SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report
(Date of earliest event reported)
December 29, 2000
Key Production Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware 001-11769 84-1089744
(State of incorporation) (Commission file number) (IRS Employer
Identification No.)
707 Seventeenth Street, Suite 3300 Denver, Colorado 80202-3404
(Address of principal executive offices) (Zip Code)
303/295-3995
(Registrant's telephone number)
Not Applicable
(Former name and address)
Item 2. Acquisition or Disposition of Assets
Key Production Company, Inc. announced that on December 29, 2000, it completed
its acquisition of Columbus Energy Corp. pursuant to the terms of its merger
agreement dated August 28, 2000.
In the transaction, each Columbus common share will be converted into 0.355
shares of Key. The number of shares of Key stock issued to the former Columbus
stockholders was based on several factors, including the relative net asset
values of the two companies. Conversion requires the issuance of up to 1.345
million new Key common shares and the assumption of $2.2 million of Columbus'
debt. As a result, the combined company's year-end 2000 debt was $44 million and
total shares outstanding approximate 13.8 million.
In connection with the merger, Key and Columbus reported that pro forma combined
proved oil and gas reserves as of June 30, 2000, were 150 billion cubic feet
(Bcf) equivalent, consisting of 9.9 million barrels of oil and 90.4 Bcf of gas.
Estimated current daily combined production rates are 45-47 million cubic feet
of gas and 4,500-4,700 barrels of oil.
The former shareholders of Columbus will receive a Letter of Transmittal by mail
for use in exchanging their current shares for shares of Key. The exchange and
transmittal process will begin promptly. Questions concerning this process
should be directed to Key's transfer agent, Continental Stock Transfer & Trust
Company at 800/509-5586. Columbus stock certificates should not be sent to Key
or Columbus for exchange. Current Key shareholders will retain their existing
shares and will not be affected by the exchange rate.
2
Item 7. Financial Statements and Exhibits
The following financial statements, pro forma financial information and exhibits
are filed as a part of this report.
(a) Financial statements of the business acquired, prepared pursuant to Rule
3.05 of Regulation S-X:
COLUMBUS ENERGY CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Audited Financial Statements of Columbus Energy Corp.:
Report of Independent Accountants......................................... 4
Consolidated Balance Sheets at November 30, 1999 and 1998............... 5
Consolidated Statements of Operations for the years ended November 30,
1999, 1998 and 1997.................................................... 7
Consolidated Statements of Stockholders' Equity for the years ended
November 30, 1999, 1998 and 1997....................................... 8
Consolidated Statements of Cash Flows for the years ended November 30,
1999, 1998 and 1997.................................................... 9
Notes to the Consolidated Financial Statements............................ 10
Unaudited Interim Financial Statements of Columbus Energy Corp.:
Consolidated Balance Sheets at August 31, 2000 and November 30, 1999.... 25
Consolidated Statements of Operations for the Nine Months ended
August 31, 1999 and 2000............................................... 27
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended August 31, 1999 and 2000......................................... 28
Consolidated Statements of Cash Flows for the Nine Months
Ended August 31, 1999 and 2000......................................... 29
Notes to the Consolidated Financial Statements............................ 30
3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Columbus Energy Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of Columbus
Energy Corp. and its subsidiaries at November 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended November 30, 1999, in conformity with accounting
principles generally accepted in the United States. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
February 17, 2000
4
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30,
------------------
1999 1998
-------- --------
(in thousands)
Current assets:
Cash and cash equivalents................................ $ 1,850 $ 2,003
Accounts receivable:
Joint interest partners................................ 1,780 1,570
Oil and gas sales...................................... 1,501 1,239
Allowance for doubtful accounts........................ (116) (116)
Deferred income taxes (Note 5)........................... 200 327
Inventory of oil field equipment, at lower of average
cost or market.......................................... 106 95
Other.................................................... 80 106
-------- --------
Total current assets................................. 5,401 5,224
-------- --------
Deferred income taxes (Note 5)............................. 937 --
Property and equipment:
Oil and gas assets, successful efforts method (Notes 3
and 4).................................................. 36,862 36,039
Other property and equipment............................. 1,836 1,804
-------- --------
38,698 37,843
Less: Accumulated depreciation, depletion, amortization
and valuation allowance (Notes 2 and 3)................. (22,506) (19,118)
-------- --------
Net property and equipment................................. 16,192 18,725
-------- --------
$ 22,530 $ 23,949
======== ========
(continued)
5
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS--(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30,
----------------
1999 1998
------- -------
(in thousands)
Current liabilities:
Accounts payable........................................... $ 2,352 $ 1,846
Undistributed oil and gas production receipts.............. 386 317
Accrued production and property taxes...................... 738 677
Prepayments from joint interest owners..................... 200 374
Accrued expenses........................................... 494 415
Income taxes payable (Note 5).............................. 30 2
Other...................................................... 32 37
------- -------
Total current liabilities................................ 4,232 3,668
------- -------
Long-term bank debt (Note 4)................................. 5,500 4,900
Deferred income taxes (Note 5)............................... -- 117
Commitments and contingent liabilities (Note 9)
Stockholders' equity:
Preferred stock authorized 5,000,000 shares, no par value;
none issued............................................... -- --
Common stock authorized 20,000,000 shares of $.20 par
value; 4,645,303 shares issued in 1999 and 4,611,001 in
1998 (outstanding 3,800,558 in 1999 and 4,046,552 in 1998)
(Notes 1 and 7)........................................... 929 922
Additional paid-in capital................................. 20,069 19,656
Accumulated deficit........................................ (2,655) (1,440)
------- -------
18,343 19,138
Less:
Treasury stock, at cost (Note 7) 844,745 shares in 1999 and
564,449 shares in 1998.................................... (5,545) (3,874)
------- -------
Total stockholders' equity................................. 12,798 15,264
------- -------
$22,530 $23,949
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended November 30,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands, except
per share data)
Revenues:
Oil and gas sales................................ $10,014 $10,617 $13,815
Operating and management services................ 1,386 1,336 1,176
Interest income and other........................ 100 141 165
------- ------- -------
Total revenues................................. 11,500 12,094 15,156
------- ------- -------
Costs and expenses:
Lease operating expenses......................... 1,903 2,140 1,849
Property and production taxes.................... 1,029 1,080 1,258
Operating and management services................ 884 1,060 827
General and administrative....................... 1,336 1,466 1,372
Depreciation, depletion and amortization......... 3,400 3,846 3,295
Impairments...................................... 973 3,482 2,179
Exploration expense.............................. 3,071 722 540
Retirement and separation........................ 111 -- --
Litigation expense............................... 119 4 10
Loss on sale of assets........................... -- -- 60
------- ------- -------
Total costs and expenses....................... 12,826 13,800 11,390
------- ------- -------
Operating income (loss)........................ (1,326) (1,706) 3,766
------- ------- -------
Other (income) expense:
Interest......................................... 373 260 174
Other............................................ 62 26 (4)
------- ------- -------
435 286 170
------- ------- -------
Earnings (loss) before income taxes................ (1,761) (1,992) 3,596
Provision (benefit) for income taxes (Note 5)...... (546) (757) 1,429
------- ------- -------
Net earnings (loss)............................ $(1,215) $(1,235) $ 2,167
======= ======= =======
Earnings (loss) per share (Note 8):
Basic............................................ $(.31) $(.29) $.50
======= ======= =======
Diluted.......................................... $(.31) $(.29) $.49
======= ======= =======
Weighted average number of common and common
equivalent shares outstanding:
Basic............................................ 3,898 4,194 4,299
======= ======= =======
Diluted.......................................... 3,898 4,194 4,392
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended November 30, 1999
Retained
Common Stock Additional Earnings Treasury Stock
---------------- Paid-in (Accumulated -----------------
Shares Amount Capital deficit) Shares Amount
--------- ------ ---------- ------------ -------- -------
(dollar amounts in thousands)
Balances, December 1, 1996.......... 3,499,915 $700 $17,361 $ 720 344,569 $(2,556)
Exercise of employee stock options.. 99,233 20 548 -- 13,333 (131)
Purchase of shares.................. -- -- -- -- 158,014 (1,381)
Shares issued for Stock
Purchase Plan...................... 6,996 1 62 -- (1,762) 12
Shares issued for Incentive Bonus
PlanPlan and directors' fees....... -- -- (7) -- (13,451) 105
Shares issued under five-for-four
stock split........................ 885,924 177 (178) -- 107,808 --
Tax benefit of disqualifying
disposition of
incentive stock options........... -- -- 76 -- -- --
Income tax benefit of loss
carryforwards arising prior to
quasi- reorganization.............. -- -- 262 -- -- --
Net earnings............ -- -- -- 2,167 -- --
--------- ---- ------- ------- -------- -------
Balances, November 30,
1997................... 4,492,068 898 18,124 2,887 608,511 (3,951)
--------- ---- ------- ------- -------- -------
Exercise of employee
stock options...................... 109,910 22 592 -- 27,193 (229)
Purchase of shares.................. -- -- -- -- 352,766 (2,550)
Shares issued for Stock
Purchase Plan...................... 9,023 2 70 -- (2,275) 16
10% stock dividend.................. -- -- 492 (3,092) (386,494) 2,598
Shares issued for
Incentive Bonus Plan
and directors' fees................ -- -- (57) -- (35,252) 242
Tax benefit of stock
option exercises................... -- -- 215 -- -- --
Income tax benefit of loss
carryforwards arising prior to
quasi- reorganization.............. -- -- 220 -- -- --
Net loss............................ -- -- -- (1,235) -- --
--------- ---- ------- ------- -------- -------
Balances, November 30,
1998.............................. 4,611,001 922 19,656 (1,440) 564,449 (3,874)
--------- ---- ------- ------- -------- -------
Exercise of employee
stock options..................... 23,320 5 63 -- 855 24
Purchase of shares................. -- -- -- -- 300,540 (1,836)
Shares issued for Stock
Purchase Plan..................... 10,982 2 66 -- (2,759) 19
Shares issued for
Incentive Bonus Plan
and directors' fees............... -- -- (38) -- (18,340) 122
Tax benefit of stock
option exercises.................. -- -- 12 -- -- --
Income tax benefit of loss
carryforwards arising prior to
quasi- reorganization............. -- -- 310 -- -- --
Net loss........................... -- -- -- (1,215) -- --
--------- ---- ------- ------- -------- -------
Balances, November 30,
1999.............................. 4,645,303 $929 $20,069 $(2,655) 844,745 $(5,545)
========= ==== ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
8
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended November 30,
-------------------------
1999 1998 1997
------- ------- -------
(in thousands)
Net earnings (loss)................................ $(1,215) $(1,235) $ 2,167
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation, depletion, and amortization........ 3,400 3,846 3,295
Impairments and loss on asset dispositions....... 973 3,482 2,179
Deferred income tax provision (benefit).......... (606) (822) 1,328
Exploration expense, non-cash portion............ 328 9 --
Other............................................ 147 190 163
Changes in operating assets and liabilities:
Accounts receivable.............................. (472) 1,177 (1,554)
Other current assets............................. (28) (7) 21
Accounts payable................................. 673 (298) 352
Undistributed oil and gas production receipts.... 69 (76) 339
Accrued production and property taxes............ 61 126 (4)
Prepayments from joint interest owners........... (174) (191) 307
Income taxes payable............................. 28 18 9
Other current liabilities........................ 74 39 36
------- ------- -------
Net cash provided by operating activities........ 3,258 6,258 8,638
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of assets..................... -- 36 1,005
Additions to oil and gas properties.............. (2,291) (6,642) (8,172)
Additions to other assets........................ (45) (111) (127)
------- ------- -------
Net cash used in investing activities............ (2,336) (6,717) (7,294)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt..................... 1,300 3,400 3,000
Reduction in long-term debt...................... (700) (700) (3,000)
Proceeds from exercise of stock options.......... 161 455 498
Purchase of treasury stock....................... (1,836) (2,550) (1,381)
------- ------- -------
Net cash provided by (used in) financing
activities...................................... (1,075) 605 (883)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (153) 146 461
Cash and cash equivalents at beginning of year..... 2,003 1,857 1,396
------- ------- -------
Cash and cash equivalents at end of year........... $ 1,850 $ 2,003 $ 1,857
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ 373 $ 254 $ 182
======= ======= =======
Income taxes, net of refunds..................... $ 32 $ 47 $ 91
======= ======= =======
Supplemental disclosure of non-cash investing and
financing activities:
Non-cash compensation expense related to common
stock........................................... $ 116 $ 190 $ 98
======= ======= =======
Use of loss carryforwards credited to additional
paid-in-capital................................. $ 310 $ 220 $ 262
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
9
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) FORMATION AND OPERATIONS OF THE COMPANY
Columbus Energy Corp. ("Columbus") was incorporated as a Colorado
corporation on October 7, 1982 primarily to explore for, develop, acquire and
produce oil and gas reserves. Columbus' wholly-owned subsidiary is Columbus
Gas Services, Inc. ("CGSI"). CEC Resources Ltd. ("Resources") was also a
wholly-owned subsidiary prior to February 24, 1995 when it was divested by
Columbus by a rights offering to its shareholders. On September 1, 1998
Columbus formed a Texas partnership named Columbus Energy, L.P. and is its
general partner. The partnership's limited partner is Columbus Texas, Inc.
("Texas"), a Nevada corporation, which is a wholly-owned subsidiary of
Columbus. All of the Company's oil and gas properties in Texas were
transferred to the partnership effective September 1, 1998. Columbus remains
the operator of the properties. Columbus and its subsidiaries are referred to
in these Notes to the Financial Statements as the "Company".
(2) ACCOUNTING POLICIES
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles and require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. The following is a summary of the significant accounting
policies followed by the Company.
Consolidation
The accompanying consolidated financial statements include the accounts of
Columbus and its wholly-owned subsidiaries, CGSI and Texas. All significant
intercompany balances have been eliminated in consolidation.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Hedging activities are included in cash
flow from operations in the cash flow statements.
Financial Instruments and Concentrations of Credit Risk
The Company maintains demand deposit accounts with separate banks in Denver,
Colorado. The Company also invests cash in the highest rated commercial paper
of large U.S. companies, with maturities not over 30 days, which have minimal
risk of loss. At November 30, 1999 and 1998 the Company had investments in
commercial paper of $1,300,000 and $1,100,000, respectively. The carrying
amounts of accounts receivable and accounts payable approximate their fair
values based on the short-term nature of those instruments. The carrying
amount of long-term debt approximates fair value because the interest rate on
this instrument changes with market interest rates.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash
equivalents and accounts receivable. Columbus as operator of jointly-owned oil
and gas properties, sells oil and gas production to relatively large U.S. oil
and gas purchasers (see Note 3), and pays vendors for oil and gas services.
The risk of non-payment by the purchasers, counterparties to the crude oil and
natural gas swap agreements or joint owners is considered minimal. The Company
does not obtain collateral from its oil and gas purchasers for sales to them.
Joint interest receivables are subject to collection under the terms of
operating agreements which provide lien rights to the operator.
10
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Oil and Gas Properties
The Company follows the successful efforts method of accounting.
Expenditures for lease acquisition and development costs (tangible and
intangible) relating to proved oil and gas properties are capitalized. Delay
and surface rentals are charged to expense in the year incurred. Dry hole
costs incurred on exploratory operations are expensed. Dry hole costs
associated with developing proved fields are capitalized. Expenditures for
additions, betterments, and renewals are capitalized. Exploratory geological
and geophysical costs are expensed when incurred.
Upon sale or retirement of proved properties, the cost thereof and the
accumulated depreciation or depletion are removed from the accounts and any
gain or loss is credited or charged to income if significant. Abandonment,
restoration, dismantlement costs and salvage value are taken into account in
determining depletion rates. These costs are generally about equal to the
proceeds from equipment salvage upon abandonment of such properties. When
estimated abandonment costs exceed the salvage value, the excess cost is
accrued and expensed. Maintenance and repairs are charged to operating
expenses.
Provision for depreciation and depletion of capitalized exploration and
development costs are computed on the unit-of-production method based on
proved reserves of oil and gas, as estimated by petroleum engineers, on a
property by property basis. Unproved properties are assessed periodically to
determine whether they are impaired. When impairment occurs, a loss is
recognized by providing a valuation allowance. When leases for unproved
properties expire, any remaining cost is expensed.
An impairment loss on oil and gas properties is reported as a component of
income from continuing operations. The Company recognizes an impairment loss
when the carrying value exceeds the expected undiscounted future net cash
flows of each property pool, at which time the property pool is written down
to the fair value. Fair value is estimated to be a discounted present value of
expected future net cash flows with appropriate risk consideration.
The Company uses crude oil and natural gas hedges to manage price exposure.
Realized gains and losses on the hedges are recognized in oil and gas sales as
settlement occurs.
The Company follows the entitlements method of accounting for balancing of
gas production. The Company's gas imbalances are immaterial at November 30,
1999 and 1998.
Other Property and Equipment
Other property and equipment consists of compressors, vehicles, office and
computer equipment and software. Gains and losses from retirement or
replacement of other properties and equipment are included in income.
Betterments and renewals are capitalized. Maintenance and repairs are charged
to operating expenses. Depreciation of other assets is provided on the
straight line method over their estimated useful lives, which range from three
to twelve years.
Operating and Management Services
The Company recognizes revenue for operating and management services
provided to other companies and non-operating interest owners in which the
Company has no economic interest. The Company receives overhead fees,
management fees and revenues related to gas marketing, compression and
gathering.
The cost of providing such services is expensed and shown as "operating and
management services" cost.
11
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
shares outstanding. Diluted earnings per share reflects the potential dilution
that would occur if options were exercised using the average market price for
the Company's stock for the period. Historical average number of shares
outstanding and earnings per share have been adjusted for the five-for-four
stock split distributed June 16, 1997 to shareholders of record as of May 27,
1997 and the 10% stock dividend distributed March 9, 1998 to shareholders of
record as of February 23, 1998.
Accounting for Stock-Based Compensation
The Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation" in 1995. This statement prescribes
the accounting and reporting standards for stock-based employee compensation
plans and was effective for the Company's 1997 fiscal year. The Company makes
the alternative pro forma disclosures as permitted in the SFAS.
New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137 which deferred the effective date
for SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to fiscal years beginning after June 15, 2000. The Company must
apply this statement no later than its fiscal year beginning December 1, 2000.
SFAS No. 133 requires recording all derivative instruments as assets or
liabilities measured at fair value. This Statement is not expected to
materially affect the Company's financial statements.
(3) OIL AND GAS PRODUCING ACTIVITIES
The following tables set forth the capitalized costs related to U.S. oil and
gas producing activities, costs incurred in oil and gas property acquisition,
exploration and development activities, and results of operations for
producing activities:
Capitalized Costs Relating to Oil and Gas
Producing Activities
(in thousands)
November 30,
------------------
1999 1998
-------- --------
Proved properties......................................... $ 36,456 $ 35,290
Unproved properties....................................... 406 749
-------- --------
36,862 36,039
Less accumulated depreciation, depletion, amortization and
valuation allowance...................................... (21,221) (17,919)
-------- --------
Total net properties.................................... $ 15,641 $ 18,120
======== ========
12
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Costs Incurred in Oil and Gas Property Acquisition,
Exploration and Development Activities
(in thousands)
Year Ended November 30,
-----------------------
1999 1998 1997
------ ------ -------
Property acquisition costs:
Proved.................................................. $ -- $ 74 $ --
Unproved................................................ 226 764 508
Exploration costs......................................... 3,071 722 540
Development costs......................................... 1,927 4,925 9,043
------ ------ -------
Total costs incurred.................................. $5,224 $6,485 $10,091
====== ====== =======
Results of Operations for Producing Activities
(in thousands)
Year Ended November 30,
-------------------------
1999 1998 1997
------- ------- -------
Sales............................................... $10,014 $10,617 $13,815
Production (lifting) costs (a)...................... 2,932 3,220 3,107
Exploration expenses................................ 3,071 722 540
Impairment of long-lived assets..................... 973 3,482 2,179
Depreciation depletion and amortization (b)......... 3,301 3,743 3,194
------- ------- -------
(263) (550) 4,795
Income tax provision (benefit)...................... (82) (209) 1,905
------- ------- -------
Results of operations from producing activities
(excluding overhead and interest incurred)......... $ (181) $ (341) $ 2,890
======= ======= =======
- --------
(a) Production costs include lease operating expenses, production and property
taxes
(b) Amortization expense per equivalent barrel of production: 1999-$4.69 1998-
$4.64 1997-$3.91
For the years ended November 30, 1999, 1998 and 1997, the Company had the
following customers who purchased production equal to more than 10% of its
total revenues. The following table shows the amounts purchased by each
customer.
1999 1998 1997
---------------- ---------------- ----------------
Amount % Revenue Amount % Revenue Amount % Revenue
------ --------- ------ --------- ------ ---------
Customer A................... $1,521 15.2% $1,652 15.6% $2,956 21.4%
Customer B................... 4,528 45.2 5,204 49.0 6,536 47.3
Customer C................... -- -- -- -- 1,395 10.1
Customer D................... 1,465 14.6 1,321 12.4 -- --
In the Company's judgment, termination by any purchaser to which its present
sales are made would not have a material impact upon its ability to sell its
production to another purchaser at similar prices.
13
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) LONG-TERM DEBT
The Company has a Credit Agreement ("Agreement") with Norwest Bank Denver,
N.A. ("Bank") having a borrowing base of $10,000,000, which is subject to
semi-annual redetermination for any increase or decrease. On May 12, 1999 the
Credit Agreement was amended to extend the revolving period to July 1, 2001
when it entirely converts to an amortizing term loan which matures July 1,
2005. The credit is collateralized by a first lien on oil and gas properties.
The interest rate options are the Bank's prime rate or LIBOR plus 1.50%. In
addition, a commitment fee of 1/4 of 1% of the average unused portion of the
credit is payable quarterly.
At November 30, 1999 outstanding borrowings on the revolving line of credit
were $5,500,000 and the unused borrowing base available was $4,500,000. The
$5,500,000 bears interest at LIBOR rate of 5.51% plus 1.50%.
The Agreement as amended provides that certain financial covenants be met
which include a minimum net worth of $12,000,000 plus 50% of Cumulative Net
Income, as defined, minus exploration expenses after August 31, 1998, a
quarterly calculation of a current ratio of not less than 1.0:1.0 and a ratio
of Funded Debt to Consolidated Net Worth, as defined, not greater than
1.25:1.00. Columbus has complied with these covenants. Under the terms of the
Agreement, Columbus is permitted to declare and pay a dividend in cash so long
as no default has occurred or a mandatory prepayment of principal is pending.
The scheduled payments of long-term debt for the years ending November 30
are as follows (in thousands):
2001................................................................ $ 458
2002................................................................ 1,375
2003................................................................ 1,375
2004................................................................ 1,375
2005................................................................ 917
------
Total............................................................. $5,500
======
(5) INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
1999 1998 1997
----- ----- ------
Current:
Federal.............................................. $ 28 $ -- $ 13
State................................................ 32 65 88
----- ----- ------
60 65 101
----- ----- ------
Deferred:
Federal.............................................. (582) (789) 942
Use of loss carryforwards............................ -- -- 347
State................................................ (24) (33) 39
----- ----- ------
(606) (822) 1,328
----- ----- ------
Total income tax provision (benefit)................ $(546) $(757) $1,429
===== ===== ======
14
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total tax provision has resulted in effective tax rates which differ from
the statutory Federal income tax rates. The reasons for these differences are:
Percent of Pretax Earnings
--------------------------------
1999 1998 1997
-------- -------- --------
U.S. statutory rate.................... (34)% (34)% 34%
State income taxes..................... 1 2 2
Change in valuation allowance.......... -- (4) 2
Other.................................. 2 (2) 2
-------- -------- --------
Effective rate......................... (31)% (38)% 40%
======== ======== ========
The Company files a consolidated income tax return with its subsidiaries.
Consolidated income taxes are payable only when taxable income exceeds
available net operating loss carryforwards and other credits.
The Tax Reform Act of 1986 limits the use of corporate tax carryforwards in
any one taxable year if a corporation experiences a 50% change of ownership.
Columbus experienced such a change of ownership in October 1987 which limits
its use of pre-change ownership net operating losses to approximately $900,000
in each subsequent year.
The Company uses the asset and liability method to account for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the temporary differences between financial statement and tax basis of assets
and liabilities using enacted rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets (net of a valuation
allowance) primarily result from net operating loss carryforwards, percentage
depletion and certain accrued but unpaid employee benefits. Deferred tax
liabilities result from the recognition of depreciation, depletion and
amortization in different periods for financial reporting and tax purposes.
Because of the Company's previous 1987 quasi-reorganization, the Company is
required to report the effect of its net deferred tax asset arising prior to
December 1, 1987 as an increase in stockholders' equity rather than as an
increase to net earnings.
15
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During fiscal 1999, certain tax assets (shown in the table below) were
utilized and the valuation allowance was decreased during the year by
$122,000. The tax effect of significant temporary differences representing
deferred tax assets and liabilities and changes were as follows (in
thousands):
Current Year
-------------------------
Dec. 1, Stockholders' Operations/ Nov. 30,
1998 Equity Other 1999
------- ------------- ----------- --------
Deferred tax assets:
Pre-1987 loss carryforwards...... $ 1,049 $-- $ (609) $ 440
Post-1987 loss carryforwards..... 615 -- 2 617
Percentage depletion
carryforwards................... 1,478 -- 172 1,650
State income tax loss
carryforwards................... 118 -- 6 124
Other............................ 329 -- 58 387
------- ---- ------ -------
Total.......................... 3,589 -- (371) 3,218
Valuation allowance (long-term).. (1,408) 310(a) (188) (1,286)
------- ---- ------ -------
Deferred tax assets............ 2,181 310 (559) 1,932
------- ---- ------ -------
Tax benefit of stock option
exercises....................... -- 12(a) (12) --
------- ---- ------ -------
Deferred tax liabilities--
Depreciation, depletion and
amortization and other.......... (1,971) -- 1,176 (795)
------- ---- ------ -------
Net tax asset.................. $ 210 $322 $ 605 $ 1,137
======= ==== ====== =======
- --------
(a) Credited to additional paid-in capital.
The Company has approximate net operating loss carryforwards (in thousands)
available at November 30, 1999 as follows:
Net
Operating
Expiration Year Loss
--------------- ---------
2000............................................................. $ 904
2001............................................................. 387
2003............................................................. 105
2004............................................................. 115
2010............................................................. 1,593
------
$3,104
======
For Alternative Minimum Tax purposes the Company had net operating loss
carryforwards of approximately $3,219,000 as of November 30, 1999. The Company
also has percentage depletion carryforwards of $4,344,000 which do not expire.
Oklahoma state income tax operating loss carryforwards total approximately
$2,075,000 at November 30, 1999. These carryforwards begin to expire in fiscal
2003 and have a full valuation allowance and no net asset value in these
financial statements.
16
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The earnings before income taxes for financial statements differed from
taxable income as follows (in thousands):
1999 1998 1997
------- ------- -------
Earnings (loss) before income taxes per financial
statements........................................ $(1,761) $(1,992) $ 3,596
Differences between income before taxes or
financial statement purposes and taxable income:
Intangible drilling costs deductible for taxes... (453) (2,685) (6,158)
Excess of book over tax depletion, depreciation
and amortization................................ 2,212 1,800 1,683
Tax benefit of stock option exercises............ (32) (229) (200)
Impairment expense............................... 973 3,426 1,843
Lease abandonments............................... (393) (74) (13)
Geological expense............................... 318 -- --
Other............................................ 153 (10) 153
------- ------- -------
Federal taxable income............................. $ 1,017 $ 236 $ 904
======= ======= =======
Realization of the future tax benefits is dependent on the Company's ability
to generate taxable income within the carryforward period. Based upon the
proved reserves as of November 30, 1999 as well as contemplated drilling
activities, but excluding revenues from any possible future increase in proved
reserves, management believes that taxable income during the carryforward
period will be sufficient to essentially utilize the NOL's before they expire.
Of the total valuation allowance of $1,286,000 as of November 30, 1999,
$206,000 relates to pre-quasi-reorganization tax assets and the balance of
$1,080,000 relates to post-quasi-reorganization tax assets. In future periods,
any reduction of the pre-quasi-reorganization portion of the valuation
allowance will be credited to additional paid-in capital and any reduction of
the post-quasi-reorganization portion of the valuation allowance will be
credited to income.
Estimates of future taxable income are subject to continuing review and
change because oil and gas prices fluctuate, proved reserves are developed or
new reserves added as a result of future drilling activities, and operation
and management services revenue and expenses vary. A minimum level of
$8,500,000 of future taxable income will be necessary to enable the Company to
fully utilize the net operating loss carryforwards and realize the gross
deferred tax assets of $3,218,000. This level of income can be achieved using
the value of proved reserves reported in the year end November 30, 1999
standardized measure of net cash flows but this does not give total assurance
that sufficient taxable income will be generated for total utilization because
of the volatility inherent in the oil and gas industry which makes it
difficult to project earnings in future years due to the factors mentioned
above. During 1999 the valuation allowance was decreased by $310,000 related
to pre-quasi- reorganization tax assets and increased by $188,000 for post-
quasi-reorganization tax assets. During 1998 the valuation allowance was
decreased by $221,000 related to pre-quasi-reorganization tax assets and
increased by $186,000 for post-quasi-reorganization assets. During 1997 the
valuation allowance was decreased by $262,000 related to pre-quasi-
reorganization tax assets and increased by $236,000 for post-quasi-
reorganization assets.
(6) RELATED PARTY TRANSACTIONS
Reimbursement is made by Resources to Columbus for services provided by
Columbus officers and employees for managing Resources and reduces general and
administrative expense. This reimbursement totaled $33,000 for fiscal 1999,
$218,000 for fiscal 1998 and $225,000 for fiscal 1997.
During fiscal 1997, the Company continued its consulting and drilling
arrangements with Trueblood Resources, Inc ("TRI") that began in 1995 and
continued each year with amendments as appropriate for each
17
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year's program. In 1997 there was a 90-day written notice provision in
addition to the monthly retainer fee of $10,000 for geological and geophysical
consulting services provided by Mark Butler, a Vice President of TRI, who
would dedicate a total of 135 hours each three-month period reviewing
prospects of third parties and supervising and planning 3D seismic programs on
Columbus' leaseholds. Also, there was to be continued participation for a
37.5% working interest in the AMI located in the Anadarko Basin primarily
located in two counties in the Oklahoma Panhandle. TRI is a privately held oil
and gas exploration and production company whose major shareholder is John
Trueblood, the son of Columbus' CEO, Harry A. Trueblood, Jr., who is a
director and also was a 1.2% shareholder of TRI. Also, there is a related
company to TRI known as Trumark Production Company, LLC ("TPC") in which Mark
Butler and John Trueblood each own 50% which is primarily a technical services
oriented company for which TRI serves in an administrative capacity therefor.
In November 1997, an amended agreement was created to cover 1998 fiscal year
operations and superseded and replaced the original 1995 agreement and
supplements thereto. Columbus and TRI formed a new AMI which included all of
Texas County, Oklahoma wherein Columbus would take up to a one-third working
interest participation and the remainder belonged to TRI. The Company advanced
$30,000 to acquire digitized logs and related software for use in the search
for new prospects in Texas County with the resulting data to be owned by
Columbus. To compensate for the advance, TRI agreed to waive any cash
promotion on the first four prospects generated from the data and further
reduced the 10% carried working interest promotion on the 100% WI to 5% in the
first two of those prospects. The retainer fee of $10,000 per month was
continued covering up to 135 hours in each three months period of Mr. Butler's
time to perform certain geological and geophysical services. Also TRI would
have the right to participate for up to a proportionate 5.0% WI in any third
party deal reviewed by Mr. Butler and taken by the Company.
For fiscal 1999, two separate agreements dated December 1, 1998 were entered
into by the Company. One was with TPC wherein Mr. Butler increased his base
consulting to 70 hours per month and his other time would be devoted to
finding prospects in the Oklahoma AMI for TRI's operations with third party
participants as well as with Columbus. The retainer would be at the rate of
$170 per hour which would result in a monthly retainer charge of $11,900. For
each prospect review by Mr. Butler and taken by Columbus, TPC would receive a
2% proportionately reduced carried working interest through logs but certain
existing areas of operations were specifically excepted from this arrangement.
The second agreement was with TRI and basically gave Columbus the option to
participate in the Oklahoma prospects during the year with no carried working
interest burden related to its proportionate share of such prospects that
might be drilled.
As a result of the above contracts, retainer fees paid to TRI for TPC's
consulting services, etc. were $155,000 in fiscal 1999, $179,000 in 1998, and
$121,000 in 1997. Promotional costs plus associated actual costs of drilling
wells involved which were paid to TRI amounted to $348,000 in 1999, $5,000 in
1998 and $614,000 in 1997. The amounts are paid monthly and at each year-end
no other amounts were owed.
(7) CAPITAL STOCK
The shares and prices of stock options in this note have been adjusted to
reflect the five-for-four stock split in 1997 and the 10% stock dividend in
fiscal 1998.
Columbus has several stock option plans with outstanding options for the
benefit of all employees. Under the 1985 Plan, options for 42,178 shares were
exercisable at November 30, 1999. No additional options may be granted under
the 1985 Plan. At November 30, 1998, 63,731 shares were exercisable.
18
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the 1995 Plan, as of November 30, 1999, 17,487 option shares remained
available for granting, and options for 287,752 shares were exercisable.
Options may be exercised for a period determined at grant date but not to
exceed five years. Options are vested in three equal annual amounts from grant
date or each annual amount may be exercised immediately for each twelve-month
period the optionholder has been an employee of the Company. At November 30,
1998, 6,937 shares were available for granting, and options for 314,182 shares
were exercisable.
The Board of Directors has granted non-qualified stock options of which
there were 329,886 exercisable at November 30, 1999 and 231,803 shares were
exercisable at November 30, 1998. The Board of Directors has reserved 475,000
shares of treasury stock to be used for issuing common stock when non-
qualified stock options are exercised.
On December 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". The Company elected to continue to measure
compensation costs for these plans using the current method of accounting
under Accounting Principles Board (APB) Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense is recognized for fixed stock options granted with an
exercise price equal to or greater than the market value of Columbus stock on
the date of grant. Had compensation cost for the Company's stock option plans
been determined using the fair-value method in SFAS No. 123, the Company's net
income and earnings per share would have been as follows:
1999 1998 1997
------- ------- ------
(thousands except per
share amounts)
Net income (loss)
As reported...................................... $(1,215) $(1,235) $2,167
Pro forma........................................ $(1,340) $(1,392) $1,968
Earnings (loss) per share (basic)
As reported...................................... $ (.31) $ (.29) $ .50
Pro forma........................................ $ (.34) $ (.33) $ .46
Options are granted at 100% of fair market value on the date of grant. The
following table is a summary of stock option transactions for the three years
ended November 30, 1999:
1999 1998 1997
---------------- ---------------- ----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
(options in thousands)
Shares under option at
beginning of year......... 619 $6.73 557 $6.45 490 $5.65
Granted.................... 246 $5.93 182 $6.76 191 $7.38
Exercised.................. (67) $5.40 (115) $5.34 (121) $4.70
Expired.................... (49) $6.46 (5) $7.79 (3) $6.64
--- ---- ----
Shares under option at end
of year................... 749 $6.61 619 $6.73 557 $6.45
=== ==== ====
Options exercisable at
November 30............... 660 $6.74 610 $6.73 542 $6.42
Shares available for future
grant at end of year...... 17 7 46
Weighted-average fair value
of options granted during
the year.................. $1.07 $1.40 $2.04
19
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's stock options
outstanding at November 30, 1999:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-Average
Remaining Weighted- Weighted-
Range of Options Contractual Average Options Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at Year End (Years) Price at Year End Price
-------- ----------- ----------- --------- ----------- ---------
(options in thousands)
$4.68 - $5.79 137 2.1 $5.57 52 $5.58
$6.12 - $6.44 273 2.4 $6.21 269 $6.21
$7.00 - $7.84 339 1.5 $7.34 339 $7.34
--- --- ----- --- -----
$4.68 - $7.84 749 2.0 $6.61 660 $6.74
=== === ===== === =====
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997
------ ------ ------
Expected option life--years............................. 2.30 2.32 2.36
Risk-free interest rate................................. 5.50% 5.02% 6.08%
Dividend yield.......................................... 0% 0% 0%
Volatility.............................................. 19.94% 25.87% 30.60%
On October 28, 1992, the Board of Directors approved an Employee Stock
Purchase Plan ("Plan") to begin January 1, 1993, which was approved by the
shareholders at the 1993 annual meeting. Under the Plan a total of 220,000
shares were reserved from authorized unissued common stock from which payments
by participants into the Plan will be utilized to purchase shares. The Company
contributes an amount of shares equivalent to 25% of those payments which are
issued out of the Company's treasury stock as vesting occurs semi-annually.
The price of the issued shares equals the average trading price during each
six month purchase period or the ending price, whichever is less. The
following table summarizes the Stock Purchase Plan activity for the last three
fiscal years:
Matching Total Shares from Average
Contributions Shares Treasury Cost
Fiscal Year Expense Purchased Stock Per Share
----------- ------------- --------- ----------- ---------
1997........................... $15,000 8,758 1,762 $8.58
1998........................... $17,000 11,298 2,275 $7.73
1999........................... $16,000 13,741 2,759 $6.30
The Company has been authorized by the Board of Directors to repurchase its
common shares from the market at various prices during the last several years.
Those repurchases are summarized as follows:
Shares
----------------------
Fiscal year repurchased As purchased Restated* Average price*
----------------------- ------------ --------- --------------
1997.......................................... 158,000 197,863 $6.92
1998.......................................... 352,750 357,715 $7.07
1999.......................................... 300,538 300,538 $6.08
- --------
* Restated for stock split and stock dividends
20
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of November 30, 1999 a total of 73,384 shares remained to be purchased
from the most recent authorizations to repurchase shares at a price not to
exceed $6.00 per share. As of January 31, 2000, 45,000 of those shares have
subsequently been acquired at an average price of $5.61 per share.
(8) EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted earnings
per share (EPS):
Fiscal Year Ended November 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands,
except per share data)
Reconciliation of basic and diluted EPS
share computations:
Income (loss) available to common
shareholders--basic and diluted EPS
(numerator).............................. $ (1,215) $ (1,235) $ 2,167
========== ========== =========
Shares (denominator):
Basic EPS................................. 3,898 4,194 4,299
Effect of dilutive option shares.......... -- -- 93
---------- ---------- ---------
Diluted EPS............................... 3,898 4,194 4,392
========== ========== =========
Per share amount:
Basic EPS................................. $ (.31) $ (.29) $ .50
========== ========== =========
Diluted EPS............................... $ (.31) $ (.29) $ .49
========== ========== =========
Number of shares not included in dilutive
EPS that would have been antidilutive
because exercise price of options was
greater than the average market price of
the common shares.......................... 544 138 73
========== ========== =========
Historical average number of shares outstanding and earnings per share have
been adjusted for the five-for-four stock split distributed June 16, 1997 to
shareholders of record as of May 27, 1997 and the 10% stock dividend
distributed March 9, 1998 to shareholders of record as of February 23, 1998.
(9) COMMITMENTS AND CONTINGENT LIABILITIES
The Company's Articles of Incorporation and By-Laws provide for
indemnification of its officers, directors, agents and employees to the
maximum extent authorized by the Colorado Corporation Code, as amended or as
may be amended, revised or superseded. In addition, the Company has entered
into individual indemnification agreements with its officers and directors,
present and past, which agreements more fully describe such indemnification.
In June 1991, Columbus executed a lease for its present office space. The
total rent expense for 1999, 1998 and 1997 was approximately $200,000,
$171,000 and $161,000, respectively. Columbus has extended the lease for an
additional one year through September 2000 at a base rate of $21,525 per
month. Future rental payments required under this lease as of November 30,
1999 are $215,000 for fiscal year 2000.
Columbus is self-insured for medical and dental claims of its U. S.
employees and dependents as well as any former employees or dependents who are
eligible and elect coverage under COBRA rules. Columbus pays a premium to
obtain both individual and aggregate stop-loss insurance coverage. A liability
for estimated claims incurred and not reported or paid before year end is
included in other current liabilities.
21
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The separation pay policy of Columbus includes a retirement provision.
Officers and employees may retire at age 65, or older, and at the discretion
of the Board of Directors be paid retirement compensation based upon the
length of service and the prior year's average compensation. Such compensation
has been approved for three individuals who have reached age 65. As of
November 30, 1999 the accrued liability totals $290,000 which may change in
future years until their retirement as compensation and length of service with
Columbus changes. The total obligation is unfunded and payment upon an
individual's retirement will be made from working capital. The total expense
accrued was $120,000, $18,000 and $23,000 in 1999, 1998 and 1997,
respectively.
Columbus periodically hedges both natural gas and crude oil prices by
entering into "swaps". The swap is matched against the calendar monthly
average price on the NYMEX and settled monthly. Revenues were decreased when
the market price at settlement exceeded the contract swap price or increased
when the contract swap price exceeded the market price. There was no hedging
activity in fiscal 1998. The following table shows the results of these swaps:
Increase
(decrease) in
oil and gas
revenues
Volume ------------------
Description per mo. Period 1999 1997
- ----------- --------- ------------- -------- --------
(Mmbtu or bbl)
Natural Gas
$2.20/Mmbtu....................... 60,000 3/97 - 10/97 $(86,400)
Crude Oil
Collar with $17.50/ bbl floor and
$22.25/bbl ceiling............... 7,500 9/99 - 8/00 $(34,000)
$21.17/bbl........................ 10,000 11/96 - 10/97 $ 8,900
$17.25/bbl with $19.50/bbl cap.... 10,000 1/96 - 12/96 $(22,500)
The Company's natural gas and crude oil swaps are considered financial
instruments with off-balance sheet risk which are entered into in the normal
course of business to partially reduce its exposure to fluctuations in the
price of crude oil and natural gas. Those instruments involved, to varying
degrees, elements of market and credit risk in excess of the amount recognized
in the balance sheets.
The Company had a crude oil hedge outstanding as of November 30, 1999 by
using a costless "collar" on 7,500 barrels per month for the 12 months from
September 1, 1999 through August 31, 2000. This "collar" is settled monthly
against the calendar monthly average price on the NYMEX with a $17.50 per
barrel floor and $22.25 per barrel ceiling. For any average price below or
above those prices Columbus receives or pays the difference which increases or
reduces oil revenues each month in which this occurs. For the two months of
December, 1999 and January, 2000, oil sales would have been $65,000 higher if
this hedge had not been in place because oil prices exceeded the $22.25
ceiling price. For the remaining period of February through August 2000 using
the prevailing price as of January 31, 2000 for each of the months, the
settlement value the Company would owe is $158,000 which would also reduce
crude oil sales.
The Company is not aware of any events of noncompliance in its operations
with any environmental laws and regulations nor of any potentially material
contingencies related to environmental issues. There is no way management can
predict what future environmental control problems may arise. The continually
changing character of environmental regulations and requirements that might be
enacted by jurisdictional authorities in various operational areas defies
forecasting.
On October 7, 1998, Columbus was served with a complaint in a lawsuit styled
Maris E. Penn, Michael Mattalino, Bruce Davis, and Benjamin T. Willey, Jr. vs.
Columbus Energy Corp., Cause No. 98-44940 in the 55th District Court of Harris
County, Texas. The plaintiffs are parties to a September 1994 settlement
agreement
22
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
that provided for the conveyance of overriding royalty interests in leases
acquired by Columbus in certain portions of Harris County. Plaintiffs claim
Columbus is obligated under the settlement agreement to acquire all leases
available within a described portion of Harris County and that Columbus has
failed to develop those leases as a reasonably prudent operator. Plaintiffs
are claiming damages based upon their alleged right to a 3% overriding royalty
interest in leases taken and drilled by third parties within the described
area. Discovery is ongoing. Columbus denies all allegations of failure to
develop and instructed counsel to vigorously defend this lawsuit. The parties
are set for mediation on April 11, 2000 and for trial on May 22, 2000.
(10) DEFINED CONTRIBUTION PENSION PLAN
The Company has a qualified defined contribution 401(k) plan covering all
employees. The Company matches, at its discretion, a portion of a
participant's voluntary contribution up to a certain maximum amount of the
participant's compensation. The Company's contribution expense was
approximately $110,000, $106,000, and $95,000 in the fiscal years 1999, 1998
and 1997, respectively.
23
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) INDUSTRY SEGMENTS
The Company operates primarily in two business segments of (1) oil and gas
exploration and development, and (2) providing services as an operator,
manager and gas marketing advisor.
Summarized financial information concerning the business segments is as
follows:
1999 1998 1997
------- ------- -------
(in thousands)
Operating revenues from unaffiliated
services:
Oil and gas............................... $10,022 $10,630 $13,848
Services.................................. 1,478 1,464 1,308
------- ------- -------
Total................................... $11,500 $12,094 $15,156
======= ======= =======
Depreciation, depletion and amortization
(a):
Oil and gas............................... $ 3,341 $ 3,784 $ 3,238
Services.................................. 59 62 57
------- ------- -------
Total................................... $ 3,400 $ 3,846 $ 3,295
======= ======= =======
Operating income (loss):
Oil and gas............................... $ (294)(b) $ (582)(b) $ 4,714(b)
Services.................................. 415 342 424
General corporate expenses................ (1,447) (1,466) (1,372)
------- ------- -------
Total operating income (loss)........... (1,326) (1,706) 3,766
Interest expense and other.................. (435) (286) (170)
------- ------- -------
Earnings (loss) before income taxes..... $(1,761) $(1,992) $ 3,596
======= ======= =======
Identifiable assets (a):
Oil and gas............................... $18,621 $19,587 $21,917
Services.................................. 3,909 4,362 4,218
------- ------- -------
Total................................... $22,530 $23,949 $26,135
======= ======= =======
Additions to property and equipment:
Oil and gas............................... $ 2,215 $ 5,872 $ 9,671
Services.................................. -- 45 7
------- ------- -------
Total................................... $ 2,215 $ 5,917 $ 9,678
======= ======= =======
- --------
(a) Other property and equipment have been allocated above to the oil and gas
and services segment based upon the estimated proportion the property is
used by each segment. Therefore, depletion, depreciation and amortization
and identifiable assets do not match the functional allocations in Note 3
to the consolidated financial statements.
(b) Includes non-cash impairment loss of $973,000 in 1999, $3,482,000 in 1998
and $2,179,000 in 1997.
24
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31, November 30,
2000 1999
----------- ------------
(unaudited)
(in thousands)
Current assets:
Cash and cash equivalents........................... $ 2,455 $ 1,850
Accounts receivable:
Joint interest partners........................... 1,058 1,780
Oil and gas sales................................. 2,195 1,501
Allowance for doubtful accounts................... (101) (116)
Deferred income taxes (Note 3)...................... 60 200
Inventory of oil field equipment, at lower of
average cost or market............................. 81 106
Other............................................... 50 80
-------- --------
Total current assets............................ 5,798 5,401
-------- --------
Deferred income taxes (Note 3)........................ 570 937
Property and equipment:
Oil and gas assets, successful efforts method (Note
2)................................................. 38,166 36,862
Other property and equipment........................ 1,884 1,836
-------- --------
40,050 38,698
Less: Accumulated depreciation, depletion and
amortization and valuation allowance............... (24,895) (22,506)
-------- --------
Net property and equipment...................... 15,155 16,192
-------- --------
$ 21,523 $ 22,530
======== ========
(continued)
25
COLUMBUS ENERGY CORP.
CONSOLIDATED BALANCE SHEETS--(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
August 31, November 30,
2000 1999
----------- ------------
(unaudited)
(in thousands)
Current liabilities:
Accounts payable.................................... $ 1,933 $ 2,352
Undistributed oil and gas
production receipts................................ 547 386
Accrued production and property taxes............... 474 738
Prepayments from joint interest owners.............. 196 200
Accrued expenses.................................... 499 494
Income taxes payable (Note 3)....................... 6 30
Other............................................... 2 32
------- -------
Total current liabilities......................... 3,657 4,232
------- -------
Long-term bank debt (Note 2).......................... 4,400 5,500
Commitments and contingent liabilities (Notes 4, 5 and
9)
Stockholders' equity:
Preferred stock authorized 5,000,000 shares, no par
value, none issued................................. -- --
Common stock authorized 20,000,000 shares of $.20
par value; shares issued 4,658,777 in 2000, and
4,645,303 in 1999 (outstanding 3,753,868 in 2000
and 3,800,558 in 1999)............................. 932 929
Additional paid-in capital.......................... 20,139 20,069
Accumulated deficit................................. (1,721) (2,655)
------- -------
19,350 18,343
Less: Treasury stock at cost 904,909 shares in 2000
and 844,745 shares in 1999........................... (5,884) (5,545)
------- -------
Total stockholders' equity........................ 13,466 12,798
------- -------
$21,523 $22,530
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
26
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Three Months
Ended Ended
August 31, August 31,
-------------- -------------
2000 1999 2000 1999
------- ------ ------ ------
(in thousands, except per
share data)
Revenues:
Oil and gas sales............................. $10,742 $7,064 $4,671 $2,760
Operating and management services............. 1,035 1,025 342 353
Interest and other income..................... 114 70 45 23
------- ------ ------ ------
Total revenues.............................. 11,891 8,159 5,058 3,136
------- ------ ------ ------
Costs and expenses:
Lease operating expenses...................... 1,566 1,357 544 514
Property and production taxes................. 995 741 410 242
Operating and management services............. 598 693 164 220
General and administrative.................... 1,217 1,075 340 299
Depreciation, depletion and amortization...... 2,414 2,571 932 847
Impairments................................... 500 503 500 --
Exploration expense........................... 1,940 971 250 627
Litigation expense............................ 380 41 13 24
Advisory fees................................. 490 -- 371 --
------- ------ ------ ------
Total costs and expenses.................... 10,100 7,952 3,524 2,773
------- ------ ------ ------
Operating income.......................... 1,791 207 1,534 363
------- ------ ------ ------
Other expenses (income):
Interest...................................... 325 273 108 98
Other......................................... 7 4 7 1
------- ------ ------ ------
332 277 115 99
------- ------ ------ ------
Earnings (loss) before income taxes......... 1,459 (70) 1,419 264
Provision (benefit) for income taxes (Note 3)... 525 (27) 511 100
------- ------ ------ ------
Net earnings (loss)......................... $ 934 $ (43) $ 908 $ 164
======= ====== ====== ======
Earnings (loss) per share (Note 7):
Basic......................................... $ .25 $ (.01) $ .24 $ .04
======= ====== ====== ======
Diluted....................................... $ .25 $ (.01) $ .24 $ .04
======= ====== ====== ======
Weighted average number of common shares and
common equivalent shares outstanding:
Basic......................................... 3,757 3,920 3,749 3,870
======= ====== ====== ======
Diluted....................................... 3,764 3,920 3,784 3,873
======= ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
27
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Nine Months Ended August 31, 2000
(Unaudited)
Common Stock Additional Treasury Stock
---------------- Paid-in Accumulated ----------------
Shares Amount Capital Deficit Shares Amount
--------- ------ ---------- ----------- ------- -------
(dollar amounts in thousands)
Balances, December 1,
1999................... 4,645,303 $929 $20,069 $(2,655) 844,745 $(5,545)
Exercise of employee
stock options.......... 2,200 1 9 -- -- --
Purchase of shares...... -- -- -- -- 63,000 (358)
Shares issued for Stock
Purchase Plan.......... 11,274 2 61 -- (2,836) 19
Net earnings............ -- -- -- 934 -- --
--------- ---- ------- ------- ------- -------
Balances, August 31,
2000................... 4,658,777 $932 $20,139 $(1,721) 904,909 $(5,884)
========= ==== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
28
COLUMBUS ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended August
31,
----------------
2000 1999
------- -------
(in thousands)
Net earnings (loss)......................................... $ 934 $ (43)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation, depletion, and amortization................. 2,414 2,571
Impairments............................................... 500 503
Deferred income tax provision (benefit)................... 507 (81)
Exploration expense, noncash portion...................... -- 80
Other..................................................... 45 108
Net change in operating assets and liabilities.............. (561) (630)
------- -------
Net cash provided by operating activities............... 3,839 2,508
------- -------
Cash flows from investing activities:
Proceeds from sale of assets.............................. 66 --
Additions to oil and gas properties....................... (1,866) (2,487)
Additions to other assets................................. (49) (11)
------- -------
Net cash used in investing activities................... (1,849) (2,498)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 300 1,100
Reduction in long-term debt............................... (1,400) (400)
Proceeds from issuance of common stock.................... 73 161
Purchase of treasury stock................................ (358) (1,471)
------- -------
Net cash used in financing activities................... (1,385) (610)
------- -------
Net increase (decrease) in cash and cash equivalents........ 605 (600)
Cash and cash equivalents at beginning of period............ 1,850 2,003
------- -------
Cash and cash equivalents at end of period.................. $ 2,455 $ 1,403
======= =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest................................................ $ 329 $ 271
======= =======
Income taxes, net of refunds.............................. $ 42 $ 28
======= =======
Supplemental disclosure of non-cash investing and financing
activities:
Non-cash compensation expense related to common stock..... $ 44 $ 103
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
29
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Columbus Energy Corp. ("Columbus") and its wholly-owned subsidiaries, Columbus
Gas Services, Inc. ("CGSI") and Columbus Texas, Inc. ("Texas"). All
significant intercompany balances have been eliminated in consolidation. The
term "Company" as used herein includes Columbus and its subsidiaries.
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles and require the use
of management's estimates. The financial statements contain all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of August 31, 2000 and November 30, 1999, and the results of its
operations and cash flows for the periods presented. The results of operations
for such interim periods are not necessarily indicative of results to be
expected for the full year.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's consolidated financial statements in the Annual Report on Form
10-K for the year ended November 30, 1999. These accounting policies and other
footnote disclosures previously made have been omitted in this report so long
as the interim information presented is not misleading. These quarterly
financial statements should be read in conjunction with the consolidated
financial statements and notes included in the 1999 Form 10-K.
(2) LONG-TERM DEBT
The Company has a credit agreement with Wells Fargo Bank West, National
Association ("Bank"), formerly known as Norwest Bank Denver, N.A., that was
amended on June 30, 2000 to extend the revolving period to July 1, 2002 when
it entirely converts to an amortizing term loan which matures July 1, 2006.
The credit is collateralized by a first lien on oil and gas properties. The
interest rate options are the Bank's prime rate or LIBOR plus 1.50%.
The borrowing base is limited to $10,000,000 and subject to semi-annual
redetermination for any increase or decrease. At August 31, 2000 outstanding
borrowings on the revolving line of credit were $4,400,000 and the unused
borrowing base available was $5,600,000. A commitment fee of 1/4 of 1% for any
unused portion of the amount which is the difference between the borrowing
base and the outstanding borrowings is payable quarterly.
30
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(3) INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Nine Months
Ended
August 31,
-----------
2000 1999
----- -----
Current:
Federal......................................................... $ 3 $ 25
State........................................................... 15 29
----- -----
18 54
----- -----
Deferred:
Federal......................................................... 487 (84)
Use of loss carryforwards....................................... -- 6
State........................................................... 20 (3)
----- -----
507 (81)
----- -----
Total income tax (benefit) expense................................ $ 525 $ (27)
===== =====
During the nine months of fiscal 2000, certain tax assets (shown in the table
below) were utilized. The tax effect of significant temporary differences
representing deferred tax assets and liabilities and changes were estimated as
follows (in thousands):
Current Year
----------------------------------
December 1, Operations/ August 31,
1999 Other 2000
----------- ----------- ----------
Deferred tax assets:
Pre-1987 loss carryforwards............... $ 440 $ -- $ 440
Post-1987 loss carryforward............... 617 -- 617
Percentage depletion carryforwards........ 1,650 (4) 1,646
State income tax loss carryforwards....... 124 -- 124
Other..................................... 387 7 394
------- ----- -------
Total................................... 3,218 3 3,221
Valuation allowance (long-term)............. (1,286) -- (1,286)
------- ----- -------
Deferred tax assets..................... 1,932 3 1,935
------- ----- -------
Deferred tax liabilities-
Depreciation, depletion and amortization
and other................................ (795) (510) (1,305)
------- ----- -------
Net tax asset (liability)............... $ 1,137 $(507) $ 630
======= ===== =======
31
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(4) LITIGATION
On May 4, 2000, Columbus was served with a complaint in a lawsuit styled
Fred E. Long and ENCO Exploration Company v. Columbus Energy Corp., Cause B-
00-1171-0-CV-B in the 156th Judicial District Court of Bee County, Texas. Fred
E. Long and his company, ENCO Exploration Company, have sued Columbus as
operator regarding the Long No. 4 well. Long/ENCO own a combined 25% working
interest. They contend that Columbus was negligent in its duty as operator to
drill a vertical hole without deviation at the location approved by the
participating working interest owners. They seek return of their proportionate
share of the drilling costs as damages, approximately $300,000. Columbus has
denied all of the Long/ENCO allegations and believes them to be without merit.
Discovery has not commenced.
(5) COMMITMENTS AND CONTINGENT LIABILITIES
The Company's natural gas and crude oil swaps are considered financial
instruments with off-balance sheet risk which are entered into in the normal
course of business to partially reduce its exposure to fluctuations in the
price of crude oil and natural gas. Those instruments involve, to varying
degrees, elements of market and credit risk in excess of the amount recognized
in the balance sheets.
The Company has had in place a twelve month costless "collar" for 7,500
barrels of crude oil each month for the period September 1, 1999 through
August 31, 2000. This "collar" was settled monthly against the calendar
monthly average price on the NYMEX with a $17.50 per barrel floor price and
$22.25 per barrel ceiling price. Columbus received or paid the difference
below the floor or above the ceiling that each monthly price averaged. During
the third quarter and nine months of fiscal 2000, oil sales were reduced by
$192,000 and $441,000, respectively, since average oil prices exceeded the
$22.25 ceiling price each month of those periods but no further reductions
will occur during the balance of fiscal 2000 because of the expiration of the
collar.
The Company is not aware of any events of noncompliance in its operations
with environmental laws and regulations nor of any potentially material
contingencies related to environmental issues. Management cannot predict what
future environmental control problems may arise or what environmental
regulations and requirements might be enacted by jurisdictional authorities in
its various operational areas in future.
32
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(6) RELATED PARTY TRANSACTIONS
CEC Resources Ltd. ("Resources") was a wholly-owned subsidiary of Columbus
prior to its divestiture on February 24, 1995. Reimbursement was made by
Resources to Columbus for services provided by its officers and employees for
managing Resources in the past which effectively reduced Columbus' general and
administrative expense. Such reimbursement totaled $33,000 for the nine months
of 1999. On March 31, 1999, the agreement was terminated pursuant to a 90 day
notice period.
The Company has been a party to an arrangement with Mark Butler, geologist
and 50% owner of Trumark Production Company ("TPC"), during fiscal 1999 and
2000 whereby Mr. Butler would provide Columbus with 70 hours per month of
geological and geophysical consulting services (including related work station
usage) at a rate of $170 per hour. John B. Trueblood, son of Columbus' CEO
Harry A. Trueblood, Jr., owns the other 50% of TPC. The retainer fees paid to
TPC were $122,000 and $111,000 during nine months of 2000 and 1999,
respectively.
(7) EARNINGS PER SHARE
The following table provides a reconciliation of basic and diluted earnings
per share (EPS):
Nine Months Three Months
Ended August 31, Ended August 31,
----------------- -----------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share
data)
Reconciliation of basic and diluted EPS
share computations:
Income (loss) available to common
shareholders--basic and diluted EPS
(numerator)........................... $ 934 $ (43) $ 908 $ 164
======== ======== ======== ========
Shares (denominator):
Basic EPS.............................. 3,757 3,920 3,749 3,870
Effect of dilutive option shares....... 7 -- 35 3
-------- -------- -------- --------
Diluted EPS............................ 3,764 3,920 3,784 3,873
======== ======== ======== ========
Per share amount:
Basic EPS.............................. $ .25 $ (.01) $ .24 $ .04
======== ======== ======== ========
Diluted EPS............................ $ .25 $ (.01) $ .24 $ .04
======== ======== ======== ========
Number of shares not included in dilutive
EPS that would have been antidilutive
because exercise price of options was
greater than the average market price of
the common shares....................... 502 612 232 626
======== ======== ======== ========
33
COLUMBUS ENERGY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(8) INDUSTRY SEGMENTS
The Company operates primarily in two business segments of (1) oil and gas
exploration and development and (2) providing services as an operator, manager
and gas marketing advisor.
Summarized financial information concerning the business segments is as
follows:
Nine Months Three Months
Ended August Ended August
31, 31,
---------------- --------------
2000 1999 2000 1999
------- ------- ------ ------
(in thousands)
Operating revenues from unaffiliated
services:
Oil and gas............................... $10,751 $ 7,071 $4,675 $2,762
Services.................................. 1,140 1,088 383 374
------- ------- ------ ------
Total................................... $11,891 $ 8,159 $5,058 $3,136
======= ======= ====== ======
Depreciation, depletion and amortization:
Oil and gas............................... $ 2,338 $ 2,528 $ 887 $ 833
Services.................................. 76 43 45 14
------- ------- ------ ------
Total................................... $ 2,414 $ 2,571 $ 932 $ 847
======= ======= ====== ======
Operating income (loss):
Oil and Gas............................... $ 3,412 $ 930 $2,085 $ 523
Services.................................. 86 351 160 138
General corporate expense................. (1,707) (1,074) (711) (298)
------- ------- ------ ------
Total operating income.................. 1,791 207 1,534 363
Interest expense and other.................. (332) (277) (115) (99)
------- ------- ------ ------
Earnings (loss) before income taxes....... $ 1,459 $ (70) $1,419 $ 264
======= ======= ====== ======
(9) MERGER AGREEMENT
Columbus and Key Production Company, Inc. (NYSE:KP) jointly announced on
August 29, 2000 that Key has agreed to acquire all of the outstanding common
stock of Columbus. Under the terms of the executed merger agreement Columbus'
shareholders will receive 0.355 of a share of Key common stock for each
Columbus share in a tax-free reorganization subject to a favorable Columbus
shareholder vote. Columbus expects to hold a special shareholders' meeting for
that purpose during November 2000 provided the SEC's review of the proxy
statement/prospectus is completed during October, 2000. The Board of Directors
of both companies have unanimously approved the transaction.
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
The following unaudited pro forma financial information has been derived from
Key's audited financial statements for the year ended December 31, 1999 and
unaudited financial statements for the nine months ended September 30, 2000 and
34
from Columbus' audited financial statements for the fiscal year ended November
30, 1999 and unaudited financial statements for the nine months ended August 31,
2000. The information is only a summary and you should read it in conjunction
with the historical financial statements and related notes contained in the
annual reports and other information that Key and Columbus have filed with the
Securities and Exchange Commission.
You should consider several factors when comparing the historical financial
information of Key and Columbus to the unaudited pro forma financial
information, including the following:
. The unaudited pro forma condensed combined balance sheet gives effect to
the merger as if it had occurred on September 30, 2000. The unaudited
pro forma combined statements of income for fiscal 1999 and the first
nine months of 2000 give effect to the merger as if it occurred on
January 1, 1999.
. Columbus' fiscal year ends on November 30. Key's fiscal year ends on
December 31. The combined company will also utilize December 31 as its
fiscal year end. No attempt has been made to roll forward Columbus'
year-end or interim financial information to conform to the combined
company's fiscal year. The following unaudited pro forma condensed
combined balance sheet as of September 30, 2000 was derived from
Columbus' August 31, 2000 balance sheet and Key's September 30, 2000
balance sheet using the adjustments and assumptions described in the
notes to the unaudited pro forma combined financial information.
Similarly, the unaudited pro forma combined statements of income combine
the latest dissimilar twelve-month and nine-month periods presented for
Columbus and Key, as adjusted, as if Columbus utilized a fiscal year end
of December 31. Columbus prepared its historical financial results using
the successful efforts method of accounting for oil and gas activities.
Key utilizes the full cost method. The combined company will also
utilize full cost.
. Certain revenue and expense items reported by Columbus on its historical
statements of income and balance sheet have been reclassified to conform
to the method of presentation utilized by Key.
. Expected annual cost savings of $2 million have not been reflected as an
adjustment to the historical data. The cost savings are expected to
result from the consolidation of the corporate headquarters of Key and
Columbus, the elimination of duplicate staff and expenses and a
reduction in the use of outside services currently utilized by Columbus.
Some of the cost savings will relate to items that, under the full cost
method of accounting, would have been capitalized rather than expensed
in the combined financial statements. Therefore, not all of the expected
savings will result in reductions to expenses as reported in the
accompanying unaudited pro forma combined statement of income.
. Columbus has accrued $490,000 as of August 31, 2000 for advisory and
legal fees associated with its merger/sale activities in its historical
financial results. These costs have not been eliminated in the pro forma
adjustments.
The unaudited pro forma information is for illustrative purposes only. If the
merger had occurred in the past, the combined company's financial position and
operating results might have been different from that presented in the
unaudited pro forma condensed combined financial statements. In addition, the
purchase price allocation is preliminary and will be finalized following
closing of the merger. The final purchase price allocation will be determined
shortly after closing based on actual fair value of current assets, current
liabilities and long-term debt at that time, as well as the number of shares
of Columbus stock and stock options outstanding at closing. We do not expect
the final allocation to differ materially from the preliminary allocation
shown below. You should not rely on the unaudited pro forma information as an
indication of the financial position or operating results that the combined
company would have achieved if the merger had occurred in the past. You also
should not rely on the unaudited pro forma information as an indication of
future results that the company will achieve after the merger.
35
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
September 30, 2000
(In Thousands)
Pro Forma
Key Columbus Adjustments Combined
-------- -------- ----------- --------
ASSETS
------
Current Assets:
Cash and cash equivalents........ $ 8,413 $ 2,455 $ $ 10,868
Receivables...................... 18,013 3,152 21,165
Prepaid expenses and other....... 891 191 (60)(b) 1,022
-------- ------- --------
27,317 5,798 33,055
-------- ------- --------
Deferred income taxes.............. -- 570 (570)(b) --
Oil and gas properties, net........ 171,215 14,661 18,842 (a) 204,718
Other assets, net.................. 1,624 494 2,118
-------- ------- --------
$200,156 $21,523 $239,891
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable................. $ 14,863 $ 1,933 $ 16,796
Accrued expenses and other....... 6,602 1,724 8,326
-------- ------- --------
21,465 3,657 25,122
-------- ------- --------
Long-term debt..................... 49,000 4,400 53,400
Deferred Credits and Other Non-
Current Liabilities:
Deferred income taxes............ 28,518 -- 6,692 (a) 35,210
Other............................ 679 -- 679
-------- ------- --------
29,197 -- 35,889
-------- ------- --------
Stockholders' Equity:
Common stock..................... 3,180 932 (596)(c) 3,516
Paid-in capital.................. 43,920 20,139 4,511 (c) 68,570
Retained earnings (accumulated
deficit)........................ 56,486 (1,721) 1,721 (c) 56,486
Treasury stock................... (3,092) (5,884) 5,884 (c) (3,092)
-------- ------- --------
100,494 13,466 125,480
-------- ------- --------
Total Liabilities and Stockholders'
Equity............................. $200,156 $21,523 $239,891
======== ======= ========
36
UNAUDITED PRO FORMA STATEMENT OF INCOME
For the Nine Months Ended September 30, 2000
(In Thousands, Except Per Share Data)
Pro Forma
Key Columbus Adjustments Combined
------- -------- ----------- --------
Revenues:
Oil and gas sales..................... $68,154 $10,742 $ $78,896
Operating and management services..... -- 1,035 (1,035)(d) --
Other................................. 277 114 (114)(d) 277
------- ------- -------
68,431 11,891 79,173
------- ------- -------
Expenses:
Depreciation, depletion and
amortization......................... 25,181 2,414 2,444 (e) 30,039
Lease operating....................... 8,238 1,566 (1,035)(d) 9,367
598 (d)
Operating and management services..... -- 598 (598)(d) --
Production and property taxes......... 2,302 995 3,297
General and administrative............ 2,179 1,224 3,403
Litigation expense.................... -- 380 380
Advisory fee.......................... -- 490 490
Financial costs:
Interest expense..................... 3,338 325 3,663
Capitalized interest................. (1,194) -- (11)(f) (1,205)
Interest income...................... (134) -- (114)(d) (248)
Impairments........................... -- 500 (500)(e) --
Exploration expense................... -- 1,940 (1,940)(e) --
------- ------- -------
39,910 10,432 49,186
------- ------- -------
Income Before Income Taxes............ 28,521 1,459 29,987
Provision for Income Taxes............ 10,553 525 17(g) 11,095
------- ------- -------
Net Income............................ $17,968 $ 934 $18,892
======= ======= =======
Basic Earnings Per Share.............. $ 1.51 $ 0.25 $ 1.42
======= ======= =======
Diluted Earnings Per Share............ $ 1.45 $ 0.25 $ 1.38
======= ======= =======
Weighted Average Basic Shares......... 11,934 3,757 (2,412)(h) 13,279
======= ======= =======
Weighted Average Diluted Shares....... 12,384 3,764 (2,417)(h) 13,731
======= ======= =======
37
UNAUDITED PRO FORMA STATEMENT OF INCOME
For the Twelve Months Ended December 31, 1999
(In Thousands, Except Per Share Data)
Pro Forma
Key Columbus Adjustments Combined
------- -------- ----------- --------
Revenues:
Oil and gas sales..................... $55,798 $10,014 $ $65,812
Operating and management services..... -- 1,386 (1,386)(d) --
Other................................. 460 100 (100)(d) 460
------- ------- -------
56,258 11,500 66,272
------- ------- -------
Expenses:
Depreciation, depletion and
amortization......................... 28,672 3,400 3,419 (e) 35,491
Lease operating....................... 8,951 1,903 (1,386)(d) 10,352
884 (d)
Operating and management services -- 884 (884)(d) --
Production and property taxes......... 2,623 1,029 3,652
General and administrative............ 2,550 1,336 3,886
Litigation expense.................... -- 119 119
Retirement and separation............. -- 111 111
Financial costs:
Interest expense..................... 4,081 373 4,454
Capitalized interest................. (1,397) -- (12)(f) (1,409)
Interest income...................... (197) -- (100)(d) (297)
Impairments........................... -- 973 (973)(e) --
Exploration expense................... -- 3,071 (3,071)(e) --
Other................................. -- 62 62
------- ------- -------
45,283 13,261 56,421
------- ------- -------
Income (Loss) Before Income Taxes..... 10,975 (1,761) 9,851
Provision (Benefit) for Income Taxes.. 4,171 (546) 20 (g) 3,645
------- ------- -------
Net Income (Loss)..................... $ 6,804 $(1,215) $ 6,206
======= ======= =======
Basic Earnings (Loss) Per Share....... $ 0.59 $ (0.31) $ 0.48
======= ======= =======
Diluted Earnings (Loss) Per Share..... $ 0.56 $ (0.31) $ 0.46
======= ======= =======
Weighted Average Basic Shares......... 11,537 3,898 (2,553)(h) 12,882
======= ======= =======
Weighted Average Diluted Shares....... 12,111 3,898 (2,553)(h) 13,456
======= ======= =======
38
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1--Basis of Presentation
Key will account for the merger of Key and Columbus as a purchase of Columbus.
Prior to the merger, Key estimated that it would issue 1,345,000 common shares
to shareholders of Columbus. In the merger Columbus became a wholly owned
subsidiary of Key.
The accompanying pro forma condensed combined balance sheet includes pro forma
adjustments to give effect to the acquisition of Columbus by Key as of
September 30, 2000. The pro forma combined statements of income for the year
ended December 31, 1999 and the nine months ended September 30, 2000 include
the historical revenue and expenses of Key and Columbus for those twelve and
nine month periods and adjustments for the pro forma effects of the
acquisition as if the transaction had occurred at January 1, 1999.
Key's fiscal year ends on December 31, while Columbus' ends on November 30.
The unaudited pro forma income statements were prepared as if Columbus'
results from operations for its fiscal year ended November 30, 1999 and nine
months ended August 31, 2000 were the same as they would have been for the
twelve and nine month periods ended December 31, 1999 and September 30, 2000,
respectively. Similarly, the unaudited pro forma condensed combined balance
sheet was prepared assuming that Columbus' historical balance sheet at August
31, 2000 was in effect on September 30, 2000.
Key's and Columbus' financial statements were prepared in accordance with
generally accepted accounting principles and require Key and Columbus to make
estimates that affect the reported amount of assets, liabilities, revenues and
expenses. In the opinion of Key and Columbus, the unaudited pro forma combined
financial statements include all the adjustments necessary to present fairly
the results of the periods presented.
The accompanying pro forma statements do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of Columbus for the year
ended November 30, 1999 and Key for the year ended December 31, 1999. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.
39
Note 2--Pro Forma Adjustments
The following adjustments have been made to the pro forma condensed combined
balance sheet of Key and Columbus at September 30, 2000 and to the statements
of income for the year and nine months ended December 31, 1999 and September
30, 2000.
(a) This entry adjusts the historical book values of Columbus' assets and
liabilities to their estimated fair values as of September 30, 2000. The
calculation of the total purchase price and the preliminary allocation to
assets and liabilities are shown in the following table. The final purchase
price allocation will be determined shortly after closing based on actual fair
value of current assets, current liabilities and long-term debt at that time
as well as the number of shares of stock and stock options outstanding at
closing. We do not expect the final allocation to differ materially from the
preliminary allocation shown below.
(In $ thousands,
except share price)
------------------
Calculation and preliminary allocation of purchase price:
Shares of Key common stock to be issued to Columbus
stockholders............................................. 1,345
Average Key stock price per share......................... $ 18.01
-------
Fair value of Key common stock issued..................... 24,223
Plus fair value of Columbus employee stock options to be
assumed by Key........................................... 763
Plus fair value of liabilities assumed by Key:
Current liabilities..................................... 3,657
Long-term debt.......................................... 4,400
Deferred taxes.......................................... 6,692
-------
Total purchase price...................................... 39,735
Less fair value of non oil and gas assets to be acquired
by Key:
Current assets.......................................... 5,738
Non oil and gas properties.............................. 494
-------
Fair value allocated to oil and gas properties, including
$1 million of unproved properties........................ $33,503
=======
40
The closing market price of Key common stock on the day of the merger
announcement was $18.25. The cost of the acquisition reflects the average of
that price and the closing prices of Key common stock for the two days
preceding and following announcement, which average price was $18.01.
The entry to record the purchase transaction provides a step-up to the book
basis of the assets being acquired by Key for the deferred tax effect
resulting from the difference between the fair market value and historical
carryover tax basis of Columbus' oil and gas assets. The new book basis of the
oil and gas assets acquired by Key is in excess of the historical carryover
tax basis of the Columbus oil and gas properties.
(b) This adjustment removes deferred tax assets previously recorded on
Columbus' historical balance sheet.
(c) These pro forma adjustments represent the allocation of the fair value of
common stock issued by Key and eliminates any retained earnings or treasury
shares of Columbus. Key will issue approximately 1.345 million shares of $0.25
par value common stock to accomplish the merger, or 0.355 share for each
Columbus share outstanding. The pro forma combined stockholders' equity
reflects the following:
(in thousands)
--------------
Stockholders' equity of Key at September 30, 2000............. $100,494
Fair value of common stock issued in purchase................. 24,223
Fair value of stock options assumed by Key.................... 763
--------
Pro forma stockholders' equity................................ $125,480
========
41
(d) Reclassifies operating and management services revenues and expenses, as
well as certain other expenses, to conform with Key's method of presentation.
(e) Adjusts depreciation, depletion and amortization to account for the
acquisition as if the acquisition had occurred on January 1, 1999 in a manner
consistent with the full cost method of accounting for oil and gas activities
utilized by Key. These adjustments also eliminate historical amounts recorded
by Columbus under the successful efforts accounting method for exploration
expense and asset impairments to conform to full cost accounting.
(f) Adjustment to capitalize interest on the pro forma amount of purchase
price allocated to unproved properties.
(g) To account for the income tax effect of the pro forma adjustments, using
the expected tax rate of the combined company. This 37% pro forma rate
reflects a Federal statutory rate of 34% and effective state income tax rate
of 3%.
(h) Adjusts the pro forma combined weighted average basic and diluted shares
outstanding for the periods presented.
Note 3--Cost Savings and Expenses of the Merger
Expected annual cost savings have not been reflected as an adjustment to the
historical data because it is prospective information pertaining to what may
happen once the companies are combined. Likewise, estimated future costs
associated with accomplishing the merger have not been factored into the pro
forma presentation of historical financial results, nor have expenses recorded
by Columbus related to its evaluation of strategic alternatives been
eliminated.
Estimated costs of the business combination total approximately $2.2 million,
consisting primarily of severance and separation pay for terminated Columbus
employees ($1 million), investment banking fees and related expenses
($675,000), legal, accounting, and engineering consulting fees ($425,000), and
printing, mailing and other costs directly related to the merger ($100,000).
Payment or accrual of virtually all of these costs will occur either before or
at closing of the merger and will be recorded by Key and Columbus in the
quarter in which they are incurred. Columbus will expense approximately $2
million of the costs. Key's estimated share of the total costs is $200,000 and
will be capitalized as direct costs associated with the transaction.
Note 4--Selected Pro Forma Supplemental Oil and Gas Information
The tables set forth below reflect unaudited pro forma disclosures about the
combined company's oil and gas activities. The information was prepared from,
and should be read in conjunction with, the related information in Key's 1999
Form 10-K and latest Form 10-Q and Columbus' 1999 Form 10-K and latest Form
10-Q that are incorporated by reference in this proxy statement/prospectus.
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Production and average sales price information
Oil Gas
------ -------
For the twelve months ended December 31, 1999:
Production (oil in thousands of barrels; gas in million
cubic feet)................................................ 1,484 17,271
Average sales prices (per barrel of oil and per Mcf of
gas)....................................................... $17.47 $ 2.21
Oil Gas
------ -------
For the nine months ended September 30, 2000
Production (oil in thousands of barrels; gas in million
cubic feet)................................................ 1,260 12,642
Average sales prices (per barrel of oil and per Mcf of
gas)....................................................... $27.93 $ 3.36
Productive wells at December 31, 1999:
Oil Gas
----------- -----------
Area Gross Net Gross Net
---- ----- ----- ----- -----
Mid-continent........................................ 193 68.2 655 125.7
Gulf Coast........................................... 217 32.6 322 40.6
Rocky Mountains...................................... 720 66.8 120 5.6
California........................................... -- -- 27 22.6
----- ----- ----- -----
1,130 167.6 1,124 194.5
===== ===== ===== =====
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Net undeveloped acres at December 31, 1999:
California........................................................... 22,138
Colorado............................................................. 593
Louisiana............................................................ 3,058
Mississippi.......................................................... 20,713
Montana.............................................................. 10,389
New Mexico........................................................... 630
North Dakota......................................................... 277
Oklahoma............................................................. 9,611
Texas................................................................ 24,724
Utah................................................................. 13,216
Wyoming.............................................................. 54,033
-------
159,382
=======
Estimated proved oil and gas reserves and standardized measure at June 30,
2000
Key Columbus(1) Combined
------- ----------- --------
Oil (MBbls)...................................... 9,056 866 9,922
Gas (MMcf)....................................... 79,758 10,632 90,390
Equivalent (Bcfe)................................ 134.1 15.8 149.9
Standarized measure of discounted future net cash
flows (MM)...................................... $ 219.8 $ 26.4 $ 246.2
- --------
* One barrel of oil is the energy equivalent of six Mcf of natural gas
(1) Columbus' proved oil and gas reserves as estimated by its independent
engineers were reported as 26.1 Bcfe in its annual report on Form 10-K for the
year ended November 30, 2000. In August 2000, the reserve estimates were
updated as of June 30, 2000 and proved reserves totaled 21.1 Bcfe, including
3.0 Bcfe and 2.4 Bcfe classified as proved developed non-producing and proved
undeveloped, respectively. During the first seven months of Columbus' fiscal
2000, 2.3 Bcfe was produced and downward reserve adjustments totaled 3.5 Bcfe
which were partially offset by a 0.8 Bcfe increase due to higher prices. These
reserve adjustments were due to Columbus receiving information that other
operators had determined not to develop certain locations, recent drilling
activity and performance of wells, as well as an evaluation of certain
technical data. The June 30, 2000 reserves consisted of 14.2 Bcf of gas and
1.16 million barrels of crude and condensate.
44
Undeveloped and non-producing proved reserves, by their nature, are less
certain to be recovered than proved developed producing reserves. The
estimates of proved reserves classified as undeveloped or non-producing
include the assumption that significant capital expenditures will be made to
develop the reserves. Although the estimates of proved developed non-producing
and proved undeveloped reserves that were prepared for Columbus were conducted
in accordance with industry standards, based on Key's assumptions and economic
parameters, Key's engineers have estimated that proved reserves to be acquired
from Columbus at June 30, 2000, were 15.8 Bcfe, including 14.5 Bcfe of proved
producing reserves.
(c) The following exhibits to this Form 8-K are filed pursuant to the
requirements of Item 601 of Regulation S-K:
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of August 28, 2000, by and
among Registrant, Key Acquisition Two, Inc. and Columbus Energy
Corp. (incorporated by reference to Annex A to the Registrant's
Registration Statement on Form S-4, registration no. 333-45654,
filed with the SEC on November 14, 200)
23.1 Consent of PricewaterhouseCoopers LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: January 2, 2001 KEY PRODUCTION COMPANY, INC.
By: /s/ Paul J. Korus
Paul J. Korus
Chief Financial Officer
45