<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 0-17162
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KEY PRODUCTION COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1089744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
707 Seventeenth Street, Suite 3300 Denver, Colorado 80202-3404
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 303/295-3995 .
----------------
One Norwest Center, 20th Floor
1700 Lincoln Street, Denver, Colorado 80203-4520
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(Previous Address of Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _____
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The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of March 31, 1998, is 11,504,080.
<PAGE>
PART 1 FINANCIAL INFORMATION
-----------------------------
ITEM 1 FINANCIAL STATEMENTS
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Three Months
Ended March 31,
----------------------
(In thousands, except per share data) 1998 1997
---------- ----------
Revenues:
Oil and gas production revenues $ 9,786 $ 11,039
Other revenues 25 71
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9,811 11,110
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Operating Expenses:
Depreciation, depletion and amortization 3,960 3,154
Operating costs 2,827 2,753
Administrative, selling and other 452 409
Financing costs:
Interest costs 290 189
Interest income (33) (24)
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7,496 6,481
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Income Before Income Taxes 2,315 4,629
Provision for Income Taxes 880 1,759
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Net Income $ 1,435 $ 2,870
========== ==========
Basic Earnings Per Share $ .12 $ .25
========== ==========
DILUTED EARNINGS PER SHARE $ .12 $ .24
========== ==========
The accompanying notes to consolidated financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
--------------------
(In thousands) 1998 1997
-------- --------
Cash Flows from Operating Activities:
Net income $ 1,435 $ 2,870
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,960 3,154
Deferred income taxes 787 1,574
Changes in operating assets and liabilities:
Decrease in receivables 2,956 2,798
Decrease in prepaid expenses and other 26 243
Increase (decrease) in accounts payable
and accrued expenses (4,447) 1,075
Decrease in long-term property liabilities
and other (40) (235)
-------- --------
Net cash provided by operating activities 4,677 11,479
-------- --------
Cash Flows from Investing Activities:
Oil and gas exploration and development
expenditures (9,169) (5,739)
Acquisition of oil and gas properties (49) (404)
Proceeds from sale of oil and gas properties - 44
Other capital expenditures (126) (66)
-------- --------
Net cash used by investing activities (9,344) (6,165)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 4,000 1,000
Payments on long-term debt - (4,500)
Payments to acquire treasury stock - (1)
-------- --------
Net cash provided (used) by financing
activities 4,000 (3,501)
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (667) 1,813
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,349 1,581
-------- --------
Cash and Cash Equivalents at End of Period $ 2,682 $ 3,394
======== =========
The accompanying notes to consolidated financial statement are
an integral part of this statement.
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<PAGE>
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, December 31,
(In thousands) 1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,682 $ 3,349
Receivables 7,298 10,254
Prepaid expenses and other 354 380
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10,334 13,983
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OIL AND GAS PROPERTIES, ON THE BASIS OF
FULL COST ACCOUNTING:
Proved properties 146,081 138,447
Unproved properties and properties
under development, not being amortized 20,736 18,624
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166,817 157,071
Less accumulated depreciation,
depletion and amortization (45,775) (41,919)
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121,042 115,152
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OTHER ASSETS, NET 1,534 1,512
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$ 132,910 $ 130,647
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,424 $ 11,290
Accrued exploration and development 1,813 1,285
Accrued lease operating expense and other 1,085 729
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9,322 13,304
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Long-Term Debt 39,000 35,000
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NONCURRENT LIABILITIES
Deferred income taxes 16,490 15,703
Long-term property liabilities and other 1,689 1,729
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18,179 17,432
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STOCKHOLDERS' EQUITY:
Common stock, $.25 par value, 50,000,000
shares authorized, 11,776,190 shares
issued 2,944 2,944
Paid-in capital 37,390 37,380
Retained earnings 28,600 27,165
Treasury stock at cost, 272,110, and
277,835 shares, respectively (2,525) (2,578)
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66,409 64,911
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$ 132,910 $ 130,647
=========== ============
The accompanying notes to consolidated financial statements are
an integral part of this statement.
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<PAGE>
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
TOTAL
STOCK-
COMMON PAID-IN RETAINED TREASURY HOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------- ------- -------- -------- --------
(In thousands, except per share data)
BALANCE, DECEMBER 31, 1997 $2,944 $37,380 $27,165 $(2,578) $64,911
Net income - - 1,435 - 1,435
Treasury stock issued - 10 - 53 63
------ ------- ------- ------- -------
BALANCE, MARCH 31, 1998 $2,944 $37,390 $28,600 $(2,525) $66,409
====== ======= ======= ======= =======
The accompanying notes to consolidated financial statements are
an integral part of this statement.
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<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The financial statements included herein have been prepared by Key
Production Company, Inc. (Key or the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, and reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited statements. All such adjustments are of a normal, recurring
nature except as disclosed herein. Certain information, accounting policies,
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Key and the accounts of its wholly-owned subsidiaries: Brock Exploration
Corporation, Brock Oil and Gas Corporation and Brock Gas Systems and Equipment,
Inc.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
Income tax expense consisted of the following:
Three Months Ended March 31,
----------------------------
1998 1997
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Current Taxes:
Federal $ - $ -
State 93 185
Deferred Taxes: 787 1,574
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$ 880 $ 1,759
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<PAGE>
NET INCOME PER SHARE
The Company adopted Financial Accounting Standards No. 128, "Earnings per
Share," on December 15, 1997. The new standard replaces "primary earnings per
share" with "basic earnings per share" and redefines "diluted earnings per
share." Basic earnings per share is computed based on the monthly weighted-
average number of shares outstanding during the period. The weighted-average
number of common shares used in computing basic earnings per share was
11,498,413 and 11,454,527 for 1998 and 1997, respectively. Diluted earnings per
share is computed based on the weighted-average number of common shares
outstanding during the periods and the assumed exercise of dilutive common stock
equivalents (stock options) using the treasury stock method. Dilutive
equivalents assumed to have been exercised totaled 681,237 and 724,701 for 1998
and 1997, respectively. The effect on this previously reported earnings per
share data was as follows:
For the Three Months
Per Share Amounts Ended March 31,1997
----------------- --------------------
Primary EPS as reported $ .24
Effect of SFAS No. 128 .01
--------
Basic EPS as restated $ .25
========
Fully diluted EPS as reported $ .24
Effect of SFAS No. 128 -
--------
Diluted EPS as restated $ .24
========
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 5.5 and 5.9 percent rates of interest at March 31, 1998 and
December 31, 1997, respectively, with cost approximating market.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Three Months
Ended March 31,
1998 1997
------ ------
Cash paid during the period for:
Interest (net of amounts capitalized) $ 252 $ 368
Income taxes (net of refunds received) $ 3 $ 6
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<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL RESULTS
Key is reporting first quarter net income of $1.4 million, or $.12 per
diluted share. This is down 50 percent from the $2.9 million and $.24 per
diluted share reported for the first quarter of 1997. These results were based
on revenues of $9.8 million and $11.1 million for 1998 and 1997, respectively.
During the first quarter of 1998, Key generated record equivalent gas
production. Additions to production from new drilling helped to counter the
impact of extremely low oil and gas prices for this period.
RESULTS OF OPERATIONS
For the Three Months
Ended March 31,
1998 1997
-------- --------
Selected Oil and Gas
Operating Statistics
- --------------------
Gas Volume Mcf per day 33,057 28,367
Gas Price Per Mcf $ 2.08 $ 2.66
Oil Volume Barrels per day 2,808 2,229
Oil Price Per barrel $ 13.45 $ 20.41
Full Cost Amortization Rate 39.4% 28.2%
Oil and gas revenues decreased by 11 percent between the first quarters of
1998 and 1997 despite hefty increases to production. Key's oil and gas revenues
were $9.8 million for the first quarter of 1998, compared to $11.0 million for
the first quarter of 1997.
Gas sales slipped 9 percent to $6.2 million for 1998. The $.6 million
decrease is composed of a negative $1.7 million price variance and a positive
$1.1 million boost from production. Average daily gas volumes climbed from
28,367 Mcf per day in 1997 to 33,057 Mcf per day in 1998. Unfortunately, Key's
average gas price dropped from $2.66 per Mcf in 1997 to $2.08 per Mcf in 1998.
Gas volumes continue to rise due to the success of the Company's drilling
program.
Oil sales for the current quarter of $3.4 million are down 17 percent from
the $4.1 million reported for the same quarter a year ago. Average daily
production rose from 2,229 barrels per day in 1997 to 2,808 barrels per day in
1998, adding $1.1 million in value to sales. Approximately 73 percent of the
oil volume increase is from the acquisition of producing oil properties in the
third quarter of 1997. On the downside, Key's average oil price plummeted from
$20.41 per barrel in 1997 to $13.45 in 1998. Price had a negative impact of
$1.8 million on sales.
Product sales from gas processing plants contributed approximately $210,000
and $162,000 to oil and gas production revenues in 1998 and 1997, respectively.
In the first quarter of 1998, Key's oil and gas revenues are derived from the
following product mix: 35 percent oil, 63 percent gas and 2 percent from plant
product sales. Similarly, the product mix for 1997 was: 37 percent oil, 61
percent gas and 2 percent from plant product sales.
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<PAGE>
Other revenues were approximately $25,000 and $71,000 for the first quarter
of 1998 and 1997, respectively. Key's primary source of other revenue for 1997
was income from a pipeline acquired in the 1996 Brock acquisition. This
pipeline was sold in March 1997, resulting in a decrease to other revenues
between 1997 and 1998.
Depreciation, depletion and amortization (DD&A) expense increased 26
percent between the first quarters of 1998 and 1997 despite an 11 percent
decrease to oil and gas revenues. The depletion rate as a percentage of oil and
gas sales increased from 28.2 percent in the first quarter of 1997 to 39.4
percent in the same period of 1998 largely due to unfavorable commodity prices.
Operating expenses increased 3 percent between the first quarters of 1997
and 1998 while equivalent production increased by 20 percent. On a unit of
production basis, operating expenses declined from $.73 per EMcf in 1997 to $.63
per EMcf in 1998. (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.)
General, administrative and other costs (G&A) increased by 11 percent
between 1998 and 1997. Based on the increase in sales volumes, this translates
to a $.01 per EMcf decrease to G&A between 1997 and 1998. Due to certain
economies of scale and full cost accounting rules, which provide for the
capitalization of direct overhead related to acquisition, exploration and
development activities, the Company was able to maintain levels of (G&A) expense
while managing a growing asset base.
Interest expense before capitalization was $625,000 and $360,000 for first
quarter 1998 and 1997, respectively. Key capitalized interest of $335,000 and
$171,000 in 1998 and 1997, respectively. These amounts are for borrowings
associated with undeveloped leasehold. The long-term debt balance was $39.0
million at March 31, 1998, compared to $19.0 million at March 31, 1997.
Key is using an effective tax rate of 38 percent for 1998 and 1997.
CASH FLOW AND LIQUIDITY
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.
Cash from operating activities for the first quarter of 1998 was $4.7
million, down 59 percent from the $11.5 million reported a year ago. Most of
the variance stems from a reduction of accounts payable balances and a decrease
in net income.
Expenditures for exploration and development for the first quarter of 1998
totaled $9.2 million, or double the cash provided by operating activities. This
is a 60 percent increase over the $5.7 million spent in the first quarter of
1997. So far in 1998, exploration and development projects have been funded
with a combination of cash from operations and long-term-debt. In the first
quarter of 1997, exploration and development projects were funded with cash from
operations.
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<PAGE>
In the first quarter of 1998, the Company borrowed $4.0 million to finance
exploration and drilling activities in excess of cash generated by operating
activities. In the first quarter of 1997, the Company retired a net $3.5
million of long-term debt using cash from operating activities.
The Company's ratio of current assets to current liabilities was 1.1 to 1
at March 31, 1998 and December 31, 1997.
FUTURE TRENDS
Key expects to continue to expand its drilling program for the remainder of
1998. First quarter expenditures for exploration and development are
significantly ahead of last year, $9.2 million compared to $5.7 million for the
first quarter of 1997. Exploration for the year is expected to outpace 1997.
The Company expects its budget for drilling expenditures to increase to
approximately $34 million compared to $24.7 million spent for drilling in 1997.
Total expenditures for exploration and development, including land and seismic
costs, are expected to increase to $46.1 million. This compares to $40.5
million spent in 1997.
Exploration efforts will continue in the company's five primary focus
areas: the Mid-Continent, Rocky Mountains, California, North Texas and the Gulf
Coast. Drilling has commenced on the Company's salt basin play in Mississippi
and several locations are expected to be drilled during the remainder of the
year. The first well on the Company's West Gueydan prospect in south Louisiana
is currently being drilled and several other drilling locations have been
identified.
Activity is increasing in North Texas, Key's newest region. The company
became active in the Hardeman Basin of north-central Texas through a joint-
venture agreement entered into in the fall of 1997. To date four oil wells have
been completed as producers. Key will operate all wells drilled under the
exploration joint venture agreement.
California continues to be one of the Company's most active exploration
regions. However, hampered by inclement weather on the West Coast, drilling
activity was somewhat behind schedule for the first quarter. Gas sales were
also affected by pipeline capacity constraints. The two productive wells
drilled in the area during 1998 will begin producing once expansion of the
Company's gas gathering facility is completed late in the second quarter.
The total number of wells drilled in 1998 is expected to be significantly higher
than the number drilled in 1997.
Oil and gas prices declined since yearend 1997 and continue to be
depressed. These price declines had a significant negative impact on first
quarter 1998 revenue. Although increased production from new wells will help
mitigate the effect, low product prices will have a negative impact on revenue
and net income. It is impossible to predict, with any substantial degree of
accuracy, the trend in, or level of, future oil and gas prices and their impact
on the Company's reported results in future periods.
Lower product prices also impact the calculation of the limitation on
capitalized costs under the full cost accounting rules of the Securities and
Exchange Commission. 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 decline
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 has not taken
any such writedowns in the past.
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<PAGE>
On April 15, 1998, the Company amended certain terms of its existing
revolving credit facility with NationsBank of Texas, N.A (Second Amendment to
the Credit Agreement). The Second Amendment to the Credit Agreement increased
the maximum loan amount authorized under the facility from $50 million to $75
million and increased the borrowing base from $42 million to $55 million. No
other significant terms were modified. The Second Amendment to the Credit
Agreement is being filed as an exhibit to this Form 10-Q.
The Company will continue to review merger and acquisition opportunities.
Potential acquisitions or mergers with the economic and strategic attributes
necessary to facilitate the profitable growth of the Company will be actively
pursued.
Management believes that cash on hand, net cash generated from operations
and amounts available under the Company's revolving 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.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's outlook for the remainder of 1998
with regard to production levels, price realizations, expenditures for
exploration and development, plans for funding operations and capital
expenditures, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. The forward-looking statements in this
report are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by the statements.
These risks and uncertainties include, but are not limited to, fluctuations
in the price the Company receives for its oil and gas production, reductions in
the quantity of oil and gas sold due to decreased industry-wide demand and/or
curtailments in production from specific properties due to mechanical, marketing
or other problems, operating and capital expenditures that are either
significantly higher or lower than anticipated because the actual cost of
identified projects varied from original estimates and/or from the number of
exploration and development opportunities being greater or fewer than currently
anticipated and increased financing costs due to a significant increase in
interest rates. These and other risks and uncertainties affecting the Company
are discussed in greater detail in this report and in other filings by the
Company with the Securities and Exchange Commission.
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<PAGE>
PART II OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
None.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
- ------- -------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- ------- -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits:
10.20 Second Amendment to Credit Agreement between Key Production
Company, Inc. and NationsBank of Texas, N.A., dated April 15,
1998.
27.1 Financial Data Schedule for Commercial and Industrial Companies
per Article 5 of Regulation S-X for the quarter ended March 31,
1998.
(b) Reports on Form 8-K:
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Dated May __, 1998
KEY PRODUCTION COMPANY, INC.
------------------------------------------
Monroe W. Robertson
Senior Vice President and Secretary
(Principal Financial Officer)
------------------------------------------
Cathy L. Anderson
Controller
(Principal Accounting Officer)
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<PAGE>
EXHIBIT 10.20
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (herein called this "Amendment")
made as of April 15, 1998 by and between KEY PRODUCTION COMPANY, INC., a
Delaware corporation ("Borrower"), and NATIONSBANK OF TEXAS, N.A. ("Lender"),
WITNESSETH:
WHEREAS, Borrower and Lender have entered into that certain Credit
Agreement dated as of April 25, 1994 (as from time to time further supplemented,
amended, or restated, the "Original Agreement") for the purposes and
consideration therein expressed, pursuant to which Lender became obligated to
make loans to Borrower as therein provided; and
WHEREAS, Borrower and Lender desire to amend the Original Agreement as
provided herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Original Agreement, in consideration
of the loans which may hereafter be made by Lender to Borrower, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
--------------------------
(S)1.1. Terms Defined in the Original Agreement. Unless the context
---------------------------------------
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment.
(S)1.2. Other Defined Terms. Unless the context otherwise requires, the
-------------------
following terms when used in this Amendment shall have the meanings assigned to
them in this (S)1.2.
"Amendment" means this Second Amendment to Credit Agreement.
---------
"Amendment Documents" means this Amendment and the Renewal Note.
-------------------
"Credit Agreement" means the Original Agreement as amended
----------------
hereby.
"Original Note" means the "Note" referred to and defined as such
-------------
in the Original Agreement.
1
<PAGE>
ARTICLE II.
Amendments to Original Agreement
--------------------------------
(S)2.1. Defined Terms.
-------------
(a) The definition of "Maximum Loan Amount" in Section 1.1 of the Original
Agreement is hereby amended in its entirety to read as follows:
"'Maximum Loan Amount' means the amount of $75,000,000."
--------------------
(b) The following definition of "Maturity Date" is hereby added to Section
1.1 of the Original Agreement:
"'Maturity Date' means January 1, 2003."
-------------
(S)2.2. Limitation on Interest. The last two sentences of Section 9.6 of
----------------------
the Original Agreement, which currently read as "In the event applicable law
provides for an interest ceiling under Texas Revised Civil Statutes Annotated
article 5069-1.04, that ceiling shall be the indicated rate ceiling and shall be
used when appropriate in determining the Highest Lawful Rate. As used in this
section the term "applicable law" means the also of the State of Texas or the
laws of the United States of America, whichever laws allow the greater interest,
as such laws now exist or may be changed or amended or come into effect in the
future.", are hereby amended to read as follows:
"In the event applicable Law provides for an interest ceiling
under (S)303 of the Texas Finance Code (the "Texas Finance Code") and
Chapter 1D of Title 79, Tex.Rev.Civ.Stats. 1925 ("Chapter 1D") as amended,
respectively for that day, the ceiling shall be the "weekly ceiling" as
defined in the Texas Finance Code and Chapter 1D and shall be used when
appropriate in determining the Highest Lawful Rate, provided that if any
applicable Law permits greater interest, the Law permitting the greatest
interest shall be used when appropriate for calculating the Highest Lawful
Rate and for all other purposes. As used in this section, the term
"applicable Law" means the Laws of the State of Texas or the Laws of the
United States of America, whichever Laws allow the greater interest, as
such Laws now exist or may be changed or amended or come into effect in the
future."
(S)2.3. Borrowing Base. Pursuant to Section 2.11 of the Credit
--------------
Agreement, Lender hereby notifies Borrower that the new Borrowing Base available
under the Credit Agreement from the date hereof until the next Determination
Date shall be $55,000,000.
(S)2.4. Replacement of Exhibit A. Exhibit A to the Original Agreement is
------------------------
hereby amended in its entirety to read as set forth in Exhibit A-1 attached
hereto.
2
<PAGE>
ARTICLE III.
Conditions of Effectiveness
---------------------------
(S)3.1. Effective Date. This Amendment shall become effective as of the
--------------
date first above written when and only when Lender shall have received, at
Lender's office, all of the following documents, each document (unless otherwise
indicated) being dated the date of receipt thereof by Lender, duly authorized,
executed and delivered, and in form and substance satisfactory to Lender:
(a) Amendment. A counterpart of this Amendment executed by
---------
Borrower;
(b) Renewal Note. Borrower's promissory note with appropriate
------------
insertions in the form attached hereto as Exhibit A-1 payable to the order
of Lender (such note being herein called the "Renewal Note"), duly executed
on behalf of Borrower, dated the date hereof, and expressly renewing the
Original Note;
(c) Opinion of Counsel of Borrower. A written opinion of Barbara
------------------------------
Schaller, counsel for Borrower, dated as of the date of this Amendment,
addressed to Lender, to the effect that this Amendment and the Renewal Note
have been duly authorized, executed and delivered by Borrower and that the
Credit Agreement and the Renewal Note constitute the legal, valid and
binding obligations of Borrower, enforceable in accordance with their terms
(subject, as to enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency and similar laws and to general principles of
equity);
(d) Officer's Certificate. A certificate of a duly authorized
---------------------
officer of Borrower dated the date of this Amendment certifying: (i) that
all of the representations and warranties set forth in Article IV hereof
are true and correct at and as of the time of such effectiveness; and (ii)
as to such other corporate matters as Lender shall deem necessary; and
(e) Other Documents. Such other supporting documents as Lender
---------------
may reasonably request.
ARTICLE IV.
Representations and Warranties
------------------------------
(S)4.1. Representations and Warranties of Borrower. In order to induce
------------------------------------------
Lender to enter into this Amendment, Borrower represents and warrants to Lender
that:
(a) Except for the representations and warranties contained in
subsection 5.1(b) of the Original Agreement regarding the Guarantor and the
3
<PAGE>
Subsidiaries of Guarantor, the representations and warranties contained in
subsections (a), (b), (c), (d), (e), (f) and (g) of Section 5.1 of the
Original Agreement are true and correct at and as of the time of the
effectiveness hereof.
(b) Borrower is duly authorized to execute and deliver this
Amendment and the Renewal Note and is and will continue to be duly
authorized to borrow and to perform its obligations under the Credit
Agreement. Borrower has duly taken all corporate action necessary to
authorize the execution and delivery of this Amendment and the Renewal Note
and to authorize the performance of the obligations of Borrower hereunder
and thereunder.
(c) The execution and delivery by Borrower of this Amendment and
the Renewal Note, the performance by Borrower of its obligations hereunder
and thereunder and the consummation of the transactions contemplated hereby
and thereby do not and will not conflict with any provision of law,
statute, rule or regulation or of the articles of incorporation and bylaws
of Borrower, or of any material agreement, judgement, license, order or
permit applicable to or binding upon Borrower, or results in the creation
of any lien, charge or encumbrance upon any assets or properties of
Borrower. Except for those which have been duly obtained, no consent,
approval, authorization or order of any court or governmental authority or
third party is required in connection with the execution and delivery by
Borrower of this Amendment and the Renewal Note or to consummate the
transactions contemplated hereby and thereby.
(d) When duly executed and delivered, each of this Amendment, the
Credit Agreement and the Renewal Note will be a legal and binding
instrument and agreement of Borrower, enforceable in accordance with its
terms, except as limited by bankruptcy, insolvency and similar laws
applying to creditors' rights generally and by principles of equity
applying to creditors' rights generally.
(e) The audited annual financial statements of Borrower dated as
of December 31, 1997 fairly represent the financial position at such dates
and the statement of operations and the changes in financial position for
the periods ending on such dates for Borrower. Copies of such financial
statements have heretofore been delivered to Lender. Since December 31,
1997, no material adverse change has occurred in the financial condition or
business of Borrower.
ARTICLE V.
Miscellaneous
-------------
(S)5.1. Ratification of Agreements. The Original Agreement as hereby
--------------------------
amendment is hereby ratified and confirmed in all respects. Any reference to
the Credit Agreement in any Loan Document shall be deemed to refer to this
Amendment also. Any reference to the Note in any other Loan Document shall be
deemed to be a reference to the Renewal Note issued and
4
<PAGE>
delivered pursuant to this Amendment. The execution, delivery and effectiveness
of this Amendment and the Renewal Note shall not, except as expressly provided
herein or therein, operate as a waiver of any right, power or remedy of Lender
under the Credit Agreement or any other Loan Document nor constitute a waiver of
any provision of the Credit Agreement or any other Loan Document.
(S)5.2. Survival of Agreements. All representations, warranties,
----------------------
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Loan and the issuance and delivery of
the Renewal Note, and shall further survive until all of the Obligations are
paid in full. All statements and agreements contained in any certificate or
instrument delivered by any Related Person hereunder or under the Credit
Agreement to Lender shall be deemed to constitute representations and warranties
by, or agreement and covenants of, Borrower under this Amendment and under the
Credit Agreement.
(S)5.3. Loan Documents. This Amendment and the Renewal Note are each a
--------------
Loan Document, and all provisions in the Credit Agreement pertaining to Loan
Documents apply hereto and thereto.
(S)5.4. Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of Texas and any applicable laws of the
United States of America in all respects, including construction, validity and
performance.
(S)5.5. Counterparts. This Amendment may be separately executed in
------------
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
KEY PRODUCTION COMPANY, INC.
By: /s/ Monroe W. Robertson
-----------------------
Senior Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/ David C. Rubenking
----------------------
Senior Vice President
5
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