SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
ANNUAL REPORT
Pursuant to Section 15(d) of the Securities Exchange Act of 1934
For the Year Ended December 31, 2003
Commission File Number 1-16619
Kerr-McGee Corporation Employee Stock Ownership Plan
(full title of the Plan)
Kerr-McGee Corporation
Kerr-McGee Center
Oklahoma City, Oklahoma 73102
(Name of the issuer of the securities held pursuant to
the Plan and address of its principal executive office)
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
DECEMBER 31, 2003 AND 2002
Report of Independent Registered Public Accounting Firm
Financial Statements
Statements of Net Assets Available for Benefits as of December 31, 2003 and 2002
Statement of Changes in Net Assets Available for Benefits for the year ended
December 31, 2003
Notes to Financial Statements
Supplemental Schedules
Schedule H, Line 4i - Schedule of Assets (Held at End of Year)
Schedule H, Line 4j - Schedule of Reportable Transactions
All other schedules required by the Employee Retirement Income Security Act of
1974 and the regulations promulgated by the Department of Labor have been
omitted since they are inapplicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Kerr-McGee Corporation Benefits Committee
Kerr-McGee Corporation Employee Stock Ownership Plan
We have audited the accompanying statements of net assets available for
benefits of Kerr-McGee Corporation Employee Stock Ownership Plan (the Plan) as
of December 31, 2003 and 2002, and the related statement of changes in net
assets available for benefits for the year ended December 31, 2003. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets available for benefits of the Plan at
December 31, 2003 and 2002, and the changes in its net assets available for
benefits for the year ended December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the
financial statements taken as a whole. The accompanying supplemental schedules
of assets (held at end of year) as of December 31, 2003, and reportable
transactions for the year then ended, are presented for the purposes of
additional analysis and are not a required part of the financial statements but
are supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. These supplemental schedules are the responsibility of the
Plan's management. The supplemental schedules have been subjected to the
auditing procedures applied in our audit of the financial statements and, in our
opinion, are fairly stated in all material respects in relation to the financial
statements taken as a whole.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
May 28, 2004
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
December 31, 2003
(Thousands of dollars)
ASSETS Unallocated Allocated Total
------ ----------- --------- -------
Common stock of Kerr-McGee Corporation $ 14,663 $68,766 $83,429
-------- ------- -------
Total investments 14,663 68,766 83,429
Dividends receivable 142 - 142
Interfund contributions receivable (payable) (784) 784 -
Interfund dividends receivable (payable) (678) 678 -
-------- ------- -------
Total assets 13,343 70,228 83,571
-------- ------- -------
LIABILITIES
Notes payable 38,288 - 38,288
Interest payable 241 - 241
-------- ------- -------
Total liabilities 38,529 - 38,529
-------- ------- -------
Net assets (liabilities) available
for benefits $(25,186) $70,228 $45,042
======== ======= =======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
December 31, 2002
(Thousands of dollars)
ASSETS Unallocated Allocated Total
------ ----------- --------- -------
Common stock of Kerr-McGee Corporation $ 27,897 $63,076 $90,973
-------- ------- -------
Total investments 27,897 63,076 90,973
Dividends receivable 285 - 285
Interfund contributions receivable (payable) (1,083) 1,083 -
Interfund dividends receivable (payable) (651) 651 -
-------- ------- -------
Total assets 26,448 64,810 91,258
-------- ------- -------
LIABILITIES
Notes payable 78,376 - 78,376
Interest payable 624 - 624
-------- ------- -------
Total liabilities 79,000 - 79,000
-------- ------- -------
Net assets (liabilities) available
for benefits $(52,552) $64,810 $12,258
======== ======= =======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
For the Year Ended December 31, 2003
(Thousands of dollars)
Unallocated Allocated Total
----------- --------- -------
Company contributions $ 41,850 $ - $41,850
Dividend income 773 2,690 3,463
Interest income 2 - 2
Appreciation of common stock 619 3,014 3,633
-------- ------- -------
Total additions 43,244 5,704 48,948
-------- ------- -------
Interest expense 4,959 - 4,959
Distributions to participants - 6,771 6,771
Transfers to (from) other fund 10,919 (10,919) -
Transfer to SIP - 4,434 4,434
-------- ------- -------
Total deductions 15,878 286 16,164
-------- ------- -------
Net increase 27,366 5,418 32,784
Net assets (liabilities) available
for benefits -
Beginning of year (52,552) 64,810 12,258
-------- ------- -------
End of year $(25,186) $70,228 $45,042
======== ======= =======
The accompanying notes are an integral part of this statement.
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
(1) PLAN DESCRIPTION
The Kerr-McGee Corporation Employee Stock Ownership Plan (the Plan) was
established in September 1989, and is designed to comply with the Internal
Revenue Code (the Code) Section 4975(e) and is subject to the applicable
provisions of the Employee Retirement Income Security Act of 1974, as
amended (ERISA). The Plan was amended and restated effective January 1,
2001. The Plan, a leveraged employee stock ownership plan, invests only in
the common stock of Kerr-McGee Corporation (the Company). The Plan covers
all employees of the Company and its subsidiaries who make salary deferrals
to the Kerr-McGee Savings Investment Plan (the SIP). Effective January 1,
1990, participant contributions to the SIP are matched by Company
contributions to the Plan. These participant contributions are matched
dollar-for-dollar by the Company, up to 6% of the participants'
compensation as defined under the Plan. In addition, effective September 1,
2001, participant contributions by bargaining employees to the Kerr-McGee
Pigments (Savannah) Inc., Employees Savings Plan (Savannah plan) are
matched at a rate of $.50 for every dollar contributed by the participant
up to 6% of the participant's compensation. Although the Plan, SIP and the
Savannah plan are separate plans, matching contributions to the Plan are
contingent upon participants' contributions to the SIP or Savannah plan.
Participants are not permitted to make contributions under the terms of the
Plan.
Effective January 1, 2000, eligible participants in the SIP have an annual
option to diversify up to 25% of their year-end Kerr-McGee stock balance in
the Plan into investment options available in the SIP. This option must be
exercised by March 31 of each year. The amount diversified during 2003 is
shown as Transfers to SIP on the Statement of Changes in Net Assets
Available for Benefits. Generally, participants who are at least age 55
with 10 years of participation in the Plan may withdraw their 25% instead
of diversifying within the SIP. They have this option for the first six
years after meeting the eligibility requirements.
The Company may direct State Street Bank and Trust Company (the Trustee) to
enter into acquisition loans for the purpose of acquiring Company stock for
the benefit of participants. Pursuant to that authority, the Trustee and
the Company entered into a Stock Purchase Agreement as of September 12,
1989. Under this agreement, the Plan purchased 2,680,965 shares of the
Company's common stock at $46.625 per share on November 29, 1989, the
market value on that date. To finance the purchase, the Plan incurred
indebtedness to a group of institutional investors in the aggregate
principal amount of $125,000,000 (see Note 4).
Company stock acquired with the proceeds of the initial loan is held in a
suspense account. The Company's matching contributions and dividends paid
on the common stock held in the loan suspense account are used to repay the
loan. Stock is released from the loan suspense account as the principal and
interest are paid. The stock is then allocated to participants' accounts at
market value as the Company matches contributions made to the SIP and
Savannah plan by participants. A total of 315,397 shares of stock pledged
to secure the debt remained in the suspense account at December 31, 2003.
Dividends paid on the common stock held in participants' accounts are also
used to repay the loan. Stock with a market value equal to the amount of
the dividend is allocated to the participants' accounts. If the value of
shares of Company stock released from the loan suspense account is not
sufficient to make the required matching and dividend allocations to
participants' accounts, the Company will contribute additional shares of
common stock or cash which may be used to purchase shares or to make
additional payments on the loan. All stock released from the loan suspense
account within the year must be allocated to participants' accounts by year
end. If the number of shares released is more than the required matching
and dividend allocation, the excess is allocated to participants.
Employees who are or become participants on or after January 1, 2000, are
100% vested in all Company matching contributions. A participant will
receive a distribution of his vested interest in his account only upon
termination of employment, retirement, death or permanent disability. No
other withdrawals are permitted, except for diversification after age 55 as
described above.
Distributions to participants are paid in a single sum consisting of shares
of stock or cash, at the election of the participant. Distributions are
recorded at the approximate market value as of the date of distribution.
Terminating participants with more than $5,000 in the Plan may defer
distribution until age 70 1/2. Investments relating to these participants
remain in the Trust until the terminated participant requests distribution.
Participants who defer distribution continue to share in earnings and
losses of the Plan.
The Plan is administered by the Kerr-McGee Corporation Benefits Committee
(the Committee), which is appointed by the Board of Directors of the
Company. Accounting and administration for the Plan are provided by the
Company at no cost to the Plan. In addition, all expenses of the Trust are
borne by the Company. During 2003, the Company paid $70,000 of
administrative and trust expenses on behalf of the Plan.
The Company intends to continue the Plan indefinitely, but reserves the
right to alter, amend, modify, revoke or terminate the Plan at any time
upon the direction of the Company's Board of Directors. If the Plan is
terminated for any reason, the Committee will direct that the participants'
account balances be distributed as soon as practical. Any unallocated funds
remaining in the Plan after all participants have received their account
balances may be disposed of as directed by the Company. The Company has no
continuing liability under the Plan after the final disposition of the
assets of the Plan.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting - The financial statements of the Plan are prepared
under the accrual method of accounting in accordance with U.S. generally
accepted accounting principles.
Use of Estimates - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of net
assets available for benefits and changes therein. Actual results could
differ from those estimates.
Investment Risk - The Plan provides for investment in Kerr-McGee
Corporation common stock, which is exposed to various market volatility
risks. Further, due to the level of risk associated with investments in
common stock, it is possible that changes in the values of the investment
will occur in the near term and that such changes could materially effect
the amounts reported in the statements of net assets available for
benefits.
Investment Valuations and Income Recognition - The Plan's investments are
stated at fair value, with the Company stock being valued at its quoted
market price. Purchases and sales of securities are recorded on a
trade-date basis. Interest income is recorded on the accrual basis.
Dividends are recorded on the ex-dividend date.
Payment of Benefits - Distributions to terminating and withdrawing
participants are recorded when paid.
(3) INVESTMENTS
The Plan's investment in the Company's common stock at December 31, 2003
and 2002, was as follows:
(Dollars in thousands) Unallocated Allocated Total
----------- --------- ---------
2003
----
Number of Shares 315,397 1,477,339 1,792,736
Cost $23,887 $68,107 $91,994
Market $14,663 $68,766 $83,429
2002
----
Number of Shares 629,723 1,425,281 2,055,004
Cost $47,692 $71,679 $119,371
Market $27,897 $63,076 $90,973
(4) NOTES PAYABLE
On November 29, 1989, the Plan borrowed $125,000,000 from a group of
institutional investors for the purpose of acquiring the Company's common
stock. This borrowing consisted of Series A notes in the amount of
$74,000,000 and Series B notes in the amount of $51,000,000. The Company
has guaranteed the Plan's indebtedness. In June 1996, the Plan issued a
$24,500,000 note, which bears interest at a fixed rate of 6.85%, to the
Company (the Sponsor note) and used the funds to prepay a portion of the
9.47% fixed-rate Series A notes. The remaining balance of the Series A
notes was paid on July 1, 1996, as scheduled. Scheduled principal payments
on the Sponsor note began in January 1997 and continued through January
2003. Principal payments on the 9.61% fixed-rate Series B notes began in
July 1998 and continue through January 2005.
Following the merger of Kerr-McGee Corporation and Oryx Energy Company
(Oryx), the Oryx Capital Accumulation Plan (CAP plan) was merged into the
Plan and the SIP during 1999. On August 1, 1989, the CAP plan borrowed $110
million by privately placing ESOP notes with Oryx. The borrowing consisted
of Series A, Series B and Series C sponsor notes with interest rates
ranging from 8.35% to 8.70%. Scheduled principal payments on the Series A
notes continue through July 2006. Principal payments on the Series B notes
begin in August 2005 and continue through July 2008. Principal payments on
the Series C notes begin in August 2008 and continue through July 2011.
During 2003, prepayments of $26,977,000 were made on the Oryx notes.
Notes payable consisted of the following at year end:
(Thousands of dollars) 2003 2002
------- -------
Sponsor note $ - $ 3,130
Series B notes 5,000 10,750
Oryx Series A sponsor notes 7,760 19,248
Oryx Series B sponsor notes 9,856 17,470
Oryx Series C sponsor notes 15,672 27,778
------- -------
$38,288 $78,376
======= =======
Maturities of notes payable due after December 31, 2003, are $6,739,000 in
2004, $5,087,000 in 2005, $3,940,000 in 2006, $4,263,000 in 2007,
$4,579,000 in 2008 and $13,680,000 thereafter.
(5) TAX STATUS
The plan obtained its latest determination letter dated September 18, 2003,
in which the Internal Revenue Service stated that the Plan is a qualified
plan under provisions of Section 401(a) and is exempt from Federal Income
taxes under provisions of Section 501(a) of the Code. Subsequent to this
determination by the Internal Revenue Service, the Plan was amended to
incorporate the final IRS regulations governing minimum required
distributions under Internal Revenue Code section 401 (a) (9). Once
qualified, the Plan is required to operate in conformity with the Code to
maintain its qualification. The Plan sponsor has indicated that it will
take the necessary steps, if any, to bring the Plan's operation into
compliance with the Code.
(6) CONTRIBUTIONS
The Company's 2003 cash contributions to the Plan totaled $41,850,000. In
addition, the Company declared $3,463,000 in dividends on the Company's
stock held in the Plan. Of the total contributions, $10,712,000 represents
the Company's matching contributions for employees' savings in the SIP and
$200,000 represents the Company's matching contributions for employees'
savings in the Savannah plan.
(7) SUBSEQUENT EVENT
On April 7, 2004, the Company and Westport Resources Corporation (Westport)
announced that their Boards of Directors had unanimously approved a
strategic merger. In connection with the merger, the Company expects to
issue approximately 49 million shares of common stock to Westport's
stockholders. The transaction is subject to approval by the stockholders of
both companies, as well as customary closing conditions. If approved, the
transaction is expected to be consummated in the second quarter of 2004,
shortly after the companies' respective shareholders meetings, which will
be held on June 25, 2004. The effect of the merger on the Plan and its net
assets, including the effect on the fair value of the Company's common
stock, if any, is not currently known.
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
(Employer Identification Number 73-1612389)
(Plan Number 014)
DECEMBER 31, 2003
(Thousands of dollars)
(b) (c) (e)
Identity of issue, borrower, lessor Description of investment including maturity date, (d) Current
(a)* or similar party rate of interest, collateral, par or maturity value Cost Value
---- ----------------------------------- --------------------------------------------------- ------- -------
* Kerr-McGee Corporation Common stock (1,792,736 shares) $91,994 $83,429
*Party-in-interest
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
SCHEDULE H, LINE 4j- SCHEDULE OF REPORTABLE TRANSACTIONS
(Employer Identification Number 73-1612389)
(Plan Number 014)
FOR THE YEAR ENDED DECEMBER 31, 2003
(Thousands of dollars)
(h)
Current
value
(c) (d) (g) of asset on (i)
(a) (b) Purchase Selling Cost of transaction Net gain
Identity of party involved Description of asset price price asset date or (loss)
-------------------------- -------------------- -------- ------- ------- ----------- ---------
Category (iii) - Series of Transactions in excess of 5% of the Plan Assets:
---------------------------------------------------------------------------
Kerr-McGee Corporation Common Stock $37,347 $ - $37,347 $37,347 $ -
Kerr-McGee Corporation Common Stock $ - $58,775 $64,724 $58,775 $(5,949)
There were no category (i), (ii) or (iv) reportable transactions during the year
ended December 31, 2003.
Columns (e) and (f) are not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Kerr-McGee Corporation Benefits Committee has duly caused this annual report to
be signed by the undersigned thereunto duly authorized.
KERR-McGEE CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
By (Robert M. Wohleber)
--------------------------------------
Robert M. Wohleber
Chairman of the Kerr-McGee Corporation
Benefits Committee
Date: June 18, 2004