<PAGE>
As Filed with the Securities and Exchange Commission on December 1, 2000
Registration No. 333-45654
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 3
TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
Key Production Company, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 84-1089744
(Primary Standard
(State or other jurisdiction of Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
707 Seventeenth Street, Suite 3300
Denver, Colorado 80202
(303) 295-3995
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Monroe W. Robertson
President and Chief Operating Officer
Key Production Company, Inc.
707 Seventeenth Street, Suite 3300
Denver, Colorado 80202
(303) 295-3995
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
Nick Nimmo James F. Wood
Holme Roberts & Owen LLP Sherman & Howard L.L.C.
1700 Lincoln Street, Suite 4100 633 17th Street, Suite 3000
Denver, Colorado 80203 Denver, Colorado 80202
(303) 866-0216 (303) 297-2900
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective and at the
effective time of the Merger as described in the Agreement and Plan of Merger
dated as of August 28, 2000.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION (8)a OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION (8)a, MAY
DETERMINE.
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<PAGE>
{LOGO OF COLUMBUS ENERGY CORP.]
December 1, 2000
Proposed Merger-Your Vote Is Very Important
Dear Shareholder:
On August 28, 2000, Key Production Company, Inc. and Columbus Energy Corp.
agreed to merge. Upon completion of the merger, Columbus shareholders will
receive 0.355 shares of Key's common stock for each share of Columbus common
stock they own. Up to 1,545,469 Key shares may be issued in the merger to
Columbus shareholders, including Key shares reserved for issuance pursuant to
Columbus employee options. Key stockholders will continue to own their
existing shares of Key common stock after the merger. Key's common stock is
traded on the New York Stock Exchange under the symbol "KP."
The merger will be tax-free to Columbus shareholders for U.S. federal income
tax purposes except for taxes due on cash received by Columbus shareholders
for fractional shares.
The merger requires the approval of Columbus' shareholders. Columbus has
scheduled a special meeting of its shareholders on December 29, 2000 to vote
on the merger. Regardless of the number of shares you own or whether you plan
to attend the meeting, it is important that your shares be represented and
voted. Voting instructions are inside.
This document provides you with detailed information about the proposed
merger. We encourage you to read this entire document carefully.
Columbus Energy Corp.
/s/ Harry A. Trueblood, Jr.
Harry A. Trueblood, Jr.
Chairman of the Board, President and
Chief Executive Officer
For a discussion of certain risk factors that you should consider in
evaluating the merger, see "Risk Factors" beginning on page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this proxy statement/prospectus. Any
representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated December 1, 2000 and was first mailed
to Columbus shareholders on or about December 1, 2000.
<PAGE>
COLUMBUS ENERGY CORP.
1660 Lincoln St.
Suite 2400
Denver, CO 80264
----------------
Notice of Special Meeting of Shareholders
To Be Held on December 29, 2000
----------------
To the Shareholders of
Columbus Energy Corp.:
A special meeting of shareholders of Columbus Energy Corp. will be held on
December 29, 2000, at 10:30 a.m., local time, at the Wells Fargo Bank Building
Forum Room, Main Floor, 1740 Broadway, Denver, Colorado, for the following
purposes:
1. To consider and vote upon a proposal to approve the merger agreement
between Key Production Company, Inc. and Columbus and the merger; and
2. To transact other business as may properly be presented at the special
meeting or any adjournments of the meeting.
Columbus will not complete the merger unless its shareholders approve the
merger agreement and the merger.
Only shareholders of record at the close of business on November 29, 2000, are
entitled to notice of and to vote at the meeting and any adjournments of the
meeting. A list of shareholders entitled to vote at the meeting will be
available for inspection during normal business hours for the ten days before
the meeting at the offices of Columbus and at the time and place of the
meeting.
Important
Please complete, date, sign and promptly return your proxy card so that
your shares may be voted in accordance with your wishes and so that the
presence of a quorum may be assured. Giving a proxy does not affect your
right to vote in person if you attend the meeting. You may revoke your
proxy at any time before it is exercised at the meeting.
By Order of the Board of Directors,
/s/ Michael M. Logan
Michael M. Logan
Corporate Secretary
Denver, Colorado
December 1, 2000
Your vote is important! Please read the accompanying proxy
statement/prospectus
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 2
Risk Factors............................................................. 10
Key After the Merger..................................................... 11
Comparative Per Share Data............................................... 12
Comparative Market Price Data............................................ 13
Unaudited Pro Forma Combined Financial Information....................... 14
The Columbus Shareholder Meeting and Proxy Solicitation.................. 22
The Merger............................................................... 25
The Merger Agreement..................................................... 42
Information Regarding Directors, Executive Officers and Five Percent
Shareholders............................................................ 48
Interests of Certain Executive Officers and Directors in the Merger...... 50
Material United States Federal Income Tax Considerations................. 51
Comparison of Shareholder Rights......................................... 53
Legal Matters............................................................ 55
Experts.................................................................. 56
Future Shareholder Proposals............................................. 56
Where You Can Find More Information...................................... 57
Cautionary Statement Concerning Forward-Looking Statements............... 59
Commonly Used Oil and Gas Terms.......................................... 59
Annex A--Agreement and Plan of Merger.................................... A-1
Annex B--Arthur Andersen LLP Fairness Opinion to the Board of Directors
of Columbus............................................................. B-1
Annex C--Columbus Annual Report on Form 10-K for Year ended November 30,
1999.................................................................... C-1
Annex D--Columbus Quarterly Report on Form 10-Q for Quarter ended August
31, 2000................................................................ D-1
</TABLE>
----------------
This document incorporates important business and financial information about
Key and Columbus that is not included or delivered with this document. The
information incorporated by reference is available without charge to
shareholders upon written or oral request to:
Columbus Energy Corp. Key Production Company, Inc.
1660 Lincoln St. 707 Seventeenth Street
Suite 2400 Suite 3300
Denver, Colorado 80264 Denver, Colorado 80202-3404
Attention: Michael M. Logan Attention: Paul Korus
Corporate Secretary Tel: (303) 295-3995
Tel: (303) 861-5252
If you would like to request documents from us, please do so by December 21,
2000, in order to receive them before the meeting.
<PAGE>
SUMMARY
This summary highlights selected information from this document. It may not
contain all of the information that is important to you. To better understand
the merger and related transactions and for a more detailed description of the
legal terms, you should carefully read this entire document and the documents
to which we have referred you. See "Where You Can Find More Information" on
page 57. In this proxy statement/prospectus, we sometimes refer to Key after
the merger with Columbus as "the combined company." References to "we," "us"
and "our" are to the combined company. The term "Key" generally means Key
Production Company, Inc., a Delaware corporation, its consolidated subsidiaries
and its predecessor entities. The term "Columbus" generally means Columbus
Energy Corp., a Colorado corporation, its consolidated subsidiaries and its
predecessor entities.
The Companies
Key Production Company, Inc.
707 Seventeenth Street
Suite 3300 Key Production Company, Inc. is an independent energy
Denver, Colorado 80202 company engaged in the exploration, development,
Tel: (303) 295-3995 acquisition and production of oil and gas in the
continental united states. Its operations are
currently focused in western Oklahoma, north Texas,
the Mississipi Salt Basin, south Louisiana, nothern
California, and Wyoming. Key's common stock is traded
on the New York Stock Exchange under the symbol "KP."
Columbus Energy Corp. Columbus engages in the production and sale of crude
1660 Lincoln St. oil, condensate and natural gas, as well as the
Suite 2400 acquisition and development of leaseholds and other
Denver, Colorado 80264 interests in oil and gas properties, and also acts as
Tel: (303) 861-5252 manager and operator of oil and gas properties for
itself and others. It also engages in the business of
compression, transmission and marketing of natural
gas. It has operations in Texas, North Dakota,
Louisiana, Oklahoma and Montana. Columbus' common
stock is traded on the American Stock Exchange under
the symbol "EGY."
The Merger
Key and Columbus are proposing to merge the two companies. Columbus will become
a wholly owned subsidiary of Key. Key will remain the publicly traded company.
Columbus shareholders will receive 0.355 shares of
What Columbus Key common stock for each share of Columbus common
shareholders will stock that they own. Columbus shareholders will not
receive in the merger receive fractional shares. Instead, they will receive
(see page 42) cash equal to the market value of any fractional
shares. Current Columbus shareholders will own
approximately 10% of the common stock of the combined
company.
Votes required (see page 22)
The affirmative vote of the holders of a majority of
the outstanding shares of Columbus common stock is
required for approval of the merger agreement at the
Columbus meeting. Abstentions and broker non-votes
will have the same effect as voting against the
merger.
Harry A. Trueblood, Jr., Columbus' President and
Chief Executive Officer, has agreed to vote
approximately 18% of the outstanding Columbus common
stock for the merger. Consequently, at least 18% of
2
<PAGE>
the outstanding Columbus common stock will be voted
for the merger. An additional approximately 8% of
Columbus' outstanding shares are held by a trust of
which Mr. Trueblood is the trustee and Columbus'
other directors and executive officers, all of whom
are expected to vote their shares for approval of the
merger. No Columbus stock is owned by Key.
To vote, please mark, sign, date and return your
proxy card or voting instruction card in the enclosed
envelope as soon as possible. Your shares will then
be voted at the special meeting in accordance with
your instructions. You may change your vote by giving
written notice of your revocation to Columbus'
secretary, delivering a later-dated, signed proxy
card to Columbus' secretary at or before the Columbus
shareholder meeting, or attending the meeting and
voting in person.
Voting Procedures (see page 23)
Directors and senior The board of directors and officers of the combined
management of the company will consist of the current directors and
combined company officers of Key. The combined company may determine
following the merger to offer employment to Columbus employees.
(see page 48)
Columbus' Columbus' board of directors has unanimously approved
recommendations to the merger and believes that the merger agreement and
its shareholders the merger are in the best interests of Columbus and
its shareholders. Accordingly, it recommends that
Columbus shareholders vote FOR the approval of the
merger agreement and the merger. The board recommends
approval of the merger even though the consideration
offered by Key represented a discount to the market
price of Columbus' common stock on the date the board
approved the merger agreement.
Fairness opinion of In deciding to approve the merger, the board of
Columbus' financial directors of Columbus considered the fairness opinion
advisor (see pages 34 of Arthur Andersen LLP, its financial advisor, to the
through 41) effect that, as of the date of its opinion, the
exchange ratio pursuant to the merger agreement was
fair from a financial point of view to the
shareholders of Columbus.
This opinion is attached as Annex B to this proxy
statement/prospectus. We encourage you to read this
opinion carefully, as well as the description of the
analyses and assumptions on which the opinion was
based found on pages 34 through 41.
Interests of officers Some of the officers and directors of Columbus have
and directors in the stock options and other benefit plans that may
merger that differ provide them with interests in the merger that are
from your interests different from yours. The Columbus board was aware of
(see pages 50 through these interests and considered them in approving the
51) merger.
3
<PAGE>
The Merger Agreement
The merger agreement is attached as Annex A to this document. It contains
representations, warranties and covenants by the parties, conditions to each
party's obligations and provisions relating to termination of the agreement and
termination fees that can become due. These provisions are discussed under the
caption "The Merger Agreement" beginning on page 42. In addition to that
discussion, we encourage you to read the entire merger agreement because it is
the legal document that governs the merger.
Conditions to the In order to complete the merger, a number of
merger (see page 43) conditions must be satisfied, including the
following:
. the approval by the Columbus shareholders;
. the approval for listing on the New York Stock
Exchange of the Key shares to be issued in the
merger; and
. there must not be a material adverse change in
either party's business or financial condition.
The board of directors of either Key or Columbus may
choose to complete the merger even though a condition
to that company's obligation has not been satisfied
if the Columbus shareholders have approved the merger
and the law allows the board to do so.
Termination fees and Fees of up to $1,000,000 could become due by either
expenses (see pages 46 party on termination of the merger agreement under
through 47) the circumstances described under the caption "The
Merger Agreement" beginning on page 46.
No solicitation Columbus has generally agreed not to initiate,
solicit or encourage any discussions with another
party regarding a business combination while the
merger is pending unless Columbus receives an
unsolicited proposal that is materially more
favorable than the terms of the merger with Key.
Other Information
Accounting treatment We expect that the merger will be accounted for as a
purchase of Columbus by Key.
Comparative per share On August 28, 2000, the last full trading day prior
market price to the public announcement of the proposed merger,
information (see page Key common stock closed at $17.8125 per share and
12) Columbus common stock closed at $6.625 per share. On
November 28, 2000, the last reported sales price for
Key common stock on the New York Stock Exchange was
$24.0625. The last reported sales price of Columbus
common stock on the American Stock Exchange on
November 28, 2000 was $8.0625.
Material federal Legal counsel to Columbus has delivered an opinion
income tax that Columbus shareholders (other than foreign
considerations (see shareholders) will not recognize any gain or loss for
pages 51 through 52) federal income tax purposes as a result of the
merger, except for taxes payable by Columbus
shareholders as a result of receiving cash instead of
fractional shares. You should review pages 51 through
52 for a more complete discussion of the tax
consequences of the merger.
4
<PAGE>
Tax matters are complicated, and the tax consequences
of the merger to you will depend on the facts of your
own situation. You should ask your tax advisor in
order to fully understand the particular tax
consequences of the merger to you.
No dissenter's rights You will have no right to seek an appraisal of the
value of your shares in connection with the merger.
Recent developments--Key
Change of Accountants
Arthur Andersen, which was Key's auditor for its last fiscal year, has acted as
a financial advisor and delivered its fairness opinion to Columbus' board of
directors. Rules governing the accounting profession preclude certain
activities by auditors. Services provided to Columbus are incompatible with
Arthur Andersen's ability to act as independent auditors for the combined
company. As a result, Key and Arthur Andersen determined that Arthur Andersen
should resign as Key's auditor. Arthur Andersen delivered its letter of
resignation to Key on November 30, 2000. Key's Audit Committee is currently
seeking new auditors to serve as Key's certifying accountant with respect to
fiscal 2000 and subsequent periods.
Key has never had any disagreement with Arthur Andersen on any matter of
accounting principles, financial statement disclosure, or auditing scope or
procedures, which disagreement if not resolved to the satisfaction of Arthur
Andersen, would have caused Arthur Andersen to make reference to the subject
matter of the disagreement in connection with its report. Arthur Andersen has
audited Key's financial statements since Key's incorporation in 1988. Arthur
Andersen's reports on the Company's financial statements have never contained
an adverse opinion or disclaimer of opinion and have never been qualified as to
audit scope or accounting principles.
Recent developments--Columbus
In August 2000, in connection with the merger and as part of its third quarter
review, Columbus updated estimates of its proved oil and gas reserves at June
30, 2000. Estimates by independent engineers show that proved reserves totaled
21.1 Bcfe, down from 26.1 Bcfe at the end of the company's previous fiscal year
(November 30, 1999). During the first seven months of fiscal year 2000,
Columbus produced 2.3 Bcfe and downward reserve adjustments totaled 3.5 Bcfe,
which were partially offset by a 0.8 Bcfe increase due to higher prices. These
reserve adjustments were due to Columbus receiving information that other
operators had determined not to develop certain locations, recent drilling
activity and performance of wells, as well as an evaluation of certain
technical data. The June 30, 2000 proved reserves consisted of 14.2 Bcf of gas
and 1.16 million barrels of crude and condensate.
Specifically, proved producing reserves decreased 1.4 Bcfe which was due to a
well's lower performance in Bee County, Texas during the seven-month period and
initial lower production beginning in late July 2000 from another well
(previously classified as proved developed non-producing) in that area. Proved
developed producing reserves increased in the Laredo, Texas area with the
nonconsent interest assigned to Columbus in the Hachar #36 well but this
increase was offset by reserve reductions based on performance of wells in the
Sralla Road field of Texas.
Proved developed non-producing reserves decreased 1.0 Bcfe with .5 Bcfe
attributable to the Morrow #23-1H revision after an operator's determination
not to recomplete the well. Also, reserves in a zone in a South Laredo well
were dropped after that zone was perforated and no production was seen. The
decrease in proved undeveloped reserves of 1.1 Bcfe was entirely the result of
deleting a location in the B.R. Cox field in South Texas after no response was
received from the new operator of the field to proceed to drill.
5
<PAGE>
Changes in the demand for oil and gas, price changes and other factors make
such reserve estimates inherently imprecise and subject to revision.
As an outgrowth of the revised technical valuation and a downward revision of
76,000 BOE of Columbus' proved reserves associated with its Morrow #23-1H well
in Louisiana, Columbus recognized a non-cash impairment expense of $500,000 in
its fiscal third quarter ending August 31, 2000.
As of November 27, 2000, Columbus had reduced its long-term debt to $1.6
million from $4.4 million at August 31, 2000.
Columbus' net revenue interest in the Hachar #36 well was reduced from 53.7% to
3.8% after payout in August 2000. This well commenced production on May 10,
2000 at the rate of 5 MMcf of gas and 100 barrels of condensate per day.
Therefore net revenue after operating costs and production taxes from this well
was $965,000 during Columbus' third-quarter 2000 and dropped to less than
$25,000 in September. A portion of this decrease has been replaced by Columbus'
69% net revenue interest in the Long #5 well, a recent completion, that
generated approximately $130,000 of net revenue per month during September
2000.
For definitions of oil and gas terms used in this document, see "Commonly Used
Oil and Gas Terms" on page 59.
6
<PAGE>
Summary Unaudited Pro Forma Combined Financial and Other Information
The following unaudited pro forma condensed combined financial information
combines the historical balance sheets and statements of income of Key and
Columbus giving effect to the merger using the purchase method of accounting
for business combinations. This information has been prepared to assist you in
your analysis of the financial effects of the merger and should be read in
conjunction with the unaudited pro forma combined financial information
contained on pages 14 through 21 in this document. You should also consider the
summary selected financial data for Key and Columbus that follows the unaudited
pro forma condensed combined financial information and the financial statements
and related notes that Key and Columbus have filed with the SEC that are
incorporated by reference.
There are several other factors that affect comparisons of the historical
financial information of Key and Columbus to the unaudited pro forma combined
financial information, including the following:
. The unaudited pro forma combined balance sheet data gives effect to the
merger as if it had occurred on September 30, 2000. The unaudited pro
forma combined income statement data for fiscal 1999 and the first nine
months of 2000 gives effect to the merger as if it occurred on January
1, 1999
. Columbus's fiscal year ends on November 30. Key's fiscal year ends on
December 31. The combined company will also utilize December 31 as its
fiscal year end. No attempt has been made to adjust Columbus' year-end
or interim financial information to conform to the combined company's
fiscal year. The following pro forma September 30, 2000 summary balance
sheet data was derived from Columbus' August 31, 2000 balance sheet and
Key's September 30, 2000 balance sheet using the adjustments and
assumptions described in the notes to the unaudited pro forma combined
financial information. Similarly, the summary pro forma combined income
statement data combines the latest dissimilar twelve-month and nine-
month periods reported by Columbus and Key, using Key's fiscal year end
of December 31 and Columbus' fiscal year end of November 30.
. The historical financial results of Columbus were prepared using the
successful efforts method of accounting for oil and gas activities. Key
utilizes the full cost method. The summary pro forma combined financial
information was prepared using the full cost method of accounting for
oil and gas activities.
. Certain items of revenue and expense reported by Columbus in its
historical financial statements have been reclassified to conform with
Key's method of reporting.
. Expected annual cost savings from combining the operations of Key and
Columbus and the anticipated costs associated with the merger have not
been reflected as adjustments to the historical data because they are
prospective. However, merger-related expenses already recorded by
Columbus in its historical financial statements have not been
eliminated.
The unaudited pro forma information is for illustrative purposes only. If the
merger had occurred in the past, the combined company's financial position and
operating results might have been different from that presented in the summary
unaudited pro forma financial information. You should not rely on the unaudited
pro forma information as an indication of the financial position or operating
results that the combined company would have achieved if the merger had
occurred in the past, nor should you rely on the unaudited pro forma
information as an indication of future results that the combined company will
achieve after the merger.
7
<PAGE>
Summary Unaudited Pro Forma Financial Information
<TABLE>
<CAPTION>
Nine months For the year
Ended ended,
September 30, December 31,
2000 1999
------------- ------------
(In thousands, except as
indicated)
<S> <C> <C>
Income Statement Data:
Revenues............................................ $ 79,173 $66,272
Net income.......................................... $ 18,892 $ 6,206
Basic earnings per share............................ $ 1.42 $ 0.48
Diluted earnings per share.......................... $ 1.38 $ 0.46
Production and Average Sales Prices:
Production:
Oil (MBbls)........................................ 1,260 1,484
Gas (MMcf)......................................... 12,642 17,271
Average prices:
Oil (per barrel)................................... $ 27.93 $ 17.47
Gas (per Mcf)...................................... $ 3.36 $ 2.21
Balance Sheet Data:
Total assets........................................ $239,891
Long-term debt...................................... $ 53,400
Stockholders' equity................................ $125,480
Shares outstanding.................................. 13,763
Book value per share................................ $ 9.12
Proved Reserves (June 30, 2000):
Oil (MBbls)......................................... 9,922
Gas (MMcf).......................................... 90,390
Total Equivalent (Bcfe)............................. 149.9
</TABLE>
Key Selected Summary Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------- ------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Revenues............... $ 68,431 $ 37,717 $ 56,258 $ 37,783 $ 42,151 $37,886 $19,297
Net income............. 17,968 3,113 6,804 4,595 9,696 7,980 3,054
Basic earnings per
share................. 1.51 0.27 0.59 0.40 0.84 0.73 0.34
Diluted earnings per
share................. 1.45 0.26 0.56 0.38 0.80 0.69 0.32
Cash dividends per
share................. -- -- -- -- -- -- --
Balance Sheet Data:
Total assets........... $200,156 $171,503 $176,857 $166,295 $130,647 $95,940 $59,199
Long-term debt......... 49,000 65,000 60,000 60,000 35,000 22,500 14,600
Stockholders' equity... 100,494 73,033 76,873 69,681 64,911 55,269 35,699
Book value per share... 8.09 6.32 6.63 6.05 5.65 4.83 4.03
</TABLE>
8
<PAGE>
Columbus Selected Summary Financial Data
<TABLE>
<CAPTION>
Nine Months
Ended
August 31, Year Ended November 30,
--------------- -----------------------------------------
2000 1999 1999 1998 1997 1996 1995
------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Revenues............... $11,891 $ 8,159 $11,500 $12,094 $15,156 $11,815 $ 9,400
Net income............. 934 (43) (1,215) (1,235) 2,167 2,098 (1,495)
Basic earnings per
share................. 0.25 (0.01) (0.31) (0.29) 0.50 0.50 (0.35)
Diluted earnings per
share................. 0.25 (0.01) (0.31) (0.29) 0.49 0.49 (0.35)
Cash dividends per
share................. -- -- -- -- -- -- --
Balance Sheet Data:
Total assets........... $21,523 $22,431 $22,530 $23,949 $26,135 $21,625 $18,321
Long-term debt......... 4,400 5,600 5,500 4,900 2,200 2,200 1,600
Stockholders' equity... 13,466 14,025 12,798 15,264 17,958 16,225 13,186
Book value per share... 3.59 3.63 3.37 3.77 4.62 5.14 4.30
</TABLE>
9
<PAGE>
RISK FACTORS
In deciding whether to approve the merger, you should consider the following
risks related to the merger. You should carefully consider these risks along
with the other information contained in this document and the documents to
which we have referred you.
We may not be able to successfully integrate the operations of Key and
Columbus and may not realize expected cost savings.
We may encounter difficulties in integrating the previously separate
organizations, accounting systems and operations of Key and Columbus. The
management of the combined company will have to devote substantial attention
and resources to the integration of the two companies. The diversion of
management's attention and any difficulties it encounters in the transition
and integration processes could have an adverse effect on the revenues, levels
of expenses and operating results of the combined company. The combined
company may also experience operational interruptions or the loss of key
employees. As a result, we may not realize any of the anticipated benefits of
the merger.
There will be no adjustment in the number of shares of Key common stock you
will receive if the trading price of the Key common stock goes down prior to
the closing date.
Because the exchange ratio is fixed, the market value of the Key common stock
issued to Columbus shareholders will depend upon the market price of Key's
common stock when the merger is completed. The trading price of Key common
stock may decline prior to the closing date. No adjustment will be made to the
number of shares of Key common stock to be received by you in the event of any
increase or decrease in the market price of Columbus common stock or Key
common stock. For historical and current market prices of Key and Columbus
common stock, see "Comparative Market Price Data" on page 13. Because of this,
at the time of the special meeting, you will not know the exact market value
of the shares of Key common stock that you will receive when the merger is
completed.
Our results of operations are directly dependent upon oil and gas commodity
prices, which are volatile.
The combined company's results of operations will be highly dependent upon oil
and gas prices. Historically, the markets for oil and gas have been volatile
and are likely to continue to be volatile in the future. During the winter of
1998/1999, oil prices were less than half the current price and natural gas
prices were less than one-third the current price. Any significant decline in
prices for oil and gas will have a material adverse effect on the combined
company's financial condition, results of operations and quantities of
reserves recoverable on an economic basis. Should the industry again
experience significant price declines or other adverse market conditions, the
combined company may not be able to generate sufficient cash flow from
operations to meet its obligations and make planned capital expenditures.
To date, we have not attempted to smooth out the effect of oil and gas price
fluctuations by entering into natural gas or crude oil hedge arrangements,
commodity swap agreements, forward sale contracts, commodity futures, options
or other similar agreements. Because we do not enter into these arrangements,
our results of operations are directly related to the then current price of
oil and gas.
If Columbus' field operations personnel quit after the merger, Key may
experience operational delays.
Columbus' oil and gas properties are primarily located in areas in which Key
is not currently active. Even though Key has offered employment to all of
Columbus' field operations personnel, these employees may choose not to
continue to remain employed by us. If we are unable to replace these
individuals, we may experience operational delays that may impact future
financial performance.
10
<PAGE>
The Delaware General Corporation Law and Key's certificate of incorporation
have provisions that discourage corporate takeovers and could prevent
shareholders from realizing a premium on their investment.
Certain provisions of the Delaware General Corporation Law may have the effect
of delaying or preventing a change in control. Also, Key's certificate of
incorporation authorizes Key's board of directors to issue preferred stock
without stockholder approval and to set the rights, preferences and other
designations, including voting rights of those shares as the board may
determine. Additional provisions include restrictions on business combinations
and the availability of authorized but unissued common stock. These
provisions, alone or in combination with each other, may discourage
transactions involving actual or potential changes of control, including
transactions that otherwise could involve payment of a premium over prevailing
market prices to stockholders for their common stock.
KEY AFTER THE MERGER
Increased financial strength. Our pro forma combined ratio of debt to total
book capitalization after the merger reflects an improvement to 30% from 33%
on September 30, 2000. As a result, we believe the combined company will have
more efficient access to capital, at a lower cost, than either Key or Columbus
has individually. In addition, our unused borrowing capacity is expected to
increase by 16%. We should also have an enhanced ability, as compared with
either company on a stand-alone basis, to pursue more acquisitions or other
business development opportunities.
Larger, more diversified asset base. Key and Columbus combined have pro forma
aggregate proved reserves of approximately 150 billion cubic feet equivalent,
a 12% increase over what Key had on a stand-alone basis at the end of 1999. In
addition to our existing operations in the Mid-continent region, Gulf Coast,
Rocky Mountains and northern California, we will have operations in South
Texas and the Williston Basin of Montana/North Dakota.
Expanded Cash Flow. In fiscal 1999, Key's net cash from operations was $35.5
million and Columbus' was $3.3 million, or a pro forma combined amount of
$38.8 million, without adjustment for expected cost savings. A larger base of
cash flow should enhance the combined company's ability to compete for and
fund new growth opportunities, including acquisitions or exploration projects.
On a pro forma combined basis, 1999 net cash used by investing activities
totaled $36.6 million, or $2.2 million less than the combined amount of net
cash from operations. Separately, Key's 1999 net cash from operations,
together with $2.1 million of proceeds from the sale of oil and gas
properties, was used to fund $36.4 million of capital expenditures and
Columbus' 1999 net cash from operations of $3.3 million was primarily used to
fund capital expenditures of $2.3 million. The remainder of Columbus'
operating cash flow, together with net borrowings of $0.6 million and $0.2
million of proceeds from stock option exercise, was used for $1.8 million of
treasury stock purchases. Key's long-term debt was unchanged during 1999 and
it had less than $0.2 million of proceeds resulting from the exercise of stock
options.
11
<PAGE>
COMPARATIVE PER SHARE DATA
The following table presents historical per share data for Key and Columbus
individually and pro forma per share data after giving effect to the merger.
The combined company pro forma per share data was derived by combining
information from the historical consolidated financial statements of Key and
Columbus using the purchase method of accounting for the merger. Columbus'
fiscal 1999 year ended November 30, 1999 and its first nine months of fiscal
2000 ended August 31, 2000. Key's fiscal 1999 year ended December 31, 1999 and
its first nine months of fiscal 2000 ended September 30, 2000. You should read
this table in conjunction with the pro forma financial statements included in
this proxy statement/prospectus and the historical consolidated financial
statements of Key and Columbus that are filed with the SEC. See "Where You Can
Find More Information" on page 57. You should not rely on the pro forma per
share data as being necessarily indicative of actual results had the merger
occurred in the past, or of future results.
<TABLE>
<CAPTION>
Columbus
----------------------------
Combined
Company
Key Pro Equivalent Pro
Historical Forma(1) Historical(2) Forma(3)
---------- -------- ------------ --------------
<S> <C> <C> <C> <C>
Net earnings (loss) per
share--basic:
First nine months of fiscal
2000...................... $1.51 $1.42 $ 0.25 $0.50
Fiscal year 1999........... 0.59 0.48 (0.31) 0.17
Net earnings (loss) per
share--diluted:
First nine months of fiscal
2000...................... 1.45 1.38 0.25 0.49
Fiscal year 1999........... 0.56 0.46 (0.31) 0.16
Book value per share:
End of nine months of
fiscal 2000............... 8.09 9.12 3.59 3.24
</TABLE>
--------
(1) The combined company's pro forma data includes the effect of the merger on
the basis described in the notes to the unaudited pro forma combined
financial statements included elsewhere in this document.
(2) These are historical amounts reported by Columbus without any adjustments
to conform its successful efforts method and other accounting policies to
the full cost method and other accounting policies of Key.
(3) Columbus' equivalent pro forma amounts have been calculated by multiplying
the combined company's pro forma net earnings and book value per share
amounts by the exchange ratio of 0.355 shares of Key common stock for each
share of Columbus common stock, so that the Columbus equivalent pro forma
per share amounts are comparable to the respective values presented with
respect to one share of Columbus common stock.
12
<PAGE>
COMPARATIVE MARKET PRICE DATA
The following table sets forth the high and low sales prices of Key common
stock, on the New York Stock Exchange, and of the Columbus common stock, on
the American Stock Exchange, for the periods indicated. The sales prices are
as reported in published financial sources.
<TABLE>
<CAPTION>
Key Columbus
------------- --------------
High Low High Low
------ ------ ----- -----
<S> <C> <C> <C> <C>
1998:
Quarter Ended March 31, 1998.................. 11.625 9.937 8.182(1) 7.125(1)
Quarter Ended June 30, 1998................... 12.625 10.000 7.625 7.000
Quarter Ended September 30, 1998.............. 12.250 5.875 7.500 6.250
Quarter Ended December 31, 1998............... 9.500 5.000 6.688 6.375
1999:
Quarter Ended March 31, 1999.................. 7.750 5.250 6.750 5.500
Quarter Ended June 30, 1999................... 10.063 7.125 6.250 5.500
Quarter Ended September 30, 1999.............. 11.000 9.063 6.000 5.250
Quarter Ended December 31, 1999............... 9.688 6.750 5.750 5.375
2000:
Quarter Ended March 31, 2000.................. 13.938 6.938 6.000 5.500
Quarter Ended June 30, 2000................... 20.938 11.625 7.250 5.500
Quarter Ending September 30, 2000............. 25.000 13.250 8.250 5.750
Quarter Ending December 31, 2000 through
November 28, 2000............................ 24.938 20.500 8.500 7.250
</TABLE>
--------
(1) Price per share amounts have been adjusted for the 10% stock dividend
distribution to shareholders of record on February 23, 1998.
On August 28, 2000, the last full trading day prior to the joint public
announcement by Key and Columbus of the proposed merger, the last reported
sales price on the New York Stock Exchange of shares of Key common stock was
$17.8125. The last reported sales price of Columbus common stock on the
American Stock Exchange on the same day was $6.625. On November 28, 2000, the
last reported sales price for Key common stock on the New York Stock Exchange
was $24.0625. The last reported sales price of Columbus common stock on the
American Stock Exchange on November 28, 2000 was $8.0625. Columbus
shareholders are urged to obtain current quotations before deciding how to
vote.
Key has not paid dividends on its common stock in a number of years and has no
intention to do so in the near future. In addition, Key is restricted from
doing so by its credit agreement.
13
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma financial information has been prepared to
assist you in your analysis of the financial effects of the merger. We derived
this information from Key's audited financial statements for the year ended
December 31, 1999 and unaudited financial statements for the nine months ended
September 30, 2000 and from Columbus' audited financial statements for the
fiscal year ended November 30, 1999 and unaudited financial statements for the
nine months ended August 31, 2000. The information is only a summary and you
should read it in conjunction with the historical financial statements and
related notes contained in the annual reports and other information that Key
and Columbus have filed with the Securities and Exchange Commission. See
"Where You Can Find More Information" on page 57.
You should consider several factors when comparing the historical financial
information of Key and Columbus to the unaudited pro forma financial
information, including the following:
. The unaudited pro forma condensed combined balance sheet gives effect to
the merger as if it had occurred on September 30, 2000. The unaudited
pro forma combined statements of income for fiscal 1999 and the first
nine months of 2000 give effect to the merger as if it occurred on
January 1, 1999.
. Columbus' fiscal year ends on November 30. Key's fiscal year ends on
December 31. The combined company will also utilize December 31 as its
fiscal year end. No attempt has been made to roll forward Columbus'
year-end or interim financial information to conform to the combined
company's fiscal year. The following unaudited pro forma condensed
combined balance sheet as of September 30, 2000 was derived from
Columbus' August 31, 2000 balance sheet and Key's September 30, 2000
balance sheet using the adjustments and assumptions described in the
notes to the unaudited pro forma combined financial information.
Similarly, the unaudited pro forma combined statements of income combine
the latest dissimilar twelve-month and nine-month periods presented for
Columbus and Key, as adjusted, as if Columbus utilized a fiscal year end
of December 31. Columbus prepared its historical financial results using
the successful efforts method of accounting for oil and gas activities.
Key utilizes the full cost method. The combined company will also
utilize full cost.
. Certain revenue and expense items reported by Columbus on its historical
statements of income and balance sheet have been reclassified to conform
to the method of presentation utilized by Key.
. Expected annual cost savings of $2 million have not been reflected as an
adjustment to the historical data. The cost savings are expected to
result from the consolidation of the corporate headquarters of Key and
Columbus, the elimination of duplicate staff and expenses and a
reduction in the use of outside services currently utilized by Columbus.
Some of the cost savings will relate to items that, under the full cost
method of accounting, would have been capitalized rather than expensed
in the combined financial statements. Therefore, not all of the expected
savings will result in reductions to expenses as reported in the
accompanying unaudited pro forma combined statement of income.
. Columbus has accrued $490,000 as of August 31, 2000 for advisory and
legal fees associated with its merger/sale activities in its historical
financial results. These costs have not been eliminated in the pro forma
adjustments.
The unaudited pro forma information is for illustrative purposes only. If the
merger had occurred in the past, the combined company's financial position and
operating results might have been different from that presented in the
unaudited pro forma condensed combined financial statements. In addition, the
purchase price allocation is preliminary and will be finalized following
closing of the merger. The final purchase price allocation will be determined
shortly after closing based on actual fair value of current assets, current
liabilities and long-term debt at that time, as well as the number of shares
of Columbus stock and stock options outstanding at closing. We do not expect
the final allocation to differ materially from the preliminary allocation
shown below. You should not rely on the unaudited pro forma information as an
indication of the financial position or operating results that the combined
company would have achieved if the merger had occurred in the past. You also
should not rely on the unaudited pro forma information as an indication of
future results that the company will achieve after the merger.
14
<PAGE>
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
September 30, 2000
(In Thousands)
<TABLE>
<CAPTION>
Pro Forma
Key Columbus Adjustments Combined
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........ $ 8,413 $ 2,455 $ $ 10,868
Receivables...................... 18,013 3,152 21,165
Prepaid expenses and other....... 891 191 (60)(b) 1,022
-------- ------- --------
27,317 5,798 33,055
-------- ------- --------
Deferred income taxes.............. -- 570 (570)(b) --
Oil and gas properties, net........ 171,215 14,661 18,842 (a) 204,718
Other assets, net.................. 1,624 494 2,118
-------- ------- --------
$200,156 $21,523 $239,891
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable................. $ 14,863 $ 1,933 $ 16,796
Accrued expenses and other....... 6,602 1,724 8,326
-------- ------- --------
21,465 3,657 25,122
-------- ------- --------
Long-term debt..................... 49,000 4,400 53,400
Deferred Credits and Other Non-
Current Liabilities:
Deferred income taxes............ 28,518 -- 6,692 (a) 35,210
Other............................ 679 -- 679
-------- ------- --------
29,197 -- 35,889
-------- ------- --------
Stockholders' Equity:
Common stock..................... 3,180 932 (596)(c) 3,516
Paid-in capital.................. 43,920 20,139 4,511 (c) 68,570
Retained earnings (accumulated
deficit)........................ 56,486 (1,721) 1,721 (c) 56,486
Treasury stock................... (3,092) (5,884) 5,884 (c) (3,092)
-------- ------- --------
100,494 13,466 125,480
-------- ------- --------
Total Liabilities and Stockholders'
Equity............................. $200,156 $21,523 $239,891
======== ======= ========
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF INCOME
For the Nine Months Ended September 30, 2000
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Pro Forma
Key Columbus Adjustments Combined
------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales..................... $68,154 $10,742 $ $78,896
Operating and management services..... -- 1,035 (1,035)(d) --
Other................................. 277 114 (114)(d) 277
------- ------- -------
68,431 11,891 79,173
------- ------- -------
Expenses:
Depreciation, depletion and
amortization......................... 25,181 2,414 2,444 (e) 30,039
Lease operating....................... 8,238 1,566 (1,035)(d) 9,367
598 (d)
Operating and management services..... -- 598 (598)(d) --
Production and property taxes......... 2,302 995 3,297
General and administrative............ 2,179 1,224 3,403
Litigation expense.................... -- 380 380
Advisory fee.......................... -- 490 490
Financial costs:
Interest expense..................... 3,338 325 3,663
Capitalized interest................. (1,194) -- (11)(f) (1,205)
Interest income...................... (134) -- (114)(d) (248)
Impairments........................... -- 500 (500)(e) --
Exploration expense................... -- 1,940 (1,940)(e) --
------- ------- -------
39,910 10,432 49,186
------- ------- -------
Income Before Income Taxes............ 28,521 1,459 29,987
Provision for Income Taxes............ 10,553 525 17(g) 11,095
------- ------- -------
Net Income............................ $17,968 $ 934 $18,892
======= ======= =======
Basic Earnings Per Share.............. $ 1.51 $ 0.25 $ 1.42
======= ======= =======
Diluted Earnings Per Share............ $ 1.45 $ 0.25 $ 1.38
======= ======= =======
Weighted Average Basic Shares......... 11,934 3,757 (2,412)(h) 13,279
======= ======= =======
Weighted Average Diluted Shares....... 12,384 3,764 (2,417)(h) 13,731
======= ======= =======
</TABLE>
16
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF INCOME
For the Twelve Months Ended December 31, 1999
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Pro Forma
Key Columbus Adjustments Combined
------- -------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales..................... $55,798 $10,014 $ $65,812
Operating and management services..... -- 1,386 (1,386)(d) --
Other................................. 460 100 (100)(d) 460
------- ------- -------
56,258 11,500 66,272
------- ------- -------
Expenses:
Depreciation, depletion and
amortization......................... 28,672 3,400 3,419 (e) 35,491
Lease operating....................... 8,951 1,903 (1,386)(d) 10,352
884 (d)
Operating and management services -- 884 (884)(d) --
Production and property taxes......... 2,623 1,029 3,652
General and administrative............ 2,550 1,336 3,886
Litigation expense.................... -- 119 119
Retirement and separation............. -- 111 111
Financial costs:
Interest expense..................... 4,081 373 4,454
Capitalized interest................. (1,397) -- (12)(f) (1,409)
Interest income...................... (197) -- (100)(d) (297)
Impairments........................... -- 973 (973)(e) --
Exploration expense................... -- 3,071 (3,071)(e) --
Other................................. -- 62 62
------- ------- -------
45,283 13,261 56,421
------- ------- -------
Income (Loss) Before Income Taxes..... 10,975 (1,761) 9,851
Provision (Benefit) for Income Taxes.. 4,171 (546) 20 (g) 3,645
------- ------- -------
Net Income (Loss)..................... $ 6,804 $(1,215) $ 6,206
======= ======= =======
Basic Earnings (Loss) Per Share....... $ 0.59 $ (0.31) $ 0.48
======= ======= =======
Diluted Earnings (Loss) Per Share..... $ 0.56 $ (0.31) $ 0.46
======= ======= =======
Weighted Average Basic Shares......... 11,537 3,898 (2,553)(h) 12,882
======= ======= =======
Weighted Average Diluted Shares....... 12,111 3,898 (2,553)(h) 13,456
======= ======= =======
</TABLE>
17
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1--Basis of Presentation
Key will account for the merger of Key and Columbus as a purchase of Columbus.
In the merger, Key estimates that it will issue 1,345,000 common shares to
shareholders of Columbus. Columbus will become a wholly owned subsidiary of
Key.
The accompanying pro forma condensed combined balance sheet includes pro forma
adjustments to give effect to the acquisition of Columbus by Key as of
September 30, 2000. The pro forma combined statements of income for the year
ended December 31, 1999 and the nine months ended September 30, 2000 include
the historical revenue and expenses of Key and Columbus for those twelve and
nine month periods and adjustments for the pro forma effects of the
acquisition as if the transaction had occurred at January 1, 1999.
Key's fiscal year ends on December 31, while Columbus' ends on November 30.
The unaudited pro forma income statements were prepared as if Columbus'
results from operations for its fiscal year ended November 30, 1999 and nine
months ended August 31, 2000 were the same as they would have been for the
twelve and nine month periods ended December 31, 1999 and September 30, 2000,
respectively. Similarly, the unaudited pro forma condensed combined balance
sheet was prepared assuming that Columbus' historical balance sheet at August
31, 2000 was in effect on September 30, 2000.
Key's and Columbus' financial statements were prepared in accordance with
generally accepted accounting principles and require Key and Columbus to make
estimates that affect the reported amount of assets, liabilities, revenues and
expenses. In the opinion of Key and Columbus, the unaudited pro forma combined
financial statements include all the adjustments necessary to present fairly
the results of the periods presented.
The accompanying pro forma statements do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of Columbus for the year
ended November 30, 1999 and Key for the year ended December 31, 1999. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.
18
<PAGE>
Note 2--Pro Forma Adjustments
The following adjustments have been made to the pro forma condensed combined
balance sheet of Key and Columbus at September 30, 2000 and to the statements
of income for the year and nine months ended December 31, 1999 and September
30, 2000.
(a) This entry adjusts the historical book values of Columbus' assets and
liabilities to their estimated fair values as of September 30, 2000. The
calculation of the total purchase price and the preliminary allocation to
assets and liabilities are shown in the following table. The final purchase
price allocation will be determined shortly after closing based on actual fair
value of current assets, current liabilities and long-term debt at that time
as well as the number of shares of stock and stock options outstanding at
closing. We do not expect the final allocation to differ materially from the
preliminary allocation shown below.
<TABLE>
<CAPTION>
(In $ thousands,
except share price)
------------------
<S> <C>
Calculation and preliminary allocation of purchase price:
Shares of Key common stock to be issued to Columbus
stockholders............................................. 1,345
Average Key stock price per share......................... $ 18.01
-------
Fair value of Key common stock issued..................... 24,223
Plus fair value of Columbus employee stock options to be
assumed by Key........................................... 763
Plus fair value of liabilities assumed by Key:
Current liabilities..................................... 3,657
Long-term debt.......................................... 4,400
Deferred taxes.......................................... 6,692
-------
Total purchase price...................................... 39,735
Less fair value of non oil and gas assets to be acquired
by Key:
Current assets.......................................... 5,738
Non oil and gas properties.............................. 494
-------
Fair value allocated to oil and gas properties, including
$1 million of unproved properties........................ $33,503
=======
</TABLE>
The closing market price of Key common stock on the day of the merger
announcement was $18.25. The cost of the acquisition reflects the average of
that price and the closing prices of Key common stock for the two days
preceding and following announcement, which average price was $18.01.
The entry to record the purchase transaction provides a step-up to the book
basis of the assets being acquired by Key for the deferred tax effect
resulting from the difference between the fair market value and historical
carryover tax basis of Columbus' oil and gas assets. The new book basis of the
oil and gas assets acquired by Key is in excess of the historical carryover
tax basis of the Columbus oil and gas properties.
(b) This adjustment removes deferred tax assets previously recorded on
Columbus' historical balance sheet.
(c) These pro forma adjustments represent the allocation of the fair value of
common stock issued by Key and eliminates any retained earnings or treasury
shares of Columbus. Key will issue approximately 1.345 million shares of $0.25
par value common stock to accomplish the merger, or 0.355 share for each
Columbus share outstanding. The pro forma combined stockholders' equity
reflects the following:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Stockholders' equity of Key at September 30, 2000............. $100,494
Fair value of common stock issued in purchase................. 24,223
Fair value of stock options assumed by Key.................... 763
--------
Pro forma stockholders' equity................................ $125,480
========
</TABLE>
19
<PAGE>
(d) Reclassifies operating and management services revenues and expenses, as
well as certain other expenses, to conform with Key's method of presentation.
(e) Adjusts depreciation, depletion and amortization to account for the
acquisition as if the acquisition had occurred on January 1, 1999 in a manner
consistent with the full cost method of accounting for oil and gas activities
utilized by Key. These adjustments also eliminate historical amounts recorded
by Columbus under the successful efforts accounting method for exploration
expense and asset impairments to conform to full cost accounting.
(f) Adjustment to capitalize interest on the pro forma amount of purchase
price allocated to unproved properties.
(g) To account for the income tax effect of the pro forma adjustments, using
the expected tax rate of the combined company. This 37% pro forma rate
reflects a Federal statutory rate of 34% and effective state income tax rate
of 3%.
(h) Adjusts the pro forma combined weighted average basic and diluted shares
outstanding for the periods presented.
Note 3--Cost Savings and Expenses of the Merger
Expected annual cost savings have not been reflected as an adjustment to the
historical data because it is prospective information pertaining to what may
happen once the companies are combined. Likewise, estimated future costs
associated with accomplishing the merger have not been factored into the pro
forma presentation of historical financial results, nor have expenses recorded
by Columbus related to its evaluation of strategic alternatives been
eliminated.
Estimated costs of the business combination total approximately $2.2 million,
consisting primarily of severance and separation pay for terminated Columbus
employees ($1 million), investment banking fees and related expenses
($675,000), legal, accounting, and engineering consulting fees ($425,000), and
printing, mailing and other costs directly related to the merger ($100,000).
Payment or accrual of virtually all of these costs will occur either before or
at closing of the merger and will be recorded by Key and Columbus in the
quarter in which they are incurred. Columbus will expense approximately $2
million of the costs. Key's estimated share of the total costs is $200,000 and
will be capitalized as direct costs associated with the transaction.
Note 4--Selected Pro Forma Supplemental Oil and Gas Information
The tables set forth below reflect unaudited pro forma disclosures about the
combined company's oil and gas activities. The information was prepared from,
and should be read in conjunction with, the related information in Key's 1999
Form 10-K and latest Form 10-Q and Columbus' 1999 Form 10-K and latest Form
10-Q that are incorporated by reference in this proxy statement/prospectus.
Production and average sales price information
<TABLE>
<CAPTION>
Oil Gas
------ -------
<S> <C> <C>
For the twelve months ended December 31, 1999:
Production (oil in thousands of barrels; gas in million
cubic feet)................................................ 1,484 17,271
Average sales prices (per barrel of oil and per Mcf of
gas)....................................................... $17.47 $ 2.21
</TABLE>
<TABLE>
<CAPTION>
Oil Gas
------ -------
<S> <C> <C>
For the nine months ended September 30, 2000
Production (oil in thousands of barrels; gas in million
cubic feet)................................................ 1,260 12,642
Average sales prices (per barrel of oil and per Mcf of
gas)....................................................... $27.93 $ 3.36
</TABLE>
20
<PAGE>
Productive wells at December 31, 1999:
<TABLE>
<CAPTION>
Oil Gas
----------- -----------
Area Gross Net Gross Net
---- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Mid-continent........................................ 193 68.2 655 125.7
Gulf Coast........................................... 217 32.6 322 40.6
Rocky Mountains...................................... 720 66.8 120 5.6
California........................................... -- -- 27 22.6
----- ----- ----- -----
1,130 167.6 1,124 194.5
===== ===== ===== =====
</TABLE>
Net undeveloped acres at December 31, 1999:
<TABLE>
<S> <C>
California........................................................... 22,138
Colorado............................................................. 593
Louisiana............................................................ 3,058
Mississippi.......................................................... 20,713
Montana.............................................................. 10,389
New Mexico........................................................... 630
North Dakota......................................................... 277
Oklahoma............................................................. 9,611
Texas................................................................ 24,724
Utah................................................................. 13,216
Wyoming.............................................................. 54,033
-------
159,382
=======
</TABLE>
Estimated proved oil and gas reserves and standardized measure at June 30,
2000
<TABLE>
<CAPTION>
Key Columbus(1) Combined
------- ----------- --------
<S> <C> <C> <C>
Oil (MBbls)...................................... 9,056 866 9,922
Gas (MMcf)....................................... 79,758 10,632 90,390
Equivalent (Bcfe)................................ 134.1 15.8 149.9
Standarized measure of discounted future net cash
flows (MM)...................................... $ 219.8 $ 26.4 $ 246.2
</TABLE>
--------
* One barrel of oil is the energy equivalent of six Mcf of natural gas
(1) Columbus' proved oil and gas reserves as estimated by its independent
engineers were reported as 26.1 Bcfe in its annual report on Form 10-K for the
year ended November 30, 2000. In August 2000, the reserve estimates were
updated as of June 30, 2000 and proved reserves totaled 21.1 Bcfe, including
3.0 Bcfe and 2.4 Bcfe classified as proved developed non-producing and proved
undeveloped, respectively. During the first seven months of Columbus' fiscal
2000, 2.3 Bcfe was produced and downward reserve adjustments totaled 3.5 Bcfe
which were partially offset by a 0.8 Bcfe increase due to higher prices. These
reserve adjustments were due to Columbus receiving information that other
operators had determined not to develop certain locations, recent drilling
activity and performance of wells, as well as an evaluation of certain
technical data. The June 30, 2000 reserves consisted of 14.2 Bcf of gas and
1.16 million barrels of crude and condensate.
Undeveloped and non-producing proved reserves, by their nature, are less
certain to be recovered than proved developed producing reserves. The
estimates of proved reserves classified as undeveloped or non-producing
include the assumption that significant capital expenditures will be made to
develop the reserves. Although the estimates of proved developed non-producing
and proved undeveloped reserves that were prepared for Columbus were conducted
in accordance with industry standards, based on Key's assumptions and economic
parameters, Key's engineers have estimated that proved reserves to be acquired
from Columbus at June 30, 2000, were 15.8 Bcfe, including 14.5 Bcfe of proved
producing reserves.
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THE COLUMBUS SHAREHOLDER MEETING AND PROXY SOLICITATION
Date, time and place......... December 29, 2000, at 10:30 a.m. (local time),
at the Wells Fargo Bank Building Forum Room,
Main Floor, 1740 Broadway, Denver, Colorado
Purpose...................... To consider and vote upon a proposal to approve
the merger agreement and the merger, and any
other business that may be presented at the
meeting. We know of no other matters to be
brought before the meeting.
Record date..................
Close of business on November 29, 2000. Only
holders of record of Columbus common stock at
the close of business on the record date will
be entitled to notice of, and to vote at, the
meeting.
Recommendation of the board
of directors.................
The Columbus board of directors believes that
the merger agreement and the merger are in the
best interests of Columbus and its shareholders
and recommends that the Columbus shareholders
vote for approval of the merger agreement and
the merger.
Shares held in street name... If you hold your Columbus shares in the name of
a bank, broker or other nominee, you should
follow the instructions provided by your bank,
broker or nominee when voting your shares or
when granting or revoking a proxy. Under the
rules of the American Stock Exchange, brokers
who hold shares in street name for customers
have the authority to vote on certain "routine"
proposals when they have not received
instructions from beneficial owners. Under
these rules, such brokers are precluded from
exercising their voting discretion with respect
to proposals for non-routine matters such as
the merger agreement and the merger. Thus,
absent specific instructions from you, your
broker is not empowered to vote your shares
with respect to the approval and adoption of
the merger agreement and the merger (i.e.,
"broker non-votes"). A broker non-vote will
have the same effect as a vote against the
merger.
Quorum....................... Presence, in person or by proxy, of
shareholders holding a majority of the
outstanding shares of common stock entitled to
vote at the meeting. Abstentions and broker
non-votes will be counted as shares present for
purposes of determining the presence of a
quorum at the meeting. If a quorum is not
present at the meeting, Columbus expects to
adjourn or postpone the meeting in order to
solicit additional proxies.
Votes required...............
Approval of the merger agreement and the merger
requires the affirmative vote of the holders of
a majority of the outstanding shares of
Columbus common stock. Abstentions will have
the same effect as votes against the merger
agreement and the merger.
Shares outstanding........... As of the record date, there were 3,787,743
shares of Columbus common stock outstanding and
entitled to vote and held by approximately 420
holders of record.
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Proxies...................... A proxy card will be sent to each Columbus
shareholder as of the record date. If you
received a proxy card, you may grant a proxy to
vote on the proposal to approve the merger
agreement by marking your proxy card
appropriately, executing it in the space
provided and returning it to Columbus. If you
hold your Columbus shares in the name of a
bank, broker or other nominee, you should
follow the instructions provided by your bank,
broker or nominee when voting your shares. If
you have timely submitted a properly executed
proxy card, clearly indicated your vote and
have not revoked your proxy, your shares will
be voted as indicated. If you have timely
submitted a properly executed proxy card and
have not clearly indicated your vote, your
shares will be voted FOR the proposal to
approve the merger agreement and merger.
If any other matters are properly presented at
the meeting for consideration, the persons
named in the proxy card will have the
discretion to vote on these matters in
accordance with their best judgment.
Voting by holders of common Each share of Columbus common stock is entitled
stock........................ to one vote at the meeting.
Revocation...................
You may revoke your proxy card at any time
prior to its exercise by:
. giving written notice of your revocation
to the secretary of Columbus;
. appearing and voting in person at the
meeting; or
. properly completing and executing a
later-dated proxy and delivering it to
the secretary of Columbus at or before
the meeting.
Your presence without voting at the meeting
will not automatically revoke your proxy and
any revocation during the meeting will not
affect votes previously taken.
Validity..................... The inspectors of election will determine all
questions as to the validity, form, eligibility
(including time of receipt) and acceptance of
proxy cards. Their determination will be final
and binding. The board of directors of Columbus
has the right to waive any irregularities or
conditions as to the manner of voting. Columbus
may accept your proxy by any form of
communication permitted by Colorado law so long
as Columbus is reasonably assured that the
communication is authorized by you.
Solicitation of proxies......
The accompanying proxy is being solicited on
behalf of the board of directors of Columbus.
The expenses of preparing, printing and mailing
the proxy and the materials used in the
solicitation will be shared by Columbus and
Key. Proxies may be solicited by personal
interview, telephone and telegram by directors,
officers and
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employees of Columbus, who will not receive
additional compensation for performing that
service. Arrangements also may be made with
brokerage houses and other custodians, nominees
and fiduciaries for the forwarding of
solicitation materials to the beneficial owners
of Columbus shares held by such persons and
Columbus will reimburse them for reasonable
expenses they incur.
Auditors .................... PricewaterhouseCoopers LLP serves as the
independent public accountants of Columbus.
Representatives of PricewaterhouseCoopers LLP
plan to be present at the special meeting where
they will have the opportunity to make a
statement if they desire to do so and will be
available to respond to appropriate questions.
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THE MERGER
This section of the proxy statement/prospectus describes the proposed merger.
While we believe that the description covers the material terms of the merger
and the related transactions, it may not contain all of the information that
is important to you. In addition, we incorporate important business and
financial information about Key and Columbus into this proxy
statement/prospectus by reference. You may obtain the information incorporated
by reference into this proxy statement/prospectus without charge by following
the instructions in the section entitled "Where You Can Find More Information"
on page 57.
Background of the merger
The management and board of Columbus regularly review Columbus' position in
light of the changing competitive environment of the oil and gas industry with
the objective of determining what alternatives are available to enhance
shareholder value. In recent years the management of Columbus has considered a
range of options to improve Columbus' competitive position, including
acquisitions, divestitures, joint ventures and other strategic alliances.
During the fall of 1999, the board of directors of Columbus began formally to
consider steps to maximize shareholder value. In the course of its
deliberations the board discussed a number of factors including:
. the lack of market liquidity in Columbus' common stock;
. the historical prices for Columbus' common stock;
. the risks associated with continuing as a small independent oil and gas
exploration company, in light of the increasing consolidation in the oil
and gas industry, which had the effect of increasing competitive
pressures on earnings and growth and reducing the universe of acquirers
and merger partners for Columbus;
. the decline in oil prices in 1998 and early 1999 that had depressed the
oil and gas industry;
. the limited prospects for growth of Columbus' assets and earnings from
internal sources; and
. the relatively limited potential for increased shareholder value from
continued independent operations or from deferring an acquisition of the
Company.
Based on these discussions the board of directors concluded that the interests
of Columbus shareholders would likely be best served by considering a business
combination. In reaching its conclusion the board emphasized that the lack of
liquidity of Columbus' common stock would prevent shareholders from realizing
fair value for their shares except pursuant to a business combination. During
the first eight months of 1999 the average trading volume for the Columbus'
common stock was approximately 4,500 shares per actual trading day and trading
in Columbus stock occurred on only 97 of the 167 trading days during that
period.
On February 17, 2000, Columbus' board engaged Arthur Andersen as its financial
advisor to assist Columbus in exploring strategic alternatives to maximize
shareholder value, which included consideration of a sale or merger of
Columbus. Shortly thereafter, Columbus publicly announced its retention of
Arthur Andersen.
The board of directors of Columbus, with the assistance of Arthur Andersen,
conducted a financial review of Columbus and developed a list of potential
bidders based upon a number of factors, including the likelihood of interest
by the potential bidder in pursuing a business combination with Columbus, the
ability to successfully acquire and integrate Columbus' operations, and the
price and liquidity of the potential bidder's stock. In early April 2000,
Columbus contacted approximately 120 companies to solicit their interest in a
possible combination with or purchase of Columbus. Columbus informed each
potential bidder that if it were interested in seeking to acquire or merge
with Columbus, it must sign a confidentiality agreement, following which they
would receive a confidential information memorandum regarding Columbus and its
reserves, production and other assets. They were also advised that if they
were interested in pursuing a transaction with Columbus after reviewing the
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confidential information that they should submit a preliminary non-binding
proposal by May 8, 2000. The potential bidders were advised that it was
Columbus' strong preference that any proposed transaction be structured so as
to be tax-free to Columbus shareholders, but the board would consider other
alternatives, including a cash purchase of the outstanding shares of Columbus.
Thirty-five of these companies requested and received the confidential
information memorandum.
Eighteen companies, including Key, submitted preliminary non-binding
indications of interest to merge with or to purchase the outstanding stock of
Columbus by the May 8, 2000 due date. After reviewing these proposals with the
assistance of Arthur Andersen, Columbus selected seven companies, including
Key, to continue in the process based upon the value of the merger
consideration in the preliminary indications of interest and their fit with
the other bidder criteria established by the board, including, the liquidity
and potential for an increase in the price of the bidder's stock, the quality
of their prospects and levels of debt. Of these seven non-binding indications
of interest, three were for a tax-free merger with Columbus, two were for a
cash purchase, and two were for either a cash purchase or a merger. Five of
the seven selected bidders elected to conduct detailed due diligence with
respect to Columbus. This included meeting with representatives of Columbus
management, Arthur Andersen, and Columbus' outside independent engineers and
geologic consultants, and reviewing documentation related to Columbus'
business and operations. These potential bidders were advised that they were
to submit formal offers by June 21, 2000.
On May 26, 2000 Columbus sent its regular quarterly report to shareholders for
the first quarter ended February 29, 2000 in which it updated shareholders on
the progress of the bidding process, which was later filed with the SEC. On
May 30, 2000 Columbus' trading price increased from $5.75 on May 23, 2000 (the
last day on which the stock traded) to $6.875.
On June 21, 2000, Key submitted to Columbus its formal offer for a tax-free
merger with an initial exchange ratio of 0.346 shares of Key common stock for
each share of Columbus common stock, subject to customary conditions,
approvals and further due diligence investigation. This offer was based on
Key's review of Columbus' detailed due diligence data and Key's assessment of
Columbus' proved reserve quantities and values under a variety of pricing
scenarios and at various effective dates.
On June 26, 2000, Columbus' board held a special meeting at which Arthur
Andersen made a detailed presentation as to the status of the merger/sale
process and the formal offers that were received by Columbus. Arthur Andersen
reported that of the five companies that elected to review the more detailed
data regarding Columbus, two submitted formal offers -- one from Key, an oil
and gas exploration company, and one from a diversified company with oil and
gas and electric utility interests. Both of the formal offers were for a tax-
free merger with Columbus. Two of the companies did not submit formal offers
because of a lack of strategic fit. One other company did not submit a formal
offer due to internal considerations.
Key's formal offer was the equivalent of an acquisition of Columbus at $6.25
per share while the other formal offer was at $4.84 per share. Both of these
valuations were calculated based upon intraday prices during Arthur Andersen's
presentation on June 26, 2000 of the common stock of Key and the other bidder.
Both formal offers were subject to standard terms and conditions. Based upon
the market price of the Columbus common stock of $6.88 and the market price of
Key's common stock of $18.06, during the meeting on June 26, 2000, the Key
formal offer represented a discount of 9.1%, and the other offer represented a
discount of 29.7% from the current market price. Following Arthur Andersen's
presentation, the board informed Arthur Andersen that both formal offers were
lower than had been expected, since they were substantially lower than the
corresponding preliminary non-binding indications of interest from these two
bidders.
In response to questions from the board, Arthur Andersen advised the board
that the formal offers were substantially lower than the preliminary non-
binding indications of interest as a result of the specific reserve valuation
parameters for acquisitions used by the two bidders in analyzing Columbus'
reserves. Although the estimates of proved reserves prepared by Columbus'
independent engineers were conducted in accordance with industry standards,
whether a bidder would characterize those same properties as proved reserves
depends on
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the bidder being able to demonstrate with reasonable certainty, based upon its
own existing economic and operating conditions, that these reserves would be
economically recoverable by them. As a result, companies may classify and
therefore value some reserves differently based on their own estimated
operating costs, production methods, recovery techniques, transportation and
marketing arrangements, and risk factors. For instance, Key only classifies as
proved undeveloped reserves those locations on which it can expect to achieve
certain returns on investment based on risk discounted economic analysis. Key
and the other bidder evaluated some of Columbus' properties as having higher
risk than Columbus had for properties in locations where Columbus had
extensive drilling experience and the bidders had little prior experience. In
determining the price of their formal offers, each of the bidders assigned a
proved reserve value only to those properties that it would classify as proved
reserves. As a result, not all of the Columbus properties were assigned the
value they would have been assigned had they been classified as proved
reserves, which had the effect of lowering the price included in the formal
offers. Arthur Andersen noted that the two formal offers had classified and
therefore valued the same Columbus reserves differently in several instances.
After Arthur Andersen's presentation and the board's review and discussion of
each of the formal offers, the board advised Arthur Andersen that it would not
accept either offer. Instead, it extended the due date of formal offers until
July 7, 2000, and requested that Arthur Andersen ask both bidders to increase
their offers. In particular, they asked Arthur Andersen to request if the
bidders had considered selected properties of Columbus to determine if they
could classify specific properties as proved reserves for purposes of the
acquisition and to consider the value of the cash flow from Columbus'
operations services, both of which would support an increase in the exchange
ratio. Thereafter, Arthur Andersen separately met with representatives of Key
and the other bidder to discuss these matters.
On July 5, 2000, representatives from Columbus met with members of Key's
management to discuss Key's June 21 formal offer and technical differences in
the evaluations by the parties of Columbus' oil and gas reserves. Present at
that meeting from Columbus were Harry A. Trueblood, Jr., president, chairman
of the board and CEO, Clarence H. Brown, executive vice president and COO, and
J. Samuel Butler, a member of Columbus' board of directors, all of whom are
petroleum engineers. Representatives from Key included Monroe R. Robertson,
Key's president and COO, Joseph Albi, Key's vice president of engineering,
Paul Korus, Key's chief financial officer, and Gary Abbott, one of Key's
petroleum engineers. During this meeting, Key also orally provided an overview
of its operations and corporate objectives and projected cash flow for the
year 2000. Later that day, Tom Jordan, vice president of exploration, and
other members of Key's geological staff, presented to Messrs. Trueblood, Brown
and Butler detailed non-public information regarding Key's drilling prospects
in California, Louisiana, Mississippi and Wyoming, including seismic
information, well logs, geological information, and reserve estimates. As a
result of this meeting, Columbus representatives concluded that Key had
prospects ready to drill and the cash flow to enable it to accomplish the
drilling.
On July 7, 2000, during a regular board meeting, the board reviewed the status
of the ongoing discussions with the two bidders. Arthur Andersen reported to
the Columbus board that Key had increased its formal offer from 0.346 shares
to 0.352 shares of Key common stock for each share of Columbus common stock
and would further increase its formal offer as soon as it completed additional
due diligence concerning Columbus' reserve information. This additional due
diligence could not be done until the early part of the following week. Arthur
Andersen reviewed in detail Key's formal offer and noted that the Key offer
now represented a 16.1% discount from the most recent closing price of
Columbus' common stock prior to July 7, 2000 (June 29, 2000), which had risen
to $7.00 per share.
Arthur Andersen also reported that Columbus had received a revised formal
offer from the other bidder. The other bidder increased its offer to $5.56 per
share based on the July 6, 2000, closing price of the other bidder's common
stock. The revised offer was conditioned on obtaining regulatory approvals.
The offer expired at the close of business on July 7, 2000. The revised
proposal represented a discount of approximately 21.2% to the closing price of
$7.00 per share for the Columbus common stock on July 6, 2000.
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Arthur Andersen also again reviewed in detail the bidding process. Arthur
Andersen explained that it had also analyzed the offers based on the period
from January 1, 2000 to May 29, 2000 in order to compare the revised formal
offers to a period before the price increases in Columbus' stock that occurred
after Columbus' quarterly report that updated shareholders on the progress of
the bidding process. Arthur Andersen and the board believed that the price
increases were a result of the market's expectation of the proposed sale.
During that period the Columbus common stock did not trade above $6.00 and the
average market price of the Columbus common stock was $5.62. Relative to the
closing price of each bidders' stock on July 6, 2000, and Columbus' average
trading price from January 1, 2000 to May 29, 2000 of $5.62, the Key proposal
would represent a 4.6% premium, while the other proposal represented a
discount of 1.8%. At this point Arthur Andersen was excused from the meeting
while the board considered each of the two formal offers.
The board first discussed the fact that each of the offers represented a
discount from the current market price for the Columbus common stock and
discussed whether to proceed with either transaction. In light of the fact
there had been a recent increases in the market price that most likely
reflected the market's reaction to the expectation of a business combination,
the board gave more weight to the comparison of the offers to the average
market price of the Columbus common stock of $5.62 from January 1, 2000
through May 29, 2000, prior to the recent increases. The board revisited the
fact that the process began with contacting over 120 companies and had
resulted in only two formal offers from the seven selected preliminary non-
binding proposals. They considered whether they should reopen the process to
some of the original proposed bidders or attempt to find additional bidders.
The board concluded that was not a viable alternative and no other third
parties meeting the board's criteria had expressed an interest in a business
combination after Columbus' public announcement that it was considering a
strategic combination. In addition, both bidder's stock would provide
liquidity for Columbus' shareholders and the board believed that both bidders
had the potential for capital appreciation in their stock price. There was
additional discussion about the non-public information obtained in the meeting
on July 5, 2000 with Key personnel and a review of analyst reports regarding
Key, which lead the board to conclude that Key's recent common stock price
represented an undervaluation of its assets by the market.
Because oil and gas prices had increased significantly since the beginning of
2000, the board considered remaining as an independent company but concluded
that doing so would not be in the best interests of shareholders because that
alternative would not provide shareholders with liquidity for their
investment, which was an important factor in the board deciding to pursue a
business combination. In addition, because of its limited oil and gas
prospects, the board believed that Columbus' prospects for growth from
internal sources were significantly limited. In determining whether to proceed
with a transaction, the board also considered the following factors:
. the recent lack of interest by investors in oil and gas companies with a
market capitalization similar to Columbus compared to that of larger
independent companies;
. the fact that the average trading volume for the Columbus' common stock
was approximately 2,600 shares per actual trading day and that the stock
had traded on only 68 of the 126 trading days between January 1 and June
30, 2000.
. large fluctuations in crude oil and natural gas prices in recent years,
including the recent increase in those prices;
. the board's belief that Columbus would be unable to raise a significant
amount of capital in the future without diluting current shareholders.
The board concluded that Columbus' prospects as a stand-alone company were
limited and therefore a business combination was the best means to provide
shareholders with liquidity and the potential for growth in their investment.
The board also concluded that it would better to engage in a business
combination at this time because the continuing consolidation in the industry
would probably make Columbus less competitive, and therefore an even less
attractive merger partner, in the future. The board concluded that the process
had most
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likely yielded the maximum value for Columbus available and therefore decided
to compare the two formal offers. After lengthy discussion, the board decided
to pursue the offer by Key, but not the other bidder. In reaching its decision
to pursue the Key offer, the board considered the following:
. the Key offer represented a premium compared to the proposal by the
other bidder;
. the Key offer provided greater market liquidity, an important factor for
Columbus in strategic combination, than the other offer. Key's market
volume was higher during the first six months of 2000 than the other
bidder's;
. the board's belief that Key offered a greater opportunity for growth and
stock price appreciation than the other bidder based on its evaluation
of the nonpublic information presented by Key and the favorable
impression Columbus' management had of Key's management and technical
personnel, which was supported by the fact that Key's common stock had
appreciated at a greater rate than the other bidders since January 2000;
. the other bidder's proposal was contingent on regulatory approvals,
which Key's was not, that might have delayed or prevented the closing of
the transaction;
. Key, as an oil and gas exploration company, provided a better strategic
fit and Key could more effectively exploit Columbus' assets and Key
could use Columbus' positive cash flow to accelerate drilling on Key's
prospects;
. the fact that the other offer terminated the same date as the meeting
and the other bidder indicated it would not extend the terms of the
offer, and therefore Columbus would not have an opportunity for further
negotiations; and
. the fact that Columbus' common stock had increased since January 2000,
which the board attributed primarily to the market expectation of a
proposed transaction.
Following the board's discussion, the board authorized Columbus' senior
management to begin to negotiate definitive terms of a formal merger agreement
with Key.
Senior management of Columbus, led by Michael Logan, vice president of
corporate development and marketing, conducted negotiations with Key's
negotiating team, led by Stephen Bell, senior vice president of land and
business development. Mr. Logan regularly reported to Columbus' executive
committee to discuss the status of negotiations and continually sought input
on the detailed structure of the transaction. Columbus' legal counsel, Sherman
& Howard L.L.C., regularly provided Columbus with its comments concerning the
structure of the transaction and the proposed terms of the merger agreement.
Mr. Bell also reported regularly on the progress of the negotiations to Key's
chairman of the board and CEO, F.H. Merelli and Mr. Robertson. During the
negotiations, discussions also continued between Joseph Albi, Michael Logan
and Columbus' independent engineers related to each company's reserves
information.
Upon further detailed review by Key engineers of the technical data pertaining
to some of the wells operated by Columbus and the cash flow from Columbus
operations services, on July 14, Key revised the terms of its merger proposal
by increasing the exchange ratio from 0.352 shares to 0.355 shares of Key
common stock for each Columbus share, a ratio which represented a discount of
approximately 14%, based on the relative market prices of Columbus' common
stock and Key's common stock on July 14, 2000.
On July 17, Holme Roberts & Owen LLP, counsel for Key, delivered an initial
draft of the merger agreement to Columbus and its counsel. Throughout the rest
of July Columbus' and Key's executives and counsel negotiated the terms of the
definitive merger agreement. The material issues discussed throughout these
negotiations included:
. price protection measures, including consideration of a price collar;
. whether and for how long there would be indemnification of the officers
and directors of Columbus by Key following the merger;
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. the terms of severance to employees of Columbus who would not be hired
by Key;
. the assumption of Columbus stock options by Key and their terms; and
. appropriate provisions and fees for termination of the merger agreement.
These discussions did not include further negotiation of the exchange ratio.
On August 8, 2000, Mr. Logan and counsel for Columbus met with Messrs. Bell,
Albi, and Korus, and counsel for Key to discuss some of the outstanding
issues. Columbus proposed several alternative price collars for the exchange
ratio, but Key held firm on its position not to include any collar. The
parties also discussed but did not resolve the duration of the indemnification
for officers and directors of Columbus, the vesting and term of Columbus stock
options, and termination provisions.
Informal discussions of these issues continued during the following week
between Messrs. Logan and Bell and on August 15, 2000, Messrs. Logan and Bell
and counsel for Columbus and Key met and during the meeting completed
negotiation of the termination provisions. Further, the parties reached
agreement on which of those provisions would require Columbus to pay a break-
up fee and when it would be appropriate only to pay Key's expenses. Columbus
requested a cap on Key's expenses in the event Columbus would be obligated to
pay those expenses, but Key refused to agree to this limitation. Finally, Key
agreed to Columbus' request that indemnification of its officers and directors
be for a term of six years. At the conclusion of this meeting, the parties had
orally agreed to all material terms of the merger and no further negotiations
on material terms were held. However, both parties understood that neither
party was legally committed to the other to proceed with the transaction.
On the same day, Arthur Andersen was retained by Columbus for the purpose of
rendering a fairness opinion to the Columbus board. Arthur Andersen then began
its analysis of Columbus and Key in connection with rendering a fairness
opinion.
On August 28, 2000, the Columbus board of directors held a special meeting to
discuss the final terms of the proposed merger with Key. Prior to the meeting,
each board member received a draft of the proposed merger agreement. At the
meeting, each of Columbus' senior management and its legal and financial
advisors reviewed with the board one or more of the following:
. the principal terms of the merger agreement;
. the potential benefits and risks of the transaction with Key;
. the rationale for and financial analysis relating to the proposed
merger;
. a detailed review of the bidding process; and
. an updated report on Columbus' due diligence of Key's non-public reserve
estimates and title records and publicly available information.
Columbus' counsel outlined the legal considerations for the board in
discharging its fiduciary responsibilities in connection with its
deliberations. Arthur Andersen then summarized the material financial analyses
that they had conducted related to the proposed transaction (as more fully
described under the heading "-- Fairness Opinion Columbus Financial Advisor"
below), which included the following:
. comparable transactions analysis;
. contribution analysis;
. pro forma merger consequences analysis;
. net asset value (NAV) analysis;
. premiums paid analysis;
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. stock price ratio history analysis; and
. comparable company trading analysis.
After a description of these analyses, Arthur Andersen rendered to the
Columbus board of directors its oral opinion, subsequently confirmed by
delivery of a written opinion, to the effect that, as of that date and based
on and subject to the matters described in the opinion, the exchange ratio
pursuant to the merger agreement with Key was fair, from a financial point of
view, to the shareholders of Columbus.
The board noted that the exchange ratio for the Key proposal was within the
range of implied exchange ratios for the contribution and net asset value
analyses and considered the results of the other analyses conducted by Arthur
Andersen. The board noted that the stock price analysis implied an exchange
ratio of .365 to .405, whereas the exchange ratio offered by Key was .355. The
board also noted that although the premiums paid analysis implied an exchange
ratio of .343 to .486, the actual premium (or discount) was well below the
average of the selected comparison transactions. In evaluating the fact that
the stock price analysis yielded an implied exchange ratio higher than that
being offered by Key, the board considered that the analysis was primarily
based on the period after the recent increases in the market price of
Columbus' stock, which the board had attributed to market expectation of a
proposed transaction as a result of Columbus' update to its shareholders
concerning the bidding process and its belief that the price of Key's common
stock was below its asset value. In considering the premiums paid analysis,
which showed that the price being offered in the proposed transaction was well
below the average of the selected comparison transactions, the board noted
that the exchange ratio was within, although at the lower end of, the implied
exchange ratio range for that analysis.
The board again discussed the bidding process that resulted in the Key
proposal and concluded that the process had produced the best price available
at this time for Columbus shareholders. The board also reiterated its belief
that by postponing the transaction Columbus would become less competitive and
a less attractive merger partner in the future. Following further discussion,
the Columbus board unanimously:
. determined that the merger agreement and the merger are in the best
interests of Columbus and its shareholders;
. approved the merger agreement and the merger;
. recommended that the shareholders of Columbus adopt the merger
agreement; and
. directed that the merger agreement be submitted for consideration by
Columbus' shareholders at a special meeting.
The Key board also met on August 28 to discuss and approve the proposed merger
agreement.
The merger agreement was executed by both companies on the evening of August
28, 2000. Columbus and Key issued a joint press release announcing the
execution of the merger agreement before the beginning of the trading day on
August 29, 2000.
Key and Columbus reasons for the merger
Key and Columbus believe that the merger will enable the combined company,
with its larger and more diversified asset base and greater financial
flexibility, to more effectively compete and to achieve certain other
strategic objectives.
. The oil and gas business is capital intensive, often requiring
substantial expenditures to gain access to mineral rights, acquire
geological and geophysical data, and drill new wells that add proved
reserves and production. Because the combined enterprise will have
greater borrowing capacity and a larger base of operating cash flow than
either company had individually, Key and Columbus believe that the
merger will enable the new company to make larger investments in
exploration and development projects or acquisitions of producing
properties than either company could have done separately. As
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of June 30, 2000, Key's bank credit facility borrowing base was $85
million and Columbus' was $10 million. We anticipate that the borrowing
base of the combined enterprise will be at least equal to the sum of the
two separate facilities, or $95 million. In fiscal 1999, Key's net cash
from operations was $35.5 million and Columbus' was $3.3 million, or a
pro forma combined amount of $38.8 million, without adjustment for
expected cost savings.
. Key and Columbus believe the merger will diversify the combined
company's asset base. The oil and gas exploration business is very
competitive and inherently risky. Key has long sought to establish a
position in south Texas, a prolific gas producing area. Columbus'
acreage in this region provides Key with a base of production and new
drilling opportunities from which it can potentially expand. Greater
diversification of the combined company's assets and growth
opportunities may also result in less reliance on any individual project
for future financial performance.
. Key and Columbus believe the merger creates the opportunity for
significant cost-saving opportunities. They expect that the merger will
result in management and administrative efficiencies, primarily from
eliminating duplicate functions and associated costs. Key expects that
the merger will result in approximately $2.0 million of annual cost
savings, which Key hopes to achieve by:
. eliminating duplicative administrative and executive staff ($1.5
million);
. consolidating corporate headquarters ($0.250 million); and
. eliminating outside service costs such as travel, legal, audit
and data processing costs ($0.175 million).
Columbus' reasons for the merger; recommendation of the Columbus board.
In reaching its decision to approve the merger agreement and the merger and to
recommend adoption of the merger agreement by Columbus shareholders, the
Columbus board consulted with Columbus' management and its legal and financial
advisors and independently considered the proposed merger agreement and the
transactions contemplated by the merger agreement. In unanimously approving
the merger agreement and the merger, the Columbus board of directors
considered a number of various factors including those mentioned in "--
Background of the Merger" on pages 25 to 31, and the following:
. the factors considered by the board at its July 7, 2000 meeting in
deciding to pursue the offer by Key (see pages 27 and 28), including the
potential for improved trading liquidity to Columbus' shareholders and
the board's belief that Columbus' prospects as a stand-alone company
were limited;
. that Key had increased the exchange ratio after its initial formal
offer, although both exchange ratios were substantially lower than the
exchange ratio in Key's preliminary non-binding indication of interest;
. the opinion of Arthur Andersen described below to the effect that, as of
the date of such opinion and based upon and subject to certain matters
stated in its opinion, the merger consideration was fair from a
financial point of view to the shareholders of Columbus (see "--
Fairness Opinion of Columbus' Financial Advisor" on pages 34 to 41);
. that the merger will be accomplished on a tax-free basis to the
shareholders for United States federal income tax purposes, except for
cash received by Columbus shareholders in lieu of fractional shares;
. the judgment, advice, and analysis of Messrs. Trueblood and Logan,
members of senior management of Columbus, including their favorable
recommendation of the merger;
. the terms of the merger agreement, including the termination provisions,
closing conditions and the ability of Columbus under certain conditions
to consider unsolicited alternative business combination proposals and
the fact that the merger agreement does not include many of the types of
conditions to closing that might lend additional uncertainty to the
transaction (such as consents by third parties
32
<PAGE>
other than shareholders). See "The Merger Agreement" on page 42, "--
Conditions to the Merger" on page 43, "-- Other Acquisition Proposals"
on page 45 and "-- Termination" on page 46;
. the process undertaken by senior management with the assistance of
Arthur Andersen to identify and solicit indications of interest from
selected bidders had exhausted the field of possible acquirers and
resulted in an increase in the exchange ratio offered to Columbus
compared to the initial formal offers (see "-- Background of the
Merger");
. the fact that Key's was one of only two formal offers submitted and that
no additional potential acquirer or strategic partner satisfying the
board's criteria had expressed an interest in engaging in a business
combination or other strategic transaction since Columbus announced its
interest in a strategic combination in February 2000;
. the market price of Key common stock over the last several years and the
potential for an increase in the market price in the future, based upon
the review of the confidential nonpublic data presented by Key,
including Key's drilling prospects and projected cash flow for the year
2000;
. the financial condition, results of operations, business and prospects
of Key and the risks involved in developing those prospects;
. the market price of Columbus' common stock for the last several years
and the financial condition, results of operations, business and
prospects of Columbus; and
. the interest of Columbus' management in the merger as described in
"Interests of Certain Executive Officers and Directors in the Merger" on
page 50.
The discussion of the information and factors considered by the board is not
intended to be exhaustive, but includes the material factors considered by the
board. In reaching its decision to approve the merger and to recommend the
merger to the Columbus shareholders, the Columbus board did not view any
single factor determinative and did not find it necessary or practicable to
assign any relative or specific weights to the various factors considered.
Furthermore, individual directors may have given differing weights to
different factors.
The Columbus board did not specifically adopt Arthur Andersen's fairness
opinion, but it did rely upon the opinion in reaching its conclusion that the
merger agreement and the merger are in the best interests of Columbus and its
shareholders and considered it an important but not exclusive factor in
determining whether to approve the merger agreement. The board noted that the
exchange ratio for the Key proposal was within the range of implied exchange
ratios for the analyses performed by Arthur Andersen in connection with
rendering its fairness opinion, other than the stock price analysis, which
yielded an implied exchange ratio higher than that being offered by Key. The
board further noted that the premiums paid analysis conducted by Arthur
Andersen showed that the price being offered in the proposed transaction was
well below the average of the selected comparison transactions, although the
exchange ratio was within the implied exchange ratio range for that analysis.
The Columbus board also identified and considered a number of negative factors
in its deliberations concerning the merger, including:
. the purchase price represented a discount of 4.9% to Columbus' closing
price on August 25, 2000 and that it represented a discount of 16.1% and
9.1% based on the relative trading prices of Columbus' and Key's common
stock on July 6, 2000 and June 26, 2000, respectively;
. the fact that the market price of the Key common stock could decline,
resulting in a further discount from the market price of the Columbus
common stock;
. the board's belief about the favorable long-term prospects of Key may
not be realized;
33
<PAGE>
. the benefits of Columbus' long-term prospects will be shared by former
shareholders of Columbus and Key, rather than solely by Columbus'
existing shareholders;
. the difficulty in managing operations in the different geographic
locations in which Columbus and Key operate;
. the risk that the expected benefits of the merger might not be fully
realized; and
. other applicable risks described in this prospectus/proxy statement
under "Risk Factors."
Further, the board concluded that, on balance, the potential benefits of the
merger described above outweighed these risks.
Recommendation of the Columbus Board. The Columbus board unanimously
recommends that the shareholders of Columbus vote FOR adoption of the merger
agreement.
Fairness Opinion of Columbus' Financial Advisor
Arthur Andersen was retained by Columbus to render a fairness opinion to the
board of directors of Columbus as to the fairness of the exchange ratio
pursuant to the merger agreement from a financial point of view to the
shareholders of Columbus. Arthur Andersen served as Columbus' financial
advisor regarding the sale to Key. Arthur Andersen is internationally
recognized and is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, restructurings,
private placements of debt and equity and valuations for corporate and other
purposes. The Columbus board selected Arthur Andersen as its financial advisor
because of its expertise and reputation and its experience in transactions
comparable to the merger. At a meeting of the Columbus board of directors held
on August 28, 2000 to consider the proposed merger, Arthur Andersen rendered
to the Columbus board an oral and written fairness opinion to the effect that,
as of August 28, 2000 and based upon and subject to certain matters stated
therein, the exchange ratio pursuant to the merger agreement was fair from a
financial point of view to the shareholders of Columbus.
The full text of Arthur Andersen's written fairness opinion dated August 28,
2000 to the board of directors of Columbus, which sets forth the procedures
followed, assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B. Holders of Columbus common stock are urged
to read carefully this opinion in its entirety. Arthur Andersen's fairness
opinion is addressed to the board of directors of Columbus and relates only to
the fairness of the exchange ratio pursuant to the merger agreement from a
financial point of view, does not address any other aspect of the proposed
merger or any related transaction and does not constitute a recommendation to
any shareholder with respect to any matters relating to the merger. The
summary of the fairness opinion of Arthur Andersen set forth in this proxy
statement/prospectus is qualified in its entirety by reference to the full
text of the opinion. The form and amount of the consideration to be paid by
Key in the merger was determined through arm's length negotiations between Key
and Columbus.
In arriving at its opinion, Arthur Andersen reviewed the merger agreement and
certain publicly available business and financial information relating to
Columbus and Key. Arthur Andersen also reviewed certain other non-public
information, provided by Columbus and Key, including the following items which
Arthur Andersen deemed to be material in its analysis:
. Internal two-year financial forecasts (2000-2001), prepared respectively
by Columbus' and Key's management (including Key's estimates of post-
merger cost savings and depreciation adjustments for 2001);
. Columbus' internal financial statements through and for June 30, 2000;
. Key's internally prepared reserve report dated July 1, 2000 and the
Columbus' reserve report dated July 1, 2000 as prepared by Columbus'
independent engineers;
. Columbus' undeveloped acreage detail as of July 1, 2000; and
. Key's (June 30, 2000) and Columbus' (May 31, 2000) outstanding options
detail.
34
<PAGE>
Arthur Andersen also met with the managements of Columbus and Key to discuss
the businesses and prospects of Columbus and Key. Arthur Andersen also
considered certain financial and stock market data of Columbus and Key and
compared this data with similar data for other publicly held companies in
businesses similar to Columbus and Key and considered, to the extent publicly
available, the financial terms and related stock market data of certain other
business combinations and other transactions recently effected. Arthur
Andersen compared the estimated net asset values of Columbus and Key based on
estimated values of certain relevant assets and liabilities, and considered
Columbus and Key on a pro forma, combined basis in order to estimate accretion
or dilution to earnings and cash flow per share, and the effects of general
and administrative expense savings and a change in accounting method
(depreciation). Arthur Andersen compared the relative contribution of certain
operational and financial factors of Columbus and Key to a combined entity.
Arthur Andersen also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria that
Arthur Andersen deemed relevant.
In connection with its review, Arthur Andersen did not assume any
responsibility for independent verification of any of the above public or non-
public information provided to or otherwise reviewed by Arthur Andersen and
relied on such information being complete and accurate in all material
respects. With respect to financial forecasts, Arthur Andersen assumed that
such forecasts were reasonably prepared by management of Columbus and Key on
bases reflecting the best currently available estimates and judgments of the
management of Columbus and Key as to the future financial performance of
Columbus and Key and the strategic benefits anticipated to result from the
merger. Arthur Andersen assumed that the reserve reports, prepared by Key and
Columbus' independent engineers, were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the preparers of such
reports as to the oil and gas reserves of Columbus and Key. In addition,
Arthur Andersen was not requested to make and did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Columbus or Key, nor was Arthur Andersen furnished with any such
evaluations or appraisals. Arthur Andersen's fairness opinion was necessarily
based upon information available to, and financial, economic, market and other
conditions as they existed and could be evaluated by, Arthur Andersen on the
date of its opinion. Arthur Andersen did not express any opinion as to the
actual value of the Key common stock when issued pursuant to the merger or the
prices at which the Key common stock will trade subsequent to the merger.
Although Arthur Andersen evaluated the exchange ratio from a financial point
of view, Arthur Andersen was not requested to, and did not, recommend the
specific consideration payable in the merger. The exchange ratio was
determined through negotiation between Columbus and Key. Arthur Andersen did
not provide any tax or accounting advice to Columbus or its shareholders. No
other limitations were imposed on Arthur Andersen with respect to the
investigations made or procedures followed by Arthur Andersen in rendering its
opinion.
In preparing its fairness opinion to the board of directors of Columbus,
Arthur Andersen performed a variety of financial and comparative analyses,
including those described below. The summary of Arthur Andersen's analyses set
forth below does not purport to be a complete description of the analyses
underlying Arthur Andersen's fairness opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. In arriving
at its fairness opinion, Arthur Andersen made qualitative judgments as to the
significance and relevance of each analysis and factor considered by it.
Accordingly, Arthur Andersen believes that its analyses must be considered as
a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying such analyses and its opinion. In its
analyses, Arthur Andersen made numerous assumptions with respect to Columbus,
Key, industry performance, regulatory, general business, economic, market and
financial conditions and other matters, many of which are beyond the control
of Columbus and Key. No company, transaction or business used in such analyses
as a comparison is identical to Columbus or Key or the combined company, nor
is an evaluation of the results of such analyses entirely mathematical; rather
such analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect
the acquisition, public trading or other values of the companies, business
segments or transactions being
35
<PAGE>
analyzed. The estimates contained in such analyses and the ranges of
valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by such
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Arthur Andersen's
fairness opinion and financial analyses were only two of many factors
considered by the board of directors of Columbus in its evaluation of the
proposed merger and should not be viewed as determinative of the views of the
board of directors or management of Columbus with respect to the merger or the
exchange ratio.
The following is a summary of the material analyses performed by Arthur
Andersen in connection with its fairness opinion dated August 28, 2000.
Comparable Transactions Analysis. Arthur Andersen reviewed certain information
from John S. Herold, Inc.'s Herold M&A Transaction Review--Upstream Analysis
on 41 transactions involving Onshore Texas Gulf Coast and Rocky Mountain
exploration and production assets which were announced from January 1, 1999 to
August 25, 2000. These transactions are comparable to Columbus due to the
similar geographic location of the reserves involved.
As of June 30, 2000, Columbus had approximately 70% of its total un-risked
proved reserves in the Onshore Texas Gulf Coast region, and 30% in the Rocky
Mountain region. Arthur Andersen calculated the weighted average reserve
transaction value multiple based on total un-risked proved oil and gas
reserves for the above 41 transactions. Arthur Andersen then multiplied the
weighted average reserve transaction value multiple for the Onshore Texas Gulf
Coast and Rocky Mountain regions by Columbus' percentage reserves within those
regions to derive an implied value ($/Mcfe). The following summary table
presents the weighted average reserve transaction value multiples and the
implied value ($/Mcfe) based on Columbus' total un-risked proved reserves by
region:
<TABLE>
<CAPTION>
$/Mcfe
------------------------------
Gulf Coast-- Rocky Implied
Onshore Mountains Value
------------ --------- -------
<S> <C> <C> <C>
Weighted Avg. (1/1/99-8/25/00).............. $ 0.95 $ 0.69
Columbus' Total Proved Reserves............. 70.0 % 30.0 %
------ ------ -----
$ 0.67 $ 0.21 $0.88
</TABLE>
The implied value of $0.88/Mcfe based on comparable transactions compares to
an implied value of $1.16/Mcfe based on the merger agreement exchange ratio of
0.355x, the Key closing stock price on August 25, 2000, and Columbus' SEC Case
total un-risked proved reserves as of June 30, 2000.
In conclusion, Arthur Andersen believes that the implied $1.16/Mcfe price paid
for Columbus' reserves compares favorably to the 41 other reserve transactions
in the Onshore Texas Gulf Coast and Rocky Mountain regions from January 1,
1999 to August 25, 2000 as reported in J.S. Herold, Inc.'s Herold M&A
Transaction Review with a weighted average $/Mcfe price paid of $0.88.
The SEC Case is the pre-tax present value of future net cash flows from proved
reserves, discounted at 10% per year. Oil, gas and natural gas liquid prices
used to calculate future revenues are based on June 30, 2000 prices held
constant, except where fixed and determinable price changes are provided by
contractual arrangements. Future development and production costs are also
based on year-end costs and assume the continuation of existing economic
conditions.
Contribution Analysis. Arthur Andersen analyzed the relative production,
revenue, EBITDAX, discretionary cash flow, and net income contributions
(adjusted for non-recurring items) of Columbus and Key to the combined company
based on historical and projected financial and operational data for the
twelve months ended June 30,
36
<PAGE>
2000 and the years 2000 and 2001 as provided by the companies, assuming no
cost savings or synergies. EBITDAX consists of earnings before interest,
taxes, depreciation, amortization, exploration costs and non-recurring items.
The following table illustrates the analysis described above:
<TABLE>
<CAPTION>
($000s)
------------------------------------------------------------------------------
Columbus'
Contribution
Columbus Key to Combined Company
-------------------------------- ----------------------- ---------------------
LTM
LTM(/2/) 6/30 2000E(/3/) 2001E 6/30 2000E 2001E LTM 6/30 2000E 2001E
------------- ---------- ------- ------- ------- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Production
(MMcfe)................ 4,026 4,024 3,614 22,821 23,691 25,411 15.0% 14.5% 12.5%
Revenue(/1/)............ $12,645 $15,474 $14,467 $75,002 $97,271 $99,284 14.4% 13.7% 12.7%
EBITDAX................. $ 8,466 $10,896 $10,066 $59,091 $79,062 $78,392 12.5% 12.1% 11.4%
Discretionary Cash
Flow................... $ 9,147 $ 9,284 $10,077 $55,875 $75,401 $74,544 14.1% 11.0% 11.9%
Net Income.............. $ 698 $ 2,422 $ 4,248 $14,920 $27,221 $28,991 4.5% 8.2% 12.8%
</TABLE>
--------
(1) Excluding Columbus' management/operating services revenue
(2) LTM means the latest twelve months.
(3) E refers to estimated.
The contribution analysis yielded an implied exchange ratio of 0.157x to
0.593x.
Pro Forma Merger Consequences Analysis. Arthur Andersen evaluated the
potential pro forma effect of the merger on the combined company's estimated
2001 earnings per share and cash flow per share based upon financial forecasts
provided by Columbus' and Key's management and after giving effect to certain
general and administrative expense savings and a change in accounting method
(depreciation) as estimated by management and illustrated in the table below.
Oil and gas prices used in the following financial projections are based on
the NYMEX futures price as of 8/15/00 for the relevant period. Adjustments
were made by Columbus' and Key's management to the oil and gas price forecasts
to reflect location and quality differentials.
<TABLE>
<CAPTION>
2001E (000s)
------------------------------------------------------
Pro
Forma % Accretion
Key Columbus Adjustments Key (Dilution)
------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $99,284 $14,467 $ -- $113,751
Leasing Operating &
Production Taxes....... $18,047 $ 3,301 $ -- $ 21,348
G & A................... $ 2,845 $ 1,100 $ (600)(1) $ 3,345
------- ------- ------- --------
EBITDAX................. $78,392 $10,066 $ 600 $ 89,058
DD&A.................... $31,417 $ 3,000 $ 3,959 (2) $ 38,376
Exploration Expense..... -- $ 250 $ (250)(3) $ --
------- ------- ------- --------
EBIT.................... $46,975 $ 6,816 $(3,109) $ 50,682
Interest (Expense)...... $(1,160) $ (115) $ -- $ (1,275)
Interest Income......... $ 202 $ 150 $ -- $ 352
Other Income
(Expenses)............. $ -- $ -- $ -- $ --
------- ------- ------- --------
Earnings Before Income
Taxes.................. $46,017 $ 6,851 $(3,109) $ 49,759
Income Tax Provision
(Benefit).............. $17,026 $ 2,603 $(1,151)(4) $ 18,479
------- ------- ------- --------
Net Earnings (Loss)..... $28,991 $ 4,248 $(1,959) $ 31,280
Average Diluted Shares.. 12,742 3,752 (2,420)(5) 14,074
Diluted EPS............. $ 2.28 $ 1.13 N/A $ 2.22 (2.3%)
======= ======= ======= ========
Diluted Discretionary
Cash Flow Per Share.... $ 5.85 $ 2.69 N/A $ 6.06 3.5%
======= ======= ======= ========
</TABLE>
37
<PAGE>
--------
(1) Estimated general and administrative expense savings
(2) Estimated incremental Columbus depreciation, depletion and amortization
associated with change in accounting method from successful efforts to
full cost
(3) Elimination of Columbus' Exploration Expense due to change in accounting
method from successful efforts to full cost
(4) Tax effect of adjustments 1 through 3 at an assumed tax rate of 37%
(5) Elimination of Columbus shares outstanding in excess of Key shares issued
in the merger
The conclusion of the analysis indicated that the proposed merger would be
dilutive to Key's per share earnings and accretive to per share discretionary
cash flow for 2001, assuming that the merger is accounted for as a purchase
under generally accepted accounting principles. The actual results achieved by
the combined company may vary from projected results and the variations may be
material.
Net Asset Value (NAV) Analysis. Arthur Andersen estimated the present value of
the future before-tax cash flows that Columbus could be expected to generate
from its proved reserves, under four oil and gas price scenarios (Case I, Case
II, Case III and Case IV, the pricing scenarios), as of June 30, 2000 based on
reserve, production and production cost estimates and a range of discount
rates, all as provided by Columbus management and Columbus' independent
engineers, Reed W. Ferrill and Associates, Inc., and as discussed with Key
management. Arthur Andersen added to such estimated values for proved reserves
assessments of the value of certain other assets, liabilities, and sources of
value of Columbus, including undeveloped acreage, operating and management
services cash flow, cash and outstanding debt. These assessments were made by
Arthur Andersen based on information provided by Columbus' management and on
various industry benchmarks and assumptions provided by Columbus' management
and discussed with Key's management.
Arthur Andersen evaluated the present value of the future before-tax cash
flows that Key could be expected to generate from proved reserves, under the
pricing scenarios, as of June 30, 2000 based on reserve, production and
production cost estimates and a range of discount rates, all as provided by
Key management and as discussed with Columbus' management. This evaluation was
net of values for assets and liabilities for undeveloped acreage, other long-
term assets and liabilities, working capital and outstanding debt, all as
provided by the companies and taking into consideration various industry
benchmarks and assumptions provided by Key management and discussed with
Columbus' management.
Case I oil and gas prices were based on the Nineteenth Annual Society of
Petroleum Evaluation Engineers Survey of Economic Parameters Used in Property
Evaluation dated June 2000. Adjustments were made by Key and Columbus'
independent engineers to the oil and gas price forecasts to reflect location
and quality differences.
Case II oil and gas price forecasts in the Pricing Scenarios were based on
NYMEX WTI (West Texas Intermediate) oil and Henry Hub gas prices as of August
15, 2000. Adjustments were made by Key and Columbus' independent engineers to
the oil and gas price forecasts to reflect location and quality differentials.
Beginning in 2004, the WTI oil and Henry Hub gas prices for the year 2004 were
assumed to escalate at 3% per year over the NYMEX WTI and Henry Hub oil and
gas prices for the prior year.
Case III oil and gas price forecasts in the Pricing Scenarios were based on
the Third Quarter, 2000 Randall & Dewey, Inc. Acquisitions Review Industry
Group price survey. Adjustments were made by Key and Columbus' independent
engineers to the oil and gas price forecasts to reflect location and quality
differences.
Case IV oil and gas price forecasts in the Pricing Scenarios were based on the
July 2000 Madison Energy Advisors, Inc. Quarterly Pricing Poll. Adjustments
were made by Key and Columbus' independent engineers to the oil and gas price
forecasts to reflect location and quality differences.
38
<PAGE>
The following table illustrates the four scenarios described above:
<TABLE>
<CAPTION>
Columbus
---------------------------------------------------------------
Case I Case II Case III Case IV
--------------- --------------- --------------- ---------------
(PV-10) (PV-15) (PV-10) (PV-15) (PV-10) (PV-15) (PV-10) (PV-15)
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
($000s)................ $14,718 $13,234 $25,117 $22,699 $21,847 $19,639 $25,195 $22,406
Basic Shares Outstanding
(000s)................. 3,744 3,744 3,744 3,744 3,744 3,744 3,744 3,744
Diluted Shares
Outstanding (000s)..... 3,796 3,796 3,796 3,796 3,796 3,796 3,796 3,796
------- ------- ------- ------- ------- ------- ------- -------
Basic NAV per Share..... $ 3.93 $ 3.53 $ 6.71 $ 6.06 $ 5.83 $ 5.24 $ 6.73 $ 5.98
Diluted NAV per Share... $ 3.88 $ 3.49 $ 6.62 $ 5.98 $ 5.75 $ 5.17 $ 6.64 $ 5.90
</TABLE>
<TABLE>
<CAPTION>
Key
------------------------------------------------------------------------------
Case I Case II Case III Case IV
------------------ ------------------ ------------------ ------------------
(PV-10) (PV-15) (PV-10) (PV-15) (PV-10) (PV-15) (PV-10) (PV-15)
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value
($000s)................ $142,625 $116,427 $183,801 $153,976 $153,753 $128,477 $181,535 $150,129
Basic Shares Outstanding
(000s)................. 12,274 12,274 12,274 12,274 12,274 12,274 12,274 12,274
Diluted Shares
Outstanding (000s)..... 12,764 12,764 12,764 12,764 12,764 12,764 12,764 12,764
-------- -------- -------- -------- -------- -------- -------- --------
Basic NAV per Share..... $ 11.62 $ 9.49 $ 14.97 $ 12.54 $ 12.53 $ 10.47 $ 14.79 $ 12.23
Diluted NAV per Share... $ 11.17 $ 9.12 $ 14.40 $ 12.06 $ 12.05 $ 10.07 $ 14.22 $ 11.76
Implied Exchange
Ratio (KP:EGY)--Basic.. 0.338x 0.373x 0.448x 0.483x 0.466x 0.501x 0.455x 0.489x
Implied Exchange
Ratio (KP:EGY)--
Diluted................ 0.347x 0.382x 0.459x 0.496x 0.478x 0.514x 0.467x 0.502x
</TABLE>
Note: PV-10 is the standardized measure of discounted (at 10% per year) future
net pretax cash flows. PV-15 is the standardized measure of discounted (at 15%
per year) future net pretax cash flows.
The NAV analysis resulted in an implied exchange ratio range of 0.338x to
0.514x.
Premiums Paid Analysis. Arthur Andersen calculated the implied premium (or
discount) being paid in the merger based on the exchange ratio of 0.355x Key
common shares for each Columbus common share, the August 25, 2000 closing
price of Key common shares and the price of Columbus common shares on certain
dates. Arthur Andersen compared these results to 14 other selected mergers and
acquisitions involving publicly traded target companies. These transactions
were primarily selected within the oil and gas exploration and production
industry, occurring after 1995, with a total transaction value of less than
$250 million. Premiums (or discounts) paid were calculated using the per share
value of the consideration paid by the acquirer to the shareholders of the
target
39
<PAGE>
companies (closing price as of the day prior to the announcement date if a
stock for stock exchange.) The following table presents the premium (or
discount) paid in the selected transactions as compared to the merger:
<TABLE>
<CAPTION>
Prior to Announcement
--------------------------------------------------------------------
1 Day 7 Days 30 Days 60 Days 90 Days 1 Year 52-Week High
----- ------ ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Key Production/
Columbus............... (4.9%) (2.1%) (1.2%) (8.3%) 9.6% 7.3% (11.6%)
Selected Transactions
Average............... 14.8% 17.8% 23.5% 25.4% 32.8% 20.9% (14.7%)
High.................. 38.1% 41.3% 63.0% 83.0% 95.2% 91.3% 24.1%
Low................... (9.5%) (9.5%) (3.2%) (37.3%) (51.1%) (79.9%) (80.5%)
</TABLE>
Arthur Andersen applied the average premium (or discount) paid in the selected
transactions to the respective historical stock prices of Columbus. This
resulted in an implied exchange ratio of 0.343x to 0.486x.
Arthur Andersen determined that the premium (discount) to be paid in the
merger is within the range of the low and high of the 14 selected transactions
for all time periods analyzed. Arthur Andersen determined that the fact that
it is generally in the lower half of the range appears reasonable based on the
following:
. the downward revisions to proved reserves reflected in Columbus' June 30,
2000 Reserve Report (independently prepared by Reed W. Ferrill and
Associates, Inc.);
. lack of market liquidity in Columbus' common stock; and
. the market's expectation of the proposed sale resulting from the
announcement made by Columbus regarding its intent to explore strategic
alternatives maximizing shareholder value, including consideration of
possibly selling the company or finding a merger partner and updates
regarding this process prior to announcement of the merger on August 28,
2000.
As such, Arthur Andersen determined that the premiums paid analysis for the 90
days and 1-year time periods is more relevant.
Stock Price Ratio History Analysis. Arthur Andersen reviewed the daily
historical closing prices of the common stock of Columbus and Key for the
period from August 28, 1999 to August 25, 2000. Arthur Andersen analyzed the
ratio of the August 25, 2000 closing share price for Columbus to the
corresponding closing share price of Key. In addition, Arthur Andersen
reviewed the ratio of average closing share prices for Columbus and Key for
periods 7-days, 30-days, 60-days and 90-days prior to August 28, 2000. Arthur
Andersen also reviewed the ratio of Columbus' and Key's 52-week high common
share price prior to August 28, 2000.
<TABLE>
<CAPTION>
(KP:EGY)
Implied Historical
Exchange Ratio
------------------
<S> <C>
1 Day Prior to August 28, 2000............................ 0.373x
Average Stock Price Ratio.................................
7 Days Prior to August 28, 2000........................... 0.366x
30 Days Prior to August 28, 2000.......................... 0.396x
60 Days Prior to August 28, 2000.......................... 0.400x
90 Days Prior to August 28, 2000.......................... 0.405x
Ratio of Stock Price 52-Week High......................... 0.365x
</TABLE>
The stock price ratio history analysis implied an exchange ratio range of
0.365x to 0.405x.
Although the Stock Price Ratio History Analysis is commonly used as a method
of evaluating transaction fairness, it relies upon the public market's
perception of the equity value of Columbus and Key over the time period
analyzed. The public market's perception of value does not always accurately
reflect information about those assets, liabilities and operations. Stock
price levels can also be affected by numerous factors, including but not
limited to level of trading volume, level of market float, press releases and
other shareholder
40
<PAGE>
communication, and expectations of future earnings and cash flow levels. As
such, Arthur Andersen did not rely solely upon the results of this analysis.
Comparable Company Trading Analysis. With respect to Columbus, Arthur Andersen
reviewed the public stock market trading multiples for the following seven
selected comparable exploration and production companies: Carrizo Oil & Gas,
Inc., Edge Petroleum Corporation, Esenjay Exploration, Inc., Goodrich
Petroleum Corporation, Parallel Petroleum Corporation, Primeenergy
Corporation, and Texoil, Inc. Using publicly available information, Arthur
Andersen calculated and analyzed the common equity market value multiples of
certain historical and projected financial results (such as net income and
discretionary cash flow, adjusted for non-recurring items) and the adjusted
enterprise value multiples of certain historical and projected financial
results (such as EBITDA (as defined below) and quantity of proved oil and gas
reserves). EBITDA consists of earnings before interest, taxes, depreciation
and amortization. The adjusted enterprise value of each company was obtained
by adding long-term debt to the sum of the market value of its common equity,
the value of its preferred stock (market value if publicly traded, conversion
value, liquidation value, or book value if not) and the book value of any
minority interests minus the cash balance.
With respect to Key, Arthur Andersen reviewed the public stock market trading
multiples for 11 selected exploration and production companies. These
companies were primarily selected for comparability based on geographic
location, oil/gas composition of proved reserves, and size. Using publicly
available information, Arthur Andersen calculated and analyzed the common
equity market value multiples of certain historical and projected financial
results (such as net income and discretionary cash flow, adjusted for non-
recurring items) and the adjusted enterprise value multiples of certain
historical and projected financial results (such as EBITDA and quantity of
proved oil and gas reserves). The adjusted enterprise value of each company
was obtained by adding long-term debt to the sum of the market value of its
common equity, the value of its preferred stock (market value if publicly
traded, conversion value, liquidation value, or book value if not) and the
book value of any minority interests minus the cash balance.
The comparable company trading analysis implied an exchange ratio of 0.285x to
1.163x.
Because of the inherent differences between the businesses, operations and
prospects of Columbus and Key and the businesses, operations and prospects of
the companies included in the comparable company groups, Arthur Andersen
believed that it was inappropriate to, and therefore did not, rely solely on
the quantitative results of the analysis, and accordingly, also made
qualitative judgements concerning differences between the financial and
operating characteristics of Columbus and Key and companies in the comparable
company groups that would affect the public trading values of Columbus and Key
and such comparable companies.
Pursuant to the terms of Arthur Andersen's engagement, Arthur Andersen
received a fee of $250,000 for its services in connection with the delivery of
its fairness opinion. Columbus also has agreed to reimburse Arthur Andersen
for reasonable out-of-pocket expenses incurred by Arthur Andersen in
performing its services, including reasonable fees and expenses for legal
counsel and any other advisor retained by Arthur Andersen, and to indemnify
Arthur Andersen and certain related persons and entities against certain
liabilities under the federal securities laws arising out of Arthur Andersen's
engagement. Arthur Andersen is continuing to provide financial advisory
services to Columbus with respect to the merger and will receive a value-added
fee for its services in the range of $280,000 to $320,000 upon successful
completion of the merger, in addition to a retainer of $25,000 paid upon its
engagement.
41
<PAGE>
THE MERGER AGREEMENT
This section describes various material provisions of the merger agreement.
Because the description of the merger agreement contained in this proxy
statement/prospectus is a summary, it does not contain all the information
that may be important to you. You should read carefully the entire agreement
and plan of merger attached as Annex A to this proxy statement/prospectus
before you decide how to vote.
General
As of the effective time of the merger, two things will happen.
. First, Key Acquisition Two, Inc., a newly formed Colorado corporation,
wholly owned by Key, will be merged into Columbus. Columbus will continue
as the surviving corporation and will become a wholly owned subsidiary of
Key.
. Second, the outstanding shares of Columbus common stock will be converted
into shares of Key common stock, based on the exchange ratio.
The articles of incorporation of Columbus will be the articles of
incorporation of the surviving corporation. The directors and officers of Key
Acquisition Two, Inc. will be the directors and officers of the surviving
corporation.
Closing of the merger; effective time of the merger
Closing of the merger. Unless Key and Columbus agree otherwise, the merger
will close as soon as practicable (but in any event within two business days)
after the date on which all closing conditions have been satisfied or waived.
We expect the closing to take place after the shareholders of Columbus approve
the merger at its special meeting of shareholders.
Effective time of the merger. At the closing of the merger, Key and Columbus
will file articles of merger with the Colorado Secretary of State. Unless Key
and Columbus agree otherwise, the merger will become effective at the time the
certificate is filed.
Consideration to be received in the merger
In the merger, without any action on the part of the Columbus shareholders,
the issued and outstanding shares of Columbus capital stock will be treated as
follows:
. each outstanding share of Columbus common stock will be converted into
0.355 shares of Key common stock;
. each share of Columbus common stock owned or held by Key or Columbus or
their wholly owned subsidiaries, including treasury stock, will be
canceled and retired;
. each option to purchase shares of Columbus Common Stock that is
outstanding immediately prior to the closing shall be converted into a
fully vested option to purchase 0.355 shares of Key common stock for each
Columbus share covered by the option. The converted options will be on
the same terms, except that they will be exercisable for only 12 months
after closing and any Columbus options that are incentive stock options
may cease being incentive stock options as a result of the conversion.
Key will use its best efforts to cause the exercise of the options to be
registered on Form S-8 prior to the time that the exercise price of the
options is less than the market price of the stock covered by the
options.
Exchange of shares; fractional shares
Exchange agent. Prior to the merger, Key will appoint Continental Stock
Transfer & Trust Company of New York to exchange the certificates representing
shares of Columbus common stock for certificates
42
<PAGE>
representing shares of Key common stock and the cash to be paid in lieu of
fractional shares of Key common stock. Key will deposit, for the benefit of
holders of Columbus common stock, certificates representing Key common stock
with the exchange agent for conversion of shares as described below.
Exchange agent; exchange of shares. Promptly after the merger, the exchange
agent will mail to each holder of certificates representing Columbus common
stock a transmittal letter and instructions explaining how to surrender their
certificates to the exchange agent.
Columbus shareholders who surrender their stock certificates to the exchange
agent, together with a properly completed and signed transmittal letter and
any other documents required by the instructions to the transmittal letter,
will receive Key common stock certificates representing the number of shares
that each holder is entitled to in accordance with the exchange ratio, with a
check representing the amount of cash being paid in lieu of fractional shares
of Key common stock. Holders of unexchanged Columbus stock certificates will
not receive any dividends or other distributions made by Key after the merger
until their stock certificates are surrendered. Upon surrender, subject to
applicable laws, those holders will receive all dividends and distributions
made subsequent to the merger (with a record date also subsequent to the
merger) and prior to surrender on the related shares of Key common stock, less
the amount of any withholding taxes, together with a check representing the
amount of cash in lieu of fractional shares of Key common stock, in each case
without interest. Any shares of Key common stock to be issued in the merger or
funds set aside by Key to pay cash in lieu of fractional shares in connection
with the merger or to pay dividends or other distributions on shares of Key
common stock to be issued in the merger that are not claimed within one year
after the merger will be delivered to Key. Thereafter, Key will act as the
exchange agent and former shareholders of Columbus may look only to Key for
payment of their shares of Key common stock, cash in lieu of fractional shares
and unpaid dividends and distributions. Key will not be liable to any former
holder of Columbus common stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
Columbus stock certificates should not be returned with the enclosed proxy
card. A transmittal letter and accompanying instructions will be provided to
Columbus shareholders following the merger.
Fractional shares. No fractional shares of Key common stock will be issued to
holders of Columbus common stock. In lieu of fractional shares, each holder of
shares of Columbus common stock otherwise entitled to a fractional amount will
receive by cash, check or other form of payment an amount representing the
fractional amount multiplied by the closing sales price of Key common stock as
reported on the New York Stock Exchange for the effective date of the merger
(or, if there is no trading activity in Key common stock on the New York Stock
Exchange on that date, the first date of trading of Key common stock on the
New York Stock Exchange after the effective date of the merger).
Key will deposit the necessary cash with the exchange agent to forward to
holders in lieu of fractional shares of Key common stock.
Conditions to the merger
The obligations of Key and Columbus to complete the merger are subject to a
number of conditions, including the following, unless waived:
. approval by Columbus' shareholders;
. the absence of any law or court order prohibiting the merger;
. the approval for listing on the New York Stock Exchange of the Key shares
to be issued in the merger;
. there must not be a material adverse change in either party's business or
financial condition; and
. the continued accuracy of each company's representations and warranties
and the compliance by each company with its covenants and agreements
contained in the merger agreement.
43
<PAGE>
The board of directors of either Key or Columbus may choose to complete the
merger even though a condition to that company's obligation has not been
satisfied if the Columbus shareholders have approved the merger and the law
allows the board to do so.
Representations and warranties
The merger agreement contains representations and warranties by Key and
Columbus as to themselves and their subsidiaries concerning, among other
things:
. organization, standing and authority;
. corporate authorization to enter into the merger and related
transactions;
. capital structure;
. significant subsidiaries;
. the absence of defaults caused by execution of the merger agreement;
. compliance with agreements, court orders and laws;
. accuracy of financial statements and reports filed with the SEC;
. the absence of material litigation;
. the absence of certain changes or events;
. tax matters;
. employee benefits and labor matters;
. the absence of violations or liabilities under environmental laws;
. good title to properties;
. futures or options trading;
. insurance matters;
. material contracts;
. fees of financial advisors and others; and
. receipt of Columbus' financial advisor's fairness opinion.
Certain covenants
Prior to the merger, each of Key and Columbus agreed to conduct its operations
in the ordinary course in substantially the same manner as previously
conducted and to use reasonable efforts to preserve substantially intact its
business organization and keep available the services of its respective
officers and maintain satisfactory relationships with its material customers
and suppliers and maintain its assets and insurance.
With certain exceptions, the merger agreement places specific restrictions on
the ability of Key to, among other things:
. pay dividends or redeem capital stock or split, combine or reclassify any
capital stock or any other securities in substitution for capital stock;
. take any action which would result in a failure to maintain the trading
of Key's common stock on the New York Stock Exchange;
. adopt any amendments to its charter or bylaws;
44
<PAGE>
With certain exceptions, the merger agreement places specific restrictions on
the ability of Columbus to, among other things:
. pay dividends or redeem capital stock or split, combine or reclassify any
capital stock or any other securities in substitution for capital stock;
. adopt any amendments to its charter or bylaws;
. increase the compensation or benefits of any director or executive
officer;
. except for outstanding options, issue capital stock or amend or
accelerate options;
. acquire businesses or entities without the consent of the other party;
. dispose of material assets, except for dispositions of oil and gas
production in the ordinary course of business and consistent with past
practice and except for the sale of limited amounts of oil and gas
properties;
. except as may be required by a change in law or in generally accepted
accounting practices, change any of its accounting methods or make or
rescind tax elections;
. borrow money, except in the ordinary course of business consistent with
past practice and in no event in excess of $100,000 in the aggregate;
. enter into any material contract that provides for an exclusive
arrangement with that third party or is substantially more restrictive on
Columbus or substantially less advantageous to Columbus than present
contracts; or
. approve authorizations for expenditures or agreements to acquire property
in excess of $30,000.
The merger agreement contains additional agreements relating to, among other
things:
. the preparation, filing and distribution of this document and Key's
filing of the registration statement on Form S-4 of which this document
is a part;
. the recommendation of the merger by Columbus' board of directors to its
shareholders;
. convening and holding the Columbus shareholders meeting;
. access to information;
. public announcements;
. mutual notification of specified matters;
. indemnification of Columbus' officers and directors;
. agreements as to certain employee benefits matters; and
. absence of actions or omissions that would result in the merger not
qualifying as a reorganization under Section 368(a) of the Internal
Revenue Code.
Arthur Andersen fairness opinion update
At any time up to 10 days prior to the date of the Columbus shareholders
meeting, either Columbus or Key may request that Arthur Andersen update its
fairness opinion to the board of directors of Columbus that the exchange ratio
pursuant to the merger agreement is fair from a financial point of view to the
shareholders of Columbus. Columbus will pay the fee for the update.
Other acquisition proposals
Columbus has agreed that it will not initiate, solicit or encourage any
proposal relating to a merger, business combination, sale of 20% of the assets
of Columbus or acquisition of 20% of the outstanding
45
<PAGE>
Columbus stock, and Columbus will promptly notify Key of all relevant terms of
any proposals Columbus receives.
The board of directors of Columbus may nevertheless negotiate with any person
in an unsolicited bona fide proposal in writing, and may withdraw its
recommendation of the Key merger, if the board determines that the proposal is
materially more favorable to the shareholders of Columbus.
As described further in the next two sections, Columbus has the right to
terminate the merger agreement in order to accept a superior acquisition
proposal, subject to the payment of a termination fee and expenses. See "--
Termination Fees and Expenses" below.
Termination
Prior to the merger, the merger agreement may be terminated:
. by mutual written consent of Key and Columbus;
. by either Key or Columbus if:
. certain material breaches of covenants or representations in the
merger agreement by the other party;
. a court or other governmental authority permanently prohibits the
merger;
. the merger is not completed by December 31, 2000, subject to
extension to March 31, 2001 if regulatory approvals are not received;
. the Columbus shareholders fail to give the required approvals; or
. the board of directors of Columbus withdraws its recommendation that
the Columbus shareholders approve the merger if there exists at such
time a competing transaction or if the board recommends approval of a
competing transaction;
. by Columbus if:
. Columbus' investment adviser is requested to deliver an updated
fairness opinion to the board of directors of Columbus that the
exchange ratio pursuant to the merger agreement is fair from a
financial point of view to the shareholders of Columbus, and fails to
do so;
. by Key if:
. the Columbus board of directors withdraws or changes its
recommendation of the merger or recommends to the Columbus
shareholders a competing transaction;
. a tender offer for 20% or more of the outstanding shares of capital
stock of Columbus is commenced and the Columbus board does not
recommend against it; or
. any person or group acquires or has the right to acquire beneficial
ownership of 20% or more of Columbus' stock.
Termination fees and expenses
Termination Fees. If Key terminates the merger agreement upon any of the
following events, then Columbus must pay to Key a fee of $1,000,000:
. Columbus has willfully breached any representation or agreement and has
initiated, solicited or encouraged a competing transaction that occurs or
is agreed upon within 12 months after the date of termination;
. the Columbus shareholders do not approve the merger and at the time of
the shareholder meeting a competing transaction has been proposed; or
46
<PAGE>
. Columbus' board withdraws its recommendation of the Key merger and at the
time of the termination a competing transaction has been proposed; or
. a tender offer for 20% or more of the outstanding shares of capital stock
of Columbus is commenced and the Columbus board does not recommend
against it; or
. any person or group acquires or has the right to acquire beneficial
ownership of 20% or more of Columbus' stock; or
. Arthur Andersen is requested to deliver an updated fairness opinion to
the board of directors of Columbus that the exchange ratio pursuant to
the merger agreement is fair from a financial point of view to the
shareholders of Columbus, and fails to deliver the updated fairness
opinion and at the time of the termination a competing transaction has
been proposed.
If Key terminates the merger agreement upon either of the following events,
then Columbus must pay to Key its out-of-pocket expenses incurred in
connection with the merger:
. the Columbus shareholders do not approve the merger and at the time of
the shareholder meeting no competing transaction has been proposed; or
. Arthur Andersen is requested to deliver an updated fairness opinion to
the board of directors of Columbus that the exchange ratio is fair from a
financial point of view to the shareholders of Columbus and fails to do
so and at the time of the shareholder meeting no competing transaction
has been proposed.
If Columbus terminates the merger agreement upon a willful breach of any
representation or agreement of Key, then Key must pay to Columbus a fee of
$1,000,000.
The termination fees and expenses were intended to increase the likelihood
that Key and Columbus will complete the merger. The termination fees and
expenses have the effect of making an acquisition of Columbus by a third party
more costly. Accordingly, the termination fees and expenses may have the
effect of discouraging a third party from proposing a competing transaction,
including one that might be more favorable to Columbus shareholders than the
merger.
Merger costs. Columbus expects to incur approximately $2,000,000 of
nonrecurring business combination costs, primarily related to financial
advisor expenses, severance, legal and accounting fees, financial printing
expenses and other related charges.
Other expenses. All costs and expenses incurred in connection with the merger
agreement and related transactions will be paid by the party incurring them,
except that printing and mailing costs will be shared one-third by Columbus
and two-thirds by Key, and termination fees and expenses will be paid as
provided above in "--Termination Fees and Expenses" on page 46.
Amendment; extension and waiver
Amendment. Subject to the next sentence, the merger agreement may be amended
at any time with the consent of the Key board and the Columbus board. If the
merger agreement has been approved by the Columbus shareholders, then it
cannot be amended subsequently without obtaining any further shareholder
approval required by law.
Extension and waiver. At any time prior to the completion of the merger, each
of Key and Columbus may, to the extent permitted by law, grant the other party
additional time to perform its obligations under the merger agreement, may
waive any inaccuracies in the representations and warranties of the other
party and may waive compliance with any agreements or conditions for the
benefit of that party.
47
<PAGE>
Stock exchange listing
Key has agreed to use all reasonable efforts to cause the shares of Key common
stock to be issued in the merger to be approved for listing on the New York
Stock Exchange prior to the closing.
Regulatory approval
No federal or state regulatory requirements must be complied with or approval
obtained in connection with the merger.
Accounting treatment
The merger will be accounted for under the "purchase" method of accounting.
This means that Key will record the excess of the purchase price of Columbus
over the fair market value of Columbus' assets as goodwill.
No appraisal rights
Holders of Columbus common stock are not entitled to dissenters' appraisal
rights under Colorado law in connection with the merger because the Columbus
common stock was listed on the American Stock Exchange on the record date for
the special meeting.
INFORMATION REGARDING DIRECTORS, EXECUTIVE OFFICERS AND
FIVE PERCENT SHAREHOLDERS
The board of directors and officers of the combined company will consist of
the current directors and officers of Key. Information about Key's officers
and directors, executive compensation and principal shareholders can be found
in its 1999 Form 10-K and proxy statement for its 2000 annual meeting that are
incorporated by reference in this proxy statement/prospectus. See "Where You
Can Find More Information" on page 57. The combined company may determine to
offer employment to some Columbus employees.
The following table sets forth information concerning persons known by
Columbus to be beneficial owners of more than five percent of its common stock
as of November 28, 2000. All information is taken from or based on filings
made by such beneficial owners with the SEC or information provided by such
owners to Columbus. Except as indicated in the footnotes, each person
identified in the table holds sole voting and investment power with respect to
the shares shown opposite such person's name.
<TABLE>
<CAPTION>
Ownership of Columbus Ownership of Key
Before the Merger After the Merger
------------------------ ---------------------
Amount and Amount and
Nature of Nature of
Name and Address of Beneficial Percent of Beneficial Percent of
Beneficial Owner Ownership Class Ownership Class
------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Harry A. Trueblood, Jr. ....... 1,025,407(1) 26.5 364,019 2.6
1660 Lincoln St., Suite 2400
Denver, CO 80264
Carl Seaman.................... 456,527(2) 12.1 162,067 1.2
63 Hunting Ridge Road
Greenwich, CT 06831
Wellington Management Company,
LLP .......................... 399,925(3) 10.6 141,973 1.0
Wellington Trust Co. N.A.
75 State Street
Boston, MA 02109
</TABLE>
--------
(1) Includes 82,000 shares underlying non-statutory stock options that are
exercisable within 60 days of November 28, 2000; 23,292 shares which are
owned by Lucile B. Trueblood, Mr. Trueblood's wife, which
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<PAGE>
she holds as her separate property and as to which Mr. Trueblood disclaims
any beneficial ownership; and includes 231,653 shares held by the Harry A.
Trueblood, Jr. Charitable Remainder Unitrust dated 6/1/98 of which Mr.
Trueblood is the sole trustee. As such, Mr. Trueblood holds sole voting
rights and dispositive power to such shares but disclaims any beneficiary
ownership thereto.
(2) Includes 166,375 shares owned by Carl and Associates, a general
partnership in which Mr. Seaman owns an 80% partnership interest and as to
which Mr. Seaman shares voting and investment power, and 6,146 shares
which are owned by Linda Seaman, Mr. Seaman's wife, which she holds as her
separate property and as to which Mr. Seaman disclaims any beneficial
ownership.
(3) Wellington Trust Co., N.A., a bank, is a wholly-owned subsidiary of
Wellington Management Company, LLP. Wellington Management Company, LLP has
shared power to vote 299,925 shares and shared power to dispose of 399,925
shares. Wellington Trust Co., N.A. has shared power to vote and dispose of
299,925 shares representing 8.0% of the class.
The table below provides information as to Columbus' common stock beneficially
owned as of November 28, 2000 by (i) each director, (ii) Columbus' Chief
Executive Officer and the three other executive officers who earned over
$100,000 in salary and bonus in fiscal 1999, and (iii) all directors and
executive officers as a group. All information is taken from or based on
filings made by such persons with the SEC or provided by such persons to
Columbus. Except as indicated in the footnotes, each person identified in the
table holds sole voting and investment power with respect to the shares shown
opposite such person's name.
<TABLE>
<CAPTION>
Name and Address of Ownership of Columbus Ownership of Key
Beneficial Owner Before the Merger After the Merger
------------------- ------------------------ ---------------------
Amount and Amount and
Nature of Nature of
Amount and Nature of Beneficial Beneficial Percent of Beneficial Percent of
Ownership Ownership Class Ownership Class
------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Harry A. Trueblood, Jr. ......... 1,025,407(1) 26.5 364,019 2.6
J. Samuel Butler................. 28,130(2) * 9,986 *
William H. Blount, Jr. .......... 27,710(2) * 9,837 *
Jerol M. Sonosky................. 36,634(2) * 13,005 *
Clarence H. Brown................ 68,204(3) 1.8 24,212 *
Ronald H. Beck................... 34,279(4) * 12,169 *
Michael M. Logan................. 38,409(4) 1.0 13,635 *
All directors and executive
officers as a group
(8 persons)..................... 1,295,836(5) 31.9 460,022 3.3
</TABLE>
-------
* Less than 1%
(1) See footnote (1) under "Security Ownership of Certain Beneficial Owners."
(2) Includes 12,000 shares of common stock underlying stock options that are
exercisable within 60 days of November 28, 2000.
(3) Includes 66,620 shares of common stock underlying stock options that are
exercisable within 60 days of November 28, 2000.
(4) Includes 29,000 shares of common stock underlying stock options that are
exercisable within 60 days of November 28, 2000.
(5) Includes an aggregate of 275,003 shares of common stock underlying stock
options that are exercisable within 60 days of November 28, 2000.
49
<PAGE>
INTERESTS OF CERTAIN EXECUTIVE OFFICERS
AND DIRECTORS IN THE MERGER
When considering the recommendation of the Columbus board of directors, you
should be aware that some of Columbus' directors and executive officers have
interests in the merger that are different from your interests.
All directors and executive officers hold options to purchase shares of
Columbus common stock, which are fully vested and exercisable. These options
will be assumed by Key and converted into options to purchase a number of
shares of Key common stock determined by multiplying the number of shares of
Columbus common stock subject to the option by .355 rounded to the nearest
whole number of shares. The per share exercise price of the Key common stock
options will be equal to the exercise price per share of the Columbus common
stock option divided by .355, rounded to the nearest one-hundredth cent. The
options will be exercisable for a period of 12 months after the effective date
of the merger. The terms and conditions of each option will remain the same as
they were prior to the effective time of the merger, except for the exercise
period and except that all options will become non-qualified options.
The following table sets forth information concerning individual grants of
stock options to Columbus' executive officers and directors which will be
converted into Key stock options at the effective date:
<TABLE>
<CAPTION>
Number of Exercise Price
Name Title Columbus Shares ($/Share)
---- ----- --------------- --------------
<C> <S> <C> <C>
Harry A. Trueblood, Jr. .... Chairman of the Board, 50,000 $ 6.125
President and Chief 32,000 7.00
Executive Officer
Clarence H. Brown........... Director, Executive Vice 26,620 6.1233
President and Chief 20,000 6.125
Operating Officer 20,000 7.00
J. Samuel Butler............ Director 12,000 6.125
William H. Blount, Jr. ..... Director 12,000 6.125
Jerol M. Sonosky............ Director 12,000 6.125
Ronald H. Beck.............. Vice President and Chief 16,000 6.125
Financial Officer 13,000 7.00
Michael M. Logan............ Vice President of 16,000 6.125
Corporate Development 13,000 7.00
and Marketing and
Corporate Secretary
James P. Garrett............ Treasurer 9,983 6.1233
12,000 6.125
10,400 7.00
</TABLE>
Columbus has a separation pay policy that provides for payments to officers
and employees who are terminated within six months after a change of control
of Columbus. The merger will constitute a change in control under this policy.
An officer with more than 36 months of service will receive three months
salary plus an additional three weeks of pay for each full year of service.
All officers have more than 36 months of service. The severance pay rate will
be calculated on the basis of the average weekly salary received during the 52
weeks immediately preceding such termination. The following table shows the
amounts that may be received by Columbus' executive officers as of November
30, 2000 under this policy:
<TABLE>
<S> <C>
Harry A. Trueblood.............................................. $182,532
Clarence H. Brown............................................... $126,034
Michael M. Logan................................................ $127,340
Ronald H. Beck.................................................. $127,340
James P. Garrett................................................ $ 67,003
</TABLE>
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With respect to Messrs. Trueblood and Brown, the amounts in the table above
have been approved by the board as retirement pay and accrued in Columbus'
historical financial statements and will be paid upon retirement from Columbus
even if the merger is not completed.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the opinion of counsel to Columbus
concerning the material United States federal income tax consequences of the
merger to a United States shareholder of Columbus holding shares of Columbus
common stock as a capital asset within the meaning of Section 1221 of the
Internal Revenue Code at the effective time of the merger. The opinion is
filed as an exhibit to the registration statement of which this prospectus is
a part.
This discussion does not address all aspects of federal taxation that may be
relevant to particular shareholders of Columbus in light of their personal
circumstances or to shareholders of Columbus subject to special treatment
under the Internal Revenue Code, including, without limitation, financial
institutions or trusts; tax-exempt entities; insurance companies; traders that
mark to market; dealers in securities or foreign currencies; shareholders who
received their Columbus stock through an exercise of employee stock options or
otherwise as compensation; shareholders who are foreign corporations, foreign
partnerships, or other foreign entities, or individuals who are not citizens
or residents of the U.S.; and shareholders who hold Columbus stock as part of
a hedge, straddle or conversion transaction. In addition, the discussion does
not address any state, local or foreign tax consequences of the merger.
Finally, the tax consequences to holders of stock options or restricted stock
are not discussed.
This discussion is based on the Internal Revenue Code, the United States
Department of Treasury regulations and administrative rulings and judicial
decisions all as in effect as of the date of this joint proxy
statement/prospectus, all of which are subject to change, possibly with
retroactive effects, and which are subject to differing interpretations. No
ruling has been or will be sought from the IRS concerning the tax consequences
of the merger. Columbus shareholders are urged to consult their tax advisors
regarding the tax consequences of the merger to them, including the effects of
United States federal, state, local, foreign and other tax laws.
Tax Consequences of the Merger. Sherman & Howard L.L.C. has delivered its
opinion to the effect that the merger will qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, subject to the
assumptions, limitations, qualifications and other considerations described
below under "--Considerations with Respect to Opinions."
As a reorganization under Section 368(a),
. Columbus will not recognize any gain or loss on the merger;
. no gain or loss will be recognized by a Columbus shareholder as a result
of the receipt solely of shares of Key common stock pursuant to the
merger, except to the extent of any cash received in lieu of fractional
shares of Key common stock;
. a Columbus shareholder who receives cash in lieu of a fractional share of
Key common stock will be treated as if the shareholder received the
fractional share and then sold the share back to Key. The shareholder
will in general recognize gain or loss on the sale of the fractional
share equal to the difference between (a) the amount of cash received for
the fractional share and (b) the shareholder's tax basis in the
fractional share;
. a Columbus shareholder's aggregate tax basis in the Key common stock
received pursuant to the merger will initially be (a) equal to the
shareholder's aggregate tax basis in that shareholder's Columbus common
stock immediately prior to the merger (b) reduced by the amount of basis
allocable to the fractional share, as described above;
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. a Columbus shareholder's holding period for Key common stock received in
exchange for Columbus common stock pursuant to the merger will include
the holding periods of that shareholder's Columbus common stock
surrendered in the merger; and
. Columbus shareholders must retain records and file a statement setting
forth facts pertinent to the merger with their United States federal
income tax returns, including a statement of the cost or other basis of
their Columbus common stock transferred pursuant to the merger and a
statement in full of the amount of stock and other property or money
received in the merger.
Considerations with Respect to Opinions. The tax opinion of Sherman & Howard
L.L.C. and the foregoing summary of the U.S. federal income tax consequences
of the merger are and will be subject to assumptions, limitations and
qualifications and are based on current law and, among other things,
representations of Columbus and Key, including representations made by the
respective managements of Columbus and Key. An opinion of counsel is not
binding on the IRS and does not preclude the IRS from adopting a contrary
position. In addition, if any of the representations or assumptions are
inconsistent with the actual facts, the U.S. federal income tax consequences
of the merger could be adversely affected.
Unless you comply with certain reporting and/or certification procedures or
are an exempt recipient under applicable provisions of the Internal Revenue
Code and Treasury regulations, cash payments in exchange for your Columbus
common shares in the merger may be subject to "backup withholding" at a rate
of 31% for federal income tax purposes. Any amounts withheld under the backup
withholding rules may be allowed a refund or credit against the holder's
federal income tax liability, provided the required information is furnished
to the IRS.
The tax consequences of the merger to you may be different from those
summarized above, based on your individual situation. Accordingly, Columbus
shareholders are strongly urged to consult with their tax advisors with
respect to the particular United States federal, state, local or foreign and
other applicable tax laws and the effect of any proposed changes in the tax
laws or other tax consequences of the merger to them.
Non-U.S. Shareholders. Because Columbus will likely be considered a "United
States real property holding corporation" under Section 897 of the Code,
foreign shareholders of Columbus (including non-resident alien individuals,
foreign corporations, partnerships with foreign partners, and certain other
foreign persons) generally will be taxable (at rates and in the manner
applicable to United States citizens and domestic corporations) upon the
receipt of the Key common stock and cash those shareholders receive in the
exchange. Furthermore, Key generally will be required to withhold 10% (and in
certain circumstances up to 35%) of the amount of such consideration paid to
such foreign shareholders. The amount withheld can be credited against the
amount of tax that is due upon the exchange. As noted above, however, this
discussion does not purport to describe all of the tax consequences for
foreign shareholders that may arise upon the exchange, and therefore such
shareholders are strongly urged to consult their tax advisors with respect to
these matters.
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COMPARISON OF SHAREHOLDER RIGHTS
Columbus is a Colorado corporation and the rights of its shareholders are
covered by the Colorado Business Corporation Act (CBCA) and the articles of
incorporation and bylaws of Columbus. Key is a Delaware corporation and the
rights of its stockholders are governed by the Delaware General Corporation
Law (DGCL) and the certificate of incorporation and bylaws of Key. By the
merger agreement, the Columbus shareholders will become Key stockholders and
as such their rights will be governed by the DGCL and the Key certificate of
incorporation and bylaws.
Significant Differences Between the Corporation Laws of Colorado and Delaware
The corporation laws of Colorado and Delaware differ in many respects.
Provisions that could materially affect the rights of shareholders are
discussed below.
Dividends and Repurchases of Shares
Colorado
Colorado law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. Colorado law permits a
corporation to declare and pay dividends unless, after giving it effect:
. the corporation would not be able to pay its debts as they become due in
the usual course of business, or
. the corporation's total assets would be less than the sum of its total
liabilities plus, unless the articles of incorporation permit otherwise,
the amount that would be needed, if the corporation were to be dissolved
at the time of the distribution, to satisfy the preferential rights that
are superior to those receiving the distribution.
Delaware
The concepts of par value, capital and surplus are retained under Delaware
law. Delaware law permits a corporation to declare and pay dividends out of
surplus or if there is not surplus, out of net profits for the fiscal year as
long as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having
preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if the capital of the corporation is not impaired and such redemption or
repurchase would not impair the capital of the corporation.
Appraisal/Dissenters' Rights
Colorado
Colorado law permits a shareholder of a corporation participating in certain
major corporate transactions to, under varying circumstances, assert
appraisal/dissenters' rights by which the shareholder may receive cash in the
amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transactions. Colorado
law provides that dissenters' rights are generally available for mergers,
statutory share exchanges and sales, leases, exchanges or other dispositions
of all or substantially all of the property of a corporation or of an entity
controlled by the corporation if the shareholders of the corporation were
entitled to vote on the consent of the corporation to the disposition under
state law.
Delaware
Delaware law provides that dissenters' rights are generally available only for
mergers.
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Advance Notice of Meeting
Colorado
Colorado law requires that shareholders be provided prior written notice no
more than 60 days nor less than ten days before the date of a meeting of
shareholders; provided that if the number of authorized shares is to be
increased, at least 30 days' notice must be given.
Delaware
Delaware law requires that stockholders be provided prior written notice no
more than 60 days nor less than ten days before the date of the meeting of
stockholders.
Shareholder Consent in Lieu of Meeting
Colorado
Under Colorado law, unless otherwise provided in the articles of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of shareholders may be taken without a meeting if a
consent in writing is signed by the holders of all of the outstanding stock
entitled to vote. Columbus' articles of incorporation do not prohibit such
action.
Delaware
Under Delaware law, unless otherwise provided in the certificate of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of stockholders may be taken without a meeting if a
consent in writing is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize
such action at a meeting at which all shares entitled to vote were present and
voted. Key's certificate of incorporation permits stockholder action by
written consent.
Shareholder Derivative Suits
Colorado
Derivative actions may be brought in Colorado by a shareholder on behalf of,
and for the benefit of, a Colorado corporation. Colorado law provides that a
shareholder must be a shareholder of the corporation at the time of the
transaction of which the shareholder complains. If the shareholder bringing
the derivative action holds less than 5% of the outstanding shares of any
class of the corporation, unless such shares have a market value in excess of
$25,000, the corporation is entitled to require the shareholder to post a bond
for the costs and reasonable expenses, excluding attorneys' fees, which may be
directly attributable to and incurred by the corporation in defense of the
derivative action or may be incurred by other parties named as defendant in
such action for which the corporation may become legally liable. A shareholder
may not sue derivatively unless the shareholder first makes demand on the
board of directors to bring the suit and such demand has been refused, unless
the shareholder can demonstrate that such demand would have been futile.
Delaware
Derivative actions may also be brought in Delaware by a stockholder on behalf
of, and for the benefit of, a Delaware corporation. Delaware law provides that
a stockholder must state in the complaint that he or she was a stockholder of
the corporation at the time of the transaction of which he or she complains. A
stockholder may not sue derivatively unless he or she first makes demand on
the corporation that it bring suit and such demand has been refused, unless
the stockholder can demonstrate that such demand would have been futile.
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Stockholder Approval of Certain Business Combinations under Delaware Law
Delaware law prohibits, in certain circumstances, a "business combination"
between the corporation and an "interested stockholder" within three years of
the stockholder becoming an "interested stockholder." An "interested
stockholder" is a holder who, directly or indirectly, controls 15% or more of
the outstanding voting stock or is an affiliate of the corporation and was the
owner of 15% or more of the outstanding voting stock at any time within the
prior three year period. A "business combination" includes a merger or
consolidation involving the corporation and the interested stockholder, a sale
or other disposition of assets having an aggregate market value equal to 10%
or more of the consolidated assets of the corporation or the aggregate market
value of the outstanding stock of the corporation involving the corporation
and the interested stockholder, certain transactions that would increase the
interested stockholder's proportionate share ownership in the corporation and
the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
This provision does not apply where (a) either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder is approved by the corporation's board of directors prior to the
date the interested stockholder acquired such 15% interest, (b) upon the
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
outstanding voting stock of the corporation excluding for the purposes of
determining the number of shares outstanding shares held by persons who are
directors and also officers and by employee stock plans in which participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered, (c) the business combination is approved by a
majority of the board of directors and the affirmative vote of two-thirds of
the outstanding votes entitled to be cast by disinterested stockholders at an
annual or special meeting, (d) the corporation does not have a class of voting
stock that is listed on a national securities exchange, authorized for
quotation on an inter-dealer quotation system of a registered national
securities association, or held of record by more than 2,000 stockholders
unless any of the foregoing results from action taken, directly or indirectly,
by an interested stockholder or from a transaction in which a person becomes
an interested stockholder, (e) the stockholder acquires a 15% interest
inadvertently and divests itself of such ownership and would not have been a
15% stockholder in the preceding three years but for the inadvertent
acquisition of ownership, (f) the stockholder acquired the 15% interest when
these restrictions did not apply, or (g) the corporation has opted out of this
provision. Key has not opted out of this provision.
Colorado law does not contain an equivalent business combination provision.
LEGAL MATTERS
Legal matters relating to the validity of the Key common stock issuable in
connection with the merger have been passed upon for Key by Holme Roberts &
Owen LLP. Certain tax matters relating to the merger have been passed upon for
Columbus by Sherman & Howard L.L.C. See "Material United States Federal Income
Tax Considerations" on page 51.
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EXPERTS
The audited Key consolidated financial statements incorporated by reference in
this proxy statement/prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated by their report with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports. Arthur Andersen has resigned as Key's independent public accountants.
See "Summary--Recent Developments."
The information incorporated by reference into this prospectus regarding the
total proved reserves of Key was prepared by Key and audited by Ryder Scott
Company, L.P. as stated in their letter reports, and is incorporated by
reference in reliance upon the authority of said firm as experts in such
matters.
The financial statements of Columbus Energy Corp. incorporated in this proxy
statement/prospectus by inclusion of its Annual Report on Form 10-K for the
year ended November 30, 1999, have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
Certain information with respect to the oil and gas reserves of Columbus
derived from the report of Reed W. Ferrill & Associates, Inc., independent
engineers, has been included herein upon the authority of said firm as experts
with respect to matters covered by such report and in giving such report.
FUTURE SHAREHOLDER PROPOSALS
Columbus expects to hold an annual meeting of shareholders in 2001 only if the
merger is not consummated. In the event of such a meeting, any Columbus
shareholder who intends to submit a proposal for inclusion in the proxy
materials for the 2001 annual meeting of Columbus is required to submit such
proposal to the Secretary of Columbus by November 28, 2000. Such proposals may
be included in next year's Proxy Statement if they comply with certain rules
and regulations of the SEC. In the event of such meeting, under Columbus'
current by-laws, a shareholder who intends to present a proposal to be
considered at the meeting, other than a shareholder proposal included in the
proxy statement, must provide notice of such proposal to the Secretary of
Columbus by February 12, 2001.
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WHERE YOU CAN FIND MORE INFORMATION
Key and Columbus file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any materials we
file at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
Key filed a registration statement on Form S-4 to register with the SEC the
Key common stock to be issued to Columbus shareholders in the merger. This
proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of Key in addition to being a proxy statement of
Columbus for its meeting. As allowed by SEC rules, this proxy
statement/prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement.
The SEC allows Key and Columbus to "incorporate by reference" information into
this proxy statement/prospectus, which means that they can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of
this proxy statement/prospectus, except for any information superseded by
information in, or incorporated by reference in, this proxy
statement/prospectus. This proxy statement/prospectus incorporates by
reference the documents listed below that Key and Columbus have previously
filed with the SEC. These documents contain important information about Key
and Columbus.
<TABLE>
<CAPTION>
Key Sec Filings
(File No. 000-11769) Period
-------------------- ------
<S> <C>
Description of Common Stock contained in Form
8-A Registration Statement.................. Filed September 2, 1988
Annual Report on Form 10-K................... Year ended December 31, 1999
Quarterly Report on Form 10-Q................ Quarter ended March 31, 2000
Quarterly Report on Form 10-Q................ Quarter ended June 30, 2000
Quarterly Report on Form 10-Q................ Quarter ended September 30, 2000
Proxy Statement on Schedule 14A.............. For Annual Meeting May 25, 2000
Form 425..................................... Filed August 29, 2000
Form 425..................................... Filed November 2, 2000
Current Report on Form 8-K................... Filed November 3, 2000
Current Report on Form 8-K................... Filed December 1, 2000
<CAPTION>
Columbus Sec Filings
(File No. 001-9872) Period
-------------------- ------
<S> <C>
Annual Report on Form 10-K................... Year ended November 30, 1999
Quarterly Report on Form 10-Q................ Quarter ended February 29, 2000
Quarterly Report on Form 10-Q................ Quarter ended May 31, 2000
Quarterly Report on Form 10-Q................ Quarter ended August 31, 2000
Proxy Statement on Schedule 14A.............. For Annual Meeting May 4, 2000
Current Report on Form 8-K................... Filed March 1, 2000
Current Report on Form 8-K................... Filed May 31, 2000
</TABLE>
Columbus' Annual Report on Form 10-K for the year ended November 30, 1999 is
attached to this proxy statement/prospectus as Annex C and its Quarterly
Report on Form 10-Q for the quarter ended August 31, 2000 is attached as Annex
D.
Key is also incorporating by reference additional documents that it files with
the SEC between the date of this proxy statement/prospectus and the date of
the Columbus shareholder meeting.
Key has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to Key, and Columbus has supplied all
information contained or incorporated by reference in this proxy
statement/prospectus relating to Columbus.
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You can obtain any of the documents incorporated by reference by contacting
Key directly, or the SEC. Documents incorporated by reference are available
from Key without charge, excluding all exhibits unless an exhibit in this
proxy statement/prospectus has been specifically incorporated by reference.
You can also get more information by visiting Key's web site at
"http://www.keyproduction.com" and Columbus' web site at
"http://www.columbusegy.com." Web site materials are not part of this proxy
statement/prospectus.
You should rely only on the information contained or incorporated by reference
in this proxy statement/prospectus. We have not authorized anyone to provide
you with information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated
December 1, 2000.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Key and Columbus have made forward-looking statements in this document and in
the documents referred to in this document, which are subject to risks and
uncertainties. These statements are based on the beliefs and assumptions of
our managements and on the information currently available to them. These
forward-looking statements include, among others, statements concerning Key's
and Columbus' outlooks for the remainder of 2000 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. These forward-looking statements 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 each company receives for 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
Key and Columbus are discussed in greater detail in this proxy
statement/prospectus and the documents incorporated by reference in this proxy
statement/prospectus.
Except for their ongoing obligations to disclose material information as
required by the federal securities laws, Key and Columbus do not have any
intention or obligation to update forward-looking statements after they
distribute this document.
COMMONLY USED OIL AND GAS TERMS
"Bbl" means barrel.
"Bcf" means billion cubic feet.
"BOE" means barrels of oil equivalent.
"MBbls" means thousand barrels.
"Mcf" means thousand cubic feet.
"Mcfe", "MMcfe" and "Bcfe" mean, respectively, thousand, million and billion
equivalent cubic feet of gas, calculated by converting oil and natural gas
liquids to equivalent Mcf. The U.S. convention for this conversion is one-
sixth Bbl equals one Mcfe.
"MMcf" means million cubic feet.
"Oil" includes crude oil, condensate and natural gas liquids.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of August 28, 2000 (this
"Agreement"), is by and among Key Production Company, Inc., a Delaware
corporation ("Key"), Key Acquisition Two, Inc., a Colorado corporation and
wholly owned subsidiary of Key ("Merger Sub"), and Columbus Energy Corp., a
Colorado corporation ("Columbus"). Key and Merger Sub are sometimes referred
to herein as the "Key Companies."
WHEREAS, Merger Sub, upon the terms and subject to the conditions of this
Agreement and in accordance with the Colorado Business Corporation Act
("Colorado Law"), will merge with and into Columbus (the "Merger"), and
pursuant thereto, the issued and outstanding shares of common stock of
Columbus ("Columbus Common Stock") not owned directly or indirectly by
Columbus or the Key Companies or their respective subsidiaries will be
converted into the right to receive shares of common stock, $.25 par value, of
Key (the "Key Common Stock"), as set forth herein;
WHEREAS, the Board of Directors of Columbus, after actively soliciting and
considering business combination proposals and indications of interest from
other persons, has determined that the Merger is consistent with and in
furtherance of the long-term business strategy of Columbus and is fair to, and
in the best interests of, Columbus and its stockholders and has approved and
adopted this Agreement and the transactions contemplated hereby, and
recommended adoption of this Agreement by the stockholders of Columbus;
WHEREAS, the Board of Directors of Key has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of Key
and is fair to, and in the best interests of, Key and its stockholders and has
approved and adopted this Agreement and the transactions contemplated hereby;
WHEREAS, the Board of Directors of Merger Sub has approved and adopted this
Agreement and Key, as the sole stockholder of Merger Sub, will adopt this
Agreement promptly after the execution hereof by the parties hereto; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code") and that
this Agreement constitute a plan of reorganization;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
The Merger
Section 1.01. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance Colorado Law, at the Effective Time
(as defined in Section 1.02 of this Agreement), Merger Sub shall be merged
with and into Columbus. As a result of the Merger, the separate corporate
existence of Merger Sub shall cease and Columbus shall continue as the
surviving corporation of the Merger (the "Surviving Corporation"). Certain
terms used in this Agreement are defined in Section 9.03 hereof.
Section 1.02. Closing; Closing Date; Effective Time. Unless this Agreement
shall have been terminated pursuant to Section 8.01, and subject to the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII, the consummation of the Merger and the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Key as soon as practicable (but in any event within two business
A-1
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days) after the satisfaction or, if permissible, waiver of the conditions set
forth in Article VII, or at such other date, time and place as Key and
Columbus may agree; provided, that the conditions set forth in Article VII
shall have been satisfied or waived at or prior to such time. The date on
which the Closing takes place is referred to herein as the "Closing Date". As
promptly as practicable on the Closing Date, the parties hereto shall cause
the Merger to be consummated by filing Articles of Merger with the Secretary
of State of the State of Colorado, in such form as required by, and executed
in accordance with the relevant provisions of, Colorado Law (the date and time
of such filing, or such later date or time agreed upon by Key and Columbus and
set forth therein, being the "Effective Time"). For all Tax purposes, the
Closing shall be effective at the end of the day on the Closing Date.
Section 1.03. Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Colorado Law.
Section 1.04. Articles of Incorporation; Bylaws. At the Effective Time, the
articles of incorporation of Columbus, as in effect immediately prior to the
Effective Time, shall be the articles of incorporation of the Surviving
Corporation and thereafter shall continue to be its articles of incorporation
until amended as provided therein and pursuant to Colorado Law. The bylaws of
Columbus, as in effect immediately prior to the Effective Time, shall be the
bylaws of the Surviving Corporation and thereafter shall continue to be its
bylaws until amended as provided therein and pursuant to Colorado Law.
Section 1.05. Directors and Officers. The directors of Merger Sub
immediately prior to the Effective Time shall be the directors of the
Surviving Corporation, each to hold office in accordance with the charter and
bylaws of the Surviving Corporation, and the officers of Merger Sub
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation, each to hold office in accordance with the bylaws of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified.
ARTICLE II
Conversion of Securities; Exchange of Certificates
Section 2.01. Merger Consideration; Conversion and Cancellation of
Securities. At the Effective Time, by virtue of the Merger and without any
action on the part of the Key Companies, Columbus or their respective
stockholders:
(a) Subject to the other provisions of this Article II, each share of
Columbus Common Stock issued and outstanding immediately prior to the
Effective Time (excluding any Columbus Common Stock described in Section
2.01(b) of this Agreement) shall be converted into the right to receive
.355 share of Key Common Stock (the "Exchange Ratio"). Notwithstanding the
foregoing, if between the date of this Agreement and the Effective Time the
outstanding shares of Key Common Stock or Columbus Common Stock shall have
been changed into a different number of shares or a different class, by
reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Exchange
Ratio shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares.
(b) Notwithstanding any provision of this Agreement to the contrary, each
share of Columbus Common Stock held in the treasury of Columbus and each
share of Columbus Common Stock owned by Key or any direct or indirect
wholly owned subsidiary of Key or of Columbus immediately prior to the
Effective Time shall be canceled and extinguished without any conversion
thereof and no payment shall be made with respect thereto.
(c) All shares of Columbus Common Stock shall cease to be outstanding and
shall automatically be canceled and retired, and each certificate
previously evidencing Columbus Common Stock outstanding immediately prior
to the Effective Time (other than Columbus Common Stock described in
Section 2.01(b) of this Agreement) ("Converted Shares") shall thereafter
represent the right to receive, subject to Section
A-2
<PAGE>
2.02(f) of this Agreement, that number of shares of Key Common Stock
determined pursuant to the Exchange Ratio and, if applicable, cash pursuant
to Section 2.02(f) of this Agreement (the "Merger Consideration"). The
holders of certificates previously evidencing Converted Shares shall cease
to have any rights with respect to such Converted Shares except as
otherwise provided herein or by law. Such certificates previously
evidencing Converted Shares shall be exchanged for certificates evidencing
whole shares of Key Common Stock upon the surrender of such Certificates in
accordance with the provisions of Section 2.02 of this Agreement, without
interest. No fractional shares of Key Common Stock shall be issued in
connection with the Merger and, in lieu thereof, a cash payment shall be
made pursuant to Section 2.02(f) of this Agreement.
(d) Each share of common stock, par value $1.00 per share, of Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of common stock, par value $.10 per share, of the
Surviving Corporation.
Section 2.02. Exchange and Surrender of Certificates.
(a) As of the Effective Time, Key shall deposit, or shall cause to be
deposited with Continental Stock Transfer & Trust Company of New York (the
"Exchange Agent"), for the benefit of the holders of certificates which
immediately prior to the Effective Time evidenced shares of Columbus Common
Stock (the "Columbus Certificates"), for exchange in accordance with this
Article II, certificates representing the shares of Key Common Stock (such
certificates for shares of Key Common Stock, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.01 in exchange for such shares
of Columbus Common Stock.
(b) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of shares of Columbus Common Stock
immediately prior to the Effective Time (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Columbus Certificates shall pass, only upon delivery of the Columbus
Certificates to the Exchange Agent, and which shall be in such form and have
such other provisions as Key and Columbus may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Columbus Certificates
in exchange for certificates representing shares of Key Common Stock. Upon
surrender of a Columbus Certificate for cancellation to the Exchange Agent
together with such letter of transmittal, duly executed, the holder of such
Columbus Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Key Common Stock which
such holder has the right to receive in respect of the Columbus Certificate
surrendered pursuant to the provisions of this Article II (after taking into
account all shares of Columbus Common Stock then held by such holder), and the
Columbus Certificate so surrendered shall forthwith be canceled. In the event
of a transfer of ownership of Columbus Common Stock which is not registered in
the transfer records of Columbus, a certificate representing the proper number
of shares of Key Common Stock may be issued to a transferee if the Columbus
Certificate representing such Columbus Common Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have
been paid. Until surrendered as contemplated by this Section 2.02, each
Columbus Certificate shall be deemed at any time after the Effective Time to
represent only the Key Common Stock into which the shares of Columbus Common
Stock represented by such Columbus Certificate have been converted as provided
in this Article II and the right to receive upon such surrender cash in lieu
of any fractional shares of Key Common Stock as contemplated by this Section
2.02.
(c) After the Effective Time, there shall be no further registration of
transfers of Columbus Common Stock. If, after the Effective Time, certificates
representing shares of Columbus Common Stock are presented to Key or the
Exchange Agent, they shall be canceled and exchanged for the Merger
Consideration provided for, and in accordance with the procedures set forth,
in this Agreement.
(d) Any portion of the Merger Consideration made available to the Exchange
Agent pursuant to Section 2.02(a) or the Exchange Fund that remains unclaimed
by the holders of shares of Columbus Common Stock one
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year after the Effective Time shall be returned to Key, upon demand, and any
such holder who has not exchanged its shares of Columbus Common Stock in
accordance with this Section 2.02 prior to that time shall thereafter look
only to Key for payment of the Merger Consideration in respect of its shares
of Columbus Common Stock. Notwithstanding the foregoing, Key shall not be
liable to any holder of Columbus Common Stock for any amount paid to a public
official pursuant to applicable abandoned property escheat or similar laws.
(e) No dividends, interest or other distributions with respect to shares of
Columbus Common Stock shall be paid the holder of any unsurrendered Columbus
Certificates until such Columbus Certificates are surrendered as provided in
this Section 2.02. Upon such surrender, there shall be paid, without interest,
to the person in whose name the certificates representing the shares of Key
Common Stock into which such shares of Columbus Common Stock were converted
all dividends and other distributions payable in respect of such securities on
a date subsequent to, and in respect of a record date after, the Effective
Time.
(f) No certificates or scrip evidencing fractional shares of Key Common
Stock shall be issued upon the surrender for exchange of certificates, and
such fractional share interests shall not entitle the owner thereof to any
rights of a stockholder of Key. In lieu of any such fractional shares, each
holder of a certificate previously evidencing Converted Shares, upon surrender
of such certificate for exchange pursuant to this Article II, shall be paid an
amount in cash (without interest), rounded to the nearest cent, determined by
multiplying (i) the per share closing price of Key Common Stock on the New
York Stock Exchange as reported in the Wall Street Journal for the date of the
Effective Time (or, if there is no trading activity in Key Common Stock on the
New York Stock Exchange on such date, the first date of trading of Key Common
Stock on the New York Stock Exchange after the Effective Time) by (ii) the
fractional interest to which such holder would otherwise be entitled (after
taking into account all Converted Shares held of record by such holder at the
Effective Time).
(g) Key shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any former holder of Converted
Shares such amounts as Key (or any affiliate thereof) is required to deduct
and withhold with respect to the making of such payment under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are
so withheld by Key, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the former holder of the Converted
Shares in respect of which such deduction and withholding was made by Key.
Section 2.03. Options. Key shall assume each option to purchase shares of
Columbus Common Stock that is outstanding immediately prior to the Effective
Time (a "Columbus Option") and each Columbus Option shall, at the Effective
Time, no longer be an option to purchase Columbus Common Stock and shall be
converted into an option to purchase Key Common Stock (a "Converted Key
Option"). Each Converted Key Option shall, at the Effective Time, become fully
vested, shall include the same terms and conditions as the corresponding
Columbus Option, and shall be subject to the terms of the Columbus stock
option plan under which the corresponding Columbus Option was granted, except
that the Converted Key Option will be exercisable for a period of 12 months
after the Effective Time and not thereafter and further provided that the
Columbus Options that are incentive stock options within the meaning of
Section 422 of the Code ("ISOs") may cease being ISOs as a result of the
conversion provided for in this Section 2.03. Key will use its best efforts to
cause the exercise of such options to be registered on Form S-8 prior to the
time that the exercise price of such options is less than the market price of
the stock covered thereby. The number of shares of Key Common Stock subject to
each Converted Key Option shall be equal to the number determined by
multiplying the number of shares of Columbus Common Stock subject to the
corresponding Columbus Option by the Exchange Ratio, rounded if necessary to
the nearest whole share. The per share exercise price for each Converted Key
Option shall be equal to the per share exercise price for the corresponding
Columbus Option divided by the Exchange Ratio, rounded if necessary to the
nearest one-hundredth cent. In the case of any Columbus Option that is an ISO,
the number of shares and the exercise price for the corresponding Converted
Key Option shall be determined according to the rules of Section 424(a) of the
Code and the regulations promulgated thereunder. Columbus shall, in
consultation with Key, obtain the necessary consents and waivers, adopt the
necessary amendments to the Columbus stock option plans, and take any other
actions necessary to implement the matters described in this
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Section 2.03. Key shall take all actions necessary to assume the Columbus
stock option plans and to amend the Columbus stock option plans to implement
the actions provided for in this Section 2.03. Following the issuance of the
Converted Key Options provided for in this Section 2.03, no further options
shall be granted under the Columbus stock option plans and the Columbus stock
option plans shall be terminated.
ARTICLE III
Representations and Warranties of Columbus
Columbus hereby represents and warrants to the Key Companies that:
Section 3.01. Organization and Qualification; Subsidiaries. Each of Columbus
and its subsidiaries is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization, has
all requisite power and authority to own, lease and operate its properties and
to carry on its business as it is now being conducted and is duly qualified
and in good standing to do business in each jurisdiction in which the nature
of the business conducted by it or the ownership or leasing of its properties
makes such qualification necessary, other than where the failure to be so duly
qualified and in good standing would not have a Columbus Material Adverse
Effect. The term "Columbus Material Adverse Effect" as used in this Agreement
shall mean any change or effect that, individually or when taken together with
all other such changes or effects, would be materially adverse to the
financial condition, results of operations or business of Columbus and its
subsidiaries, taken as a whole. Schedule 3.01 of the disclosure schedule
delivered to Key by Columbus on the date hereof (the "Columbus Disclosure
Schedule") sets forth, as of the date of this Agreement, a true and complete
list of all Columbus' directly or indirectly owned subsidiaries, together with
(A) the jurisdiction of incorporation or organization of each subsidiary and
the percentage of each subsidiary's outstanding capital stock or other equity
interests owned by Columbus or another subsidiary of Columbus, and (B) an
indication of whether each such subsidiary is a "Significant Subsidiary" as
defined in Section 9.03(g) of this Agreement. Except as set forth in Schedule
3.01 to the Columbus Disclosure Schedule, neither Columbus nor any of its
subsidiaries owns an equity interest in any partnership or joint venture
arrangement or business entity that is material to the financial condition,
results of operations or business of Columbus and its subsidiaries, taken as a
whole.
Section 3.02. Charter and Bylaws. Columbus has heretofore furnished to Key
complete and correct copies of the charter and the bylaws or the equivalent
organizational documents, in each case as amended or restated, of Columbus and
each of its subsidiaries. Neither Columbus nor any of its subsidiaries is in
violation of any of the provisions of its charter or any material provision of
its bylaws (or equivalent organizational documents).
Section 3.03. Capitalization.
(a) As of the date of this Agreement (1) 3,751,668 shares were issued and
outstanding, (2) authorized capital stock of Columbus consists of (i)
20,000,000 shares of Columbus Common Stock, of which 904,909 shares were held
in treasury by Columbus and (3) 475,000 shares were reserved for future
issuance pursuant to outstanding stock options ("Stock Options") granted
pursuant to Columbus' 1985 Stock Option Plan, 1995 Employees' Stock Option
Plan and Non-Statutory Stock Option Agreements (the "Option Plans"); and (ii)
5,000,000 shares of preferred stock ("Columbus Preferred Stock"), of which no
shares are issued and outstanding. Except as described in this Section 3.03 or
in Schedule 3.03(a) to the Columbus Disclosure Schedule, as of the date of
this Agreement, no shares of capital stock of Columbus are reserved for any
purpose. Each of the outstanding shares of capital stock of, or other equity
interests in, each of Columbus and its subsidiaries is duly authorized,
validly issued, and, in the case of shares of capital stock, fully paid and
nonassessable, and has not been issued in violation of (nor are any of the
authorized shares of capital stock of, or other equity interests in, such
entities subject to) any preemptive or similar rights created by statute, the
charter or bylaws (or the equivalent organizational documents) of Columbus or
any of its subsidiaries, or any agreement to which Columbus or any of its
subsidiaries is a party or bound, and such outstanding shares or other equity
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interests owned by Columbus or a subsidiary of Columbus are owned free and
clear of all security interests, liens, claims, pledges, agreements,
limitations on Columbus' or such subsidiaries' voting rights, charges or other
encumbrances of any nature whatsoever.
(b) Except as set forth in Section 3.03(a) above or in Schedule 3.03(b)(i)
to the Columbus Disclosure Schedule, there are no options, warrants or other
rights (including registration rights), agreements, arrangements or
commitments of any character to which Columbus or any of its subsidiaries is a
party relating to the issued or unissued capital stock of Columbus or any of
its subsidiaries or obligating Columbus or any of its subsidiaries to grant,
issue or sell any shares of the capital stock of Columbus or any of its
subsidiaries, by sale, lease, license or otherwise. Each Columbus Option that
is outstanding immediately prior to the Effective Time shall be cancelled as
of the Effective Time. Except as set forth in Schedule 3.03(b)(ii) to the
Columbus Disclosure Schedule, there are no obligations, contingent or
otherwise, of Columbus or any of its subsidiaries to (i) repurchase, redeem or
otherwise acquire any shares of Columbus Common Stock or other capital stock
of Columbus, or the capital stock or other equity interests of any subsidiary
of Columbus; or (ii) (other than advances to subsidiaries in the ordinary
course of business) provide material funds to, or make any material investment
in (in the form of a loan, capital contribution or otherwise), or provide any
guarantee with respect to the obligations of, any subsidiary of Columbus or
any other person. Except as described in Schedule 3.03(b)(iii) to the Columbus
Disclosure Schedule, neither Columbus nor any of its subsidiaries (x) directly
or indirectly owns, (y) has agreed to purchase or otherwise acquire or (z)
holds any interest convertible into or exchangeable or exercisable for, 5% or
more of the capital stock of any corporation, partnership, joint venture or
other business association or entity (other than the subsidiaries of Columbus
set forth in Schedule 3.01 to the Columbus Disclosure Schedule). Except as set
forth in Schedule 3.03(b)(iv) to the Columbus Disclosure Schedule and except
for any agreements, arrangements or commitments between Columbus and its
subsidiaries or between such subsidiaries, there are no agreements,
arrangements or commitments of any character (contingent or otherwise)
pursuant to which any person is or may be entitled to receive any payment
based on the revenues or earnings, or calculated in accordance therewith, of
Columbus or any of its subsidiaries. There are no voting trusts, proxies or
other agreements or understandings to which Columbus or any of its
subsidiaries is a party or by which Columbus or any of its subsidiaries is
bound with respect to the voting of any shares of capital stock of Columbus or
any of its subsidiaries.
(c) Columbus has made available to Key complete and correct copies of (i)
the Option Plans and the forms of options issued pursuant to the Option Plans,
including all amendments thereto and (ii) all options that are not in the form
thereof provided under clause (i) above. Schedule 3.03(c) to the Columbus
Disclosure Schedule sets forth a complete and correct list of all outstanding
options, restricted stock or any other stock awards (the "Stock Awards")
granted under the Option Plans or otherwise, setting forth as of the date
hereof (i) the number and type of Stock Awards, (ii) the exercise price of
each outstanding Stock Option, and (iii) the number of Stock Options
exercisable.
Section 3.04. Authority. Columbus has all requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the adoption of this Agreement by the stockholders
of Columbus as described in Section 3.15 hereof). The execution and delivery
of this Agreement by Columbus and the consummation by Columbus of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of Columbus
are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby (subject to, with respect to the Merger, the adoption of
this Agreement by the stockholders of Columbus as described in Section 3.15
hereof). This Agreement has been duly executed and delivered by Columbus and,
assuming the due authorization, execution and delivery thereof by the Key
Companies, constitutes the legal, valid and binding obligation of Columbus,
subject to bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other statutes or rules of law affecting the rights and
remedies of creditors and secured parties generally and general principles of
equity, regardless of whether applied in proceedings in equity or at law.
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Section 3.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Columbus does not, and
the consummation of the transactions contemplated hereby in accordance with
its terms will not (i) conflict with or violate the charter or bylaws, or the
equivalent organizational documents, in each case as amended or restated, of
Columbus or any of its subsidiaries, (ii) conflict with or violate any
federal, state, foreign or local law, statute, ordinance, rule, regulation,
order, judgment or decree (collectively, "Laws") applicable to Columbus or any
of its subsidiaries or by which any of their respective properties is bound or
subject or (iii) except as described in Schedule 3.05 to the Columbus
Disclosure Schedule, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or require payment under, or result in the creation of a lien
or encumbrance on any of the properties or assets of Columbus or any of its
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Columbus or any of its subsidiaries is a party or by or to which
Columbus or any of its subsidiaries or any of their respective properties is
bound or subject, except for any such conflicts or violations described in
clause (ii) or breaches, defaults, events, rights of termination, amendment,
acceleration or cancellation, payment obligations or liens or encumbrances
described in clause (iii) that would not have a Columbus Material Adverse
Effect.
(b) The execution and delivery of this Agreement by Columbus does not, and
consummation of the transactions contemplated hereby will not, require
Columbus to obtain any consent, license, permit, approval, waiver,
authorization or order of, or to make any filing with or notification to, any
governmental or regulatory authority, domestic or foreign (collectively,
"Governmental Entities"), except (i) for applicable requirements, if any, of
the Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and state securities or
blue sky laws ("Blue Sky Laws"), and the filing and recordation of appropriate
merger documents as required by Colorado Law, (ii) applicable filings with the
American Stock Exchange and (iii) where the failure to obtain such consents,
licenses, permits, approvals, waivers, authorizations or orders, or to make
such filings or notifications, would not, either individually or in the
aggregate, prevent Columbus from performing its obligations under this
Agreement and would not have a Columbus Material Adverse Effect.
Section 3.06. Permits; Compliance. Except as disclosed in Schedule 3.14 of
the Columbus Disclosure Schedule, each of Columbus and its subsidiaries and to
Columbus' knowledge each third party operator of any of Columbus' properties,
is in possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to carry on its
business as it is now being conducted (collectively, the "Columbus Permits"),
and there is no action, proceeding or investigation pending or, to the
knowledge of Columbus, threatened regarding suspension or cancellation of any
of the Columbus Permits, except where the failure to possess, or the
suspension or cancellation of, such Columbus Permits would not have a Columbus
Material Adverse Effect. Except as disclosed in Schedule 3.14 of the Columbus
Disclosure Schedule, neither Columbus nor any of its subsidiaries is in
conflict with, or in default or violation of (a) any Law applicable to
Columbus or any of its subsidiaries or by or to which any of their respective
properties is bound or subject or (b) any of the Columbus Permits, except for
any such conflicts, defaults or violations that would not have a Columbus
Material Adverse Effect. During the period commencing on January 1, 1999 and
ending on the date hereof, neither Columbus nor any of its subsidiaries has
received from any Governmental Entity any written notification with respect to
possible conflicts, defaults or violations of Laws, except as set forth in
Schedule 3.06 of the Columbus Disclosure Schedule and except for written
notices relating to possible conflicts, defaults or violations that would not
have a Columbus Material Adverse Effect.
Section 3.07. Reports; Financial Statements.
(a) Since December 31, 1997, Columbus and its subsidiaries have filed (i)
all forms, reports, statements and other documents required to be filed with
(A) the Securities and Exchange Commission (the "SEC") including, without
limitation, (1) all Annual Reports on Form 10-K, (2) all Quarterly Reports on
Form 10-Q,
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(3) all proxy statements relating to meetings of stockholders (whether annual
or special), (4) all Current Reports on Form 8-K and (5) all other reports,
schedules, registration statements or other documents (collectively referred
to as the "Columbus SEC Reports") and (B) any applicable state securities
authorities and (ii) all forms, reports, statements and other documents
required to be filed with any other applicable federal or state regulatory
authorities, except as disclosed in Schedule 3.14 of the Columbus Disclosure
Schedule and except where the failure to file any such forms, reports,
statements or other documents would not have a Columbus Material Adverse
Effect (all such forms, reports, statements and other documents in clauses (i)
and (ii) of this Section 3.07(a) being referred to herein, collectively, as
the "Columbus Reports"). The Columbus Reports, including all Columbus Reports
filed after the date of this Agreement and prior to the Effective Time, (x)
were or will be prepared in all material respects in accordance with the
requirements of applicable Law (including, with respect to Columbus SEC
Reports, the Securities Act and the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Columbus SEC
Reports) and (y) did not at the time they were filed, or will not at the time
they are filed, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Columbus SEC Reports filed prior to
the Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except (A) to the extent required by changes in generally accepted accounting
principles and (B) with respect to Columbus SEC Reports filed prior to the
date of this Agreement, as may be indicated in the notes thereto) and (ii)
fairly present or will fairly present the consolidated financial position of
Columbus and its subsidiaries as of the respective dates thereof and the
consolidated results of operations and cash flows for the periods indicated
(including reasonable estimates of normal and recurring year-end adjustments),
except that (x) any unaudited interim financial statements were or will be
subject to normal and recurring year-end adjustments and (y) any pro forma
financial statements contained in such consolidated financial statements are
not necessarily indicative of the consolidated financial position of Columbus
and its subsidiaries as of the respective dates thereof and the consolidated
results of operations and cash flows for the periods indicated.
Section 3.08. Absence of Certain Changes or Events. Except as disclosed in
the Columbus SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in Schedule 3.08 to the
Columbus Disclosure Schedule, since May 31, 2000, Columbus and its
subsidiaries have conducted their respective businesses only in the ordinary
course and in a manner consistent with past practice and there has not been:
(i) any material damage, destruction or loss (whether or not covered by
insurance) with respect to any material assets of Columbus or any of its
subsidiaries; (ii) any material change by Columbus or its subsidiaries in
their accounting methods, principles or practices; (iii) except for dividends
by a subsidiary of Columbus to Columbus or another subsidiary of Columbus, any
declaration, setting aside or payment of any dividends or distributions in
respect of shares of Columbus Common Stock or the shares of stock of, or other
equity interests in, any subsidiary of Columbus, or any redemption, purchase
or other acquisition by Columbus or any of its subsidiaries of any of
Columbus' securities or any of the securities of any subsidiary of Columbus;
(iv) any increase in the benefits under, or the establishment or amendment of,
any bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including, without limitation, the granting of
stock options, stock appreciation rights, performance awards, or restricted
stock awards), stock purchase or other employee benefit plan, or any increase
in the compensation payable or to become payable to directors, officers or
employees of Columbus or its subsidiaries; (v) any revaluation by Columbus or
any of its subsidiaries of any of their assets, including the writing down of
the value of inventory or the writing down or off of notes or accounts
receivable, other than in the ordinary course of business and consistent with
past practices; (vi) any entry by Columbus or any of its subsidiaries into any
commitment or transaction material to Columbus and its subsidiaries, taken as
a whole (other than this Agreement and the transactions contemplated hereby);
(vii) any material increase in indebtedness for borrowed money; or (viii) a
Columbus Material Adverse Effect.
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Section 3.09. Absence of Litigation. Except as disclosed in the Columbus SEC
Reports filed prior to the date of this Agreement or as set forth in Schedule
3.09 to the Columbus Disclosure Schedule, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the knowledge of Columbus,
investigation of any kind, at law or in equity (including actions or
proceedings seeking injunctive relief), pending or, to the knowledge of
Columbus, threatened against Columbus or any of its subsidiaries or any
properties or rights of Columbus or any of its subsidiaries (except for
claims, actions, suits, litigation, proceedings, arbitrations or
investigations which would not have a Columbus Material Adverse Effect), and
neither Columbus nor any of its subsidiaries is subject to any continuing
order of, consent decree, settlement agreement or other similar written
agreement with, or, to the knowledge of Columbus, continuing investigation by,
any Governmental Entity, or any judgment, order, writ, injunction, decree or
award of any Government Entity or arbitrator, including, without limitation,
cease-and-desist or other orders, except for matters that would not have a
Columbus Material Adverse Effect.
Section 3.10. Employee Benefit Plans; Labor Matters.
(a) Schedule 3.10(a) to the Columbus Disclosure Schedule sets forth each
employee benefit plan (as such term is defined in ERISA section 3(3))
maintained or contributed to by Columbus or any member of its ERISA Group and
any other retirement, pension, stock option, stock appreciation right, profit
sharing, incentive compensation, deferred compensation, savings, thrift,
vacation pay, severance pay, or other employee compensation or benefit plan,
agreement, practice, or arrangement, whether written or unwritten, whether or
not legally binding, maintained or contributed to by Columbus or any member of
its ERISA Group (collectively, the "Columbus Benefit Plans"). For purposes of
this Agreement, "ERISA Group" means a controlled or affiliated group within
the meaning of Code section 414(b), (c), (m), or (o) of which Columbus is a
member. Columbus has furnished to Key correct and complete copies of all
Columbus Benefit Plans (including a detailed written description of any
Columbus Benefit Plan that is unwritten, including a description of
eligibility criteria, participation, vesting, benefits, funding arrangements
and assets and any other provisions relating to Columbus) and, with respect to
each Columbus Benefit Plan, a copy of each of the following, to the extent
each is applicable to each Columbus Benefit Plan: (i) the most recent
favorable determination letter, (ii) materials submitted to the Internal
Revenue Service in support of a pending determination letter request, (iii)
the most recent letter issued by the Internal Revenue Service recognizing tax
exemption, (iv) each insurance contract, trust agreement, or other funding
vehicle, (v) the three most recently filed Forms 5500 plus all schedules and
attachments, (vi) the three most recent actuarial valuations, and (vii) each
summary plan description or other general explanation or communication
distributed or otherwise provided to employees with respect to each Columbus
Benefit Plan during the past five years that describes the terms of the
Columbus Benefit Plan.
(b) With respect to the Columbus Benefit Plans, no event has occurred and,
to the knowledge of Columbus, there exists no condition or set of
circumstances, in connection with which Columbus or any member of its ERISA
Group could reasonably be expected to be subject to any liability under the
terms of such Columbus Benefit Plans, ERISA, the Code or any other applicable
Law which would have a Columbus Material Adverse Effect. Except as otherwise
set forth on Schedule 3.10(b) to the Columbus Disclosure Schedule,
(i) Each Columbus Benefit Plan has at all times been in compliance, in
form and in operation, in all material respects with all applicable
requirements of law and regulations, including without limitation ERISA.
Each Columbus Benefit Plan that is intended to be a qualified plan has
received a favorable determination letter from the Internal Revenue Service
or is a standardized master or prototype plan that is subject to a
notification letter issued by the National Office of the Internal Revenue
Service; nothing has occurred since the date of the most recent favorable
determination letter or notification letter that would cause the loss of
the Columbus Benefit Plan's qualification; and each such Columbus Benefit
Plan has at all times been in compliance, in form and in operation, in all
material respects with the applicable requirements of the Internal Revenue
Code and the applicable Treasury Regulations.
(ii) With respect to each Columbus Benefit Plan (including any benefit
plan that has been terminated prior to the date of this Agreement (a
"Terminated Plan")), there are no actions, suits, grievances, arbitrations
or other manner of litigation, or claim with respect to any Columbus
Benefit Plan (except for
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routine claims for benefits made in the ordinary course of plan
administration for which plan administrative procedures have not been
exhausted) pending, threatened or imminent against or with respect to any
Columbus Benefit Plan, any plan sponsor, or any fiduciary (as such term is
defined in Section 3(21) of ERISA) of such Columbus Benefit Plan or
Terminated Plan, and Columbus has no knowledge of any facts that could
reasonably be expected to give rise to any action, suit, grievance,
arbitration or other manner of litigation, or action.
(iii) All contributions required to be made to the Columbus Benefit Plans
pursuant to their terms and provisions or required by applicable law have
been made timely.
(iv) Neither Columbus nor any member of its ERISA Group has ever
maintained, contributed to, or been obligated to contribute to any plan
that is subject to Title IV of ERISA or the minimum funding requirements of
Section 412 of the Code. Neither Columbus nor any member of its ERISA Group
has ever contributed to, been obligated to contribute to, or incurred any
liability to a multiemployer plan (as such term in defined in Section 3(37)
of ERISA).
(v) Neither Columbus nor any party in interest (as such term is defined
in ERISA section 3(14)) nor any disqualified person has engaged in any
prohibited transaction within the meaning of ERISA section 406 or Code
section 4975 that could reasonably be expected to result in a Columbus
Material Adverse Effect.
(vi) With respect to the Columbus Benefit Plans and the employees and
directors of Columbus, the consummation of the transactions contemplated by
this Agreement will not give rise to any acceleration of vesting of
payments or options, the acceleration of the time of making any payments,
or the making of any payments, which in the aggregate would result in an
"excess parachute payment" within the meaning of Section 280G of the Code
and the imposition of the excise tax under Section 4999 of the Code.
(c) Neither Columbus nor any member of its ERISA Group is or has ever been a
party to any collective bargaining or other labor union contracts. No
collective bargaining agreement is being negotiated by Columbus or any of its
subsidiaries. There is no pending or threatened labor dispute, strike or work
stoppage against Columbus or any of its subsidiaries which could reasonably be
expected to interfere with the respective business activities of Columbus or
any of its subsidiaries. To the knowledge of Columbus, none of Columbus, any
of its subsidiaries or any of their respective representatives or employees
has committed any unfair labor practices in connection with the operation of
the respective businesses of Columbus or its subsidiaries, and there is no
pending or threatened charge or complaint against Columbus or any of its
subsidiaries by the National Labor Relations Board or any comparable state
agency.
(d) Except as disclosed in Schedule 3.10(a) to the Columbus Disclosure
Schedule, neither Columbus nor any of its subsidiaries is a party to or is
bound by any severance agreements, programs or policies. Schedule 3.10(d) to
the Columbus Disclosure Schedule sets forth, and Columbus has made available
to Key true and correct copies of (i) all employment agreements with Columbus
or its subsidiaries; (ii) all agreements with consultants of Columbus or its
subsidiaries; (iii) all non-competition agreements with Columbus or a
subsidiary executed by officers of Columbus; and (iv) all plans, programs,
agreements and other arrangements of Columbus or its subsidiaries with or
relating to its directors.
(e) No Columbus Benefit Plan provides retiree medical or retiree life
insurance benefits to any person and neither Columbus nor any of its
subsidiaries is contractually or otherwise obligated (whether or not in
writing) to provide any person with life insurance or medical benefits upon
retirement or termination of employment, other than as required by the
provisions of Sections 601 through 608 of ERISA and Section 4980B of the Code
and each such Columbus Benefit Plan or arrangement may be amended or
terminated by Columbus or its subsidiaries at any time without liability.
(f) Except as contemplated by this Agreement or as set forth in Schedule
3.10(g), Columbus has not amended, or taken any other actions with respect to
any of the Columbus Benefit Plans or any of the plans, programs, agreements,
policies or other arrangements described in Section 3.10(d) of this Agreement
since January1, 1999.
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(g) With respect to each Columbus Benefit Plan that is a "group health plan"
within the meaning of Section 5000(b) of the Code, each such Columbus Benefit
Plan complies and has complied in all material respects with the requirements
of Part 6 of Title I of ERISA and Sections 4980B and 5000 of the Code, or, if
ERISA and the Code do not apply, the requirements of applicable state law.
(h) Columbus' federal income tax deduction for compensation paid or payable
by Columbus to employees covered by Section 162(m) of the Code has not been,
and will not be, limited by Section 162(m) of the Internal Revenue Code.
(i) Any Columbus Benefit Plan that has been terminated prior to the date of
this Agreement was terminated in accordance with its provisions and applicable
law and each such Columbus Benefit Plan that was intended to be a qualified
plan has received a determination letter from the Internal Revenue Service to
the effect that the termination does not adversely affect such Columbus
Benefit Plan's qualification.
(j) The Columbus Energy Corp. 401(k) Profit Sharing Plan and Trust will be
terminated immediately prior to the Effective Time, and Columbus will apply
for a determination letter from the Internal Revenue Service to the effect
that the termination of such Plan does not adversely affect the qualification
of such Plan.
Section 3.11. Taxes.
(a) (1) Except to the extent that the applicable statute of limitations has
expired, all Returns required to be filed by or on behalf of Columbus have
been duly filed on a timely basis and such Returns (including all attached
statements and schedules) are true, complete and correct in all material
respects. Except to the extent that the applicable statute of limitations has
expired, all Taxes shown to be payable on such Returns or on subsequent
assessments with respect thereto have been paid in full on a timely basis, and
no other Taxes are currently due and payable by Columbus with respect to items
or periods covered by such Returns (whether or not shown on or reportable on
such Returns) or with respect to any period prior to the Effective Time.
(2) Columbus has withheld and paid over all Taxes required to have been
withheld and paid over (including any estimated taxes), and has complied in
all material respects with all information reporting and backup withholding
requirements, including maintenance of required records with respect thereto,
in connection with amounts paid or owing to any employee, creditor,
independent contractor, or other third party.
(3) Columbus has disclosed on its income tax returns all positions taken
therein that could give rise to a substantial understatement penalty within
the meaning of Code Section 6662.
(4) There are no liens on any of the assets of Columbus with respect to
Taxes, other than liens for Taxes not yet due and payable or for Taxes that
are being contested in good faith through appropriate proceedings and for
which appropriate reserves have been established.
(5) Columbus does not have any liability under Treasury Regulation (S)
1.1502-6 or any analogous state, local or foreign law by reason of having been
a member of any consolidated, combined or unitary group, other than in the
current affiliated group of which Columbus is the common parent corporation.
(6) Except to the extent that the applicable statute of limitations has
expired, Columbus has made available to Key complete copies of: (i) all
federal and state income and franchise tax returns of Columbus for all periods
since the formation of Columbus, and (ii) all tax audit reports, work papers
statements of deficiencies, closing or other agreements received by Columbus
or on its behalf relating to Taxes, and
(7) Columbus does not do business in or derive income from any state, local,
territorial or foreign taxing jurisdiction other than those for which Returns
have been furnished to Key.
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(b) Except as disclosed on Schedule 3.11(b) of the Columbus Disclosure
Schedule:
(1) There is no audit of any Returns of Columbus by a governmental or
taxing authority in process, pending or, to the knowledge of Columbus,
threatened (formally or informally).
(2) Except to the extent that the applicable statute of limitations has
expired and except as to matters that have been resolved, no deficiencies
exist or have been asserted (either formally or informally) or are expected
to be asserted with respect to Taxes of Columbus, and no notice (either
formally or informally) has been received by Columbus that it has not filed
a Return or paid Taxes required to be filed or paid by it.
(3) Columbus is not a party to any pending action or proceeding for
assessment or collection of Taxes, nor has such action or proceeding been
asserted or threatened (either formally or informally) against it or any of
its assets, except to the extent that the applicable statute of limitations
has expired and except as to matters that have been resolved.
(4) No waiver or extension of any statute of limitations is in effect
with respect to Taxes or Returns of Columbus.
(5) No action has been taken that would have the effect of deferring any
material liability for Taxes for Columbus from any period prior to the
Effective Time to any period after the Effective Time.
(6) There are no requests for rulings, subpoenas or requests for
information pending with respect to Taxes of Columbus.
(7) No power of attorney has been granted by Columbus, with respect to
any matter relating to Taxes.
(8) Since January 1, 1997, Columbus has not been included in an
affiliated group of corporations, within the meaning of section 1504 of the
Code, other than in the current affiliated group of which Columbus is the
common parent corporation.
(9) Columbus is not (nor has it ever been) a party to any tax sharing
agreement between affiliated corporations.
(c) Except as disclosed on Schedule 3.11(c) of the Columbus Disclosure
Schedule:
(1) Columbus has not made an election, and is not required to treat any
asset as owned by another person for federal income tax purposes or as tax-
exempt bond financed property or tax-exempt use property within the meaning
of section 168 of the Code.
(2) Columbus has not issued or assumed any indebtedness that is subject
to section 279(b) of the Code.
(3) Columbus has not entered into any compensatory agreements with
respect to the performance of services under which payment would result in
a nondeductible expense pursuant to Section 280G of the Code or an excise
tax to the recipient of such payment pursuant to Section 4999 of the Code.
(4) No election has been made under Section 338 of the Code with respect
to Columbus and no action has been taken that would result in any income
tax liability to Columbus as a result of a deemed election within the
meaning of Section 338 of the Code.
(5) No consent under Section 341(f) of the Code has been filed with
respect to Columbus.
(6) Columbus has not agreed, nor is it required to make, any adjustment
under Code Section 481(a) by reason of a change in accounting method or
otherwise.
(7) Columbus has not disposed of any property that is presently being
accounted for under the installment method.
(8) Columbus is not a party to any interest rate swap, currency swap or
similar transaction.
(9) Columbus has not participated in any international boycott as defined
in Code Section 999.
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(10) There are no outstanding balances of deferred gain or loss accounts
related to deferred intercompany transactions with respect to Columbus
under Treasury Regulations (S)(S) 1.1502-13 or 1.1502-14.
(11) Columbus has not made and will not make any election under Treasury
Regulation (S) 1.1502-20(g)(1) (or any similar provision) with respect to
the reattribution of net operating losses of Columbus.
(12) There is no excess loss account under Treasury Regulation (S)1.1502-
19 with respect to the stock of Columbus or any subsidiary.
(13) Columbus is not subject to any joint venture, partnership or other
arrangement or contract that is treated as a partnership for federal income
tax purposes.
(14) Columbus has not made any of the foregoing elections and is not
required to apply any of the foregoing rules under any comparable state or
local income tax provisions.
(15) Columbus does not have and has never had a permanent establishment
in any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country.
(16) Except as provided in section 1445(a) of the Code with respect to
Columbus shareholders who are foreign persons, the Merger is not subject to
the tax withholding provisions of section 3406 of the Code, or of
Subchapter A of Chapter 3 of the Code, or of any other provision of law
(exclusive of any backup withholding with respect to cash payments in lieu
of fractional shares).
(d) To the extent the following information is contained therein, the tax
returns and tax work papers provided by Columbus to Key contained in all
material respects, as of the respective dates thereof, accurate and complete
information with respect to:
(1) All material tax elections in effect with respect to Columbus;
(2) The current tax basis of the assets of Columbus;
(3) The net operating losses of Columbus by taxable year;
(4) The net capital losses of Columbus;
(5) The tax credit carry overs of Columbus;
(6) The overall foreign losses of Columbus under section 904(f) of the
Code that is subject to recapture.
(e) The tax returns and tax work papers provided by Columbus to Key contain
accurate and complete information in all material respects with respect to the
net operating losses, net operating loss carry forwards and other tax
attributes of Columbus, and the extent to which they are subject to any
limitation under Code sections 381, 382, 383, or 384, or any other provision
of the Code or the federal consolidated return regulations (or any predecessor
provision of any Code section or the regulations) and there is nothing that
would prevent Columbus from utilizing these net operating losses, net
operating loss carry forwards or other tax attributes as so limited if it had
sufficient income.
(f) (1) For purposes of this Agreement the term "Taxes" shall mean all
taxes, however, denominated, including any interest, penalties or other
additions to tax that may become payable in respect thereof, imposed by any
federal, territorial, state, local or foreign government or any agency or
political subdivision of any such government, which taxes shall include,
without limiting the generality of the foregoing, all income or profits taxes,
payroll and employee withholding taxes, unemployment insurance, social
security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise
taxes, gross receipts taxes, business license taxes, occupation taxes, real
and personal property taxes, stamp taxes, environmental taxes, transfer taxes,
workers' compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar nature
to any of the foregoing, required to be paid, withheld or collected.
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(2) For the purposes of this agreement, the term "Returns" shall mean all
reports, estimates, declarations of estimated tax, information statements and
returns relating to, or required to be filed in connection with, any Taxes,
including information returns or reports with respect to backup withholding
and other payments to third parties.
(3) All references to "Columbus" in this section 3.11 shall include all
subsidiaries of Columbus and where appropriate in this section 3.11, the
singular shall include the plural.
Section 3.12. Tax Matters.
(a) Neither Columbus nor, to the knowledge of Columbus, any of its
affiliates has taken or agreed to take any action that would prevent the
Merger from constituting a reorganization qualifying under the provisions of
section 368(a) of the Code.
(b) There is no plan or intention by any stockholder of Columbus who owns
five percent or more of Columbus Common Stock, and to the knowledge of
Columbus there is no plan or intention on the part of any of the remaining
stockholders of Columbus, to sell, exchange or otherwise dispose of a number
of shares of Key Common Stock to be received in the Merger that would reduce
the Columbus stockholders' ownership of Key Common Stock to a number of shares
having a value, as of the Effective Time, of less than 80 percent of the value
of all of the Columbus Common Stock (including shares of Columbus Common Stock
exchanged for cash in lieu of fractional shares of Key Common Stock)
outstanding immediately prior to the Effective Time.
(c) Immediately following the Merger, Columbus will hold at least 90 percent
of the fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets held immediately prior to the Merger. For
purposes of this representation, amounts used by Columbus to pay Merger
expenses and all redemptions and distributions made by Columbus will be
included as assets of Columbus immediately prior to the Merger.
(d) There is no intercorporate indebtedness existing between Columbus and
Key or between Columbus and Merger Sub that was issued, acquired or will be
settled at a discount.
(e) Columbus is not an investment company as defined in section
368(a)(2)(F)(iii) and (iv) of the Code.
(f) Columbus is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of section 368(a)(3)(A) of the Code.
Section 3.13. Certain Business Practices. None of Columbus, any of its
subsidiaries or any directors, officers, agents or employees of Columbus or
any of its subsidiaries has (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political
activity, (ii) made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
Section 3.14. Environmental Matters. Except for matters disclosed in
Schedule 3.14 to the Columbus Disclosure Schedule and except for matters that
would not result, individually or in the aggregate with all other such
matters, in liability to Columbus or any of its subsidiaries in excess of
$500,000, (i) the properties, operations and activities of Columbus and its
subsidiaries are in compliance with all applicable Environmental Laws; (ii)
Columbus and its subsidiaries and the properties and operations of Columbus
and its subsidiaries are not subject to any existing, pending or, to the
knowledge of Columbus, threatened action, suit, investigation, inquiry or
proceeding by or before any governmental authority under any Environmental
Law; (iii) all notices, permits, licenses, or similar authorizations, if any,
required to be obtained or filed by Columbus or any of its subsidiaries under
any Environmental Law in connection with any aspect of the business of
Columbus or its subsidiaries, including without limitation those relating to
the treatment, storage, disposal or release of a
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hazardous substance, have been duly obtained or filed and will remain valid
and in effect after the Merger, and Columbus and its subsidiaries are in
compliance with the terms and conditions of all such notices, permits,
licenses and similar authorizations; (iv) Columbus and its subsidiaries have
satisfied and are currently in compliance with all financial responsibility
requirements applicable to their operations and imposed by any governmental
authority under any Environmental Law, and Columbus and its subsidiaries have
not received any notice of noncompliance with any such financial
responsibility requirements; (v) to Columbus' knowledge, there are no physical
or environmental conditions existing on any property of Columbus or its
subsidiaries or resulting from Columbus' or such subsidiaries' operations or
activities, past or present, at any location, that would give rise to any on-
site or off-site remedial obligations imposed on Columbus or any of its
subsidiaries under any Environmental Laws; (vi) to Columbus' knowledge, since
the effective date of the relevant requirements of applicable Environmental
Laws and to the extent required by such applicable Environmental Laws, all
hazardous substances generated by Columbus and its subsidiaries have been
transported only by carriers authorized under Environmental Laws to transport
such substances and wastes, and disposed of only at treatment, storage and
disposal facilities authorized under Environmental Laws to treat, store or
dispose of such substances and wastes; (vii) there has been no exposure of any
person or property to hazardous substances or any pollutant or contaminant,
nor has there been any unauthorized release of hazardous substances, or any
pollutant or contaminant into the environment by Columbus or its subsidiaries
or in connection with their properties or operations, where such unauthorized
release could reasonably be expected to give rise to any claim against
Columbus or any of its subsidiaries for damages or compensation; and (viii)
Columbus and its subsidiaries have made available to Key all non-privileged
internal and external environmental audits and studies and all non-privileged
correspondence on substantial environmental matters in the possession of
Columbus or its subsidiaries relating to any of the current or former
properties or operations of Columbus and its subsidiaries. To Columbus'
knowledge, except for matters disclosed in Schedule 3.14 to the Columbus
Disclosure Schedule, the operations of each third party operator of any of
Columbus or its subsidiaries' properties are in compliance with the terms of
this Section 3.14.
For purposes of this Agreement, the term "Environmental Laws" shall mean any
and all laws, statutes, ordinances, rules, regulations or orders of any
Governmental Entity pertaining to health or the environment in effect as of
the Effective Time in any and all jurisdictions in which the party in question
and its subsidiaries own property or conduct business, including without
limitation, the Clean Air Act, as amended, the Comprehensive Environmental,
Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, the Resource Conservation and Recovery Act of
1976 ("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Hazardous & Solid Waste Amendments Act
of 1984, as amended, the Superfund Amendments and Reauthorization Act of 1986,
as amended, the Hazardous Materials Transportation Act, as amended, the Oil
Pollution Act of 1990 ("OPA"), any state laws implementing the foregoing
federal laws, and any state laws pertaining to the handling of oil and gas
exploration and production wastes or the use, maintenance and closure of pits
and impoundments, and all other environmental conservation or protection laws.
For purposes of this Agreement, the terms "hazardous substance" and "release"
have the meanings specified in CERCLA, and the term "disposal" has the meaning
specified in RCRA; provided, however, that to the extent the laws of the state
in which the property is located establish a meaning for "hazardous
substance," "release," or "disposal" that is broader than that specified in
either CERCLA or RCRA, such broader meaning shall apply.
Section 3.15. Vote Required. The only vote of the holders of any class or
series of Columbus capital stock necessary to approve the Merger and adopt
this Agreement is the affirmative vote of the holders of at least a majority
of the outstanding shares of Columbus Common Stock.
Section 3.16. Brokers. Except as set forth in Schedule 3.16 to the Columbus
Disclosure Schedule, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Columbus. Prior to the date of this Agreement, Columbus has made
available to Key a complete and correct
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copy of all agreements referenced in Schedule 3.16 to the Columbus Disclosure
Schedule pursuant to which such firm will be entitled to any payment relating
to the transactions contemplated by this Agreement.
Section 3.17. Insurance. Columbus and each of its subsidiaries are currently
insured, and during each of the past five calendar years have been insured,
for reasonable amounts against such risks as companies engaged in a similar
business would, in accordance with good business practice, customarily be
insured.
Section 3.18. Properties.
(a) With respect to Columbus and its subsidiaries' non-oil and gas
properties, except for liens arising in the ordinary course of business after
the date hereof and properties and assets disposed of in the ordinary course
of business after the date of the most recent balance sheet contained in the
Form 10-Q referred to below, Columbus and its subsidiaries have good and
marketable title free and clear of all liens, the existence of which would
have a Columbus Material Adverse Effect, to all their material properties and
assets, whether tangible or intangible, real, personal or mixed, reflected in
Columbus' most recent consolidated balance sheet contained in Columbus' most
recent Columbus SEC Report on Form 10-Q filed prior to the date hereof as
being owned by Columbus and its subsidiaries as of the date thereof or
purported to be owned on the date hereof. All buildings, and all fixtures,
equipment and other property and assets which are material to its business on
a consolidated basis, held under leases by any of Columbus or its subsidiaries
are held under valid instruments enforceable by Columbus or its subsidiaries
in accordance with their respective terms. Substantially all of Columbus' and
its subsidiaries' equipment in regular use has been well maintained and is in
good and serviceable condition, reasonable wear and tear excepted.
(b) With respect to Columbus and its subsidiaries' oil and gas properties,
Schedule 3.18(b) to the Columbus Disclosure Schedule lists, as of the date of
this Agreement, all of the producing oil and gas properties owned by Columbus
and its subsidiaries (the "Columbus Oil and Gas Properties") and certain
information with respect thereto. Other than matters that do not have a
Columbus Material Adverse Effect:
(i) Columbus and its subsidiaries have Defensible Title to all of the
Columbus Oil and Gas Properties, subject to and except for the Permitted
Encumbrances and as would be acceptable to a reasonably prudent operator of
oil and gas properties.
(A) As used herein, the term "Defensible Title" shall mean as to the
wells and properties described in the column "Lease Name" in Schedule
3.18(b) to the Columbus Disclosure Schedule (individually called a
"Property"), such title as will enable Columbus and its subsidiaries to
receive not less than the net revenue interests set forth on Schedule
3.18(b) to the Columbus Disclosure Schedule of all hydrocarbons and
other minerals produced from each Property, and which will obligate
Columbus and its subsidiaries to bear costs and expenses relating to
the maintenance, development, and operations of each Property not
greater than the working interests set forth on Schedule 3.18(b) to the
Columbus Disclosure Schedule.
(B) As used herein, the term "Permitted Encumbrances" shall mean:
(1) lessors' royalties, overriding royalties, division orders,
reversionary interests and net profits interests and similar burdens
which do not operate to reduce the net revenue interests in any
Property below those set forth on Schedule 3.18(b) to the Columbus
Disclosure Schedule;
(2) the terms and conditions of the oil, gas and mineral leases
(the "Columbus Leases") related to the Columbus Oil and Gas
Properties and all agreements, orders, instruments and declarations
to which the Columbus Leases are subject and that are customary and
acceptable in the oil and gas industry in the area of the particular
property;
(3) liens arising under operating agreements, pooling, unitization
or communitization agreements, and similar agreements of a type and
nature customary in the oil and gas industry and securing payment of
amounts not yet delinquent;
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(4) liens securing payments to mechanics and materialmen, and
liens securing payment of taxes or assessments, which liens are not
yet delinquent or, if delinquent, are being contested in good faith
in the normal course of business;
(5) conventional rights of reassignment obligating Columbus and
its subsidiaries to reassign their interests in a portion of the
Columbus Oil and Gas Properties to a third party in the event
Columbus and its subsidiaries intend to release or abandon such
interest;
(6) calls on or preferential rights to purchase production at not
less than prevailing prices;
(7) covenants, conditions, and other terms to which the Columbus
Oil and Gas Properties were subject when acquired by Columbus and
its subsidiaries and are not such as to materially interfere with
the operation, value, use and enjoyment of the Columbus Oil and Gas
Properties;
(8) rights reserved to or vested in any Governmental Entity to
control or regulate any of the Columbus Oil and Gas Properties in
any manner, and all applicable laws, rules, regulations and orders
of any such Governmental Entity;
(9) easements, rights-of-way, servitudes, permits, surface leases,
and other surface uses on, over or in respect of any of the Columbus
Oil and Gas Properties that are not such as to materially interfere
with the operation, value or use thereof; and
(10) all other liens, charges, encumbrances, limitations,
obligations, defects and irregularities affecting any portion of the
Columbus Oil and Gas Properties which would not have a material
adverse effect on the operation, value, use and enjoyment thereof.
(ii) Except as described in Schedule 3.18(b)(ii) to the Columbus
Disclosure Schedule, the Columbus Leases are in full force and effect, are
valid and subsisting, cover the entire estates they purport to cover and
contain no express provisions that require the drilling of additional wells
or other material development operations in order to earn or to continue to
hold all or any portion of the Columbus Oil and Gas Properties, and to its
knowledge, Columbus has not been advised directly or indirectly by any
lessor under any Columbus Lease or by any other party of a default under
any such Lease or of any requirements or demands to drill additional wells
on any of the lands included within any of the Columbus Oil and Gas
Properties.
(iii) Neither Columbus nor any of its subsidiaries is in default under
any contract or agreement pertaining to the Columbus Oil and Gas
Properties. Except as specifically indicated on Schedule 3.18(b)(iii) to
the Columbus Disclosure Schedule and except for hydrocarbon sales contracts
with a term not greater than six months, no hydrocarbons produced from the
Columbus Oil and Gas Properties are subject to a sales contract or other
agreement relating to the marketing of hydrocarbons, and no person has any
call upon, option to purchase or similar rights with respect to the
Columbus Oil and Gas Properties or the rights therefrom.
(iv) All royalties, rentals and other payments due under the Columbus
Leases have been properly and timely paid, and all conditions necessary to
keep the Columbus Leases in force have been fully performed.
(v) Except for gas balancing agreements containing customary provisions,
neither Columbus nor any of its subsidiaries is obligated, by virtue of a
prepayment arrangement, a "take or pay" arrangement, a production payment
or any other arrangement, to deliver hydrocarbons produced from the
Columbus Oil and Gas Properties at some future time without then or
thereafter receiving full payment therefor.
(vi) Except as set forth on Schedule 3.18(b)(vi) to the Columbus
Disclosure Schedule, with respect to Authorizations for Expenditure
executed on or after May 31, 2000, and covering expenditures exceeding
$50,000 attributable to Columbus or its subsidiaries' interest,
(1) there are no outstanding calls under Authorizations for
Expenditures for payments which are due or which Columbus has committed
to make which have not been made;
(2) there are no material operations with respect to which Columbus
has become a non-consenting party where the effect of such non-consent
is not disclosed on Schedule 3.18(b) to the Columbus Disclosure
Schedule, and
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(3) there are no commitments for the expenditure of funds for
drilling or other capital projects other than projects with respect to
which the operator is not required under the applicable operating
agreement to seek consent.
(vii) Except as set forth on Schedule 3.18(b)(vii) to the Columbus
Disclosure Schedule, there are no Columbus Oil and Gas Properties to which
Columbus or any of its subsidiaries is either "over-produced" or "under-
produced" which singly or in the aggregate would have a Columbus Material
Adverse Effect.
Section 3.19. Certain Contracts and Restrictions. Other than agreements,
contracts or commitments listed elsewhere in the Columbus Disclosure Schedule,
Schedule 3.19 to the Columbus Disclosure Schedule lists, as of the date of
this Agreement, each agreement, contract or commitment (including any
amendments thereto) to which Columbus or any of its subsidiaries is a party or
by which Columbus or any of its subsidiaries is bound (i) involving
consideration during the next twelve months in excess of $50,000 or (ii) which
is otherwise material to the financial condition, results of operations or
business of Columbus and its subsidiaries, taken as a whole. As of the date of
this Agreement and except as indicated on the Columbus Disclosure Schedule,
(i) Columbus has fully complied in all material respects with all the terms
and conditions of all agreements, contracts and commitments listed in the
Columbus Disclosure Schedule and all such agreements, contracts and
commitments are in full force and effect, (ii) Columbus has no knowledge of
any defaults thereunder or any cancellations or modifications thereof, and
(iii) such agreements, contracts and commitments are not subject to any
memorandum or other written document or understanding permitting cancellation.
Section 3.20. Easements. The business of Columbus and its subsidiaries has
been operated in a manner that does not violate the material terms of any
easements, rights of way, permits, servitudes, licenses and similar rights
relating to real property used by Columbus and its subsidiaries in its
business (collectively, "Columbus Easements") except for Environmental Matters
that are covered in Section 3.14 and violations that have not resulted and
will not result in a Columbus Material Adverse Effect. All material Columbus
Easements are valid and enforceable and grant the rights purported to be
granted thereby and all rights necessary thereunder for the current operation
of such business.
Section 3.21. Futures Trading and Fixed Price Exposure. Except as set forth
on Schedule 3.21 to the Columbus Disclosure Schedule, none of Columbus or any
of its subsidiaries engages in any natural gas or other futures or options
trading or is a party to any price swaps, hedges, futures or similar
instruments.
Section 3.22. Information Supplied. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of Columbus and no statement by Columbus or other information contained in the
Columbus Disclosure Schedule or any document incorporated therein by reference
or delivered by Columbus to Key since April 11, 2000, as of the date of such
representation, warranty, statement or document, contains or contained any
untrue statement of material fact, or, at the date thereof, omits or omitted
to state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements are or were
made, not misleading.
Section 3.23. Opinion of Financial Advisor. Columbus has received the
opinion of Arthur Andersen LLP to the effect that, as of the date of delivery
of such opinion, the Key Common Stock to be received by the holders of
Columbus Common Stock in the Merger is fair, from a financial point of view,
to such holders. Columbus will promptly deliver to Key a true and complete
written copy of such opinion.
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ARTICLE IV
Representations and Warranties of Key Companies
THE KEY COMPANIES HEREBY REPRESENT AND WARRANT TO COLUMBUS THAT:
Section 4.01. Organization and Qualification. Each of the Key Companies is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as it is now being conducted and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of the
business conducted by it or the ownership or leasing of its properties makes
such qualification necessary, other than where the failure to be so duly
qualified and in good standing would not have a Key Material Adverse Effect.
The term "Key Material Adverse Effect" as used in this Agreement shall mean
any change or effect that, individually or when taken together with all such
other changes or effects, would be materially adverse to the financial
condition, results of operations or business of Key. Except as set forth in
Schedule 4.01 to the Key Disclosure Schedule, Key has no subsidiaries and does
not own an equity interest in any partnership or joint venture arrangement or
business entity that is material to the financial condition, results of
operations or business of Key.
Section 4.02. Charter and Bylaws. Key has heretofore made available to
Columbus a complete and correct copy of the charter and bylaws, as amended or
restated, of each of the Key Companies. None of the Key Companies is in
violation of any of the provisions of its charter or any material provision of
its bylaws.
Section 4.03. Capitalization.
(a) The authorized capital stock of Key consists of (i) 50,000,000 shares of
Key Common Stock, of which, as of the date of this Agreement, (1) 12,274,493
shares were issued and outstanding, (2) 305,546 shares were held in treasury
by Key and (3) 1,871,667 shares were reserved for future issuance pursuant to
outstanding stock options; and (ii) 15,000,000 shares of preferred stock ("Key
Preferred Stock"), of which no shares are issued and outstanding. Except as
described in this Section 4.03 or in Schedule 4.03(a) of the disclosure
schedule delivered to Columbus by Key on the date hereof (the "Key Disclosure
Schedule"), as of the date of this Agreement, no shares of capital stock of
Key are reserved for any purpose. The outstanding shares of capital stock of
Key are duly authorized, validly issued, fully paid and nonassessable, and
have not been issued in violation of (nor are any of the authorized shares of
capital stock of Key subject to) any preemptive or similar rights created by
statute, the charter or bylaws of Key, or any agreement to which Key is a
party or bound.
(b) Except as set forth in Section 4.03(a) above or in Schedule 4.03(b)(i)
to the Key Disclosure Schedule, there are no options, warrants or other rights
(including registration rights), agreements, arrangements or commitments of
any character to which Key is a party relating to the issued or unissued
capital stock of Key or obligating Key to grant, issue or sell any shares of
the capital stock of Key, by sale, lease, license or otherwise. Except as set
forth in Schedule 4.03(b)(ii) to the Key Disclosure Schedule, there are no
obligations, contingent or otherwise, of Key to (i) repurchase, redeem or
otherwise acquire any shares of Key Common Stock or other capital stock of
Key; or (ii) provide material funds to, or make any material investment in (in
the form of a loan, capital contribution or otherwise), or provide any
guarantee with respect to the obligations of, any person. Except as described
in Schedule 4.03(b)(iii) to the Key Disclosure Schedule, Key (x) does not
directly or indirectly own, (y) has not agreed to purchase or otherwise
acquire or (z) does not hold any interest convertible into or exchangeable or
exercisable for, 5% or more of the capital stock of any corporation,
partnership, joint venture or other business association or entity. Except as
set forth in Schedule 4.03(b)(iv) to the Key Disclosure Schedule, there are no
agreements, arrangements or commitments of any character (contingent or
otherwise) pursuant to which any person is or may be entitled to receive any
payment based on the revenues or earnings, or calculated in accordance
therewith, of Key. Except as set forth in Schedule 4.03(b)(v), there are no
voting trusts, proxies or other agreements or understandings to which Key is a
party or by which Key is bound with respect to the voting of any shares of
capital stock of Key.
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(c) The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock ("Merger Sub Common Stock"). As of the date of this Agreement,
1,000 shares of Merger Sub Common Stock were issued and outstanding and held
by Key, all of which are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, Merger
Sub's charter or bylaws or any agreement to which Merger Sub is a party or is
bound.
(d) The shares of Key Common Stock to be issued pursuant to the Merger (i)
will be duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, Key's charter or bylaws or
any agreement to which Key is a party or is bound and (ii) will, when issued,
be registered under the Securities Act and the Exchange Act and registered or
exempt from registration under applicable Blue Sky Laws and (iii) listed on
the New York Stock Exchange.
Section 4.04. Authority. Each of the Key Companies has all requisite
corporate power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by each of
the Key Companies and the consummation by each of the Key Companies of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of any of the
Key Companies are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of the Key Companies and, assuming the due authorization,
execution and delivery thereof by Columbus, constitutes the legal, valid and
binding obligation of each of the Key Companies, subject to bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
statutes or rules of law affecting the rights and remedies of creditors and
secured parties generally and general principles of equity, regardless of
whether applied in proceedings in equity or at law.
Section 4.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by each of the Key
Companies does not, and the consummation of the transactions contemplated
hereby will not (i) conflict with or violate the charter or bylaws, or the
equivalent organizational documents, in each case as amended or restated, of
Key, (ii) conflict with or violate any Laws applicable to Key or by which any
of its properties is bound or subject, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the properties or assets of Key pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Key is a party or by or
to which Key or any of its properties is bound or subject, except for any such
conflicts or violations described in clause (ii) or breaches, defaults,
events, rights of termination, amendment, acceleration or cancellation or
liens or encumbrances described in clause (iii) that would not have a Key
Material Adverse Effect.
(b) The execution and delivery of this Agreement by each of the Key
Companies does not, and the consummation of the transactions contemplated
hereby will not, require any of the Key Companies to obtain any consent,
license, permit, approval, waiver, authorization or order of, or to make any
filing with or notification to, any Governmental Entities, except (i) for
applicable requirements, if any, of the Securities Act, the Exchange Act and
Blue Sky Laws and the filing and recordation of appropriate merger documents
as required by Delaware Law and Colorado Law, and (ii) where the failure to
obtain such consents, licenses, permits, approvals, waivers, authorizations or
orders, or to make such filings or notifications, would not, either
individually or in the aggregate, prevent any of the Key Companies from
performing its obligations under this Agreement and would not have a Key
Material Adverse Effect.
Section 4.06. Permits; Compliance. Except as disclosed in Schedule 4.17 of
the Key Disclosure Schedule, as of the date of this Agreement, Key and to
Key's knowledge each third party operator of any of Key's properties, is in
possession of all franchises, grants, authorizations, licenses, permits,
easements, variances, exemptions, consents, certificates, approvals and orders
necessary to own, lease and operate its properties and to
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carry on its business as it is now being conducted (collectively, the "Key
Permits"), and there is no action, proceeding or investigation pending or, to
the knowledge of Key, threatened regarding suspension or cancellation of any
of the Key Permits, except where the failure to possess, or the suspension or
cancellation of, such Key Permits would not have a Key Material Adverse
Effect. Except as disclosed in Schedule 4.17 of the Key Disclosure Schedule,
Key is not in conflict with, or in default or violation of (a) any Law
applicable to Key or by or to which any of its properties is bound or subject
or (b) any of the Key Permits, except for any such conflicts, defaults or
violations described in the Key SEC Reports filed prior to the date hereof or
which would not have a Key Material Adverse Effect. During the period
commencing on January 1, 1999 and ending on the date hereof, Key has not
received from any Governmental Entity any written notification with respect to
possible conflicts, defaults or violations of Laws, except for written notices
relating to possible conflicts, defaults or violations described in the Key
SEC Reports filed prior to the date hereof or that would not have a Key
Material Adverse Effect.
Section 4.07. Reports; Financial Statements.
(a) Since December 31, 1997, Key has filed (i) all forms, reports,
statements and other documents required to be filed with (A) the SEC,
including, without limitation, (1) all Annual Reports on Form10-K, (2) all
Quarterly Reports on Form 10-Q, (3) all proxy statements relating to meetings
of stockholders (whether annual or special), (4) all Current Reports on Form
8-K and (5) all other reports, schedules, registration statements or other
documents (collectively, the "Key SEC Reports") and (B) any applicable state
securities authorities and (ii) all forms, reports, statements and other
documents required to be filed with any other applicable federal or state
regulatory authorities, except as disclosed in Schedule 4.17 of the Key
Disclosure Schedule and except where the failure to file any such forms,
reports, statements or other documents would not have a Key Material Adverse
Effect (all such forms, reports, statements and other documents in clauses (i)
and (ii) of this Section 4.07(a) being referred to herein, collectively, as
the "Key Reports"). The Key Reports, including all Key Reports filed after the
date of this Agreement and prior to the Effective Time (x) were or will be
prepared in all material respects in accordance with the requirements of
applicable Law (including, with respect to the Key SEC Reports, the Securities
Act and the Exchange Act, as the case may be, and the rules and regulations of
the SEC thereunder applicable to such Key SEC Reports) and (y) did not at the
time they were filed, or will not at the time they are filed, contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Key SEC Reports filed prior to the
Effective Time (i) have been or will be prepared in accordance with the
published rules and regulations of the SEC and generally accepted accounting
principles applied on a consistent basis throughout the periods involved
(except (A) to the extent required by changes in generally accepted accounting
principles and (B) with respect to Key SEC Reports filed prior to the date of
this Agreement, as may be indicated in the notes thereto) and (ii) fairly
present or will fairly present the financial position of Key as of the
respective dates thereof and the results of operations and cash flows for the
periods indicated (including reasonable estimates of normal and recurring
year-end adjustments), except that (x) any unaudited interim financial
statements were or will be subject to normal and recurring year-end
adjustments and (y) any pro forma financial information contained in such
financial statements is not necessarily indicative of the financial position
of Key as of the respective dates thereof and the results of operations and
cash flows for the periods indicated.
Section 4.08. Absence of Certain Changes or Events. Except as disclosed in
the Key SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in Schedule 4.08 to the Key
Disclosure Schedule, since March 31, 2000, Key has conducted its business only
in the ordinary course and in a manner consistent with past practice, and
there has not been: (i) any material damage, destruction or loss (whether or
not covered by insurance) with respect to any material assets of Key; (ii) any
material change by Key in its accounting methods, principles or practices;
(iii) any declaration, setting aside or payment of any
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dividends or distributions in respect of shares of Key Common Stock or any
redemption, purchase or other acquisition by Key of any of Key's securities;
(iv) any increase in the benefits under, or the establishment or amendment of,
any bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including, without limitation, the granting of
stock options, stock appreciation rights, performance awards, or restricted
stock awards), stock purchase or other employee benefit plan, or any increase
in the compensation payable or to become payable to directors, officers or
employees of Key; (v) any revaluation by Key of any of its assets, including
the writing down of the value of inventory or the writing down or off of notes
or accounts receivable, other than in the ordinary course of business and
consistent with past practices; or (vi) a Key Material Adverse Effect.
Section 4.09. Absence of Litigation. Except as disclosed in the Key SEC
Reports filed prior to the date of this Agreement or as set forth in Schedule
4.09 to the Key Disclosure Schedule, there is no claim, action, suit,
litigation, proceeding, arbitration or, to the knowledge of Key, investigation
of any kind, at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to the knowledge or Key, threatened against
Key or any properties or rights of Key (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which would not have a
Key Material Adverse Effect) and Key is not subject to any continuing order
of, consent decree, settlement agreement or other similar written agreement
with, or, to the knowledge of Key, continuing investigation by, any
Governmental Entity, or any judgment, order, writ, injunction, decree or award
of any Governmental Entity or arbitrator, including, without limitation,
cease-and- desist or other orders, except for matters which would not have a
Key Material Adverse Effect.
Section 4.10. Tax Matters. None of the Key Companies nor, to the knowledge
of Key, any of their affiliates has taken or agreed to take any action that
would prevent the Merger from constituting a reorganization qualifying under
the provisions of section 368(a) of the Code.
Section 4.11. Vote Required. No vote of the holders of any class or series
of Key capital stock is necessary to approve the issuance of the Key Common
Stock in the Merger.
Section 4.12. Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of any of the Key Companies.
Section 4.13. Information Supplied. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of the Key Companies and no statement by the Key Companies or other
information contained in the Key Disclosure Schedule or any document
incorporated therein by reference or delivered by Key to Columbus since April
11, 2000, as of the date of such representation, warranty, statement or
document, contains or contained any untrue statement of material fact, or, at
the date thereof, omits or omitted to state a material fact necessary in order
to make the statements contained therein, in light of the circumstances under
which such statements are or were made, not misleading.
Section 4.14. Employee Benefit Plans; Labor Matters.
(a) Schedule 4.14(a) to the Key Disclosure Schedule sets forth each employee
benefit plan (as such term is defined in ERISA section 3(3)) maintained or
contributed to by Key or any member of its ERISA Group and any other
retirement, pension, stock option, stock appreciation right, profit sharing,
incentive compensation, deferred compensation, savings, thrift, vacation pay,
severance pay, or other employee compensation or benefit plan, agreement,
practice, or arrangement, whether written or unwritten, whether or not legally
binding, maintained or contributed to by Key or any member of its ERISA Group
(collectively, the "Key Benefit Plans"). For purposes of this Agreement,
"ERISA Group" means a controlled or affiliated group within the meaning of
Code section 414(b), (c), (m), or (o) of which Key is a member. Key has made
available to Columbus correct and complete copies of all Key Benefit Plans
(including a detailed written description of any Key Benefit Plan that is
unwritten, including a description of eligibility criteria, participation,
vesting, benefits, funding arrangements and assets and any other provisions
relating to Key) and, with respect to each Key Benefit Plan, a
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copy of each of the following, to the extent each is applicable to each Key
Benefit Plan: (i) the most recent favorable determination letter, (ii)
materials submitted to the Internal Revenue Service in support of a pending
determination letter request, (iii) the most recent letter issued by the
Internal Revenue Service recognizing tax exemption, (iv) each insurance
contract, trust agreement, or other funding vehicle, (v) the three most
recently filed Forms 5500 plus all schedules and attachments, (vi) the three
most recent actuarial valuations, and (vii) each summary plan description or
other general explanation or communication distributed or otherwise provided
to employees with respect to each Key Benefit Plan during the past five years
that describes the terms of the Key Benefit Plan.
(b) With respect to the Key Benefit Plans, no event has occurred and, to the
knowledge of Key, there exists no condition or set of circumstances, in
connection with which Key or any member of its ERISA Group could reasonably be
expected to be subject to any liability under the terms of such Key Benefit
Plans, ERISA, the Code or any other applicable Law which would have a Key
Material Adverse Effect. Except as otherwise set forth on Schedule 4.14(b) to
the Key Disclosure Schedule,
(i) Each Key Benefit Plan has at all times been in compliance, in form
and in operation, in all material respects with all applicable requirements
of law and regulations, including without limitation ERISA. Each Key
Benefit Plan that is intended to be a qualified plan has received a
favorable determination letter from the Internal Revenue Service or is a
standardized master or prototype plan that is subject to a notification
letter issued by the National Office of the Internal Revenue Service;
nothing has occurred since the date of the most recent favorable
determination letter or notification letter that would cause the loss of
the Key Benefit Plan's qualification; and each such Key Benefit Plan has at
all times been in compliance, in form and in operation, in all material
respects with the applicable requirements of the Internal Revenue Code and
the applicable Treasury Regulations.
(ii) With respect to each Key Benefit Plan (including any benefit plan
that has been terminated prior to the date of this Agreement (a "Terminated
Plan")), there are no actions, suits, grievances, arbitrations or other
manner of litigation, or claim with respect to any Key Benefit Plan (except
for routine claims for benefits made in the ordinary course of plan
administration for which plan administrative procedures have not been
exhausted) pending, threatened or imminent against or with respect to any
Key Benefit Plan, any plan sponsor, or any fiduciary (as such term is
defined in Section 3(21) of ERISA) of such Key Benefit Plan or Terminated
Plan, and Key has no knowledge of any facts that could reasonably be
expected to give rise to any action, suit, grievance, arbitration or other
manner of litigation, or action.
(iii) All contributions required to be made to the Key Benefit Plans
pursuant to their terms and provisions or required by applicable law have
been made timely.
(iv) Neither Key nor any member of its ERISA Group has ever maintained,
contributed to, or been obligated to contribute to any plan that is subject
to Title IV of ERISA or the minimum funding requirements of Section 412 of
the Code. Neither Key nor any member of its ERISA Group has ever
contributed to, been obligated to contribute to, or incurred any liability
to a multiemployer plan (as such term in defined in Section 3(37) of
ERISA).
(v) Neither Key nor any party in interest (as such term is defined in
ERISA section 3(14)) nor any disqualified person has engaged in any
prohibited transaction within the meaning of ERISA section 406 or Code
section 4975 that could reasonably be expected to result in a Key Material
Adverse Effect.
(vi) With respect to the Key Benefit Plans and the employees and
directors of Key, the consummation of the transactions contemplated by this
Agreement will not give rise to any acceleration of vesting of payments or
options, the acceleration of the time of making any payments, or the making
of any payments, which in the aggregate would result in an "excess
parachute payment" within the meaning of Section 280G of the Code and the
imposition of the excise tax under Section 4999 of the Code.
(c) Neither Key nor any member of its ERISA Group is or has ever been a
party to any collective bargaining or other labor union contracts. No
collective bargaining agreement is being negotiated by Key or any
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of its subsidiaries. There is no pending or threatened labor dispute, strike
or work stoppage against Key or any of its subsidiaries which could reasonably
be expected to interfere with the respective business activities of Key or any
of its subsidiaries. To the knowledge of Key, none of Key, any of its
subsidiaries or any of their respective representatives or employees has
committed any unfair labor practices in connection with the operation of the
respective businesses of Key or its subsidiaries, and there is no pending or
threatened charge or complaint against Key or any of its subsidiaries by the
National Labor Relations Board or any comparable state agency.
(d) Except as disclosed in Schedule 4.14(a) to the Key Disclosure Schedule,
neither Key nor any of its subsidiaries is a party to or is bound by any
severance agreements, programs or policies. Schedule 4.14(d) to the Key
Disclosure Schedule sets forth, and Key has made available to Columbus true
and correct copies of (i) all employment agreements with officers of Key or
its subsidiaries obligating Key to make annual cash payments in an amount
exceeding $50,000; (ii) all agreements with consultants of Key or its
subsidiaries; (iii) all non-competition agreements with Key or a subsidiary
executed by officers of Key; and (iv) all plans, programs, agreements and
other arrangements of Key or its subsidiaries with or relating to its
directors.
(e) No Key Benefit Plan provides retiree medical or retiree life insurance
benefits to any person and neither Key nor any of its subsidiaries is
contractually or otherwise obligated (whether or not in writing) to provide
any person with life insurance or medical benefits upon retirement or
termination of employment, other than as required by the provisions of
Sections 601 through 608 of ERISA and Section 4980B of the Code and each such
Key Benefit Plan or arrangement may be amended or terminated by Key or its
subsidiaries at any time without liability.
(f) Except as contemplated by this Agreement or as set forth in Schedule
4.14(f), Key has not amended, or taken any other actions with respect to any
of the Key Benefit Plans or any of the plans, programs, agreements, policies
or other arrangements described in Section 4.14(d) of this Agreement since
March 31, 2000.
(g) With respect to each Key Benefit Plan that is a "group health plan"
within the meaning of Section 5000(b) of the Code, each such Key Benefit Plan
complies and has complied in all material respects with the requirements of
Part 6 of Title I of ERISA and Sections 4980B and 5000 of the Code, or, if
ERISA and the Code do not apply, the requirements of applicable state law.
(h) Key's federal income tax deduction for compensation paid or payable by
Key to employees covered by Section 162(m) of the Code has not been, and will
not be, limited by Section 162(m) of the Internal Revenue Code.
(i) Any Key Benefit Plan that has been terminated prior to the date of this
Agreement was terminated in accordance with its provisions and applicable law
and each such Key Benefit Plan that was intended to be a qualified plan has
received a determination letter from the Internal Revenue Service to the
effect that the termination does not adversely affect such Key Benefit Plan's
qualification.
Section 4.15. Taxes.
(a) (1) Except to the extent that the applicable statute of limitations has
expired, all Returns required to be filed by or on behalf of Key have been
duly filed on a timely basis and such Returns (including all attached
statements and schedules) are true, complete and correct in all material
respects. Except to the extent that the applicable statute of limitations has
expired, all Taxes shown to be payable on the Returns or on subsequent
assessments with respect thereto have been paid in full on a timely basis, and
no other Taxes are currently due and payable by Key with respect to items or
periods covered by such Returns (whether or not shown on or reportable on such
Returns) or with respect to any period prior to the Effective Time.
(2) Key has withheld and paid over all Taxes required to have been withheld
and paid over (including any estimated taxes), and has complied in all
material respects with all information reporting and backup withholding
requirements, including maintenance of required records with respect thereto,
in connection with amounts paid or owing to any employee, creditor,
independent contractor, or other third party.
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(3) Key has disclosed on its income tax returns all positions taken therein
that could give rise to a substantial understatement penalty within the
meaning of Code Section 6662.
(4) There are no liens on any of the assets of Key with respect to Taxes,
other than liens for Taxes not yet due and payable or for Taxes that are being
contested in good faith through appropriate proceedings and for which
appropriate reserves have been established.
(5) Key does not have any liability under Treasury Regulation (S) 1.1502-6
or any analogous state, local or foreign law by reason of having been a member
of any consolidated, combined or unitary group, other than in the current
affiliated group of which Key is the common parent corporation.
(6) Except to the extent that the applicable statute of limitations has
expired, Key has made available to Columbus complete copies of: (i) all
federal and state income and franchise tax returns of Key for all periods
since the formation of Key, and (ii) all tax audit reports, work papers
statements of deficiencies, closing or other agreements received by Key or on
its behalf relating to Taxes, and
(7) Key does not do business in or derive income from any state, local,
territorial or foreign taxing jurisdiction other than those for which Returns
have been furnished to Columbus.
(b) Except as disclosed on Schedule 4.15(b) of the Key Disclosure Schedule:
(1) There is no audit of any Returns of Key by a governmental or taxing
authority in process, pending or, to the knowledge of Key, threatened
(formally or informally).
(2) Except to the extent that the applicable statute of limitations has
expired and except as to matters that have been resolved, no deficiencies
exist or have been asserted (either formally or informally) or are expected
to be asserted with respect to Taxes of Key, and no notice (either formally
or informally) has been received by Key that it has not filed a Return or
paid Taxes required to be filed or paid by it.
(3) Key is not a party to any pending action or proceeding for assessment
or collection of Taxes, nor has such action or proceeding been asserted or
threatened (either formally or informally) against it or any of its assets,
except to the extent that the applicable statute of limitations has expired
and except as to matters that have been resolved.
(4) No waiver or extension of any statute of limitations is in effect
with respect to Taxes or Returns of Key.
(5) No action has been taken that would have the effect of deferring any
material liability for Taxes for Key from any period prior to the Effective
Time to any period after the Effective Time.
(6) There are no requests for rulings, subpoenas or requests for
information pending with respect to Key.
(7) No power of attorney has been granted by Key, with respect to any
matter relating to Taxes.
(8) Key has never been included in an affiliated group of corporations,
within the meaning of section 1504 of the Code, other than in the current
affiliated group of which Key is the common parent corporation.
(9) Key is not (nor has it ever been) a party to any tax sharing
agreement between affiliated corporations.
(10) The amount of liability for unpaid Taxes of Key for all periods
ending on or before the Effective Time will not, in the aggregate,
materially exceed the amount of the current liability accruals for Taxes,
as such accruals are reflected on the balance sheet of Key as of the
Closing Date.
(c) Except as disclosed on Schedule 4.15(c) of the Key Disclosure Schedule:
(1) Key has not made an election, and is not required to treat any asset
as owned by another person for federal income tax purposes or as tax-exempt
bond financed property or tax-exempt use property within the meaning of
section 168 of the Code.
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(2) Key has not issued or assumed any indebtedness that is subject to
section 279(b) of the Code.
(3) No election has been made under Section 338 of the Code with respect
to Key and no action has been taken that would result in any income tax
liability to Key as a result of a deemed election within the meaning of
Section 338 of the Code.
(4) No consent under Section 341(f) of the Code has been filed with
respect to Key.
(5) Key has not agreed, nor is it required to make, any adjustment under
Code Section 481(a) by reason of a change in accounting method or
otherwise.
(6) Key has not disposed of any property that is presently being
accounted for under the installment method.
(7) Key is not a party to any interest rate swap, currency swap or
similar transaction.
(8) Key has not participated in any international boycott as defined in
Code Section 999.
(9) There are no outstanding balances of deferred gain or loss accounts
related to deferred intercompany transactions with respect to Key under
Treasury Regulations (S)(S) 1.1502-13 or 1.1502-14.
(10) Key has not made and will not make any election under Treasury
Regulation (S) 1.1502-20(g)(1) (or any similar provision) with respect to
the reattribution of net operating losses of Key.
(11) There is no excess loss account under Treasury Regulation (S)
1.1502-19 with respect to the stock of Key.
(12) Key is not subject to any joint venture, partnership or other
arrangement or contract that is treated as a partnership for federal income
tax purposes.
(13) Key has not made any of the foregoing elections and is not required
to apply any of the foregoing rules under any comparable state or local
income tax provisions.
(14) Key does not have and has never had a permanent establishment in any
foreign country, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
(15) The Merger is not subject to the tax withholding provisions of
section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or
of any other provision of law.
(d) To the extent the following information is contained therein, the tax
returns and tax work papers made available by Key to Columbus contained in all
material respects, as of the respective dates thereof, accurate and complete
information with respect to:
(1) All material tax elections in effect with respect to Key;
(2) The current tax basis of the assets of Key;
(3) The current and accumulated earnings and profits of Key;
(4) The net operating losses of Key by taxable year;
(5) The net capital losses of Key;
(6) The tax credit carry overs of Key;
(7) The overall foreign losses of Key under section 904(f) of the Code
that is subject to recapture.
(e) The tax returns and tax work papers made available by Key to Columbus
contain accurate and complete information in all material respects with
respect to the net operating losses, net operating loss carry forwards and
other tax attributes of Key, and the extent to which they are subject to any
limitation under Code sections 381, 382, 383, or 384, or any other provision
of the Code or the federal consolidated return regulations (or any
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predecessor provision of any Code section or the regulations) and there is
nothing that would prevent Key from utilizing these net operating losses, net
operating loss carry forwards or other tax attributes as so limited if it had
sufficient income.
(f) Where appropriate in this section 4.15, the singular shall include the
plural.
Section 4.16. Certain Business Practices. None of Key or any directors,
officers, agents or employees of Key has (i) used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties
or campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or (iii) made any other unlawful payment.
Section 4.17. Environmental Matters. Except for matters disclosed in the Key
SEC Reports filed prior to the date hereof or disclosed in Schedule 4.17 to
the Key Disclosure Schedule, and except for matters that would not,
individually or in the aggregate, result in a Key Material Adverse Effect, (i)
the properties, operations and activities of Key are in compliance with all
applicable Environmental Laws; (ii) Key and the properties and operations of
Key are not subject to any existing, pending or, to the knowledge of Key,
threatened action, suit, investigation, inquiry or proceeding by or before any
governmental authority under any Environmental Law; (iii) all notices,
permits, licenses, or similar authorizations, if any, required to be obtained
or filed by Key under any Environmental Law in connection with any aspect of
the business of Key, including without limitation those relating to the
treatment, storage, disposal or release of a hazardous substance, have been
duly obtained or filed and will remain valid and in effect after the Merger,
and Key is in compliance with the terms and conditions of all such notices,
permits, licenses and similar authorizations; (iv) Key has satisfied and is
currently in compliance with all financial responsibility requirements
applicable to their operations and imposed by any governmental authority under
any Environmental Law, and Key has not received any notice of noncompliance
with any such financial responsibility requirements; (v) to Key's knowledge,
there are no physical or environmental conditions existing on any property of
Key or resulting from Key's operations or activities, past or present, at any
location, that would give rise to any on-site or off-site remedial obligations
imposed on Key under any Environmental Laws; (vi) to Key's knowledge, since
the effective date of the relevant requirements of applicable Environmental
Laws and to the extent required by such applicable Environmental Laws, all
hazardous substances generated by Key have been transported only by carriers
authorized under Environmental Laws to transport such substances and wastes,
and disposed of only at treatment, storage, and disposal facilities authorized
under Environmental Laws to treat, store or dispose of such substances and
wastes; (vii) there has been no exposure of any person or property to
hazardous substances or any pollutant or contaminant, nor has there been any
release of hazardous substances or any pollutant or contaminant into the
environment by Key or in connection with its properties or operations that
could reasonably be expected to give rise to any claim against Key for damages
or compensation; and (viii) Key has made available to Columbus all non-
privileged internal and external environmental audits and studies and all non-
privileged correspondence on substantial environmental matters in the
possession of Key relating to any of the current or former properties or
operations of Key. To Key's knowledge, except for matters disclosed in
Schedule 4.17 to the Key Disclosure Schedule, the operations of each third
party operator of any of Key's properties are in compliance with the terms of
this Section 4.17.
Section 4.18. Insurance. Key is currently insured, and during each of the
past five calendar years has been insured, for reasonable amounts against such
risks as companies engaged in a similar business would, in accordance with
good business practice, customarily be insured.
Section 4.19. Properties.
(a) With respect to Key's non-oil and gas properties, except for liens
arising in the ordinary course of business after the date hereof and
properties and assets disposed of in the ordinary course of business after the
date of the most recent balance sheet contained in the Form 10-Q referred to
below, Key has good and marketable title free and clear of all liens, the
existence of which would have a Key Material Adverse Effect, to all their
material properties and assets, whether tangible or intangible, real, personal
or mixed, reflected in Key's most
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recent consolidated balance sheet contained in Key's most recent Key SEC
Report on Form 10-Q filed prior to the date hereof as being owned by Key as of
the date thereof or purported to be owned on the date hereof. All buildings,
and all fixtures, equipment and other property and assets which are material
to its business on a consolidated basis, held under leases by Key are held
under valid instruments enforceable by Key in accordance with their respective
terms. Substantially all of Key's equipment in regular use has been well
maintained and is in good and serviceable condition, reasonable wear and tear
excepted.
(b) With respect to Key's oil and gas properties, Schedule 4.19(b) to the
Key Disclosure Schedule lists, as of the date of this Agreement, the material
producing oil and gas properties owned by Key (the "Key Oil and Gas
Properties") and certain information with respect thereto. Other than matters
that do not have a Key Material Adverse Effect:
(i) Key has Defensible Title to all Key Oil and Gas Properties, subject
to and except for the Permitted Encumbrances and as would be acceptable to
a reasonably prudent operator of oil and gas properties.
(A) As used herein, the term "Defensible Title" shall mean as to the
wells and properties described in Schedule 4.19(b) to the Key
Disclosure Schedule (individually called a "Property"), such title as
will enable Key to receive not less than the net revenue interests set
forth on Schedule 4.19(b) to the Key Disclosure Schedule of all
hydrocarbons and other minerals produced from each Property, and which
will obligate Key to bear costs and expenses relating to the
maintenance, development, and operations of each Property not greater
than the working interests set forth on Schedule 4.19(b) to the Key
Disclosure Schedule.
(B) As used herein, the term "Permitted Encumbrances" shall mean:
(1) lessors' royalties, overriding royalties, division orders,
reversionary interests and net profits interests and similar burdens
which do not operate to reduce the net revenue interests in any
Property below those set forth on Schedule 4.19(b) to the Key
Disclosure Schedule;
(2) the terms and conditions of the oil, gas and mineral leases
(the "Key Leases") related to the Key Oil and Gas Properties and all
agreements, orders, instruments and declarations to which the Key
Leases are subject and that are customary and acceptable in the oil
and gas industry in the area of the particular property;
(3) liens arising under operating agreements, pooling, unitization
or communitization agreements, and similar agreements of a type and
nature customary in the oil and gas industry and securing payment of
amounts not yet delinquent;
(4) liens securing payments to mechanics and materialmen, and
liens securing payment of taxes or assessments, which liens are not
yet delinquent or, if delinquent, are being contested in good faith
in the normal course of business;
(5) conventional rights of reassignment obligating Key to reassign
their interests in a portion of the Key Oil and Gas Properties to a
third party in the event Key intends to release or abandon such
interest;
(6) calls on or preferential rights to purchase production at not
less than prevailing prices;
(7) covenants, conditions, and other terms to which the Key Oil
and Gas Properties were subject when acquired by Key and are not
such as to materially interfere with the operation, value, use and
enjoyment of the Key Oil and Gas Properties;
(8) rights reserved to or vested in any Governmental Entity to
control or regulate any of the Oil and Gas Properties in any manner,
and all applicable laws, rules, regulations and orders of any such
Governmental Entity;
(9) easements, rights-of-way, servitudes, permits, surface leases,
and other surface uses on, over or in respect of any of the Key Oil
and Gas Properties that are not such as to materially interfere with
the operation, value or use thereof; and
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(10) all other liens, charges, encumbrances, limitations,
obligations, defects and irregularities affecting any portion of the
Key Oil and Gas Properties which would not have a material adverse
effect on the operation, value, use and enjoyment thereof.
(ii) Except as described in Schedule 4.19(b) to the Key Disclosure
Schedule, the Key Leases are in full force and effect, are valid and
subsisting, cover the entire estates they purport to cover and contain no
express provisions that require the drilling of additional wells or other
material development operations in order to earn or to continue to hold all
or any portion of the Key Oil and Gas Properties, and to the knowledge of
Key has never been advised directly or indirectly by any lessor under any
such Lease or by any other party of a default under any Key Lease or of any
requirements or demands to drill additional wells on any of the lands
included within any of the Key Oil and Gas Properties.
(iii) Key is not in default under any contract or agreement pertaining to
the Key Oil and Gas Properties. Except as specifically indicated on
Schedule 4.19(b) to the Key Disclosure Schedule, and except for hydrocarbon
sales contracts with a term not greater than six months, no hydrocarbons
produced from the Key Oil and Gas Properties are subject to a sales
contract or other agreement relating to the marketing of hydrocarbons, and
no person has any call upon, option to purchase or similar rights with
respect to the Key Oil and Gas Properties or the rights therefrom.
(iv) All royalties, rentals and other payments due under the Key Leases
have been properly and timely paid, and all conditions necessary to keep
the Key Leases in force have been fully performed.
(v) Except for gas balancing agreements containing customary provisions,
Key is not obligated, by virtue of a prepayment arrangement, a "take or
pay" arrangement, a production payment or any other arrangement, to deliver
hydrocarbons produced from the Key Oil and Gas Properties at some future
time without then or thereafter receiving full payment therefor.
(vi) Except as set forth on Schedule 4.19(b) to the Key Disclosure
Schedule, with respect to Authorizations for Expenditure executed on or
after May 31, 2000 and covering expenditures exceeding $250,000
attributable to Key's interest,
(1) there are no outstanding calls under Authorizations for
Expenditures for payments which are due or which Key has committed to
make which have not been made;
(2) there are no material operations with respect to which Key has
become a non-consenting party where the effect of such non-consent is
not disclosed on Schedule 4.19(b) to the Key Disclosure Schedule, and
(3) there are no commitments for the expenditure of funds for
drilling or other capital projects other than projects with respect to
which the operator is not required under the applicable operating
agreement to seek consent.
(vii) Except as set forth on Schedule 4.19(b) to the Key Disclosure
Schedule, there are no Key Oil and Gas Properties to which Key is either
"over- produced" or "under-produced" which singly or in the aggregate would
have a Key Material Adverse Effect.
Section 4.20. Certain Contracts and Restrictions. Other than agreements,
contracts or commitments listed elsewhere in the Key Disclosure Schedule,
Schedule 4.20 to the Key Disclosure Schedule lists, as of the date of this
Agreement, each agreement, contract or commitment (including any amendments
thereto) to which Key is a party or by which Key is bound (i) involving
consideration during the next twelve months in excess of $250,000 or (ii)
which is otherwise material to the financial condition, results of operations
or business of Key. As of the date of this Agreement and except as indicated
on the Key Disclosure Schedule, (i) Key has fully complied in all material
respects with all the terms and conditions of all agreements, contracts and
commitments listed in the Key Disclosure Schedule and all such agreements,
contracts and commitments are in full force and effect, (ii) Key has no
knowledge of any defaults thereunder or any cancellations or modifications
thereof, and (iii) such agreements, contracts and commitments are not subject
to any memorandum or other written document or understanding permitting
cancellation.
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Section 4.21. Easements. The business of Key has been operated in a manner
that does not violate the material terms of any easements, rights of way,
permits, servitudes, licenses and similar rights relating to real property
used by Key in its business (collectively, "Key Easements") except for
violations that have not resulted and will not result in a Key Material
Adverse Effect. All material Key Easements are valid and enforceable and grant
the rights purported to be granted thereby and all rights necessary thereunder
for the current operation of such business.
Section 4.22. Futures Trading. Except as set forth on Schedule 4.22 to the
Key Disclosure Schedule, Key does not engage in any natural gas or other
futures or options trading or is a party to any price swaps, hedges, futures
or similar instruments.
ARTICLE V
Covenants
Section 5.01. Affirmative Covenants of Columbus. Columbus hereby covenants
and agrees that, prior to the Effective Time, unless otherwise expressly
contemplated by this Agreement or consented to in writing by Key, Columbus
will and will cause its subsidiaries to:
(a) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
(b) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain
the services of its respective officers and key employees and maintain its
relationships with its material customers and suppliers;
(c) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its
customary business practice;
(d) use all reasonable efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that currently
maintained.
Section 5.02. Negative Covenants of Columbus. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by Key,
from the date of this Agreement until the Effective Time, Columbus will not
do, and will not permit any of its subsidiaries to do, any of the foregoing:
(a) (i) increase the compensation payable to or to become payable to any
director or executive officer; (ii) grant any severance or termination pay
to, or enter into or amend any employment or severance agreement with, any
director, officer or employee; (iii) establish, adopt or enter into any
employee benefit plan or arrangement; (iv) grant any bonuses under the
Incentive Compensation Plan, or (v) except as may be required by applicable
law and actions that are not inconsistent with the provisions of Section
6.07 of this Agreement, amend, or take any other actions with respect to,
any of the Benefit Plans or any of the plans, programs, agreements,
policies or other arrangements described in Section 3.10(d) of this
Agreement;
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Columbus to Columbus or another wholly owned
subsidiary of Columbus, or redeem any stock of Columbus;
(c) (i) except as described in Schedule 3.03(b)(ii) to the Columbus
Disclosure Schedule, redeem, purchase or otherwise acquire any shares of
its or any of its subsidiaries' capital stock or any securities or
obligations convertible into or exchangeable for any shares of its or its
subsidiaries' capital stock (other than any such acquisition directly from
any wholly owned subsidiary of Columbus in exchange for capital
contributions or loans to such subsidiary), or any options, warrants or
conversion or other rights to acquire any shares of its or its
subsidiaries' capital stock or any such securities or obligations (except
in connection
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with the exercise of outstanding Stock Options in accordance with their
terms); (ii) effect any reorganization or recapitalization; or (iii) split,
combine or reclassify any of its or its subsidiaries' capital stock or
issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for, shares of its or its
subsidiaries' capital stock;
(d) (i) except as described in Schedule 3.03(b)(i) to the Columbus
Disclosure Schedule, issue, deliver, award, grant or sell, or authorize or
propose the issuance, delivery, award, grant or sale (including the grant
of any security interests, liens, claims, pledges, limitations in voting
rights, charges or other encumbrances) of, any shares of any class of its
or its subsidiaries' capital stock (including shares held in treasury), any
securities convertible into or exercisable or exchangeable for any such
shares, or any rights, warrants or options to acquire any such shares
(except as permitted pursuant to Section 6.07 of this Agreement or for the
issuance of shares upon the exercise of outstanding Stock Options or the
vesting of restricted stock in accordance with the terms of outstanding
Stock Awards); (ii) amend or otherwise modify the terms of any such rights,
warrants or options the effect of which shall be to make such terms more
favorable to the holders thereof; or (iii) take any action to optionally
accelerate the exercisability of Stock Options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets of any other person (other than the purchase of
assets from suppliers or vendors in the ordinary course of business and
consistent with past practice);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, any of its material assets or any material assets
of any of its subsidiaries, except for dispositions of oil and gas
production in the ordinary course of business and consistent with past
practice and except for the sale of oil and gas properties having an
individual net present value of $25,000 (discounted at 10% per annum);
(g) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably
be expected to lead to, any Competing Transaction (as defined below), or
enter into discussions or negotiate with any person or entity in
furtherance of such inquiries or to obtain a Competing Transaction, or
agree to or endorse any Competing Transaction, or authorize or permit any
of the officers, directors or employees of Columbus or any of its
subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative retained by Columbus or any of Columbus'
subsidiaries to take any such action, and Columbus shall promptly notify
Key of all relevant terms of any such inquiries and proposals received by
Columbus or any of its subsidiaries or by any such officer, director,
investment banker, financial advisor, attorney, accountant or other
representative relating to any of such matters and if such inquiry or
proposal is in writing, Columbus shall promptly deliver or cause to be
delivered to Key a copy of such inquiry or proposal; provided, however,
that nothing contained in this subsection (g) shall prohibit the Board of
Directors of Columbus from (i) furnishing information to, or entering into
discussions or negotiations with, any person or entity in connection with
an unsolicited bona fide proposal in writing by such person or entity to
acquire Columbus pursuant to a merger, consolidation, share exchange,
business combination or other similar transaction or to acquire a
substantial portion of the assets of Columbus or any of its Significant
Subsidiaries, if, and only to the extent that (A) the Board of Directors of
Columbus, after consultation with and based upon the advice of independent
legal counsel (who may be Columbus' regularly engaged independent legal
counsel), determines in good faith that such proposal constitutes or is
likely to lead to a proposal that is materially more favorable to the
stockholders of Columbus than the terms of the Merger and (B) prior to
furnishing such information to, or entering into discussions or
negotiations with, such person or entity Columbus (x) provides written
notice to Key to the effect that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity and
(y) enters into with such person or entity a confidentiality agreement in
reasonably customary form on terms not more favorable to such person or
entity than the terms contained in those certain Confidentiality Agreements
dated as of April 11, 2000 and August 23, 2000, respectively, between Key
and Columbus (the "Confidentiality
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Agreements"); (ii) complying with Rule 14e-2 promulgated under the Exchange
Act with regard to a Competing Transaction; or (iii) failing to make or
withdrawing or modifying its recommendation referred to in Section 6.02(a)
or taking the action required by the second sentence of Section 6.01 if
there exists a Competing Transaction and the Board of Directors of
Columbus, after consultation with and based upon the advice of independent
legal counsel (who may be Columbus' regularly engaged independent legal
counsel), determines in good faith that the Competing Transaction is
materially more favorable to the stockholders of Columbus than the terms of
the Merger. For purposes of this Agreement, "Competing Transaction" shall
mean any of the following (other than the transactions contemplated by this
Agreement) involving Columbus or any of its subsidiaries: (i) any merger,
consolidation, share exchange, business combination or similar transaction;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 20% or more of the assets of Columbus and its subsidiaries,
taken as a whole, (iii) any tender offer or exchange offer for 20% or more
of the outstanding shares of capital stock of Columbus or the filing of a
registration statement under the Securities Act in connection therewith;
(iv) any person (other than stockholders as of the date of this Agreement)
having acquired beneficial ownership of, or any group (as such term is
defined under Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) having been formed which beneficially
owns or has the right to acquire beneficial ownership of, 20% or more of
the outstanding shares of capital stock of Columbus; or (v) any public
announcement of a proposal, plan or intention to do any of the foregoing or
any agreement to engage in any of the foregoing;
(h) adopt or propose to adopt any amendments to its charter or bylaws,
which would alter the terms of its capital stock or would have an adverse
impact on the consummation of the transactions contemplated by this
Agreement;
(i) (A) change any of its methods of accounting in effect at December 31,
1999, or (B) make or rescind any express or deemed election relating to
Taxes, settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
Taxes (except where the amount of such settlements or controversies,
individually or in the aggregate, does not exceed $50,000), or change any
of its methods of reporting income or deductions for federal income tax
purposes from those employed in the preparation of the federal income tax
returns for the taxable year ended December 31, 1999, except, in each case,
as may be required by Law or generally accepted accounting principles;
(j) incur any obligation for borrowed money or purchase money
indebtedness, whether or not evidenced by a note, bond, debenture or
similar instrument, except in the ordinary course of business consistent
with past practice and in no event in excess of $100,000 in the aggregate;
(k) enter into any material arrangement, agreement or contract with any
third party which provides for an exclusive arrangement with that third
party or is substantially more restrictive on Columbus or substantially
less advantageous to Columbus than arrangements, agreements or contracts
existing on the date hereof;
(l) agree to or approve any commitment, including any authorization for
expenditure or agreement to acquire property, obligating Columbus for an
amount in excess of $30,000; or
(m) agree in writing or otherwise to do any of the foregoing.
Section 5.03. Affirmative and Negative Covenants of Key.
(a) Key hereby covenants and agrees that, prior to the Effective Time,
unless otherwise expressly contemplated by this Agreement or consented to in
writing by Columbus, Key will and will cause its subsidiaries to:
(i) operate its business in all material respects in the usual and
ordinary course consistent with past practices;
(ii) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain
the services of its respective officers and key employees and maintain its
relationships with its material customers and suppliers;
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(iii) maintain and keep its material properties and assets in as good
repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its
customary business practice; and
(iv) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that
currently maintained.
(b) Except as expressly contemplated by this Agreement or otherwise
consented to in writing by Columbus, from the date of this Agreement until the
Effective Time, Key will not do, and will not permit any of its subsidiaries
to do, any of the following:
(i) knowingly take any action which would result in a failure to maintain
the trading of the Key Common Stock on the New York Stock Exchange;
(ii) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Key to Key or another wholly owned subsidiary of
Key, or redeem any stock of Key, except for open market purchases from non-
affiliates;
(iii) adopt or propose to adopt any amendments to its charter or bylaws,
which would have an adverse impact on the consummation of the transactions
contemplated by this Agreement; or
(iv) agree in writing or otherwise to do any of the foregoing.
Section 5.04. Access and Information.
(a) Columbus shall, and shall cause its subsidiaries to (i) afford to Key
and its officers, directors, employees, accountants, consultants, legal
counsel, agents and other representatives (collectively, the "Key
Representatives") reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, agents, properties, offices and other
facilities of Columbus and its subsidiaries and to the books and records
thereof and (ii) furnish promptly to Key and the Key Representatives such
information concerning the business, properties, contracts, records and
personnel of Columbus and its subsidiaries (including, without limitation,
financial, operating and other data and information) as may be reasonably
requested, from time to time, by Key.
(b) Key shall, and shall cause its subsidiaries to (i) afford to Columbus
and its officers, directors, employees, accountants, consultants, legal
counsel, agents and other representatives (collectively, the "Columbus
Representatives") reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, accountants, agents, properties, offices
and other facilities of Key and its subsidiaries and to the books and records
thereof and (ii) furnish promptly to Columbus and the Columbus Representatives
such information concerning the business, properties, contracts, records and
personnel of Key and its subsidiaries (including, without limitation,
financial, operating and other data and information) as may be reasonably
requested, from time to time, by Columbus.
(c) Notwithstanding the foregoing provisions of this Section 5.04, neither
party shall be required to grant access or furnish information to the other
party to the extent that such access or the furnishing of such information is
prohibited by law. No investigation by the parties hereto made heretofore or
hereafter shall affect the representations and warranties of the parties which
are herein contained and each such representation and warranty shall survive
such investigation.
(d) The information received pursuant to Section 5.04 (a) and (b) shall be
deemed to be "Confidential Information" for purposes of the Confidentiality
Agreements.
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ARTICLE VI
Additional Agreements
Section 6.01. Meeting of Stockholders. Columbus shall, promptly after the
date of this Agreement, take all actions necessary in accordance with Colorado
Law and its charter and bylaws to convene a special meeting of Columbus'
stockholders to act on this Agreement (the "Columbus Stockholders Meeting"),
and Columbus shall consult with Key in connection therewith. Columbus shall
use its best efforts to solicit from stockholders of Columbus proxies in favor
of the approval and adoption of this Agreement and to secure the vote of
stockholders required by Colorado Law and its charter and bylaws to approve
and adopt this Agreement, unless otherwise necessary due to the applicable
fiduciary duties of the directors of Columbus, as determined by such directors
in good faith after consultation with and based upon the advice of independent
legal counsel (who may be Columbus' regularly engaged independent legal
counsel).
Section 6.02. Registration Statement; Proxy Statements.
(a) As promptly as practicable after the execution of this Agreement, Key
shall prepare and file with the SEC a registration statement on Form S-4 (such
registration statement, together with any amendments thereof or supplements
thereto, being the "Registration Statement"), containing a proxy
statement/prospectus for stockholders of Columbus (the "Columbus Proxy
Statement/Prospectus"), in connection with the registration under the
Securities Act of the offer and sale of Key Common Stock to be issued in the
Merger and the other transactions contemplated by this Agreement. As promptly
as practicable after the execution of this Agreement, Columbus shall prepare
and file with the SEC a proxy statement that will be the same as the Columbus
Proxy Statement/Prospectus, and a form of proxy, in connection with the vote
of Columbus' stockholders with respect to the Merger (such proxy statement and
form of proxy, together with any amendments thereof or supplements thereto, in
each case in the form or forms mailed to Columbus' stockholders, being the
"Columbus Proxy Statement"). Each of Key and Columbus will use its best
efforts to cause the Registration Statement to be declared effective as
promptly as practicable, and shall take any action required to be taken under
any applicable federal or state securities laws in connection with the
issuance of shares of Key Common Stock in the Merger. Each of Key and Columbus
shall furnish to the other all information concerning it and the holders of
its capital stock as the other may reasonably request in connection with such
actions. As promptly as practicable after the Registration Statement shall
have been declared effective, Columbus shall mail the Columbus Proxy Statement
to its stockholders entitled to notice of and to vote at the Columbus
Stockholders Meeting. The Columbus Proxy Statement shall include the
recommendation of Columbus' Board of Directors in favor of the Merger and
adoption of this Agreement, unless otherwise necessary due to the applicable
fiduciary duties of the directors of Columbus, as determined by such directors
in good faith after consultation with and based upon the advice of independent
legal counsel (who may be Columbus' regularly engaged independent legal
counsel).
(b) The information supplied by Columbus for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading. The information supplied by Columbus
for inclusion in the Columbus Proxy Statement to be sent to the stockholders
of Columbus in connection with the Columbus Stockholders Meeting shall not, at
the date the Columbus Proxy Statement (or any supplement thereto) is first
mailed to stockholders, at the time of the Columbus Stockholders Meeting or at
the Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which
they are made, not misleading. If at any time prior to the Effective Time any
event or circumstance relating to Columbus or any of its affiliates, or its or
their respective officers or directors, should be discovered by Columbus that
should be set forth in an amendment to the Registration Statement or a
supplement to the Columbus Proxy Statement, Columbus shall promptly inform Key
thereof in writing. All documents that Columbus is responsible for filing with
the SEC in connection with the transactions contemplated herein will comply as
to form in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange Act
and the rules and regulations thereunder.
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(c) The information supplied by Key for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading. The information supplied by Key for
inclusion in the Columbus Proxy Statement to be sent to the stockholders of
Columbus in connection with the Columbus Stockholders Meeting shall not, at
the date the Columbus Proxy Statement (or any supplement thereto) is first
mailed to stockholders, at the time of the Columbus Stockholders Meeting or at
the Effective Time shall not, at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to Key
or any of its affiliates, or to their respective officers or directors, should
be discovered by Key that should be set forth in an amendment to the
Registration Statement or a supplement to the Columbus Proxy Statement, Key
shall promptly inform Columbus thereof in writing. All documents that Key is
responsible for filing with the SEC in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
applicable requirements of the Securities Act and the rules and regulations
thereunder and the Exchange Act and the rules and regulations thereunder.
Section 6.03. Appropriate Action; Consents; Filings.
(a) Columbus and Key shall each use, and shall cause each of their
respective subsidiaries to use, all reasonable efforts to (i) take, or cause
to be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Agreement, (ii)
obtain from any Governmental Entities any consents, licenses, permits,
waivers, approvals, authorizations or orders required to be obtained or made
by Key or Columbus or any of their subsidiaries in connection with the
authorization, execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, including, without limitation, the
Merger, (iii) make all necessary filings, and thereafter make any other
required submissions, with respect to this Agreement and the Merger required
under (A) the Securities Act (in the case of Key) and the Exchange Act and the
rules and regulations thereunder, and any other applicable federal or state
securities laws, and (B) any other applicable Law; provided that Key and
Columbus shall cooperate with each other in connection with the making of all
such filings, including providing copies of all such documents to the
nonfiling party and its advisors prior to filings and, if requested, shall
accept all reasonable additions, deletions or changes suggested in connection
therewith. Columbus and Key shall furnish all information required for any
application or other filing to be made pursuant to the rules and regulations
of any applicable Law (including all information required to be included in
the Columbus Proxy Statement or the Registration Statement) in connection with
the transactions contemplated by this Agreement.
(b) Key and Columbus agree to cooperate with respect to, and shall cause
each of their respective subsidiaries to cooperate with respect to, and agree
to use all reasonable efforts vigorously to contest and resist, any action,
including legislative, administrative or judicial action, and to have vacated,
lifted, reversed or overturned any decree, judgment, injunction or other order
(whether temporary, preliminary or permanent) (an "Order") of any Governmental
Entity that is in effect and that restricts, prevents or prohibits the
consummation of the Merger or any other transactions contemplated by this
Agreement, including, without limitation, by vigorously pursuing all available
avenues of administrative and judicial appeal and all available legislative
action. Each of Key and Columbus also agree to take any and all actions,
including, without limitation, the disposition of assets or the withdrawal
from doing business in particular jurisdictions, required by regulatory
authorities as a condition to the granting of any approvals required in order
to permit the consummation of the Merger or as may be required to avoid, lift,
vacate or reverse any legislative or judicial action which would otherwise
cause any condition to Closing not to be satisfied; provided, however, that in
no event shall either party take, or be required to take, any action that
would or could reasonably be expected to have a Key Material Adverse Effect,
and Columbus shall not be required to take any action which would be
consummated prior to the Effective Time and which would or could reasonably be
expected to have a Columbus Material Adverse Effect .
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(c) (i) Each of Columbus and Key shall give (or shall cause their respective
subsidiaries to give) any notices to third parties, and use, and cause their
respective subsidiaries to use, all reasonable efforts to obtain any third
party consents (A) necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, (B) otherwise required under any
contracts, licenses, leases or other agreements in connection with the
consummation of the transactions contemplated hereby or (C) required to
prevent a Columbus Material Adverse Effect from occurring prior to the
Effective Time or a Key Material Adverse Effect from occurring after the
Effective Time.
(ii) In the event that any party shall fail to obtain any third party
consent described in subsection (c)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by
the other parties, to limit the adverse effect upon Columbus and Key, their
respective subsidiaries, and their respective businesses resulting, or which
could reasonably be expected to result after the Effective Time, from the
failure to obtain such consent.
(d) Each of Key and Columbus shall promptly notify the other of (w) any
material change in its business, financial condition or results of operations,
(x) any complaints, investigations or hearings (or communications indicating
that the same may be contemplated) of any Governmental Entities with respect
to its business or the transactions contemplated hereby, (y) the institution
or the threat of material litigation involving it or any of its subsidiaries
or (z) any event or condition that might reasonably be expected to cause any
of its representations, warranties, covenants or agreements set forth herein
not to be true and correct at the Effective Time. As used in the preceding
sentence, "material litigation" means any case, arbitration or adversary
proceeding or other matter which would have been required to be disclosed on
the Columbus Disclosure Schedule pursuant to Section 3.09 or the Key
Disclosure Schedule pursuant to Section 4.09, as the case may be, if in
existence on the date hereof, or in respect of which the legal fees and other
costs to Columbus or Key (or their respective subsidiaries), as the case may
be, might reasonably be expected to exceed $100,000 over the life of the
matter.
Section 6.04. Affiliates; Tax Treatment.
(a) Columbus shall use all reasonable efforts to cooperate with Key in
complying with Rule145 under the Securities Act.
(b) Key shall not be required to maintain the effectiveness of the
Registration Statement for the purpose of resale by stockholders of Columbus
who may be affiliates of Columbus or Key pursuant to Rule 145 under the
Securities Act.
(c) Each party hereto shall use all reasonable efforts to cause the Merger
to qualify, and shall not take, and shall use all reasonable efforts to
prevent any affiliate of such party from taking, any actions that could
prevent the Merger from qualifying, as a reorganization under the provisions
of section 368(a) of the Code.
Section 6.05. Public Announcements. Key and Columbus shall consult with each
other before issuing any press release or otherwise making any public
statements with respect to the Merger and, except as required by law, shall
not issue any such press release or make any such public statement prior to
such consultation. The joint press release of Key and Columbus announcing the
execution and delivery of this Agreement is attached as Exhibit A.
Section 6.06. New York Stock Exchange Listing. Key shall use all reasonable
efforts to cause the shares of Key Common Stock to be issued in the Merger to
be approved for listing (subject to official notice of issuance) on the New
York Stock Exchange prior to the Effective Time.
Section 6.07. Employees and Employee Benefits.
(a) Employees. Prior to the Effective Time, Key shall notify Columbus of the
employees of Columbus who are employed by Columbus immediately before the
Effective Time that Key desires to retain after the Effective Time (the
"Columbus Employees"). Key agrees that the Columbus Employees will participate
in the
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Key Benefit Plans according to this Section 6.07 and the terms and conditions
of the Key Benefit Plans; provided however, that Key and Merger agree to
honor, and to cause the Surviving Corporation to honor, all severance
agreements or other agreements, contracts, plans, programs, policies, or
arrangements for the payment of severance or other benefits upon consummation
of a change of control or other business combination involving Columbus in
existence as of the date hereof and further provided, however, that if Key
offers employment to a Columbus Employee with the same salary, duties and
location for a period longer than one year after the Effective Time, no
severance payments shall be due to such Columbus Employees and Columbus shall
amend such plans before the Effective Time to the extent necessary to so
provide. Key and Merger Sub acknowledge that all payments due upon
consummation of the Merger under any such agreements, contracts, plans,
programs, policies or arrangements shall be made on the date of termination of
employment.
(b) Employee Stock Purchase Plan. Columbus shall take such action as is
necessary to terminate the Columbus 1993 Employee Stock Purchase Plan and any
other employee stock purchase plan of Columbus or any subsidiary of Columbus
(the "Employee Stock Purchase Plan") prior to the Effective Time (the
"Termination Date") provided that the termination shall be conditioned on the
consummation of the Merger. On the Termination Date, Columbus shall refund the
funds credited on such date under each Employee Stock Purchase Plan in each
participant's account to each Participant in accordance with the terms of the
Employee Stock Purchase Plan.
(c) 401(k) Plan. After the Effective Time, the Columbus Employees shall
participate in the Key 401(k) Plan according to the terms of the Key 401(k)
Plan. The Columbus Employees shall be credited with up to four years of their
service with Columbus for purposes of participation and vesting in the Key
401(k) Plan. Individuals who terminated employment with Columbus prior to the
Effective Time and who are hired by Columbus or Key after the Effective Time
shall be treated as new employees and shall not receive credit for their prior
service with Columbus for any purpose under the Key 401(k) Plan. Columbus
shall take all steps necessary to terminate the Columbus 401(k) Plan
immediately prior to the Effective Time.
(d) Group Health Plan coverage. The Columbus Employees and their dependents
will be offered group health plan coverage under Key's group health plan
effective the day after the Effective Time. Such coverage shall not exclude
any pre-existing conditions. Any Columbus Employees and dependents who are
covered under the Key group health plan and who terminate employment with Key
or Columbus after the Effective Time shall be offered COBRA continuation
coverage under the Key group health plan.
Columbus employees who were covered under the Columbus group health plan
immediately before the Effective Time and who are terminated at the Effective
Time shall be offered COBRA continuation coverage under the Key group health
plan. Former employees of Columbus or dependents thereof, who were receiving
COBRA continuation coverage under the Columbus group health plan as of the
Effective Time will be eligible to elect, pursuant to COBRA, to continue
coverage under Key's group health plan for the remainder of the COBRA
continuation period at such former employee's or dependent's sole expense.
Further, if such persons, and dependents thereof, elect COBRA continuation
coverage under Key's group health plan, such persons will not be subject to
any pre-existing condition limitation under Key's group health plan. All such
persons, as of the date of this Agreement, are listed on Schedule 6.07(d).
(e) Incentive Compensation Plan. Prior to the Effective Date, Columbus shall
take all action necessary to terminate the Incentive Compensation Plan;
provided that the termination shall be conditioned on the consummation of the
Merger.
(f) Other Benefits. Effective the day after the Effective Time, the Columbus
Employees shall participate in the Key Benefit Plans (other than the Key group
health plan, which is covered in subsection 6.07(d) above, and the Key 401(k)
Plan, which is covered in subsection 6.07(c) above) according to the terms and
conditions of each such Key Benefit Plan. The Columbus Employees shall receive
credit for their service with Columbus for all purposes under such plans
(except as provided otherwise in subsections 6.07(c) and (d)). Columbus
employees who accept an offer of employment with Key after the Effective Time
shall be eligible to participate in all Key
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Benefit Plans (including those implemented following the Effective Time)
according to the terms and conditions of each such Key Benefit Plan. All
Columbus employees who accept an offer of employment with Key after the
Effective Time shall receive credit for prior service with Columbus as
follows: the lesser of actual years of service or an amount equal to the
period of time between January 1, 1993 and the Effective Time for purposes of
participation and vesting in all of the Key Benefit Plans, except as provided
otherwise in subsections 6.07(c) and (d).
Section 6.08. Merger Sub. Prior to the Effective Time, Merger Sub shall not
conduct any business or make any investments other than as specifically
contemplated by this Agreement and will not have any assets (other than a de
minimis amount of cash paid to Merger Sub for the issuance of its stock to
Key) or liabilities.
Section 6.09. Indemnification. (a) From and after the Effective Time,
Columbus shall, and, if applicable, Key shall cause Columbus to, indemnify and
hold harmless, and provide advancement of expenses to, to the fullest extent
permitted under applicable law, each person who is a current or former officer
or director of Columbus or any of its Subsidiaries (each, and "Indemnified
Party") against all losses, claims, damages, liabilities, costs or expenses
(including reasonable attorneys' fees), judgments, fines, penalties and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to acts or omissions,
or alleged acts or omissions, by them in their capacities as such, which acts
or omissions occurred prior to or as of the Effective Time. Key shall have the
option to control any such claim, action, suit, proceeding or investigation;
and shall have the option to choose counsel to represent the Indemnified Party
after discussion with the Indemnified Party.
(b) Key agrees that the provisions of Columbus' Restated Articles of
Incorporation and By-laws in effect as of the date of this Agreement affecting
the Indemnified Parties' rights to indemnification, limitation of liability
and advancement of expenses shall survive the consummation of the Merger and
shall continue in full force and effect, without any amendment thereto (unless
required by law), for a period of six years from the Effective Time.
(c) The provisions of this Section 6.09 are intended to be for the benefit
of, and shall by enforceable by, each of the Indemnified Parties, their heirs
and their representatives, and no amendment or waiver under this Agreement
will have any effect on the rights of the Indemnified Parties.
Section 6.10. Arthur Andersen Opinion Update. At any time up to 10 days
prior to the date of the Columbus Stockholders Meeting, either Columbus or Key
may request that Arthur Andersen LLP deliver its written opinion updated to
the date of the Columbus Stockholders Meeting, to the effect that, subject to
the qualifications and limitations contained therein, as of such date, the
Merger Consideration is fair from a financial point of view to the holders of
shares of Columbus Common Stock (other than the Key Companies). Columbus shall
pay the fee associated with such update.
Section 6.11. Section 16(b). Key and Columbus shall use their reasonable
best efforts to cause the transactions contemplated hereby and any other
dispositions of equity securities of Columbus (including derivative
securities) or acquisitions of Key equity securities in connection with this
Agreement by each individual who (a) is a director or officer of Columbus or
(b) at the Effective Time, will become a director or officer of Key, to be
exempt under Rule 16b-3 promulgated under the Exchange Act.
ARTICLE VII
Closing Conditions
Section 7.01. Conditions to Obligations of Each Party Under This
Agreement. The respective obligations of each party to effect the Merger and
the other transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Closing Date of the following conditions, any
or all of which may be waived in writing by the parties hereto, in whole or in
part, to the extent permitted by applicable law:
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(a) Effectiveness of the Registration Statement; Blue Sky. The
Registration Statement shall have been declared effective by the SEC under
the Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated by the SEC. Key shall have
received all Blue Sky permits and other authorizations necessary to
consummate the transactions contemplated by this Agreement.
(b) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of Columbus.
(c) No Order. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction
or other order (whether temporary, preliminary or permanent) which is in
effect and which has the effect of making the Merger illegal or otherwise
prohibiting consummation of the Merger.
Section 7.02. Additional Conditions to Obligations of the Key Companies. The
obligations of the Key Companies to effect the Merger and the other
transactions contemplated hereby are also subject to the satisfaction at or
prior to the Closing Date of the following conditions, any or all of which may
be waived in writing by Key, in whole or in part, to the extent permitted by
applicable law:
(a) Representations and Warranties. Each of the representations and
warranties of Columbus contained in this Agreement shall be true and
correct as of the Closing Date as though made on and as of the Closing Date
(except to the extent such representations and warranties specifically
relate to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date). The Key
Companies shall have received a certificate of the President and the Chief
Financial Officer of Columbus, dated the Closing Date, to such effect.
(b) Agreements and Covenants. Columbus shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date. The Key Companies shall have received a certificate of the President
and the Chief Financial Officer of Columbus, dated the Closing Date, to
that effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no change, occurrence or circumstance in the business,
financial condition or results of operations of Columbus or any of its
subsidiaries having or reasonably likely to have, individually or in the
aggregate, a material adverse effect on the financial condition, results of
operations or business of Columbus and its subsidiaries, taken as a whole,
except as to changes in general economic conditions that affect each of Key
and Columbus substantially equally. The Key Companies shall have received a
certificate of the President and the Chief Financial Officer of Columbus,
dated the Closing Date, to such effect.
(d) Absence of Regulatory Conditions. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, by any Governmental Entity in
connection with the grant of a regulatory approval necessary, in the
reasonable business judgment of Key, to the continuing operation of the
business of Columbus, which imposes any condition or restriction upon the
Key Companies or the business or operations of Columbus which, in the
reasonable business judgment of Key, would be materially burdensome in the
context of the transactions contemplated by this Agreement.
(e) Tax Opinion. Prior to the effective date of the Registration
Statement, Sherman & Howard L.L.C. shall have delivered its written opinion
to Key, in form and substance reasonably satisfactory to Key, to the effect
that: (i) the Merger will constitute a reorganization within the meaning of
section 368(a) of the Code; (ii) Key, Merger Sub and Columbus will each be
a party to that reorganization within the meaning of section 368(b) of the
Code; (iii) Key, Merger Sub and Columbus will not recognize any gain or
loss for U.S. federal income tax purposes as a result of the Merger; and
(iv) the Federal Income Tax Consequences section of the Proxy Statement
(which constitutes the prospectus included in the Registration Statement)
describes the material income tax consequences to Key, Columbus and the
Columbus stockholders from the Merger
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Transaction and fairly represents such counsel's opinion as to the federal
income tax matters discussed therein. Such firm shall have consented to the
filing of such opinion as an exhibit to the Registration Statement and to
the reference to such firm in the Registration Statement and such tax
opinion shall not have been withdrawn or modified in any material respect
prior to the Closing Date.
(f) Nonforeign Status. Columbus shall have delivered to Key at closing
such certificates and affidavits under Section 1445 of the Code as may be
requested by Key in a form satisfactory to Key.
Section 7.03. Additional Conditions to Obligations of Columbus. The
obligations of Columbus to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by Columbus, in whole or in part, to the extent permitted by
applicable law:
(a) Representations and Warranties. Each of the representations and
warranties of the Key Companies contained in this Agreement shall be true
and correct as of the Closing Date as though made on and as of the Closing
Date (except to the extent such representations and warranties specifically
relate to an earlier date, in which case such representations and
warranties shall be true and correct as of such earlier date). Columbus
shall have received a certificate of the President and the Chief Financial
Officer of each of the Key Companies, dated the Closing Date, to such
effect.
(b) Agreements and Covenants. The Key Companies shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or
prior to the Closing Date. Columbus shall have received a certificate of
the President and the Chief Financial Officer of each of the Key Companies,
dated the Closing Date, to that effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no change, occurrence or circumstance in the business,
financial condition or results of operations of Key or any of its
subsidiaries having or reasonably likely to have, individually or in the
aggregate, a material adverse effect on the financial condition, results of
operations or business of Key and its subsidiaries, taken as a whole.
Columbus shall have received a certificate of the President and the Chief
Financial Officer of each of the Key Companies, dated the Closing Date, to
such effect.
(d) Absence of Regulatory Conditions. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, by any Governmental Entity in
connection with the grant of a regulatory approval necessary, in the
reasonable business judgment of Columbus, to the continuing operation of
the business of Key, which imposes any condition or restriction upon Key or
the business or operations of Key which, in the reasonable business
judgment of Columbus, would be materially burdensome in the context of the
transactions contemplated by this Agreement.
(e) New York Stock Exchange Listing. The shares of Key Common Stock to be
issued in the Merger shall have been approved for listing (subject to
official notice of issuance) on the New York Stock Exchange.
ARTICLE VIII
Termination, Amendment and Waiver
Section 8.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this
Agreement and the Merger by the stockholders of Columbus:
(a) by mutual consent of Key and Columbus;
(b) by Key, upon a material breach of any representation, warranty,
covenant or agreement on the part of Columbus set forth in this Agreement,
or if any representation or warranty of Columbus shall have become untrue,
in either case such that the conditions set forth in Section 7.02(a) or
Section 7.02(b) of this Agreement, as the case may be, would be incapable
of being satisfied by December 31, 2000 (or as
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otherwise extended as described in Section 8.01(e)); provided, that in any
case, a wilful breach shall be deemed to cause such conditions to be
incapable of being satisfied for purposes of this Section 8.01(b);
(c) by Columbus, upon a material breach of any representation, warranty,
covenant or agreement on the part of the Key Companies set forth in this
Agreement, or if any representation or warranty of the Key Companies shall
have become untrue, in either case such that the conditions set forth in
Section 7.03(a) or Section 7.03(b) of this Agreement, as the case may be,
would be incapable of being satisfied by December 31, 2000 (or as otherwise
extended as described in Section 8.01(e)); provided, that in any case, a
wilful breach shall be deemed to cause such conditions to be incapable of
being satisfied for purposes of this Section 8.01(c);
(d) by either Key or Columbus, if there shall be any Order which is final
and nonappealable preventing the consummation of the Merger, except if the
party relying on such Order to terminate this Agreement has not complied
with its obligations under Section 6.03(b) of this Agreement;
(e) by either Key or Columbus, if the Merger shall not have been
consummated before December 31, 2000; provided, however, that this
Agreement may be extended by written notice of either Key or Columbus to a
date not later than March 31, 2001, if the Merger shall not have been
consummated as a direct result of Columbus or the Key Companies having
failed by December 31, 2000 to receive all required regulatory approvals or
regulatory consents with respect to the Merger;
(f) by either Key or Columbus, if this Agreement and the Merger shall
fail to receive the requisite vote for approval and adoption by the
stockholders of Columbus at the Columbus Stockholders Meeting;
(g) by Key, if (i) the Board of Directors of Columbus withdraws, modifies
or changes its recommendation of this Agreement or the Merger in a manner
adverse to Key or shall have resolved to do any of the foregoing; (ii) the
Board of Directors of Columbus shall have recommended to the stockholders
of Columbus any Competing Transaction or shall have resolved to do so;
(iii) a tender offer or exchange offer for 20% or more of the outstanding
shares of capital stock of Columbus is commenced, and the Board of
Directors of Columbus does not recommend that stockholders not tender their
shares into such tender or exchange offer or; (iv) any person (other than
Key or an affiliate thereof, or any stockholder of Columbus as of the date
of this Agreement) shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder), shall have been formed which beneficially owns, or
has the right to acquire beneficial ownership of, 20% or more of the then
outstanding shares of capital stock of Columbus; or
(h) by either Key or Columbus, if the Board of Directors of Columbus (x)
fails to make or withdraws its recommendation referred to in Section
6.02(a) if there exists at such time a Competing Transaction (as defined in
Section 5.02(g)), or (y) recommends to Columbus' stockholders approval or
acceptance of a Competing Transaction.
(i) by Columbus, if Arthur Andersen LLP is requested under Section 6.10
and fails to deliver its written opinion updated as of the date of the
Columbus Stockholders Meeting, to the effect that, subject to the
qualifications and limitations contained therein, as of such date, the
Merger Consideration is fair from a financial point of view to the holders
of shares of Columbus Common Stock (other than the Key Companies).
The right of any party hereto to terminate this Agreement pursuant to this
Section 8.01 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
Section 8.02. Effect of Termination. Except as provided in Section 8.05 or
Section 9.01 of this Agreement, in the event of the termination of this
Agreement pursuant to Section 8.01, this Agreement shall forthwith become
void, there shall be no liability on the part of the Key Companies or Columbus
to the other
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and all rights and obligations of any party hereto shall cease, except that
nothing herein shall relieve any party of any liability for (i) any breach of
such party's covenants or agreements contained in this Agreement, or (ii) any
willful breach of such party's representations or warranties contained in this
Agreement.
Section 8.03. Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after approval of
the Merger by the stockholders of Columbus, (i) no amendment, which under
applicable law may not be made without the approval of the stockholders of
Columbus, may be made without such approval. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
Section 8.04. Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations
or other acts of the other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and (c) waive compliance by the other party
with any of the agreements or conditions contained herein. Any such extension
or waiver shall be valid only if set forth in an instrument in writing signed
by the party or parties to be bound thereby. For purposes of this Section
8.04, the Key Companies as a group shall be deemed to be one party.
Section 8.05. Fees, Expenses and Other Payments.
(a) Except as provided in Section 8.05(c) and (d) of this Agreement, all
Expenses (as defined in paragraph (b) of this Section 8.05) incurred by the
parties hereto shall be borne solely and entirely by the party that has
incurred such Expenses; provided, however, that the allocable share of the Key
Companies as a group and Columbus for (i) all Expenses paid to financial
printers for printing, filing and mailing the Registration Statement and the
Columbus Proxy Statement and (ii) all SEC and other regulatory filing fees
incurred in connection with the Registration Statement and the Columbus Proxy
Statement shall be one-third by Columbus and two-thirds by Key; and provided
further that Key may, at its option, pay any Expenses of Columbus, and Key
shall pay all SEC filing fees.
(b) "Expenses" as used in this Agreement shall include all reasonable out-
of-pocket third party expenses (including, without limitation, all fees and
expenses of counsel, accountants, investment bankers, experts and consultants
to a party hereto and its affiliates) incurred by a party or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of this Agreement, the preparation, printing, filing
and mailing of the Registration Statement and the Columbus Proxy Statement,
the solicitation of stockholder approvals and all other matters related to the
consummation of the transactions contemplated hereby.
(c) Columbus agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(b) and (x) such termination is the result of a willful
breach of any representation, warranty, covenant or agreement of Columbus
contained herein, (y) at any time within the period commencing on the date
of this Agreement through the date of termination of this Agreement
Columbus shall have initiated, solicited or encouraged (including by way of
furnishing information or assistance), or taken any other action to
facilitate, any inquiries or the making of any proposal relating to, or
that may reasonably be expected to lead to, any Competing Transaction, or
entered into discussions or negotiated with any person or entity in
furtherance of such inquiries or to obtain a Competing Transaction, or
agreed to or endorsed any Competing Transaction, or authorized or permitted
any of the officers, directors or employees of Columbus or any of its
subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative retained by Columbus or any of Columbus'
subsidiaries to take any such action, and (z) within twelve months after
the date of termination of this Agreement, and with respect to any person
or group with whom the contacts or negotiations referred to in clause (y)
have occurred, a Business Combination (as defined in Section 8.05(e)) shall
have occurred or Columbus shall have entered into a definitive agreement
providing for a Business Combination; or
A-42
<PAGE>
(ii) Section 8.01(f) because this Agreement and the Merger shall fail to
receive the requisite vote for approval and adoption by the stockholders of
Columbus at the Columbus Stockholders Meeting and at the time of such
meeting there shall exist a Competing Transaction; or
(iii) Section 8.01(g), (h) or (i) and at the time of the termination
there shall exist a Competing Transaction;
then Columbus shall pay to Key an amount equal to $1,000,000, which amount is
inclusive of all of Key's Expenses.
(d) Columbus agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(f) because this Agreement and the Merger shall fail to
receive the requisite vote for approval and adoption by the stockholders of
Columbus at the Columbus Stockholders Meeting and at the time of such
meeting there shall not exist a Competing Transaction; or
(ii) Section 8.01(i) because Arthur Andersen LLP would not deliver its
written opinion updated to the date of the Columbus Stockholders Meeting
opining that the Merger Consideration is fair from a financial point of
view as of such date and at such time there shall not exist a Competing
Transaction;
then Columbus shall pay to Key an amount equal to Key's Expenses.
(e) Key agrees that if this Agreement is terminated pursuant to Section
8.01(c) and such termination is the result of a willful breach of any
representation, warranty, covenant or agreement of Key contained herein, then
Key shall pay to Columbus an amount equal to $1,000,000, which amount is
inclusive of all of Columbus' Expenses.
(f) Any payment required to be made pursuant to Section 8.05(c) or (d) of
this Agreement shall be made as promptly as practicable but not later than ten
business days after termination of this Agreement, and shall be made by wire
transfer of immediately available funds to an account designated by the
recipient, except that any payment to be made as the result of an event
described in Section 8.05(c)(i) shall be made as promptly as practicable but
not later than ten business days after the occurrence of the Business
Combination or the execution of the definitive agreement providing for a
Business Combination.
(g) For purposes of this Section 8.05, the term "Business Combination" means
(i) a merger, consolidation, share exchange, business combination or similar
transaction involving Columbus, (ii) a sale, lease, exchange, transfer or
other disposition of 20% or more of the assets of Columbus and its
subsidiaries, taken as a whole, in a single transaction or a series of
transactions, or (iii) the acquisition, by a person (other than Key or any
affiliate thereof) or group (as such term is defined under Section 13(d) of
the Exchange Act and the rules and regulations thereunder) of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of 20% or more of
the Columbus Common Stock whether by tender or exchange offer or otherwise.
ARTICLE IX
General Provisions
Section 9.01. Effectiveness of Representations, Warranties and Agreements.
(a) Except as set forth in Section 9.01(b) of this Agreement, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party
or any of their officers, directors, representatives or agents, whether prior
to or after the execution of this Agreement.
A-43
<PAGE>
(b) The representations, warranties and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to Article VIII, except that the agreements set forth in Articles I
and II and IX and Sections 6.07 and 6.09 shall survive the Effective Time and
those set forth in Sections 5.04(d), 8.02 and 8.05 and Article IX hereof shall
survive termination. Nothing herein shall be construed to cause the
Confidentiality Agreements to terminate upon the termination of this Agreement
pursuant to Article VIII.
Section 9.02. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly
given upon receipt, if delivered personally, mailed by registered or certified
mail (postage prepaid, return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be
specified by like changes of address) or sent by electronic transmission to
the telecopier number specified below:
(a) If to any of the Key Companies, to:
Key Production Company, Inc.
707 Seventeenth Street
Suite 3300
Denver, Colorado 80202-3404
Attention: Monroe W. Robertson
Telecopier No.: (303) 295-3494
with a copy to:
Holme Roberts & Owen LLP
1700 Lincoln Street, Suite 4100
Denver, Colorado 80203
Attention: Nick Nimmo
Telecopier No.: (303) 866-0200
(b) If to Columbus, to:
1660 Lincoln St., Suite 2400
Denver, CO 80264
Attention: President
Telecopier No.: (303) 831-0135
with a copy to:
Sherman & Howard L.L.C.
633 17th Street, Suite 3000
Denver, Colorado 80202
Attention: James F. Wood
Telecopier No.: (303) 298-0940
Section 9.03. Certain Definitions. For the purposes of this Agreement, the
term:
(a) "affiliate" means a person that directly or indirectly, through one
or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
(b) a person shall be deemed a "beneficial owner" of or to have
"beneficial ownership" of Columbus Common Stock or Key Common Stock, as the
case may be, in accordance with the interpretation of the term "beneficial
ownership" as defined in Rule 13d-3 under the Exchange Act, as in effect on
the date hereof; provided that a person shall be deemed to be the
beneficial owner of, and to have beneficial ownership of, Columbus Common
Stock or Key Common Stock, as the case may be, that such person or any
affiliate of such person has the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise.
A-44
<PAGE>
(c) "business day" means any day other than a day on which banks in the
State of New York are authorized or obligated to be closed;
(d) "control" (including the terms "controlled," "controlled by" and
"under common control with") means the possession, directly or indirectly
or as trustee or executor, of the power to direct or cause the direction of
the management or policies of a person, whether through the ownership of
stock or as trustee or executor, by contract or credit arrangement or
otherwise;
(e) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of Columbus or Key, as the case may be,
has actual knowledge of such matter, and, with respect to Section 3.14, if
Michael M. Logan has actual knowledge of such matter;
(f) "person" means an individual, corporation, partnership, association,
trust, unincorporated organization, other entity or group (as defined in
Section 13(d) of the Exchange Act);
(g) "Significant Subsidiary" means any subsidiary of Columbus or Key, as
the case may be, that would constitute a Significant Subsidiary of such
party within the meaning of Rule 1-02 of Regulation S-X of the SEC; and
(h) "subsidiary" or "subsidiaries" of Columbus, Key, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which Columbus, Key, the Surviving
Corporation or any such other person, as the case may be (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, 50% or more of the stock or other equity interests the holders
of which are generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other legal
entity.
Section 9.04. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Section references herein are, unless the
context otherwise requires, references to sections of this Agreement.
Section 9.05. Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are
fulfilled to the extent possible.
Section 9.06. Entire Agreement. This Agreement (together with the Exhibits,
the Columbus Disclosure Schedule and the Key Disclosure Schedule) and the
Confidentiality Agreements constitute the entire agreement of the parties, and
supersede all prior agreements and undertakings, both written and oral, among
the parties or between any of them, with respect to the subject matter hereof.
Section 9.07. Assignment. This Agreement shall not be assigned by operation
of law or otherwise.
Section 9.08. Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied (other than as contemplated by Section 6.07 and
Section 6.09), is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
Section 9.09. Specific Performance. The parties hereby acknowledge and agree
that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
A-45
<PAGE>
Section 9.10. Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude
other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive
to, and not exclusive of, any rights or remedies otherwise available.
Section 9.11. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of law.
Section 9.12. Counterparts. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
In Witness Whereof, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
Key Production Company, Inc.
/s/ Monroe W. Robertson
By:__________________________________
Monroe W. Robertson
President and Chief Operating
Officer
Key Acquisition Two, Inc.
/s/ Monroe W. Robertson
By:__________________________________
Monroe W. Robertson
President
Columbus Energy Corp.
/s/ Harry A. Trueblood, Jr.
By:__________________________________
Harry A. Trueblood, Jr.,
Chairman of the Board, President,
and Chief Executive Officer
A-46
<PAGE>
ANNEX B
[ARTHUR ANDERSEN LETTERHEAD GOES HERE]
August 28, 2000
Board of Directors
Columbus Energy Corp.
1660 Lincoln Street, Suite 2400
Denver, Colorado 80264
Members of the Board:
You have asked us to advise you with respect to the fairness from a
financial point of view to the stockholders of Columbus Energy Corp. (the
"Company") of the Exchange Ratio pursuant to the terms of the Merger
Agreement, dated as of August 28, 2000 (the "Merger Agreement"), among the
Company and Key Production Company, Inc. (the "Acquiror"). The Merger, as
proposed, generally provides for the Company's stock to be converted into the
right to receive 0.355 shares of Acquiror common stock.
In connection with our analysis, we have been furnished certain documents
and other information concerning the Company and the Acquiror as we requested.
We have performed such due diligence, studies, analyses and inquiries as we
considered appropriate. Among other items we have considered, we have:
1) read certain publicly available business and financial information
relating to the Company and the Acquiror for recent years and interim
periods to date;
2) read the Company's and Acquiror's internally prepared two-year
Financial Forecasts (2000-2001), prepared by management of the Company
and Acquiror;
3) read Acquiror's internally prepared reserve report dated July 1, 2000
and the Company's reserve report dated July 1, 2000 as prepared by
outside petroleum engineering consultants retained by the Company;
4) considered certain financial and stock market data of the Company and
Acquiror and compared that data with similar data for certain other
companies, the securities of which are publicly traded, which we
believe may be similar or comparable to the Company and Acquiror;
5) considered the financial terms and related stock market data of certain
recent acquisition or business combination transactions in the oil and
gas industry;
6) compared the estimated net asset value of the Company and Acquiror
based on estimated values of certain relevant assets and liabilities;
7) considered the Company and Acquiror on a pro forma, combined basis in
order to estimate accretion to earnings and cash flow per share, and
the effects of general and administrative savings and a change in
accounting method (depreciation);
8) compared certain operational and financial contributions of the Company
and Acquiror to a combined entity;
9) held meetings and discussions with management, senior personnel to
discuss the business operations, assets, historical financial results
and future prospects of the Company and Acquiror; and
10) conducted such other studies, analysis, inquiries and investigations,
as we deemed appropriate.
B-1
<PAGE>
In our analysis and in formulating our opinion, we have assumed and relied
upon the accuracy and completeness of all the financial and other information
provided to us or publicly available, and we have not assumed any
responsibility for the independent verification of such information. We have
further relied upon the assurances of management of the Company and the
Acquiror that they are unaware of any facts that would make the information
provided to us incomplete or misleading in any respect. We have assumed that
the financial forecasts and projections provided to us by the Company and
Acquiror were prepared in good faith and on basis reflecting the best
currently available judgments and estimates of the Company's management. In
addition, we have not conducted a physical inspection of the properties or
facilities of the Company or Acquiror and have not made or obtained an
independent valuation or appraisal of the assets or liabilities of the Company
or Acquiror. We express no view whatever as to the federal, state or local tax
consequences of the Merger.
Our services to the Company in connection with the Merger have been
comprised solely of financial advisory services and not accounting, audit or
tax services. Without limiting the foregoing, our services with respect to the
Merger do not constitute, nor should they be construed to constitute in any
way, a review or audit of or any other procedures with respect to any
financial information nor should such services be relied upon by any person to
disclose weaknesses in internal controls, financial statement errors or
irregularities, or illegal acts or omissions of any person affiliated with the
Merger. Our opinion is necessarily based on economic and market conditions and
other circumstances as they exist and can be evaluated by us on the date
hereof. We shall have no obligation to update this Opinion unless requested by
you in writing to do so and expressly disclaim any responsibility to do so in
the absence of any such request. Our opinion does not address nor shall it be
construed to address the underlying business decision to effect the Merger.
We have acted as financial advisor to the Company in connection with the
proposed Merger and will receive a fee for such services on the basis
described in our letter dated February 22, 2000. We have performed various
auditing, accounting and tax services for the Company and/or Acquiror in the
past and have received customary fees for the rendering of such services. We
currently provide various auditing, accounting and tax services for Acquiror.
This letter does not constitute a recommendation to any stockholder with
respect to whether to vote in favor of the Merger or take any other action in
connection with the Merger or otherwise, and should not be relied upon by any
stockholder as such. We are not expressing any view as to the price or trading
range of which the shares to be issued in connection with the Merger may be
sold or traded.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof
the Exchange Ratio pursuant to the Merger Agreement is fair from a financial
point of view to the stockholders of the Company.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
B-2
<PAGE>
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ANNEX C
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
November 30, 1999 001-9872
----------------
COLUMBUS ENERGY CORP.
(Exact name of Registrant as specified in its Charter)
COLORADO 84-0891713
(State of incorporation) (I.R.S. Employer Identification No.)
1660 Lincoln Street 80264
Denver, Colorado (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code:
(303) 861-5252
Securities registered pursuant to
Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each Exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, ($.20 par value) American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 2000 is $16,848,000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of January 31, 2000.
<TABLE>
<CAPTION>
Outstanding at
Class January 31, 2000
----- ----------------
<S> <C>
Common Stock, ($.20 par value)................................. 3,762,374 shares
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Columbus Energy Corp. definitive proxy statement to be filed no later than
120 days after the end of the fiscal year covered by this report, is
incorporated by reference into Part III.
-------------------------------------------------------------------------------
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<PAGE>
ANNUAL REPORT (S.E.C. FORM 10-K)
INDEX
Securities and Exchange Commission
Item Number and Description
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Business.......................................................... 3
Item 2. Properties--Oil and Gas Operations................................ 4
Item 3. Legal Proceedings................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.......................................................... 17
Item 6. Selected Financial Data.......................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk........ 29
Item 8. Financial Statements and Supplementary Data....................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 29
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 30
Item 11. Executive Compensation........................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 30
Item 13. Certain Relationships and Related Transactions................... 30
PART IV AND SIGNATURES
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 31
Signatures............................................................ 55
</TABLE>
C-2
<PAGE>
PART I
Item 1. BUSINESS
Columbus Energy Corp. ("Columbus") was incorporated under the laws of the
State of Colorado on October 7, 1982. Columbus engages in the production and
sale of crude oil, condensate and natural gas, as well as the acquisition and
development of leaseholds and other interests in oil and gas properties, and
also acts as manager and operator of oil and gas properties for itself and
others. It also engages in the business of compression, transmission and
marketing of natural gas through its wholly-owned subsidiary, Columbus Gas
Services, Inc. ("CGSI"), a Delaware corporation. On September 1, 1998 Columbus
formed a Texas partnership named Columbus Energy, L.P. and is its general
partner. The partnership's limited partner is Columbus Texas, Inc., a Nevada
corporation, which is a wholly-owned subsidiary of Columbus. All of the
Company's oil and gas properties in Texas were transferred to the partnership
effective September 1, 1998. Columbus remains the operator of the properties.
Prior to February 1995, CEC Resources Ltd. ("Resources"), an Alberta, Canada
corporation, was also a wholly-owned subsidiary but became a separate
publicly-owned entity when it was spun-off via a rights offering by Columbus
to its shareholders. The term "Company" or "EGY" as used herein includes
Columbus and its subsidiaries.
The Company currently has 31 employees. The current technical staff,
including management, is comprised of four petroleum engineers and one
landman. The administrative staff provides support required for accounting and
data processing including disbursement of monthly oil and gas revenues, joint
interest billing functions, and accounts payable.
During 1998 Columbus declared a 10% stock dividend distributed March 9, 1998
to shareholders of record as of February 23, 1998. During 1997, Columbus
declared a five-for-four stock split for shareholders of record as of May 27
which was distributed on June 16, 1997 and was issued from authorized but
unissued shares. The 1998 stock dividend and two prior 10% stock dividends in
1994 and 1995 were paid from treasury shares reacquired from the market and
therefore reduced cumulative retained earnings and increased paid-in capital.
No cash dividends have been paid since the Company became publicly-owned in
1988.
From shortly after its incorporation until January 1988, the Company was a
wholly-owned or majority-owned subsidiary of Consolidated Oil & Gas, Inc.
("Consolidated") after which time it became a separate publicly-owned entity
as a result of a spin-off via a rights offering by Consolidated to its
shareholders.
C-3
<PAGE>
Item 2. PROPERTIES
Oil and Gas Properties
Reserves
The estimated reserve amounts and future net revenues were determined by
outside consulting petroleum engineers. The reserve tables presented below
show total proved reserves and changes in proved reserves owned by Columbus
for the three years ended November 30, 1999, 1998 and 1997.
PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
Oil Gas Oil Gas Oil Gas
MBbl Mmcf MBbl Mmcf MBbl Mmcf
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year....... 960 22,463 1,805 18,520 1,643 18,665
Revisions of previous
estimates.............. 399 (1,405) (713) 767 (127) 226
Purchase of reserves.... -- -- 1 320 -- --
Extensions and
discoveries............ 68 726 88 6,355 538 5,066
Production.............. (169) (3,201) (221) (3,499) (249) (3,370)
Sale of reserves........ -- -- -- -- -- (2,067)
----- ------ ----- ------ ----- ------
End of year............. 1,258 18,583 960 22,463 1,805 18,520
===== ====== ===== ====== ===== ======
Proved developed reserves:
Beginning of year....... 762 20,674 1,333 16,122 1,211 15,758
===== ====== ===== ====== ===== ======
End of year............. 925 14,748 762 20,674 1,333 16,122
===== ====== ===== ====== ===== ======
</TABLE>
Proved Developed Producing Reserves
As of November 30, 1999, Columbus has approximately 815,000 barrels of
proved developed producing oil and condensate in the United States most of
which are attributable to primary recovery operations. Producing oil
properties in Montana and Texas account for over 98%, and Texas alone 77%, of
the reserves in the proved developed producing category.
The gas producing properties owned by Columbus are located in Texas, North
Dakota, Louisiana, Oklahoma and Montana and contain 11.0 billion cubic feet of
proved developed producing gas reserves. Texas properties account for 95% of
these reserves.
The reserves in this category can be materially affected positively or
negatively by either currently prevailing or future prices because they
determine the economic lives of the producing wells.
Proved Developed Non-Producing Reserves
The reserves in this category are located in the states of Texas, Louisiana
and Montana. Generally, these are reserves behind the casing in existing wells
with recompletion required before commencement of production or else are in
wells being completed and/or completed but awaiting pipeline connections at
year end.
Columbus' non-producing reserves equal 110,000 barrels of oil, or 9% of its
total proved oil reserves, and 3.7 billion cubic feet of natural gas, or 20%
of its total proved natural gas reserves.
C-4
<PAGE>
Proved Undeveloped Reserves
Columbus' proved undeveloped reserves were approximately 333,000 barrels and
3.8 billion cubic feet of natural gas. Almost all of the oil reserves in this
category are in Montana. All of the proved undeveloped gas reserves are
attributable to undrilled locations offsetting production in Webb, Zapata,
Harris and Jim Hogg Counties, Texas and Montana.
These reserves are expected to either be developed during 2000 or in future
when there is some stabilization of oil prices at levels which will yield a
satisfactory rate of return on investment without fear of another roller
coaster price fallout.
Standardized Measure
The schedule of Standardized Measure of Discounted Future Net Cash Flows
(the "Standardized Measure") is presented below pursuant to the disclosure
requirements of the Securities and Exchange Commission ("SEC") and Statement
of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas
Producing Activities" (SFAS-69) for such information. Future cash flows are
calculated using year-end oil and gas prices and operating expenses, and are
discounted using a 10% discount factor.
Standardized Measure of Discounted Future Net Cash Flows
Relating to Estimated Proved Oil and Gas Reserves
(thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Future oil and gas revenues..................... $ 74,284 $ 53,271 $ 79,381
Future cost:
Production cost............................... (24,031) (13,688) (21,856)
Development cost.............................. (4,811) (2,638) (5,401)
Future income taxes............................. (10,504) (6,325) (11,531)
-------- -------- --------
Future net cash flows........................... 34,938 30,620 40,593
Discount at 10%................................. (11,229) (8,691) (10,422)
-------- -------- --------
Standardized measure of discounted future net
cash flows..................................... $ 23,709 $ 21,929 $ 30,171
======== ======== ========
</TABLE>
C-5
<PAGE>
Change in Standardized Measure of Discounted Future Net Cash
Flows from Estimated Proved Oil and Gas Reserves
For the Three Years Ended November 30, 1999
(thousands of dollars)
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year........................ $21,929 $ 30,171 $ 38,160
Sale of oil and gas net of production costs..... (7,081) (7,397) (10,708)
Net changes in prices and production costs...... 9,801 (12,034) (10,502)
Purchase of reserves............................ -- 310 --
Sale of reserves................................ -- -- (1.320)
Extensions, discoveries and other additions..... 1,150 6,896 9,660
Revisions to previous estimates................. 1,346 (3,406) (710)
Previously estimated development costs incurred
during the period.............................. 268 586 1,089
Changes in development costs.................... (1,945) 2,066 229
Accretion of discount........................... 2,599 3,730 4,653
Other........................................... (1,951) (2,066) (1,620)
Change in future income taxes................... (2,407) 3,073 1,240
------- -------- --------
Net increase (decrease)........................... 1,780 (8,242) (7,989)
------- -------- --------
Balance, end of year.............................. $23,709 $ 21,929 $ 30,171
======= ======== ========
</TABLE>
The standardized measure is intended to provide a standard of comparable
measurement of the Company's estimated proved oil and gas reserves based on
economic and operating conditions existing as of November 30, 1999, 1998 and
1997. Pursuant to SFAS-69, the future oil and gas revenues are calculated by
applying to the proved oil and gas reserves the oil and gas prices at November
30 of each year relating to such reserves. Future price changes are considered
only to the extent provided by contractual arrangements in existence at year
end. Production and development costs are based upon costs at each year end.
Future income taxes are computed by applying statutory tax rates as of year
end with recognition of tax basis, net operating loss carryforwards, depletion
carryforwards, and investment tax credit carryforwards as of that date and
relating to the proved properties. Discounted amounts are based on a 10%
annual discount rate. Changes in the demand for oil and gas, price changes and
other factors make such estimates inherently imprecise and subject to
revision.
Discounted future net cash flows before income taxes for reserves were
$30,173,000 in 1999, $25,986,000 in 1998, and $37,301,000 in 1997. As required
by SFAS-69, the future tax computation appearing in the above table does not
consider the Company's annual interest expenses and general and administrative
expenses nor future expenditures for intangible drilling costs. Because of
these factors, the tax provisions are not truly representative of the expected
lower future tax expense to the Company so long as it remains an active
operating company.
The reserve and standardized measure tables prescribed by the SEC and
presented above are prepared on the basis of a weighted average price for all
properties as of each year end. At November 30, 1999 the crude oil price
(including natural gas liquids) was $23.48 per barrel and the natural gas
price was $2.41 per thousand cubic feet. The SEC requires that this
computation utilize those year end prices and expenses which are then held
constant, except for contractual escalations, over the life of the property.
The calculation of discounted future cash flows can be materially affected
by being compelled to use only those prices that happen to be effective on
November 30 each year (Columbus' fiscal year end) because of price volatility.
Mandatory usage of prices which happen to prevail on a single date can have an
inordinate influence on year-end reserves as well as on the resulting year to
year change that a company reports for discounted future net cash flows
determined using this standardized measure calculation. Management has long
advocated using a
C-6
<PAGE>
weighted average of prices actually received throughout the year to make this
standardized measure calculation less susceptible to the impact of wide
monthly fluctuations in prices which have occurred so frequently in recent
years. Even using weighted average annual prices still may or may not be very
indicative of future cash flows because average prices may vary widely in
future fiscal years.
Both 1999 and 1998 fiscal years are good examples of why an average price
would be preferable in management's opinion since year end prices for natural
gas and crude oil were significantly different from the average annual prices
received.
Outside Consultant's Report
An outside consulting firm, Reed Ferrill & Associates, was retained for the
purpose of preparing a report covering the reserves of the Company's
properties and a future production forecast using constant prices as of
November 30, 1999, 1998 and 1997. The reports for 1998 and 1997 on the
reserves of the properties located in the Berry Cox field in Texas were
prepared by Huddleston & Co., Inc., another outside consulting firm. These
reports are prepared each year as required by the Company's bank line of
credit.
Production
Columbus' net U.S. oil and gas production for each of the past three fiscal
years is shown on the following table:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Oil-barrels............................................. 169,000 221,000 249,000
Gas-Mmcf................................................ 3,201 3,499 3,370
</TABLE>
During the fiscal year 1999, Columbus filed Form EIA23 with the Energy
Information Agency which required disclosure of oil and natural gas reserve
data for wells operated by Columbus. The reserve data reported was for
calendar year 1998. This data was reported on a gross operated basis inclusive
of royalty interest and, therefore, does not compare with Columbus' net
reserves reported for 1998.
Average price and cost per unit of production for the past three fiscal
years are as follows:
<TABLE>
<CAPTION>
Fiscal Year
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Average sales price:
per barrel of oil....................................... $16.63 $13.22 $19.62
per Mcf of gas.......................................... $ 2.28 $ 2.18 $ 2.65
Average production cost per equivalent barrel............. $ 4.18 $ 4.00 $ 3.83
</TABLE>
Natural gas is converted to oil at the ratio of six Mcf of natural gas to
one barrel of oil. Production costs for fiscal years 1999, 1998 and 1997
include production taxes.
Developed Properties
A summary of the gross and net interest in producing wells and gross and net
interest in producing acres is shown in the following table:
<TABLE>
<CAPTION>
November 30, 1999 Gross Net
----------------- ---------- ---------
Oil Gas Oil Gas
--- ------ --- -----
<S> <C> <C> <C> <C>
Wells...................................................... 80 169 21 21
Acres...................................................... 33,788 9,845
</TABLE>
C-7
<PAGE>
Undeveloped Properties
The following table sets forth the Company's ownership in undeveloped
properties:
<TABLE>
<CAPTION>
November 30, 1999 Gross Acres Net Acres
----------------- ----------- ---------
<S> <C> <C>
Louisiana................................................. 16,047 1,561
Montana................................................... 11,223 6,759
New Mexico................................................ 840 630
North Dakota.............................................. 1,659 277
Oklahoma.................................................. 1,280 640
Texas..................................................... 7,460 3,682
------ ------
Total Undeveloped Properties............................ 38,509 13,549
====== ======
</TABLE>
Drilling Activities
The Company engages in exploratory and development drilling in association
with third parties, typically other oil companies. Actual drilling operations
are not conducted by the Company and are usually carried out by third party
drilling contractors, but the Company may act as operator of the projects. The
following table gives information regarding the Company's drilling activity in
its last three fiscal years.
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
EXPLORATORY
Wells Drilled:
Oil.......................................... 2 1.34 2 1.10 2 1.45
Gas.......................................... 1 .54 3 1.69 1 .37
Dry.......................................... 4 2.38 2 .92 1 .34
DEVELOPMENT
Wells Drilled:
Oil.......................................... 0 0 1 .67 4 1.91
Gas.......................................... 7 1.63 8 1.06 18 2.71
Dry.......................................... 2 .15 4 1.23 3 .65
TOTAL
Wells Drilled:
Oil.......................................... 2 1.34 3 1.77 6 3.36
Gas.......................................... 8 2.17 11 2.75 19 3.08
Dry.......................................... 6 2.53 6 2.15 4 .99
--- ---- --- ---- --- ----
Total...................................... 16 6.04 20 6.67 29 7.43
=== ==== === ==== === ====
</TABLE>
Current Activities
During the fourth quarter of fiscal 1999 and subsequent thereto, there was a
flurry of drilling and completion activity involving the El Squared prospect
in Bee County. This was primarily related to the impending expiration of the
primary term of the Fred Long lease which represented over 40% of the
approximate 5,700 acres of leaseholds in that prospect block. This lease could
be extended over the primary term with two alternatives available. One of
these required payment to the royalty owner of approximately $500,000 of lease
bonus for a two-year lease extension agreement which also required
modifications to the base lease with some fairly significant changes in the
size of and the manner in which drilling units could be created or pooled. The
other alternative available was to have drilling operations under way over the
primary term of the lease or have a well completing within 60 days of
expiration of the primary term of the lease, or both.
C-8
<PAGE>
Columbus, as operator for its own account as well as on behalf of
participants, determined to have both circumstances in existence by
essentially utilizing the bonus money equivalent to commence drilling a
deviated wellbore toward an upper Massive objective after cutting a window in
the casing in the Long #3 and be drilling over the January 7, 2000 lease
expiration date. Fortunately, there was already a completion attempt under way
at the Long #4 which met the within 60 days of the lease expiration
requirement. During the last week in December 1999 and early in January of
2000, management initially tried to establish commercial production from a
lower Massive section at approximately 13,000 feet as well as in a stray sand
in the Massive silt interval at approximately 12,300 feet. It was assumed that
if those zones proved to be unsuccessful, the upper Massive Sand at
approximately 12,000 feet, which had an excellent electric log in that
interval, could be completed as a gas producer. However, a continuous drilling
program would be necessary with the commencement of a new well every 60 days
following completion of a preceding well in order to keep the lease in force.
This provision was expected to provide a sufficient period of time to allow
the group to develop the anticipated reserves in fault block "B" in the upper
and middle Wilcox Sands. Such a program would not maintain the deep Wilcox
Reagan Sands under lease without drilling a wellbore to that depth, but the
group was unwilling to take that route because of the expense and the risk
associated therewith. Based on 3-D seismic interpretation, only one potential
Reagan structure was being given up under the Long lease and those rights were
owned under the remaining acreage.
Management was able to meet the critical path logistics necessary to keep
the lease in force but then had to suffer severe disappointment from the
results of those extraordinary efforts. As explained in a Special Interim
Report to Shareholders on January 14, 2000, the lower Massive zone was fairly
tight and yielded only about 100,000 cubic feet per day flow rate although it
exhibited an extremely high shut-in bottom hole pressure of approximately
10,000 psig. Management was not confident that a fracture stimulation of that
sand would yield a completion with sufficient flow rates to justify postponing
completion of the upper Massive zone and leaving it shut-in behind
unperforated casing. A dual completion was not practical. Furthermore, a small
amount of water with limited gas had been added from the zone at 12,300 feet
after being perforated. This effectively eliminated any further consideration
of the basal sand being fracture stimulated without encountering considerable
wellbore logistical problems to isolate that lower zone from the 12,300-foot
zone.
As a consequence, completion efforts were moved uphole where we fully
expected an excellent flow of gas from the upper Massive zone. This belief was
supported by good sand in the mud samples along with a reasonable show of gas
plus corroborating electric logs of the interval. The latter had been
interpreted by various service company experts, our consultants, and Columbus'
own personnel as being gas productive with a reasonably high flow rate
anticipated. This confidence was further supported by log calculations which
were made using available known resistivities from water samples obtained from
an upper Massive Sand interval in the initial deviated hole drilled from the
Long #3 which had flowed gas and water. It was over 300 feet down structure
from this Long #4 sand but was in a separate fault block. To the absolute
astonishment of all concerned, this upper Massive Sand inexplicably yielded
formation water with only a very limited amount of accompanying gas. In fact,
a significant hourly rate was swabbed from 25 feet of perforations from within
a gross sand interval of 90 feet so the zone was permeable but definitely wet.
To date, no one has a solid explanation for these results. Admittedly, the
water in this interval was a bit fresher and this isolated fault block was
probably completely sealed, but this is not a satisfactory explanation. So
confident that commercial gas production would be found by every person
involved, the Company had already installed a gathering line in order to
connect the well and commence sales immediately. Unfortunately, surprises such
as this have plagued explorationists since the first U.S. commercial oil
discovery in 1859. It is a part of the business not understood by most people
outside of the industry and is painful to those within.
As soon as it was established that the upper Massive Sand was water
productive, management also shut down drilling operations at the Long #3
sidetrack hole. However, by the time this could be done, the wellbore was
already at a measured depth of 10,800 feet and was over 150 feet away from the
original wellbore and at a 20 degree angle. Management did weigh the
possibility of continuing drilling operations at the Long #3 until it reached
its objective since it would have required only a few days and because this
sand would be in a different fault block. To support the notion that this
might make a difference, the sand in the initial Long #3 deviated
C-9
<PAGE>
wellbore had yielded considerably more gas than the Long #4 despite being over
300 feet structurally lower. However, the likelihood of finding a water free
completion updip in the Long #3 fault block carried too much risk. It was
believed those same funds could be used to further develop additional gas
reserves from the Slick Sands which are known producers in this "B" fault
block area.
Because of the Long #4 results, two other identified upper Massive locations
were scrapped and it was determined to farmout about 1,000 acres of leaseholds
within the "A" fault block area on the east side of the El Squared acreage
block. This farmout will require a test of a sizable Massive structure
identified by 3-D seismic which will be followed by a working interest back-in
after payout to Columbus, et al. In addition, there are at least three
Slick/Luling Sand upper Wilcox structures previously identified on the El
Squared acreage which can be drilled during fiscal 2000. While these
structures are not quite so romantic as Massive prospects, they do offer
potential reserves at each structure of 5 to 10 billion cubic feet plus
associated condensate with considerably lower costs to develop.
As fiscal 1999 came to a close, Columbus had no rigs actively drilling at
any of its other key areas as the focus and funds had been dedicated to El
Squared activity. There were two wells in the Laredo area that had been
drilled which for tax reasons were awaiting completion until after January 1,
2000. These were being carried as "in progress" at year end. A few proved
undeveloped locations have been identified for drilling in the Laredo area
during fiscal 2000 and more should be forthcoming.
A more detailed description related to recent activities as segregated by
Columbus' primary areas of operations follows:
South Texas--Laredo Area
This continues to be the most important operational area where the Company
serves as operator of over 100 natural gas wells in various fields that extend
from the southern city limits of Laredo to the B. R. Cox field in Jim Hogg
County, approximately 80 miles to the south. In this area Columbus owns
working interests ranging from 1% to 53% in wells which it operates and less
than 10% in the relatively few wells where it does not.
For the past several years in the area near Laredo, Columbus has, for a good
portion of each year, had at least one rig drilling infill, extension, and new
fault block locations which had been identified by a 3-D seismic program
conducted in 1994-95. During fiscal 1999, only five (1.01 net) gas wells were
drilled and completed successfully. In addition, one (.06 net) well was
drilled which resulted in a dry hole. The total number of wells was somewhat
reduced from past drilling programs of 10 wells in fiscal 1998, 18 in fiscal
1997, and 12 in fiscal 1996.
In the B. R. Cox field, Columbus continued to postpone all workovers,
recompletions, or new drilling because of the failure of the largest working
interest owner's willingness or capability to advance their share of the funds
required to do the work. Even worse, they would not agree to go non-consent
and suffer penalties provided for in the Operating Agreement so we have been
stalemated for years. Continued frustration with this "do nothing" stance
appears about to be alleviated as that company recently agreed to sell the
balance of its properties in this field to another operator. At least now the
working interest holders should be able to jointly perform some much needed
workovers to reestablish commercial production at several shut-in wells. Also,
the group will consider drilling at least one or more wells during fiscal
2000.
El Squared Prospect--Bee County, Texas
This prospect area is one for which recent drilling activities were
discussed in detail above and had previously been described in earlier reports
and news releases as one of the most exciting areas for potential reserve
accumulation since Columbus' Sralla Road discovery east of Houston in 1990.
Currently, leaseholds approximate 5,700 acres in size of which all have been
shot with 3-D seismic and Columbus currently owns a 55% working interest (42%
NRI) while three of its drilling associates own working interests which total
20%.
C-10
<PAGE>
An energy company which originated the prospect owns the remaining 25% and its
principal owner is also the mineral owner of the prospect's largest individual
lease which is almost 2,500 acres in size. As indicated, there was a flurry of
calendar year end activity because its expiration date was January 7, 2000.
Two successful Slick Sand wells have been completed thereon with each of the
wells being inside 320-acre units which overlap so approximately 450 plus
acres out of the almost 2,500 acres will be held by production. The balance
will probably be allowed to expire because of the lack of a continuous
drilling program. Most of this leasehold cost was wiped out by exploratory
expense charges in fiscal 1999 as it appears the Massive zones of the Wilcox
have pretty much been condemned under the Long lease. Shallower sand
development location(s) are within these producing units for the most part.
Only one working interest well (0.54 net), the Long #2, was actually
completed during fiscal 1999 as lower Slick producer while the other two wells
were in an "in progress" status at year end. These were the Long #3 (0.75 net
WI) and the Long #4 (0.90 net WI) which were subsequently determined to be
unsuccessful exploratory wells as previously discussed following recovery of
water in the upper Massive in the Long #4 and cessation of drilling at the
Long #3. These cased wellbores are being kept intact for the present in case
they might be usable for some other purpose.
Several leases adjacent to the Long lease have now had their attractiveness
eliminated by the Massive Sand being condemned in this "B" fault block. Some
of those remaining leases have possibilities of being productive in the
Slick/Luling zones of the upper Wilcox and three drillable structures have
been identified thus far on remaining acreage in the prospect.
As mentioned in Current Activities, the proposed farmout which is about to
be offered to industry is a separate leasehold block of 1,021 acres. The
farmee would acquire 100% of this acreage and related seismic for $160,000
which approximates the actual cost thereof. An initial test well will be
required to be drilled to a depth of 12,000 feet to test an upper Massive sand
which underlies the "A" fault block and a 352-acre drilling unit has been
defined for that purpose. Also, a lower Massive sand structure whose apex lies
to the west of this initial test well site is essentially located entirely
within this 1,021-acre leasehold block should the farmee desire to drill
another wellbore at some future date. Such a test well is not a requirement
under the proposed farmout agreement. At such time as the farmee has recovered
all of its costs of drilling and completing the initial test well, Columbus,
et al, will back in for a 33 1/3% working interest in that drilling unit
assuming a successful completion. Because this wildcat location is in an
entirely separate fault block and a separate structure on the basinward side
of the "A" fault, it is unrelated to the Long #4. This test well will be the
second deep test ever to be drilled in this fault block and its structural
location is over 300 feet high to the prior well which was drilled in 1977.
That initial well had excellent shows of gas in a sand which appears to be the
upper Massive but that zone was never perforated and tested because the hole
was junked while trying to run production liner. It is expected this farmout
well will be drilled during the next few months assuming its terms can be
negotiated successfully early in fiscal 2000.
In addition to the previously planned tests during fiscal 2000 of untested
Slick/Luling structures on the remaining leaseholds which are still intact,
the structure on which the Long #1 and #2 wells have been completed will
require the drilling of a Long #5 wellbore in order to timely and adequately
drain the main Slick sand and the lower Slick sand reservoirs. This well site
should not only find those two reservoirs at structural positions of 30 feet
to 45 feet high to Long #1 but would permit the upper portion of the lower
Slick sand to be drained as it was faulted out in the Long #2. Also, the main
Slick sand that produced initially in the Long #1 was shut-off by a through
tubing bridge plug and needs to be returned to production very soon rather
than wait until upper Slick reserves have been depleted in the Long #1.
Particularly appealing is the fact the structurally favorable Long #5 location
should recover "chimney" gas reserves for that zone as well as the lower
Slick. Both producing zones would probably be produced through separate
strings of tubing in this single wellbore to facilitate workover operations
when required. A combination of the present worth value improvement of
accelerating recovery of the gas reserves related to both reservoirs plus
their higher structural locations that should recover reserves which might
otherwise be lost more than justifies the drilling of this Long #5 location.
It was previously proposed but
C-11
<PAGE>
then postponed because of the flurry of year end activity surrounding the
testing of the Massive structures on the Long lease.
Sralla Road Field Area--Harris County, Texas
During fiscal 1999, there was participation in two wells drilled on the
south end of this field. One of those wells was in the form of an overriding
royalty (0.0022 NRI) in a successful gas well drilled by another operator.
Because of the relatively minor amount of acreage that could be contributed to
form the 160-acre drilling unit and the wellbore would have to be
directionally drilled with no cinch completion, that acreage was farmed out
and an overriding royalty retained. A second well, the Johnson/Peace #1, was
drilled by that same operator at the southwesternmost end of the field. This
proved to be an expensive dry hole as unfortunately the operator attempted to
complete same. Columbus contributed its limited acreage owned to this 160-acre
drilling unit and fortunately participated for only a 0.086 net working
interest. This unit offset to the south Columbus' Jones #1 oil well discovery
that was announced in fiscal 1998. That well was placed on production flowing
200 barrels of oil per day in June 1999 after completion of a gas gathering
system through a densely populated area. Columbus owns 19% working interest in
the Jones #1 well and 5% of the gathering system. Apparently there is a cross
fault between the Jones #1 well and the Johnson/Peace #1 dry hole which
accounts for the latter being water bearing. This is the first indication of
water being present in the Jackson sand in the Sralla Road West Jackson sand
field and most probably signals the southwestern extremity of the field has
been found.
The Sralla Road Field area has been a very important asset to Columbus
throughout the last decade. This was primarily because of a relatively small,
but very prolific, Vicksburg oil field which generated the necessary cash flow
which allowed the Company to take risks in extending both the initial Jackson
sand field on the downthrown side of the "B" fault as well as on the upside
thereof. The very thin (3' to 6') sand thickness found in both Jackson fields
required the wells to be drilled on 160 acre spacing to make any economic
sense when the costs and risks involved were weighed. There was little room
for any dry holes or marginal wells to be drilled yet some were drilled as
these fields were being defined. However, a combination of increased gas
prices during the 1990's and the recent recovery of crude oil prices has
definitely improved the outlook for obtaining a decent rate of return on
recent investments during the coming years. Furthermore, without the initial
Jackson sand oil discovery having been completed in only four feet of sand at
the Davis Oil Unit #1 in 1988, the shallower Vicksburg oil discovery at the
offset Davis B-1 would never have been found. One must therefore consider the
overall return from the area from every source so the Jackson sand may claim
credit for that discovery. Overall, this area proved to be very satisfactory
from that standpoint and this field has been Columbus' primary source of field
level cash flow for the past ten years.
About 20 miles east of the Sralla Road field, one of the best gas wells in
which the Company owns an interest is located near the famous old Anahuac
field in Chambers County, Texas. This well, the Syphrett Heirs #1, was
discovered in July, 1997 and has sold around 100 million cubic feet of gas
each month since that completion in the Frio 16 sand and is expected to do so
for many years to come. Columbus originally owned a larger working interest
but as a result of certain "back-ins" that interest approximated about 26%
working interest in fiscal 1999. The most recent reserve review indicated that
remaining reserves yet to be recovered approximate 4.92 BCF so it is expected
that this well will yield a very high production rate for several more years.
Williston Basin Area
During the latter part of fiscal 1998 and the first half of fiscal 1999 this
mature area of operations suffered from crude oil prices that were so
ridiculously low that many of the wells which had been profitable had to be
shut down as they were essentially being operated for the benefit of royalty
owners and the state and local taxing authorities. They would not cover the
operating expenses primarily because of pump failures as well as the fact that
the principal producing horizons--the Ordivician Red River formation and the
Mississippian Mission Canyon formation--produce water with the crude oil
almost from the beginning of each well's productive life
C-12
<PAGE>
which becomes even a greater factor as the reservoirs approach the latter
stages of their economic life. During fiscal 1998, a sizeable reduction was
recognized for this area for both the proved producing and proved undeveloped
crude oil reserves with essentially all undeveloped locations being eliminated
as marginal or uneconomic. Also, the potential structures that had been
identified by a 3-D Seismic program were eliminated from further consideration
as warranting an exploratory test well. A general provision was made during
both 1998 and 1999 in the form of an impairment for undeveloped acreage that
probably would not justify a test before expiration of the primary term of the
lease.
When crude oil prices began to recover toward mid-year 1999, an attempt was
made to resume operations and all of the wells that had been shut-in. Not
unexpectedly, several of the wells showed a reduced productivity of oil as a
result of the shut-in period. In the instance of two Red River wells, the
water percentage had increased to 100% or to such a high percentage as to be
uneconomic. Fortunately, two of these wells, the Ullman #1 and the Young Heirs
#4, had porous zones in the shallower Duperow formation which offered promise
of being productive of commercial rates of oil and were successfully
recompleted in this uphole zone as oil discoveries. While the initial
production began at higher rates, both of these wells leveled off to about 50
barrels of oil per day and have settled into what is believed will be the long
slow decline which is customary with the various producing formations in this
deeper portion of the Williston Basin. Most of the wells the Company owns in
this area are at least 20 years old while several are over 30 years old and
still are producing from the original zone in which the well was completed.
Decline curve history of a majority of these reservoirs appears to settle at
less than 5% per year with ultimate well life depending more on the integrity
of the production casing against collapse opposite salt sections than on
depletion. Also, since there appears to be evidence of a limited water drive
in almost all of these fields. Although the production rates of these newly
completed discoveries in the Duperow are modest, Columbus owns a substantial
63.7% working interest in the Ullman #2 and a 70.3% working interest in the
Young Heirs #4 and their economic well life expectancy at this time could be
in the 20 year range barring unforeseen mechanical problems.
By the end of fiscal 1999, the price of crude oil had recovered to a high
enough level and for a sufficient length of time for some of the previously
dropped reserves for proved undeveloped locations to be restored. Also, the
economic well life of several wells was extended thereby adding to the proved
developed producing reserves for those wells which had produced during the two
years of low prices as well as for those which had successfully been placed
back on production because water production had not rendered them uneconomic
or had not been permanently abandoned or recompleted. If crude prices would
eventually stabilize in the $25 per barrel range, management would feel more
comfortable that a reasonable rate of return could be realized and the proved
undeveloped locations could then be drilled. There is sufficient available
forecasted cash flow in excess of preliminary budget for the coming year to
enable Columbus to add one or more Red River wells and/or several of the
shallower Mission Canyon locations.
Titles
The Company is confident that it has satisfactory title to its producing
properties which are held pursuant to leases from third parties and have been
examined on several occasions to determine their suitability to serve as
collateral for bank loans. Oil and gas interests are subject to customary
interest and burdens, including overriding royalties and operating agreements.
Titles to the Company's properties may also be subject to liens incident to
operating agreements and minor encumbrances, easements and restrictions.
As is customary in the oil and gas industry, the Company does not regularly
investigate titles to oil and gas leases when acquiring undeveloped acreage.
Title is typically examined before any drilling or development is undertaken
by checking the county and various governmental records to determine the
ownership of the land and the validity of the oil and gas leases on which
drilling is to take place. The methods of title examination adopted by the
Company are reasonably calculated, in the opinion of the Company, to insure
that production from its properties, if obtained, will be readily salable for
the account of the Company. As stated above, certain of the Company's
producing properties have been subject to independent title investigations as
a consequence of
C-13
<PAGE>
bank loans obtained and have been accepted for such purposes. Insofar as is
known to the Company, there is no material litigation pending or threatened
pertaining to its proved acreage.
The producing and non-producing acreages are subject to customary royalty
interests, liens for current taxes, and other burdens, none of which, in the
opinion of the Company, materially interfere with the use of or adversely
affect the value of such properties.
Competition, Marketing and Customers
Competition and Marketing. The oil and gas industry is highly competitive.
Major oil and gas companies, independent producers with public drilling and
production purchase programs and individual producers and operators are active
bidders for desirable oil and gas properties as well as for the equipment and
labor required to operate such properties. Many competitors have financial
resources, staffs and facilities substantially greater than those of the
Company. A ready market for the oil and gas production is, to a limited
extent, dependent upon the cost and availability of alternative fuels as well
as upon the level of consumer demand and domestic production of oil and gas;
the amount of importation of foreign oil and gas; the cost and proximity to
pipelines and other transportation facilities; the regulation of state and
federal authorities; and the cost of complying with applicable environmental
regulations.
All production of crude oil and condensate by the Company is sold to others
at field prices posted by the principal purchasers of crude oil in the areas
where the producing properties are located. In the Company's judgment,
termination of the arrangements under which such sales are made would not
adversely affect its ability to market oil and condensate at comparable
prices. During recent years, the posted prices were directly affected by the
fluctuations in the supply and price of imported crude oil as well as by
trading of oil futures.
A very limited amount of the natural gas produced by the Company is being
sold at the wellhead under long-term contracts. Following deregulation of
natural gas, excesses of domestic supply over demand, plus competition from
alternate fuels caused Columbus, through CGSI, to take a much more active role
in marketing its own gas along with gas owned by third parties.
Customers. Sales to four purchasers of crude oil and natural gas, which
amounted to more than 10% of the Company's combined revenues for the years
ended November 30, 1999, 1998 and 1997, are set forth in Note 3 to Notes to
the Consolidated Financial Statements. In the opinion of management, a loss of
a customer has not to date, and should not in the future, materially affect
the Company since the nature of the oil and gas industry is such that
alternative purchasers are normally available on very short notice.
Government Regulations
The development, production and sale of oil and gas is subject to various
federal, state and local governmental regulations. In general, regulatory
agencies are empowered to make and enforce regulations to prevent waste of oil
and gas, to protect the correlative rights and opportunities to produce oil
and gas between owners of a common reservoir, and to protect the environment.
Matters subject to regulation include, but are not limited to, discharge
permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, unitization and pooling of properties,
taxation and environmental protection. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas.
The Company believes that the environmental regulations, as presently in
effect, will not have a material effect upon its capital expenditures,
earnings or competitive position in the industry. Consequently, the Company
does not anticipate any material capital expenditures for environmental
control facilities for the current year or any succeeding year. No assurance
can be given as to the future capital expenditures which may be required for
compliance with environmental regulations as they may be adopted in future.
The Company believes, however, that it is reasonably likely that the trend in
environmental legislation and regulations will continue to be towards
C-14
<PAGE>
stricter standards. For instance, legislation previously considered in
Congress would amend the Resource Conservation and Recovery Act to reclassify
oil and gas production wastes as "hazardous waste," the effect of which would
be to further regulate the handling, transportation and disposal of such
waste. If similar legislation were to pass, it could have a significant
adverse impact on the operating costs of the Company, as well as the oil and
gas industry in general.
Operating Hazards
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations, and environmental hazards such as oil spills,
gas leaks, ruptures and discharge of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury and loss
of life, severe damage to and destruction of property, natural resources and
equipment, pollution and other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. The Company maintains insurance against some, but not all,
potential risks; however, there can be no assurance that such insurance will
be adequate to cover any losses or exposure for liability. Furthermore, the
Company cannot predict whether insurance will continue to be available at
premium levels that justify its purchase or whether insurance will be
available at all. Generally, the Company has elected to not obtain blow-out
insurance when drilling a well, except for deep high pressure wells or when
required such as within city limits.
Natural Gas Controls
The Federal Energy Regulatory Commission ("FERC") has issued several rules
which encourage sales of gas directly to end users and provides open access to
existing pipelines by producers and end users at the highest possible prices
that can be negotiated. All price controls were terminated as of January 1,
1993. On April 8, 1992, FERC issued Order No. 636 which has essentially
restructured the interstate gas transportation business. The stated purpose of
Order 636 was to improve the competitive structure of the pipeline industry
and maximize consumer benefits from the competitive wellhead gas market and to
assure that the services non-pipeline companies can obtain from pipelines is
comparable to the services pipeline companies offer to their customers.
Following a rehearing with minimum modification, it was subsequently reissued
as FERC Order No. 636A which has led to much more competitive markets. It
raised questions about whether gathering systems of interstate pipelines can
be sold off and totally escape regulation but in more recent hearings FERC has
failed to resolve this issue satisfactorily by suggesting this is a matter for
regulatory authorities in various local jurisdictions.
Item 3. LEGAL PROCEEDINGS
On October 7, 1998, Columbus was served with a complaint in a lawsuit styled
Maris E. Penn, Michael Mattalino, Bruce Davis, and Benjamin T. Willey, Jr. vs.
Columbus Energy Corp., Cause No. 98- 44940 in the 55th District Court of
Harris County, Texas. The plaintiffs are parties to a September 1994
settlement agreement that provided for the conveyance of overriding royalty
interests in leases acquired by Columbus in certain portions of Harris County.
Plaintiffs claim Columbus is obligated under the settlement agreement to
acquire all leases available within a described portion of Harris County and
that Columbus has failed to develop those leases as a reasonably prudent
operator. Plaintiffs are claiming damages based upon their alleged right to a
3% overriding royalty interest in leases taken and drilled by third parties
within the described area. Discovery is ongoing. Columbus denies all
allegations of failure to develop and instructed counsel to vigorously defend
this lawsuit. The parties are set for mediation on April 11, 2000 and for
trial on May 22, 2000.
Management is unaware of any asserted or unasserted claims or assessments
against the Company which would materially affect the Company's future
financial position or results of operations.
The Company's officers and directors are indemnified by contractual
agreement with each individual, as well as by the Articles of Incorporation of
Columbus as provided in and in accordance with the Colorado Corporation Code,
as amended, of the State of Colorado.
C-15
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matters were submitted to a vote of
security holders.
C-16
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Columbus commenced trading on the American Stock
Exchange on March 11, 1993. The common stock previously traded on the American
Stock Exchange Emerging Companies Marketplace since July 30, 1992. The
reported high and low sales prices for the periods ending below were as
follows:
<TABLE>
<CAPTION>
High(1) Low(1)
------- ------
<S> <C> <C>
2000:
December 1, 1999 through January 31, 2000...................... $5.75 $5.50
1999:
First quarter.................................................. $6.75 $6.125
Second quarter................................................. 6.25 5.50
Third quarter.................................................. 6.125 5.68
Fourth quarter................................................. 6.00 5.25
1998:
First quarter.................................................. $8.18 $7.125
Second quarter................................................. 7.875 7.00
Third quarter.................................................. 7.50 6.375
Fourth quarter................................................. 6.69 6.25
1997:
First quarter.................................................. $8.00 $6.27
Second quarter................................................. 7.64 6.14
Third quarter.................................................. 7.84 6.82
Fourth quarter................................................. 8.30 7.05
</TABLE>
--------
(1) Price per share amounts have been adjusted for the 10% stock dividend
distribution to shareholders of record on February 23, 1998 and the five-
for-four stock split on May 27, 1997.
As of January 31, 2000 the reported closing sales price of Columbus common
stock was $5.625 per share.
As of November 30, 1999, there were approximately 420 holders of record of
Columbus' common stock and an estimated 1,000 or more beneficial owners who
hold their shares in brokerage accounts.
The Company has never paid any cash dividends on its common stock and does
not contemplate the payment of cash dividends since it plans to use earnings
available for its drilling, development and acquisition programs and excess
cash flow has been used to acquire treasury shares that can be used for
acquisitions or stock dividends. Payment of future cash dividends would also
be dependent on earnings, financial requirements and other factors.
C-17
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The table below sets forth selected historical financial and operating data
for the Company and its consolidated subsidiaries for the years indicated. The
historical data for each of the years in the five-year period ended November
30, 1999, were derived from the financial statements of the Company which have
been audited by PricewaterhouseCoopers LLP, independent accountants. This
information is not necessarily indicative of the Company's future performance.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Financial Statements and notes thereto,
included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------
1999 1998 1997 1996 1995(a)
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating data:
Revenues........................ $11,500 $12,094 $15,156 $11,815 $ 9,400
Loss on asset disposition,
impairment of long-lived
properties and abandonments.... (973) (3,482) (2,179) (165) (3,055)
Net earnings (loss)............. (1,215) (1,235) 2,167 2,098 (1,495)
======= ======= ======= ======= =======
Earnings (loss) per share(b):
Basic......................... $ (.31) $ (.29) $ .50 $ .50 $ (.35)
======= ======= ======= ======= =======
Diluted....................... $ (.31) $ (.29) $ .49 $ .49 $ (.35)
======= ======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding(b):
Basic......................... 3,898 4,194 4,299 4,211 4,321
======= ======= ======= ======= =======
Diluted....................... 3,898 4,194 4,392 4,259 4,321
======= ======= ======= ======= =======
Cash flow data(d):
Cash from operating activities.. $ 3,258 $ 6,258 $ 8,638 $ 5,638 $ 3,929
Cash used in investing
activities..................... $(2,336) $(6,717) $(7,294) $(6,320) $ (119)
Cash provided by (used in)
financing activities(c)........ $(1,075) $ 605 $ (883) $ 664 $(4,223)
Cash flow before changes in
operating assets and
liabilities.................... $ 3,027 $ 5,470 $ 9,132 $ 6,340 $ 3,920
Discretionary cash flow......... $ 5,770 $ 6,192 $ 9,672 $ 6,658 $ 4,096
Balance sheet data:
Total assets.................... $22,530 $23,949 $26,135 $21,625 $18,321
Long-term debt, excluding
current maturities--bank debt.. $ 5,500 $ 4,900 $ 2,200 $ 2,200 $ 1,600
Stockholders' equity............ $12,798 $15,264 $17,958 $16,225 $13,186
</TABLE>
--------
(a) Does not include results of CEC Resources Ltd. after its divestiture on
February 24, 1995.
(b) Reflects restated amounts for 1994 through 1997 after stock dividends and
stock split.
(c) No cash dividends have been declared or paid in any period presented.
(d) See discussion of cash flows in "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
C-18
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following summarizes the Company's financial condition and results of
operations and should be read in conjunction with the consolidated financial
statements and related notes.
The information below and elsewhere in this Form 10-K may contain certain
"forward-looking statements" that have been based on imprecise assumptions
with regard to production levels, price realizations, and expenditures for
exploration and development and anticipated results therefrom. Such statements
are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed herein or implied by such statements.
Liquidity and Capital Resources
By mid-1999 crude oil prices had begun to recover after two years of dismal
prices. Natural gas prices also had a similar recovery from lower prices
during the winter of 1998/1999. The Company's natural gas prices averaged 5%
higher than in 1998 while annual production was down 9% compared to 1998 for
reasons discussed later. Improved prices did not fully offset the 24% decline
in crude oil production which resulted in lower revenues. Fiscal 1999 had
substantially higher exploration expenses but lower impairment charges so that
the 1999 net loss approximated that of 1998. Such charges in 1999 totaled
$4,044,000 which, after being tax effected, reduced net earnings by
$2,790,000, or $0.72 per share which thereby created a net loss of $1,215,000,
or $0.31 per share. During 1998 exploration charges of $722,000 and impairment
charges of $3,482,000 were primarily responsible for the net loss of
$1,235,000, or $0.29 per share. Low crude oil prices during the 1998 fiscal
year contributed to the impairments and essentially eliminated drilling for
crude oil production and reserves. Average shares outstanding for fiscal 1999
were only 3,898,000 compared to 4,194,000 last year. Discretionary Cash Flow
in 1999 of $5,770,000 was 7% lower than 1998's because of lower gross revenues
and oil and gas sales.
As of the end of 1999, shareholders' equity decreased to $12,798,000
compared to $15,264,000 at November 30, 1998 as a result of the exploration
and impairment charges along with repurchases of treasury shares. Positive
working capital was $1,169,000 at year end which, when combined with the
Company's anticipated cash flow for 2000, should provide sufficient funds for
the capital expenditure program during fiscal 2000 which will continue to be
directed toward onshore exploratory drilling in the lower Gulf Coast area
including activity on existing El Squared prospect leaseholds. The unused
portion of the $10,000,000 bank credit facility has previously been primarily
targeted by management for acquisitions of oil and gas properties, but can be
used for any legal corporate purpose and also is available should unforeseen
capital expenditures arise during 2000 as a result of exploratory success.
Generally accepted accounting principles ("GAAP") require cash flows from
operating activities to be determined after giving effect to working capital
changes. Accordingly, GAAP's net cash provided from operating activities has
fluctuated widely from $3,300,000 to $8,600,000 during the last three years
but, when coupled with use of the Company's credit facility, still provided
sufficient liquidity to fund those three years' oil and gas capital
expenditures, treasury share repurchases, and limited purchases of fractional
working interests in existing properties.
As regularly noted in prior reports, management places greater reliance upon
an important alternative method of computing cash flow which is generally
known as Discretionary Cash Flow ("DCF"). DCF is not in accordance with GAAP
but is commonly used in the industry as this method calculates cash flow
before working capital changes or deduction of exploration expenses since the
latter can be increased or decreased at management's discretion. DCF is often
used by successful efforts companies to compare their cash flow results with
those independent energy companies who use the full cost accounting method
where exploration expenses are capitalized and do not immediately adversely
affect either operating cash flow or net earnings. Columbus' DCF for 1999 was
$5,770,000 which compared to 1998's $6,192,000 when more shares were
outstanding. DCF is calculated without debt retirement being considered but in
Columbus' case this does not matter as current bank
C-19
<PAGE>
debt requires no principal payments before August 1, 2001. Interest expense is
always deducted before arriving at DCF.
Management notes in each of its public filings and reports its strong
exception to the Statement of Financial Accounting Standards No. 95 as it
applies to Columbus which directs that operating cash flow must only be
determined after consideration of working capital changes. Management believes
such a requirement by GAAP ignores entirely the significant impact that the
timing of income received for, and expenses incurred on behalf of, third party
owners in properties may have on working capital. This is particularly
significant where Columbus owns only a small working interest but is the
operator.
Neither DCF nor operating cash flow before working capital changes is
allowed to be substituted for net income or for cash available from operations
as defined by GAAP. Furthermore, currently reported cash flows, however
defined, are not necessarily indicative that there will be sufficient funds
for all future cash requirements. For 1999 and 1997 GAAP cash flow was lower
than DCF and for 1998 it was the opposite.
At the present time the Company has partially hedged its crude oil prices.
Therefore, the Company's natural gas revenues are fully exposed and a portion
of its crude oil revenues are exposed to risk of very low prices such as
existed during fiscal 1998 and 1999's first half.
Columbus periodically hedges both natural gas and crude oil prices by
entering into "swaps". The swap is matched against the calendar monthly
average price on the NYMEX and settled monthly. Revenues were decreased when
the market price at settlement exceeded the contract swap price or increased
when the contract swap price exceeded the market price. There was no hedging
activity in fiscal 1998. The following table shows the results of these swaps:
<TABLE>
<CAPTION>
Increase
(decrease) in
oil and gas
revenues
------------------
Description Volume per mo. Period 1999 1997
----------- -------------- ------------- -------- --------
(Mmbtu or
bbl)
<S> <C> <C> <C> <C>
Natural Gas
$2.20/Mmbtu................. 60,000 3/97 - 10/97 $(86,400)
Crude Oil
Collar with $17.50/ bbl
floor and $22.25/bbl
ceiling.................... 7,500 9/99 - 8/00 $(34,000)
$21.17/bbl.................. 10,000 11/96 - 10/97 $ 8,900
$17.25/bbl with $19.50/bbl
cap........................ 10,000 1/96 - 12/96 $(22,500)
</TABLE>
The Company's natural gas and crude oil swaps are considered financial
instruments with off-balance sheet risk which are entered into in the normal
course of business to partially reduce its exposure to fluctuations in the
price of crude oil and natural gas. Those instruments involved, to varying
degrees, elements of market and credit risk in excess of the amount recognized
in the balance sheets.
The Company had a crude oil hedge outstanding as of November 30, 1999 by
using a costless "collar" on 7,500 barrels per month for the 12 months from
September 1, 1999 through August 31, 2000. This "collar" is settled monthly
against the calendar monthly average price on the NYMEX with a $17.50 per
barrel floor and $22.25 per barrel ceiling. For any average price below or
above those prices Columbus receives or pays the difference which increases or
reduces oil revenues each month in which this occurs. For the two months of
December, 1999 and January, 2000, oil sales would have been $65,000 higher if
this hedge had not been in place because oil prices exceeded the $22.25
ceiling price. For the remaining period of February through August 2000 using
the prevailing price as of January 31, 2000 for each of the months, the
settlement value the Company would owe is $158,000 which would also reduce
crude oil sales.
Columbus had outstanding borrowings of $5,500,000 as of November 30, 1999
against its $10,000,000 line of credit with Norwest Bank Denver, N.A. which is
collateralized by its oil and gas properties. At the end of 1999, the ratio of
net long-term debt (debt less working capital) to shareholders' equity was
0.34 and to total
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<PAGE>
assets was 0.19. The outstanding debt used a LIBOR option with an average
interest rate of 7.0%. Subsequent to year end through January 31, 2000, the
debt was increased by $200,000 to $5,700,000. The net increase (or decrease)
in long-term debt directly affects cash flows from financing activities as do
the purchase of treasury shares and proceeds from the exercise of stock
options. For the Company's floating rate debt, interest rate changes generally
do not affect the fair market value but do impact future results of operations
and cash flows, assuming other factors are held constant. The carrying amount
of the Company's debt approximates its fair value.
Working capital at 1999 year end remained positive at $1,169,000 compared to
$1,556,000 at November 30, 1998. This was achieved despite capital
expenditures of $2,153,000 for additions to oil and gas properties along with
record exploration expenses plus purchase 300,538 shares of treasury stock for
$1,836,000 during the year.
The Company has been authorized by its Board of Directors to repurchase its
common shares from the market at various prices during the last several years.
Those repurchases are summarized as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------------
Fiscal year repurchased As purchased Restated* Average price*
----------------------- ------------ --------- --------------
<S> <C> <C> <C>
1997...................................... 158,000 197,863 $6.92
1998...................................... 352,750 357,715 $7.07
1999...................................... 300,538 300,538 $6.08
</TABLE>
--------
* Restated for stock split and stock dividends
As of November 30, 1999 a total of 73,384 shares remained to be purchased
from the most recent authorizations to repurchase shares at a price not to
exceed $6.00 per share. As of January 31, 2000, 45,000 of those shares have
subsequently been acquired at an average price of $5.61 per share.
During 1999, capital expenditures actually incurred for oil and gas
properties totaled $2,153,000 (excludes costs of exploratory dry holes
included in exploration expense) which amount differs from the capital
expenditure shown in the Consolidated Statement of Cash Flows. The latter also
includes cash payments made during 1999 for 1998 expenditures incurred but not
yet paid as of 1998's year end. Similarly, there were expenditures accrued in
1999 that will not be actually paid until 2000. These were primarily related
to the exploratory program in the Texas Gulf Coast area.
Impact of the Year 2000 issue. The Year 2000 issue is the result of computer
programs being written using two digits rather than four, or other methods, to
define the applicable year. Computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000 and could result in a system failure or miscalculations causing
disruptions of operations such as a temporary inability to process
transactions, transmit invoices or engage in similar normal business
activities.
The Company upgraded its major system computer software in 1997 to a new
release of a major software vendor that the vendor represented was compliant
with the year 2000. Columbus completed before year-end 1999 its review of
other less important systems as well as its significant suppliers, purchasers,
and transporters of oil and gas to determine the extent to which the Company
might be vulnerable to other failures and what the impact might be on its
operations.
The Company's interest in wells operated by other companies was not
considered to be as important but management attempted to determine if those
companies were ready for the year 2000. The Company uses outside services for
payroll and medical benefits processing and those companies provided updates
to their software that they represented were year 2000 compliant. The Company
is also somewhat dependent upon personal computers as well as certain
spreadsheet and word processing software programs which may not have been year
2000 compliant. Evaluations were made to establish which of those systems were
critical and a few personal computers and software programs were replaced at a
cost of less than $10,000.
C-21
<PAGE>
The Company also relies on non-information technology systems, such as
office telephones, facsimile machines, air conditioning, heating and elevators
in its leased office space, which may have embedded technology such as micro
controllers and are generally outside of its control to assess or remedy.
As previously disclosed, the major system computer software upgrade
performed in 1997 cost $16,000 and personal computer upgrades cost less than
$10,000. This represented the costs required to meet the Company's goal of
being year 2000 ready for mission-critical systems. The Company did not
believe that any loss of revenue would occur as a result of the year 2000
problem. The Company did not established a contingency plan because it
believed all major issues had been addressed.
As of the date of this report in the year 2000 the Company has not
experienced any year 2000 failures or problems that have affected its computer
systems, operations, revenues, benefits processing or non-information
technology systems. Should any year 2000 failures occur we will address them
at that time.
Results of Operations
The Company's 1999 gross revenues of $11.5 million were 5% below 1998's and
was attributable to lower sales volumes because higher prices were received
for both natural gas and crude oil. The Company's 1998 gross revenues of $12.1
million were 20% below 1997's primarily because of significantly lower prices.
During 1998 low crude oil prices resulted in over one-half of the Company's
operated wells in the Williston Basin being uneconomic which were either shut
down or operated only a few days each month and this continued during 1999's
first half.
The operating loss in 1999 was almost entirely due to record exploration
expense charges and impairments of $4,044,000 because gross revenues were only
slightly lower than 1998's. Lease operating costs, depreciation and
amortization and general and administrative expenses were all lower. The
operating loss of $1,706,000 in 1998 was a direct result of a significant
increase in impairments, lower revenues due to prices plus higher lease
operating expenses and exploration costs compared with 1997. Operating income
of $3,766,000 in 1997 represented an improvement of only 5% over 1996 and
excluding the exploratory charges and impairment provisions, this would have
been a 59% improvement.
The 1999 net loss of $1,215,000 was caused by the factors previously
discussed as well as increased interest and litigation expense. The 1998 net
loss of $1,235,000 was primarily attributable to the impairment expense
although all of the factors previously discussed contributed to this result.
Net earnings during 1997 set a new high from U.S. only operations of
$2,167,000 which surpassed 1996 earnings of $2,098,000. Had there not been the
extremely high non-cash impairment provisions during 1997, record net earnings
would have surpassed earlier years' results which also included Canadian
operations.
Impairments
The 1999 pre-tax, non-cash impairment loss of $973,000 included $503,000
that was recorded during the second quarter with the balance added at year
end. The initial improvement in crude oil prices toward the end of the second
quarter was insufficient at that time to justify restoration of previously
written down proved undeveloped reserves in one of the Williston Basin's cost
pools which had led to that pool's impairment charge equal to a shortfall of
$253,000 between remaining book value of the pool and the current fair market
value of its reserves. Elsewhere, an unexpected influx of water in natural gas
wells in the shallow Heidi property in Jim Wells County, Texas brought about
premature abandonment of producing zones and associated natural gas reserves.
This contributed a pre-tax, non-cash impairment of $250,000 of the mid-year
charge.
As of 1999's fiscal year end, an impairment of $270,000 was recorded for one
successful efforts pool in Texas where a significant reduction in total
reserve quantities and future net cash flows became evident due to its
producing/pressure performance. Also, there was a charge of $200,000 for an
anticipated loss in value of undeveloped acreage following exploratory dry
holes at the El Squared project and in Oklahoma.
C-22
<PAGE>
During fiscal 1998, the non-cash impairment loss of $3,482,000 was
recognized during the first and fourth quarters with provisions of $2,816,000
and $666,000 respectively. The primary cause for each was the continued low
crude oil prices which had showed signs of recovery on occasions throughout
the year but had again retreated to the lows by year end. This resulted in a
significant reduction for total reserve quantities which are based on the SEC
calculation method using constant prices. Therefore, carrying values of
remaining unamortized costs in several successful efforts pools continued to
exceed resultant undiscounted future net cash flows even if determined using
somewhat higher crude prices than were currently being realized. Several
property pools were initially written down as of the end of the first quarter
to a fair value based on an assumption that the average future crude oil price
over the life of reserves would be $18.75 per barrel, which was subsequently
lowered to $14 at year end based on bearish longer term sentiments expressed
by many noted experts. The actual $11.50 year-end price calculation eliminated
certain proved undeveloped locations as no longer being economic and further
shortened the economic productive life and reserves of most oil wells. Using a
$14 price over the life of the reserves still required an additional non-cash
impairment for the 1998 fourth quarter of $666,000.
A $400,000 charge in 1998 which was provided during the first quarter was
for probable loss in value of undeveloped acreage and abandonments of
leaseholds located primarily in Louisiana. This was in addition to $200,000
similarly reserved in 1997. A Louisiana Austin Chalk horizontal well, the
Morrow #23-H, had reserves originally assigned to a contemplated extension of
the then current downdip lateral. However, those reserves were eliminated by
price and performance which contributed heavily to the first quarter
provision. Also, because of added costs related to the necessary recompletion
workover required to place the updip lateral on production, this operation was
deferred. Although economic at a $14 per barrel crude oil price, such a
recompletion was postponed for a minimum of two more years in anticipation
that better prices would favorably alter the present worth of those reserves.
This circumstance also contributed to the fourth quarter provisions.
The non-cash impairment loss of $243,000 for 1997 was recognized for certain
Oklahoma development oil and gas wells completed in prior years which had
become marginal. During the third quarter of 1997, despite the fact that a
production test of the Morrow #23-1H had not yet occurred, management also
chose to write off as impaired certain small leaseholds within the acreage
block where the possibility of putting together a drilling unit before
expiration appeared rather remote. Also included were certain leaseholds where
annual rentals were already due or about to become due. Those non-cash write
downs equaled $251,000 which brought the total impairment provision during the
third quarter of 1997 to $494,000.
As fiscal 1997 ended, it had become apparent that with continued increasing
water cuts, the Morrow #23-1H's oil production rates would probably be less
than the initial potential tests had indicated. Accordingly, 1997's year-end
proved reserves attributable to both horizontal legs were reduced which
created additional impairment charges of $1,140,000 related to that Louisiana
well and $84,000 to related leaseholds. Also, a general provision of $200,000
against all undeveloped leaseholds was recorded in anticipation that it was
very likely that additional development probably could not be completed prior
to lease expirations. Also, two oil wells in Oklahoma failed to respond to
attempts to eliminate shifting frac sand from halting production. These were
charged with additional impairment of $260,000 of the total 1997 year end
amount even though the wells had not been abandoned permanently. Another
attempt at production is expected during fiscal 2000 when better crude prices
are available which support drilling horizontally to reduce the shifting frac
sand and formation sand problem since a potentially profitable oil reservoir
is believed to exist.
C-23
<PAGE>
Oil and Gas Operations
The following discussion of the Company's oil and gas operations is based
upon the tables of production and average prices shown under the caption Item
2, "Oil and Gas Properties" and "Production".
The changes in the components of oil and gas revenues during the periods
presented are summarized as follows:
<TABLE>
<CAPTION>
Production
Price Quantity Revenue
Change Change Change
------ ---------- -------
<S> <C> <C> <C>
1999 vs. 1998
Gas.............................................. 5% (9)% (6)%
Oil.............................................. 26% (24)% (5)%
1998 vs. 1997
Gas.............................................. (18)% 4% (14)%
Oil.............................................. (33)% (11)% (40)%
</TABLE>
Natural gas revenues for fiscal 1999 compared to 1998 decreased 6% as a
result of a 9% decrease in production and despite a 5% increase in average
prices. Average gas prices improved from somewhat depressed 1998 prices which
had resulted from a warm winter and a high level of inventory of storage gas.
Production volumes for 1999 decreased as a result of production declines not
fully offset by production from newly completed development wells and from a
lack of exploratory successes.
Oil revenues for 1999 were down 5% from 1998 as a result of a 26% increase
in the average price received because sales volumes were 24% lower. Oil
revenues and average prices for 1999 were also reduced by $34,000 ($.20 per
barrel) due to hedging activity while no oil hedges existed in 1998. Oil
production has declined steadily commensurate with a lack of development
drilling activity because of depressed oil prices. However, one exploratory
oil well in Harris County, Texas, drilled during 1998, was finally hooked-up
to a gas line and commenced flowing 200 barrels per day with associated gas
during June 1999. Columbus owns a 19.5% working interest.
Columbus' 1999 sales volumes of natural gas averaged 8,751 Mcf per day while
oil and liquids sales declined to 456 barrels per day. This equates to daily
production of 1,915 barrels of oil equivalent (BOE) which was down 14% from
the record 2,223 BOE during 1998.
A ratio of oil versus natural gas production during 1999 reveals that the
Company now realizes approximately 76% of its production from natural gas.
Such a high percentage is in keeping with expected results commensurate with
the change in emphasis by management during the last several years toward
exploring for and developing natural gas reserves.
Natural gas revenues for 1998 decreased 14% compared to 1997 primarily as a
result of lower prices which more than offset improved gas production from new
wells in the Texas Gulf Coast area. These new discoveries had mitigated a
normal annual production decline plus the sale of a Berry R. Cox field
property in Texas during fourth quarter 1997. Average prices for natural gas
in 1998 decreased 18% compared to 1997 as a result of reduced demand from both
a warm winter and the highest percentage of storage refill ever accomplished.
Gas revenues for 1997 were reduced by $86,400 ($.03 per Mcf) from swaps of
natural gas.
Oil revenues for 1998 versus 1997 were down by a significant 40% as a result
of a substantial 33% decrease in the average price along with a lower sales
volume of 11% which reflected a very sharp decline related to a 90%-owned
Montana oil well. This well had been recompleted in a new zone uphole during
1997's third quarter and contributed most of its initial flush production for
the last few months of that year. Furthermore, during 1998's third quarter,
several oil wells which had been marginal because of low prices were shut down
and any well which had pump or tubing problems was not repaired nor any
workovers performed. Unfortunately no crude
C-24
<PAGE>
oil swap existed during 1998 to offer protection from that price debacle
because one was in place during a portion of 1997 when prices were high which
reduced revenues. Oil revenues for 1997 were decreased by $13,600 ($.06 per
barrel) from crude oil swaps.
U.S. oil prices have fluctuated for several years similar to the same wide
swings experienced in world crude oil prices. From the beginning of 1997,
world and U.S. crude oil prices steadily softened from almost $23.00 per
barrel with the decline continuing unabated throughout fiscal 1998 and reached
a year end price of $11.50 per barrel. Crude oil prices finally began to show
recovery late in 1999's second quarter and have since accelerated during the
third and fourth quarters reaching approximately $26.00 per barrel by year-
end.
Lease operating expenses for 1999 were 11% lower than 1998's. Expensive
workovers and replacements of downhole and surface equipment on older wells
occurred earlier in 1998 while several of those older wells remained shut-in
during 1999's first half. Lease operating expenses increased 16% in 1998 over
1997 because of expensive workovers along with downhole and surface equipment
replacements on several older wells. Lease operating costs on a barrel of oil
equivalent basis for 1999 approximated $2.72 compared to $2.63 in 1998 and
$2.27 for 1997. Operating costs as a percentage of revenues were 19% in 1999
compared to 20% in 1998 which had both lower unit prices and higher costs.
During 1997 costs were only 13% due to increased production and commodity
prices when compared with 1998 or 1999.
Production and property taxes approximated 10% of revenues in 1999 and 1998
and 9% of revenues in 1997. These vary based on Texas' percentage share of the
total production where oil tax rates are lower than gas tax rates. The
relationship of taxes and revenue is not always directly proportional since
several of the local jurisdiction's property taxes are based upon reserve
evaluations as opposed to revenues received or production rates for a given
tax period.
Operating and Management Services
This segment of the Company's business is comprised of operations and
services conducted on behalf of third parties including compressor rentals and
salt water disposal facilities. Operating and management services revenue has
increased in each of the last three years.
Operating and management services profit was $502,000 for 1999 up
substantially from the $276,000 for 1998 and the $349,000 for 1997. The 1999
profit benefited from an increase in operated wells plus an ownership increase
from 50% to 100% in four compressors operating in South Texas although profits
therefrom were adversely affected by significant compressor repairs. During
1999 the Company's contract operator services in the B. R. Cox field
contributed $100,000 to operating and management services income and profit
but this is expected to be terminated in fiscal 2000. The 1998 profit was
lower as a result of unusually high 1998 workover expenses required to clean
out sand from the well bore of a salt water disposal well in Texas although
1998's second half revenue did show improvement with the increase in well
activity along with the aforementioned increased ownership interest in the
four compressors.
Interest Income
Interest income is earned primarily from short-term investments whose rates
fluctuate with changes in the commercial paper rates and the prime rate.
Interest income declined in 1999 to $100,000 compared to 1998's $141,000 as a
result of reduced short-term interest rates and a lower amount of investments.
Likewise 1998 was lower than the $147,000 for 1997 for the same reasons.
General and Administrative Expenses
General and administrative expenses are considered to be those which relate
to the direct costs of the Company which do not originate from operation of
properties or providing of services. Corporate expense represents a major part
of this category.
C-25
<PAGE>
The Company's general and administrative expenses for 1999 were 9% less than
last year and would have been even greater except for total phase out during
the second quarter of 1999 of reimbursement for management services provided
Resources. This had the effect of increasing costs by the amount credits of
$33,000 for 1999 were lower than $218,000 for 1998. Salary expenses were
comparable in 1999 and 1998 because increases were granted effective December
1, 1998 for non-officer employees while officer salaries remained unchanged
and incentive compensation and bonuses were reduced in 1999. Such bonuses are
discretionary and directly related to the Company's performance during a prior
year. These amounted to only $80,000 ($58,000 non-cash) for 1999. Higher
medical claims in 1999 under the Company's self-insured plan raised expenses.
A one-time charge for a retirement pay accrual of $111,000 was approved by the
Board of Directors during 1999 for one officer and has been reported as a
separate line item.
One of the Company's working interest owners is now disputing its 25%
participation in the Long #4 well in Texas after paying $90,000 of
approximately $300,000 of its share of drilling costs. This dispute came after
the well was determined to be a dry hole. In the Company's opinion, the claim
is groundless but in the short- term will affect the collectability of its
joint interest receivable.
The Company's general and administrative expenses for 1998 were 7% higher
than fiscal 1997 due primarily to higher medical claims and increased
incentive bonuses which totaled $273,000 ($153,000 non-cash) as of May, 1998
compared to $220,000 ($70,000 non-cash) in May, 1997. Also, some 1998 cost
increases resulted from salary adjustments granted effective December 1, 1997
for non-officer employees as well as the May 1, 1998 raises for officers.
Medical claims under the Company's self-insured plan vary from year to year
with no discernible pattern. For 1998 legal and accounting expenses decreased
from 1997 which had included costs related to a registration statement filing
which was canceled.
Reimbursement for services provided by Columbus officers and employees for
managing Resources and providing services has had the net effect of reducing
overall general and administrative expenses. These amounted to $33,000 in
1999, $218,000 for 1998 and $255,000 for 1997.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization of oil and gas assets are
calculated based upon the units of production for the period compared to
proved reserves of each successful efforts property pool. This expense is not
only directly related to the level of production, but also is dependent upon
past costs to find, develop and recover related reserves in each of the cost
pools or fields. Depreciation and amortization of office equipment and
computer software is also included in the total charge.
Total charges for depletion expense for oil and gas properties was lower in
1999 compared to 1998 as a result of decreased units of production, especially
in higher rate pools, and despite additional development expenditures. This
expense item for 1998 was higher than in 1997 as a result of increased
production plus added development expenditures during the intervening period
and a reduction in reserves in several cost pools.
During 1999 the depletion rate was $4.69 per barrel of oil equivalent
("BOE") or $.79 per thousand cubic feet of gas equivalent ("Mcfe") compared to
1998's rate of $4.64 per BOE ($.77 per Mcfe). The depletion and depreciation
rate for fiscal 1998 increased over 1997 because of 1998's reduced crude oil
reserves in certain cost pools and an exceptionally low $3.91 per BOE ($.65
per Mcfe) recorded for fiscal 1997.
Effective October 1, 1997 the Company sold fractional working interests in
seven wells in the Berry Cox field in Texas for cash proceeds of $750,000.
These wells were a part of a larger pool of properties in the general Laredo
area and so those sale proceeds reduced the carrying costs of the successful
efforts pool and no book gain or loss was recognized.
C-26
<PAGE>
Exploration Expense
In general, the exploration expense category includes the cost of Company-
wide efforts to acquire and explore new prospective areas. The successful
efforts method of accounting for oil and gas properties requires expensing the
costs of unsuccessful exploratory wells including associated leaseholds. Other
exploratory charges such as seismic and geological costs must also be
immediately expensed regardless of whether a prospect is ultimately proved to
be successful. All such exploration charges not only decrease net earnings but
also reduce reported GAAP cash flow from operations even though they are
discretionary expenses; however, such charges are added back for purposes of
determining DCF which is why it more nearly tracks cash flow reported by full
cost accounting companies which capitalize such costs.
Exploration charges of $3,071,000 for 1999 were a record and far in excess
of 1998's $722,000. Costs for 1999 included $1,443,000 to initially drill and
eventually deepen the Long #3 exploratory well in the El Squared prospect. The
Long #3 wellbore had drilling ceased and was abandoned in January 2000 for yet
a second time when the Long #4 well failed to find commercial natural gas
reserves in the upper Massive zone of the middle Wilcox. Long #4 well dry hole
costs totaled $911,000 as of year end which included associated leaseholds
which were also expensed. Seismic interpretation costs of $72,000 in the El
Squared prospect in Texas were expensed. During fiscal 1999 an additional
$453,000 was expensed for participation in five other exploratory dry holes.
Subsequent to fiscal year end about $1,200,000 was further incurred while
drilling and eventually abandoning the Long #3 and #4 wells. This amount will
be recognized as an exploration expense during first quarter of fiscal year
2000.
Whenever a company using the successful efforts method of accounting is
involved in an exploratory program that represents a significant part of its
budget, it is automatically subjected to the risk that net earnings for any
given quarter or year will be impacted negatively by wildcat dry holes. The
numerous exploratory well bores involved at Columbus' El Squared Prospect that
have already been or will be required to be drilled to properly evaluate the
various fault blocks and/or potential producing horizons certainly fit that
circumstance. Shareholders have been forewarned that net earnings and GAAP
cash flow may not be truly indicative of the Company's operational activity.
This is why management suggests that shareholders may wish to follow its own
assessment of placing more emphasis on DCF from year to year and ignore net
earnings. Comparing EGY's results with other company's net earnings or cash
flows when they use the full cost accounting method is unrealistic and ill
advised because they capitalize such exploratory costs.
Exploration expense for 1998 of $722,000 included two exploratory dry holes
in the S.E. Froid area in Montana where $209,000 was expensed while in the
Texas Gulf Coast area a second dry hole cost $142,000. No exploratory oil
wells could be justified during 1998 on any of its 3-D seismic structures
mapped on its Williston Basin leasehold blocks in Montana until crude oil
prices showed significant improvement. Early in 1998 3-D seismic costs of
$135,000 had been incurred in this area in anticipation there would be an
improvement in crude oil prices during the year and before leasehold
expirations occurred during 1999.
Exploration charges for 1997 were $540,000. These included $224,000 of 3-D
seismic costs incurred in the S.E. Froid area in Montana in an attempt to
locate new exploratory well sites plus $73,000 incurred for drilling a non-
commercial exploratory oil well.
Litigation Expense
The litigation expense in 1999 and 1998 relates to the Maris E. Penn, et al
lawsuit previously described.
Interest Expense
Interest expense varies in direct proportion to the amount of bank debt and
the level of bank interest rates. The average amount outstanding has been
higher during 1999 than in 1998. The average bank interest rate paid for debt
in 1999, 1998 and 1997 was 6.6%, 7.1%, and 7.1%, respectively.
C-27
<PAGE>
Income Taxes
The Company's income tax position is complex. The utilization of net
operating loss carryforwards by the Company has been complicated by two
"change of ownership" transactions under Section 382 of the Internal Revenue
Code, one of which occurred on October 1, 1987 and the other on August 25,
1993. Only the first of those changes has limited the utilization of net
operating loss carryforwards. Furthermore, a quasi-reorganization occurred on
December 1, 1987 which requires that benefits from net operating loss
carryforwards or any other tax credits that arose prior to the quasi-
reorganization be credited to additional paid-in capital rather than to
income. Only post quasi-reorganization tax benefits realized can be credited
to income.
As a result of available net operating loss carryforwards, the Company's
Federal income tax obligations have been limited to "alternative minimum tax"
so that the Company has had current Federal and state taxes payable of 2% to
3% of pre-tax earnings. For use in fiscal 1999, the Company has a net
operating loss carryforward from 1995 and operating loss carryforwards
remaining from periods prior to the Section 382 ownership changes. Utilization
of those latter benefits are limited to $1,707,000 for fiscal 1999, which
expire if not used, and $904,000 in fiscal 2000. The significant exploration
costs incurred during 1999 and first quarter of fiscal 2000 will reduce
taxable income and may result in net operating losses expiring before they are
utilized. The Company's current Federal tax provision and liability might
increase after fiscal 2000 unless an active drilling program is maintained. In
addition, the Company pays state income taxes in some states.
During 1999, the net deferred tax asset increased to $1,137,000 which was
comprised of $200,000 current portion and $937,000 long-term asset. The
valuation allowance had a net reduction of $122,000 from 1998 to November 30,
1999. A deduction of $12,000 for the benefit of disqualifying disposition of
incentive stock options was added to additional paid-in capital.
During 1998, the net deferred tax asset was $210,000 and is comprised of a
$327,000 current portion and a $117,000 long-term tax liability. The valuation
allowance was decreased by a net $35,000. A deduction of $156,000 for the
benefit of stock options that were exercised was added to additional paid-in
capital.
New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137 which deferred the effective date
for SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to fiscal years beginning after June 15, 2000. The Company must
apply this statement no later than its fiscal year beginning December 1, 2000.
SFAS No. 133 requires recording all derivative instruments as assets or
liabilities measured at fair value. This Statement is not expected to
materially affect the Company's financial statements.
Effects of Changing Prices
The United States economy experienced considerable inflation during the late
1970's and early 1980's but in recent years has been fairly stable and at low
levels. The Company, along with most other U.S. business enterprises, was then
and could again be adversely affected by any recurrence of such economic
conditions although in general, inflation has had a minimal effect on the
Company.
In recent years, oil and natural gas prices have fluctuated widely so the
Company's results of operations and cash flow have been inordinately affected.
Oil and gas prices have also been somewhat influenced by regulation by various
governmental agencies, by the world economy, and by world politics. Operating
expenses have been relatively stable but, when analyzed as a percentage of
revenues, may be distorted because they become a larger percentage of revenues
when lower product prices prevail. Drilling and equipment costs have risen
noticeably in the last three years. Competition in the industry can
significantly affect the cost of acquiring leases, although in the past decade
competition has lessened as more operators have withdrawn from active
exploration programs. Inflation, as well as a recessionary period, can cause
significant swings in the interest rates the Company pays on bank borrowings.
These factors are anticipated to continue to affect the Company's operations,
both positively and negatively, for the foreseeable future.
C-28
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate risk and commodity price risk is
discussed in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations under the heading "Liquidity and Capital
Resources". The Company has no exposure to foreign currency exchange rate
risks or to any other market risks.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of independent accountants and consolidated financial statements
listed in the accompanying index are filed as part of this report. See Index
to Consolidated Financial Statements on page 46.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
C-29
<PAGE>
PART III
Items 10 and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
A definitive proxy statement related to the 2000 Annual Meeting of
Stockholders of Columbus Energy Corp. will be filed no later than 120 days
after the end of the fiscal year with the Securities and Exchange Commission.
The information set forth therein under "Nominees for Election of Directors,"
"Executive Officers of the Company," and "Executive Compensation" is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth under the caption "Voting Securities and
Principal Holders Thereof" in the Proxy Statement for the 2000 Annual Meeting
of Stockholders and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Election of Directors"
in the Proxy Statement for the 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
C-30
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial statements and schedules included in this report:
See "Index to Consolidated Financial Statements" on page 33.
All schedules are omitted since either the required information is set
forth in the financial statements or in the notes thereto or the
information called for is not present in the accounts or is not required
under the exception stated in Rule 5.04.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed on behalf of the Registrant
since the third quarter of fiscal 1999:
None
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
*3.1 Restated Articles of Incorporation and Amendments thereto to date
(Exhibit to Registration Statement No. 33-17885, Exhibit "a" to
Form 10-Q dated July 13, 1990 and Exhibit 3(1)(a) to Form 8-K
dated May 11, 1995).
*3.2 Amended By-Laws of Columbus Energy Corp. amended as of May 5,
1999 (Exhibit 3(b) to Form 8-K dated May 5, 1999).
*10.1 Amended and Restated Credit Agreement dated as of October 23,
1996 between Columbus Energy Corp. and Norwest Bank Denver,
National Association (Exhibit 10(a) to Registration Statement No.
333-19643 dated January 13, 1997).
*10.2 First Amendment of Credit Agreement dated September 8, 1998
between Columbus Energy Corp. and Norwest Bank Colorado, National
Association (Exhibit 10(a) to Form 10-Q dated August 31, 1998).
*10.3 Second Amendment of Credit Agreement dated October 6, 1998
between Columbus Energy Corp. and Norwest Bank Colorado, National
Association (Exhibit 10(b) to Form 10-Q dated August 31, 1998).
*10.4 Third Amendment of Credit Agreement dated May 12, 1999 between
Columbus Energy Corp. and Norwest Bank Colorado, National
Association (Exhibit 10.1 to Form 10-Q dated May 31, 1999).
*10.5 1993 Stock Purchase Plan (Exhibit to Registration Statement No.
33-63336).
*10.6 1995 Stock Option Plan (Exhibit 10(k) to Form 8-K dated May 11,
1995).
*10.7 1985 Stock Option Plan (Exhibit to Registration Statement No. 33-
17885).
*10.8 1985 Stock Option Plan, Amendment No. 2 dated November 7, 1991
(Exhibit 10(h) to Form 10-K dated November 30, 1991).
*10.9 Separation Pay Policy adopted December 1, 1990 for officers and
employees and as amended February 17, 1992 (Exhibit 10(i) to Form
10-K dated November 30, 1991).
*10.10 Form of Indemnity Agreements with directors (Exhibit 10(k) to
Registration Statement No. 33-46394).
</TABLE>
C-31
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
-----------
<C> <S>
22 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Reed W. Ferrill & Associates, Inc.
27 Financial Data Schedule
</TABLE>
--------
* Incorporated by reference
C-32
<PAGE>
COLUMBUS ENERGY CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... 34
Financial Statements:
Consolidated Balance Sheets at November 30, 1999 and 1998............... 35
Consolidated Statements of Operations for the years ended November 30,
1999, 1998 and 1997.................................................... 37
Consolidated Statements of Stockholders' Equity for the years ended
November 30, 1999, 1998 and 1997....................................... 38
Consolidated Statements of Cash Flows for the years ended November 30,
1999, 1998 and 1997.................................................... 39
Notes to the Consolidated Financial Statements............................ 40
</TABLE>
C-33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Columbus Energy Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Columbus
Energy Corp. and its subsidiaries at November 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended November 30, 1999, in conformity with accounting
principles generally accepted in the United States. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 17, 2000
C-34
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
November 30,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 1,850 $ 2,003
Accounts receivable:
Joint interest partners................................ 1,780 1,570
Oil and gas sales...................................... 1,501 1,239
Allowance for doubtful accounts........................ (116) (116)
Deferred income taxes (Note 5)........................... 200 327
Inventory of oil field equipment, at lower of average
cost or market.......................................... 106 95
Other.................................................... 80 106
-------- --------
Total current assets................................. 5,401 5,224
-------- --------
Deferred income taxes (Note 5)............................. 937 --
Property and equipment:
Oil and gas assets, successful efforts method (Notes 3
and 4).................................................. 36,862 36,039
Other property and equipment............................. 1,836 1,804
-------- --------
38,698 37,843
Less: Accumulated depreciation, depletion, amortization
and valuation allowance (Notes 2 and 3)................. (22,506) (19,118)
-------- --------
Net property and equipment................................. 16,192 18,725
-------- --------
$ 22,530 $ 23,949
======== ========
</TABLE>
(continued)
C-35
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS--(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
November 30,
----------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable........................................... $ 2,352 $ 1,846
Undistributed oil and gas production receipts.............. 386 317
Accrued production and property taxes...................... 738 677
Prepayments from joint interest owners..................... 200 374
Accrued expenses........................................... 494 415
Income taxes payable (Note 5).............................. 30 2
Other...................................................... 32 37
------- -------
Total current liabilities................................ 4,232 3,668
------- -------
Long-term bank debt (Note 4)................................. 5,500 4,900
Deferred income taxes (Note 5)............................... -- 117
Commitments and contingent liabilities (Note 9)
Stockholders' equity:
Preferred stock authorized 5,000,000 shares, no par value;
none issued............................................... -- --
Common stock authorized 20,000,000 shares of $.20 par
value; 4,645,303 shares issued in 1999 and 4,611,001 in
1998 (outstanding 3,800,558 in 1999 and 4,046,552 in 1998)
(Notes 1 and 7)........................................... 929 922
Additional paid-in capital................................. 20,069 19,656
Accumulated deficit........................................ (2,655) (1,440)
------- -------
18,343 19,138
Less:
Treasury stock, at cost (Note 7) 844,745 shares in 1999 and
564,449 shares in 1998.................................... (5,545) (3,874)
------- -------
Total stockholders' equity................................. 12,798 15,264
------- -------
$22,530 $23,949
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-36
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Revenues:
Oil and gas sales................................ $10,014 $10,617 $13,815
Operating and management services................ 1,386 1,336 1,176
Interest income and other........................ 100 141 165
------- ------- -------
Total revenues................................. 11,500 12,094 15,156
------- ------- -------
Costs and expenses:
Lease operating expenses......................... 1,903 2,140 1,849
Property and production taxes.................... 1,029 1,080 1,258
Operating and management services................ 884 1,060 827
General and administrative....................... 1,336 1,466 1,372
Depreciation, depletion and amortization......... 3,400 3,846 3,295
Impairments...................................... 973 3,482 2,179
Exploration expense.............................. 3,071 722 540
Retirement and separation........................ 111 -- --
Litigation expense............................... 119 4 10
Loss on sale of assets........................... -- -- 60
------- ------- -------
Total costs and expenses....................... 12,826 13,800 11,390
------- ------- -------
Operating income (loss)........................ (1,326) (1,706) 3,766
------- ------- -------
Other (income) expense:
Interest......................................... 373 260 174
Other............................................ 62 26 (4)
------- ------- -------
435 286 170
------- ------- -------
Earnings (loss) before income taxes................ (1,761) (1,992) 3,596
Provision (benefit) for income taxes (Note 5)...... (546) (757) 1,429
------- ------- -------
Net earnings (loss)............................ $(1,215) $(1,235) $ 2,167
======= ======= =======
Earnings (loss) per share (Note 8):
Basic............................................ $(.31) $(.29) $.50
======= ======= =======
Diluted.......................................... $(.31) $(.29) $.49
======= ======= =======
Weighted average number of common and common
equivalent shares outstanding:
Basic............................................ 3,898 4,194 4,299
======= ======= =======
Diluted.......................................... 3,898 4,194 4,392
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-37
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended November 30, 1999
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock
---------------- Paid-in (Accumulated -----------------
Shares Amount Capital deficit) Shares Amount
--------- ------ ---------- ------------ -------- -------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances, December 1,
1996................... 3,499,915 $700 $17,361 $ 720 344,569 $(2,556)
Exercise of employee
stock options.......... 99,233 20 548 -- 13,333 (131)
Purchase of shares...... -- -- -- -- 158,014 (1,381)
Shares issued for Stock
Purchase Plan.......... 6,996 1 62 -- (1,762) 12
Shares issued for
Incentive Bonus Plan
and directors' fees.... -- -- (7) -- (13,451) 105
Shares issued under
five-for-four stock
split.................. 885,924 177 (178) -- 107,808 --
Tax benefit of
disqualifying
disposition of
incentive stock
options................ -- -- 76 -- -- --
Income tax benefit of
loss carryforwards
arising prior to quasi-
reorganization......... -- -- 262 -- -- --
Net earnings............ -- -- -- 2,167 -- --
--------- ---- ------- ------- -------- -------
Balances, November 30,
1997................... 4,492,068 898 18,124 2,887 608,511 (3,951)
--------- ---- ------- ------- -------- -------
Exercise of employee
stock options.......... 109,910 22 592 -- 27,193 (229)
Purchase of shares...... -- -- -- -- 352,766 (2,550)
Shares issued for Stock
Purchase Plan.......... 9,023 2 70 -- (2,275) 16
10% stock dividend...... -- -- 492 (3,092) (386,494) 2,598
Shares issued for
Incentive Bonus Plan
and directors' fees.... -- -- (57) -- (35,252) 242
Tax benefit of stock
option exercises....... -- -- 215 -- -- --
Income tax benefit of
loss carryforwards
arising prior to quasi-
reorganization......... -- -- 220 -- -- --
Net loss................ -- -- -- (1,235) -- --
--------- ---- ------- ------- -------- -------
Balances, November 30,
1998................... 4,611,001 922 19,656 (1,440) 564,449 (3,874)
--------- ---- ------- ------- -------- -------
Exercise of employee
stock options.......... 23,320 5 63 -- 855 24
Purchase of shares...... -- -- -- -- 300,540 (1,836)
Shares issued for Stock
Purchase Plan.......... 10,982 2 66 -- (2,759) 19
Shares issued for
Incentive Bonus Plan
and directors' fees.... -- -- (38) -- (18,340) 122
Tax benefit of stock
option exercises....... -- -- 12 -- -- --
Income tax benefit of
loss carryforwards
arising prior to quasi-
reorganization......... -- -- 310 -- -- --
Net loss................ -- -- -- (1,215) -- --
--------- ---- ------- ------- -------- -------
Balances, November 30,
1999................... 4,645,303 $929 $20,069 $(2,655) 844,745 $(5,545)
========= ==== ======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-38
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Net earnings (loss)................................ $(1,215) $(1,235) $ 2,167
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation, depletion, and amortization........ 3,400 3,846 3,295
Impairments and loss on asset dispositions....... 973 3,482 2,179
Deferred income tax provision (benefit).......... (606) (822) 1,328
Exploration expense, non-cash portion............ 328 9 --
Other............................................ 147 190 163
Changes in operating assets and liabilities:
Accounts receivable.............................. (472) 1,177 (1,554)
Other current assets............................. (28) (7) 21
Accounts payable................................. 673 (298) 352
Undistributed oil and gas production receipts.... 69 (76) 339
Accrued production and property taxes............ 61 126 (4)
Prepayments from joint interest owners........... (174) (191) 307
Income taxes payable............................. 28 18 9
Other current liabilities........................ 74 39 36
------- ------- -------
Net cash provided by operating activities........ 3,258 6,258 8,638
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of assets..................... -- 36 1,005
Additions to oil and gas properties.............. (2,291) (6,642) (8,172)
Additions to other assets........................ (45) (111) (127)
------- ------- -------
Net cash used in investing activities............ (2,336) (6,717) (7,294)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt..................... 1,300 3,400 3,000
Reduction in long-term debt...................... (700) (700) (3,000)
Proceeds from exercise of stock options.......... 161 455 498
Purchase of treasury stock....................... (1,836) (2,550) (1,381)
------- ------- -------
Net cash provided by (used in) financing
activities...................................... (1,075) 605 (883)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (153) 146 461
Cash and cash equivalents at beginning of year..... 2,003 1,857 1,396
------- ------- -------
Cash and cash equivalents at end of year........... $ 1,850 $ 2,003 $ 1,857
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ 373 $ 254 $ 182
======= ======= =======
Income taxes, net of refunds..................... $ 32 $ 47 $ 91
======= ======= =======
Supplemental disclosure of non-cash investing and
financing activities:
Non-cash compensation expense related to common
stock........................................... $ 116 $ 190 $ 98
======= ======= =======
Use of loss carryforwards credited to additional
paid-in-capital................................. $ 310 $ 220 $ 262
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
C-39
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) FORMATION AND OPERATIONS OF THE COMPANY
Columbus Energy Corp. ("Columbus") was incorporated as a Colorado
corporation on October 7, 1982 primarily to explore for, develop, acquire and
produce oil and gas reserves. Columbus' wholly-owned subsidiary is Columbus
Gas Services, Inc. ("CGSI"). CEC Resources Ltd. ("Resources") was also a
wholly-owned subsidiary prior to February 24, 1995 when it was divested by
Columbus by a rights offering to its shareholders. On September 1, 1998
Columbus formed a Texas partnership named Columbus Energy, L.P. and is its
general partner. The partnership's limited partner is Columbus Texas, Inc.
("Texas"), a Nevada corporation, which is a wholly-owned subsidiary of
Columbus. All of the Company's oil and gas properties in Texas were
transferred to the partnership effective September 1, 1998. Columbus remains
the operator of the properties. Columbus and its subsidiaries are referred to
in these Notes to the Financial Statements as the "Company".
(2) ACCOUNTING POLICIES
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles and require
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. The following is a summary of the significant accounting
policies followed by the Company.
Consolidation
The accompanying consolidated financial statements include the accounts of
Columbus and its wholly-owned subsidiaries, CGSI and Texas. All significant
intercompany balances have been eliminated in consolidation.
Cash Equivalents
For purposes of the statements 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. Hedging activities are included in cash
flow from operations in the cash flow statements.
Financial Instruments and Concentrations of Credit Risk
The Company maintains demand deposit accounts with separate banks in Denver,
Colorado. The Company also invests cash in the highest rated commercial paper
of large U.S. companies, with maturities not over 30 days, which have minimal
risk of loss. At November 30, 1999 and 1998 the Company had investments in
commercial paper of $1,300,000 and $1,100,000, respectively. The carrying
amounts of accounts receivable and accounts payable approximate their fair
values based on the short-term nature of those instruments. The carrying
amount of long-term debt approximates fair value because the interest rate on
this instrument changes with market interest rates.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents and accounts receivable. Columbus as operator of jointly-owned oil
and gas properties, sells oil and gas production to relatively large U.S. oil
and gas purchasers (see Note 3), and pays vendors for oil and gas services.
The risk of non-payment by the purchasers, counterparties to the crude oil and
natural gas swap agreements or joint owners is considered minimal. The Company
does not obtain collateral from its oil and gas purchasers for sales to them.
Joint interest receivables are subject to collection under the terms of
operating agreements which provide lien rights to the operator.
C-40
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Oil and Gas Properties
The Company follows the successful efforts method of accounting.
Expenditures for lease acquisition and development costs (tangible and
intangible) relating to proved oil and gas properties are capitalized. Delay
and surface rentals are charged to expense in the year incurred. Dry hole
costs incurred on exploratory operations are expensed. Dry hole costs
associated with developing proved fields are capitalized. Expenditures for
additions, betterments, and renewals are capitalized. Exploratory geological
and geophysical costs are expensed when incurred.
Upon sale or retirement of proved properties, the cost thereof and the
accumulated depreciation or depletion are removed from the accounts and any
gain or loss is credited or charged to income if significant. Abandonment,
restoration, dismantlement costs and salvage value are taken into account in
determining depletion rates. These costs are generally about equal to the
proceeds from equipment salvage upon abandonment of such properties. When
estimated abandonment costs exceed the salvage value, the excess cost is
accrued and expensed. Maintenance and repairs are charged to operating
expenses.
Provision for depreciation and depletion of capitalized exploration and
development costs are computed on the unit-of-production method based on
proved reserves of oil and gas, as estimated by petroleum engineers, on a
property by property basis. Unproved properties are assessed periodically to
determine whether they are impaired. When impairment occurs, a loss is
recognized by providing a valuation allowance. When leases for unproved
properties expire, any remaining cost is expensed.
An impairment loss on oil and gas properties is reported as a component of
income from continuing operations. The Company recognizes an impairment loss
when the carrying value exceeds the expected undiscounted future net cash
flows of each property pool, at which time the property pool is written down
to the fair value. Fair value is estimated to be a discounted present value of
expected future net cash flows with appropriate risk consideration.
The Company uses crude oil and natural gas hedges to manage price exposure.
Realized gains and losses on the hedges are recognized in oil and gas sales as
settlement occurs.
The Company follows the entitlements method of accounting for balancing of
gas production. The Company's gas imbalances are immaterial at November 30,
1999 and 1998.
Other Property and Equipment
Other property and equipment consists of compressors, vehicles, office and
computer equipment and software. Gains and losses from retirement or
replacement of other properties and equipment are included in income.
Betterments and renewals are capitalized. Maintenance and repairs are charged
to operating expenses. Depreciation of other assets is provided on the
straight line method over their estimated useful lives, which range from three
to twelve years.
Operating and Management Services
The Company recognizes revenue for operating and management services
provided to other companies and non-operating interest owners in which the
Company has no economic interest. The Company receives overhead fees,
management fees and revenues related to gas marketing, compression and
gathering.
The cost of providing such services is expensed and shown as "operating and
management services" cost.
C-41
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
shares outstanding. Diluted earnings per share reflects the potential dilution
that would occur if options were exercised using the average market price for
the Company's stock for the period. Historical average number of shares
outstanding and earnings per share have been adjusted for the five-for-four
stock split distributed June 16, 1997 to shareholders of record as of May 27,
1997 and the 10% stock dividend distributed March 9, 1998 to shareholders of
record as of February 23, 1998.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation" in 1995. This statement prescribes
the accounting and reporting standards for stock-based employee compensation
plans and was effective for the Company's 1997 fiscal year. The Company makes
the alternative pro forma disclosures as permitted in the SFAS.
New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137 which deferred the effective date
for SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to fiscal years beginning after June 15, 2000. The Company must
apply this statement no later than its fiscal year beginning December 1, 2000.
SFAS No. 133 requires recording all derivative instruments as assets or
liabilities measured at fair value. This Statement is not expected to
materially affect the Company's financial statements.
(3) OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth the capitalized costs related to U.S. oil and
gas producing activities, costs incurred in oil and gas property acquisition,
exploration and development activities, and results of operations for
producing activities:
Capitalized Costs Relating to Oil and Gas
Producing Activities
(in thousands)
<TABLE>
<CAPTION>
November 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Proved properties......................................... $ 36,456 $ 35,290
Unproved properties....................................... 406 749
-------- --------
36,862 36,039
Less accumulated depreciation, depletion, amortization and
valuation allowance...................................... (21,221) (17,919)
-------- --------
Total net properties.................................... $ 15,641 $ 18,120
======== ========
</TABLE>
C-42
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities
(in thousands)
<TABLE>
<CAPTION>
Year Ended November
30,
---------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Property acquisition costs:
Proved.................................................. $ -- $ 74 $ --
Unproved................................................ 226 764 508
Exploration costs......................................... 3,071 722 540
Development costs......................................... 1,927 4,925 9,043
------ ------ -------
Total costs incurred.................................. $5,224 $6,485 $10,091
====== ====== =======
</TABLE>
Results of Operations for Producing Activities
(in thousands)
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Sales............................................... $10,014 $10,617 $13,815
Production (lifting) costs (a)...................... 2,932 3,220 3,107
Exploration expenses................................ 3,071 722 540
Impairment of long-lived assets..................... 973 3,482 2,179
Depreciation depletion and amortization (b)......... 3,301 3,743 3,194
------- ------- -------
(263) (550) 4,795
Income tax provision (benefit)...................... (82) (209) 1,905
------- ------- -------
Results of operations from producing activities
(excluding overhead and interest incurred)......... $ (181) $ (341) $ 2,890
======= ======= =======
</TABLE>
--------
(a) Production costs include lease operating expenses, production and property
taxes
(b) Amortization expense per equivalent barrel of production: 1999-$4.69 1998-
$4.64 1997-$3.91
For the years ended November 30, 1999, 1998 and 1997, the Company had the
following customers who purchased production equal to more than 10% of its
total revenues. The following table shows the amounts purchased by each
customer.
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
Amount % Revenue Amount % Revenue Amount % Revenue
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Customer A................... $1,521 15.2% $1,652 15.6% $2,956 21.4%
Customer B................... 4,528 45.2 5,204 49.0 6,536 47.3
Customer C................... -- -- -- -- 1,395 10.1
Customer D................... 1,465 14.6 1,321 12.4 -- --
</TABLE>
In the Company's judgment, termination by any purchaser to which its present
sales are made would not have a material impact upon its ability to sell its
production to another purchaser at similar prices.
C-43
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) LONG-TERM DEBT
The Company has a Credit Agreement ("Agreement") with Norwest Bank Denver,
N.A. ("Bank") having a borrowing base of $10,000,000, which is subject to
semi-annual redetermination for any increase or decrease. On May 12, 1999 the
Credit Agreement was amended to extend the revolving period to July 1, 2001
when it entirely converts to an amortizing term loan which matures July 1,
2005. The credit is collateralized by a first lien on oil and gas properties.
The interest rate options are the Bank's prime rate or LIBOR plus 1.50%. In
addition, a commitment fee of 1/4 of 1% of the average unused portion of the
credit is payable quarterly.
At November 30, 1999 outstanding borrowings on the revolving line of credit
were $5,500,000 and the unused borrowing base available was $4,500,000. The
$5,500,000 bears interest at LIBOR rate of 5.51% plus 1.50%.
The Agreement as amended provides that certain financial covenants be met
which include a minimum net worth of $12,000,000 plus 50% of Cumulative Net
Income, as defined, minus exploration expenses after August 31, 1998, a
quarterly calculation of a current ratio of not less than 1.0:1.0 and a ratio
of Funded Debt to Consolidated Net Worth, as defined, not greater than
1.25:1.00. Columbus has complied with these covenants. Under the terms of the
Agreement, Columbus is permitted to declare and pay a dividend in cash so long
as no default has occurred or a mandatory prepayment of principal is pending.
The scheduled payments of long-term debt for the years ending November 30
are as follows (in thousands):
<TABLE>
<S> <C>
2001................................................................ $ 458
2002................................................................ 1,375
2003................................................................ 1,375
2004................................................................ 1,375
2005................................................................ 917
------
Total............................................................. $5,500
======
</TABLE>
(5) INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 28 $ -- $ 13
State................................................ 32 65 88
----- ----- ------
60 65 101
----- ----- ------
Deferred:
Federal.............................................. (582) (789) 942
Use of loss carryforwards............................ -- -- 347
State................................................ (24) (33) 39
----- ----- ------
(606) (822) 1,328
----- ----- ------
Total income tax provision (benefit)................ $(546) $(757) $1,429
===== ===== ======
</TABLE>
C-44
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total tax provision has resulted in effective tax rates which differ from
the statutory Federal income tax rates. The reasons for these differences are:
<TABLE>
<CAPTION>
Percent of Pretax Earnings
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate.................... (34)% (34)% 34%
State income taxes..................... 1 2 2
Change in valuation allowance.......... -- (4) 2
Other.................................. 2 (2) 2
-------- -------- --------
Effective rate......................... (31)% (38)% 40%
======== ======== ========
</TABLE>
The Company files a consolidated income tax return with its subsidiaries.
Consolidated income taxes are payable only when taxable income exceeds
available net operating loss carryforwards and other credits.
The Tax Reform Act of 1986 limits the use of corporate tax carryforwards in
any one taxable year if a corporation experiences a 50% change of ownership.
Columbus experienced such a change of ownership in October 1987 which limits
its use of pre-change ownership net operating losses to approximately $900,000
in each subsequent year.
The Company uses the asset and liability method to account for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the temporary differences between financial statement and tax basis of assets
and liabilities using enacted rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets (net of a valuation
allowance) primarily result from net operating loss carryforwards, percentage
depletion and certain accrued but unpaid employee benefits. Deferred tax
liabilities result from the recognition of depreciation, depletion and
amortization in different periods for financial reporting and tax purposes.
Because of the Company's previous 1987 quasi-reorganization, the Company is
required to report the effect of its net deferred tax asset arising prior to
December 1, 1987 as an increase in stockholders' equity rather than as an
increase to net earnings.
C-45
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, certain tax assets (shown in the table below) were
utilized and the valuation allowance was decreased during the year by
$122,000. The tax effect of significant temporary differences representing
deferred tax assets and liabilities and changes were as follows (in
thousands):
<TABLE>
<CAPTION>
Current Year
-------------------------
Dec. 1, Stockholders' Operations/ Nov. 30,
1998 Equity Other 1999
------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Deferred tax assets:
Pre-1987 loss carryforwards...... $ 1,049 $-- $ (609) $ 440
Post-1987 loss carryforwards..... 615 -- 2 617
Percentage depletion
carryforwards................... 1,478 -- 172 1,650
State income tax loss
carryforwards................... 118 -- 6 124
Other............................ 329 -- 58 387
------- ---- ------ -------
Total.......................... 3,589 -- (371) 3,218
Valuation allowance (long-term).. (1,408) 310(a) (188) (1,286)
------- ---- ------ -------
Deferred tax assets............ 2,181 310 (559) 1,932
------- ---- ------ -------
Tax benefit of stock option
exercises....................... -- 12(a) (12) --
------- ---- ------ -------
Deferred tax liabilities--
Depreciation, depletion and
amortization and other.......... (1,971) -- 1,176 (795)
------- ---- ------ -------
Net tax asset.................. $ 210 $322 $ 605 $ 1,137
======= ==== ====== =======
</TABLE>
--------
(a) Credited to additional paid-in capital.
The Company has approximate net operating loss carryforwards (in thousands)
available at November 30, 1999 as follows:
<TABLE>
<CAPTION>
Net
Operating
Expiration Year Loss
--------------- ---------
<S> <C>
2000............................................................. $ 904
2001............................................................. 387
2003............................................................. 105
2004............................................................. 115
2010............................................................. 1,593
------
$3,104
======
</TABLE>
For Alternative Minimum Tax purposes the Company had net operating loss
carryforwards of approximately $3,219,000 as of November 30, 1999. The Company
also has percentage depletion carryforwards of $4,344,000 which do not expire.
Oklahoma state income tax operating loss carryforwards total approximately
$2,075,000 at November 30, 1999. These carryforwards begin to expire in fiscal
2003 and have a full valuation allowance and no net asset value in these
financial statements.
C-46
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The earnings before income taxes for financial statements differed from
taxable income as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Earnings (loss) before income taxes per financial
statements........................................ $(1,761) $(1,992) $ 3,596
Differences between income before taxes or
financial statement purposes and taxable income:
Intangible drilling costs deductible for taxes... (453) (2,685) (6,158)
Excess of book over tax depletion, depreciation
and amortization................................ 2,212 1,800 1,683
Tax benefit of stock option exercises............ (32) (229) (200)
Impairment expense............................... 973 3,426 1,843
Lease abandonments............................... (393) (74) (13)
Geological expense............................... 318 -- --
Other............................................ 153 (10) 153
------- ------- -------
Federal taxable income............................. $ 1,017 $ 236 $ 904
======= ======= =======
</TABLE>
Realization of the future tax benefits is dependent on the Company's ability
to generate taxable income within the carryforward period. Based upon the
proved reserves as of November 30, 1999 as well as contemplated drilling
activities, but excluding revenues from any possible future increase in proved
reserves, management believes that taxable income during the carryforward
period will be sufficient to essentially utilize the NOL's before they expire.
Of the total valuation allowance of $1,286,000 as of November 30, 1999,
$206,000 relates to pre-quasi-reorganization tax assets and the balance of
$1,080,000 relates to post-quasi-reorganization tax assets. In future periods,
any reduction of the pre-quasi-reorganization portion of the valuation
allowance will be credited to additional paid-in capital and any reduction of
the post-quasi-reorganization portion of the valuation allowance will be
credited to income.
Estimates of future taxable income are subject to continuing review and
change because oil and gas prices fluctuate, proved reserves are developed or
new reserves added as a result of future drilling activities, and operation
and management services revenue and expenses vary. A minimum level of
$8,500,000 of future taxable income will be necessary to enable the Company to
fully utilize the net operating loss carryforwards and realize the gross
deferred tax assets of $3,218,000. This level of income can be achieved using
the value of proved reserves reported in the year end November 30, 1999
standardized measure of net cash flows but this does not give total assurance
that sufficient taxable income will be generated for total utilization because
of the volatility inherent in the oil and gas industry which makes it
difficult to project earnings in future years due to the factors mentioned
above. During 1999 the valuation allowance was decreased by $310,000 related
to pre-quasi- reorganization tax assets and increased by $188,000 for post-
quasi-reorganization tax assets. During 1998 the valuation allowance was
decreased by $221,000 related to pre-quasi-reorganization tax assets and
increased by $186,000 for post-quasi-reorganization assets. During 1997 the
valuation allowance was decreased by $262,000 related to pre-quasi-
reorganization tax assets and increased by $236,000 for post-quasi-
reorganization assets.
(6) RELATED PARTY TRANSACTIONS
Reimbursement is made by Resources to Columbus for services provided by
Columbus officers and employees for managing Resources and reduces general and
administrative expense. This reimbursement totaled $33,000 for fiscal 1999,
$218,000 for fiscal 1998 and $225,000 for fiscal 1997.
During fiscal 1997, the Company continued its consulting and drilling
arrangements with Trueblood Resources, Inc ("TRI") that began in 1995 and
continued each year with amendments as appropriate for each
C-47
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year's program. In 1997 there was a 90-day written notice provision in
addition to the monthly retainer fee of $10,000 for geological and geophysical
consulting services provided by Mark Butler, a Vice President of TRI, who
would dedicate a total of 135 hours each three-month period reviewing
prospects of third parties and supervising and planning 3D seismic programs on
Columbus' leaseholds. Also, there was to be continued participation for a
37.5% working interest in the AMI located in the Anadarko Basin primarily
located in two counties in the Oklahoma Panhandle. TRI is a privately held oil
and gas exploration and production company whose major shareholder is John
Trueblood, the son of Columbus' CEO, Harry A. Trueblood, Jr., who is a
director and also was a 1.2% shareholder of TRI. Also, there is a related
company to TRI known as Trumark Production Company, LLC ("TPC") in which Mark
Butler and John Trueblood each own 50% which is primarily a technical services
oriented company for which TRI serves in an administrative capacity therefor.
In November 1997, an amended agreement was created to cover 1998 fiscal year
operations and superseded and replaced the original 1995 agreement and
supplements thereto. Columbus and TRI formed a new AMI which included all of
Texas County, Oklahoma wherein Columbus would take up to a one-third working
interest participation and the remainder belonged to TRI. The Company advanced
$30,000 to acquire digitized logs and related software for use in the search
for new prospects in Texas County with the resulting data to be owned by
Columbus. To compensate for the advance, TRI agreed to waive any cash
promotion on the first four prospects generated from the data and further
reduced the 10% carried working interest promotion on the 100% WI to 5% in the
first two of those prospects. The retainer fee of $10,000 per month was
continued covering up to 135 hours in each three months period of Mr. Butler's
time to perform certain geological and geophysical services. Also TRI would
have the right to participate for up to a proportionate 5.0% WI in any third
party deal reviewed by Mr. Butler and taken by the Company.
For fiscal 1999, two separate agreements dated December 1, 1998 were entered
into by the Company. One was with TPC wherein Mr. Butler increased his base
consulting to 70 hours per month and his other time would be devoted to
finding prospects in the Oklahoma AMI for TRI's operations with third party
participants as well as with Columbus. The retainer would be at the rate of
$170 per hour which would result in a monthly retainer charge of $11,900. For
each prospect review by Mr. Butler and taken by Columbus, TPC would receive a
2% proportionately reduced carried working interest through logs but certain
existing areas of operations were specifically excepted from this arrangement.
The second agreement was with TRI and basically gave Columbus the option to
participate in the Oklahoma prospects during the year with no carried working
interest burden related to its proportionate share of such prospects that
might be drilled.
As a result of the above contracts, retainer fees paid to TRI for TPC's
consulting services, etc. were $155,000 in fiscal 1999, $179,000 in 1998, and
$121,000 in 1997. Promotional costs plus associated actual costs of drilling
wells involved which were paid to TRI amounted to $348,000 in 1999, $5,000 in
1998 and $614,000 in 1997. The amounts are paid monthly and at each year-end
no other amounts were owed.
(7) CAPITAL STOCK
The shares and prices of stock options in this note have been adjusted to
reflect the five-for-four stock split in 1997 and the 10% stock dividend in
fiscal 1998.
Columbus has several stock option plans with outstanding options for the
benefit of all employees. Under the 1985 Plan, options for 42,178 shares were
exercisable at November 30, 1999. No additional options may be granted under
the 1985 Plan. At November 30, 1998, 63,731 shares were exercisable.
C-48
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the 1995 Plan, as of November 30, 1999, 17,487 option shares remained
available for granting, and options for 287,752 shares were exercisable.
Options may be exercised for a period determined at grant date but not to
exceed five years. Options are vested in three equal annual amounts from grant
date or each annual amount may be exercised immediately for each twelve-month
period the optionholder has been an employee of the Company. At November 30,
1998, 6,937 shares were available for granting, and options for 314,182 shares
were exercisable.
The Board of Directors has granted non-qualified stock options of which
there were 329,886 exercisable at November 30, 1999 and 231,803 shares were
exercisable at November 30, 1998. The Board of Directors has reserved 475,000
shares of treasury stock to be used for issuing common stock when non-
qualified stock options are exercised.
On December 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". The Company elected to continue to measure
compensation costs for these plans using the current method of accounting
under Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense is recognized for fixed stock options granted with an
exercise price equal to or greater than the market value of Columbus stock on
the date of grant. Had compensation cost for the Company's stock option plans
been determined using the fair-value method in SFAS No. 123, the Company's net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
(thousands except per
share amounts)
<S> <C> <C> <C>
Net income (loss)
As reported...................................... $(1,215) $(1,235) $2,167
Pro forma........................................ $(1,340) $(1,392) $1,968
Earnings (loss) per share (basic)
As reported...................................... $ (.31) $ (.29) $ .50
Pro forma........................................ $ (.34) $ (.33) $ .46
</TABLE>
Options are granted at 100% of fair market value on the date of grant. The
following table is a summary of stock option transactions for the three years
ended November 30, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
(options in thousands)
<S> <C> <C> <C> <C> <C> <C>
Shares under option at
beginning of year......... 619 $6.73 557 $6.45 490 $5.65
Granted.................... 246 $5.93 182 $6.76 191 $7.38
Exercised.................. (67) $5.40 (115) $5.34 (121) $4.70
Expired.................... (49) $6.46 (5) $7.79 (3) $6.64
--- ---- ----
Shares under option at end
of year................... 749 $6.61 619 $6.73 557 $6.45
=== ==== ====
Options exercisable at
November 30............... 660 $6.74 610 $6.73 542 $6.42
Shares available for future
grant at end of year...... 17 7 46
Weighted-average fair value
of options granted during
the year.................. $1.07 $1.40 $2.04
</TABLE>
C-49
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's stock options
outstanding at November 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range of Options Contractual Average Options Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at Year End (Years) Price at Year End Price
-------- ----------- ----------- --------- ----------- ---------
(options in thousands)
<S> <C> <C> <C> <C> <C>
$4.68 - $5.79 137 2.1 $5.57 52 $5.58
$6.12 - $6.44 273 2.4 $6.21 269 $6.21
$7.00 - $7.84 339 1.5 $7.34 339 $7.34
--- --- ----- --- -----
$4.68 - $7.84 749 2.0 $6.61 660 $6.74
=== === ===== === =====
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected option life--years............................. 2.30 2.32 2.36
Risk-free interest rate................................. 5.50% 5.02% 6.08%
Dividend yield.......................................... 0% 0% 0%
Volatility.............................................. 19.94% 25.87% 30.60%
</TABLE>
On October 28, 1992, the Board of Directors approved an Employee Stock
Purchase Plan ("Plan") to begin January 1, 1993, which was approved by the
shareholders at the 1993 annual meeting. Under the Plan a total of 220,000
shares were reserved from authorized unissued common stock from which payments
by participants into the Plan will be utilized to purchase shares. The Company
contributes an amount of shares equivalent to 25% of those payments which are
issued out of the Company's treasury stock as vesting occurs semi-annually.
The price of the issued shares equals the average trading price during each
six month purchase period or the ending price, whichever is less. The
following table summarizes the Stock Purchase Plan activity for the last three
fiscal years:
<TABLE>
<CAPTION>
Matching Total Shares from Average
Contributions Shares Treasury Cost
Fiscal Year Expense Purchased Stock Per Share
----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1997........................... $15,000 8,758 1,762 $8.58
1998........................... $17,000 11,298 2,275 $7.73
1999........................... $16,000 13,741 2,759 $6.30
</TABLE>
The Company has been authorized by the Board of Directors to repurchase its
common shares from the market at various prices during the last several years.
Those repurchases are summarized as follows:
<TABLE>
<CAPTION>
Shares
----------------------
Fiscal year Average
repurchased As purchased Restated* price*
----------- ------------ --------- -------
<S> <C> <C> <C>
1997.......................................... 158,000 197,863 $6.92
1998.......................................... 352,750 357,715 $7.07
1999.......................................... 300,538 300,538 $6.08
</TABLE>
--------
* Restated for stock split and stock dividends
C-50
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of November 30, 1999 a total of 73,384 shares remained to be purchased
from the most recent authorizations to repurchase shares at a price not to
exceed $6.00 per share. As of January 31, 2000, 45,000 of those shares have
subsequently been acquired at an average price of $5.61 per share.
(8) EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted earnings
per share (EPS):
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands,
except per share data)
<S> <C> <C> <C>
Reconciliation of basic and diluted EPS
share computations:
Income (loss) available to common
shareholders--basic and diluted EPS
(numerator).............................. $ (1,215) $ (1,235) $ 2,167
========== ========== =========
Shares (denominator):
Basic EPS................................. 3,898 4,194 4,299
Effect of dilutive option shares.......... -- -- 93
---------- ---------- ---------
Diluted EPS............................... 3,898 4,194 4,392
========== ========== =========
Per share amount:
Basic EPS................................. $ (.31) $ (.29) $ .50
========== ========== =========
Diluted EPS............................... $ (.31) $ (.29) $ .49
========== ========== =========
Number of shares not included in dilutive
EPS that would have been antidilutive
because exercise price of options was
greater than the average market price of
the common shares.......................... 544 138 73
========== ========== =========
</TABLE>
Historical average number of shares outstanding and earnings per share have
been adjusted for the five-for-four stock split distributed June 16, 1997 to
shareholders of record as of May 27, 1997 and the 10% stock dividend
distributed March 9, 1998 to shareholders of record as of February 23, 1998.
(9) COMMITMENTS AND CONTINGENT LIABILITIES
The Company's Articles of Incorporation and By-Laws provide for
indemnification of its officers, directors, agents and employees to the
maximum extent authorized by the Colorado Corporation Code, as amended or as
may be amended, revised or superseded. In addition, the Company has entered
into individual indemnification agreements with its officers and directors,
present and past, which agreements more fully describe such indemnification.
In June 1991, Columbus executed a lease for its present office space. The
total rent expense for 1999, 1998 and 1997 was approximately $200,000,
$171,000 and $161,000, respectively. Columbus has extended the lease for an
additional one year through September 2000 at a base rate of $21,525 per
month. Future rental payments required under this lease as of November 30,
1999 are $215,000 for fiscal year 2000.
Columbus is self-insured for medical and dental claims of its U. S.
employees and dependents as well as any former employees or dependents who are
eligible and elect coverage under COBRA rules. Columbus pays a premium to
obtain both individual and aggregate stop-loss insurance coverage. A liability
for estimated claims incurred and not reported or paid before year end is
included in other current liabilities.
C-51
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The separation pay policy of Columbus includes a retirement provision.
Officers and employees may retire at age 65, or older, and at the discretion
of the Board of Directors be paid retirement compensation based upon the
length of service and the prior year's average compensation. Such compensation
has been approved for three individuals who have reached age 65. As of
November 30, 1999 the accrued liability totals $290,000 which may change in
future years until their retirement as compensation and length of service with
Columbus changes. The total obligation is unfunded and payment upon an
individual's retirement will be made from working capital. The total expense
accrued was $120,000, $18,000 and $23,000 in 1999, 1998 and 1997,
respectively.
Columbus periodically hedges both natural gas and crude oil prices by
entering into "swaps". The swap is matched against the calendar monthly
average price on the NYMEX and settled monthly. Revenues were decreased when
the market price at settlement exceeded the contract swap price or increased
when the contract swap price exceeded the market price. There was no hedging
activity in fiscal 1998. The following table shows the results of these swaps:
<TABLE>
<CAPTION>
Increase
(decrease) in
oil and gas
revenues
Volume ------------------
Description per mo. Period 1999 1997
----------- --------- ------------- -------- --------
(Mmbtu or
bbl)
<S> <C> <C> <C> <C>
Natural Gas
$2.20/Mmbtu....................... 60,000 3/97 - 10/97 $(86,400)
Crude Oil
Collar with $17.50/ bbl floor and
$22.25/bbl ceiling............... 7,500 9/99 - 8/00 $(34,000)
$21.17/bbl........................ 10,000 11/96 - 10/97 $ 8,900
$17.25/bbl with $19.50/bbl cap.... 10,000 1/96 - 12/96 $(22,500)
</TABLE>
The Company's natural gas and crude oil swaps are considered financial
instruments with off-balance sheet risk which are entered into in the normal
course of business to partially reduce its exposure to fluctuations in the
price of crude oil and natural gas. Those instruments involved, to varying
degrees, elements of market and credit risk in excess of the amount recognized
in the balance sheets.
The Company had a crude oil hedge outstanding as of November 30, 1999 by
using a costless "collar" on 7,500 barrels per month for the 12 months from
September 1, 1999 through August 31, 2000. This "collar" is settled monthly
against the calendar monthly average price on the NYMEX with a $17.50 per
barrel floor and $22.25 per barrel ceiling. For any average price below or
above those prices Columbus receives or pays the difference which increases or
reduces oil revenues each month in which this occurs. For the two months of
December, 1999 and January, 2000, oil sales would have been $65,000 higher if
this hedge had not been in place because oil prices exceeded the $22.25
ceiling price. For the remaining period of February through August 2000 using
the prevailing price as of January 31, 2000 for each of the months, the
settlement value the Company would owe is $158,000 which would also reduce
crude oil sales.
The Company is not aware of any events of noncompliance in its operations
with any environmental laws and regulations nor of any potentially material
contingencies related to environmental issues. There is no way management can
predict what future environmental control problems may arise. The continually
changing character of environmental regulations and requirements that might be
enacted by jurisdictional authorities in various operational areas defies
forecasting.
On October 7, 1998, Columbus was served with a complaint in a lawsuit styled
Maris E. Penn, Michael Mattalino, Bruce Davis, and Benjamin T. Willey, Jr. vs.
Columbus Energy Corp., Cause No. 98-44940 in the 55th District Court of Harris
County, Texas. The plaintiffs are parties to a September 1994 settlement
agreement
C-52
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
that provided for the conveyance of overriding royalty interests in leases
acquired by Columbus in certain portions of Harris County. Plaintiffs claim
Columbus is obligated under the settlement agreement to acquire all leases
available within a described portion of Harris County and that Columbus has
failed to develop those leases as a reasonably prudent operator. Plaintiffs
are claiming damages based upon their alleged right to a 3% overriding royalty
interest in leases taken and drilled by third parties within the described
area. Discovery is ongoing. Columbus denies all allegations of failure to
develop and instructed counsel to vigorously defend this lawsuit. The parties
are set for mediation on April 11, 2000 and for trial on May 22, 2000.
(10) DEFINED CONTRIBUTION PENSION PLAN
The Company has a qualified defined contribution 401(k) plan covering all
employees. The Company matches, at its discretion, a portion of a
participant's voluntary contribution up to a certain maximum amount of the
participant's compensation. The Company's contribution expense was
approximately $110,000, $106,000, and $95,000 in the fiscal years 1999, 1998
and 1997, respectively.
C-53
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) INDUSTRY SEGMENTS
The Company operates primarily in two business segments of (1) oil and gas
exploration and development, and (2) providing services as an operator,
manager and gas marketing advisor.
Summarized financial information concerning the business segments is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Operating revenues from unaffiliated
services:
Oil and gas............................... $10,022 $10,630 $13,848
Services.................................. 1,478 1,464 1,308
------- ------- -------
Total................................... $11,500 $12,094 $15,156
======= ======= =======
Depreciation, depletion and amortization
(a):
Oil and gas............................... $ 3,341 $ 3,784 $ 3,238
Services.................................. 59 62 57
------- ------- -------
Total................................... $ 3,400 $ 3,846 $ 3,295
======= ======= =======
Operating income (loss):
Oil and gas............................... $ (294)(b) $ (582)(b) $ 4,714(b)
Services.................................. 415 342 424
General corporate expenses................ (1,447) (1,466) (1,372)
------- ------- -------
Total operating income (loss)........... (1,326) (1,706) 3,766
Interest expense and other.................. (435) (286) (170)
------- ------- -------
Earnings (loss) before income taxes..... $(1,761) $(1,992) $ 3,596
======= ======= =======
Identifiable assets (a):
Oil and gas............................... $18,621 $19,587 $21,917
Services.................................. 3,909 4,362 4,218
------- ------- -------
Total................................... $22,530 $23,949 $26,135
======= ======= =======
Additions to property and equipment:
Oil and gas............................... $ 2,215 $ 5,872 $ 9,671
Services.................................. -- 45 7
------- ------- -------
Total................................... $ 2,215 $ 5,917 $ 9,678
======= ======= =======
</TABLE>
--------
(a) Other property and equipment have been allocated above to the oil and gas
and services segment based upon the estimated proportion the property is
used by each segment. Therefore, depletion, depreciation and amortization
and identifiable assets do not match the functional allocations in Note 3
to the consolidated financial statements.
(b) Includes non-cash impairment loss of $973,000 in 1999, $3,482,000 in 1998
and $2,179,000 in 1997.
C-54
<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.
Columbus Energy Corp.
___________________
(Registrant)
Date: February 17, 2000 /s/ Harry A. Trueblood, Jr.
By: _________________________________
Harry A. Trueblood, Jr.
Chairman of the Board
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
Principal Executive Officer
<S> <C> <C>
/s/ Harry A. Trueblood, Jr. Chairman of the Board, 2/17/00
______________________________________ President, and Chief
Harry A. Trueblood, Jr. Executive Officer
Chief Operating Officer
/s/ Clarence H. Brown Executive Vice President 2/17/00
______________________________________ and Chief Operating
Clarence H. Brown Officer
Principal Accounting and Financial Officer
/s/ Ronald H. Beck Vice President 2/17/00
______________________________________
Ronald H. Beck
Majority of Board of Directors
/s/ Harry A. Trueblood, Jr. Director 2/17/00
______________________________________
Harry A. Trueblood, Jr.
/s/ Clarence H. Brown Director 2/17/00
______________________________________
Clarence H. Brown
/s/ J. Samuel Butler Director 2/17/00
______________________________________
J. Samuel Butler
/s/ William H. Blount, Jr. Director 2/17/00
______________________________________
William H. Blount, Jr.
</TABLE>
C-55
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
ANNEX D
UNITED STATES
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 August 31, 2000
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: 001-9872
COLUMBUS ENERGY CORP.
(Exact name of registrant as specified in its charter)
Colorado 84-0891713
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1660 Lincoln St., 80264
Denver, CO (Zip Code)
(Address of principal executive
offices)
(303) 861-5252
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at
Class October 6, 2000
----- ---------------
<S> <C>
Common stock, $.20 par value.................................... 3,760,743
</TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
COLUMBUS ENERGY CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--August 31, 2000 and November 30, 1999...... 3
Consolidated Statements of Operations--Three Months and Nine Months
Ended August 31, 2000 and 1999......................................... 5
Consolidated Statement of Stockholders' Equity--Nine Months Ended August
31, 2000............................................................... 6
Consolidated Statements of Cash Flows--Nine Months Ended August 31, 2000
and 1999............................................................... 7
Notes to the Consolidated Financial Statements.......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 21
Item 2. Not Applicable
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 21
Items 4 and 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K................................. 21
Signatures............................................................... 22
</TABLE>
D-2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 2,455 $ 1,850
Accounts receivable:
Joint interest partners........................... 1,058 1,780
Oil and gas sales................................. 2,195 1,501
Allowance for doubtful accounts................... (101) (116)
Deferred income taxes (Note 3)...................... 60 200
Inventory of oil field equipment, at lower of
average cost or market............................. 81 106
Other............................................... 50 80
-------- --------
Total current assets............................ 5,798 5,401
-------- --------
Deferred income taxes (Note 3)........................ 570 937
Property and equipment:
Oil and gas assets, successful efforts method (Note
2)................................................. 38,166 36,862
Other property and equipment........................ 1,884 1,836
-------- --------
40,050 38,698
Less: Accumulated depreciation, depletion and
amortization and valuation allowance............... (24,895) (22,506)
-------- --------
Net property and equipment...................... 15,155 16,192
-------- --------
$ 21,523 $ 22,530
======== ========
</TABLE>
(continued)
D-3
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS--(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
----------- ------------
(unaudited)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable.................................... $ 1,933 $ 2,352
Undistributed oil and gas
production receipts................................ 547 386
Accrued production and property taxes............... 474 738
Prepayments from joint interest owners.............. 196 200
Accrued expenses.................................... 499 494
Income taxes payable (Note 3)....................... 6 30
Other............................................... 2 32
------- -------
Total current liabilities......................... 3,657 4,232
------- -------
Long-term bank debt (Note 2).......................... 4,400 5,500
Commitments and contingent liabilities (Notes 4, 5 and
9)
Stockholders' equity:
Preferred stock authorized 5,000,000 shares, no par
value, none issued................................. -- --
Common stock authorized 20,000,000 shares of $.20
par value; shares issued 4,658,777 in 2000, and
4,645,303 in 1999 (outstanding 3,753,868 in 2000
and 3,800,558 in 1999)............................. 932 929
Additional paid-in capital.......................... 20,139 20,069
Accumulated deficit................................. (1,721) (2,655)
------- -------
19,350 18,343
Less: Treasury stock at cost 904,909 shares in 2000
and 844,745 shares in 1999........................... (5,884) (5,545)
------- -------
Total stockholders' equity........................ 13,466 12,798
------- -------
$21,523 $22,530
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-4
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
August 31, August 31,
-------------- -------------
2000 1999 2000 1999
------- ------ ------ ------
(in thousands, except per
share data)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales............................. $10,742 $7,064 $4,671 $2,760
Operating and management services............. 1,035 1,025 342 353
Interest and other income..................... 114 70 45 23
------- ------ ------ ------
Total revenues.............................. 11,891 8,159 5,058 3,136
------- ------ ------ ------
Costs and expenses:
Lease operating expenses...................... 1,566 1,357 544 514
Property and production taxes................. 995 741 410 242
Operating and management services............. 598 693 164 220
General and administrative.................... 1,217 1,075 340 299
Depreciation, depletion and amortization...... 2,414 2,571 932 847
Impairments................................... 500 503 500 --
Exploration expense........................... 1,940 971 250 627
Litigation expense............................ 380 41 13 24
Advisory fees................................. 490 -- 371 --
------- ------ ------ ------
Total costs and expenses.................... 10,100 7,952 3,524 2,773
------- ------ ------ ------
Operating income.......................... 1,791 207 1,534 363
------- ------ ------ ------
Other expenses (income):
Interest...................................... 325 273 108 98
Other......................................... 7 4 7 1
------- ------ ------ ------
332 277 115 99
------- ------ ------ ------
Earnings (loss) before income taxes......... 1,459 (70) 1,419 264
Provision (benefit) for income taxes (Note 3)... 525 (27) 511 100
------- ------ ------ ------
Net earnings (loss)......................... $ 934 $ (43) $ 908 $ 164
======= ====== ====== ======
Earnings (loss) per share (Note 7):
Basic......................................... $ .25 $ (.01) $ .24 $ .04
======= ====== ====== ======
Diluted....................................... $ .25 $ (.01) $ .24 $ .04
======= ====== ====== ======
Weighted average number of common shares and
common equivalent shares outstanding:
Basic......................................... 3,757 3,920 3,749 3,870
======= ====== ====== ======
Diluted....................................... 3,764 3,920 3,784 3,873
======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-5
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Nine Months Ended August 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
---------------- Paid-in Accumulated ----------------
Shares Amount Capital Deficit Shares Amount
--------- ------ ---------- ----------- ------- -------
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances, December 1,
1999................... 4,645,303 $929 $20,069 $(2,655) 844,745 $(5,545)
Exercise of employee
stock options.......... 2,200 1 9 -- -- --
Purchase of shares...... -- -- -- -- 63,000 (358)
Shares issued for Stock
Purchase Plan.......... 11,274 2 61 -- (2,836) 19
Net earnings............ -- -- -- 934 -- --
--------- ---- ------- ------- ------- -------
Balances, August 31,
2000................... 4,658,777 $932 $20,139 $(1,721) 904,909 $(5,884)
========= ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-6
<PAGE>
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended August
31,
----------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Net earnings (loss)......................................... $ 934 $ (43)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation, depletion, and amortization................. 2,414 2,571
Impairments............................................... 500 503
Deferred income tax provision (benefit)................... 507 (81)
Exploration expense, noncash portion...................... -- 80
Other..................................................... 45 108
Net change in operating assets and liabilities.............. (561) (630)
------- -------
Net cash provided by operating activities............... 3,839 2,508
------- -------
Cash flows from investing activities:
Proceeds from sale of assets.............................. 66 --
Additions to oil and gas properties....................... (1,866) (2,487)
Additions to other assets................................. (49) (11)
------- -------
Net cash used in investing activities................... (1,849) (2,498)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 300 1,100
Reduction in long-term debt............................... (1,400) (400)
Proceeds from issuance of common stock.................... 73 161
Purchase of treasury stock................................ (358) (1,471)
------- -------
Net cash used in financing activities................... (1,385) (610)
------- -------
Net increase (decrease) in cash and cash equivalents........ 605 (600)
Cash and cash equivalents at beginning of period............ 1,850 2,003
------- -------
Cash and cash equivalents at end of period.................. $ 2,455 $ 1,403
======= =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest................................................ $ 329 $ 271
======= =======
Income taxes, net of refunds.............................. $ 42 $ 28
======= =======
Supplemental disclosure of non-cash investing and financing
activities:
Non-cash compensation expense related to common stock..... $ 44 $ 103
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
D-7
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Columbus Energy Corp. ("Columbus") and its wholly-owned subsidiaries, Columbus
Gas Services, Inc. ("CGSI") and Columbus Texas, Inc. ("Texas"). All
significant intercompany balances have been eliminated in consolidation. The
term "Company" as used herein includes Columbus and its subsidiaries.
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles and require the use
of management's estimates. The financial statements contain all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of August 31, 2000 and November 30, 1999, and the results of its
operations and cash flows for the periods presented. The results of operations
for such interim periods are not necessarily indicative of results to be
expected for the full year.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's consolidated financial statements in the Annual Report on Form
10-K for the year ended November 30, 1999. These accounting policies and other
footnote disclosures previously made have been omitted in this report so long
as the interim information presented is not misleading. These quarterly
financial statements should be read in conjunction with the consolidated
financial statements and notes included in the 1999 Form 10-K.
(2) LONG-TERM DEBT
The Company has a credit agreement with Wells Fargo Bank West, National
Association ("Bank"), formerly known as Norwest Bank Denver, N.A., that was
amended on June 30, 2000 to extend the revolving period to July 1, 2002 when
it entirely converts to an amortizing term loan which matures July 1, 2006.
The credit is collateralized by a first lien on oil and gas properties. The
interest rate options are the Bank's prime rate or LIBOR plus 1.50%.
The borrowing base is limited to $10,000,000 and subject to semi-annual
redetermination for any increase or decrease. At August 31, 2000 outstanding
borrowings on the revolving line of credit were $4,400,000 and the unused
borrowing base available was $5,600,000. A commitment fee of 1/4 of 1% for any
unused portion of the amount which is the difference between the borrowing
base and the outstanding borrowings is payable quarterly.
D-8
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(3) INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Nine Months
Ended
August 31,
-----------
2000 1999
----- -----
<S> <C> <C>
Current:
Federal......................................................... $ 3 $ 25
State........................................................... 15 29
----- -----
18 54
----- -----
Deferred:
Federal......................................................... 487 (84)
Use of loss carryforwards....................................... -- 6
State........................................................... 20 (3)
----- -----
507 (81)
----- -----
Total income tax (benefit) expense................................ $ 525 $ (27)
===== =====
</TABLE>
During the nine months of fiscal 2000, certain tax assets (shown in the table
below) were utilized. The tax effect of significant temporary differences
representing deferred tax assets and liabilities and changes were estimated as
follows (in thousands):
<TABLE>
<CAPTION>
Current Year
----------------------------------
December 1, Operations/ August 31,
1999 Other 2000
----------- ----------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Pre-1987 loss carryforwards............... $ 440 $ -- $ 440
Post-1987 loss carryforward............... 617 -- 617
Percentage depletion carryforwards........ 1,650 (4) 1,646
State income tax loss carryforwards....... 124 -- 124
Other..................................... 387 7 394
------- ----- -------
Total................................... 3,218 3 3,221
Valuation allowance (long-term)............. (1,286) -- (1,286)
------- ----- -------
Deferred tax assets..................... 1,932 3 1,935
------- ----- -------
Deferred tax liabilities-
Depreciation, depletion and amortization
and other................................ (795) (510) (1,305)
------- ----- -------
Net tax asset (liability)............... $ 1,137 $(507) $ 630
======= ===== =======
</TABLE>
D-9
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(4) LITIGATION
On May 4, 2000, Columbus was served with a complaint in a lawsuit styled
Fred E. Long and ENCO Exploration Company v. Columbus Energy Corp., Cause B-
00-1171-0-CV-B in the 156th Judicial District Court of Bee County, Texas. Fred
E. Long and his company, ENCO Exploration Company, have sued Columbus as
operator regarding the Long No. 4 well. Long/ENCO own a combined 25% working
interest. They contend that Columbus was negligent in its duty as operator to
drill a vertical hole without deviation at the location approved by the
participating working interest owners. They seek return of their proportionate
share of the drilling costs as damages, approximately $300,000. Columbus has
denied all of the Long/ENCO allegations and believes them to be without merit.
Discovery has not commenced.
(5) COMMITMENTS AND CONTINGENT LIABILITIES
The Company's natural gas and crude oil swaps are considered financial
instruments with off-balance sheet risk which are entered into in the normal
course of business to partially reduce its exposure to fluctuations in the
price of crude oil and natural gas. Those instruments involve, to varying
degrees, elements of market and credit risk in excess of the amount recognized
in the balance sheets.
The Company has had in place a twelve month costless "collar" for 7,500
barrels of crude oil each month for the period September 1, 1999 through
August 31, 2000. This "collar" was settled monthly against the calendar
monthly average price on the NYMEX with a $17.50 per barrel floor price and
$22.25 per barrel ceiling price. Columbus received or paid the difference
below the floor or above the ceiling that each monthly price averaged. During
the third quarter and nine months of fiscal 2000, oil sales were reduced by
$192,000 and $441,000, respectively, since average oil prices exceeded the
$22.25 ceiling price each month of those periods but no further reductions
will occur during the balance of fiscal 2000 because of the expiration of the
collar.
The Company is not aware of any events of noncompliance in its operations
with environmental laws and regulations nor of any potentially material
contingencies related to environmental issues. Management cannot predict what
future environmental control problems may arise or what environmental
regulations and requirements might be enacted by jurisdictional authorities in
its various operational areas in future.
D-10
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(6) RELATED PARTY TRANSACTIONS
CEC Resources Ltd. ("Resources") was a wholly-owned subsidiary of Columbus
prior to its divestiture on February 24, 1995. Reimbursement was made by
Resources to Columbus for services provided by its officers and employees for
managing Resources in the past which effectively reduced Columbus' general and
administrative expense. Such reimbursement totaled $33,000 for the nine months
of 1999. On March 31, 1999, the agreement was terminated pursuant to a 90 day
notice period.
The Company has been a party to an arrangement with Mark Butler, geologist
and 50% owner of Trumark Production Company ("TPC"), during fiscal 1999 and
2000 whereby Mr. Butler would provide Columbus with 70 hours per month of
geological and geophysical consulting services (including related work station
usage) at a rate of $170 per hour. John B. Trueblood, son of Columbus' CEO
Harry A. Trueblood, Jr., owns the other 50% of TPC. The retainer fees paid to
TPC were $122,000 and $111,000 during nine months of 2000 and 1999,
respectively.
(7) EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted earnings
per share (EPS):
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August 31, Ended August 31,
----------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Reconciliation of basic and diluted EPS
share computations:
Income (loss) available to common
shareholders--basic and diluted EPS
(numerator)........................... $ 934 $ (43) $ 908 $ 164
======== ======== ======== ========
Shares (denominator):
Basic EPS.............................. 3,757 3,920 3,749 3,870
Effect of dilutive option shares....... 7 -- 35 3
-------- -------- -------- --------
Diluted EPS............................ 3,764 3,920 3,784 3,873
======== ======== ======== ========
Per share amount:
Basic EPS.............................. $ .25 $ (.01) $ .24 $ .04
======== ======== ======== ========
Diluted EPS............................ $ .25 $ (.01) $ .24 $ .04
======== ======== ======== ========
Number of shares not included in dilutive
EPS that would have been antidilutive
because exercise price of options was
greater than the average market price of
the common shares....................... 502 612 232 626
======== ======== ======== ========
</TABLE>
D-11
<PAGE>
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(8) INDUSTRY SEGMENTS
The Company operates primarily in two business segments of (1) oil and gas
exploration and development and (2) providing services as an operator, manager
and gas marketing advisor.
Summarized financial information concerning the business segments is as
follows:
<TABLE>
<CAPTION>
Nine Months Three Months
Ended August Ended August
31, 31,
---------------- --------------
2000 1999 2000 1999
------- ------- ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Operating revenues from unaffiliated
services:
Oil and gas............................... $10,751 $ 7,071 $4,675 $2,762
Services.................................. 1,140 1,088 383 374
------- ------- ------ ------
Total................................... $11,891 $ 8,159 $5,058 $3,136
======= ======= ====== ======
Depreciation, depletion and amortization:
Oil and gas............................... $ 2,338 $ 2,528 $ 887 $ 833
Services.................................. 76 43 45 14
------- ------- ------ ------
Total................................... $ 2,414 $ 2,571 $ 932 $ 847
======= ======= ====== ======
Operating income (loss):
Oil and Gas............................... $ 3,412 $ 930 $2,085 $ 523
Services.................................. 86 351 160 138
General corporate expense................. (1,707) (1,074) (711) (298)
------- ------- ------ ------
Total operating income.................. 1,791 207 1,534 363
Interest expense and other.................. (332) (277) (115) (99)
------- ------- ------ ------
Earnings (loss) before income taxes....... $ 1,459 $ (70) $1,419 $ 264
======= ======= ====== ======
</TABLE>
(9) MERGER AGREEMENT
Columbus and Key Production Company, Inc. (NYSE:KP) jointly announced on
August 29, 2000 that Key has agreed to acquire all of the outstanding common
stock of Columbus. Under the terms of the executed merger agreement Columbus'
shareholders will receive 0.355 of a share of Key common stock for each
Columbus share in a tax-free reorganization subject to a favorable Columbus
shareholder vote. Columbus expects to hold a special shareholders' meeting for
that purpose during November 2000 provided the SEC's review of the proxy
statement/prospectus is completed during October, 2000. The Board of Directors
of both companies have unanimously approved the transaction.
D-12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following summarizes the Company's financial condition and results of
operations and should be read in conjunction with the consolidated financial
statements and related notes.
Liquidity and Capital Resources
As previously announced in February 2000 and reported in our Form 10-Q for
the quarter ended May 31, 2000, Arthur Andersen LLP's Global Energy Corporate
Finance team was selected to assist directors to explore various strategic
alternatives that could maximize shareholder value. A merger agreement with
Key was executed on August 28, 2000 and, assuming shareholder approval, the
effective date is expected in late November 2000. Thereafter, Columbus will
continue as a wholly-owned subsidiary of Key.
During third quarter of 2000, liquidity was further strengthened as oil and
gas sales increased 69% over 1999's like period. The Company's natural gas
prices averaged 79% higher than 1999's third quarter while crude oil prices
were 36% higher. There was increased natural gas production but this
improvement was partially offset by a decline in oil production.
Third quarter 2000 had a pre-tax, non-cash impairment loss of $500,000 and
exploration expenses of $250,000 which reduced net earnings. Net earnings were
also adversely affected by a non-recurring charge for advisory fees and other
expenses connected with the auction process and completion of negotiations of
the terms of a proposed tax-free exchange of shares in a merger with Key.
Excluding the exploration expense, those other unusual charges amounted to a
reduction (after tax) of net earnings by $557,000, or $.15 per share. Despite
that reduction, quarterly net earnings for 2000's third quarter attained the
second highest ever of $908,000, or $0.24 per share, which compares with last
year's quarter of $164,000, or $0.04 per share.
Stockholders' equity as of the end of 2000's third quarter increased to
$13,466,000 from $12,798,000 at November 30, 1999 even after the repurchase of
63,000 treasury shares for $358,000. Also, working capital at August 31, 2000
had risen to $2,141,000 from $1,169,000 at the end of fiscal 1999.
This positive working capital combined with the Company's greatly increased
cash flow is expected to provide considerably more than the required funds for
the remainder of fiscal 2000's capital expenditure program. It is expected
that excess cash flow will be utilized to reduce bank debt. The unused portion
of the $10,000,000 bank credit facility has previously been targeted by
management for acquisitions of oil and gas properties, but can be used for any
legal corporate purpose.
Generally accepted accounting principles ("GAAP") require cash flows from
operating activities to be determined after giving effect to working capital
changes. Accordingly, GAAP's net cash provided from operating activities can
fluctuate widely depending on the scope of such activities. Net cash provided
by operating activities was $3,839,000 for the nine months of 2000, which
compares with $2,508,000 provided by operating activities for the same period
last year. GAAP defined operating cash flow for the nine months of 2000 was
adversely affected by the unusually large first quarter expenses attributed to
exploratory dry holes primarily located in the El Squared Prospect near
Beeville, Texas.
As regularly noted in prior reports, management places greater reliance upon
an important alternative method of computing cash flow which is generally
known as Discretionary Cash Flow ("DCF"). DCF is not in accordance with GAAP
but is commonly used in the industry as this method calculates cash flow
before working capital changes or deduction of exploration expenses since the
latter can be increased or decreased at management's discretion. DCF is often
used by successful efforts companies to compare their cash flow results with
those independent energy companies who use the full cost accounting method
whereby exploration expenses are capitalized and do not immediately adversely
affect either operating cash flow or net earnings. Columbus' DCF for the nine
months of fiscal 2000 was $6,340,000 up 57% from 1999's similar period of
$4,029,000. DCF
D-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
increased during third quarter of 2000 to $3,105,000, a new quarterly record
and up substantially from the $1,729,000 reported for the second quarter of
2000. As discussed below in "Results of Operations," cash flow generated by
the significant production increase from a new well will not be repeated
during the fourth quarter because Columbus' interest was reduced following
payout that occurred during August. DCF is calculated without debt retirement
being considered. However, in Columbus' case this is not important since the
existing bank debt requires no principal payments before August 1, 2002 and is
expected to be eliminated before that date. Interest expense has already been
deducted before arriving at DCF.
Management notes in each of its public filings and reports its strong
exception to the Statement of Financial Accounting Standards No. 95 as it
applies to Columbus which directs that operating cash flow must only be
determined after consideration of working capital changes. Management believes
such a requirement by GAAP ignores entirely the significant impact that the
timing of income received for, and expenses incurred on behalf of, third party
owners in properties may have on working capital. This is particularly
significant where Columbus owns only a small working interest but is the
operator of several properties.
Neither DCF nor operating cash flow before working capital changes may be
substituted for net income or for cash available from operations as defined by
GAAP. Furthermore, currently reported cash flows, however defined, are not
necessarily indicative that there will be sufficient funds for all future cash
requirements. For the nine months of 2000 and 1999 GAAP cash flow was
materially lower than DCF.
When used, the Company's natural gas and crude oil swaps are considered
financial instruments with off-balance sheet risk. These are entered into in
the normal course of business to partially reduce its exposure to fluctuations
in the price of crude oil and natural gas and may involve elements of market
and credit risk in excess of the amount recognized in the balance sheets.
During the nine months of fiscal 2000 the Company partially hedged its crude
oil prices while the Company's natural gas revenues were fully exposed to
price fluctuations which fortunately were positive. The non-hedged portion of
our crude oil revenues were similarly exposed to price fluctuations which were
also positive.
The only hedge in existence during third quarter 2000 was a costless
"collar" for 7,500 barrels per month which expired August 31, 2000. This hedge
is more fully described in Note 5, "Commitments and Contingent Liabilities",
in the Notes to the Consolidated Financial statements.
At August 31, 2000, Columbus had outstanding bank borrowings of $4,400,000
against its $10,000,000 line of credit with Wells Fargo Bank West, N.A. which
is collateralized by its oil and gas properties. On that same date, the ratio
of net long-term debt (debt less working capital) to total assets was 0.10.
The outstanding debt used a LIBOR option with an average interest rate of
8.1%. Subsequent to the end of the third quarter and through October 6, 2000,
long-term debt was further reduced by $500,000 to $3,900,000. The net increase
(or decrease) in long-term debt directly affects cash flows from financing
activities as do the purchase of treasury shares. For the Company's floating
rate debt, interest rate changes generally do not affect its fair market value
but does impact future results of operations and cash flows, assuming other
factors remain constant. The carrying amount of the Company's debt
approximates its fair value.
The Company's Board of Directors has authorized over the last several years
the repurchase of common shares from the market at various "not to exceed"
price levels. As of August 31, 2000 a total of 60,384 shares remained
unpurchased from the most recent authorizations at a price not to exceed $6.00
per share but none is expected to be purchased in light of current market
price and the impending merger with Key.
During nine months of 2000, capital expenditures actually incurred for oil
and gas properties totaled $1,895,000 (which amount excludes $1.9 million for
exploratory dry holes and other exploration expenses) and
D-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
differs from the capital expenditure shown in the Consolidated Statement of
Cash Flows. The latter also includes cash payments made during 2000 for 1999
expenditures which had been incurred but not yet paid as of 1999's year end.
Similarly, some expenditures accrued during fiscal 2000's nine months period
were not actually paid until subsequent to the end of the period.
RESULTS OF OPERATIONS
Gross revenues increased by 61% over last year's third quarter and operating
income increased to $1,534,000 in the current quarter compared to $363,000
last year. Other comparisons for the 2000 quarter and nine month periods
versus 1999 related to prices, production and oil and gas sales appear in
tabular form below.
During 2000's third quarter six gross wells (2.89 net WI) were drilled.
These included two (.30 net WI) gas development wells in Webb County, Texas,
and one (.92 net WI) gas development well located in Bee County, Texas. One
(.34 net WI) well in Oklahoma was an attempted extension in a horizontal hole
drilled out of an existing cased well bore but the Morrow oil reservoir
encountered was previously depleted and that zone in the lateral was
abandoned. However, an existing oil zone in the original well bore could be
recompleted and is currently producing about 10 barrels per day with no
fracture stimulation. One (1.00 net WI) other exploratory oil well was a
successful recompletion as a new zone discovery in an existing well. This was
a "behind-the-pipe" Duperow zone in a well located in Richland County, Montana
which had not been considered prospective. This zone initially raised
production to in excess of 100 barrels of crude oil per day and has apparently
leveled out at approximately 50 barrels per day. The Long #5 well in Bee
County commenced production at about 700 Mcfd in late July and has improved to
1,500 Mcfd following frac treatment. It is currently producing approximately
1,300 Mcfd on a small choke. The BMT #15 (.26 net WI) in Webb County was
completed but not hooked-up to a gas pipeline until after the quarter's end.
Its initial rate of 2,000 Mcfd and over 20 barrels of condensate per day has
leveled out at about 1,800 Mcfd and has not been stimulated yet. The other
Webb County well (.04 net WI) was connected in August and is making
approximately 1,400 Mcf per day. During the fourth quarter, the production
from these wells will help offset the decreased production to Columbus'
interest from the Hachar #36 following payout in August.
As highlighted in the second quarter report, the Hachar #36, in which
Columbus owns a 53.7% net revenue interest, until 200% of the well costs of
the well are recovered, was an outstanding gas well completed in the Lobo sand
in the Laredo field area. It was connected to a pipeline during May 2000
producing at a rate in excess of 5,000,000 cubic feet of natural gas and 100
barrels of condensate per day. This revenue from the Hachar #36 had a very
large impact on results for the third quarter by yielding $965,000 of net
lease level income. This is defined as revenue less operating costs and
production taxes. Payout of 200% of costs of the well occurred in mid-August
in three months and reduced Columbus' monthly net revenue stream from over
$300,000 to an estimated $25,000 in September at its current net revenue
interest of 3.8%.
D-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Oil and Gas Revenues and Operating Costs
The following table shows comparative crude oil and natural gas revenues,
sales volumes, average prices and percentage changes between the periods
presented as follows:
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------- ----------------------
2000 1999 Change 2000 1999 Change
------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Natural gas revenues M$............. $3,627 $1,943 87% 7,758 $ 5,261 47%
Oil revenue M$...................... $1,044 $ 817 28% $ 2,984 $ 1,803 66%
Natural gas sales volumes:
Millions of cubic feet (MMCF)..... 799 765 4% 2,228 2,451 (9)%
MCF/day........................... 8,680 8,310 8,101 8,945
Oil sales volumes:
Barrels........................... 41,854 44,434 (6)% 123,717 121,781 2%
Barrels/day....................... 455 483 450 444
Average price received:
Natural gas-$/MCF................. $ 4.54 $ 2.54 79% $ 3.48 $ 2.15 62%
Oil-$/BBL......................... $24.96 $18.38 36% $ 24.12 $ 14.80 63%
</TABLE>
Natural gas revenues for the quarter increased by 87% over 1999's third
quarter due to 79% higher prices and 4% higher sales volumes. Similarly, the
nine month period for 2000 had 47% higher natural gas revenues due to 62%
higher prices partially offset by 9% lower sales volumes. Average gas prices
have improved steadily from depressed price levels experienced during the
early part of 1999 which reflected a prior warm winter and relatively high
storage inventory. This storage level has not been maintained throughout 2000
to date because of this summer's strong demand for cooling load which has
severely restricted excess supply for storage refill. Disaster was averted by
a warm winter heating season in early 2000 but increased demand and lack of
additional supply for injection due to very limited excess gas capacity have
caused prices to exceed $5.00 per Mcf recently. Higher natural gas production
during third quarter 2000 compared with 1999 was not sufficient to overcome
the decline in production between comparable nine month periods. Normal
production declines in older wells due to depletion were not reversed by new
production since there was less exploratory drilling success than had been
expected, there was reduced inventory of new prospects or development
locations available to drill, and the effects from the lack of drilling in
fiscal 1998 and 1999 because of the price debacle brought about those low cash
flow years.
Oil revenues for 2000's third quarter increased by 28% over the 1999 quarter
because average prices rose by 36% although there were 6% lower sales volumes.
Comparative nine month's results show 66% greater oil revenues since average
prices were up 63% and sales volumes were up 2%. Oil revenues and average
prices for 2000 were impacted adversely by the crude oil collar. The reduction
amounted to $192,000 ($4.59 per barrel) for the third quarter and $441,000
($3.56 per barrel) for the nine months. Oil production has declined steadily
for the past few years commensurate with a lack of development drilling
activity and no exploratory incentives in keeping with low crude oil prices
and lack of certainty of future improvement. During 1999's first half several
oil wells were temporarily shut-in due to those low crude oil prices and did
not resume production until later that year. One exploratory well searching
for gas did discover a flowing oil well in Harris County, Texas. This well was
drilled during fiscal 1998 but would not be connected to a gas line. It began
production flowing 200 barrels of oil per day with associated gas during June
1999. Columbus' 19.5% working interest in that well did help improve crude oil
production during 1999 but only temporarily overcame the ongoing decline in
other wells which caused the reduction of third quarter 2000 oil volumes
compared to the prior year's quarter. Prices for crude oil have continued to
move upwards due to strong demand and a restrictive production program
instigated by OPEC which has not kept pace with that demand.
D-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Columbus' third quarter sales volumes of natural gas averaged 8,680 Mcfd
while oil and liquids sales volumes were 464 barrels per day which equates to
a daily sales volume of 11,467 MCF equivalent (Mcfe). This compares with
1999's third quarter rate of 11,245 Mcfe, a 2% increase. As stated before,
this small increase was attributable to increased sales volumes net to
Columbus from the Hachar #36 well which temporarily overcame the lack of new
development wells being drilled along with a lack of exploratory success at
Columbus' El Squared prospect. Production from the Hachar #36 and Lien #2
wells temporarily reversed the decline in oil production but the fourth
quarter of 2000 is expected to be less than third quarter volumes. For
comparative nine month's periods, average daily sales volumes were 10,845 Mcfe
in 2000 versus 11,646 Mcfe in 1999 and were affected adversely for the
aforementioned reasons.
Lease operating expenses for the third quarter and nine months of 2000 were
6% and 15% higher, respectively, than similar periods in 1999. Most of the
increase was in the Williston Basin in Montana and the Sralla Road field in
Texas where several wells had workover costs including repairs and
replacements of equipment. Periodic expensive workovers and replacement of
downhole and surface equipment on older wells is a normal occurrence. Also,
several older Williston Basin oil wells were shut-in during 1999's first half
which accounts for lower operating costs in that year. Lease operating costs
on an Mcfe basis were $0.52 in the third quarter of 2000 compared to $0.50 in
1999 while operating costs as a percentage of revenues were 12% in 2000 versus
19% in 1999 with its lower prices but with reduced costs. For the nine month
periods, lease operating costs were $0.53 per Mcfe in 2000 and $0.43 in 1999
and lease operating costs as a percentage of revenues were 15% in 2000 and 19%
in 1999.
Production and property taxes approximated 9% of revenues in the nine months
of 2000 and 10% in 1999. These taxes vary based on Texas' percentage share of
the total production where oil tax rates are lower than gas tax rates. The
relationship of taxes and revenue is not always directly proportional since
most of the local jurisdiction's property taxes in Texas are based upon
reserve evaluations as opposed to revenues received or production rates for a
given tax period.
Operating and Management Services
This segment of the Company's business is comprised of operations and
services conducted on behalf of third parties which includes compressor
operations and salt water disposal facilities.
Operating and management services gross profit was as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Third quarter................................................. $178,000 $133,000
Nine months................................................... $437,000 $332,000
</TABLE>
Operating revenues increased during 2000 partially due to Columbus' 5% share
of transportation revenues from a gas pipeline in the Sralla Road area of
Texas. Effective March 1, 2000, the Company no longer is serving as contract
operator for wells in the Berry R. Cox field in South Texas, which generated
$23,000 of profit during 2000's first quarter. Operating and management
service costs were less in 2000 due to fewer compressor repairs in Texas and
lower costs after payroll recoveries billed to others in the Williston Basin
area.
Interest Income
Interest income is earned primarily from short-term investments whose rates
fluctuate with changes in the commercial paper rates and the prime rate.
Interest income increased in the third quarter of 2000 to $45,000 from $23,000
in 1999's third quarter because of a larger amount of investments resulting
from higher natural gas and crude oil prices and short-term interest rates.
D-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
General and Administrative Expenses
General and administrative expenses are considered to be those which relate
to the direct costs of the Company which do not originate from operation of
properties or providing of services. Corporate expense represents a major part
of this category.
The Company's general and administrative expenses were as follows:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Third quarter............................................. $ 340,000 $ 299,000
Nine months............................................... $1,217,000 $1,075,000
</TABLE>
Nine month expenses exceeded last year's primarily due to cash bonuses of
$178,000 paid in May but there were no stock option grants. This compares with
1999 incentive bonuses of $80,000 ($58,000 non-cash) plus grants of stock
options to all officers. Also, as previously disclosed there was a total
phase-out of reimbursement for management services provided Resources during
1999. Salary increases were granted effective December 1, 1999 for non-officer
employees and officer salaries were increased May 1, 2000 after having been
frozen at prior year levels during 1999. However, total officer and directors'
expense was reduced because there was one less officer and one less director
during 2000. Expenses accrued for vacation and retirement pay were higher
during both the third quarter and nine month periods this year compared to
1999 due to a higher salary base. Medical claims under the Company's self-
insured plan were higher for 2000's third quarter and nine months. Office rent
was about the same during third quarter in 2000 compared to 1999 as a result
of a sublease of a portion of the leased space but for the nine months period,
rental expense and parking was higher due to an increase in the monthly rate.
Both the third quarter and nine month periods' outside contract and
professional services were lower in fiscal 2000 versus 1999.
Unusual expenses were incurred during third quarter and nine months which
relate to exploring various strategic alternatives for the Company by use of
financial advisors as well as subsequent related merger negotiation costs.
These fees totaled $371,000 for the third quarter and appear under expenses as
"Advisory fees".
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization of oil and gas assets are
calculated based upon the units of production for the period compared to
proved reserves of each successful efforts property field. This expense is not
only directly related to the level of production, but is also dependent upon
past costs to find, develop, and recover related reserves in each of the
fields. Depreciation and amortization of office equipment and computer
software is also included in the total charge.
Charges for this expense item increased from 1999's third quarter due to
updated estimates of proved oil and gas reserves in connection with the merger
and its third quarter review. Estimates by independent engineers show that
proved reserves as of June 30, 2000 totaled 21.2 Bcfe, down from 26.1 Bcfe at
the end of the Company's previous fiscal year (November 30, 1999). During the
first seven months of fiscal year 2000, Columbus produced 2.3 Bcfe and
downward reserve adjustments totaled 3.6 Bcfe which were partially offset by a
1.0 Bcfe increase due to higher prices. The major reserve adjustments resulted
from Columbus receiving information that other operators and participants in
two properties had determined not to proceed with drilling or recompletion of
new or existing wells. Recent drilling activity and performance of wells as
well as an evaluation of certain technical data, also contributed to those
decisions. The depletion rate for third quarter 2000 was $.83 per Mcfe
compared to $.79 per Mcfe for that like period of 1999. For the nine month
periods depletion expense decreased as a result of decreased production from
fields having higher rates and increased production from the Laredo area where
there is a lower depletion rate. The depletion rate per Mcfe was $.77 for this
period during 2000 compared to $.78 per Mcfe in 1999.
D-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Exploration Expense
In general, the exploration expense category includes the cost of Company-
wide efforts to acquire and explore new prospective areas. The successful
efforts method of accounting for oil and gas properties requires expensing the
costs of unsuccessful exploratory wells including associated leaseholds. Other
exploratory charges such as seismic and geologic costs must also be
immediately expensed regardless of whether a prospect is ultimately proved to
be successful. All such exploration charges not only decrease net earnings but
also reduce reported GAAP cash flow from operations even though they are
discretionary expenses; however, such charges are added back for purposes of
determining DCF which is why it more nearly tracks cash flow reported by full
cost accounting companies which capitalize such costs.
Exploration charges of $250,000 for 2000's third quarter were down from
1999's $627,000 and included $186,000 related to the drilling of a horizontal
well in Oklahoma. A total of $531,000 was expensed last year in connection
with deepening an exploratory well in the El Squared prospect which did not
find any proved reserves along with $30,000 for seismic interpretation costs.
Nine months of fiscal 2000 exploration charges of $1,940,000 were up
significantly over 1999's. Most of these charges ($1,371,000) were incurred
during the sidetrack and testing phase of the Long #4 and the initiation of a
sidetrack of the Long #3 as well as for the subsequent abandonments of those
wells. Also included was $196,000 for recompletion and abandonment costs for a
90%-owned exploratory well in Montana. In addition to 1999's third quarter
expense described above, a total of $233,000 was expensed for three
exploratory dry holes and $47,000 for undeveloped leases dropped as a result
of an offset dry hole being drilled during that nine month period.
Whenever a company who uses the successful efforts method of accounting is
involved in an exploratory program which represents a significant part of its
budget, that company is automatically subjected to the risk that its net
earnings for any given quarter or year will be impacted negatively by wildcat
dry holes. Shareholders have been previously forewarned that net earnings and
GAAP cash flow for a given period may not be truly indicative of the Company's
operational activity. This is why management has suggested that shareholders
may wish to follow management's program of placing more emphasis on DCF from
period to period while essentially ignoring net earnings results. Comparing
Columbus' results with net earnings or cash flows of companies who use the
full cost accounting method is unrealistic since they capitalize exploratory
drilling and seismic costs as well as other costs related to such activity.
Impairments
As an outgrowth of a revised technical evaluation of Columbus' ability to
economically recomplete the updip lateral's proved reserves originally drilled
in its Morrow #23-1H well in Louisiana, Columbus' co-operator participant
indicated he was no longer interested in attempting to recover these reserves.
Therefore, a non-cash impairment expense of $500,000 during the third quarter
was recorded as the Company was unwilling to attempt such an operational
expense by itself.
Last year at the end of the second quarter, there was a pre-tax, non-cash
impairment loss of $503,000 as a result of reduced proved undeveloped
reserves. The improvement in crude oil prices up to that time was considered
insufficient to justify restoration of proved undeveloped reserves in one of
the Williston Basin's fields because the indicated return on new investments
would be unsatisfactory. Therefore, any restoration of undeveloped reserves
was deferred and the shortfall of $253,000 between remaining book value of the
pool and the then current fair market value of reserves was recognized as a
charge. Elsewhere, an unexpected influx of water in natural gas wells in a
shallow gas property in Jim Wells County, Texas brought about premature
abandonment of the producing zones with related reserves. This generated a
pre-tax, non-cash impairment of $250,000.
D-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
Litigation Expense
Almost all of the unusually high litigation expense for the nine months
period is related to the successful defense of the Maris E. Penn, et al
lawsuit described in previous quarters. A small amount of legal expenses in
the third quarter are the result of the Fred E. Long, et al lawsuit described
in Note 4 of the Notes to the Financial Statements.
Interest Expense
Interest expense varies in direct proportion to the amount of bank debt and
the level of bank interest rates. The average level of bank debt outstanding
has been higher during the 2000's first and second quarters than in 1999. The
average bank interest rate paid during the third quarter was 8.2% which
compares to 6.6% in 1999. For the nine month periods average interest rates
were 7.8% in 2000 and 6.6% in 1999.
Income Taxes
During the nine months of 2000, the net deferred tax asset decreased to
$630,000. The asset is comprised of a $60,000 current portion and $570,000
long-term asset. The estimated decrease in deferred tax assets was $507,000
during that period. Thus far in 2000, the valuation allowance has remained
unchanged and the effective tax rate is 36%. See Note 3 to the consolidated
financial statements for further explanation of income taxes.
Statement Pursuant to Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995
This report may contain certain "forward-looking statements" that have been
based on imprecise assumptions with regard to production levels, price
realizations, and expenditures for exploration and development and anticipated
results therefrom. Such statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed herein or
implied by such statements.
D-20
<PAGE>
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Management is unaware of any asserted or unasserted claims or assessments
against the Company which would materially affect the Company's future
financial position or results of operations. See Note (4) of the Notes to the
Financial Statements regarding a lawsuit styled Fred E. Long and ENCO
Exploration Company v. Columbus Energy Corp. filed in the 156th Judicial
District Court of Bee County, Texas, Cause No. B-00-1171-0-CV-B.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate risk and commodity price risk is
discussed in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations under the heading "Liquidity and Capital
Resources". The Company has no exposure to foreign currency exchange rate
risks or to any other market risks.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1--Fourth Amendment of Credit Agreement dated June 30, 2000 between
Columbus Energy Corp. and Wells Fargo Bank West, National Association.
27--Financial data schedule--August 31, 2000.
(b) Reports on Form 8-K
None
D-21
<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.
Columbus Energy Corp.
(Registrant)
<TABLE>
<CAPTION>
Date Signature Title
---- --------- -----
<S> <C> <C>
October 12, 2000 /s/ Harry A. Trueblood, Jr. Chairman, President and
______________________________________ Chief Executive Officer (a
Harry A. Trueblood, Jr. duly authorized officer)
October 12, 2000 /s/ Ronald H. Beck Vice President (Chief
______________________________________ Accounting Officer)
Ronald H. Beck
</TABLE>
D-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Except to the extent indicated below, there is no charter provision, by-law,
contract, arrangement or statute under which any director or officer of
Registrant is insured or indemnified in any manner against any liability which
he or she may incur in his or her capacity as such.
Under Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), a Delaware corporation has the power, under specified circumstances,
to indemnify its directors, officers, employees and agents in connection with
threatened, pending or completed actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in right
of the corporation), brought against them by reason of the fact that they were
or are such directors, officers, employees or agents, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred in any such action, suit or proceeding. Article 6 of Key Production's
Bylaws provides for indemnification of each person who is or was or is
threatened to be made a party to any threatened, pending or completed civil,
administrative, criminal, arbitrative or investigative action, suit or
proceeding because such person is or was a director, officer or employee of
Key Production or is or was serving at the request of Key Production as a
director, officer, partner, trustee, fiduciary, agent or employee of another
corporation or of a partnership, joint venture, trust, employee benefit plan
or other enterprise, against judgments, fines, penalties, amounts paid in
settlement, reasonable expenses and other liabilities arising in connection
with such action, suit or proceeding, to the fullest extent permitted by law.
Key also maintains policies of directors and officers liability insurance.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) or (iv) for any transaction from which the director derived an
improper personal benefit. Article IV of the Key Production's Charter contains
such a provision.
The merger agreement dated August 28, 2000 between Registrant and Columbus
Energy Corp., a Colorado corporation ("Columbus"), provides that for six years
after the effective time, Registrant will indemnify and hold harmless each
person who was a director or officer of Registrant or Columbus prior to the
effective time from their acts or omissions in those capacities occurring
prior to the effective time to the fullest extent permitted by applicable law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith unless otherwise indicated:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 28, 2000, by and
among Registrant, Key Acquisition Two, Inc. and Columbus Energy
Corp. (attached as Annex A to the Proxy Statement/Prospectus
contained in this Registration Statement).
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).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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
10-Q 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).
4.4 Description of Capital Stock of Registrant. (incorporated by
reference to Registrant's Form 8-A Registration Statement, File
No. 000-11769).
5.1 Opinion of Holme Roberts & Owen LLP regarding the legality of the
shares of Registrant common stock to be registered under this
Registration Statement (contained in the first filing of this
Registration Statement).
8.1 Opinion of Sherman & Howard L.L.C. regarding the United States
federal income tax consequences of the merger.
16 Letter regarding change in certifying accountant (incorporated by
reference to Registrant's Form 8-K, file with the SEC on December
1, 2000).
23.1 Consent of Arthur Andersen LLP (Key accountants).
23.2 Consent of PricewaterhouseCoopers LLP (Columbus accountants).
23.3 Consent of Arthur Andersen Global Energy Corporate Finance Group
(Columbus financial advisor).
23.4 Consent of Reed W. Ferrill & Associates, Inc. (Columbus
engineers).
23.5 Consent of Ryder Scott Company, L.P. (Key engineers) (contained in
Amendment No. 2 to this Registration Statement, filed November 30,
2000).
23.6 Consent of Holme Roberts & Owen LLP (contained in its opinion in
Exhibit 5.1).
23.7 Consent of Sherman & Howard L.L.C. (contained in its opinion in
Exhibit 8.1).
24.1 Powers of Attorney of Registrant's Directors. Contained on the
signature page of the first filing of this registration statement.
</TABLE>
Schedules are omitted because they either are not required or are not
applicable or because equivalent information has been included in the
financial statements, the notes thereto or elsewhere herein.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
to file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(i) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
II-2
<PAGE>
(ii) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement;
PROVIDED, HOWEVER, that paragraphs a(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered, which remain, unsold at the
termination of the offering.
(4) that, for purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(5) that prior to any public re-offering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes
that such re-offering prospectus will contain the information called
for by this Form S-4 with respect to re- offerings by persons who may
be deemed underwriters, in addition to the information called for by
the other Items of this Form S-4;
(6) that every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a
part of an amendment to this registration statement and will not be
used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof;
(7) insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue;
(8) to respond to requests for information that are incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of
Form S-4, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally
prompt means. This
II-3
<PAGE>
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request; and
(9) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in this registration
statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Denver, State of Colorado, on the 30th day of November, 2000.
Key Production Company, Inc.
/s/ F.H. Merelli
By: _________________________________
F.H. MERELLI
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
1 to Registration Statement has been signed by the following persons in the
capacities indicated on the 30th day of November, 2000.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
------------------ -----
<S> <C> <C>
/s/ F.H. Merelli Chairman and Chief
______________________________________ Executive Officer
F.H. Merelli (Principal Executive
Officer)
* Vice President and Chief
______________________________________ Financial Officer
Paul Korus (Principal Financial and
Accounting Officer)
* Director
______________________________________
Cortlandt S. Dietler
* Director
______________________________________
</TABLE> L. Paul Teague
/s/ F.H. Merelli
_________________________________
F.H. Merelli, Attorney in Fact
II-5
<PAGE>
PROXY
COLUMBUS ENERGY CORP.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Columbus Energy Corp., a Colorado corporation,
hereby nominates and appoints J. Samuel Butler or Jerol M. Sonosky, with full
power of substitution, as true and lawful agent and proxy to represent the
undersigned and vote all shares of stock of Columbus Energy Corp. owned by the
undersigned in all matters coming before the Special Meeting of Shareholders
(or any adjournment thereof) of Columbus Energy Corp. to be held on December
29, 2000 at 10:30 a.m. local time, at the Wells Fargo Bank Building Forum Room,
Main Floor, 1740 Broadway, Denver, Colorado. The Board of Directors recommends
a vote "FOR" the matters set forth on the reverse side.
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER SPECIFIED
BELOW BY THE SHAREHOLDER. TO THE EXTENT CONTRARY SPECIFICATIONS ARE NOT GIVEN,
THIS PROXY WILL BE VOTED "FOR" THE MATTER LISTED BELOW.
Approve the merger agreement among Key Production Company, Inc., a
wholly owned subsidiary of Key, and Columbus Energy Corp. and the merger
of the subsidiary into Columbus pursuant to which each share of Columbus
common stock will be converted into 0.355 shares of Key common stock.
[_] FOR [_] AGAINST [_] ABSTAIN
SEE REVERSE SIDE SEE REVERSE SIDE
(Continued and to be signed on reverse side)
<PAGE>
(Continued from other side)
This proxy also grants authority for the proxies to vote in their discretion
with respect to any other matters that may come before the meeting or any
adjournment thereof, including matters incident to its conduct.
MARK HERE IF YOU PLAN TO ATTEND THE MEETING [_]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [_]
Date: _____________________________________
___________________________________________
___________________________________________
(Signature if held jointly)
Please sign exactly as your name appears
at left, indicating your official position
or representative capacity, if applicable.
If shares are held jointly, each owner
should sign.
