<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999
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 001-11769
---------
KEY PRODUCTION COMPANY, INC.
A Delaware Corporation IRS Employer No. 84-1089744
707 Seventeenth Street, Suite 3300
Denver, Colorado 80202
Telephone Number (303) 295-3995
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock ($.25 par value) New York Stock Exchange
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 (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 ____
---
Aggregate market value of the voting stock held by non-affiliates of Key
Production Company, Inc. as of March 10, 2000................. $130,867,508.
Number of shares of Key Production Company, Inc. common stock outstanding
as of March 10, 2000.......................................... 11,609,403
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III.
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 the 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
---
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TABLE OF CONTENTS
DESCRIPTION
<TABLE>
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I.................................................................. 3
1. BUSINESS................................................... 7
2. PROPERTIES................................................. 10
3. LEGAL PROCEEDINGS.......................................... 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 10
EXECUTIVE OFFICERS OF THE REGISTRANT....................... 10
PART II................................................................. 12
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 12
6. SELECTED FINANCIAL DATA.................................... 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 12
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 18
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 18
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 39
PART III................................................................ 39
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*........ 39
11. EXECUTIVE COMPENSATION*.................................... 39
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT*............................................ 39
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 40
PART IV................................................................. 40
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K................................................ 40
</TABLE>
* This information is incorporated herein by reference from the
Company's Proxy Statement for its 2000 Annual Meeting of
Stockholders.
All defined terms under Rule 4-10(a) of Regulation S-X have their
statutorily-prescribed meanings when used in this report. We express quantities
of natural gas in terms of thousand cubic feet (Mcf), million cubic feet (MMcf)
or billion cubic feet (Bcf). Oil is quantified in terms of barrels (Bbls),
thousands of barrels (MBbls) and millions of barrels (MMBbls). Oil is compared
to natural gas in terms of equivalent thousand cubic feet (Mcfe). One barrel of
oil is the energy equivalent of six Mcf of natural gas. Information relating to
our working interest in wells or acreage, "net" oil and gas wells or acreage is
determined by multiplying gross wells or acreage by our working interest
therein. Unless otherwise specified, all references to wells and acres are
gross. Percentages are calculated on actual, unrounded numbers and may not agree
with percentages calculated off the rounded numbers presented in this Form 10-K.
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PART I
ITEM 1. BUSINESS
General
Key Production Company, Inc. is an independent energy company engaged in
the exploration, development, acquisition, and production of oil and gas in the
continental United States. We conduct exploration and development activities
primarily in the Anadarko Basin of Oklahoma, north Texas, the Mississippi Salt
Basin, south Louisiana, and northern California. We also have meaningful
production operations and exploration acreage in Wyoming and other Rocky
Mountain states.
Key was incorporated in Delaware on June 22, 1988, and our corporate office
is in Denver, Colorado. We have regional operations offices in: Tulsa, Oklahoma;
New Orleans, Louisiana; and Sacramento, California. Key's common stock trades on
the New York Stock Exchange under the symbol KP. We report all our operations as
one business segment.
As of December 31, 1999, we had estimated proved reserves of approximately
79.4 Bcf of gas and 9.2 MMBbls of oil, or an aggregate of 134.7 Bcfe, (59% gas,
97% proved developed) with an SEC PV10 before income taxes of $185.2 million.
Total production in 1999 was 22.3 Bcfe, consisting of 14.1 Bcf of gas and 1.4
million barrels of oil. Total proved reserves and production both increased for
the sixth consecutive year in 1999.
Key owns approximately 168,000 net acres of developed leasehold and 146,000
net undeveloped acres, the bulk of which is in Wyoming, Mississippi, Texas,
California and Oklahoma. We also own working interests in 2,005 gross (320.7
net) oil and gas wells located primarily in those same states.
Our primary business objective is to increase shareholder value. To
accomplish this objective we have implemented strategies designed to generate
attractive economic returns on capital employed and profitable growth in per-
share reserves, production, and cash flow. We maintain a balanced program of
exploration and development, supplemented from time to time by acquisitions and
other business development initiatives that lead to new drilling projects. Given
the highly competitive nature of the domestic oil and gas business,
decentralization is also a core component of our business strategy. We seek to
have local experts in each of our regional offices equipped with the necessary
authority to act decisively and motivated by economic incentives designed to
benefit Key's common shareholders.
In our search for new oil and gas reserves, Key's technical staff uses
sophisticated computer systems for processes encompassing geology, geophysics,
petrophysics, engineering, and economic modeling. Modern field-tested drilling
tools and production technologies also play an integral role in our pursuit of
cost-effective oil and gas resource development. We routinely pool our
collective expertise to ensure that we bring the necessary professional skills
and exploration techniques to bear on every project. Equally important, we
temper our use of technology with experience and sound professional judgment.
We believe that preservation of a healthy balance sheet is integral to the
successful execution of our business strategies because it provides the
financial capability to capture attractive investment opportunities and the
wherewithal to weather periods of low commodity prices.
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Business During 1999
Key achieved several operational and financial milestones in 1999,
including record oil and gas production volumes and total year-end proved
reserves. At the same time, earnings increased 47 percent to $.56 per diluted
share, or $6.8 million, and net cash provided by operating activities rose 33
percent to $35.5 million.
Key's 1999 production of oil and gas averaged 61.1 MMcfe per day, up 21
percent compared to output of 50.4 MMcfe per day in 1998. Gas volumes increased
12 percent to 38.5 MMcf per day and oil output averaged 3,767 barrels per day,
growth of 43 percent compared to 1998 volumes. Key ended the year with even
higher daily output. During the fourth quarter of 1999, our average daily
volumes had increased to 41.1 MMcf of gas and 4,073 barrels of oil.
In addition to higher production volumes, higher production prices also
benefited our financial results. Our natural gas price increased 10 percent to
$2.19 per Mcf and our average oil price jumped 49 percent to $17.58 per barrel.
Cash production costs, including lease operating expense, general and
administrative expense, and production-related taxes, equated to $.63 per Mcfe
in 1999, or 11% lower than the prior year's corresponding figure of $.71. Lease
operating expenses of $.40 per Mcfe were down 17 percent compared to $.48 per
Mcfe in 1998. Production taxes for 1999 amounted to $.12 per Mcfe versus $.13 in
1998.
Our year-end 1999 proved oil and gas reserves increased 7.7 percent to
134.7 Bcfe, consisting of approximately 79.4 Bcf of gas and 9.2 million barrels
of oil. Compared to December 31, 1998, oil reserves increased 31 percent and gas
reserves declined 4% percent. Approximately 97 percent of year-end 1999 proved
reserves were classified as proved developed.
The present value, using a 10 percent discount rate, of the future net cash
flows before income taxes of Key's total proved reserves at the end of 1999
increased to $185.2 million, up from $118.4 million a year earlier.
Key participated in drilling 104 wells during 1999, with an overall success
rate of 74 percent. We concentrated our drilling efforts in the Mid-Continent
region (including the Anadarko Basin of western Oklahoma and north Texas),
Mississippi, south Louisiana, and California. Of the 50 wells drilled by Key in
its Mid-Continent region, 39 were completed as producers. In our Gulf Coast
region, 15 out of 19 wells drilled were successful. Our drilling program in
California's Sacramento Basin yielded eight successful wells out of 16 attempts.
Overall, 23.8 of 38.3 net wells were successful in 1999. Also contributing to
the increase in 1999 proved reserves were additions ensuing from higher
commodity prices, hydraulic fracturing treatments, and better than expected
reservoir performance.
We incurred capitalized costs during 1999 for oil and gas activities of
$34.5 million, including $2 million for the acquisition of proved reserves.
Exploration and development expenditures, including the acquisition of unproved
properties, totaled $32.5 million. Factoring in 1999 proved reserve additions
from all sources of 31.9 Bcfe, the company's cost of reserves added equated to
$1.08 per Mcfe.
At December 31, 1999, long-term debt was $60.0 million, unchanged from a
year earlier; and our debt to total book capitalization ratio was 44 percent.
In 2000, we intend to build on the groundwork established in our
exploration focus areas. At present, we anticipate spending between $42 and $48
million for
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exploration and development, depending on various factors. Prudent financial
practices and a healthy balance sheet also position Key to respond to
acquisition opportunities or other business development transactions that we
believe have manageable risk parameters and attractive economics.
Competition
The oil and gas industry is highly competitive. As an independent oil and
gas company, we must compete against companies with substantially larger
financial, human, and technological resources for a variety of opportunities,
including the purchase of proved reserves, exploratory lease acquisitions, and
the marketing of our gas and oil.
Natural Gas and Oil Prices
Our 1999 gas price averaged $2.19 per Mcf, $.19 higher than the prior year
average of $2.00 per Mcf. Our 1999 oil price was $17.58 per barrel, up $5.80
from $11.78 in 1998. Historically, we have not used futures contracts,
derivative instruments, or other hedging agreements to mitigate the impact of
changes in commodity prices. Key's business will continue to be affected by
future changes in domestic and international oil and gas prices. It is
impossible to predict, with any substantial degree of accuracy, the trend in, or
level of, future oil and gas prices and their impact on our reported results in
future periods.
Reserve Value Ceiling Test
Key reviews the carrying value of its oil and gas properties quarterly
under the full cost accounting rules of the Securities and Exchange Commission.
Under the full cost accounting rules, capitalized costs of oil and gas
properties may not exceed the present value of estimated future net revenues
from proved reserves, discounted at 10 percent, plus the lower of cost or fair
market value of unproved properties, as adjusted for related tax effects and
deferred tax revenues. Applying this rule generally requires pricing of future
revenues at the unescalated prices in effect at the end of each fiscal quarter
and requires a write-down if the "ceiling" is exceeded, even if prices declined
for only a short period of time. If a write-down were required, the charge to
earnings would not impact cash flow from operating activities. Key has never
taken such a write-down.
Regulation of Oil and Gas
Our exploration, production and marketing activities are regulated
extensively by federal, state and local governments. Oil and gas exploration,
development and production activities are subject to various laws and
regulations governing a wide variety of matters. For example, the states in
which Key produces oil and gas have statutes or regulations addressing
production practices that may affect our operations and limit the quantity of
hydrocarbons we may produce and sell. Marketing and transportation of oil and
gas and the valuation of royalty payments are also regulated.
The Federal Energy Regulatory Commission (FERC) regulates interstate
transportation of natural gas under the Natural Gas Act among other regulated
matters. Intrastate and interstate gas transportation regulations affect our gas
sales. FERC has issued a series of orders that have significantly altered the
marketing and transportation of natural gas. To date, Key has not experienced
any material adverse effect on gas marketing as a result of these FERC orders.
However, we cannot predict what effect subsequent regulations may have on future
gas marketing.
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<PAGE>
Environmental
We are subject to various federal, state and local laws and regulations
relating to discharge of materials into, and protection of, the environment.
These laws and regulations may, among other things, impose liability for the
cost of pollution clean-up resulting from operations, subject to liability for
pollution damages, and restrict injection of liquids into subsurface aquifers
that may contaminate groundwater.
Key has and will continue to incur costs complying with these requirements,
which we believe are necessary business costs in the oil and gas industry. These
costs are inextricably connected to normal operating expenses. We are unable to
separate the expenses related to environmental matters. However, we do not
believe any such additional expenses will materially affect our business.
Although environmental regulations do have a substantial impact upon the energy
industry, generally these requirements do not appear to affect Key any
differently or to any greater or lesser extent than any other companies in the
industry.
We are not aware of any environmental claims existing as of December 31,
1999, which would have a material impact upon our financial condition or results
of operations. We do not believe that compliance with federal, state or local
provisions regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, will have such an
impact.
Employees
On December 31, 1999, Key had 60 full-time employees.
Offices
Our principal executive office is located at 707 Seventeenth Street, Suite
3300, Denver, Colorado 80202-3404.
Glossary
Mcf - Thousand cubic feet (of natural gas)
MMcf - Million cubic feet
MMcf/d - Million cubic feet per day
Bcf - Billion cubic feet
Mcfe - Thousand cubic feet equivalent
Mmcfe - Million cubic feet equivalent
Bcfe - Billion cubic feet equivalent
Bbls - Barrels (of oil)
Bbls/d - Barrels per day
MMBbls - Million barrels
Net Acres - Gross acreage multiplied by working interest percentage
Net Production - Gross production multiplied by net revenue interest
EBITDA - Earnings before interest, taxes, depreciation, depletion and
amortization
SEC PV10 - The value of proved reserves based on year-end commodity prices,
discounted at 10 percent
One barrel of oil is the energy equivalent of six Mcf of natural gas.
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<PAGE>
ITEM 2. PROPERTIES
Proved Reserves
Gas Oil Equivalent
Region (Bcf) (MMBbls) (Bcfe)
- ------ ----- ------ ----
Mid-Continent.......... 44.4 3.1 63.0
Gulf Coast............. 15.3 2.6 31.0
Rocky Mountains........ 14.2 3.5 35.2
California............. 5.5 - 5.5
---- --- -----
Total.................. 79.4 9.2 134.7
---- --- -----
Proved developed....... 77.0 8.9 130.5
---- --- -----
Our engineers estimate proved natural gas and oil reserve quantities in
accordance with guidelines established by the SEC. Ryder Scott Company, L.P.,
who are independent petroleum engineers, reviewed approximately 80 percent of
our reserve estimates. All information in this Form 10-K relating to oil and gas
reserves is net to Key's interest unless stated otherwise. See Supplemental Oil
and Gas Disclosures in this Form 10-K for further information.
Acreage
The undeveloped and developed acreage held by Key as of December 31, 1999,
is set forth below:
Undeveloped Acreage Developed Acreage
---------------------- ----------------------
Gross Acres Net Acres Gross Acres Net Acres
----------- --------- ----------- ---------
Mid-Continent
Kansas - - 8,737 7,348
Oklahoma 20,381 8,971 184,086 36,808
Texas 10,637 20,808 15,481 10,303
------- ------- ------- -------
31,018 29,779 208,304 54,459
------- ------- ------- -------
Gulf Coast
Arkansas - - 1,596 238
Louisiana 7,698 1,497 47,174 4,578
Mississippi 46,138 20,713 42,189 7,061
Texas 1,979 234 122,413 21,444
------- ------- ------- -------
55,815 22,444 213,372 33,321
------- ------- ------- -------
Rocky Mountains
Colorado 902 593 10,312 2,076
Montana 7,901 3,630 16,992 4,609
New Mexico - - 21,053 4,077
North Dakota - - 34,231 2,919
Utah 15,953 13,216 9,172 2,261
Wyoming 94,124 54,033 205,668 60,058
Other - - 11,546 1,062
------- ------- ------- -------
118,880 71,472 308,974 77,062
------- ------- ------- -------
California 22,377 22,138 8,611 3,017
------- ------- ------- -------
TOTAL COMPANY 228,090 145,833 739,261 167,859
======= ======= ======= =======
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<PAGE>
Productive Wells
We have working interests in the following productive gas and oil wells as
of December 31, 1999:
<TABLE>
<CAPTION>
Gas Oil
--- ---
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Mid-Continent 652 125.4 187 67.1
Gulf Coast 158 20.1 187 27.2
Rocky Mountains 118 5.6 676 52.7
California 27 22.6 - -
----- ----- ----- -----
955 173.7 1,050 147.0
===== ===== ===== =====
</TABLE>
In addition, Key has royalty or overriding royalty interests in
approximately 105 properties in the Mid-Continent region, 60 properties in the
Gulf Coast region, and 1,847 properties in the Rocky Mountain region.
Gross Wells Drilled
Key participated in the following number of wells drilled during 1999,
1998, and 1997:
<TABLE>
<CAPTION>
Exploratory Developmental
----------- -------------
Productive Dry Total Productive Dry Total
---------- ----------- ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
1999
----
Mid-Continent 4 5 9 35 6 41
Gulf Coast 4 3 7 11 1 12
Rocky Mountains 0 1 1 15 3 18
California 8 8 16 0 0 0
---------- ----------- ------- ---------- ----------- -------
16 17 33 61 10 71
========== =========== ======= ========== =========== =======
1998
----
Mid-Continent 1 6 7 30 4 34
Gulf Coast 2 1 3 6 1 7
Rocky Mountains 1 1 2 15 - 15
California 6 8 14 - - -
---------- ----------- ------- ---------- ----------- -------
10 16 26 51 5 56
========== =========== ======= ========== ========== =======
1997
----
Mid-Continent 2 3 5 46 5 51
Gulf Coast - 1 1 9 1 10
Rocky Mountains - 1 1 14 - 14
California 7 6 13 - - -
---------- ----------- ------- ---------- ----------- -------
9 11 20 69 6 75
========== =========== ======= ========== ========== =======
</TABLE>
We were in the process of drilling, 11 gross (4.5 net) wells at December
31, 1999.
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<PAGE>
Net Wells Drilled
The number of net wells Key drilled during each of the last three years is
shown below:
<TABLE>
<CAPTION>
Exploratory Developmental
----------- -------------
Productive Dry Total Productive Dry Total
---------- --- ----- ---------- --- -----
<S> <C> <C> <C> <C> <C> <C>
1999 10.2 12.1 22.3 13.6 2.4 16.0
1998 5.7 10.6 16.3 10.1 1.7 11.8
1997 7.9 7.6 15.5 9.1 1.2 10.3
</TABLE>
Production and Pricing Information
The following table describes, for each of the last three fiscal years, our
oil and gas production and pricing data.
<TABLE>
<CAPTION>
Average
Production
Oil Gas Average Sales Price Cost
-------------------
Year Ended December 31 MBbls MMcf Per Bbl Per Mcf Per Mcfe
- ---------------------- ----- ---- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1999............................................... 1,315 14,070 $17.58 $ 2.19 $ .52
1998............................................... 965 12,600 $11.78 $ 2.00 $ .61
1997............................................... 839 10,958 $18.04 $ 2.38 $ .66
</TABLE>
Reserve Information
Key's estimated proved oil and gas reserves, as of December 31, 1999, 1998
and 1997, and the standardized measure of discounted future net cash flows
attributable thereto at December 31, 1999, 1998 and 1997, are included in
Supplemental Oil and Gas Disclosures to Financial Statements appearing in this
Form 10-K. Supplemental Oil and Gas Disclosures also include Key's net revenues
from production (including royalty and working interest production) of oil and
natural gas for the three years ended December 31, 1999.
<TABLE>
<CAPTION>
TOTAL PROVED RESERVES
---------------------
Gas Oil Equivalent
(MMcf) (MBbls) MMcfe
---- ----- -----
<S> <C> <C> <C>
1999...................... 79,351 9,220 134,671
1998...................... 82,956 7,022 125,088
1997...................... 69,543 6,213 106,821
</TABLE>
Future reserve values are based on year-end prices except in those
instances where the sale of gas is covered by contract terms providing for
determinable escalations. Operating costs, production and ad valorem taxes and
future development costs are based on current costs with no escalations.
<TABLE>
<CAPTION>
Undiscounted Present Value of Estimated
Estimated Future Future Net Cash Flows Before
Net Cash Flows Income Tax
Before Income Tax (Discounted at 10 Percent)
------------------- ----------------------------
Proved Proved
Year Ended December 31, Proved Developed Proved Developed
- ------------------------- -------- --------- ------------- -------------
<S> <C> <C> <C> <C>
(In thousands)
1999................................ $279,989 $272,553 $185,204 $180,162
1998................................ $170,117 $169,074 $118,419 $117,870
1997................................ $175,001 $171,861 $121,718 $119,620
</TABLE>
The present value of estimated future net cash flows from proved reserves
after income taxes are $146,975,000, $104,222,000, $99,253,000, for 1999, 1998,
and 1997, respectively.
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<PAGE>
We estimated our future net cash flows as of December 31, 1999. These
amounts were not discounted or reduced by income tax, and we expect to receive
them in the following years:
Year Ended December 31, Proved
- -----------------------
Proved Developed
------ ---------
(In thousands)
2000.......................................... $ 53,966 $ 55,344
2001.......................................... 42,776 39,530
2002.......................................... 31,551 29,823
Thereafter.................................... 151,696 147,856
-------- ---------
$279,989 $ 272,553
======== =========
No major discovery or other favorable or adverse event is believed to have
occurred since December 31, 1999, which would cause significant change in the
estimated proved reserves reported herein. The above estimates are based on
year-end pricing in accordance with Commission guidelines and do not reflect
current prices. Since December 31, 1999, no oil or gas reserve information has
been filed with, or included in any report to, any federal authority or agency
other than the SEC and/or the Energy Information Administration.
ITEM 3. LEGAL PROCEEDINGS
We are not subject to any pending litigation that, in the opinion of our
management, will materially affect the financial position or results of
operations of Key.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
F.H. MERELLI, 63, has been with Key since September 9, 1992. He is
currently the chairman of the board of directors and chief executive officer.
Prior to September 1999, he also held the office of President. From July 1991 to
September 1992, Mr. Merelli was engaged as a private consultant in the oil and
gas industry. Mr. Merelli was president and chief operating officer of Apache
Corporation, and president, chief operating officer and a director of Key from
June 1988 to July 1991, at which time he resigned from those positions in both
companies. He was president of Terra Resources, Inc. from 1979 to 1988. Mr.
Merelli has been a director of Apache Corporation since July 1997.
MONROE W. ROBERTSON, 50, has been with Key since September 10, 1992. In
September 1999, he was appointed president and chief operating officer. He
served as senior vice president and corporate secretary until his appointment as
president. Prior to that, he served as vice president and corporate secretary.
From August 1988 to July 1992, he was employed by Apache Corporation in various
capacities; the most recent of which was director of operational planning. From
1986 to 1988, Mr. Robertson was director of corporate planning for Terra
Resources, Inc. From 1973 to 1986, Mr. Robertson was employed by Gulf Oil
Corporation in various engineering and management positions.
STEPHEN P. BELL, 45, has been with Key since February 1994. In September
1999, he was appointed senior vice president-business development and land.
Prior to that time, he served as the vice president-land. From March 1991 to
February 1994, he was president of Concord Reserve, Inc., a privately-held
independent oil and gas company. He was employed by Pacific Enterprises Oil
Company (formerly
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<PAGE>
Terra Resources, Inc.) as mid-continent regional manager from February 1990 to
February 1991 and as land manager from August 1985 to January 1990.
JOSEPH R. ALBI, 41, has been with Key since June 1994. In September 1999,
he was appointed vice president-engineering. He served as manager of engineering
from June 1994 to September 1999. He was executive vice president of Black Dome
Energy Corporation from 1991 to 1994. Prior to that, Mr. Albi held various
engineering positions with Apache Corporation and Nicor Oil and Gas Corporation.
THOMAS E. JORDEN, 42, has been with Key since November 1993. In September
1999, he was appointed vice president-exploration. He served as chief
geophysicist from November 1993 to September 1999. Prior to joining Key
Production, Mr. Jorden was with Union Pacific Resources in Fort Worth, Texas.
PAUL KORUS, 43, joined Key in September 1999, as its vice president and
chief financial officer. He was an equity research analyst with Petrie Parkman &
Co. from June 1995 to September 1999. Prior to that, Mr. Korus was director of
investor relations for Apache Corporation.
BARBARA L. SCHALLER, 44, joined Key in March 1993. She was appointed
general counsel and corporate secretary in September 1999. Prior to that time,
she served as corporate counsel and assistant secretary. Ms. Schaller has been
practicing law since 1982 and is a member of the Denver, Colorado and American
Bar Associations.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Key's common stock, par value $.25 per share, trades on the New York Stock
Exchange under the symbol KP. No dividends were paid in 1999 or in 1998. The
table below shows the market price of the common stock for 1999 and 1998:
<TABLE>
<CAPTION>
MARKET PRICE
------------
1999 1998
------------ -------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 7.750 $5.250 $11.625 $ 9.937
Second Quarter $10.063 $7.125 $12.625 $10.000
Third Quarter $11.000 $9.063 $12.250 $ 5.875
Fourth Quarter $ 9.688 $6.750 $ 9.500 $ 5.000
</TABLE>
The closing price of Key's common stock as reported on the New York Stock
Exchange for March 10, 2000, was $11.625. At December 31, 1999, the Company's
11,587,303 shares of common stock outstanding were held by approximately 5,900
stockholders of record and approximately 7,200 beneficial owners.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the years in the five-year period ended December 31, 1999, which
information has been derived from the Company's audited financial statements.
This information should be read in connection with and is qualified in its
entirety by the more detailed information and financial statements under Item 8
below.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 56,258 $ 37,783 $ 42,151 $37,886 $19,297
Net income.................... 6,804 4,595 9,696 7,980 3,054
Basic earnings per share.... .59 .40 .84 .73 .34
Diluted earnings per share.. .56 .38 .80 .69 .32
Oil and gas expenditures...... 34,456 55,429 44,625 43,476 13,591
Total assets.................. 176,857 166,295 130,647 95,940 59,199
Long-term debt................ 60,000 60,000 35,000 22,500 14,600
Stockholders' equity.......... 76,873 69,681 64,911 55,269 35,699
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Results
Key reported 1999 net income of $6.8 million, or $.56 per diluted share.
Driven by record production and favorable commodity prices, net income for 1999
increased 48 percent compared to 1998 net income of $4.6 million, or $.38 per
diluted share. In 1998, Key experienced a decrease of 53 percent in net income
from the $9.7 million, or $.80 per diluted share reported in 1997. Earnings for
1999, 1998 and 1997 are based on revenues of $56.3, $37.8 and $42.2 million,
respectively.
-12-
<PAGE>
Revenues
Oil and gas revenues climbed to $55.8 million in 1999, up 49 percent from
the $37.4 we reported in 1998. About $12.8 million of the increase is from oil
sales and $5.6 million is from gas sales. Combined oil and gas production
averaged 61.1 MMcfe per day in 1999, up 21 percent from the 50.4 MMcfe per day
produced during the prior year.
In 1998, oil and gas revenues decreased 11 percent from $42.0 million in
1997. Most of this decrease, approximately $3.8 million, was related to lower
oil prices. Production for these periods averaged 50.4 and 43.8 MMcfe per day,
respectively. The 15 percent increase in 1998 output was not enough to mitigate
the effect of weaker commodity prices.
Gas sales increased to $30.8 million in 1999, up 22 percent from the $25.2
million realized in 1998. Production and price both contributed to the favorable
variance. Average daily production rose to 38,549 Mcf per day in 1999 from
34,520 Mcf per day in 1998. The 12 percent volume increase added approximately
$2.9 million to gas sales. Production increases in 1999 are primarily from new
wells drilled in western Oklahoma, the Sacramento Basin of California and the
Mississippi Salt Basin. Our average gas price increased 10 percent to $2.19 per
Mcf in 1999 from $2.00 per Mcf in 1998. Favorable pricing added about $2.7
million to 1999 gas sales.
Gas sales of $25.2 million in 1998 were down 3 percent from the $26.1
million reported in 1997. During 1998, gas production grew 15 percent to 34,520
Mcf per day from 30,021 Mcf per day in 1997. The increase in production added
$3.9 million to revenues. However, our average gas price slipped to $2.00 per
Mcf in 1998 from $2.38 per Mcf received in 1997, and had a negative impact of
$4.9 million.
Oil sales more than doubled between 1999 and 1998. A 49 percent increase in
our average selling price and a 43 percent increase in volume boosted 1999 sales
to $24.2 million. This compares to $11.4 million reported in 1998. Our average
oil price rose to $17.58 per barrel in 1999, up from $11.78 per barrel in 1998.
The increase in price added almost $8.0 million in revenues. Our production
jumped to 3,767 barrels per day in 1999 versus 2,643 barrels in 1998. This added
$4.8 million to oil sales. The positive production variance stems from the
acquisition of oil properties at year-end 1998 and ongoing investments in 1999.
Oil sales for 1998 fell 25 percent to $11.4 million from $15.1 million in
1997. Most of the decline, $6.0 million, was due to low crude oil prices. Our
average price realization dropped to $11.78 per barrel in 1998 from $18.04 per
barrel in 1997. On the upside, 1998 production increased 15 percent to 2,643
barrels per day versus 2,298 barrels per day in 1997. The gain in production
added $2.3 million in value, but was not enough to overcome the steep decline in
oil prices.
Product sales from gas processing plants contributed approximately
$842,000, $828,000 and $748,000 in 1999, 1998 and 1997, respectively.
Our oil and gas revenues are derived from the following product mix in
1999: 43 percent oil, 55 percent gas and 2 percent plant products. This compares
to the following mix for 1998: 30 percent oil, 67 percent gas and 3 percent
plant products.
-13-
<PAGE>
Looking at total 1999 production volumes, 37 percent of our output is oil
and 63 percent is gas. Production for 1998 was 31 percent oil and 69 percent
gas.
Other revenues were approximately $460,000, $370,000 and $186,000 in 1999,
1998 and 1997, respectively. Other revenue for 1999 and 1998 includes income
from our gathering systems in California. The first system was built in 1998
and a second system was added in 1999. Our primary source of other revenue in
1997 was income from a pipeline acquired in 1996. That pipeline was
subsequently sold in March of 1997. The remaining other revenue for all periods
presented includes proceeds from gas contract settlements and other
miscellaneous items.
Costs and Expenses
Depreciation, depletion and amortization (DD&A) expense increased 76
percent between 1999 and 1998. Part of this increase can be attributed to the
49 percent increase in oil and gas sales. The other determining factor was the
increase in the depletion rate. The depletion rate as a percentage of oil and
gas sales increased to 50.6 percent in 1999 from 42.3 percent in 1998. Key uses
the future gross revenue method to compute DD&A expense. If the average price
is lower than the price the Company is currently receiving for its oil and gas
production, the increase in DD&A expense will be greater than the increase in
revenue for the period. This was the case in 1999. Conversely, if the average
price is higher than the price the Company is receiving for its oil and gas
production, the decrease in DD&A expense will be greater than the decrease in
revenue for the period.
DD&A expense increased 23 percent between 1998 and 1997 while sales
decreased by 11 percent. The depletion rate as a percentage of oil and gas
sales escalated to 42.3 percent in 1998 from 30.9 percent in 1997. Also
included in DD&A expense for the three years presented is a small amount of
depreciation on fixed assets and amortization of financing costs associated with
our credit facility.
Lease operating expense (LOE) for 1999 increased less than 1 percent from
1998 to $9.0 million. This increase is especially small considering oil and gas
revenues increased by 49 percent and production increased by 21 percent during
the same period. On a unit of production basis, LOE decreased to $.40 per Mcfe
in 1999 from $.48 per Mcfe in 1998. (Oil is compared to natural gas in terms of
equivalent thousand cubic feet, "Mcfe." One barrel of oil is the energy
equivalent of six Mcf of natural gas.) LOE increased 12 percent to $8.9 million
in 1998 from $7.9 million in 1997. Compared on a unit of production basis, 1998
LOE decreased to $.48 per Mcfe from $.49 per Mcfe in 1997.
Production taxes increased to $2.6 million in 1999 from $2.4 million in
1998. On a Mcfe basis, production taxes decreased to $.12 per Mcfe in 1999 from
$.13 per Mcfe in 1998. In the fourth quarter of 1999, we made a downward
adjustment to our estimate for production taxes that impacted reported earnings
for that period by $.03 per share. The adjustment reflects a decrease in our
overall production tax rate and a change in our procedure for accruing unpaid
production taxes. In 1998, production taxes decreased to $2.4 million from $2.7
million in 1997. This equates to $.13 and $.17 per Mcfe in 1998 and 1997,
respectively.
General and administrative expense (G&A) increased to $2.6 million in 1999
from $1.7 million in 1998. With a 21 percent increase in production, this
translates to $.11 and $.09 per Mcfe in 1999 and 1998, respectively. G&A
decreased to $1.7 million in 1998 from $2.0 million in 1997. Complemented by an
increase in oil and gas output, this decrease equates to a 31 percent, or $.04
per Mcfe decrease between 1998 and 1997. Under full cost accounting rules,
which
-14-
<PAGE>
provide for the capitalization of direct overhead related to exploration and
development activities, we were able to sustain the level of administrative
expense while managing an active drilling program and a growing asset base.
Interest expense before capitalization was $4,081,000, $2,752,000 and
$1,718,000 for 1999, 1998 and 1997, respectively. Interest expense has
increased because our long-term debt balance rose from $35.0 million at December
31, 1997 to $60.0 million at December 31, 1999. We capitalized interest of
$1,397,000, $1,456,000 and $1,019,000 in 1999, 1998 and 1997, respectively.
These capitalized amounts are for borrowings associated with undeveloped
leasehold.
Our effective tax rate was 38 percent for 1999, 1998 and 1997.
Cash Flow and Liquidity
Our primary needs for cash are to fund oil and gas exploration, development
and acquisition activities and for payment of existing obligations and trade
commitments related to oil and gas operations. Our primary sources of liquidity
are cash flows from operating activities and proceeds from financing activities.
Net cash from operating activities was $35.5 million in 1999. This is an
$8.9 million, or 33 percent, increase over the $26.6 million reported in 1998.
Most of this increase is related to higher production and prices.
Cash from operating activities in 1998 of $26.6 million compares to $34.1
million in 1997. The $7.5 million, or 22 percent, decrease can be traced to
lower commodity prices.
Cash expenditures for exploration and development in 1999 totaled $32.8
million, or 92 percent of cash from operating activities. This is approximately
$7.0 million less than the $39.8 million spent in 1998 and $3.5 million less
than the $36.3 million spent in 1997. Key drilled 104 gross wells (38.3 net) in
1999, 82 gross wells (28.1 net) in 1998 and 95 gross wells (25.8 net) in 1997.
In 1999, we acquired additional interests in producing properties we
already operated in the Hardeman Basin and properties in the Gulf Coast region.
These transactions amounted to $2 million and were funded with cash from
operating activities.
Late in 1998, we purchased additional interests in producing oil and gas
properties in the Hardeman Basin for $10.5 million. Key already held an
interest in these properties since the second quarter of 1997 and was operator
of the wells. We acquired other properties in 1998 for a total of $2.7 million.
We obtained funds from our credit facility to complete these transactions.
In the second quarter of 1997, we acquired non-producing acreage over
several salt domes in west-central Mississippi. In the third quarter of 1997,
Key acquired producing properties in the Hardeman Basin. Both transactions were
funded with a combination of cash from operating activities and funds obtained
from our credit facility.
We received proceeds from numerous purchasers totaling $2.1, $3.4 and $.7
million in 1999, 1998 and 1997, respectively. The proceeds are for the sale of
miscellaneous producing properties and non-producing acreage.
We started and finished 1999 with a long-term debt balance of $60.0
million. During the year, proceeds from borrowings were used to finance
exploration and drilling activities. These borrowings were subsequently repaid
with cash from operating activities. We borrowed $25.0 million in 1998 and
$12.5 million in 1997
-15-
<PAGE>
to fund various acquisition, exploration and development projects. See Footnote
2, "Debt", for detailed information on our long-term debt arrangements.
Management believes that cash on hand, net cash generated from operations
and amounts available under our existing line of credit will be adequate to meet
future liquidity needs, including satisfying our financial obligations and
funding operations, exploration and development.
Year 2000 Compliance
Many existing computer programs use only two digits to identify a year in
the date field and were developed without considering the impact of the upcoming
change in the century. If not corrected, date-sensitive software applications
could fail or create erroneous results by or at the Year 2000.
During 1997, we evaluated the various computer hardware and software
systems we used. We identified date-sensitive software systems used to record,
process and track information in three functional areas: accounting, land and
lease records and reservoir engineering. The land and lease records and
reservoir engineering software was found to be Year 2000 compliant. During
1998, the accounting system was upgraded to make it year 2000 compliant. The
cost of the accounting system upgrade was provided, at no additional charge, as
part of our annual software maintenance agreement with the vendor. The cost of
installing the software and testing the systems was not material and was charged
to expense during 1998.
We have assessed the effects of Year 2000 computer issues and determined
that there was no material adverse impact on the Company's business. We do not
expect to record any losses related to this event. Our computer systems for
accounting, land and lease records and reservoir engineering did not have any
interruption in the transition between 1999 and 2000 and continue to operate
normally in 2000. Further, we are not aware of any material problems
experienced by the various entities Key does business with that would materially
impact Key.
Future Trends
Key's main objective is to increase shareholder value. We continue to plan
to accomplish this goal through strategies designed to profitably increase oil
and gas reserves, production, and cash flow through exploration and development,
supplemented from time to time by acquisitions or mergers.
At the present time, we anticipate that the bulk of our exploration and
development spending will be concentrated in our four main exploration focus
areas: the Anadarko Basin of western Oklahoma, the Mississippi Salt Basin,
south Louisiana, and the Sacramento Basin of northern California. We also plan
to continue to explore on our undeveloped acreage and participate in lower-risk
exploitation projects in the Rocky Mountain region.
Exploration and development expenditures for 2000 are expected to range
from $42-48 million. We also expect to fund these expenditures from cash
provided by operating activities, supplemented, if necessary, by borrowings
under our bank line of credit. The amount and allocation of future capital
expenditures will depend upon a number of factors, including the impact of oil
and gas prices on investment opportunities and available cash flow, the
availability of debt and equity capital, and the number and size of attractive
acquisition opportunities.
As part of its on-going business strategy, Key will continue to evaluate
merger and acquisition opportunities. Potential transactions with the economic
-16-
<PAGE>
and strategic attributes necessary to facilitate the profitable growth of Key
will be actively pursued.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk as a result of changes in the price
of natural gas and crude oil and changes in interest rates.
Natural gas and crude oil prices fluctuate widely in response to changing
market forces. Virtually 100 percent of the Company's revenue derives from the
sale of natural gas and crude oil, so these fluctuations, positive and negative,
can have a significant impact on the revenue the Company reports each period.
Changes in product prices also impact the calculation of the limitation on
capitalized costs under the full cost accounting rules of the Securities and
Exchange Commission. Application of this rule generally requires pricing future
revenues at the unescalated prices in effect at the end of each fiscal quarter
and requires a write-down if the "ceiling" is exceeded, even if prices decline
for only a short period of time. If a write-down were required, the charge to
earnings would not impact cash flow from operating activities. Key has never
taken a full-cost ceiling write-down.
The Company's reported earnings are impacted by changes in interest rates
as a result of its long-term debt with floating interest rates. Interest
charges are based on either the prime rate or the LIBOR rate. Fluctuations in
these rates directly impact the amount of interest expense the Company reports
in each period.
Historically, the Company has not used financial instruments such as
commodity futures contracts or interest rate swaps to mitigate the impact of
changes in product prices or interest rates.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities law. These forward-looking statements include, among others,
statements concerning the Company's outlook with regard to production levels,
price realizations, expenditures for exploration and development, plans for
funding operations and capital expenditures, and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts. The
forward-looking statements in this report are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in or
implied by the statements.
These risks and uncertainties include, but are not limited to, fluctuations
in the price the Company receives for its oil and gas production, reductions in
the quantity of oil and gas sold due to decreased industry-wide demand and/or
curtailments in production from specific properties due to mechanical, marketing
or other problems, operating and capital expenditures that are either
significantly higher or lower than anticipated because the actual cost of
identified projects varied from original estimates and/or from the number of
exploration and development opportunities being greater or fewer than currently
anticipated, and increased financing costs due to a significant increase in
interest rates. These and other risks and uncertainties affecting the Company
are discussed in greater detail in this report and in other filings by the
Company with the Securities and Exchange Commission.
-17-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See following Index.
KEY PRODUCTION COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of independent public accountants.............................. 19
Consolidated statement of income for each of the three years in the
period ended December 31, 1999...................................... 20
Consolidated statement of cash flows for each of the three years in
the period ended December 31, 1999.................................. 21
Consolidated balance sheet as of December 31, 1999 and 1998........... 22
Consolidated statement of stockholders' equity for each of the three
years in the period ended December 31, 1999......................... 23
Summary of significant accounting policies............................ 24
Notes to consolidated financial statements............................ 28
Supplemental oil and gas disclosures.................................. 36
Supplemental quarterly financial data................................. 39
</TABLE>
All other supplemental information and schedules have been omitted because
they are not applicable or the information required is shown in the consolidated
financial statements or related notes thereto.
-18-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Key Production Company, Inc.:
We have audited the accompanying consolidated balance sheets of Key
Production Company, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Key
Production Company, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 24, 2000.
-19-
<PAGE>
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Natural gas production..................... $30,779 $25,217 $26,084
Oil production............................. 24,177 11,368 15,133
Plant production........................... 842 828 748
Other...................................... 460 370 186
------- ------- -------
56,258 37,783 42,151
------- ------- -------
Expenses:
Depreciation, depletion and amortization... 28,672 16,255 13,245
Lease operating............................ 8,951 8,874 7,913
Production taxes........................... 2,623 2,409 2,714
General and administrative................. 2,550 1,697 2,045
Financing costs:
Interest expense.......................... 4,081 2,752 1,718
Capitalized interest...................... (1,397) (1,456) (1,019)
Interest income........................... (197) (160) (104)
------- ------- -------
45,283 30,371 26,512
------- ------- -------
Income Before Income Taxes................... 10,975 7,412 15,639
Provision for income taxes................... 4,171 2,817 5,943
------- ------- -------
Net Income................................... $ 6,804 $ 4,595 $ 9,696
======= ======= =======
Basic earnings per share..................... $ .59 $ .40 $ .84
======= ======= =======
Diluted earnings per share................... $ .56 $ .38 $ .80
======= ======= =======
Weighted average common shares outstanding... 11,537 11,509 11,480
======= ======= =======
Weighted average diluted shares outstanding.. 12,111 12,140 12,169
======= ======= =======
</TABLE>
The accompanying Summary of Significant Accounting Policies
and Notes to Consolidated Financial Statements
are an integral part of this statement.
-20-
<PAGE>
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................. $ 6,804 $ 4,595 $ 9,696
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization....................... 28,672 16,255 13,245
Deferred income taxes................ 3,732 2,420 5,943
Changes in operating assets and
liabilities:
(Increase) decrease in receivables... (4,228) 2,276 (1,631)
(Increase) decrease in prepaid
expenses and other................. (654) (189) 494
Increase in accounts payable and
accrued expenses................... 1,679 1,676 7,023
Decrease in long-term
property liabilities and other..... (545) (406) (664)
-------- -------- --------
Net cash provided by operating
activities......................... 35,460 26,627 34,106
-------- -------- --------
Cash Flows from Investing Activities:
Oil and gas exploration and
development expenditures............... (32,800) (39,810) (36,286)
Acquisition of oil and gas properties... (2,877) (13,253) (7,906)
Proceeds from sale of oil and gas
properties............................. 2,114 3,411 726
Other capital expenditures.............. (685) (601) (1,027)
-------- -------- --------
Net cash used by investing
activities (34,248) (50,253) (44,493)
-------- -------- --------
Cash Flows From Financing Activities:
Long-term borrowings.................... 7,000 25,000 17,000
Payments on long-term debt.............. (7,000) - (4,500)
Payments to acquire treasury stock...... (3) (3) (414)
Proceeds from issuance of common stock.. 158 - 69
-------- -------- --------
Net cash provided by
financing activities............... 155 24,997 12,155
-------- -------- --------
Net Increase in Cash
and Cash Equivalents.................... 1,367 1,371 1,768
Cash and Cash Equivalents at Beginning
of Year................................. 4,720 3,349 1,581
-------- -------- --------
Cash and Cash Equivalents at End of Year.. $ 6,087 $ 4,720 $ 3,349
======== ======== ========
</TABLE>
The accompanying Summary of Significant Accounting Policies
and Notes to Consolidated Financial Statements
are an integral part of this statement.
-21-
<PAGE>
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------
ASSETS 1999 1998
--------- ---------
(In thousands, except share data)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 6,087 $ 4,720
Receivables........................................... 12,206 7,978
Prepaid expenses and other............................ 1,223 569
-------- --------
19,516 13,267
-------- --------
Oil and Gas Properties, on the basis of
full cost accounting:
Proved properties..................................... 223,285 185,813
Unproved properties and properties
under development, not being amortized............... 18,104 23,276
-------- --------
241,389 209,089
Less - accumulated depreciation,
depletion and amortization........................... (85,990) (57,752)
-------- --------
155,399 151,337
-------- --------
Other Assets, net....................................... 1,942 1,691
-------- --------
$176,857 $166,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 13,189 $ 11,271
Accrued exploration and development................... 2,388 3,651
Accrued lease operating expense and other............. 1,901 2,276
-------- --------
17,478 17,198
-------- --------
Long-Term Debt.......................................... 60,000 60,000
-------- --------
Non-Current Liabilities:
Deferred income taxes................................. 21,855 18,123
Long-term property liabilities and other.............. 651 1,293
-------- --------
22,506 19,416
-------- --------
Commitments and Contingencies (Notes 6 and 7)
Stockholders' Equity:
Common stock, $.25 par value, 50,000,000 shares
authorized, 11,820,190 and 11,778,190 shares
issued, respectively................................. 2,955 2,945
Paid-in capital....................................... 37,557 37,406
Retained earnings..................................... 38,518 31,737
Treasury stock at cost, 232,887 and 259,734
shares, respectively................................. (2,157) (2,407)
-------- --------
76,873 69,681
-------- --------
$176,857 $166,295
======== ========
</TABLE>
The accompanying Summary of Significant Accounting Policies
and Notes to Consolidated Financial Statements
are an integral part of this statement.
-22-
<PAGE>
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Paid-in Retained Treasury Stockholders,
Stock Capital Earnings Stock Equity
----- ------- -------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $2,928 $37,245 $17,469 $(2,373) $55,269
Net income.............................. - - 9,696 - 9,696
Common stock issued..................... 16 111 - - 127
Treasury stock issued................... - 24 - 209 233
Treasury stock purchased................ - - - (414) (414)
------ ------- ------- ------- -------
Balance, December 31, 1997 2,944 37,380 27,165 (2,578) 64,911
Net income.............................. - - 4,595 - 4,595
Common stock issued..................... 1 7 - - 8
Treasury stock issued................... - 19 (23) 174 170
Treasury stock purchased................ - - - (3) (3)
------ ------- ------- ------- -------
Balance, December 31, 1998 2,945 37,406 31,737 (2,407) 69,681
Net income.............................. - - 6,804 - 6,804
Common stock issued..................... 10 144 - - 154
Treasury stock issued................... - 7 (23) 252 236
Treasury stock purchased................ - - - (2) (2)
------ ------- ------- ------- -------
Balance, December 31, 1999 $2,955 $37,557 $38,518 $(2,157) $76,873
====== ======= ======= ======= =======
</TABLE>
The accompanying Summary of Significant Accounting Policies
and Notes to Consolidated Financial Statements
are an integral part of this statement.
-23-
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Key Production Company, Inc. (Key or the Company) is an independent energy
company engaged in the exploration, development, acquisition and production of
oil and gas in the continental United States. The Company's primary focus areas
are the Anadarko Basin of Oklahoma, south Louisiana, the Mississippi Salt Basin,
northern California, and the Rocky Mountain region.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Key and its subsidiaries for all periods presented. All intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Oil and Gas Properties
The Company follows the full cost method of accounting for its investment
in oil and gas properties and, accordingly, capitalizes all exploration and
development costs incurred for the purposes of finding oil and gas reserves,
including dry hole costs, geological and geophysical costs and direct overhead
related to exploration and development activities. Payroll and other internal
costs capitalized include salaries and related benefits paid to employees
directly engaged in the exploration and development of oil and gas properties,
as well as other specifically identifiable internal costs. Future development,
site restoration, dismantlement and abandonment costs, net of salvage values,
are estimated on a property-by-property basis using prevailing prices. No gains
or losses are normally recognized on the sale or disposition of oil and gas
properties under full cost accounting.
Key computes the provision for depreciation, depletion and amortization
(DD&A) of oil and gas properties on a quarterly basis using the future gross
revenue method. The quarterly provision is calculated by multiplying the
quarter's oil and gas revenues by an overall rate determined by dividing the
total unamortized cost of oil and gas properties including estimated future
development costs (excluding the cost of investments in unproved and unevaluated
properties) by the total estimated future oil and gas revenues.
-24-
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In accordance with rules prescribed by the Securities and Exchange
Commission, capitalized costs of oil and gas properties, net of accumulated
DD&A, are limited to the estimated future net cash flows from proved oil and gas
reserves discounted at 10 percent, plus the lower of cost or fair market value
of unproved properties as adjusted for related tax effects (the "full cost
ceiling test limitation"). This limit may be particularly sensitive to changes
in the near term in pricing and production rates. If capitalized costs exceed
this limit, the excess is charged to DD&A expense. The Company has not recorded
any such write-downs of capitalized costs.
The costs of certain unevaluated leasehold acreage and wells in the process
of being drilled are not amortized. Amortization commences when such costs are
evaluated or upon completion of wells in progress. Costs not being amortized are
periodically assessed for possible impairments or reductions in value. If a
reduction in value has occurred, the portion of the carrying cost in excess of
the current value is included in the costs subject to amortization. Interest
costs related to undeveloped properties are also capitalized. Financing costs
were reduced by capitalized interest totaling $1,397,000, $1,456,000 and
$1,019,000 in 1999, 1998, and 1997, respectively.
Office furniture and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from five to 10 years.
Revenue Recognition
Key uses the sales method of accounting for natural gas revenues. Under
this method, revenues are recognized based on actual volumes of gas sold to
purchasers. The volumes of gas sold may differ from the volumes to which Key is
entitled based on its interests in the properties. Differences between volumes
sold and entitlement volumes create gas imbalances. These imbalances are
reflected as adjustments to reported gas reserves and future cash flows in the
Company's reserve report. Adjustments for gas imbalances reduced Key's proved
gas reserves by approximately 3 percent at December 31, 1999. Key recognizes
revenues from oil based on actual volumes sold to purchasers.
Net Income Per Common Share
Basic net income per common share is computed by dividing income
attributable to common stock by the weighted average number of common shares
outstanding for the period. Diluted net income per common share reflects the
potential dilution that could occur if common stock equivalents (stock options)
are assumed to have been exercised. The treasury stock method is used to
determine the number of shares converted. Calculations of net income per common
share are illustrated in Note 10.
-25-
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. These investments
earned 3.4 and 4.4 percent rates of interest at December 31, 1999 and 1998,
respectively, with cost approximating market.
Financial Instruments
The Company's financial investments consist of cash, trade receivables,
trade payables and long-term debt. The carrying value of cash and cash
equivalents, trade receivables and trade payables are considered to be
representative of their fair market value, due to the short maturity of these
instruments. The fair value of long-term debt is estimated based on current
rates available for similar debt with similar maturities and securities and
approximates its carrying value.
Income Taxes
The company utilizes an asset and liability approach to account for income
taxes. A deferred tax liability or asset is determined based on the temporary
differences between the financial reporting basis and tax basis of assets and
liabilities as measured by the enacted tax rates. A valuation allowance must be
established for any portion of a deferred tax asset for which it is more likely
than not that a tax benefit will not be realized.
General and Administrative Expense
General and administrative expenses are reported net of amounts allocated
to working interest owners of oil and gas properties operated by Key and net of
amounts capitalized pursuant to the full cost method of accounting.
Hedging and Related Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" effective for fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, which
delays the effective date of SFAS No. 133 for one year, to fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended by SFAS No. 137,
establishes accounting and reporting standards requiring that every derivative
instrument be recorded as either an asset or liability measured at fair value
and bases the accounting treatment of changes in the derivative's fair value on
the reasons an entity holds the instrument.
Key is currently reviewing the effect that SFAS No. 133 will have on its
financial statements in relation to hedging activity. Because the Company has
not used hedging arrangements or other financial instruments to mitigate changes
in market-based commodity prices or interest rates, the Company does not expect
the impact of adoption of SFAS No. 133 to be material.
-26-
<PAGE>
Reclassification
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
-27-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS
In 1999, Key acquired additional interests in producing properties we
already operated in the Hardeman Basin and other properties in the Gulf Coast
region. These transactions were funded with cash from operating activities.
In December 1998, Key purchased EEX Corporation's (EEX) remaining interest
in oil and gas properties in the Hardeman Basin for $10.5 million. In September
1997, Key purchased 20 percent of EEX's interest and assumed operation of the
producing properties. Acquisition of other producing and non-producing
properties in 1998 totaled $2.7 million.
Key made various property acquisitions in 1997 including the acquisition of
non-producing acreage over 11 salt domes in west-central Mississippi.
2. LONG TERM DEBT
On November 12, 1999, Key entered into a new long-term revolving credit
agreement funded by a group of banks. The new facility replaced the Company's
prior credit agreement dated April 25, 1994 and amended on April 15, 1998. The
new credit agreement specifies a maximum loan amount of $150 million and had an
initial aggregate borrowing base of $85 million. The borrowing base is largely
predicated on the value of the Company's oil and gas reserves and is subject to
periodic re-determination. If the re-determined borrowing base falls below the
outstanding loan amount, the banks may request repayment of the excess amount.
At December 31, 1999, Key had $60 million outstanding and $25 million unused and
available on the new credit facility.
The credit agreement has a maturity date of January 1, 2006, including a
revolving period that matures on January 1, 2002. At that point, if not amended
before then, the outstanding loan amount converts to a term loan and the Company
must commence quarterly principal payments.
Oil and gas assets owned by Key and its subsidiaries secure debt borrowed
under the credit facility. The loan agreement also contains certain covenants
and restrictions, among which are limitations on additional borrowings, working
capital requirements, and net worth maintenance. Key has been in compliance with
the covenants since inception of the agreement.
At Key's option, interest on amounts borrowed is calculated based on London
Interbank Offered Rates (LIBOR) or the Base Rate. Base Rate means the higher of
the Federal Funds rate plus 0.5 percent or the prime rate. The interest rate Key
pays is also predicated on the facility usage ratio (the quotient obtained by
dividing the outstanding loan amount by the borrowing base). Pursuant to the
terms of the loan agreement, the margin on the applicable market sensitive
interest rate for LIBOR-based loans could range from 1.00-1.75 percent per
annum. Similarly, the margin on Base Rate borrowings could range from 0.00-0.50
percent per annum.
-28-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The average interest rate on the outstanding debt at the end of 1999 was
7.45 percent. The loan agreement also provides for a 0.30-0.40 percent
commitment fee (also based on the facility usage ratio) on the average unused
portion of the borrowing base in return for the banks' obligation to maintain
the availability of those funds.
The carrying value of long-term debt approximates fair value because the
debt is variable rate and re-prices in the short term.
Aggregate maturities of long-term debt outstanding at December 31, 1999,
are as follows:
(In thousands)
2000............................... $ -
2001............................... -
2002............................... 15,000
2003............................... 15,000
2004............................... 15,000
Thereafter......................... 15,000
--------
$ 60,000
========
3. INCOME TAXES
Deferred tax assets and liabilities are comprised of the following
components at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
(In thousands)
Long-term deferred tax assets:
Operating loss carryforwards................................. $ 2,847 $ 5,241
Percentage depletion carryforwards........................... 826 826
Other........................................................ (164) 925
-------- --------
3,509 6,992
Valuation allowance........................................... (711) (2,088)
-------- --------
2,798 4,904
Long-term deferred tax liabilities:
Depreciation, depletion and amortization..................... (24,653) (23,027)
-------- --------
Net deferred income tax liability............................ $(21,855) $(18,123)
======== ========
</TABLE>
The Company had net tax operating loss carryforwards of approximately $8.2
million at December 31, 1999, which expire in the years 2000 through 2010. As of
December 31, 1999, a portion of these net operating losses (NOLs) acquired as
part of a 1996 acquisition are subject to annual limitations. The Company has
provided a valuation allowance for the portion of these NOLs which it does not
believe will be available for use prior to expiration.
-29-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense consisted of the following:
For the Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Current Taxes:
Federal....................... $ - $ - $ -
State......................... 78 297 -
Deferred Taxes.................. 4,093 2,520 5,943
------ ------ ------
Total tax provision on income $4,171 $2,817 $5,943
====== ====== ======
A reconciliation of the statutory income tax rate to the effective rate is as
follows:
1999 1998 1997
---- ---- ----
Statutory income tax rate............... 34.0% 34.0% 34.0%
State income tax........................ 4.0 4.0 4.0
---- ---- ----
38.0% 38.0% 38.0%
==== ==== ====
4. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
For the Year Ended December 31,
--------------------------------
1999 1998 1997
------ ------ ------
(In thousands)
Cash paid during the year for:
Interest (net of amounts
capitalized: $1,397, $1,456 and
$1,019, respectively)......... $ 2,703 $ 1,144 $ 987
Income taxes (net of refunds
received)....................... $ 78 $ (147) $ 145
5. STOCK OPTIONS
The Key Production Company, Inc. 1992 Stock Option Plan reserves 2,000,000
shares of common stock for issuance to the Company's officers and employees. A
total of 1,305,500 options were outstanding at year-end. The options expire at
various dates through 2009 and are at prices ranging from $2.50 to $11.38 per
share with an aggregate exercise price of $11,220,187.
The Key Production Company, Inc. Stock Option Plan for Non-Employee
Directors reserves 360,000 shares of common stock for issuance to the Company's
non-employee directors. There were 152,500 options outstanding at year-end at an
aggregate exercise price of $1,230,938. These outstanding options were granted
at exercise prices from $2.88 to $12.00 and expire at various dates through
2008.
The Company's chief executive officer was granted options for 500,000
shares of the Company's common stock in 1992 in accordance with the terms of his
employment agreement. These outstanding options were granted at an exercise
price of $3.00 and expire in 2002.
-30-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All options granted had an exercise price equal to or above market price on
the date of grant. Subject to accelerated vesting under certain circumstances
such as death of the employee or change in control of the Company, one-third of
the options vest in each of the three years following the date of grant.
The following table summarizes the changes in stock options for the year,
the number of common shares available for grant and the number of outstanding
options vested at year-end.
1999
--------------------
Weighted
Average
Number of Exercise
Options Price
---------- --------
Outstanding, Beginning of Year...... 1,540,000 $ 6.30
Granted............................. 490,000 $ 9.69
Exercised........................... (42,000) $ 3.76
Terminated.......................... (30,000) $ 11.38
----------
Outstanding, End of Year............ 1,958,000 $ 7.11
==========
Exercisable, End of Year............ 1,269,666 $ 5.45
==========
Available for Grant, End of Year.... 702,500
==========
1998
--------------------
Weighted
Average
Number of Exercise
Options Price
--------- ---------
Outstanding, Beginning of Year...... 1,479,500 $ 6.07
Granted............................. 62,500 $ 11.75
Exercised........................... (2,000) $ 4.13
---------
Outstanding, End of Year............ 1,540,000 $ 6.30
=========
Exercisable, End of Year............ 1,129,167 $ 4.48
=========
Available for Grant, End of Year.... 1,162,500
=========
1997
--------------------
Weighted
Average
Number of Exercise
Options Price
--------- --------
Outstanding, Beginning of Year...... 1,049,000 $ 3.32
Granted............................. 500,000 $ 11.38
Exercised........................... (69,500) $ 2.85
---------
Outstanding, End of Year............ 1,479,500 $ 6.07
=========
Exercisable, End of Year............ 942,833 $ 3.19
=========
Available for Grant, End of Year.... 1,225,000
=========
-31-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) was adopted by the Company as of December 31,
1996. This Statement establishes a fair value method of accounting for stock-
based compensation plans either through recognition or disclosure. SFAS No. 123
allows the continued measurement of compensation cost for such plans using the
intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), provided that pro forma results of
operations are disclosed for those options granted beginning January 1, 1995. We
account for our stock-based compensation plans under APB Opinion No. 25, and
related interpretations, under which no compensation cost has been recognized
for the Stock Option Plans. If compensation costs had been determined in
accordance with SFAS No. 123, our net income and net income per common share
would approximate the following pro forma amounts :
(In thousands, except per share amounts)
Net income: 1999 1998 1997
------ ------ ------
As reported............................. 6,804 4,595 9,696
====== ====== ======
Pro forma............................... 6,025 4,029 9,122
====== ====== ======
Net income per common share:
Basic:
As reported............................ $ .59 $ .40 $ .84
====== ====== ======
Pro forma.............................. $ .52 $ .35 $ .79
====== ====== ======
Diluted:
As reported............................ $ .56 $ .38 $ .80
====== ====== ======
Pro forma.............................. $ .50 $ .33 $ .75
====== ====== ======
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The weighted-average
fair value of each option granted is estimated on the date of grant using the
Black Scholes option pricing model with the following assumptions for 1999:
risk-free interest rate of 5.5 to 6.6 percent, expected weighted-average lives
of five years, expected volatility of 47 percent in 1999, and 1998 and 39
percent in 1997 and expected dividends of zero percent.
The following table summarizes information about the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Year Exercise Number Contractual Exercise Number Exercise
Granted Prices Outstanding Life Price Exercisable Price
- ----------- ------------- ----------- ------------------- -------- ------------------- --------
<S> <C> <C> <C> <C> <C> <C>
1992-1993 $ 2.50-$ 3.75 705,000 2.9 years $ 3.02 705,000 $ 3.02
1994-1995 $ 3.00-$ 4.88 185,500 4.3 years $ 3.38 185,500 $ 3.38
1996-1997 $ 8.13-$11.38 515,000 7.0 years $11.09 358,333 $10.97
1998 $11.31-$12.00 62,500 8.3 years $11.36 20,833 $11.36
1999 $ 9.69 490,000 9.7 years $ 9.69 - $ -
--------- ------------------- ------ --------- ------
1,958,000 6.0 years $ 7.11 1,269,666 $ 5.45
========= =================== ====== ========= ======
</TABLE>
-32-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. EMPLOYEE BENEFIT PLANS
Retirement Plan-We provide a 401(k) retirement/savings plan for all
employees. Participants may contribute up to 10 percent of their compensation,
and we match contributions up to 4 percent of their compensation. Our
contribution is made in the form of Key common stock. Employees vest in the
Company's contribution at the rate of 25 percent per year. Total expenses for
our matching contribution were $155,485, $169,714 and $114,109 in 1999, 1998 and
1997 respectively.
Deferred Compensation Plan-Effective December 1, 1993, the Company
established the Key Production Company, Inc. Deferred Compensation Plan. This
plan is intended to provide a mechanism whereby certain management employees of
the Company may defer compensation. The Company intends for this plan to
provide the eligible employees with the opportunity to defer compensation in
cases where deferrals under the 401(k) plan may be limited by applicable
provisions of the Internal Revenue Code of 1986.
Income Continuance Plan-Effective June 1, 1994, the Company established the
Key Production Company, Inc. Income Continuance Plan. The plan provides for the
continuation of salary and benefits for certain employees in the event of a
change in control of the Company.
The administrative, compliance and legal costs associated with
administering these plans are paid by Key. Such expenses were not significant
in 1999, 1998, or 1997.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments-We have lease commitments for office space with varying
expiration dates through 2002. Rental expense was $387,216, $407,039 and
$262,648 for 1999, 1998 and 1997, respectively.
As of December 31, 1999, minimum rental commitments under these leases are
payable in the following years:
2000.......... $307,488
2001.......... 289,155
2002.......... 39,674
--------
$636,317
========
Litigation-We are involved in litigation claims and are subject to
governmental and regulatory controls arising in the ordinary course of business.
It is the opinion of our management that all claims and litigation involving the
Company are not likely to have a material adverse effect on our financial
position, results of operation or cash flows.
-33-
<PAGE>
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Environmental-We are not aware of any environmental claims existing as of
December 31, 1999, which would have a material impact upon the Company's
financial condition, results of operations or cash flows. We do not believe
that compliance with federal, state or local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, will have such an impact on the future.
8. TRANSACTIONS WITH RELATED PARTIES
In May 1997, the Company purchased 40,000 shares of Key common stock from a
former director of Key. The shares were purchased at $10.00 per share, the
market price at that time.
9. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1999
and 1998, resulted from transactions with other companies in the oil and gas
industry. This concentration of customers may impact the Company's overall
credit risk, either positively or negatively, in that these entities may be
similarly affected by industry-wide changes in economic or other conditions.
Such receivables are generally not collateralized.
The following parties purchased 10 percent or more of Key's oil and gas
production:
For the Year Ended December 31,
-------------------------------
Purchaser 1999 1998 1997
--------- ---- ---- ----
Transok, LLC.................. 18% 21% 14%
Scurlock Permian Corporation.. 16% 22% -
Tosco Refining & Marketing.... 10% 14% -
Eighty Eight Oil Company...... 6% 6% 12%
ProEnergy Marketing........... 6% 11% 14%
Enserco Energy, Inc........... 4% 13% -
In January 1997, Key signed a five-year agreement with Transok, LLC. Under
this arrangement, Transok, LLC gathers the majority of Key's Mid-Continent gas
production.
-34-
<PAGE>
KEY PRODUCTION COMPANY, INC.
Notes to Consolidated Financial Statements
10. EARNINGS PER SHARE
A reconciliation of the components of basic and diluted net income per
common share for the years ended December 31, 1999, 1998 and 1997 is presented
in the table below:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999
-------------------------
Income Shares Per Share
------ ------ ---------
<S> <C> <C> <C>
Basic:
Income available to common stockholders... $6,804 11,537 $.59
====
Effect of dilutive securities:
Stock Options............................. - 574
------ ------
Diluted:
Income available to common stockholders,
including assumed conversions............ $6,804 12,111 $.56
====== ====== ====
1998
-------------------------
Income Shares Per Share
------ ------ ---------
Basic:
Income available to common stockholders... $4,595 11,509 $.40
====
Effect of dilutive securities:
Stock Options............................. - 631
------ ------
Diluted:
Income available to common stockholders,
including assumed conversions............ $4,595 12,140 $.38
====== ====== ====
1997
-------------------------
Income Shares Per Share
------ ------ ---------
Basic:
Income available to common stockholders... $9,696 11,480 $.84
====
Effect of dilutive securities:
Stock Options............................. - 689
------ ------
Diluted:
Income available to common stockholders,
including assumed conversions............ $9,696 12,169 $.80
====== ====== ====
</TABLE>
-35-
<PAGE>
KEY PRODUCTION COMPANY, INC.
SUPPLEMENTAL OIL AND GAS DISCLOSURES
Oil and Gas Operations-The following tables contain revenues and direct
cost information relating to our oil and gas exploration and production
activities for the periods indicated. We have no long-term supply or purchase
agreements with governments or authorities in which we act as producer.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(In thousands, except percentages)
<S> <C> <C> <C>
Oil and gas revenues from production....... $ 55,798 $ 37,413 $ 41,965
-------- --------- --------
Operating costs:
Depreciation, depletion and amortization.. 28,238 15,833 12,978
Lease operating........................... 8,951 8,874 7,913
Production taxes.......................... 2,623 2,409 2,714
Income taxes.............................. 6,075 3,913 6,977
-------- --------- --------
45,887 31,029 30,582
-------- --------- --------
Results of operations from oil and gas
producing activities...................... $ 9,911 $ 6,384 $ 11,383
======== ========= ========
Amortization rate as a percentage
of revenues............................... 50.6% 42.3% 30.9%
======== ========= ========
</TABLE>
Capitalized Costs Incurred-The following table sets forth the capitalized
costs incurred in the Company's oil and gas production, exploration and
development activities.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Costs incurred during the year:
Acquisition of properties
Proved........................... $ 1,986 $ 9,605 $ 3,763
Unproved......................... 891 3,648 4,143
Exploration........................ 15,977 16,780 15,169
Development........................ 15,602 25,396 21,550
------- ------- -------
Oil and gas expenditures......... 34,456 55,429 44,625
Property sales..................... (2,114) (3,411) (726)
------- ------- -------
$32,342 $52,018 $43,899
======= ======= =======
</TABLE>
Costs Not Being Amortized-The following table summarizes oil and gas
property costs not being amortized at December 31, 1999, by year that the costs
were incurred:
1999............ $ 4,285
1998............ 6,491
1997............ 5,220
1996 and prior.. 2,108
-------
$18,104
=======
The Company expects a majority of these costs to be evaluated and to become
subject to amortization within the next three years.
-36-
<PAGE>
Oil and Gas Reserve Information (Unaudited)-Proved oil and gas reserve
quantities are based on estimates prepared by the Company's engineers, and were
audited by Ryder Scott Company Petroleum Engineers, independent petroleum
engineers, in accordance with guidelines established by the Securities and
Exchange Commission (SEC). Reserve estimates are based on economic and operating
conditions existing at December 31 of each year presented.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and projecting future rates of production and the timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. All of the Company's reserves are
located in the continental or offshore United States.
<TABLE>
<CAPTION>
Gas in Million Cubic Feet Oil in Thousands of Barrels
------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total proved reserves-
Developed and undeveloped
Beginning of year.......... 82,956 69,543 64,094 7,022 6,213 6,207
Revisions of previous
estimates................. (1,951) 8,523 (1,206) 1,740 (282) (306)
Improved recovery.......... - - - - - 5
Extensions and
discoveries............... 10,849 16,560 17,401 1,575 910 845
Purchases of
reserves.................. 1,567 971 374 258 1,159 301
Production................. (14,070) (12,600) (10,958) (1,375) (965) (839)
Sales of properties........ - (41) (162) - (13) -
------- ------- ------- ------- ------- ------
End of year................ 79,351 82,956 69,543 9,220 7,022 6,213
======= ======= ======= ======= ======= ======
Proved developed reserves-
Beginning of year.......... 82,337 67,771 62,806 7,012 6,197 6,006
End of year................ 77,048 82,337 67,771 8,916 7,012 6,197
</TABLE>
Standardized Measure Of Future Net Cash Flows (Unaudited)-Future cash flows
are based on year-end prices (averaging $23.68 per barrel of oil and $2.16 per
Mcf of gas as of December 31, 1999) except in those instances where the sale of
gas is covered by contract terms providing for determinable escalations.
Operating costs, production and ad valorem taxes and future development costs
are based on current costs with no escalation.
The following table presents information concerning future net cash flows
from the production of oil and gas reserves, net of income tax expense. Income
tax expense has been computed using expected future tax rates and giving effect
to permanent differences and credits which, under current laws, relate to oil
and gas producing activities. This information does not purport to present the
fair market value of Key's oil and gas assets, but does present a standardized
disclosure concerning possible future net cash flows that will result under the
assumptions used.
-37-
<PAGE>
Discounted Future Net Cash Flows and Changes Relating to Proved Reserves at
December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash inflows........................ $ 403,480 $252,148 $266,095
Production costs.................... (116,487) (78,822) (87,312)
Development costs................... (7,005) (3,209) (3,782)
Income tax expense.................. (61,117) (22,143) (34,171)
--------- -------- --------
Net cash flows...................... 218,871 147,974 140,830
10% annual discount rate............ (71,896) (43,752) (41,577)
--------- -------- --------
Standardized measure of discounted
future net cash flows.............. $ 146,975 $104,222 $ 99,253
========= ======== ========
Discounted future net cash flows
before income taxes................ $ 185,204 $118,419 $121,718
========= ======== ========
</TABLE>
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Sales, net of production costs........ $(44,224) $(26,130) $(31,338)
Net change in prices and production... 53,947 (27,302) (69,612)
Extensions, discoveries and improved
recovery, net of related costs....... 38,721 30,580 36,531
Change in future development costs.... 1,187 1,857 660
Revision of quantities................ 11,876 6,800 (2,432)
Accretion of discount................. 11,842 12,172 17,259
Effective change in income taxes...... (24,033) 8,269 20,902
Purchases of reserves in place........ 5,547 9,025 4,592
Sales of properties................... - (155) (254)
Change in production rates and other.. (12,110) (10,147) (6,275)
-------- -------- --------
$ 42,753 $ 4,969 $(29,967)
======== ======== ========
</TABLE>
Impact of Pricing (Unaudited)-The estimates of cash flows and reserve
quantities shown above are based on year-end oil and gas prices, except in those
cases where future gas sales are covered by contracts at specified prices.
Fluctuations are largely due to the seasonal pricing nature of natural gas,
supply perceptions for natural gas and significant worldwide volatility in oil
prices.
Under SEC rules, companies that follow full cost accounting methods are
required to make quarterly "ceiling test" calculations. Under this test,
capitalized costs of oil and gas properties may not exceed the present value of
estimated future net revenues from proved reserves, discounted at 10 percent,
plus the lower cost or fair market value of unproved properties, as adjusted for
related tax effects and deferred tax reserves. The Company calculates the
projected income tax effect using the "year-by-year" method for purposes of the
supplemental oil and gas disclosures and uses the "short-cut" method for the
"ceiling test" calculation. Application of these rules during periods of
relatively low oil and gas prices, even if of short-term duration, may result in
write-downs.
-38-
<PAGE>
UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth Total
------- ------- ------- ------- -------
(In thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
1999
- ----
Revenues.............. $10,005 $11,884 $15,828 $18,541 56,258
Expenses, net......... 9,420 11,128 14,056 14,850 49,454
------- ------- ------- ------- -------
Net income............ $ 585 $ 756 $ 1,772 $ 3,691 $ 6,804
======= ======= ======= ======= =======
Basic earnings per
common share......... $ .05 $ .07 $ .15 $ .32 $ .59
======= ======= ======= ======= =======
Diluted earnings per
common share......... $ .05 $ .06 $ .15 $ .30 $ .56
======= ======= ======= ======= =======
1998
- ----
Revenues.............. $ 9,811 $ 9,695 $ 9,059 $ 9,218 $37,783
Expenses, net......... 8,376 8,145 8,134 8,533 33,188
------- ------- ------- ------- -------
Net income............ $ 1,435 $ 1,550 $ 925 $ 685 $ 4,595
======= ======= ======= ======= =======
Basic earnings per
common share*........ $ .12 $ .13 $ .08 $ .06 $ .40
======= ======= ======= ======= =======
Diluted earnings per
common share*........ $ .12 $ .13 $ .08 $ .06 $ .38
======= ======= ======= ======= =======
</TABLE>
* The sum of the individual quarters' net income per share may not agree with
year-to-date net income as each period's computation is based on the weighted
average number of shares outstanding during that period.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Information About Nominees for
Election as Directors" in the Company's proxy statement relating to the
Company's 1999 annual meeting of stockholders (Proxy Statement) is incorporated
herein by reference. Certain information with regard to the executive officers
of the Company is set forth under the caption "Executive Officers of the
Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information set for the under the captions "Summary Compensation
Table," "Aggregated Option Exercises In The Last Fiscal Year and Fiscal Year-End
Option Values," "Director Compensation," and "Employment Agreements" in the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement
is incorporated herein by reference.
-39-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are included in Item 8 to this
10-K.
Statement of income for each of the three years in the period ended
December 31, 1999.
Statement of cash flows for each of the three years in the period
ended December 31, 1999.
Balance sheet as of December 31, 1999 and 1998.
Statement of changes in stockholders' equity for each of the three
years in the period ended December 31, 1999.
Summary of significant accounting policies.
Notes to financial statements.
Report of independent public accountants.
Supplemental oil and gas disclosures.
Supplemental quarterly financial data.
2. Schedules: None.
3. Exhibits:
Exhibits not incorporated by reference to a prior filing are
designated by an asterisk (*) and are filed herewith; all exhibits not
so designated are incorporated by reference to a prior SEC filing as
indicated.
Exhibits designated by a plus sign (+) are management contracts or
compensatory plans or arrangements required to be filed herewith
pursuant to Item 14.
-40-
<PAGE>
Exhibit No. Description
-----------------------------------------------
2.1 -- Dissolution Agreement and Quitclaim Assignment between APC
Operating Partnership L.P., Apache Corporation and the
Registrant, dated as of January 1, 1993 (incorporated by
reference to Exhibit 2.1 to the Registrant's Form 10-Q for
the period ended March 31, 1993, file no. 0-17162).
2.2 -- Agreement and Plan of Merger dated as of December 21, 1995
among Key Production Company, Inc., Key Acquisition One,
Inc. and Brock Exploration Corporation (incorporated by
reference to Exhibit 2.2 to the Registrant's Statement on
Form S-4, registration no. 333-00889 filed with the SEC on
February 15, 1996).
3.1 -- Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-4,
registration no. 33-23533 filed with the SEC on August 5,
1988).
3.2 -- Amendment to Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-4,
registration no. 33-23533 filed with the SEC on August 5,
1988).
3.3 -- Bylaws of the Registrant, as amended and restated on June
8, 1995 (incorporated by reference to Exhibit 3.3 to the
Registrant's Form 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).
+ 10.7 -- Key Production Company, Inc. 1992 Stock Option Plan
(incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-K for the fiscal year ended December
31, 1992, file no. 0-17162).
+ 10.8 -- Key Production Company, Inc. Stock Option Plan for Non-
Employee Directors, (incorporated by reference to Exhibit
10.8 to the Registrant's Form 10-K for the fiscal year
ended December 31, 1992, file no. 0-17162).
+ 10.9 -- Stock Option Agreement between the Registrant and Francis
H. Merelli, dated September 1, 1992 (incorporated by
reference to Exhibit 10.9 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1992, file no. 0-
17162).
+ 10.10 -- Key Production Company, Inc. 401(k) Plan (incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-K
for the fiscal year ended December 31, 1992, file no. 0-
17162).
+ 10.11 -- Employment Agreement between the Registrant and Francis H.
Merelli, dated as of September 1, 1992 (incorporated by
-41-
<PAGE>
reference to Exhibit 10.11 to the Registrant's Form
10-K for the fiscal year ended December 31, 1992,
file no. 0-17162).
+ 10.12 -- Employment Agreement between the Registrant and
Monroe W. Robertson, dated as of September 1, 1992
(incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-K for the fiscal year ended
December 31, 1992, file no. 0-17162).
10.16 -- Credit Agreement between Key Production Company, Inc.
and NationsBank of Texas, N.A., dated April 25, 1994
(incorporated by reference to Exhibit 10.16 to the
Registrant's Form 8-K dated April 29, 1994, file no.
0-17162).
+ 10.18 -- Key Production Company, Inc. Income Continuance Plan,
dated effective June 1, 1994 (incorporated by
reference to Exhibit 10.18 to the Registrant's Form
10-K for the fiscal year ended December 31, 1992,
file no. 0-17162).
10.19 -- First Amendment to Credit Agreement between Key
Production Company, Inc. and NationsBank of Texas,
N.A., dated January 1, 1997 (incorporated by
reference to Exhibit 10.19 to the Registrant's Form
10-K for the fiscal year ended December 31, 1996,
file no. 0-17162).
10.20 -- Second Amendment to Credit Agreement between Key
Production Company, Inc. and NationsBank of Texas,
N.A., dated April 15, 1998 (incorporated by reference
to Exhibit 10.20 to the Registrant's Form 10-Q for
the period ended March 31, 1998, file no. 0-17162).
+ 10.21.1 -- Amendment No. 1 to the Key Production Company, Inc.
1992 Stock Option Plan, dated March 14, 1997
(incorporated by reference to Exhibit 10.21.1 to the
Registrant's Form 10-Q for the period ended June 30,
1998, file no. 0-17162).
+ 10.21.2 -- Amendment No. 1 to the Key Production Company, Inc.
Stock Option Plan for Non-Employee Directors, dated
January 27, 1997 (incorporated by reference to
Exhibit 10.21.2 to the Registrant's Form 10-Q for the
period ended June 30, 1998, file no. 0-17162).
+ 10.21.3 -- Amendment No. 2 to the Key Production Company, Inc.
Stock Option Plan for Non-Employee Directors, dated
March 14, 1997 (incorporated by reference to Exhibit
10.21.3 to the Registrant's Form 10-Q for the period
ended June 30, 1998, file no. 0-17162).
+ 10.21.4 -- Amendment No. 3 to the Key Production Company, Inc.
Stock Option Plan for Non-Employee Directors, dated
May 7, 1998 (incorporated by reference to Exhibit
10.21.4 to the Registrant's Form 10-Q for the period
ended June 30, 1998, file no. 0-17162).
* 12.1 -- Statement RE: Computation of Earnings to Fixed
Charges.
* 23.1 -- Consent of Arthur Andersen LLP, dated March 21, 2000.
-42-
<PAGE>
* 27.1 -- Financial Data Schedule for Commercial and Industrial
Companies per Article 5 of Regulation S-X for the
year ended December 31, 1999.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
-43-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized:
KEY PRODUCTION COMPANY, INC.
By:_____________________________
F.H. Merelli
Date:______________ Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
____________________________ Director, Chairman, and
F.H. Merelli Chief Executive Officer
(Principal Executive Officer) ___________
____________________________ President and Chief Operating
Monroe W. Robertson Officer ___________
____________________________ Vice President and Chief
Paul Korus Financial Officer
(Principal Financial Officer) ___________
____________________________ Director, Financial Reporting
Sherri M. Nitta (Principal Accounting Officer) ___________
____________________________ Director ___________
Cortlandt S. Dietler
____________________________ Director ___________
L. Paul Teague
-44-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized:
KEY PRODUCTION COMPANY, INC.
By: /s/ F.H. Merelli
-----------------
F.H. Merelli
Date: March , 2000 Chairman and Chief Executive
------------------
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ F.H. Merelli Director, Chairman and Chief
------------------------
F.H. Merelli Executive Officer
(Principal Executive Officer) March , 2000
--------------
/s/ Monroe W. Robertson President and Chief Operating
------------------------
Monroe W. Robertson Officer March , 2000
--------------
/s/ Paul Korus Vice President and Chief
------------------------
Paul Korus Financial Officer
(Principal Financial Officer) March , 2000
--------------
/s/ Sherri M. Nitta Director, Financial Reporting
------------------------
Sherri M. Nitta (Principal Accounting Officer) March , 2000
--------------
/s/ Cortlandt S. Dietler Director March , 2000
------------------------ --------------
Cortlandt S. Dietler
/s/ L. Paul Teague Director March , 2000
------------------------ --------------
L. Paul Teague
-45-
<PAGE>
Exhibit 12.1
KEY PRODUCTION COMPANY, INC.
Statement of Computation of Ratios of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Twelve Months Ended
December 31, 1999
-----------------
<S> <C>
Earnings:
Pretax income........................................... 10,975
Plus: Fixed charges excluding capitalized interest...... 2,832
------
13,807
======
Fixed Charges:
Interest expensed including capitalized interest........ 4,081
Amortization of debt expenses........................... 26
------
4,107
======
Ratio of earnings to fixed charges........................ 3.36
======
</TABLE>
-46-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into Key Production Company, Inc.'s previously
filed Registration Statement on Form S-8, dated September 5, 1995 and July 26,
1999, file No. 33-62355.
Arthur Andersen LLP
Denver, Colorado,
March 21, 2000
-47-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000837290
<NAME> SHERRI NITTA
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> OCT-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,087
<SECURITIES> 0
<RECEIVABLES> 12,206
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,516
<PP&E> 241,389
<DEPRECIATION> 85,990
<TOTAL-ASSETS> 176,857
<CURRENT-LIABILITIES> 17,478
<BONDS> 60,000
0
0
<COMMON> 2,955
<OTHER-SE> 73,918
<TOTAL-LIABILITY-AND-EQUITY> 176,857
<SALES> 18,399
<TOTAL-REVENUES> 18,541
<CGS> 11,123
<TOTAL-COSTS> 11,123
<OTHER-EXPENSES> 836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,070
<INCOME-PRETAX> 5,954
<INCOME-TAX> 2,23
<INCOME-CONTINUING> 3,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,691
<EPS-BASIC> .32
<EPS-DILUTED> .30
</TABLE>
