ITEM 1. BUSINESS
GENERAL
Key Production Company, Inc. (Key or the Company) is an independent oil and gas company engaged in oil and gas exploration, development and production in the continental United States. The Company's exploration interests are spread over 14 states with primary focus areas in the Anadarko Basin of Oklahoma, California, the Rocky Mountain region and the Gulf Coast. The Company was incorporated in Delaware on June 22, 1988, and maintains its corporate offices in Denver, Colorado. Key opened regional exploration offices in Tulsa, Oklahoma and Houston, Texas in October 1994 and March 1995, respectively. The Company's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol KPCI.
BUSINESS DURING 1995
Production during 1995 totaled 633 Mbbls of oil and 5,262 MMcf of gas. Oil and gas production increased 26 percent and 16 percent, respectively, primarily as a result of production from new drilling. Product prices averaged $15.70 per barrel of oil and $1.71 per Mcf of gas.
In 1995, the Company spent $13 million on exploration and development activities. Key participated in drilling 56 gross (8.35 net) wells in 1995. During 1995, 48 gross (6.36 net) wells were completed as producers and 8 gross (1.99 net) wells were dry. Sales of producing properties were not significant in 1995.
Key has working interests in approximately 1,286 gross (94 net) wells located primarily in the Anadarko Basin of Oklahoma, Wyoming, southern Texas, Louisiana and offshore Gulf of Mexico. In addition, Key has royalty or overriding royalty interests in approximately 60 properties in the Midcontinent region, 60 properties in the Gulf Coast region and 1,775 properties in the Rocky Mountain region. At year end, Key held approximately 92,900 net acres of developed leasehold located primarily in Oklahoma, Wyoming, Texas and Louisiana. Key also held approximately 353,000 net acres of undeveloped leasehold located primarily in the Rocky Mountain region.
During 1995, the majority of Key's spot market gas production was marketed by Apache Corporation (Apache) and sold to Natural Gas Clearinghouse (NGC). Sales to NGC accounted for 37 percent of Key's 1995 oil and gas revenues. Eighty-Eight Oil Company (Eighty-Eight Oil) was the largest purchaser of Key's crude oil production. Approximately 29 percent of 1995 revenues resulted from crude oil sales to Eighty-Eight Oil. No other single purchaser accounted for more than 10 percent of revenues in 1995.
On December 21, 1995, the Company announced that Key and Brock Exploration Corporation (Brock) had entered into a definitive merger agreement that would combine the two companies. The merger will be structured as a tax-
free exchange with each Brock shareholder receving one share of Key stock for each 1.45 Brock share held. The proposed transaction is subject to approval by the stockholders of both Key and Brock and certain other conditions. Both Key and Brock will submit the merger to their respective stockholders for approval at special meetings on March 28, 1996. Subject to stockholder approval and other conditions, the transaction will be consummated as soon as practicable in the Spring of 1996.
COMPETITION
The oil and gas industry is highly competitive. As an independent oil and gas company, Key must compete against companies with substantially larger financial and other resources for a variety of opportunities including reserve and lease acquisitions and marketing agreements.
NATURAL GAS AND OIL PRICES
Key's gas price averaged $1.71 per Mcf in 1995, $.27 lower than the prior year average of $1.98 per Mcf. Key's average realized oil price rose to $15.70 per barrel in 1995, up from $14.27 in the prior year. Key's business will continue to be affected by future changes in domestic and international oil and gas prices. No assurances can be given as to the trend in, or level of, future oil and gas prices.
RESERVE VALUE CEILING TEST
Key reviews the carrying value of its oil and gas properties on a quarterly basis under the full cost accounting rules of the Securities and Exchange Commission (SEC or the Commission). Under the full cost accounting rules, capitalized costs of oil and gas properties may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10 percent, plus the lower of cost or fair market value of unproved properties, as adjusted for related tax effects and deferred tax reserves. 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 declined for only a short period of time. If a write- down were required, the charge to earnings would not impact cash flow from operating activities. Key did not record any write-downs in the three years ended December 31, 1995.
REGULATION OF OIL AND GAS
Key's exploration, production and marketing are regulated extensively at the federal, state and local levels. Oil and gas exploration, development and production activities are subject to various laws and regulations governing a wide variety of matters. For example, the states in which Key produces oil and gas have statutes or regulations addressing production practices that may affect Key's operations and limit the quantity of hydrocarbons Key may produce and sell. Other regulated matters include the marketing and transportation of oil and gas and the valuation of royalty payments.
Among other regulated matters on the federal level, the Federal Energy Regulatory Commission (FERC) regulates interstate transportation of natural gas under the Natural Gas Act. Key's gas sales are affected by regulation of intrastate and interstate gas transportation. In an attempt to promote competition, FERC has issued a series of orders which have significantly altered the marketing and transportation of natural gas. To date, Key has not experienced any material adverse effect on gas marketing as a result of these FERC orders. However, the Company cannot predict what effect subsequent regulations may have on its future gas marketing.
ENVIRONMENTAL
Key, as an owner of interests in oil and gas properties, is subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations, subject the lessee to liability for pollution damages, require suspension or cessation of operations in affected areas and impose restrictions on the injection of liquids into subsurface aquifers that may contaminate groundwater.
Key has made and will continue to make expenditures in its efforts to comply with these requirements, which it believes are necessary business costs in the oil and gas industry. These costs are inextricably connected to normal operating expenses such that the Company is unable to separate the expenses related to environmental matters. However, the Company does not believe any such additional expenses will materially affect its business. Although environmental requirements do have a substantial impact upon the energy industry, generally these requirements do not appear to affect Key any differently or to any greater or lesser extent than other companies in the industry.
The Company is not aware of any environmental claims existing as of December 31, 1995, which would have a material impact upon the Company's financial condition or results of operations. Key does not believe that compliance with federal, state or local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have such an impact.
EMPLOYEES
On December 31, 1995, Key had 28 full-time employees.
OFFICES
Key's principal executive offices are located at One Norwest Center, 20th Floor, 1700 Lincoln Street, Denver, Colorado 80203-4520.
ITEM 2.

ITEM 2. PROPERTIES
PRODUCTIVE WELLS AND ACREAGE
The number of productive gas and oil wells in which Key has working interests as of December 31, 1995, is set forth below. Substantially all of these properties are operated by other owners.
In addition, Key has royalty or overriding royalty interests in approximately 60 properties in the Midcontinent region, 60 properties in the Gulf Coast region and 1,775 properties in the Rocky Mountain region. As of December 31, 1995, Key held approximately 92,900 net developed acres. Approximately 70,700 net acres are located in the Rocky Mountains with the remainder located in the Midcontinent and Gulf Coast regions.
GROSS WELLS DRILLED
The following table sets forth the number of wells drilled during 1995, 1994 and 1993 in which the Company participated.
At December 31, 1995, 7 gross (1.36 net) wells were in the process of being drilled.
UNDEVELOPED ACREAGE
As of December 31, 1995, Key held an interest in approximately 353,000 net undeveloped acres located in the Rocky Mountain region.
PRODUCTION AND PRICING INFORMATION
The following table describes, for each of the last three fiscal years, oil and gas production and pricing data for the Company.
RESERVE VALUE INFORMATION
The estimated proved oil and gas reserves of Key, as of December 31, 1995, 1994 and 1993, and the standardized measure of discounted future net cash flows attributable thereto at December 31, 1995, 1994 and 1993, are included in Supplemental Oil and Gas Disclosures to Financial Statements appearing on pages 31 through 33 of this Form 10-K. Supplemental Oil and Gas Disclosures also include Key's net revenues from production (including royalty and working interest production) of oil and natural gas for the three years ended December 31, 1995.
Future reserve values are based on year-end prices except in those instances where the sale of gas is covered by contract terms providing for determinable escalations. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalations.
The present value of estimated future net cash flows from proved reserves after income taxes are $50,758,000, $42,722,000 and $32,110,000 for 1995, 1994 and 1993, respectively.
Estimated future net cash flows at December 31, 1995, are expected to be received as shown in the following years:
Other than the proposed merger described in Item 7 on page 13, no major discovery or other favorable or adverse event is believed to have occurred since December 31, 1995, which would cause significant change in the estimated proved reserves reported herein. The above estimates are based on year-end pricing in accordance with Commission guidelines and do not reflect current prices. Since January 1, 1995, no oil or gas reserve information has been filed with, or included in any report to, any federal authority or agency other than the SEC and/or the Energy Information Administration.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any pending litigation that, in the opinion of the Company's management, will materially affect the financial position or results of operations of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth quarter of 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
FRANCIS H. MERELLI, 60, has been chairman of the board of directors, president and chief executive officer of the Company since September 9, 1992. From July 1991 to September 1992, Mr. Merelli was engaged as a private consultant in the oil and gas industry. Mr. Merelli was president and chief operating officer of Apache Corporation, and president, chief operating officer and a director of Key from June 1988 to July 1991, at which time he resigned from those positions in both companies. He was president of Terra Resources, Inc. from 1979 to 1988.
MONROE W. ROBERTSON, 46, has been with the Company since September 10, 1992. Since February 1994, he has served as senior vice president and corporate secretary and prior to that time as vice president and corporate secretary. From August 1988 to July 1992, he was employed by Apache Corporation in various capacities, the most recent of which was director of operational planning. From 1986 to 1988, Mr. Robertson was director of
corporate planning for Terra Resources, Inc. From 1973 to 1986, Mr. Robertson was employed by Gulf Oil Corporation.
CATHY L. ANDERSON, 40, has been controller of the Company since January 15, 1993. From July 1985 to January 1993, Ms. Anderson was employed by Arthur Andersen LLP, a public accounting firm, in various capacities, the most recent of which was audit manager.
STEPHEN P. BELL, 41, has been vice president - land of the Company since February 2, 1994. From March 1991 to February 1994, he was president of Concord Reserve, Inc., a privately-held independent oil and gas company. He was employed by Pacific Enterprises Oil Company (formerly Terra Resources, Inc.) as midcontinent regional manager from February 1990 to February 1991 and as land manager from August 1985 to January 1990.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Key's common stock, par value $.25 per share, trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol KPCI. No dividends were paid in 1995 or in 1994. The table below shows the market price of the common stock for 1995 and 1994:
The closing price of Key's common stock as reported on The Nasdaq Stock Market for March 22, 1996, was $5.50. At March 22, 1996, the Company's 8,849,468 shares of common stock outstanding were held by 5,323 stockholders of record and approximately 5,400 beneficial owners.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for each of the years in the five-year period ended December 31, 1995, which information has been derived from the Company's audited financial statements. This information should be read in connection with and is qualified in its entirety by the more detailed information and financial statements under Item 8 below.
/(a)/ Net income for 1993 includes a non-recurring gain of $1,603,000 ($.16 per share) due to a change in the method of accounting for income taxes and an extraordinary loss on early extinguishment of debt of $122,000 ($.01 per share).
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL RESULTS
Key is reporting 1995 net income of $3.1 million, or $.32 per share. On a per share basis, net income rose 7 percent over the $.30 per share reported in 1994, and 68 percent over the $.19 per share from continuing operations reported in 1993. Earnings for 1995, 1994 and 1993 are based on oil and gas revenues of $19.3, $16.3, and $11.7 million, respectively.
Net income for 1993 was $3.5 million ($.34 per share) and includes a $1.6 million non-recurring benefit resulting from the adoption of Statement of Financial Accounting Standards No. 109 in January 1993 and $122,000 loss on early extinguishment of debt.
REVENUES
In 1995, oil and gas revenues climbed 18 percent to $19.3 million. The surge in revenues is primarily the result of production increases. Sales for 1995 reflect a full year of production from the Company's 1994 acquisition and additional volumes from successful drilling projects.
Between 1994 and 1993, oil and gas revenues rose by $4.6 million, or 40 percent to reach $16.3 million. The significant increase to 1994 sales encompasses eight months of production from the Company's second quarter 1994 acquisition of producing properties and the positive impact that wells drilled or recompleted since 1993 had on oil and gas production.
Gas sales between 1995 and 1994 remained relatively flat at $9.0 million. Daily gas volumes climbed 16 percent from 12,389 Mcf per day in 1994 to 14,416 Mcf per day in 1995, adding approximately $1.5 million in value. Increased gas production from new drilling and the 1994 acquisition were just enough to offset a drop in Key's average gas price. Average gas prices fell from $1.98 per Mcf in 1994 to $1.71 per Mcf in 1995.
Gas sales increased 7 percent between 1994 and 1993. The increase in gas sales is the result of gas volumes climbing 18 percent between 1994 and 1993. Daily production volumes went from 10,470 Mcf per day in 1993 to 12,389 Mcf per day in 1994 and had a positive impact of $1.5 million. This production increase was more than enough to counteract the effect of falling prices in the latter part of 1994. Key's average gas price dropped from $2.19 per Mcf in 1993 to $1.98 per Mcf in 1994.
Oil sales of $9.9 million in 1995 increased $2.7 million, or 38 percent, over the comparable 1994 sales. Increases to both price and production volumes account for the substantial gain. Daily production volumes increased 26 percent from 1,382 barrels per day in 1994 to 1,736 barrels per day in 1995. Additional volume in 1995 added approximately $1.8 million to oil sales. Key's average oil price increased 10 percent from $14.27 per barrel in 1994 to $15.70 per barrel in 1995. The favorable price variance had a positive impact of $.9 million.
Spurred on by the acquisition, 1994 oil sales increased by $4 million over 1993 oil sales. Daily oil production more than doubled, going from 569 barrels per day in 1993 to 1,382 barrels per day in 1994. Production increases added $4.6 million to sales, while a 7 percent dip in prices reduced sales by $.6 million. The average price for oil was $14.27 per barrel in 1994 compared to $15.36 per barrel in 1993.
Product sales from gas processing plants contributed $301,000, $140,000 and $106,000 to oil and gas production revenues in 1995, 1994 and 1993, respectively. In 1995, Key's oil and gas revenues are derived from the following product mix: 52 percent oil, 47 percent gas and the balance from plant product sales. This compares to the following components for 1994: 44 percent oil, 55 percent gas and 1 percent plant products.
Other revenues for 1994 include proceeds from a gas contract settlement in the amount of $300,000.
COSTS AND EXPENSES
Depreciation, depletion and amortization (DD&A) expense increased 40 percent to $7.5 million for 1995. The increase to DD&A expense was triggered by higher oil and gas revenues as discussed above, and an increase to the amortization rate. Key's annualized amortization rate as a percentage of revenue increased from 32.1 percent in 1994 to 38.0 percent in 1995. The rate increase was a consequence of significantly lower gas prices and their effect on the future gross revenue component of the DD&A calculation. DD&A expense increased between 1994 and 1993. The 1994 increase was due to relatively higher oil and gas sales and net properties in 1994. Reserve additions from the acquisition and drilling helped reduce the amortization rate to 32.1 percent of revenue from 33.1 percent in the prior year.
As anticipated, operating expenses for 1995 rose 25 percent to $6.4 million. The increase can be attributed to the Company's 1994 acquisition and the numerous workovers performed in 1995 to maintain production on older, declining wells. On a unit of production basis, 1995 operating expenses are $.70 per EMcf, compared to $.68 per EMcf in 1994. Key's expenses on a unit of production basis increased in 1995 because the newly acquired properties have a greater oil percentage than Key's pre-acquisition properties and oil properties generally have higher lifting costs than gas properties. Key's operating expenses increased 1.9 million, or 59 percent, between 1994 and 1993. This increase was largely due to the second quarter acquisition and is in line with the boost to oil and gas revenues. On a unit of production basis, operating expenses for 1994 are $.68 per EMcf, up from the $.63 per EMcf in 1993.
Administrative, selling and other costs held steady with just a 2 percent increase to reach $1.5 million for 1995. Between 1995 and 1994, administrative expense dropped from $.19 per EMcf to $.16 per EMcf. Due to certain economies of scale and full cost accounting rules which provide for the capitalization of direct overhead related to exploration and development activities, the Company was able to maintain levels of administrative expense while managing a larger asset base. Administrative expenses declined seven
percent between 1994 and 1993. On a units of production basis, administrative expense decreased to $.19 per Emcf in 1994, compared to $.30 per EMcf in 1993. Apache Corporation provided accounting and administrative services to Key for the first four months of 1993. Key paid Apache $300,000 for the services provided and this amount is included in the 1993 total.
Key has a $50 million credit facility with NationsBank of Texas, N.A. In 1995, the Company elected to increase its borrowing base from $18 million to $22 million. During the year, an additional $4.6 million was borrowed to fund various exploration and development projects. Annual interest for 1995 increased from $446,000 to $828,000. Interest expense for 1995 includes interest on the additional $4.6 million borrowing and twelve months of interest versus eight months in 1994. Interest expense was only $125,000 in 1993 and reflects the Company's pre-acquisition debt levels.
Interest of $574,000 was capitalized in 1995 for borrowings associated with the undeveloped leasehold acquired in 1994. Capitalized interest of $309,000 was recorded for the same period of 1994. No interest was capitalized for 1993.
Interest income of $16,000, $110,000 and $282,000 was recorded for the years 1995, 1994 and 1993, respectively. The higher interest income in 1994 and 1993 reflects the investment of property sales proceeds received in the first quarter of 1993 and held until the second quarter of 1994. Available cash was used to partially fund the acquisition.
As discussed in more detail in Footnote 3, "Income Taxes", the Company has determined that it is no longer necessary to maintain a valuation allowance against its deferred tax asset. This adjustment decreased the combined federal and state effective tax rate from 38 percent to approximately 19 percent for 1995.
CASH FLOW AND LIQUIDITY
Liquidity refers to the ability of an enterprise to generate adequate amounts of cash to satisfy its financial commitments. 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. Management believes that the overall sources of funds available to Key will continue to be more than sufficient to satisfy the Company's financial obligations.
Cash from operating activities declined slightly from $11.6 million in 1994 to $11.3 million in 1995. An increase to net income between the two years added $.1 million to cash from operating activities, and the increase in DD&A added another $2.1 million. These 1995 increases were offset by a $1 million decrease in deferred taxes and normal fluctuations in the other balance sheet components. Cash from operating activities soared from $6.7 million in 1993 to $11.6 million in 1994. Most of this increase can be traced to Key's 1994 acquisition and active drilling program. The resulting higher
oil and gas production translates into elevated oil and gas revenues and a boost to cash from operating activities.
Cash expenditures for exploration and development for 1995 totaled $13.5 million, or 119 percent of cash from operating activities. This compares to $6.1 million and 53 percent of cash from operating activities in 1994, and $1.9 million and 29 percent of cash from operating activities in 1993. The Company implemented a strategy to increase production and reserves through selective drilling in the second quarter of 1993. Since that time, the Company has steadily expanded its exploration and development activities. Key drilled 56 gross wells (8.35 net) in 1995, 45 gross wells (6.25 net) in 1994 and 27 gross wells (.6 net) in 1993.
In the second quarter of 1994, Key completed a transaction to acquire assets in the Rocky Mountain region for $22.75 million. As of the October 1, 1993 effective date, the acquisition included 2.6 million barrels of oil, 8 billion cubic feet of natural gas and approximately 980,000 net undeveloped acres. Only minor acquisitions of oil and gas properties were made in 1995 and no acquisitions were made in 1993.
In 1993, the Company received $3.9 million in proceeds from the sale of approximately 1,100 low value oil and gas properties, the sale of a net profit reversionary interest and the sale of a negative reversionary interest. The properties and net profit interests were sold to Apache to reduce the administrative expense Key would incur accounting for numerous low-value properties. Key received proceeds for small property sales in 1995 and 1994.
In the second quarter of 1994, Key borrowed $12.5 million against its credit facility with NationsBank to partially fund the acquisition. In the second half of 1994, the Company repaid $2.5 million of the loan using cash from operations. In 1995, the Company borrowed a net of $4.6 million against its NationsBank credit facility to finance exploration and drilling activities and stock repurchases in excess of cash generated by operating activities.
In the fourth quarter of 1995, Key purchased 331,000 shares of its own stock from Apache Corporation for $1.7 million, or $5.00 per share. In 1994, Key purchased 292,171 shares of its own stock for $1.3 million, or an average of $4.58 per share. In a non-cash transaction in 1994, the Company exchanged approximately 200,000 net undeveloped acres in the Green River Basin in Wyoming for 800,000 shares of Key common stock held by Apache. Transactions for the purchase of shares in 1993 were immaterial.
The Company's ratio of current assets to current liabilities was 1.1 to 1 at December 31, 1995, an increase from the 1 to 1 ratio calculated at December 31, 1994.
Management believes that cash on hand at year-end, net cash generated from operations and remaining amounts available under the existing line of credit will be adequate to meet future liquidity needs, including satisfying the Company's financial obligations and funding operations, exploration and development activities.
FUTURE TRENDS
Consistent with its stated objective over the last several years, the Company will continue to pursue expansion of its exploration and development activities in 1996. As discussed above, cash expenditures for exploration and development activities totaled $1.9 million, $6.1 million and $13.5 million in fiscal 1993, 1994 and 1995, respectively.
Total reserve additions in 1995 replaced 154% of that year's production and, on a year-end comparative basis, reserve quantities increased approximately 9% to 60.2 EBcf. Production for the year increased approximately 20% on an EMcf basis. These production and reserve quantity increases are primarily attributable to the results of successful drilling projects. The Company intends to continue to increase exploration and development expenditures. However, as in the past, Key will invest only in those projects that meet its economic investment criteria. Depending on the number and quality of drilling opportunities identified, total cash available under the credit facility combined with cash from operating activities may exceed the dollar amount of the investment opportunities identified. This has been the case in each of the last three fiscal years.
In December 1995, Key and Brock Exploration Corporation (Brock) entered into a definitive merger agreement that would combine the two companies. The agreement provides that each Brock stockholder will receive one share of Key common stock for each 1.45 Brock shares held. The transaction is subject to approval by stockholders of both companies and will be voted upon at special meetings of the respective stockholders on March 28, 1996. If the requisite approval is received, the merger will be close as soon as reasonably practicable thereafter. Based on information currently available, Key expects the transaction to be consummated.
Details of the merger and pro forma information about the combined companies is contained in a Joint Proxy Statement/Prospectus that was mailed to stockholders of both companies on or about February 16, 1996. As described therein, subsequent to the merger, Brock would be a wholly-owned subsidiary of Key. Administrative and accounting functions previously performed by Brock employees in Brock's offices in New Orleans, LA would be consolidated in Key's Denver office. Key expects to maintain a small staff of former Brock employees in Brock's exisiting New Orleans office. Personnel in that office will focus on exploration and acquisition activities. Key expects to realize significant administrative savings compared to the combined pre-merger expenses of the two companies.
In connection with the merger, Key will assume all of the assets and liabilities of Brock, including Brock's exisiting bank debt. The borrowing base under Key's line of credit with NationsBank is based on the value of its oil and gas properties. Key is currently negotiating with NationsBank to obtain an increase in its borrowing base using the reserve value of the combined companies. The Company expects to obtain this increase and will use the additional funds available under the facility to repay Brock's exisiting bank debt thereby taking advantage of Key's more favable interest rate terms.
Key will continue to pursue its strategy of centralized administration and regionally-decentralized exploration in 1996. Regional offices were opened in Tulsa, OK and Houston, TX in October, 1994 and March 1995, respectively, and as discussed above, consummation of the merger with Brock will add a regional office in New Orleans. Personnel in the regional offices will seek to identify attractive exploration and acquisition opportunities in their respective geographical areas with the overall corporate goal of increased production, reserves and profitability.
Key's regional efforts have historically been focused in the Rocky Mountain, Gulf Coast and Mid Continent areas. During 1995, Key launched exploration activities in a fourth regional area - California. Under the terms of a joint venture agreement with Mobil Exploration & Producing U.S. Inc. (Mobil), Key obtained exploration rights on approximately 15,000 gross acres of producing leasehold in the gas-prone Sacramento basin. To date, results have been encouraging with three of the four wells drilled completed as producers. These three wells were placed on production in January, February and March, 1996. These wells are currently producing and selling gas. Key has access to the 3-D seismic information previously obtained by Mobil and is in the process of conducting additional 3-D seismic surveys in the area. Additional drilling is planned in this area during 1996, although the exact number of wells to be drilled has not been determined at this time.
The Company expects that cash on hand, net cash generated by operating activities and amounts available under the credit facility will be adequate to meet future liquidity needs under corporate policies. Management believes that the overall sources of funds available to Key will continue to be sufficient to satisfy the Company's financial obligations and to provide resources for exploration, development and acquisition activities.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See following Index
KEY PRODUCTION COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the financial statements or related notes thereto.
KEY PRODUCTION COMPANY, INC.
STATEMENT OF INCOME
KEY PRODUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
The accompanying Summary of Significant Accounting Policies and Notes to Financial Statements are integral parts of this statement.
KEY PRODUCTION COMPANY, INC.
BALANCE SHEET
KEY PRODUCTION COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
The accompanying Summary of Significant Accounting Policies and Notes to Financial Statements are integral parts of this statement.
KEY PRODUCTION COMPANY, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF KEY PRODUCTION COMPANY, INC.
Key Production Company, Inc. (Key or the Company) was formed in 1988 to succeed to a portion of the assets and liabilities of Apache Petroleum Company L.P. (APC). From 1988 through the third quarter of 1992, the Company used operating cash flow and property sales proceeds to reduce debt, repurchase shares of its common stock and pay dividends. In light of its depleting reserves and increasingly disproportionate general and administrative costs, the Company began evaluating strategic alternatives for its future.
Since inception, all of Key's operating and managerial functions had been performed by Apache Corporation (Apache) under the terms of a management agreement between Key and Apache. On September 9, 1992, Key's board of directors announced its intention to establish a management team independent of Apache and to engage the Company in active operations. They appointed a board of directors unrelated to Apache. The newly-elected board announced its intention to discontinue semiannual dividend payments and use the Company's cash flows to actively pursue alternatives for increasing its reserve base.
Apache subsequently gave Key notice of its intent to dissolve APC Operating Partnership L.P. (APCOP) and, effective January 1, 1993, the parties entered into an agreement covering the distribution of APCOP's assets. Under the terms of the agreement, Apache assumed the majority of APCOP's trade payables and accrued liabilities plus a portion of its long-term debt in exchange for a portion of APCOP's current assets. APCOP's remaining assets were distributed to Apache and Key in accordance with their respective partnership interests. Immediately following the dissolution of APCOP, Key sold its interest in approximately 1,100 properties to Apache. The properties sold were primarily those with low individual values. These properties were sold to reduce the overhead Key would subsequently incur by accounting for numerous low-value properties.
Key is an independent oil and gas company engaged in oil and gas exploration, development and production in the continental United States. The Company's exploration interests are spread over 14 states with primary focus areas in the the Anadarko Basin of Oklahoma, California, the Rocky Mountain region, and the Gulf Coast.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Key for 1995, 1994 and 1993.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for its investment in oil and gas properties and, accordingly, capitalizes all exploration and development costs incurred for the purposes of finding oil and gas reserves, including dry hole costs, geological and geophysical costs and direct overhead related to exploration and development activities. Payroll and other internal costs capitalized include salaries and related benefits paid to employees directly engaged in the acquisition, exploration and development of oil and gas properties, as well as other specifically identifiable internal costs. Future development, site restoration, dismantlement and abandonment costs, net of salvage values, are estimated on a property-by-property basis using prevailing prices. No gains or losses are normally recognized on the sale or disposition of oil and gas properties under full cost accounting.
Key computes the provision for depreciation, depletion and amortization (DD&A) of oil and gas properties on a quarterly basis using the future gross revenue method. The quarterly provision is calculated by multiplying the quarter's oil and gas revenues by an overall rate determined by dividing the total unamortized cost of oil and gas properties including estimated future development costs (excluding the cost of investments in unproved and unevaluated properties) by the total estimated future oil and gas revenues.
Key limits the capitalized costs of oil and gas properties, net of accumulated DD&A, to the estimated future net cash flows from proved oil and gas reserves discounted at ten percent, plus the lower of cost or fair market value of unproved properties as adjusted for related tax effects. This limit may be particularly sensitive to changes in the near term in pricing and production rates. If capitalized costs exceed this limit, the excess is charged to DD&A expense. The Company has not recorded any such write-downs of capitalized costs for the three years ended December 31, 1995.
The costs of certain unevaluated leasehold acreage and wells in the process of being drilled are not amortized. Amortization commences when such costs are evaluated or upon completion of wells in progress. Costs not being amortized are periodically assessed for possible impairments or reductions in value. If a reduction in value has occurred, the portion of the carrying cost in excess of the current value is included in the costs subject to amortization. Interest costs related to undeveloped properties are also capitalized. Financing costs were reduced by capitalized interest totaling $574,000 and $309,000 in 1995 and 1994, respectively. No interest was capitalized during 1993.
Office furniture and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets which range from five to ten years.
REVENUE RECOGNITION
Key uses the sales method of accounting for natural gas revenues. Under this method, revenues are recognized based on actual volumes of gas sold to purchasers. The volumes of gas sold may differ from the volumes to which Key is entitled based on its interests in the properties. Differences between volumes sold and volumes based on entitlements create gas imbalances which are reflected as adjustments to reported gas reserves and future cash flows. Adjustments for gas imbalances reduced Key's proved gas reserves by approximately eight percent at December 31, 1995.
INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires an asset and liability approach to accounting for income taxes. A deferred tax liability or asset is determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities as measured by the enacted tax rates. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. In 1993, the Company recognized a one- time cumulative benefit of the accounting change on prior years of $1,603,000.
NET INCOME PER SHARE
Net income per share amounts are based on the weighted average number of common shares outstanding for each year. When dilutive, outstanding options to purchase common stock are included as share equivalents using the treasury stock method. In 1995, only one per share figure is presented because the fully diluted and primary earnings per share amounts are not materially different. For 1994 and 1993, the common stock equivalents were either antidiulutive or their inclusion did not materially affect the net income per share amounts.
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 5.3 percent rates of interest at December 31, 1995 and 1994, with cost approximating market.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the 1995 presentation.
TREASURY STOCK
Treasury shares were acquired in 1995, 1994 and 1993 under the Company's policy of repurchasing shares when market conditions appear favorable. Treasury stock is recorded at cost.
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ACQUISITIONS AND DIVESTITURES
On April 29, 1994, Key completed a transaction to purchase all the assets of a privately-held independent oil and gas company for $22.75 million. As of the effective date, October 1, 1993, the assets included 2.6 million barrels of oil, 8 billion cubic feet of natural gas and approximately 980,000 net undeveloped acres. Key used cash on hand and a $12.5 million draw on its credit facility to fund the acquisition.
The following unaudited pro forma information was prepared as if the acquisition occurred on January 1, 1993. The pro forma data presented is based on numerous assumptions.
2. DEBT
BANK FINANCING-The bank financing is a $50 million revolving credit facility with NationsBank of Texas, N.A. The Company entered into the agreement on April 25, 1994, to fund the above-mentioned acquisition and any future acquisition and drilling opportunities. In 1995, the Company elected to increase the borrowing base from $18 million to $22 million. The current borrowing base is still significantly less than the total borrowing base that could have been requested under the terms of the agreement.
Interest on amounts borrowed is charged at NationsBank's prime rate or at London Interbank Offered Rates (LIBOR) plus .5 to 1.125 percent, at the Company's option. The factor added to LIBOR is determined by the Company's debt to capitalization ratio at the time of borrowing. The average interest rate on the various maturities of debt outstanding at December 31, 1995, was 6.63 percent. Key pays a .25 percent fee on the unused portion of the borrowing base, as well as other fees of approximately $10,000 per year in return for the bank's commitment to maintain the availability of those funds. On April 1, 1997, the borrowing converts from a revolving loan to a term note. At that point, if not renegotiated before then, the Company must commence quarterly principal payments in addition to paying interest. The entire facility matures on January 1, 2000.
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with full cost accounting rules, the Company capitalizes interest expense on borrowings associated with undeveloped leasehold. For 1995 and 1994, the Company capitalized $574,000 and $309,000, respectively. No interest was capitalized for 1993.
The credit facility with NationsBank requires the Company to comply with certain covenants contained within the Credit Agreement (Agreement) until full and final payment of the obligaton and termination of the Agreement. The Company has been in compliance with the covenants since April 1994 when the Agreement was signed.
Aggregate maturities of long-term debt outstanding at December 31, 1995, are as follows:
The fair value for long-term debt is estimated based on current rates available for similar debt with similar maturities and securities, and at December 31, 1995, approximates the carrying value.
3. INCOME TAXES
The cumulative effect of the change in the method of accounting for income taxes attributable to fiscal years prior to 1993 was an increase in net earnings of $1,603,000 or $.16 per share, which has been reflected as a change in accounting method in the accompanying financial statements.
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax liabilities and assets are comprised of the following components at December 31, 1995 and 1994:
The Company had net tax operating loss carryforwards of approximately $4.8 million at December 31, 1995, which expire in the years 2003 through 2009.
In connection with adoption of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993, the Company established a valuation allowance for a portion of its deferred tax asset. At that time, it was unknown whether the Company would be able to fully utilize the net operating loss (NOL) carryforwards underlying the deferred tax asset.
In 1994, a significant portion of the NOL carryforwards were utilized in connection with a sale of non-producing leasehold and, based on current projections, it appears more likely than not that the Company will be able to utilize the remaining NOL carryforwards before they expire. As a result, the Company has determined that it is no longer necessary to provide a valuation allowance. This adjustment decreased the combined federal and state effective tax rate from 38 percent to approximately 19 percent for 1995.
Income tax expense consisted of the following:
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. NON-CASH INVESTING AND FINANCING ACTIVITIES
Supplemental Disclosure of Cash Flow Information
Supplemental Disclosure of Non-Cash Investing and Financing Activities
On July 19, 1994, the Company exchanged approximately 200,000 net undeveloped acres in the Green River Basin in Wyoming for 800,000 shares of Key common stock held by Apache and the formation of an exploration joint venture which gives Key the right to explore on all of Apache's non-Green River Basin acreage in Wyoming and access to all of Apache's seismic and other data in Wyoming. The trade involved approximately 25 percent of Key's Rocky Mountain acreage. The transaction value was based on the price for the Company's common stock at that date and, accordingly, Key reduced the carrying value of its undeveloped properties by $3.3 million.
5. STOCK OPTIONS
The Key Production Company, Inc. 1992 Stock Option Plan reserves 1,000,000 shares of common stock for issuance to the Company's officers and employees. A total of 500,000 options were outstanding at year end. The options expire at various dates through 2005 and are at prices ranging from $2.50 to $4.875 per share with an aggregate exercise price of $1,598,750.
The Key Production Company, Inc. Stock Option Plan for Non-Employee Directors reserves 180,000 shares of common stock for issuance to the Company's non-employee directors. There were 90,000 options outstanding at year end at an aggregate exercise price of $258,750. These options expire in 2002. No options have been granted since 1992.
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's president was granted options for 500,000 shares of the Company's common stock in 1992 in accordance with the terms of his employment agreement. These outstanding options were granted at an exercise price of $3.00 and expire in 2002.
All options granted had an exercise price equal to or above fair market value on the date of grant. Subject to accelerated vesting under certain circumstances such as death of the employee or change in control of the Company, one-third of the options vest in each of the three years following the date of grant. At December 31, 1995, a total of 840,000 outstanding options were vested.
The following table summarizes the changes in stock options for the year and the number of common shares available for grant at year end.
6. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN-The Company provides a 401(k) retirement/savings plan for all employees. This plan allows participants to contribute up to 10 percent of their compensation, with Key matching contributions up to a maximum of 4 percent of their compensation. The Company's contribution is made in the form of Key common stock. Employees vest in the Company's contribution at the rate of 25 percent per year. Total expenses for the Company's matching contribution were $55,362, $33,029 and $18,505 in 1995, 1994 and 1993, respectively. In connection with the annual testing required on all 401(k) plans, Key made qualified non-elective contributions for the benefit of all non-highly compensated employees. Qualified non-elective contribution expense was $23,056 and $11,980 in 1995 and 1994, respectively. The contribution was required to keep the plan qualified due to the top heavy status of the plan. No comparable contribution was required for 1993.
DEFERRED COMPENSATION PLAN-Effective December 1, 1993, the Company established the Key Production Company, Inc. Deferred Compensation Plan. This plan is intended to provide a mechanism whereby certain management employees of the Company may defer compensation. The Company intends this plan to provide the eligible employees with the opportunity to defer compensation in cases where deferrals under the 401(k) plan may be limited by applicable provisions of the Internal Revenue Code of 1986.
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME CONTINUANCE PLAN-Effective June 1, 1994, the Company established the Key Production Company, Inc. Income Continuance Plan. This plan provides for the continuation of salary and benefits for certain employees in the event of a change in control of the Company.
The administrative, compliance, and legal costs associated with administering these plans are paid by Key. Such expenses were not significant in 1995, 1994 or 1993.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS-The Company has leases for office space with varying expiration dates through 1998. Rental expense was $96,997, $52,683 and $13,746 for 1995, 1994 and 1993, respectively.
As of December 31, 1995, minimum rental commitments under these leases are payable in the following years:
LITIGATION-The Company is involved in litigation claims and is subject to governmental and regulatory controls arising in the ordinary course of business. It is the opinion of the Company's management that all claims and litigation involving the Company are not likely to have a material adverse effect on its financial position or results of operations.
ENVIRONMENTAL-The Company is not aware of any environmental claims existing as of December 31, 1995, which would have a material impact upon the Company's financial condition or the results of operations. Key does not believe that compliance with federal, state or local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have such an impact.
8. TRANSACTIONS WITH RELATED PARTIES
In connection with the APCOP dissolution, Key entered into an agreement with Apache whereby Apache provided accounting and administrative services to Key for the first four months of 1993. Key paid Apache $300,000 for services provided under this agreement.
During 1994, Key entered into three other transactions with Apache. As discussed in Note 4, in July 1994, Key exchanged approximately 200,000 net undeveloped acres in the Green River Basin of Wyoming for 800,000 shares of Key's common stock held by Apache. Later in July, 1994, Key purchased 200,000
KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares of its common stock from Apache at a price of $4.50 per share and in December, 1994, Key purchased an additional 91,000 shares from Apache at $4.75 per share.
In October, 1995, Key purchased 331,000 shares of its own stock from Apache at $5.00 per share.
9. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable at December 31, 1995 and 1994, result from oil and gas sales to other companies in the oil and gas industry. This concentration of customers may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by industry-wide changes in economic or other conditions. Such receivables are generally not collateralized.
The following parties purchased 10 percent or more of Key's oil and gas production:
Effective January 1, 1993, Key entered into an agreement with Apache under which Key pays Apache a fee to market the majority of its gas production that is not subject to traditional gas contract arrangements. From 1993 to 1995, the majority of Key's gas production marketed by Apache was sold to Natural Gas Clearinghouse (NGC).
10. SUBSEQUENT EVENT
On December 21, 1995, Key announced the signing of a definitive agreement to merge with Brock Exploration Corporation (Brock). The merger will be structured as a tax-free exchange with each Brock stockholder receiving one share of Key stock for each 1.45 Brock share held. The merger is subject to approval by the stockholders of both Key and Brock and certain other conditions. Both Key and Brock will submit the merger to their respective stockholders for approval at special meetings on March 28, 1996. Subject to stockholder approval and other conditions, the transaction will be consummated as soon as practicable in the Spring of 1996.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Key Production Company, Inc.:
We have audited the accompanying balance sheets of Key Production Company, Inc. (a Delaware corporation) as of December 31, 1995 and 1994, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Key Production Company, Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As explained in Note 3 to the financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Denver, Colorado, February 28, 1996.
KEY PRODUCTION COMPANY, INC.
SUPPLEMENTAL OIL AND GAS DISCLOSURES
OIL AND GAS OPERATIONS-The following tables contain revenues and direct cost information relating to the Company's oil and gas exploration and production activities for the periods indicated. Key has no long-term supply or purchase agreements with governments or authorities in which it acts as producer.
CAPITALIZED COSTS-The following table sets forth the capitalized costs and related accumulated depreciation, depletion and amortization relating to the Company's oil and gas production, exploration and development activities.
COSTS NOT BEING AMORTIZED-Oil and gas property costs not being amortized at December 31, 1995, consist of $9,104,000 of leasehold cost. Of the total, $2,270,000, $6,814,000 and $20,000 was incurred in 1995, 1994, and 1993, respectively.
OIL AND GAS RESERVE INFORMATION (UNAUDITED)-Proved oil and gas reserve quantities are based on estimates prepared by the Company's engineers, and were audited by Ryder Scott Company Petroleum Engineers, independent petroleum engineers, in accordance with guidelines established by the Securities and Exchange Commission (SEC). Reserve estimates are based on economic and operating conditions existing at December 31 of each year presented.
There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact. All of the Company's reserves are located in the continental or offshore United States.
FUTURE NET CASH FLOWS (UNAUDITED)-Future revenues are based on year end prices except in those instances where the sale of gas is covered by contract terms providing for determinable escalations. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
The following table presents information concerning future net cash flows from the production of oil and gas reserves, net of income tax expense. Income tax expense has been computed using expected future tax rates and giving effect to permanent differences and credits which, under current laws,
relate to oil and gas producing activities. This information does not purport to present the fair market value of Key's oil and gas assets, but does present a standardized disclosure concerning possible future net cash flows that will result under the assumptions used.
DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES RELATING TO PROVED RESERVES AT DECEMBER 31,
IMPACT OF PRICING (UNAUDITED)-The estimates of cash flows and reserve quantities shown above are based on year end oil and gas prices, except in those cases where future gas sales are covered by contracts at specified prices. Fluctuations are largely due to the seasonal pricing nature of natural gas, supply perceptions for natural gas and significant worldwide volatility in oil prices.
Under SEC rules, companies that follow full cost accounting methods are required to make quarterly "ceiling test" calculations. Under this test, capitalized costs of oil and gas properties may not exceed the present value of estimated future net revenues from proved reserves, discounted at 10 percent, plus the lower of cost or fair market value of unproved properties, as adjusted for related tax effects and deferred tax reserves. Application of these rules during periods of relatively low oil and gas prices, even if of short-term duration, may result in write-downs.
KEY PRODUCTION COMPANY, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Information About Nominees for Election as Directors" in the Company's proxy statement relating to the Company's 1995 annual meeting of stockholders (Proxy Statement) is incorporated herein by reference. Certain information with regard to the executive officers of the Company is set forth under the caption "Executive Officers of the Registrant" in Part I of this report.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table," "Aggregated Option Exercises In The Last Fiscal Year and Fiscal Year End Option Values," "Director Compensation," "Employment Agreements" and "Board Compensation Committee Report on Executive Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" in the Proxy Statement is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Transactions with Affiliates" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are included in Item 8 to this 10-K.
Statement of income for each of the three years in the period ended December 31, 1995.
Statement of cash flows for each of the three years in the period ended December 31, 1995.
Balance sheet as of December 31, 1995 and 1994.
Statement of changes in stockholders' equity for each of the three years in the period ended December 31, 1995.
Summary of significant accounting policies.
Notes to financial statements.
Report of independent public accountants.
Supplemental oil and gas disclosures.
Supplemental quarterly financial data.
2. Schedules: None.
3. Exhibits:
Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated.
Exhibits designated by a plus sign (+) are management contracts or compensatory plans or arrangements required to be filed herewith pursuant to Item 14.
Exhibit No. Description ----------- -----------
2.1 -- Dissolution Agreement and Quitclaim Assignment between APC Operating Partnership L.P., Apache Corporation and
the Registrant, dated as of January 1, 1993 (incorporated by reference to Exhibit 2.1 to the Registrant's Form 10-Q for the period ended March 31, 1993, file no. 0-17162).
2.2 -- Agreement and Plan of Merger dated as of December 21, 1995 among Key Production Company, Inc., Key Acquisition One, Inc. and Brock Exploration Corporation (incorporated by reference to Exhibit 2.2 to the Registrant's Statement on Form S-4, registration no. 333-00889 filed with the SEC on February 15, 1996).
3.1 -- Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4, registration no. 33-23533 filed with the SEC on August 5, 1988).
3.2 -- Amendment to Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4, registration no. 33-23533 filed with the SEC on August 5, 1988).
3.3 -- Bylaws of the Registrant, as amended and restated on June 8, 1995 (incorporated by reference to Exhibit 3.3 to the Registrant's Form 10Q for the quarter ended June 30, 1995, file no. 0-17162.
4.1 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.12 to the Registrant's Amendment No. 1 to Registration Statement on Form S-4, registration no. 33- 23533 filed with the SEC on August 15, 1988).
10.6 -- Standstill Agreement between Registrant and Apache Corporation dated March 1, 1990, effective February 1, 1990 (incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-K for the fiscal year ended December 31, 1991, SEC file no. 0-17162).
+10.7 - Key Production Company, Inc. 1992 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
+10.8 - Key Production Company, Inc. Stock Option Plan for Non- Employee Directors, (incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
+10.9 --Stock Option Agreement between the Registrant and Francis H. Merelli, dated September 1, 1992 (incorporated by reference to Exhibit 10.9 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
+10.10 --Key Production Company, Inc. 401(k) Plan (incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
+10.11 --Employment Agreement between the Registrant and Francis H. Merelli, dated as of September 1, 1992 (incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
+10.12 --Employment Agreement between the Registrant and Monroe W. Robertson, dated as of September 1, 1992 (incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
10.13 --Stock Appreciation Rights Agreement between Apache Corporation and Francis H. Merelli, dated September 1, 1992 (incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
10.14 --Stock Purchase Agreements between Apache Corporation and Francis H. Merelli, dated September 1, 1992 (incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992, file no. 0-17162).
10.15 --Purchase and Sale Agreement between Chorney Oil Company, The Estate of Raymond Chorney, Joan Chorney, Lancaster Corporation and Seabrook Corporation, collectively as seller, and Key Production Company, Inc., as buyer, dated April 29, 1994, effective October 1, 1993 (incorporated by reference to Exhibit 10.15 to the Registrant's Form 8-K dated April 29, 1994, file no. 0-17162).
10.16 --Credit Agreement between Key Production Company, Inc. and NationsBank of Texas, N.A., dated April 25, 1994 (incorporated by reference to Exhibit 10.16 to the Registrant's Form 8-K dated April 29, 1994, file no. 0- 17162).
10.17 --Purchase and Sale Agreement between Key Production Company, Inc., as seller; and Apache Corporation, as buyer, dated effective June 30, 1994 (incorporated by reference to Exhibit 10.17 to the Registrant's Form 10-Q for the quarter ended September 30, 1994, file no. 0-17162).
+10.18 --Key Production Company, Inc. Income Continuance Plan, dated effective June 1, 1994.
*24.1 --Consent of Arthur Andersen LLP dated February 28, 1996.
*27.1 --Financial Data Schedule for Commercial and Industrial Companies per Article 5 of Regulation S-X for the year ended December 31, 1995.
(b) Reports on Form 8-K:
On January 3, 1996, the Company filed a report dated December 21, 1995, on Form 8-K. The Form 8-K announced that Key Production Company, Inc. and Brock Exploration Corporation had entered into a definitive merger agreement that would combine the two companies.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KEY PRODUCTION COMPANY, INC.
By: /s/ F. H. Merelli _______________________________________ F. H. Merelli Date: March 28, 1996 Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ F. H. Merelli Director, Chairman, - --------------------------- President and Chief F. H. Merelli Executive Officer (Principal Executive Officer) March 28, 1996
/s/ Monroe W. Robertson Senior Vice President ____________________________ and Secretary Monroe W. Robertson (Principal Financial Officer) March 28, 1996
/s/ Cathy L. Anderson Controller ____________________________ (Principal Accounting Cathy L. Anderson Officer) March 28, 1996
/s/ Cortlandt S. Dietler Director March 28, 1996 ____________________________ Cortlandt S. Dietler
/s/ Timothy J. Moylan Director March 28, 1996 ____________________________ Timothy J. Moylan