA would be consolidated in Key's
Denver office. Key expects to maintain a small staff of former Brock employees
in Brock's exisiting New Orleans office. Personnel in that office will focus on
exploration and acquisition activities. Key expects to realize significant
administrative savings compared to the combined pre-merger expenses of the two
companies.
In connection with the merger, Key will assume all of the assets and
liabilities of Brock, including Brock's exisiting bank debt. The borrowing base
under Key's line of credit with NationsBank is based on the value of its oil and
gas properties. Key is currently negotiating with NationsBank to obtain an
increase in its borrowing base using the reserve value of the combined
companies. The Company expects to obtain this increase and will use the
additional funds available under the facility to repay Brock's exisiting bank
debt thereby taking advantage of Key's more favable interest rate terms.
13
<PAGE>
Key will continue to pursue its strategy of centralized administration and
regionally-decentralized exploration in 1996. Regional offices were opened in
Tulsa, OK and Houston, TX in October, 1994 and March 1995, respectively, and as
discussed above, consummation of the merger with Brock will add a regional
office in New Orleans. Personnel in the regional offices will seek to identify
attractive exploration and acquisition opportunities in their respective
geographical areas with the overall corporate goal of increased production,
reserves and profitability.
Key's regional efforts have historically been focused in the Rocky
Mountain, Gulf Coast and Mid Continent areas. During 1995, Key launched
exploration activities in a fourth regional area - California. Under the terms
of a joint venture agreement with Mobil Exploration & Producing U.S. Inc.
(Mobil), Key obtained exploration rights on approximately 15,000 gross acres of
producing leasehold in the gas-prone Sacramento basin. To date, results have
been encouraging with three of the four wells drilled completed as producers.
These three wells were placed on production in January, February and March,
1996. These wells are currently producing and selling gas. Key has access to
the 3-D seismic information previously obtained by Mobil and is in the process
of conducting additional 3-D seismic surveys in the area. Additional drilling
is planned in this area during 1996, although the exact number of wells to be
drilled has not been determined at this time.
The Company 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 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.
14
<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 December 31, 1995................................... 16
Statement of cash flows for each of the three years in
the period ended December 31, 1995............................... 17
Balance sheet as of December 31, 1995 and 1994................... 18
Statement of stockholders' equity for each of the three
years in the period ended December 31, 1995...................... 19
Summary of significant accounting policies....................... 20
Notes to financial statements.................................... 23
Report of independent public accountants......................... 30
Supplemental oil and gas disclosures............................. 31
Supplemental quarterly financial data............................ 34
</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.
15
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1995 1994 1993
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
REVENUES:
Oil and gas production revenues..... $19,255 $16,307 $11,658
Other revenues...................... 42 330 77
------- ------- -------
19,297 16,637 11,735
------- ------- -------
OPERATING EXPENSES:
Depreciation, depletion and
amortization....................... 7,451 5,328 3,902
Operating costs..................... 6,376 5,103 3,207
Administrative, selling and other... 1,461 1,432 1,535
Financing costs:
Interest expense.................. 254 137 125
Interest income................... (16) (110) (282)
------- ------- -------
15,526 11,890 8,487
------- ------- -------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............. 3,771 4,747 3,248
PROVISION FOR INCOME TAXES........... 717 1,804 1,234
------- ------- -------
NET INCOME BEFORE
EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE............. 3,054 2,943 2,014
Extraordinary item (loss on
early extinguishment of debt,
net of related income tax
benefit of $74,000)............... - - (122)
Cumulative effect of change
in accounting for income taxes.... - - 1,603
------- ------- -------
NET INCOME........................... $ 3,054 $ 2,943 $ 3,495
======= ======= =======
NET INCOME PER COMMON SHARE:
Before extraordinary item and
cumulative effect of change
in accounting principle........... $.32 $.30 $ .19
Extraordinary item.................. - - (.01)
Cumulative effect of change in
accounting for income taxes........ - - .16
------- ------- -------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING....... $.32 $.30 $ .34
======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING....... 9,569 9,808 10,252
======= ======= =======
</TABLE>
16
<PAGE>
KEY PRODUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 3,054 $ 2,943 $ 3,495
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization......................... 7,451 5,328 3,902
Deferred income taxes.................. 543 1,552 1,104
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
liabilities:
(Increase) decrease in receivables....... 30 (426) 763
(Increase) decrease in prepaid
expenses and other..................... (321) 86 25
Increase (decrease) in accounts
payable and accrued expenses........... 629 1,308 (214)
Increase (decrease) in long-term
property liabilities and other......... (88) 823 (912)
-------- -------- -------
Net cash provided by operating
activities........................... 11,298 11,614 6,682
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas exploration and
development expenditures............... (13,478) (6,128) (1,928)
Acquisition of oil and gas properties.... (597) (23,021) -
Proceeds from sale of oil and gas
properties............................. 351 321 3,859
Other capital expenditures............... (198) (383) (241)
-------- -------- -------
Net cash provided (used) by investing
activities........................... (13,922) (29,211) 1,690
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings..................... 4,900 12,500 -
Payments on long-term debt............... (300) (2,500) (3,183)
Payments to acquire treasury stock....... (1,666) (1,337) (1)
-------- -------- -------
Net cash provided (used) by
financing activities................. 2,934 8,663 (3,184)
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 310 (8,934) 5,188
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR.................................. 281 9,215 4,027
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.. $ 591 $ 281 $ 9,215
======== ======== =======
</TABLE>
The accompanying Summary of Significant Accounting Policies and Notes
to Financial Statements are integral parts of this statement.
17
<PAGE>
KEY PRODUCTION COMPANY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------
ASSETS 1995 1994
--------- --------
(In thousands,
except share data)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 591 $ 281
Receivables............................................... 3,346 3,376
Prepaid expenses and other................................ 481 160
-------- -------
4,418 3,817
-------- -------
OIL AND GAS PROPERTIES, ON THE BASIS OF
FULL COST ACCOUNTING:
Proved properties......................................... 61,470 49,381
Unproved properties and properties
under development, not being amortized.................. 9,104 7,953
-------- -------
70,574 57,334
Less - accumulated depreciation, depletion
and amortization........................................ (16,420) (9,105)
-------- -------
54,154 48,229
-------- -------
OTHER ASSETS, NET.......................................... 627 565
-------- -------
$ 59,199 $52,611
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,948 $ 2,193
Accrued exploration and development....................... 370 854
Accrued lease operating expense and other................. 531 711
-------- -------
3,849 3,758
-------- -------
LONG-TERM DEBT............................................. 14,600 10,000
-------- -------
NON-CURRENT LIABILITIES:
Income taxes.............................................. 3,199 2,656
Long-term property liabilities and other.................. 1,852 1,940
-------- -------
5,051 4,596
-------- -------
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........................................... 34,401 34,388
Retained earnings......................................... 9,489 6,435
Treasury stock at cost, 2,806,882 and 2,484,351
shares, respectively.................................... (11,105) (9,480)
-------- -------
35,699 34,257
-------- -------
$ 59,199 $52,611
======== =======
</TABLE>
18
<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,
1992................... $2,914 $34,381 $ - $ (4,895) $32,400
Net income............. - - 3,495 - 3,495
Treasury stock issued.. - 1 - 23 24
Treasury stock
purchased............ - 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
purchased............ - - - (4,637) (4,637)
------- ------- ------ -------- -------
BALANCE, DECEMBER 31,
1994................... 2,914 34,388 6,435 (9,480) 34,257
Net income............. - - 3,054 - 3,054
Treasury stock issued.. - 13 - 41 54
Treasury stock
purchased............ - - - (1,666) (1,666)
------- ------- ------ -------- -------
BALANCE, DECEMBER 31,
1995 $2,914 $34,401 $9,489 $(11,105) $35,699
======= ======= ====== ======== =======
</TABLE>
The accompanying Summary of Significant Accounting Policies and Notes
to Financial Statements are integral parts of this statement.
19
<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 appointed 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. APCOP's remaining assets were distributed to
Apache and Key in accordance with their respective partnership interests.
Immediately following the dissolution of APCOP, 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.
Key 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 14 states with primary focus areas in the
the Anadarko Basin of Oklahoma, California, the Rocky Mountain region, and the
Gulf Coast.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Key for 1995,
1994 and 1993.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
20
<PAGE>
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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. Future
development, site restoration, dismantlement and abandonment costs, net of
salvage values, are estimated on a property-by-property basis using prevailing
prices. 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 including estimated future development costs
(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. This limit may be
particularly sensitive to changes in the near term in pricing and production
rates. 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, 1995.
The costs of certain unevaluated leasehold acreage and wells in the process of
being drilled are not amortized. Amortization commences 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 $574,000 and $309,000 in 1995 and
1994, respectively. No interest was capitalized during 1993.
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.
21
<PAGE>
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 eight percent
at December 31, 1995.
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.
NET INCOME PER SHARE
Net income per share amounts are based on the weighted average number of
common shares outstanding for each year. When dilutive, outstanding options to
purchase common stock are included as share equivalents using the treasury stock
method. In 1995, only one per share figure is presented because the fully
diluted and primary earnings per share amounts are not materially different.
For 1994 and 1993, the common stock equivalents were either antidiulutive or
their inclusion did not materially affect 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 rates of interest at December 31, 1995 and 1994,
with cost approximating market.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the 1995
presentation.
TREASURY STOCK
Treasury shares were acquired in 1995, 1994 and 1993 under the Company's
policy of repurchasing shares when market conditions appear favorable. Treasury
stock is recorded at cost.
22
<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.
The following unaudited pro forma information was prepared as if the
acquisition occurred on January 1, 1993. The pro forma data presented is based
on numerous assumptions.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
(In thousands, except per share data) 1994 1993
------- -------
<S> <C> <C>
Revenues $19,148 $21,809
Net income $ 3,154 $ 5,339
Net income per share $ .32 $ .52
</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. In 1995, the Company elected to increase
the borrowing base from $18 million to $22 million. The current borrowing base
is still 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 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, 1995, was 6.63
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 revolving loan 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.
23
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with full cost accounting rules, the Company capitalizes
interest expense on borrowings associated with undeveloped leasehold. For 1995
and 1994, the Company capitalized $574,000 and $309,000, respectively. No
interest was capitalized for 1993.
The credit facility with NationsBank requires the Company to comply
with certain covenants contained within the Credit Agreement (Agreement) until
full and final payment of the obligaton and termination of the Agreement. The
Company has been in compliance with the covenants since April 1994 when the
Agreement was signed.
Aggregate maturities of long-term debt outstanding at December
31, 1995, are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1996 -
1997 3,650
1998 4,867
1999 4,867
2000 1,216
Thereafter -
-------
$14,600
=======
</TABLE>
The fair value for long-term debt is estimated based on current rates
available for similar debt with similar maturities and securities, and at
December 31, 1995, approximates the carrying value.
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.
24
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities and assets are comprised of the following
components at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
--------- ---------
<S> <C> <C>
Long-term deferred tax assets:
Operating loss carryforwards $ 2,028 $ 1,462
Other 241 65
------- -------
2,269 1,527
Valuation allowance........................ - (581)
------- -------
2,269 946
Long-term deferred tax liabilities:
Depreciation, depletion and amortization.. (5,468) (3,602)
------- -------
Deferred income tax liability............. $(3,199) $(2,656)
======= =======
</TABLE>
The Company had net tax operating loss carryforwards of approximately $4.8
million at December 31, 1995, which expire in the years 2003 through 2009.
In connection with adoption of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993, the
Company established a valuation allowance for a portion of its deferred tax
asset. At that time, it was unknown whether the Company would be able to fully
utilize the net operating loss (NOL) carryforwards underlying the deferred tax
asset.
In 1994, a significant portion of the NOL carryforwards were utilized in
connection with a sale of non-producing leasehold and, based on current
projections, it appears more likely than not that the Company will be able to
utilize the remaining NOL carryforwards before they expire. As a result, the
Company has determined that it is no longer necessary to provide a valuation
allowance. This adjustment decreased the combined federal and state effective
tax rate from 38 percent to approximately 19 percent for 1995.
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1995 1994 1993
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current Taxes:
Federal.............................................. $ 23 $ 182 $ -
State................................................ 151 70 56
Deferred Taxes:....................................... 543 1,552 1,104
------ ------ ------
717 1,804 1,160
Tax benefit of extraordinary item..................... - - 74
------ ------ ------
Total tax provision on income from
continuing operations................................ $ 717 $ 1,804 $ 1,234
====== ====== ======
</TABLE>
25
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
A reconciliation of the statutory income tax rate to the effective rate is as
follows:
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Statutory income tax rate...................................................... 34.0% 34.0% 34.0%
State income tax............................................................... 4.0 4.0 4.0
Amortization of valuation allowance
and other..................................................................... (19.0) - -
------ ------ -------
19.0% 38.0% 38.0%
====== ====== =======
</TABLE>
4. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts
capitalized)................ $ 171 $ 74 $ 217
Income taxes (net of
refunds received)........... $ 361 $ 79 $ 109
</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 500,000 options were outstanding at year end. The options expire at
various dates through 2005 and are at prices ranging from $2.50 to $4.875 per
share with an aggregate exercise price of $1,598,750.
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
have been granted since 1992.
26
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995, a total of 840,000 outstanding options were
vested.
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>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Outstanding, beginning of year 1,070,000 860,000 590,000
Granted 20,000 210,000 270,000
--------- --------- -------
Outstanding, end of year 1,090,000 1,070,000 860,000
========= ========= =======
Available for grant, end of year 590,000 610,000 820,000
========= ========= =======
</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 $55,362, $33,029 and $18,505 in 1995, 1994 and 1993, respectively. In
connection with the annual testing required on all 401(k) plans, Key made
qualified non-elective contributions for the benefit of all non-highly
compensated employees. Qualified non-elective contribution expense was $23,056
and $11,980 in 1995 and 1994, respectively. The contribution was required to
keep the plan qualified due to the top heavy status of the plan. No comparable
contribution was required for 1993.
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.
27
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 1995, 1994 or 1993.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS-The Company has leases for office space with varying
expiration dates through 1998. Rental expense was $96,997, $52,683 and $13,746
for 1995, 1994 and 1993, respectively.
As of December 31, 1995, minimum rental
commitments under these leases are payable in the following years:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 98,634
1997 51,696
1998 6,600
--------
$156,930
========
</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 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, 1995, 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.
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
28
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In October, 1995, Key purchased 331,000 shares of its own stock from Apache
at $5.00 per share.
9. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1995
and 1994, result from oil and gas sales to other companies in the oil and gas
industry. This concentration of customers may impact the Company's overall
credit risk, either positively or negatively, in that these entities may be
similarly affected by industry-wide changes in economic or other conditions.
Such receivables are generally not collateralized.
The following parties purchased 10 percent or more of Key's oil and gas
production:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
Purchaser 1995 1994 1993
--------- ---- ---- ----
<S> <C> <C> <C>
Natural Gas Clearinghouse.. 37% 38% 32%
Dow Chemical Company....... - - 12%
Eighty-Eight Oil Company... 29% 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. From 1993 to 1995, the
majority of Key's gas production marketed by Apache was sold to Natural Gas
Clearinghouse (NGC).
10. SUBSEQUENT EVENT
On December 21, 1995, Key announced the signing of a definitive agreement
to merge with Brock Exploration Corporation (Brock). The merger will be
structured as a tax-free exchange with each Brock stockholder receiving one
share of Key stock for each 1.45 Brock share held. The merger is subject to
approval by the stockholders of both Key and Brock and certain other conditions.
Both Key and Brock will submit the merger to their respective stockholders for
approval at special meetings on March 28, 1996. Subject to stockholder approval
and other conditions, the transaction will be consummated as soon as practicable
in the Spring of 1996.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Key Production Company, Inc.:
We have audited the accompanying balance sheets of Key Production Company,
Inc. (a Delaware corporation) as of December 31, 1995 and 1994, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, 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 28, 1996.
30
<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,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Oil and gas revenues from production....... $19,255 $16,307 $11,658
------- ------- -------
Operating costs:
Depreciation, depletion and amortization.. 7,315 5,241 3,864
Lease operating........................... 4,916 4,086 2,469
Production taxes.......................... 1,460 1,017 738
Income tax................................ 1,057 2,266 1,743
------- ------- -------
14,748 12,610 8,814
------- ------- -------
Results of operations from oil and gas
producing activities...................... $ 4,507 $ 3,697 $ 2,844
======= ======= =======
Amortization rate as a percentage
of revenues............................... 38.0% 32.1% 33.1%
======= ======= =======
</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,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(In thousands, except percentages)
<S> <C> <C> <C>
Balance, beginning of year.............. $ 57,334 $30,989 $32,963
Costs incurred during the year:
Exploration............................ 3,534 2,657 -
Development............................ 9,460 4,288 1,885
Acquisition of properties
Proved................................ 597 12,948 -
Unproved............................. - 10,073 -
Property sales
Proved............................... - (10) (3,859)
Unproved............................. (351) (3,611) -
-------- ------- -------
Balance, end of year.................... 70,574 57,334 30,989
Less - costs not being amortized........ (9,104) (7,953) (90)
-------- ------- -------
Costs being amortized................... 61,470 49,381 30,899
Less - accumulated depreciation,
depletion and amortization............. (16,420) (9,105) (3,864)
-------- ------- -------
Capitalized costs being amortized, net.. $ 45,050 $40,276 $27,035
======== ======= =======
</TABLE>
31
<PAGE>
COSTS NOT BEING AMORTIZED-Oil and gas property costs not being amortized at
December 31, 1995, consist of $9,104,000 of leasehold cost. Of the total,
$2,270,000, $6,814,000 and $20,000 was incurred in 1995, 1994, and 1993,
respectively.
OIL AND GAS RESERVE INFORMATION (UNAUDITED)-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 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
------------------------------------ -------------------------------------
1995 1994 1993 1995 1994 1993
------------- ------------ ------- -------------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Total proved reserves-
Developed and
undeveloped
Beginning of year...... 33,597 24,240 28,721 3,623 1,048 1,513
Revisions of previous
estimates............ 1,083 140 2,691 241 38 (50)
Improved recovery...... 205 - - 255 112 -
Extensions and
discoveries.......... 7,459 4,587 1,199 301 617 20
Purchases of
reserves............. 396 9,152 - 5 2,312 -
Production............. (5,262) (4,522) (3,822) (633) (504) (208)
Sales of
properties........... - - (4,549) - - (227)
------ ------ ------ ----- ----- -----
End of year............ 37,478 33,597 24,240 3,792 3,623 1,048
====== ====== ====== ===== ===== =====
Proved developed
reserves-
Beginning of year...... 31,967 24,140 28,532 3,099 1,004 1,450
End of year............ 36,986 31,967 24,140 3,685 3,099 1,004
</TABLE>
FUTURE NET CASH FLOWS (UNAUDITED)-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,
32
<PAGE>
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>
1995 1994 1993
--------- -------------- --------
(In thousands)
<S> <C> <C> <C>
Cash inflows.............................................................................. $141,429 $122,228 $ 77,215
Production and development costs.......................................................... (53,413) (45,122) (22,344
Income tax expense........................................................................ (15,822) (12,864) (9,999
-------- -------- --------
Net cash flows............................................................................ 72,194 64,242 44,872
10% annual discount rate.................................................................. (21,436) (21,520) (12,762
-------- -------- --------
Discounted future net cash flows.......................................................... $ 50,758 $ 42,722 $ 32,110
======== ======== ========
The following are the principal sources of change in the discounted future net cash flows:
For the Year Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
Sales, net of production costs.............................................................. $(12,879) $(11,204) $ (8,451
Net change in prices and production costs................................................... 1,512 (2,163) (3,029
Extensions, discoveries and improved
recovery, net of related costs............................................................. 10,544 5,692 1,582
Change in future development costs.......................................................... 1,026 (22) 270
Revision of quantities...................................................................... 2,969 461 2,747
Accretion of discount....................................................................... 5,133 3,858 4,366
Change in income taxes...................................................................... (1,837) (2,139) 150
Purchases of reserves in place.............................................................. 409 18,458 -
Sales of properties......................................................................... - - (5,432
Change in production rates and other........................................................ 1,159 (2,329) 2,862
-------- -------- --------
$ 8,036 $ 10,612 $ (4,935
======== ======== ========
</TABLE>
IMPACT OF PRICING (UNAUDITED)-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.
33
<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>
1995
Revenues................... $4,738 $4,688 $4,782 $5,089 $19,297
Expenses, net.............. 4,107 3,903 4,005 4,228 16,243
------ ------ ------ ------ -------
Net income................. $ 631 $ 785 $ 777 $ 861 $ 3,054
====== ====== ====== ====== =======
Net income per common and
common equivalent share... $ .07 $ .08 $ .08 $ .09 $ .32
====== ====== ====== ====== =======
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
====== ====== ====== ====== =======
</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.
34
<PAGE>
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.
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, 1995.
Statement of cash flows for each of the three years in the period
ended December 31, 1995.
Balance sheet as of December 31, 1995 and 1994.
Statement of changes in stockholders' equity for each of the three
years in the period ended December 31, 1995.
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.
Exhibit No. Description
----------- -----------
2.1 -- Dissolution Agreement and Quitclaim Assignment between APC
Operating Partnership L.P., Apache Corporation and
35
<PAGE>
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).
2.2 -- Agreement and Plan of Merger dated as of December 21, 1995
among Key Production Company, Inc., Key Acquisition One,
Inc. and Brock Exploration Corporation (incorporated by
reference to Exhibit 2.2 to the Registrant's Statement on
Form S-4, registration no. 333-00889 filed with the SEC on
February 15, 1996).
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, as amended and restated on June 8,
1995 (incorporated by reference to Exhibit 3.3 to the
Registrant's Form 10Q for the quarter ended June 30, 1995,
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).
+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).
36
<PAGE>
+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).
37
<PAGE>
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.
*24.1 --Consent of Arthur Andersen LLP dated February 28,
1996.
*27.1 --Financial Data Schedule for Commercial and Industrial
Companies per Article 5 of Regulation S-X for the year ended
December 31, 1995.
(b) Reports on Form 8-K:
On January 3, 1996, the Company filed a report dated December 21, 1995, on
Form 8-K. The Form 8-K announced that Key Production Company, Inc. and
Brock Exploration Corporation had entered into a definitive merger
agreement that would combine the two companies.
38
<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.
By: /s/ F. H. Merelli
_______________________________________
F. H. Merelli
Date: March 28, 1996 Chairman, President and Chief Executive
Officer
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.
Signature Title Date
--------- ----- ----
/s/ F. H. Merelli Director, Chairman,
- --------------------------- President and Chief
F. H. Merelli Executive Officer
(Principal Executive
Officer) March 28, 1996
/s/ Monroe W. Robertson Senior Vice President
____________________________ and Secretary
Monroe W. Robertson (Principal Financial
Officer) March 28, 1996
/s/ Cathy L. Anderson Controller
____________________________ (Principal Accounting
Cathy L. Anderson Officer) March 28, 1996
/s/ Cortlandt S. Dietler Director March 28, 1996
____________________________
Cortlandt S. Dietler
/s/ Timothy J. Moylan Director March 28, 1996
____________________________
Timothy J. Moylan
39
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statement on Form S-8, dated September
5, 1995, file no. 33-62355.
/s/ Arthur Andersen LLP
Denver, Colorado
February 28, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 591
<SECURITIES> 0
<RECEIVABLES> 3,346
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,418
<PP&E> 70,574
<DEPRECIATION> 16,420
<TOTAL-ASSETS> 59,199
<CURRENT-LIABILITIES> 3,849
<BONDS> 14,600
0
0
<COMMON> 2,914
<OTHER-SE> 32,785
<TOTAL-LIABILITY-AND-EQUITY> 59,199
<SALES> 19,255
<TOTAL-REVENUES> 19,297
<CGS> 13,691
<TOTAL-COSTS> 13,691
<OTHER-EXPENSES> 1,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> 3,771
<INCOME-TAX> 717
<INCOME-CONTINUING> 3,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,054
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
