SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number 001-11769
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KEY PRODUCTION COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1089744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
707 Seventeenth Street, Suite 3300 Denver, Colorado 80202-3404
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 303/295-3995 .
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _____
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The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of September 30, 1999, is 11,556,167.
PART 1 - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
For the Quarter For the Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
(In thousands, except per share data) 1999 1998 1999 1998
--------- ------- -------- ---------
Revenues:
Natural gas production $ 8,628 $ 6,113 $21,439 $18,825
Oil production 6,904 2,706 15,448 8,954
Plant production 203 205 512 625
Other 93 35 318 161
------- ------- ------- -------
15,828 9,059 37,717 28,565
------- ------- ------- -------
Operating Expenses:
Depreciation, depletion and
amortization 8,277 3,983 20,209 11,821
Lease operating 2,419 2,304 6,392 6,520
Production taxes 1,010 581 2,411 1,830
Administrative, selling and other 607 418 1,825 1,294
Financing costs:
Interest expense 1,093 705 3,011 1,982
Capitalized interest (361) (382) (1,008) (1,064)
Interest income (75) (42) (144) (125)
------- ------- ------- -------
12,970 7,567 32,696 22,258
------- ------- ------- -------
Income Before Income Taxes 2,858 1,492 5,021 6,307
Provision for Income Taxes 1,086 567 1,908 2,397
------- ------- ------- -------
Net Income $ 1,772 $ 925 $ 3,113 $ 3,910
======= ======= ======= =======
Basic Earnings Per Share $ .15 $ .08 $ .27 $ .34
======= ======= ======= =======
Diluted Earnings Per Share $ .15 $ .08 $ .26 $ .32
======= ======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of this statement.
2
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
----------------------------
(In thousands) 1999 1998
-------- --------
Cash Flows from Operating Activities:
Net income $ 3,113 $ 3,910
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 20,209 11,821
Deferred income taxes 1,707 2,144
Changes in operating assets and liabilities:
(Increase) Decrease in receivables (2,696) 1,214
Increase in prepaid expenses and other (99) (132)
Increase (decrease) in accounts payable and
accrued expenses (2,687) 4,152
Increase (decrease) in long-term property
liabilities and other 99 (160)
-------- --------
Net cash provided by operating activities 19,646 22,949
-------- --------
Cash Flows from Investing Activities:
Oil and gas exploration and development
expenditures (24,611) (30,484)
Acquisition of oil and gas properties (2,684) (349)
Proceeds from sale of oil and gas properties 1,947 3,361
Other capital expenditures (110) (463)
-------- --------
Net cash used by investing activities (25,458) (27,935)
-------- --------
Cash Flows From Financing Activities:
Long-term borrowings 5,000 9,000
Payments on long-term debt (4,000) -
Payments to acquire treasury stock (2) (3)
-------- --------
Net cash provided by financing
activities 4,998 8,997
-------- --------
Net Increase (Decrease) in Cash
and Cash Equivalents (814) 4,011
Cash and Cash Equivalents at Beginning of Year 4,720 3,349
-------- --------
Cash and Cash Equivalents at End of Period $ 3,906 $ 7,360
======== ========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
3
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
(In thousands) 1999 1998
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ASSETS
Current Assets:
Cash and cash equivalents $ 3,906 $ 4,720
Receivables 10,674 7,978
Prepaid expenses and other 668 569
-------- --------
15,248 13,267
-------- --------
Oil and Gas Properties, on the basis of
full cost accounting:
Proved properties 212,373 185,813
Unproved properties and properties
under development, not being amortized 20,042 23,276
-------- --------
232,415 209,089
Less - accumulated depreciation,
depletion and amortization (77,638) (57,752)
-------- --------
154,777 151,337
-------- --------
Other Assets, net 1,478 1,691
-------- --------
$171,503 $166,295
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,780 $ 11,271
Accrued exploration and development 1,629 3,651
Accrued lease operating expense and other 1,932 2,276
-------- --------
12,341 17,198
-------- --------
Long-Term Debt 65,000 60,000
-------- --------
Non-current Liabilities
Deferred income taxes 19,830 18,123
Long-term property liabilities and other 1,299 1,293
-------- --------
21,129 19,416
-------- --------
Stockholders' Equity:
Common stock, $.25 par value, 50,000,000
shares authorized, 11,793,290 and
11,778,190 shares issued, respectively 2,948 2,945
Paid-in capital 37,451 37,406
Retained earnings 34,831 31,737
Treasury stock at cost, 237,123, and
259,734 shares, respectively (2,197) (2,407)
-------- --------
73,033 69,681
-------- --------
$171,503 $166,295
======== ========
The accompanying notes to consolidated financial statements
are an integral part of this statement.
4
KEY PRODUCTION COMPANY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Stock-
Common Paid-in Retained Treasury holders'
Stock Capital Earnings Stock Equity
------ ------- ------- ------- -------
(In thousands, except per share data)
Balance, December 31, 1998 $2,945 $37,406 $31,737 $(2,407) $69,681
Net income - - 3,113 - 3,113
Common stock issued 3 42 - - 45
Treasury stock issued - 3 (19) 212 196
Treasury stock purchased - - - (2) (2)
------ ------- ------- ------- -------
Balance, September 30, 1999 $2,948 $37,451 $34,831 $(2,197) $73,033
====== ======= ======= ======= =======
The accompanying notes to consolidated financial statements
are an integral part of this statement.
5
KEY PRODUCTION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The financial statements included herein have been prepared by Key
Production Company, Inc. (Key or the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission, and reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods, on a basis consistent with the
annual audited statements. All such adjustments are of a normal, recurring
nature except as disclosed herein. Certain information, accounting policies,
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Key and the accounts of its wholly-owned subsidiaries: Brock Exploration
Corporation, Brock Oil and Gas Corporation and Brock Gas Systems and Equipment,
Inc.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
Income tax expense consisted of the following:
Nine Months Ended September 30,
---------------------------------
1999 1998
------ ------
Current Taxes:
Federal $ - $ -
State 201 253
Deferred Taxes 1,707 2,144
------ ------
$1,908 $2,397
====== ======
6
Net Income Per Share
Basic earnings per share is computed based on the weighted-average number
of shares outstanding during the period. The weighted-average number of common
shares used in computing basic earnings per share were: 11,535,264 and
11,510,570 for the third quarters of 1999 and 1998, respectively; and 11,526,181
and 11,506,590 for the first nine months of 1999 and 1998, respectively.
Diluted earnings per share is computed based on the weighted-average number of
common shares outstanding during the periods and the assumed exercise of
dilutive common stock equivalents (stock options) using the treasury stock
method. Dilutive equivalents assumed to have been outstanding totaled: 653,690
and 597,867 for the third quarters of 1999 and 1998, respectively; and 574,463
and 663,893 for the first nine months of 1999 and 1998, respectively.
Statement of Cash Flows
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments earned 5.1 and 4.4 percent rates of interest at September 30, 1999
and December 31, 1998, respectively, with cost approximating market.
Supplemental Disclosure of Cash Flow Information
For the Nine Months
Ended September 30,
---------------------------
1999 1998
-------- --------
Cash paid during the period for:
Interest (net of amounts capitalized) $1,987 $ 844
Income taxes (net of refunds received) $ (6) $ 123
Debt
Key has a credit facility with NationsBank of Texas, N.A. (now Bank of
America, N.A.) that provides for borrowings of up to $75 million. The existing
agreement provides that borrowings be revolving loans until April 1, 2000, at
which time the outstanding balance will be converted to a term loan with a final
maturity date of January 1, 2003. Unless the current facility is amended or
refinanced, the Company must commence quarterly principal payments on April 1,
2000.
In August 1999, Key and Bank of America, N.A. and Banc of America
Securities LLC (collectively, Bank of America) executed an agreement regarding
the arrangement and syndication of a new senior secured revolving/term credit
facility that specifies a maximum loan amount of $150 million. The new facility
will replace the Company's existing credit facility with NationsBank of Texas,
N.A. As a result of a merger, NationsBank of Texas, N.A. is now known as Bank
of America, N.A.
Under the terms of the proposed credit agreement, the new facility will
cease to revolve on January 1, 2002 and all amounts outstanding thereunder will
be converted to a four-year amortizing term loan. Closing on the new facility
is expected by December 31, 1999. Accordingly, the entire balance of the
Company's outstanding debt has been classified as long-term in the accompanying
balance sheet.
Reclassification
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Results
Key is reporting third quarter net income of $1.8 million, or $.15 per
diluted share. Third quarter 1999 net income almost doubled the $.9 million and
$.08 per diluted share reported for the same period a year ago. Third quarter
earnings are based on revenues of $15.8 million and $9.1 million in 1999 and
1998, respectively.
Net income for the first nine months of 1999 was $3.1 million ($.26 per
diluted share) compared to $3.9 million ($.32 per diluted share) for the first
nine months of 1998. Revenues for the first nine months climbed to $37.7
million in 1999 from $28.6 million in 1998.
Results of Operations
For the Quarter For the Nine Months
Ended September 30, Ended September30,
------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- -------------- -----------
Selected Oil and Gas
Operating Statistics
- --------------------
Gas Volume - Mcf per day 37,201 35,205 37,705 34,343
Gas Price - Per Mcf $ $2.52 $ 1.89 $ 2.08 $ 2.01
Oil Volume - Barrels per day 3,820 2,591 3,665 2,663
Oil Price - Per barrel $ 19.65 $ 11.35 $ 15.44 $ 12.32
Full Cost Amortization Rate 51.9% 42.5% 53.2% 40.4%
Oil and gas revenues for the third quarter of 1999 increased 74 percent to
$15.7 million compared to $9.0 million in the third quarter of 1998.
Substantial increases in production and stronger oil and gas prices contributed
to the increase. For the first nine months of 1999, oil and gas sales increased
32 percent to $37.4 million versus $28.4 million in the same period last year.
Oil sales for the third quarter of $6.9 million are approximately two and
one half times the $2.7 million reported a year ago. Between 1998 and 1999, oil
prices rose from a dismal $11.35 per barrel to $19.65 per barrel. The increase
in oil prices had a positive $2.9 million impact on quarterly oil sales. Oil
production increased 47 percent to 3,820 barrels per day, and added $1.3 million
to oil sales. The 1,229 barrels per day increase in oil volume includes
approximately 760 barrels per day from the $10.5 million acquisition of
producing properties in the Hardeman Basin of north-central Texas at year-end
1998. The remainder of the increase can be attributed to the company's ongoing
investments in the Hardeman Basin and initial production from Key's new wells in
Mississippi.
Oil sales for the first nine months of 1999 rose 73 percent to $15.4
million from $9.0 million in the corresponding period last year. A little more
than half of the increase ($3.4 million) can be attributed to increases in oil
production and the rest ($3.1 million) is the result of improved commodity
prices. Key's average price realization for this period went to $15.44 per
barrel in 1999 from $12.32 per barrel in 1998. Daily production increased 38
percent to 3,665 barrels per day in 1999 compared to 2,663 barrels per day
during the same nine-month period last year. The favorable production variance
for the nine-month periods also stems from the acquisition of oil properties at
year-end 1998 and ongoing investments since then.
Gas sales for the third quarter jumped to $8.6 million in 1999 from $6.1
million in 1998, a 41 percent increase. Most of the quarter-over-quarter gain
is
8
due to an increase in gas prices. Key's average gas price increased to $2.52
per Mcf in 1999 from $1.89 per Mcf in 1998, and added $2.2 million in sales
value. Daily gas output for the third quarter rose to 37,201 Mcf per day in
1999 from 35,205 Mcf per day in 1998 resulting in a $.3 million addition to
sales. Most of the production increase is from new wells drilled in western
Oklahoma, the Sacramento Basin of California and the Mississippi Salt Basin.
Gas sales for the latest nine-month period increased by 14 percent to $21.4
million versus $18.8 million in the corresponding period of 1998. Daily
production expanded to 37,705 Mcf per day in 1999 from 34,343 Mcf per day in
1998, a 10 percent increase. The increase in production added $1.9 million to
gas sales. Key's average gas price realization during the first nine months of
1999 inched ahead to $2.08 per Mcf from $2.01 per Mcf in the corresponding
period of 1998 and had a positive impact on sales of $.7 million.
Product sales from gas processing plants for the third quarters remained
relatively flat between 1999 and 1998, and decreased 18 percent between the
first nine months of 1999 and 1998.
Key's third quarter oil and gas revenues for 1999 are derived from the
following product mix: 44 percent oil, 55 percent gas and one percent plant
products. This compares to the following mix for 1998: 30 percent oil, 68
percent gas and two percent plant products.
Other revenues were approximately $318,000 and $161,000 for the first nine
months of 1999 and 1998, respectively. Key's other revenue is primarily
comprised of income from the Company's gathering systems in California.
Depreciation, depletion and amortization (DD&A) expense more than doubled
between the third quarters of 1999 and 1998, a much larger variance than the 74
percent increase in oil and gas revenues. The third quarter depletion rates as
a percentage of oil and gas sales increased to 51.9 percent in 1999 from 42.5
percent in 1998. DD&A expense for the nine months increased by 71 percent
between 1999 and 1998. The nine-month depletion rates as a percentage of oil
and gas sales escalated to 53.2 percent in 1999 from 40.4 percent in 1998. Key
uses the future gross revenue method to compute DD&A expense. For purposes of
the calculation, future gross revenue is computed using a trailing 12-month
average price. If the trailing 12-month average price is lower than the price
the Company is currently receiving for its oil and gas production, the increase
in DD&A expense will be greater than the increase in revenue for the period.
This was the case during the third quarter of 1999. Conversely, if the trailing
12-month average price is higher than the price the Company is currently
receiving for its oil and gas production, the decrease in DD&A expense will be
greater than the decrease in revenue for the period. Also included in DD&A
expense is a relatively immaterial amount of depreciation on fixed assets and
amortization of financing costs associated with the Company's credit facility.
Lease operating expense (LOE) for the third quarter of 1999 increased just
five percent from 1998 to $2.4 million. This is a small increase considering
oil and gas revenues increased by 74 percent and production increased by 18
percent for the same quarter. On a unit of production basis, third quarter LOE
decreased to $.44 per EMcf in 1999 from $.49 per EMcf in 1998. Year to date LOE
was down two percent between 1999 and 1998. Compared on a unit of production
basis, year to date expenses decreased 19 percent, or $.09 per EMcf, to $.39 per
EMcf in 1999. (Oil is compared to natural gas in terms of equivalent thousand
cubic feet, "EMcf." One barrel of oil is the energy equivalent of six Mcf of
natural gas.)
Production taxes for the third quarter increased to $1.0 million in 1999
from $.6 million in 1998. The 74 percent increase was in direct correlation
with the
9
increase to oil and gas sales. On an EMcf basis, production taxes increased to
$.18 per EMcf in 1999 from $.12 per EMcf in 1998. It makes sense that production
taxes increased on an EMcf basis because most of these taxes are calculated on
sales value, not volumes. For the nine months, production taxes increased to
$2.4 million in 1999 from $1.8 million in 1998. On an EMcf basis, production
taxes increased 11 percent, or $.09, to $.39 per EMcf.
General, administrative and other costs (G&A) increased 45 percent between
the third quarters of 1999 and 1998 and increased 41 percent between the first
nine months of 1999 and 1998. For the third quarter and nine month periods, G&A
increased to $.11 per EMcf in 1999 from $.09 per EMcf in 1998.
Interest expense before capitalization was $3,011,000 and $1,982,000 for
the first nine months of 1999 and 1998, respectively. Long-term debt was $65.0
million at September 30, 1999, compared to $44.0 million at September 30, 1998.
Key capitalized interest of $1,008,000 and $1,064,000 in 1999 and 1998,
respectively. These amounts are for borrowings associated with undeveloped
leasehold.
Key is using an effective tax rate of 38 percent for 1999 and 1998.
Cash Flow and Liquidity
Key's primary needs for cash are to fund oil and gas exploration,
development and acquisition activities and for payment of existing obligations
and trade commitments related to oil and gas operations. The Company's primary
sources of liquidity are cash flows from operating activities and proceeds from
financing activities.
In the first nine months of 1999, cash provided by operating activities was
$19.6 million, compared to $22.9 million in 1998. The net decrease of $3.3
million, or 14 percent, is primarily due to changes in accounts receivable,
accounts payable and accrued expense balances. However, these working capital
changes are more than offset by the combined changes to net income, DD&A expense
and deferred taxes for 1999 and 1998.
Expenditures for exploration and development (E&D) in the first nine months
of 1999 totaled $24.6 million, or 125 percent of cash generated from operating
activities. Year-to-date expenditures are down 19 percent from the $30.5
million expended in 1998. E&D projects initiated in the first nine months of
1999 and 1998 were funded with a combination of cash from operations, long-term
debt and property sales proceeds. So far in 1999, the Company has participated
in drilling 76 wells, with an overall success rate of 80 percent. Twenty-seven
of the 31 wells drilled during the third quarter were successful. Drilling
efforts continue to be concentrated in the Mid-Continent region, California,
Mississippi, and south Louisiana.
In the first nine months of 1999, Key acquired additional interests in
producing properties it already operated in the Hardeman Basin of north-central
Texas and properties in the Gulf Coast region.
Key received proceeds from various purchasers totaling $1.9 million and
$3.4 million in 1999 and 1998, respectively, for the sale of miscellaneous
producing properties and non-producing acreage.
As of September 30, 1999, the Company had borrowed a net $5.0 million on
its credit facility with NationsBank of Texas, N.A. (now Bank of America),
bringing its total long-term debt to $65.0 million. Proceeds of the borrowings
were used to finance acquisition, exploration and drilling activities in excess
of cash generated by operating activities. The Company borrowed a net $9.0
million during
10
the same period of 1998. The Company's debt to capitalization ratio was 47.1
percent at September 30, 1999 compared to 46.3 percent at December 31, 1998.
The Company's ratio of current assets to current liabilities was 1.2 to 1
at September 30, 1999, an improvement over the .8 to 1 ratio calculated at
December 31, 1998.
Management believes that cash on hand, net cash generated from operations
and amounts available under the Company's revolving line of credit will be
adequate to meet future liquidity needs, including satisfying the Company's
financial obligations and funding operations, exploration and development.
Year 2000 Compliance
Many existing computer programs use only two digits to identify a year in
the date field and were developed without considering the impact of the upcoming
change in the century. If not corrected, date-sensitive software applications
could fail or create erroneous results by or at the Year 2000.
During 1997, Key conducted an assessment of the various computer hardware
and software systems it uses. This assessment identified date-sensitive
software systems used to record, process and track information in three
functional areas: accounting, land and lease records and reservoir engineering.
The land and lease records and reservoir engineering software was found to be
Year 2000 compliant. During 1998, the accounting system was upgraded to make it
Year 2000 compliant. Testing of all three systems was conducted throughout the
year, and the Company believes that these systems will continue to function
properly when the century changes. The cost of the accounting system upgrade
was provided, at no additional charge, as part of the Company's annual software
maintenance agreement with the vendor. The cost of installing the software and
testing the systems was not material and was charged to expense during 1998.
The Company feels that its remediation plan has adequately addressed the
Year 2000 problem, and therefore, this issue is not expected to have a material
effect on the Company's internal operations. The Company has also attempted to
assess the impact of this issue on the various entities with which the Company
does business. Although failure of these entities to adequately address the
Year 2000 issue could indirectly impact the Company, it is not possible to
quantify that impact, if any. However, the Company does not anticipate that the
impact would have a material adverse effect on the Company's business.
Future Trends
We look forward to ending 1999 and entering 2000 with an active drilling
program complimented by improved energy prices. However, it is not possible to
accurately predict future oil and gas prices or their impact on the availability
of drilling capital, and ultimately, our growth in proved reserves and
production.
Key will continue to concentrate its resources and expertise on exploration
and development projects for the remainder of 1999 and into the year 2000. In
addition to its moderate-risk drilling programs in the Mid-Continent region and
the Sacramento Basin of California, Key is also accelerating its higher risk
(and higher potential) exploratory drilling efforts. In the Mississippi Salt
Basin, two new wells are already in-progress. Key expects to commence drilling
at three more locations during the next few months and several others
thereafter. The Company also plans to drill exploratory wells on potentially
high-impact prospects in south Louisiana, the Sacramento Basin and in Wyoming.
Key anticipates funding exploration and drilling primarily with cash generated
by operating activities.
11
In August 1999, Key and Bank of America, N.A. and Banc of America
Securities LLC (collectively, Bank of America) executed an agreement regarding
the arrangement and syndication of a new senior secured revolving/term credit
facility that specifies a maximum loan amount of $150 million. The new facility
will replace the Company's existing credit facility with NationsBank of Texas,
N.A. Closing on the new facility is expected by December 31, 1999.
As part of our on-going business strategy, Key will continue to evaluate
merger and acquisition opportunities. Key will actively pursue merger and
acquisition candidates with the economic and strategic attributes that will
promote profitable growth.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk as a result of changes in the price
of natural gas and crude oil and changes in interest rates.
Natural gas and crude oil prices fluctuate widely in response to changing
market forces. Virtually 100 percent of the Company's revenue derives from the
sale of natural gas and crude oil, so these fluctuations, positive and negative,
can have a significant impact on the revenue the Company reports each period.
Changes in product prices also impact the calculation of the limitation on
capitalized costs under the full cost accounting rules of the Securities and
Exchange Commission. Application of this rule generally requires pricing future
revenues at the unescalated prices in effect at the end of each fiscal quarter
and requires a write-down if the "ceiling" is exceeded, even if prices decline
for only a short period of time. If a write-down were required, the charge to
earnings would not impact cash flow from operating activities. Key has never
taken a full-cost ceiling write-down.
The Company's reported earnings are impacted by changes in interest rates
as a result of its long-term debt with floating interest rates. Interest
charges are based on either the prime rate or the LIBOR rate. Fluctuations in
these rates directly impact the amount of interest expense the Company reports
in each period.
Historically, the Company has not used financial instruments such as
futures contracts or interest rate swaps to mitigate the impact of changes in
commodity prices or interest rates.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's outlook for the remainder of 1999
with regard to production levels, price realizations, expenditures for
exploration and development, plans for funding operations and capital
expenditures, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. The forward-looking statements in this
report are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by the statements.
These risks and uncertainties include, but are not limited to, fluctuations
in the price the Company receives for its oil and gas production, reductions in
the quantity of oil and gas sold due to decreased industry-wide demand and/or
curtailments in production from specific properties due to mechanical, marketing
or other problems, operating and capital expenditures that are either
significantly
12
higher or lower than anticipated because the actual cost of identified projects
varied from original estimates and/or from the number of exploration and
development opportunities being greater or fewer than currently anticipated and
increased financing costs due to a significant increase in interest rates. These
and other risks and uncertainties affecting the Company are discussed in greater
detail in this report and in other filings by the Company with the Securities
and Exchange Commission.
13
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
- ----------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
12.1 Statement RE: Computation of Ratio of Earnings to Fixed Charges.
27.1 Financial Data Schedule for Commercial and Industrial Companies
per Article 5 of Regulation S-X for the quarter ended September
30, 1999.
(b) Reports on Form 8-K:
On September 22, 1999, the Company filed a report dated September 21,
1999, on Form 8-K. The Form 8-K announced organization changes and
named new corporate officers.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
Dated November __, 1999
KEY PRODUCTION COMPANY, INC.
/s/ Paul Korus
-----------------------------------------
Paul Korus
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Sherri M. Nitta
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Sherri M. Nitta
Director, Financial Reporting
(Principal Accounting Officer)