SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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Check the Appropriate Box:
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(as permitted by Rule 14a-6(e)(2))
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[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Key Production Company, Inc
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number,
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<PAGE>
K E Y
PRODUCTION
COMPANY, INC.
Suite 3300
707 Seventeenth Street
Denver, Colorado 80202-3404
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT
March 30, 2000
Fellow Stockholders:
We invite you to attend our annual meeting on May 25, 2000, in Denver,
Colorado. Following the meeting, we will report on our operations and you will
have a chance to meet your directors and officers.
This booklet includes the formal notice of the meeting and the proxy
statement. The proxy statement tells you more about the agenda and procedures
for the meeting. It also describes how the board operates and gives personal
information about our director candidates.
We are sure that you, like most people, lead a busy life and are tempted to
put this proxy aside for another day. Please don't delay. Even if you only own a
few shares, we want your shares to be represented at the meeting. Also, when
stockholders do not return their proxies we incur additional expenses to pay for
follow-up mailings and telephone calls.
Please take a few minutes today to review this proxy statement and record
your vote. To make voting easier, you may vote by telephone or on the Internet
by following the instructions that appear on the enclosed proxy insert or you
may sign and return the enclosed proxy card.
If you have any questions regarding the issues to be voted on or need
assistance in recording your vote, please call us at 303/295-3995. Thank you for
investing in Key and for your continuing support.
Sincerely yours,
F. H. Merelli
Chairman and Chief Executive Officer
Monroe W. Robertson
President and Chief Operating Officer
<PAGE>
KEY
PRODUCTION
COMPANY, INC.
The board of directors of Key Production Company, Inc. is soliciting
proxies to be used at the 2000 annual meeting. This proxy statement and form of
proxy will be mailed to stockholders commencing March 30, 2000.
ATTENDANCE AND VOTING MATTERS
THE MEETING
Date: Thursday, May 25, 2000
Time: 2:00 p.m., Mountain Daylight Time
Place: The Westin Tabor Center Denver
1672 Lawrence Street
Denver, Colorado 80202
Purpose: o To elect three directors (Proposal No. 1);
o To authorize an amendment to Key's Articles of
Incorporation to authorize the board of directors to issue
up to 15,000,000 shares of preferred stock in one or more
series and to fix the designations, preferences,
limitations and relative rights of any series of preferred
stock (Proposal No. 2); and
o To conduct other business properly brought before the
meeting.
WHO MAY VOTE
Stockholders of record as of March 16, 2000 may vote at the meeting.
HOW TO VOTE
This year, we have added voting options to make it easier to cast your
vote. You can now vote on matters presented at the meeting in any one of the
following four ways:
o You can vote by telephone by following the instructions on the enclosed proxy
card; or o You can vote on the Internet by following the instructions on the
enclosed proxy card; or o You can vote by signing and returning the enclosed
proxy card in the postage paid envelope provided; or o You can come to the
annual meeting and cast your vote there.
We recommend you vote by proxy even if you plan to attend the meeting. You
can always change your vote at the meeting.
Each share of Key Production stock you own (as of the March 16, 2000 record
date) entitles you to one vote. The number of shares you own is shown on your
proxy card beneath and to the right of your name. As of March 10, 2000, there
were 11,609,403 shares of Key Production common stock outstanding.
HOW PROXIES WORK
Key Production's board of directors is asking for your proxy. Giving us
your proxy means you authorize us to vote your shares at the meeting in the
manner you direct. You may vote for all, some, or none of our director
candidates. You may also abstain from voting.
If you sign and return the enclosed proxy card but do not specify how to
vote, we will vote your shares in favor of our director candidates and the
amendment authorizing the issuance of preferred stock.
You may receive more than one proxy or voting card depending on how you
hold your shares. If you hold shares through someone else, such as a
stockbroker, you may get material from them asking how you want to vote. Please
vote each proxy you receive.
REVOKING A PROXY
You may revoke your proxy before it is voted by submitting a new proxy with
a later date (either by telephone, on the Internet, or by returning a new proxy
card); by voting in person at the meeting; or by notifying our Corporate
Secretary in writing at the address listed on the front of this booklet.
THE QUORUM REQUIREMENT
In order to conduct business at the meeting, we must have a quorum. This
means at least a majority of the outstanding Key Production stock must be
represented at the meeting either in person or by proxy. Abstentions and broker
non-votes are counted as present for establishing a quorum.
VOTES NEEDED
Director candidates receiving a majority of the votes cast are elected to
fill the seats on the board. Approval of other proposals, including the proposal
authorizing the issuance of preferred stock, requires a favorable vote of the
majority of the outstanding stock. Abstentions and broker non-votes count for
quorum purposes but not for voting purposes. Broker non-votes occur when a
broker returns a proxy but does not have authority to vote on a particular
proposal. Brokers will not have the authority to vote for their customers on the
amendment authorizing the preferred stock. You are not allowed to cumulate votes
in the election of directors.
TABULATION OF VOTES
Continental Stock Transfer & Trust Company, New York, our stock transfer
agent, will receive proxies and ballots, tabulate the vote, determine whether a
quorum exists and serve as inspector of election at the meeting.
PROPOSAL NO. 1
KEY PRODUCTION BOARD OF DIRECTORS
STRUCTURE
The board of directors oversees the management of the company on your
behalf, and it reviews our long-term strategic plans. We have three directors
and all directors are elected for a one-year term.
Personal information about each director is given below. Unless you
instruct the proxies differently on your proxy card, the proxies will vote for
these nominees. If a nominee becomes unavailable before election, the proxy card
authorizes us to vote for another nominee proposed by the board.
DIRECTORS NOMINATED FOR RE-ELECTION
Information regarding each nominee is contained in the table and text
below.
<TABLE>
<CAPTION>
-------------------------- --------- --------------------- -------------------------------- ------------------------------
Nominee Age Director Since Current Position Committees
<S> <C> <C> <C> <C>
F.H. Merelli 63 1992 Chairman of the Board and None
Chief Executive Officer
Cortlandt S. Dietler 78 1992 Director Audit and Compensation
L. Paul Teague 65 1996 Director Audit and Compensation
</TABLE>
F.H. MERELLI has been with Key since September 9, 1992. He is currently
chairman of the board of directors and chief executive officer. Prior to
September 1999, he also held the office of president. 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. Mr.
Merelli has been a director of Apache Corporation since July 1997.
CORTLANDT S. DIETLER has been a member of the board of directors of Key
since September 9, 1992. He has been the chairman of the board of TransMontaigne
Inc. since April 1995. He was the founder, chairman and chief executive officer
of Associated Natural Gas Corporation prior to its 1994 merger with Panhandle
Eastern Corporation (now Duke Energy Corporation). He also serves as a director
of Hallador Petroleum Company and Forest Oil Corporation. His industry
affiliations include: member of the National Petroleum Council; director of the
American Petroleum Institute; past director of the Independent Petroleum
Association of America; and director, past president and life member of the
Rocky Mountain Oil & Gas Association.
L. PAUL TEAGUE has been a member of the board of directors of Key since
August 20, 1996. He retired in 1994 from his position as vice president, Western
Region, Texaco Exploration & Producing Inc. in Denver. Other positions in his 35
years with Texaco included division manager of the New Orleans Division, Eastern
Producing Department; vice president, New Orleans Producing Division of Texaco
USA; and vice president, Producing Department, Texaco USA in Houston. His
industry affiliations include: chairman of the API Executive Committee on
Drilling and Production Practices; president of the Colorado Petroleum
Association; director and executive committee member of the Rocky Mountain Oil &
Gas Association; and executive committee member of the Louisiana Oil & Gas
Association.
YOUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THESE NOMINEES.
BOARD MEETINGS AND COMMITTEES
In 1999, our full board formally met two times. In addition to meetings of
the full board, directors attended meetings of board committees. Each member of
the board of directors attended 100 percent of the formal meetings of the board
and the committees on which he served.
In addition to formally convened directors' meetings, several informal
telephone conferences or meetings between senior management and board members
were usually held during each month. Other board action throughout the year was
accomplished by written consent, after informal discussion among the board
members.
The board appoints committees to help carry out its duties. Our board has
two standing committees that serve a critical function for Key Production and
its stockholders.
The Audit Committee is responsible for accounting and internal control
matters. The committee chooses the independent public accountants to audit our
financial statements. The committee consults with the independent accountants
and reviews their audit and other work. The committee also consults with our
chief financial officer and reviews our internal controls and compliance with
policies. In addition to its regular activities, the committee is available to
meet on call of the independent accountants or chief financial officer whenever
a special situation arises. The audit committee members are Cortlandt S. Dietler
and L. Paul Teague. The audit committee formally met one time during 1999.
The Compensation Committee reviews our compensation practices, oversees
compensation for our senior executives and administers several of our
compensation plans. The committee's report on executive compensation starts on
page 8. The compensation committee members are Cortlandt S. Dietler and L. Paul
Teague. The compensation committee formally met three times during 1999.
The board of directors does not have a nominating committee.
DIRECTOR COMPENSATION
Of our current board members, only one, Mr. Merelli, is a salaried employee
of Key Production. Board members who are not employees received no cash
compensation during 1999 for serving as directors. Commencing in 2000,
non-employee directors will receive $1,000 for each board meeting attended and
$300 for each committee meeting attended. Board members are also reimbursed for
their actual expenses related to attending board meetings. Non-employee
directors also receive director compensation in the form of stock options
granted under the Stock Option Plan for Non-Employee Directors.
Upon his election to the board, Mr. Dietler was granted stock options for
45,000 shares on December 9, 1992, at an exercise price of $2.875 per share.
These options vested at a rate of one-third per year over three years. In
recognition of his continued service to Key Production, Mr. Dietler was also
granted additional stock options for 22,500 shares on January 26, 1997, at an
exercise price of $11.375 per share and stock options for 20,000 shares on May
7, 1998, at an exercise price of $12.00 per share. These options also vest at
the rate of one-third per year over three years.
Upon his election to the board, Mr. Teague was granted stock options for
45,000 shares on August 19, 1996, at an exercise price of $8.125 per share.
These options vested at a rate of one-third per year over three years. In
recognition of his continued service to Key Production, Mr. Teague was also
granted additional stock options for 20,000 shares on May 7, 1998, at an
exercise price of $12.00 per share. These options also vest at a rate of
one-third per year over three years.
PROPOSAL NO. 2
Amendment to Articles of Incorporation
to authorize Preferred Stock
Our board of directors recommends that the stockholders authorize an
amendment to our Articles of Incorporation to create a newly authorized class of
preferred stock consisting of 15,000,000 shares. If the amendment is approved,
the board will have the ability to issue preferred shares from time to time. We
do not expect to solicit further authorization from the stockholders for the
issuance of any shares of the preferred stock, except to the extent required by
law or by the rules of the New York Stock Exchange.
The authorized capital stock of Key Production now consists of a single
class of common stock and no preferred stock is authorized. The board believes
the authorization of preferred stock will provide flexibility for future
acquisitions or financings, although it does not presently contemplate an
issuance.
If you approve the proposed amendment, the board will be able to specify
the precise characteristics of preferred stock to be issued, taking into account
the nature of specific transactions and current market conditions. The proposed
amendment would enable us, by action of the board, to issue at any time, one or
more series of preferred stock and to set all designations, preferences,
limitations, and relative rights of the series, including: the designation of
series and numbers of shares; dividend rights; rights upon liquidation or
distribution of the assets of the corporation; conversion or exchange rights;
redemption provisions; sinking fund provisions; voting rights (but the holders
of the preferred stock would not be entitled to more than one vote per share;
and restrictions on issuance of corporate debt.
It is not possible to state the effect of the authorization of the
preferred stock upon the rights of holders of common stock until the board
determines the specific rights of the holders of a series of the preferred
stock. However, some effects might include: restrictions of dividends on common
stock if dividends on the preferred are in arrears; dilution of the voting power
of the common stock to the extent that the preferred stock has voting rights
(but the holders of the preferred would not be entitled to more than one vote
per share); and the holders of common stock not being entitled to share in the
company's assets upon liquidation until satisfaction of liquidation preferences
granted to the preferred stock, if any.
Even though voting rights of any preferred stock would be limited as
described above, the issuance of preferred stock (whether convertible into
common stock or not) could have the effect of discouraging attempts to acquire
control of the company. The board is not considering the use of preferred stock
for such purposes, and it is not aware of any present effort to accumulate Key's
stock for the purpose of gaining control. At the present time, we have no
specific intention of establishing any series of preferred stock.
Without prior stockholder approval, we will not issue preferred stock
except to raise capital in the ordinary course of business or to make
acquisitions. We will not issue preferred stock in order to dilute the stock
ownership of, or create voting impediments for, an unsolicited acquirer.
Therefore, the board believes that, as structured, the authorization of
preferred stock is in the best interest of both the stockholders and Key
Production since it is consistent with corporate governance principles and will
facilitate our ability to take advantage of acquisition or financing
opportunities that might not be available through the use of common stock.
You can read the full text of the proposed amendment included at the end of
this proxy statement as Exhibit A.
YOUR BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE AMENDMENT TO THE
ARTICLES OF INCORPORATION AUTHORIZING THE ISSUANCE OF THE PREFERRED STOCK.
KEY PRODUCTION COMPANY OFFICERS
F.H. MERELLI, 63, has been with Key since September 9,1992. He is currently
the chairman of the board of directors and chief executive officer. Prior to
September 1999, he also held the office of President. 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. Mr.
Merelli has been a director of Apache Corporation since July 1997.
MONROE W. ROBERTSON, 50, has been with Key since September 10, 1992. In
September 1999, he was appointed president and chief operating officer. He
served as senior vice president and corporate secretary until his appointment as
president. Prior to that, he served as vice president and corporate secretary.
From August 1988 to July 1992, he was employed by Apache Corporation in various
capacities; the most recent of which was director of operational planning. From
1986 to 1988, Mr. Robertson was director of corporate planning for Terra
Resources, Inc. From 1973 to 1986, Mr. Robertson was employed by Gulf Oil
Corporation in various engineering and management positions.
STEPHEN P. BELL, 45, has been with Key since February 1994. In September
1999, he was appointed senior vice president-business development and land.
Prior to that time, he served as the vice president-land. 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 mid-continent regional manager from
February 1990 to February 1991 and as land manager from August 1985 to January
1990.
JOSEPH R. ALBI, 41, has been with Key since June 1994. In September 1999,
he was appointed vice president-engineering. He served as manager of engineering
from June 1994 to September 1999. He was executive vice president of Black Dome
Energy Corporation from 1991 to 1994. Prior to that, Mr. Albi held various
engineering positions with Apache Corporation and Nicor Oil and Gas Corporation.
THOMAS E. JORDEN, 42, has been with Key since November 1993. In September
1999, he was appointed vice president-exploration. He served as chief
geophysicist from November 1993 to September 1999. Prior to joining Key
Production, Mr. Jorden was with Union Pacific Resources in Fort Worth, Texas.
PAUL KORUS, 43, joined Key in September 1999, as its vice president and
chief financial officer. He was an equity research analyst with Petrie Parkman &
Co. from June 1995 to September 1999. Prior to that, Mr. Korus was director of
investor relations for Apache Corporation.
BARBARA L. SCHALLER, 44, joined Key in March 1993. She was appointed
general counsel and corporate secretary in September 1999. Prior to that time,
she served as corporate counsel and assistant secretary. Ms. Schaller has been
practicing law since 1982 and is a member of the Denver, Colorado and American
Bar Associations.
<TABLE>
<CAPTION>
OFFICER AND DIRECTOR STOCK OWNERSHIP
(As of March 10, 2000)
Name Shares Beneficially Owned* Percent of Class*
<S> <C> <C>
F.H. Merelli 1,064,067(1)(5) 8.61%
Cortlandt S. Dietler 146,000(2) 1.25%
L. Paul Teague 67,000(3) 0.57%
Monroe W. Robertson 355,429(4)(5) 3.00%
Stephen P. Bell 270,253(6) 2.28%
Joseph R. Albi 185,014(7) 1.57%
Thomas E. Jorden 207,078(8) 1.75%
All directors and executive officers as group
(including the above named persons) 2,363,268(9) 17.46%
</TABLE>
* Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of
1934.
(1) Includes 152,300 shares held in Mr. Merelli's IRA account; 8,382 shares
held in his 401(k) account; and options for 750,000 shares, all of which
are vested.
(2) Includes options for 67,500 shares, all of which are vested; and options
for 20,000 shares, one-third of which vested on May 7, 1999, with an
additional one-third vesting on each subsequent anniversary date.
(3) Includes options for 45,000 shares, all of which are vested; and options
for 20,000 shares, one-third of which vested on May 7, 1999, with an
additional one-third vesting on each subsequent anniversary date.
(4) Includes options for 125,000 shares, all of which are vested; options for
120,000 shares, one-third of which will vest on September 7, 2000, with an
additional one-third vesting on each subsequent anniversary date; and 7,313
shares held in his 401(k) account.
(5) Includes 83,285 shares held by Messrs. Merelli and Robertson as Trustees of
Key's 401(k) retirement plan.
(6) Includes options for 180,000 shares, all of which are vested; options for
80,000 shares, one-third of which will vest on September 7, 2000, with an
additional one-third vesting on each subsequent anniversary date; and 3,753
shares held in his 401(k) account.
(7) Includes 800 shares held in Mr. Albi's IRA account; options for 100,500
shares, all of which are vested; options for 80,000 shares, one-third of
which will vest on September 7, 2000, with an additional one-third vesting
on each subsequent anniversary date; and 3,714 shares held in his 401(k)
account.
(8) Includes options for 120,000 shares, all of which are vested; options for
80,000 shares, one-third of which will vest on September 7, 2000, with an
additional one-third vesting on each subsequent anniversary date; and 4,578
shares held in his 401(k) account.
(9) Includes options for 1,928,000 shares of common stock, vesting at various
dates beginning September 1, 1993. The 83,285 shares held by the trustees
of our 401(k) retirement plan were only counted once in this calculation.
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL COMPENSATION PHILOSOPHY
Key Production's compensation program is designed to be competitive in the
oil industry and to motivate, retain and reward executives who are capable of
successfully leading the company. Our program consists primarily of base salary
and stock options, although executives also receive benefits typically offered
to corporate executives. We also consider granting cash bonuses based upon a
subjective determination of an individual's performance and accomplishments as
well as the overall financial results of the company.
In keeping with this overall policy, we aim to link management goals with
your interests as stockholders by emphasizing the grant of stock options. When
Key's stockholders win--through consistent growth in earnings, revenue,
production, reserves and stock price appreciation--Key's executives win. If
stockholders do not realize these gains, neither do our executives.
BASE SALARIES
In making decisions regarding base salaries, the chairman and chief
executive officer, by authority of the compensation committee, makes
recommendations about the base salary of the executive officers (other than
himself). He relied primarily upon the information contained in the William
Mercer 1999 Energy Compensation Survey. He reviewed the compensation and
benefits of executives in positions of similar overall responsibility for those
companies included in the report which most closely approximated the size of
Key. Based on this report and an assessment of the skills, experience and
achievements of individual executives, the 1999 executive compensation was
decided. During 1999, Key's existing officers were promoted and given additional
responsibilities. Also, several valuable employees were appointed officers of
the company during 1999. Salary increases were made to most of these individuals
in accordance with the salary ranges shown in the report.
The 1999 base salaries of our executives remain near to the mid-range for
companies of comparable size engaged in similar business, which were included in
the report. This result is in keeping with our current philosophy that in order
to retain our executives, the non-variable portion of any executive officer's
pay should be within the parameters offered by our competitors.
BONUSES
Short-term incentives consist of cash bonuses to executives to reward their
contributions during the past business years and to provide incentives for
further improvement in the future. The bonus any executive receives depends on
the executive's individual performance and level of responsibility as well as
the overall financial performance of Key. We assess relative performance based
on factors including initiative, business judgement, technical expertise and
management skills, but no particular formula is used. In early 1999, each of
Key's executive officers received cash bonuses equal to 15% of their base
salary. These bonuses were based upon 1998 financial results and recognized that
Key remained profitable during a downturn in the oil and gas business as a whole
during 1998 and that Key has reported profits in every quarter since 1992.
However, the cash bonuses were relatively small because the income per share
reported by Key in 1998 was down from prior periods.
STOCK OPTIONS
Stock options are the central focus of our long-term incentive program. The
executives who are granted stock options gain only when you gain--when the
common stock value goes up. In September 1999, option grants were made to all
executive officers except the chief executive officer. These grants were made in
connection with the promotions described above. All options were granted under
our 1992 Stock Option Plan and have an exercise price of $9.6875 (which is equal
to the fair market value of our common stock on the date of grant) and vest over
three years.
BENEFIT PLANS
The benefit package offered to executive officers is substantially the same
as that for all Key Production employees for group health and hospitalization,
dental, life and disability insurance, although we provide a $500,000 life
insurance policy for Mr. Merelli pursuant to his employment agreement.
The executive officers participate in our 401(k) retirement savings plan,
which consists of employee contributions and the company's matching contribution
of up to four percent of the employee's compensation. The company's matching
contribution is made in the form of Key common stock. The Key Production
Company, Inc. Income Continuance Plan provides for the continuation of salary
and benefits for certain employees if there is a change in control of Key. Any
payments made pursuant to this plan are in lieu of, and not in addition to, any
payments made pursuant to employment agreements.
Under the company's non-qualified Deferred Compensation Plan, executive
officers and certain other employees are entitled to defer an amount of income
equal to the amount they would have been able to contribute to the company's
401(k) plan, but are prohibited from doing so under Section 402(g) of the
Internal Revenue Code of 1986. Participants may also elect to have up to 25
percent of their annual compensation and 75 percent of any bonus withheld and
credited to the plan.
CEO COMPENSATION
Mr. Merelli was hired in late 1992. He is currently the chairman and chief
executive officer of Key. Prior to September 1999, he also held the office of
president. The compensation committee increased Mr. Merelli's base salary to
$250,000, effective September 16, 1999. This was the first increase to his base
salary since 1996. The compensation committee believes that Mr. Merelli's base
salary remains very conservative for the chairman of the board and chief
executive officer for a corporation of Key Production's size. Mr. Merelli's
compensation is inherently tied to the performance of Key because of the
emphasis on stock options.
Mr. Merelli received a cash bonus in 1999, reflecting his level of
responsibility and his experience, which significantly contributed to the
company's reporting profits in every quarter since he assumed management of Key.
The committee focused on the importance of Mr. Merelli to the continued growth
and development of Key, his expertise in the industry and demonstrated
management skills, and the company's continued financial success, as well as the
fact that his base salary is relatively modest.
In 1999, Mr. Merelli received matching contributions pursuant to Key's
401(k) plan and Key paid the premium for a term life insurance policy it
provides for him. These two components of Mr. Merelli's compensation are not
based upon performance.
U.S. INCOME TAX LIMITS ON DEDUCTIBILITY
U.S. income tax law limits the amount Key Production can deduct for
compensation paid to the CEO and the other four most highly paid executives. We
do not currently have a policy regarding qualifying compensation paid to
executive officers for deductibility under Section 162(m) of the Internal
Revenue Code. If such limits have a material effect on the company's tax
position in the future, we will consider adopting criterion to qualify for the
tax deduction at that time.
<PAGE>
SUMMARY
The compensation committee is made up of non-employee directors who do not
participate in the compensation plans we administer. We approve or endorse
compensation paid or awarded to senior executives and we administer several of
Key's benefit plans including the 1992 Stock Option Plan. We also specifically
set salary and benefit levels for the chief executive officer, subject to the
terms of his existing employment agreement. In the opinion of the committee, Key
Production has an appropriate and competitive compensation program. The
combination of sound base salary, short-term bonuses and the emphasis on
long-term incentives provides a foundation for effective leadership into the
future.
Respectfully submitted,
Cortlandt S. Dietler
L. Paul Teague
<PAGE>
EXECUTIVE COMPENSATION TABLES
These tables show the compensation of Key's chairman and the four other
most highly paid officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
---------------------------- ----------------
Securities
Underlying All other
Name and Position Year Salary(1) Bonus Options Compensation
------------------------------------ ---- ----------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
F.H. Merelli, 1999 $ 196,977 $ 26,269 -- $ 11,132(2)
Chairman and Chief 1998 $ 175,102 $ 87,500 -- $ 12,152
Executive Officer 1997 $ 175,102 -- 250,000 $ 9,097
Monroe W. Robertson, 1999 $ 181,319 $ 23,639 120,000 $ 8,259(3)
President and Chief 1998 $ 157,592 $ 74,690 -- $ 9,356
Operating Officer 1997 $ 149,380 -- 75,000 $ 5,838
Stephen P. Bell, 1999 $ 112,782 $ 14,515 80,000 $ 5,127(4)
Senior Vice President--Business 1998 $ 96,771 $ 45,866 -- $ 5,704
Development and Land 1997 $ 91,732 $ 60,000 60,000 $ 5,961
Joseph R. Albi, 1999 $ 120,601 $ 15,850 80,000 $ 5,440(5)
Vice President Engineering 1998 $ 105,670 $ 47,538 -- $ 6,400
1997 $ 95,075 $ 45,000 40,000 $ 6,195
Thomas E. Jorden, 1999 $ 133,102 $ 18,165 80,000 $ 6,032(6)
Vice President Exploration 1998 $ 121,102 $ 54,078 -- $ 6,993
1997 $ 108,155 $ 70,000 40,000 $ 7,108
</TABLE>
(1) Includes amounts earned but deferred at the election of the officer, if any
(2) Includes our matching contribution of $8,980 (made in the form of Key
common stock) pursuant to our 401(k) plan in which all employees are
eligible to participate, and the one-year term cost of life insurance
provided for Mr. Merelli of $2,152.
(3) Includes our matching contribution of $8,259 (made in the form of Key
common stock) pursuant to our 401(k) plan in which all employees are
eligible to participate.
(4) Includes our matching contribution of $5,127 (made in the form of Key
common stock) pursuant to our 401(k) plan in which all employees are
eligible to participate.
(5) Includes our matching contribution of $5,440 (made in the form of Key
common stock) pursuant to our 401(k) plan in which all employees are
eligible to participate.
(6) Includes our matching contribution of $6,032 (made in the form of Key
common stock) pursuant to our 401(k) plan in which all employees are
eligible to participate.
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1999
and 1999 Year-End Option Values
Number of
Securities Underlying Values of Unexercised
Unexercised Options In-the-Money Options
At 1999 Year-End at 1999 Year-End
-------------------------- -------------- -------------- ------------------------------ ------------------------------
Number of
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable(1)Unexercisable(1)
<S> <C> <C> <C> <C> <C> <C>
F.H. Merelli -- -- 500,000(2) -- (2) $2,187,500 --
-- -- 166,666(3) 83,334(3) -- --
Monroe W. Robertson -- -- 80,000(4) -- (4) $ 390,000 --
-- -- 50,000(3) 25,000(3) -- --
--(5) 120,000(5) -- --
Stephen P. Bell -- -- 120,000(6) -- (6) $ 525,000 --
-- -- 40,000(3) 20,000(3) -- --
--(5) 80,000(5) -- --
Joseph R. Albi 2,000 $ 17,344 60,500(7) -- (7) $ 196,625 --
-- -- 26,667(3) 13,333(3) -- --
-- -- --(5) 80,000(5) -- --
Thomas E. Jorden -- -- 80,000(8) -- (8) $ 290,000 --
-- -- 26,667(3) 13,333(3) -- --
-- -- --(5) 80,000(5) -- --
</TABLE>
(1) Amount represents the $7.375 closing price of our common stock on December
31, 1999, on the New York Stock Exchange, less the exercise price
multiplied by the number of exercisable/unexercisable stock options at
December 31, 1999, that had an exercise price less than the market value
at that date.
(2) Options were granted September 1, 1992, and vested at a rate of one-third
per year over three years. These options were not granted under our 1992
Stock Option Plan.
(3) Options were granted on January 26, 1997, and vest at a rate of one-third
per year over three years. These options were granted under our 1992 Stock
Option Plan. No value was calculated for these options because the
exercise price was greater than the year-end closing price.
(4) Options were granted on January 4, 1993, and vested at a rate of one-third
per year over three years. These options were granted under our 1992 Stock
Option Plan.
(5) Options were granted on September 7, 1999, and vest at a rate of one-third
per year over three years. These options were granted under our 1992 Stock
Option Plan. No value was calculated for these options because the
exercise price was greater than the year-end closing price.
(6) Options were granted on February 2, 1994, and vested at a rate of
one-third per year over three years. These options were granted under our
1992 Stock Option Plan.
(7) Options were granted on June 8, 1994, and vested at a rate of one-third
per year over three years. These options were granted under our 1992 Stock
Option Plan.
(8) Options were granted on November 8, 1993, and vested at a rate of
one-third per year over three years. These options were granted under our
1992 Stock Option Plan.
<PAGE>
<TABLE>
<CAPTION>
Option Grants in 1999
Potential Realizable
Value at Assumed Rates
of Stock Appreciation
for Option Term
--------------------------------- --------------- ------------ ------------- ------------ ----------------------------
Number of Percentage
Securities of Total Exercise
Underlying Options or Base
Options Granted to Price Per Expiration
Name Granted(1) Employees Share Date 5% 10%
--------------------------------- --------------- ------------ ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Monroe W. Robertson 120,000 24% $9.6875 9/06/09 731,096 1,852,676
Stephen P. Bell 80,000 16% $9.6875 9/06/09 487,398 1,235,118
Joseph R. Albi 80,000 16% $9.6875 9/06/09 487,398 1,235,118
Thomas E. Jorden 80,000 16% $9.6875 9/06/09 487,398 1,235,118
</TABLE>
(1) Options were granted on September 7, 1999, and vest at a rate of one-third
per year. These options were granted under our 1992 Stock Option Plan at
an exercise price equal to the fair market value of the common stock on
the date of the grant.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
F.H. Merelli. Mr. Merelli has an employment agreement with Key pursuant to
which he agreed to serve for an indefinite term at an initial base annual salary
of $150,000. The base salary may be increased (but not decreased) by the
compensation committee of the board.
In addition to the base salary, the employment agreement provides for the
grant to Mr. Merelli of stock options for 500,000 shares of the company's common
stock and also provides that Mr. Merelli is eligible for incentive bonuses under
any incentive program for executives of the company which is adopted by the
board of directors. No formal incentive bonus program has been adopted as of the
date of this proxy statement, although cash bonuses are granted based upon a
subjective determination of an individual's performance as well as the overall
financial results of Key.
It further provides that if he is terminated without cause or because of
death or disability, Mr. Merelli or his estate will receive his then-current
monthly salary for two years. The company must also purchase a $500,000 life
insurance policy for him.
Mr. Merelli's stock option agreement provides that upon a change in control
of Key, all of his outstanding options will immediately vest. He is a
participant in the Key Production Company, Inc. Income Continuance Plan which
provides for the continuation of salary and benefits for certain employees upon
a change in control of Key. Any benefits paid to Mr. Merelli pursuant to this
plan would be in lieu of, and not in addition to, any payments made pursuant to
his employment agreement.
Monroe W. Robertson. Mr. Robertson has an employment agreement with Key
pursuant to which he agreed to serve for an indefinite term at an initial base
annual salary of $115,000. The base salary may be increased (but not decreased)
by the compensation committee of the board. Mr. Robertson is also eligible to
receive incentive bonuses under any incentive program for executives of the
company which is adopted by the board of directors. No formal incentive bonus
program has been adopted as of the date of this proxy statement, although cash
bonuses are granted based upon a subjective determination of an individual's
performance as well as the overall financial results of Key.
It further provides that if he is terminated without cause or because of
death or disability, Mr. Robertson or his estate will receive his then-current
monthly salary for two years.
Mr. Robertson's stock option agreement provides that upon a change in
control of Key, all of his outstanding options will immediately vest. He is a
participant in the Key Production Company, Inc. Income Continuance Plan which
provides for the continuation of salary and benefits for certain employees upon
a change in control of Key. Any benefits paid to Mr. Robertson pursuant to this
plan would be in lieu of, and not in addition to, any payments made pursuant to
his employment agreement.
Stephen P. Bell. Mr. Bell has an employment agreement with Key pursuant to
which he agreed to serve for a three-year term, which expired February 2, 1997.
It provides that if Mr. Bell continues as an employee after the term of the
agreement and is terminated without cause after a change in control, he will
receive an immediate payment of two times his then-current annual salary.
A stock option agreement with Mr. Bell provides that upon a change in
control of Key, all of his outstanding options will immediately vest.
He is a participant in the Key Production Company, Inc. Income Continuance
Plan which provides for the continuation of salary and benefits for certain
employees upon a change in control of Key. Any benefits paid to Mr. Bell
pursuant to this plan would be in lieu of, and not in addition to, any payments
made pursuant to his employment agreement.
Joseph R. Albi. Mr. Albi has an employment agreement with Key pursuant to
which he agreed to serve for a three-year term, which expired March 11, 1997. It
provides that if Mr. Albi continues as an employee after the term of the
agreement and is terminated without cause after a change in control, he will
receive an immediate payment of two times his then-current annual salary.
A stock option agreement with Mr. Albi provides that upon a change in
control of Key, all of his outstanding options will immediately vest.
He is a participant in the Key Production Company, Inc. Income Continuance
Plan, which provides for the continuation of salary and benefits for certain
employees upon a change in control of Key. Any benefits paid to Mr. Albi
pursuant to this plan would be in lieu of, and not in addition to, any payments
made pursuant to his employment agreement.
Thomas E. Jorden. Mr. Jorden has an employment agreement with Key pursuant
to which he agreed to serve for a three-year term, which expired November 8,
1996. It provides that if Mr. Jorden continues as an employee after the term of
the agreement and is terminated without cause after a change in control, he will
receive an immediate payment of two times his then-current annual salary.
A stock option agreement with Mr. Jorden provides that upon a change in
control of Key, all of his outstanding options will immediately vest.
He is a participant in the Key Production Company, Inc. Income Continuance
Plan, which provides for the continuation of salary and benefits for certain
employees upon a change in control of Key. Any benefits paid to Mr. Jorden
pursuant to this plan would be in lieu of, and not in addition to, any payments
made pursuant to his employment agreement.
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on Key
Production common stock with Standard & Poor's 500 Stock Index and the Dow Jones
Secondary Oil Stock Index. The graph assumes that $100 each was invested on
December 31, 1994, and that all dividends were reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG KEY PRODUCTION COMPANY, INC., THE S & P 500 INDEX
AND THE DOW JONES SECONDARY OIL INDEX
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
KP 100 119 276 227 114 162
S&P 500 100 138 169 226 290 351
DJ OIL 2D 100 116 143 152 111 125
[OBJECT OMITTED]
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL STOCK OWNERSHIP
PERSONS OWNING MORE THAN FIVE PERCENT
OF KEY PRODUCTION STOCK
(As of March 10, 2000)
Voting Dispositive Total Amount Percent
Authority Authority Of Beneficial Of
------------------- ------------------- Ownership Class
--------------- ----------
Name and Address Sole Shared Sole Shared
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
F.H. Merelli(1) 1,064,067 -- 1,064,067 -- 1,064,067 8.61%
707 Seventeenth Street, Suite 3300
Denver, Colorado 80202
Robert Fleming Inc. (2) -- 1,000,780 -- 1,000,780 1,000,780 8.62%
320 Park Avenue, 11th Floor
New York, New York 10022
Dimensional Fund Advisors Inc. (3) 692,091 -- 692,091 -- 692,091 5.96%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
J.L. Kaplan Associates, LLC (4) 445,900 -- 670,350 -- 670,350 5.77%
222 Berkeley Street
Boston, Massachusetts 02116
</TABLE>
(1) Mr. Merelli is chairman and chief executive officer of Key. The total
number of shares includes options for 750,000 shares. (See "Officer and
Director Stock Ownership" above.)
(2) Information from Schedule 13G filed by Robert Fleming Inc. with the SEC on
February 9, 2000.
(3) Information from Schedule 13G filed by Dimensional Fund Advisors Inc. with
the SEC on February 3, 2000.
(4) Information from Schedule 13G filed by J.L. Kaplan Associates, LLC with the
SEC on January 26, 2000.
------------
OTHER INFORMATION
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has been our independent auditor since 1988, the year
we were incorporated, and will continue in that capacity in 2000. A
representative of Arthur Andersen LLP will be at the annual meeting to respond
to appropriate questions and to make a statement if he desires to do so.
OTHER BUSINESS
We do not expect any business to come up for vote at the meeting, other
than the items discussed in this booklet. If other business is properly raised,
your proxy card authorizes the people named as proxies to vote as they think
best.
STOCKHOLDER PROPOSALS
The deadline for submitting stockholder proposals for inclusion in our
proxy statement next year is December 1, 2000. In order for business to be
presented by a stockholder at next year's annual meeting, our bylaws require
that we receive notice of the proposal between February 25, 2001, and March 27,
2001.
HOW WE SOLICIT PROXIES
In addition to this mailing, our employees may solicit proxies personally,
electronically or by phone. We pay Corporate Investor Communications, Inc.
$6,000 plus expenses to help with the solicitation. If any of our directors,
officers, or employees assist, they will not be paid for their soliciting
activities. We also reimburse brokers and other nominees for their reasonable
expenses in sending these materials to you and getting your voting instructions.
<PAGE>
STOCKHOLDER LIST
You can examine the stockholder list during normal business hours at our
offices in Denver, Colorado starting on May 15, 2000, ten days prior to the
annual meeting.
PEOPLE WITH DISABILITIES
We can provide reasonable assistance to help you participate in the meeting
if you tell us about your disability and your plan to attend. Please write the
Corporate Secretary at least two weeks before the meeting at the address on the
front of this booklet.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The federal securities laws require our directors and executive officers to
file reports of changes in ownership of Key's stock. All reports due in 1999
were timely filed.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither Mr. Dietler nor Mr. Teague, the members of the compensation
committee, was at any time during fiscal year 1999 or any preceding fiscal year
an officer or employee of Key or any of its subsidiaries. During fiscal year
1999, no executive officer of Key served as a director or member of a
compensation (or similarly empowered) committee for any entity whose executive
officer or officers served on Key's compensation committee.
ANNUAL REPORT
We are mailing our Annual Report for fiscal year 1999 to you with this
proxy statement. If you want a free copy of our Form 10-K filed with the
Securities and Exchange Commission, please write to our Corporate Secretary, at
707 Seventeenth Street, Suite 3300, Denver, Colorado 80202-3404.
By order of the Board of Directors
KEY PRODUCTION COMPANY, INC.
Barbara L. Schaller
Corporate Secretary
We urge you to record your vote today.
<PAGE>
Exhibit A
Amendment of Certificate of Incorporation
of Key Production Company, Inc.
Article II of the current Certificate of Incorporation of Key Production
Company, Inc. is deleted and Article II is amended and restated in its entirety
as follows:
ARTICLE II
AUTHORIZED SHARES
Section 1. The total number of shares of stock that the Corporation shall
have authority to issue is 15,000,000 shares, divided into the following
classes: (i) 50,000,000 shares of common stock, par value $.25 per share
("Common Stock"), and (ii) 15,000,000 shares of preferred stock, par value $.01
per share ("Preferred Stock").
Section 2. Each holder of Common Stock shall be entitled to one vote for
each share of such stock held, on all matters presented to stockholders.
Cumulative voting shall not be allowed in the election of directors or for any
other purpose.
Section 3. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide from time to time for the issuance of the shares
of Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware, to establish the characteristics of
each series, including the following:
(i) the number of shares of that series, which may subsequently be
increased or decreased (but not below the number of shares of that
series then outstanding) by resolution of the Board of Directors, and
the distinctive designation thereof;
(ii) the voting powers, full or limited, if any, of the shares of
that series and the number of votes per share;
(iii)the rights in respect of dividends on the shares of that series,
whether dividends shall be cumulative and, if so, from which date or
dates and the relative rights or priority, if any, of payment of
dividends on shares of that series and any limitations, restrictions
or conditions on the payment of dividends;
(iv) the relative amounts, and the relative rights of priority, if any, of
payment in respect of shares of that series, which the holders of the
shares of that series shall be entitled to receive upon any
liquidation, dissolution or winding up of the Corporation;
(v) the terms and conditions (including the price or prices, which may
vary under different conditions and at different redemption dates), if
any, upon which all or any part of the shares of that series may be
redeemed, and any limitations, restrictions or conditions on such
redemption;
(vi) the terms, if any, of any purchase, retirement or sinking fund to be
provided for the shares of that series;
(vii)the terms, if any, upon which the shares of that series shall be
convertible into or exchangeable for shares of any other class,
classes or series, or other securities, whether or not issued by the
Corporation;
(viii)the restrictions, limitations and conditions, if any, upon
issuance of indebtedness of the Corporation so long as any shares of
that series are outstanding; and
(ix) any other preferences and relative, participating, optional or other
rights and limitations not inconsistent with law, this ARTICLE II or
any resolution of the Board of Directors pursuant to this ARTICLE II.
Section 4. Shares of Common Stock shall not carry preemptive rights.
