UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 19971998
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 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, TenthTwentieth Floor, East Brunswick, NJ 08816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908)(732) 247-4822
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.10 par value AmericanNew York Stock Exchange
7% Convertible Subordinated None
Debentures Due 2003 None
5% Convertible Subordinated Notes Due 2004 None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Shares held by nonaffiliates of the
Registrant as of September 11, 19971998 was approximately $366,091,543.$154,884,755.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
Common Shares outstanding at September 11, 1997: 16,459,8941998: 18,284,048
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement with
respect to the Annual Meeting of Shareholders are incorporated by reference in
Part III of this report.
Key Energy Group, Inc. and Subsidiaries
INDEX
PART I.
Item 1. BusinessBusiness. 3
Item 2. Properties. 8
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of
Security Holders. 9
PART II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters. 10
Item 6. Selected Financial Data. 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operation. 12
Item 8. Financial Statements and Supplementary Data. 19
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure. 5251
PART III.
Item 10. Directors and Executive Officers of
the Registrant. 5251
Item 11. Executive Compensation. 5251
Item 12. Security Ownership of Certain Beneficial
Owners and Management. 5251
Item 13. Certain Relationships and Related
Transactions. 5251
PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 53
- 2 -52
Key Energy Group, Inc. and Subsidiaries
PART I.
ITEMSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 3. Legal
Proceedings", "Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of Key Energy
Group, Inc. (the "Company" or "Key") to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the volatility of oil and gas prices, the availability of capital resources,
operating hazards and uninsured risks, competition, and the ability of the
Company to implement its business strategy.ITEM 1. BUSINESS.
The Company
Key Energy Group, Inc. (the "Company" or "Key") is a leadingthe largest provider of
onshore oil and gas well services in the United States and second largest in
Argentina. As of June 30, 1997,1998, the Company operated a fleet of 523803 well service
rigs, 437 fluid hauling and
other733 oilfield trucks, and nine70 drilling rigs (including 16 workoverwell service rigs,
six28 oilfield trucks, and 3six drilling rigs in Argentina). As of June 30, 1997,1998,
Key's well service and workover rig fleet and fluid hauling and otheroilfield truck fleetfleets were the second largest and largest fleets,
respectively, onshore the continental United States. TheStates and the Company operated in
all major onshore oil and gas producing regions of the continental United
States, other than California and in Argentina. Including the consummation of
the subsequent acquisitions of Dawson Production Services, Inc. ("Dawson") and
the other well servicing companies referred to in "Subsequent Events" below, the
Company also operates in California and in the inland waters of the Gulf of
Mexico. Including completion of the subsequent acquisitions, the Company
operates a fleet of approximately 1,423 well service rigs, 1,121 oilfield
trucks, and 71 drilling rigs (including 20 well service rigs, 28 oilfield trucks
and six drilling rigs in Texas, New Mexico, Oklahoma,
Michigan,Argentina). After the Appalachian Basin and Argentina.subsequent acquisitions, the
Company is the world's largest provider of well service rigs.
The Company generally provides a full range of maintenance and workover services
to major and independent oil and gas companies in all of its operating regions.
In addition to maintenance and workover services, Key also provides services
which include the completion of newly drilled wells, the recompletion of
existing wells (including horizontal recompletions) and the plugging and
abandonment of wells at the end of their useful lives. Other services include
oil field fluid transportation, storage and disposal services, frac tank
rentals, fishing and rental tools, wireline services, air drilling, hot oiling
and hot oiling.following the Dawson acquisition, production testing services. In addition,
the Company is engaged in contract drilling in West
Texasseveral oil and gas producing
regions of the continental United States and Argentina, and owns and produces
oil and natural gas in the Permian Basin.
TheBasin and Texas Panhandle.
As of June 30, 1998, the Company conductsconducted operations through foureight directly or
indirectly wholly-owned subsidiaries:subsidiaries; Yale E. Key, Inc. ("Yale E. Key");
WellTech Eastern, Inc. ("WellTech Eastern"); WellTech Mid-Continent, Inc.
("WellTech Mid-Continent"); Odessa Exploration Incorporated ("Odessa
Exploration"); Brooks Well Servicing, Inc. ("Brooks""); Key Four Corners, Inc.
("Key Four Corners"); Key Rocky Mountain, Inc. ("Key Rocky Mountain") and Key
Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt"Key Energy Drilling"). In addition, Key operates in
Argentina through its 63% ownership (wholly-
owned as of July 1, 1997) ofwholly-owned subsidiary, Servicios WellTech, S.A.
("Servicios"). WellTech Eastern operates through two divisions: WellTech Mid-Continent
Division and WellTech Eastern Division. Yale E. Key, WellTech Eastern, WellTech Mid-Continent, Brooks,
Key Four Corners, Key Rocky Mountain and Servicios provide oil and gas well
services,services. In addition, WellTech Eastern, Key Four Corners, Servicios and Servicios ownsKey
Energy Drilling provide contract oil and gas well drilling rigs.services. Odessa
Exploration is engaged in the production of oil and natural gasgas.
Subsequent Events
On September 15, 1998, Midland Acquisition Corporation ("Midland"), a New Jersey
corporation and Clint Hurt provides contract oila wholly-owned subsidiary of the Company, completed its cash
tender offer (the "Tender Offer") for all outstanding shares of common stock,
par value $0.01 per share (the "Dawson Shares"), including the associated common
stock purchase rights, of Dawson at a price of $17.50 per Dawson Share. The
Tender Offer expired at 8:30 a.m., New York City Time, on Tuesday, September 15,
1998. Midland accepted for payment 10,021,601 Dawson Shares for a total purchase
price of approximately $175.4 million. The acceptance of tendered Dawson Shares,
together with Dawson Shares previously owned by Midland and gasthe Company prior to
the commencement of the Tender Offer resulted in Midland and the Company
acquiring approximately 97.0% of the outstanding Dawson Shares. The purchase
price for Dawson Shares pursuant to the Tender Offer and the merger agreement
was determined pursuant to arms-length negotiations between the parties and was
based on a variety of factors, including, without limitation, the anticipated
earnings and cash flows of Dawson.
The Tender Offer was made pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of August 11, 1998, by and among, Midland, the
Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger
Agreement, Midland was merged with and into Dawson (the "First Merger") under
the laws of the States of New Jersey and Texas and all Dawson Shares not owned
by Midland were cancelled and retired and converted into the right to receive
$17.50 in cash per Dawson Share. On September 21, 1998, Dawson was merged with
and into the Company (the "Second Merger") pursuant to the laws of the States of
Maryland and Texas.
The total consideration paid for the Dawson Shares pursuant to the Tender Offer
and the First Merger was approximately $181.7 million. The Company's source of
funds to pay such amount, certain outstanding debt of Dawson and the Company and
related fees and expenses was (i) a bridge loan agreement in the amount of
$150,000,000, dated as of September 14, 1998, among the Company, Lehman Brothers
Inc., as Arranger, and Lehman Commercial Paper Inc., as Administrative Agent,
and the other lenders party thereto (the "Bridge Loan Agreement") and (ii) a
$550,000,000 Second Amended and Restated Credit Agreement, dated as of June 6,
1997, as amended and restated through September 14, 1998, among the Company, PNC
Bank, National Association, as Administrative Agent, Norwest Bank Texas, N.A.,
as Collateral Agent, PNC Capital Markets, Inc., as Arranger and the other
lenders named from time to time parties thereto (the "Second Amended and
Restated Credit Agreement"). In connection with the Bridge Loan Agreement, the
Company entered into Registration Rights Agreements (the "Registration Rights
Agreements") with Lehman Brothers Inc. and Lehman Commercial Paper Inc. pursuant
to which the Company agreed to file with the Securities and Exchange Commission
(the "Commission") within a certain time period a registration statement with
respect to (i) an offer to exchange borrowings under the Bridge Loan Agreement
for a new issue of debt securities of the Company, and (ii) the resale of
warrants (and the shares of common stock of the Company to be issued upon the
exercise of such warrant) to purchase shares of common stock of the Company
issued to Lehman Brothers Inc. in connection with the Bridge Loan Agreement.
Loans outstanding after one year pursuant to the Bridge Loan Agreement will
convert into term loans which may be exchanged by the holders thereof for
exchange notes issued pursuant to an Indenture dated as of September 14, 1998
(the "Indenture"), between the Company and The Bank of New York, trustee.
At the time the Second Merger was consummated, the Company, its subsidiaries and
U.S. Trust Company of Texas, N.A., trustee ("U.S. Trust"), entered into a
Supplemental Indenture dated September 21, 1998 (the "Supplemental Indenture"),
pursuant to which the Company assumed the obligations of Dawson under the
indenture dated February 20, 1997 (the "Dawson Indenture") between Dawson and
U.S. Trust, most of the Company's subsidiaries guarantied those obligations and
the notes issued pursuant to the Dawson Indenture were equally and ratably
secured with the obligations under the Second Amended and Restated Credit
Agreement. Under the terms of the Dawson Indenture, the Company is required to
commence a cash tender offer to purchase at 101% of the aggregate principal
amount of the outstanding notes (which the outstanding amount is $140 million)
by mid-October 1998, the source of funds for which will be borrowings under the
Second Amended and Restated Credit Agreement.
Dawson operates approximately 527 well drilling servicesservice rigs, 200 oilfield trucks, and 21
production testing units in South Texas and the Gulf Coast, East Texas and
Louisiana, the Permian Basin of West Texas.
Subsequent Events
SubsequentTexas and New Mexico, the Anadarko Basin of
Texas and Oklahoma, California, and in the inland waters of the Gulf of Mexico.
In addition, subsequent to June 30, 1997,1998, the Company purchased the remaining 37%
interest in Servicios and completed the acquisition
of fourfive well servicing companies which collectively operate 83 well service and workover rigs
(including six in Argentina), three drilling rigs in Argentina, and 75 fluid
hauling and other trucks. The Company has also announced, subsequent to June
30, 1997, five acquisitions of well service companies and one acquisition of
a drilling company which collectively operate 15393 well service rigs
11(including four in Argentina), one drilling rigs, 91 fluid haulingrig, and other trucks and a fishing and rental
tool business. These six announced acquisitions are currently pending and
assuming their completion, the Company will have expanded its operating
presence into markets it previously did not serve, including the Rocky
Mountains, the Four Corners area, the Hugoton Basin, Northern Louisiana and
Arkansas. Upon completion of these pending acquisitions, Key's operations
will include 764 well service and workover rigs, 603 fluid hauling and other
trucks, 23 drilling rigs and numerous ancillary operations. Following the
closing of these acquisitions, the Company believes that, based upon the
number of active well service rigs and fluid hauling and other trucks, that
it would operate at that time, it will be the largest well service provider
onshore the continental United States and the second largest well service
provider in Argentina.188 oilfield trucks.
Growth Strategy
The domestic well service rig and production service industry has historically
been highly fragmented, characterized by a large number of smaller companies
which have competed effectively on a local basis in
- 3 -
terms of pricing and the
quality of services offered. In recent years, many major and independent oil and
gas companies have placed increasing emphasis upon not only pricing, but also on
safety records and quality management systems of, and the breadth of services
offered by, their vendors, including well servicing contractors. This market
environment, which requires significant expenditures by smaller companies to
meet these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As a result,
the industry has seen high levels of consolidation among the competing
contractors.
Over the past eighteen months,two and one-half years, Key has been a the leading consolidator of
this industry, completing twenty-three acquisitionsin excess of well
servicing operations (twenty-eight including pending transactions).fifty acquisitions. This consolidation
has led to reduced fragmentation in the market and has led to more predictable
demand for well services for the Company and its competitors. Key's management
structure is decentralized, which allows for rapid integration of acquisitions
and the retention of strong local identities of many of the acquired businesses.
AsThe Company, as a result,
of these and other factors, the Company has developed a growth strategy to: (i),subject to
restrictions under its existing credit facilities, identify, negotiate and
consummate additional acquisitions of complementary well servicing operations,
including rigs, trucking and other ancillary services; (ii) fully-integrate
acquisitions into the Company's decentralized organizational structure and
thereby attempt to maximize operating margins; (iii) expand business lines and
services offered by the Company in existing areas of operations; and (iv) extend
the geographic scope and operating environments for the Company's operations.
Oil Field Services
The Company provides a full range of well service rig services, oil field liquid
services and other production services necessary to maintain and workover
producing oil and gas wells through its wholly-owned subsidiaries, Yale E. Key, WellTech
Eastern, WellTech Mid-Continent, Brooks, Key Four Corners, Key Rocky Mountain,
and WellTech Eastern.Servicios. These services also include the completion of newly drilled
wells, the recompletion of existing wells (including horizontal recompletions)
and the plugging and abandonment of wells at the end of their useful lives.
Other services include oil field fluid transportation, storage and disposal
services, frac tank rentals, fishing and rental tools, wireline services, air
drilling, hot oiling, and hot oiling.following the Dawson acquisition, production testing
services. The Company has more than 7501,000 customers which are either major oil
and gas companies or independent producers seeking to optimize performance of
oil and gas wells. Although the mix of oil and gas wells serviced varies by
particular markets, approximately two-thirds of the Company's overall
business is attributable to oil wells. As of June 30, 1997,1998, of the Company's 523803 well service and workover rigs,
273299 operate in the Permian Basin of West Texas and New Mexico, 161187 in Oklahoma and East Texas, 79the
Mid-Continent Region, 80 in the ArkLaTex Region, 84 in Michigan and the
Appalachian Basin,Northeast, 29 in the Four Corners Region, 108 in the Rocky Mountain Region and
ten16 in Argentina.
Well Service Rig Services. The Company utilizes its fleet to perform four major
categories of service to oil and gas operators including:
Maintenance Services. Maintenance services are required on producing oil and gas
wells to ensure efficient and continuous operation. These services consist of
routine mechanical repairs necessary to maintain production from the well, such
as repairing parted sucker rods or defective down-hole pumps in an oil well, or
replacing defective tubing in an oil or gas well. The Company provides the well
service rigs, equipment and crews for these maintenance services. Many of these
well service rigs also have pumps and tanks (a workover package) that can be
used for circulating fluids into and out of the well. Maintenance jobs are often
performed on a series of wells in proximity to each other and typically take
less than 48 hours per well.
Maintenance services are generally required throughout the life of a well. The
need for these services does not directly depend on the level of drilling
activity and is generally independent of short-term fluctuations - 4 -
in oil and gas
prices. Accordingly, maintenance services are generally the most stable type of
well service rig activity. The general level of maintenance, however, is affected by
changes in the total number of producing oil and gas wells in the Company's
geographic service areas.
Workover Services. In addition to periodic maintenance, producing oil and gas
wells occasionally require major repairs or modifications, called "workovers."
Workover services include extensions of existing wells to drain new formations
either through deepening well bores or through drilling of horizontal laterals.
In less extensive workovers, the Company's rigs are used to seal off depleted
zones in existing well bores and access previously bypassed productive zones.
The Company's workover rigs are also used to convert producing wells to
injection wells for enhanced recovery operations. Workover services include
major subsurface repairs such as casing repair or replacement, recovery of
tubing and removal of foreign objects in the well bore. These extensive workover
operations are normally performed by a well service rig with a workover package, ,
which may include rotary drilling equipment, mud pumps, mud tanks and blowout
preventers depending upon the particular type of workover operation. Most of the
Company's well service rigs are designed for and can be equipped to perform
complex workover operations. A workover may last from a few days to several
weeks.
The demand for workover services is more sensitive to expectations relating to
and changes in oil and gas prices than the demand for maintenance services, but
not as sensitive as the demand for completion services. When oil and gas prices
are low, there is little incentive to perform workovers on wells to increase
production and well operators tend to defer such expenditures. As oil and gas
prices increase, the level of workover activity tends to increase as operators
seek to increase production by enhancing the efficiency of their wells.
Completion Services. Completion services prepare a newly drilled well for
production. The completion process may involve selectively perforating the well
casing to access producing zones, stimulating and testing these zones and
installing downhole equipment. The Company provides a well service and workover
package rig to assist in this completion process. Newly drilled wells are
frequently completed by a well service rig so that an operator can minimize the
use of a higher cost drilling rig. The completion process typically requires a
few days to several weeks, depending on the nature and type of the completion,
and generally requires additional auxiliary equipment which the Company provides
for an additional fee.
The demand for well completion services is directly related to drilling activity
levels, which are highly sensitive to expectations relating to and changes in
oil and gas prices. During periods of weak drilling demand, drilling contractors
frequently price well completion work competitively compared to a well service
rig so that the drilling rig stays on the job. Thus, excess drilling capacity
will serve to reduce the amount of completion work available to the well
servicing industry.
Plugging and Abandonment Services. Well service rigs and workover equipment are
also used in the plugging and abandonment of oil and gas wells no longer capable
of producing in economic quantities. The demand for oil and gas does not
significantly affect the demand for well plugging services.
Liquid Services. The Company provides vacuum truck services, frac tank rentals
and salt water disposal services which together provide an integrated mix of
liquid services to well site customers.
Production Testing Services. Dawson owns 21 gas production testing units that
are used to provide services to oil and gas wells located onshore and in inland
waters. Dawson performs production testing services for oil and gas producers
primarily along the Texas Gulf Coast.
Dawson's equipment includes several trailer-mounted manifolds, separators,
heater treaters, sand separators, light generators and slickline wireline units.
Manifolds are used to reduce the flowing pressure of the well stream to a rate
that will easily flow through the production testing equipment. After the
appropriate well stream rate is achieved, a separator is used to divide the well
stream into its respective components -- oil, gas and water. For gas wells, a
heater is used to prevent the gas from freezing during flowbacks. Slickline
wireline equipment generally is used to lower measurement equipment into a well
for several days to retrieve data to determine the characteristics of the
reservoir.
Dawson uses its production testing units to perform deliverability tests
required upon the initial completion of a well and periodically during the
productive life of a gas well to determine the maximum production allowable
under certain rules of the Texas Railroad Commission, the state oil and gas
regulatory agency. In addition, these units are used to clean and test
stimulated wells and to measure the pressure, volume and quality of gas and
liquids produced by the well. These units also are used to determine the most
efficient production flow rate, to run pressure build-up tests that measure the
rate of increase of shut-in gas pressure to determine reservoir characteristics
and to determine whether a producing formation has been damaged.
Other Production Services. The Company provides production services, which
include hot oiler unit services, pipeline installation and testing services,
slickline wire-line services and fishing and rental tool services.
- 5 -
Shallow Contract Drilling Services The Company, primarily through Clint Hurt,Key Energy Drilling,
owns and operates six71 drilling rigs and provides contract drilling services for
major and independent oil companies primarily in West Texas. On August 4, 1997, the Company
announced it had signed a letter of intent to acquire BRW Drilling,
Inc. ("BRW") for approximately $15.0 million in cash. BRW operates 7
drilling rigsmost onshore oil and related equipment in the Permian Basin of West Texas.
The closinggas producing areas
of the BRW acquisition is expected upon negotiation of a
definitive agreement, completion of the Company's standard due
diligence and receipt of regulatory clearances, if any are required.
Upon completion, the BRW acquisition will be combined with Clint Hurt's
drilling operations in the Permian Basin of West Texas to form a
thirteen rig shallow drilling operation.continental United States. The Company entered the land drilling business
in March 1995 with the acquisition of four drilling rigs from an independent
third party and, as the result of the WellTech
merger,subsequent acquisitions, acquired two67
additional land drilling rigs.rigs (six of which operate in Argentina). The rigs are
generally capable of drilling up to 10,000 feet.
Production The Company is engaged in the production of oil and natural gas in
the Permian Basin area of West Texas through its wholly-owned subsidiary, Odessa Exploration. Odessa
Exploration acquires and manages interests in producing oil and gas properties
for its own account and for drilling partnerships it sponsors. Odessa
Exploration acquires producing oil and gas wells and related properties from
major and independent producers and, subsequently, either reworks the acquired
wells to increase production or forms drilling ventures for additional
development wells. Odessa Exploration operates oil and gas wells on behalf of
over 250 working interest owners as well as for its own account.
Foreign Operations The Company provides oil field services in Argentina through
its 63%
ownership (wholly-owned as of July 1, 1997) of Servicios. As of June 30, 1997,1998, Servicios owned and operated ten16 well servicing
rigs and threesix drilling rigs in Argentina (which are currently idle and
undergoing refurbishment). On August 1, 1997, the Company completed the
acquisition of Kenting Holdings (Argentina) S.A. ("Kenting") for $10.1
million in cash. The Kenting assets included six oilwell service rigs,
three drilling rigs and related equipment in Argentina. The Kenting
assets are being operated by Servicios and are expected to more than
double the size of Servicios' operations based on revenues.
COMPETITION AND OTHER EXTERNAL FACTORS
Despite a significant amount of consolidation having occurred, the domestic well
service rig and production service industry is still
highlyremains somewhat fragmented and
includes a small number of companies that are capable of competing effectively
in all or part of the Company's well servicing markets. Nonetheless, the Company
believes that it is competitive in terms of pricing, performance, equipment,
safety, availability of equipment to meet customer needs and availability of
experienced, skilled personnel in those regions in which it operates.
In the well servicing market, an important competitive factor in establishing
and maintaining long-term customer relationships is having an experienced,
skilled and well trained work force. In recent years, many of the Company's
larger customers have placed emphasis not only on pricing, but also on safety
records and quality management systems of contractors. The Company believes that
such factors will be of increased importance in the future. The Company has
directed substantial resources toward employee safety and training programs, as
well as its employee review process. While the Company's efforts in these areas
are not unique, many competitors, particularly small contractors, have not
undertaken similar training programs for their employees. Management believes
that the Company's safety record and reputation for quality equipment and
service are among the best in the industry.
- 6 -
The Company acquires oil and gas properties from independent and major oil
companies and competes with other independent and integrated oil companies for
the acquisition of these properties. The Company also competes with other local
oil and gas drilling contractors, as well as national oil and gas drilling
companies. As with oil field services, the need for drilling oil and gas wells
fluctuates, in part, based on the price of, and demand for, oil and natural gas.
The Company serves over 7501,000 customers in West Texas, East Texas, New Mexico,
Oklahoma, Michigan,most oil and gas producing regions of
the Appalachian Basincontinental United States and Argentina with its two largest
customers providing 13% and 7%,Argentina. The Company had no single customer
in fiscal 1998 that provided 10% or more of total Company revenue during fiscal 1997.consolidated revenues.
The need for oilfield services fluctuates, in part, in relation to the demand
for oil and natural gas. As demand for those commodities increases, service and
maintenance requirements increase as oil and natural gas producers attempt to
maximize the producing efficiency of their wells in a higher priced environment.
EMPLOYEES
As of June 30, 1997,1998, the Company employed 3,1755,601 persons (3,047(4,982 in well service
operations, 12 in oil and gas production, 105587 in contract drilling operations
and 1120 in corporate). None of theThe Company's employees are not represented by a labor
union or collective bargaining agent. The Company has experienced no work
stoppages associated with labor disputes or grievances and considers its
relations with its employees to be satisfactory.
REGULATIONS
The oilfield service operations and the oil and gas production and drilling
activities of the Company are subject to various local, state and federal laws
and regulations intended to protect the environment. The Company's operations
routinely involve the handling of waste materials, some of which are classified
as hazardous substances. Consequently, the regulations applicable to the
Company's operations include those with respect to containment, disposal and
controlling the discharge of any hazardous oil field waste and other
non-hazardous waste material into the environment, requiring removal and cleanup
under certain circumstances, or otherwise relating to the protection of the
environment. Laws and regulations protecting the environment have become more
stringent in recent years, and may in certain circumstances impose "strict
liability," rendering a party liable for environmental damage without regard to
negligence or fault on the part of such party. Such laws and regulations may
expose the Company to liability for the conduct of, or conditions caused by,
others, or for acts of the Company which were in compliance with all applicable
laws at the times such acts were performed. Management of the Company believes
that it is in substantial compliance with all material federal, state and local
regulations as they relate to the environment. Although the Company has incurred
certain costs in complying with environmental laws and regulations, such amounts
have not been material to the Company's financial conditionresults during the three past
fiscal years.
Management believes that the Company is in substantial compliance with all known
material local, state and federal safety guidelines and regulations. In order to
comply with such safety guidelines and regulations and increase employee
awareness of on-the-job safety, the Company employs eightseven safety officers. The
Company also has a safety training and education center whichthat is used by it for
continued safety training and awareness.
- 7 -
ITEM 2. PROPERTIES.
The Company's corporate offices are located in East Brunswick, New Jersey and
Midland, Texas where the Company leases office space from an independent third
party.
Oil Field Services
The following table sets forth the type, number and location of the major
equipment owned and operated by the Company's oil field service subsidiaries as
of June 30, 1997:1998:
(table located on next page)
Well Service/ Fluid Hauling andDrilling Oilfield
Company Workover Rigs OtherRigs Trucks
- -------------------------------------------------------------------------------
Domestic:
Yale E. Key (Permian Basin of
West Texas and New Mexico) 299 - 215
WellTech Mid-Continent
(Mid-Continent Region) 187 - 91
Brooks (ArkLaTex Region) 80 2 105
WellTech Eastern (Michigan
and Northeast) 84 5 214
Key Rocky Mountain (Rocky
Mountains) 108 - -
Key Four Corners (Four Corners
Area) 29 17 80
Key Energy Drilling (West Texas
and New Mexico) 273 82
Mid-Continent Division
of WellTech Eastern (Texas
and Oklahoma) 161 105
Eastern Division of
WellTech Eastern (Michigan
and Appalachian Basin) 79 244- 40 -
International:
Servicios (Argentina) 1016 6 ----- -----
TOTAL 523 437
===== =====28
--- --- ---
TOTALS 803 70 733
=== === ===
Yale E. Key owns ten and leases six office and yard locations. TheWellTech
Mid-Continent Division of WellTech Eastern owns sevensixteen and leases fiveseventeen office and yard locations.
TheWellTech Eastern Division of WellTech Easternowns two and leases fourteen office and yard locations. Brooks
owns three and leases 11 office and yard locations. Key Rocky Mountain owns four
and leases twelveeight office and yard locations. Key Four Corners owns three and
leases two office and yard locations. Key Energy Drilling owns three and leases
one office and yard location. In Argentina, Servicios leases two office and yard
locations.
All operating facilities are metal one story office and/or shop buildings. All
buildings are occupied and considered to be in satisfactory condition.
Production
Odessa Exploration's properties consist primarily of oil and gas
leases. At June 30, 1997, Odessa Exploration operated and/or owned
interests in 467 wells. Odessa Exploration's major proved producing properties are located primarily in
the Permian Basin area of West Texas. Odessa Exploration leases office space in
Odessa, Texas.
As of June 30, 1997, the Company had interests in 446 gross (127 net)
oil wells and 21 gross (10 net) gas wells. As of such date,1998, the Company owned 71,360 gross (19,980 net) acres of developed acreage and no
undeveloped acreage. The Company had working interests in 13452 gross (12.5 net) development wells as of the same date.(332 proved
developed) oil properties and 60 gross (45 proved developed) gas properties.
During the fiscal year ended June 30, 1997,1998, the Company produced 178,121 bbls.223,009 barrels
of oil at an average sales price of $22.19$16.25 per bbls.,barrel and 1.23 Mcf1,396 MMcf of natural gas at
an average sales price of $2.74$2.44 per Mcf. Average production (lifting) costs were
$7.89$6.54 per barrel of oil equivalent bbls.(one barrel of oil.
- 8 -
oil equals six thousand cubic
feet of natural gas). The Company's reserves had a pre-tax SEC 10 value of
approximately $47.8 million as of June 30, 1998. The Company holds proved oil
and gas reserves of approximately 93.5 billion cubic feet of natural gas
equivalent (15.6 million barrels of oil equivalent) primarily in the Permian
Basin and Panhandle of West Texas.
ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS.
See Item 7,8, Note 4 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 9 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is currently traded on the AmericanNew York Stock Exchange,
under the symbol "KEG". Prior to April 1998, the Company's common stock was
traded on the American Stock Exchange. As of June 30, 1997,1998, there were 4981,143
holders of record of 12,297,75218,267,813 shares of common stock.stock outstanding.
The following table sets forth, for the periods indicated, the high and low
closing prices of the Company's common stock on the New York Stock Exchange for
the third and fourth quarters of fiscal 1998 and the American Stock Exchange for
the remaining quarters, as derived from published sources.
High Low
Fiscal Year Ending 1998:
First Quarter $ 34 1/2 $18 1/8
Second Quarter 37 3/4 17 1/4
Third Quarter 20 7/8 14
Fourth Quarter 19 1/2 13
Fiscal Year Ending 1997:
First Quarter $ 8 3/4 $ 7 1/2
Second Quarter 12 1/4 8 3/8
Third Quarter 14 7/8 11 3/8
Fourth Quarter 17 13/16 12 7/8
Fiscal Year Ending 1996:
First Quarter $ 4 3/4 $ 5 1/2
Second Quarter 4 15/16 6 7/16
Third Quarter 5 7/8 7 9/16
Fourth Quarter 7 1/16 8 1/2
There were no dividends paid on the Company's common stock during the fiscal
years ended June 30, 1998, 1997 1996 or 1995.1996. The Company does not intend, for the
foreseeable future, to pay dividends on its common stock. In addition, the
Company is contractually restricted from paying dividends under the terms of its
existing credit facilities.
Recent Sales of Unregistered Securities:
The Company effected the following unregistered sales of its securities during
the threetwelve months ended June 30, 1997.1998 that were not previously included in the
Company's Quarterly Reports filed for such period. Each of the following
issuances by the Company of the securities sold in the transactions referred to
below were not registered under the Securities Act of 1933, as amended, pursuant
to the exemption provided under Section 4 (2) thereof for transactions not
involving a public offering:
Effective as of June 25, 1997,March 19, 1998, the Company issued 240,000 shares of the
Company's common stock to certain selling shareholders as partial
consideration for the acquisition of all of the capital stock of Well-Co Oil
Service, Inc.
The Company issued,various employees, pursuant to
the Company's 1995 Employee Stock OptionKey Energy Group, Inc. 1997 Incentive Plan, various options to purchase shares of
the Company's common stock.
- 10 -Effective January 8, 1998, the Company issued a warrant to purchase 265,000
shares of Common Stock at an exercise price of $18.00 per share, subject to
certain adjustments, as partial consideration in connection with the purchase by
Key Rocky Mountain, a wholly-owned subsidiary of the Company, of substantially
all the capital stock of J.W. Gibson Well Service Company.
Item 6.
Selected Financial Data.
Five
Fiscal Fiscal Fiscal Fiscal Fiscal
Year FiscalYear Year(1) Fiscal Year Fiscal Year Seven Months Months (2)
Ended
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
November 30,
(in thousands) 1998 1997 1996 1995 1994
1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
- -------------------------------------------
Revenues $163,630 $66,478$420,046 $162,425 $65,857 $44,689 $34,621 $14,256 $10,433
Operating costs:
Direct costs 111,551 47,117288,951 111,250 46,962 32,793 26,585 10,863 7,947
Depreciation, depletion and amortization 11,42031,001 11,076 4,701 2,738 1,371
406 505
General and administrative 18,522 6,60839,813 17,545 6,142 4,352 3,540
1,587 1,117
Interest 7,53521,476 7,879 2,477 1,478 830 276 464
Income before income taxes, minority interest
reorganization items and extraordinary items 14,60238,805 14,675 5,575 3,328 2,295
1,124 400
Net income 24,175 9,098 3,586 2,178 1,345
711 4,986
Income per common share:
Primary:
Net income $0.75Basic $1.41 $0.81 $0.46 $0.33 $0.26
Diluted $1.23 $0.66 $0.45 $0.33 $0.26 $0.14 $0.28
Fully-diluted:
Net income $0.65 $0.44 $0.33 $0.25 $0.14 $0.03
Average common shares outstanding:
Primary 12,205Basic 17,153 11,216 7,789 6,647 5,274
Dilution 24,024 17,632 7,941 6,647 5,274 5,124 17,942
Assuming full dilution 17,963 8,114 6,647 5,288 5,138 176,508
Common shares outstanding at period end 18,267 12,298 10,414 6,914 5,274 5,124 17,942
Market price per common share at period end $13.12 $17.81 $8.19 $5.06 $4.67 $3.67 n/a
Cash dividends paid on common shares $ - $ - $ - $ - $ -
$ -
BALANCE SHEET DATA:
- -------------------------------------------
Cash $25,265 $41,704 $4,211 $1,275 $1,173
$623 *
Current assets 127,557 93,333 27,481 11,290 9,167
4,922 *
Property and equipment 547,537 227,255 96,127 36,336 18,935
10,093 *
Property and equipment, net 499,152 208,186 87,207 31,942 17,159
9,688 *
Total assets 698,640 320,095 121,722 45,243 28,095
15,906 *
Current liabilities 48,029 33,142 24,339 9,228 8,383
4,113 *
Long-term debt,obligations, including current portion399,779 174,167 46,825 15,949 11,501
5,374 *
Stockholders' equity 154,928 73,179 41,624 20,111 9,263
7,280 *
OTHER DATA:
- -------------------------------------------
EBITDA (3) 33,557 12,752(2) 91,282 33,630 12,753 7,544 4,496
1,806 *
Net cash (used)(used in) provided by:
Operating activities 1,30634,349 2,156 7,121 3,258 1,842
(123) *
Investing activities (299,763) (82,062) (13,551) (7,154) (5,608)
(1,284) *
Financing activities 118,249248,975 117,399 9,366 3,998 4,316
(73) *
Working capital 79,528 60,191 3,142 2,062 784 809 *
Book value per common share (4)(3) $8.48 $5.95 $4.00 $2.91 $1.76 $1.42 *
Ratio of earnings to fixed charges (5) $2.61 $2.77 $2.54 $2.65 $2.91 *(4) 2.61 2.52 2.62 2.57 2.65
* - Not applicable due to the Company's 1992
Reorganization Plan.
(1) Financial data for the year ended June 30, 1996 includes the allocated
purchase price of WellTech Eastern and the results of their operations,
beginning March 26, 1996.
(2) Financial Data for the five months ended November 30, 1992 and prior
periods reflect the previous capital structure of Key Energy Group, Inc.
(previously "National Environmental Group, Inc.") before the Company's 1992
Reorganization Plan and are not always comparable to subsequent periods.
(3) Net income before interest exp.,expense, income taxes, depreciation, depletion
and amortization. EBITDA is presented because of its wide acceptance as a
financial indicatorsindicator of a company's ability to service or incur debt. EBITDA
should not be considered as an alternative to operating net income, as defined
by generally accepted accounting principals, as indicators of the Company's
financial performance or to cash flow as a measure of liquidity.
(4)(3) Book value per common share areis stockholders' equity at period end of period divided by
the number of outstanding common shares at period end.
(5)(4) For purposes of computing the ratios of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and fixed
charges. Fixed charges consist of interest expenses, amortization of debt
issuance expenses and the portionsportion of rentalsrental and lease obligations representative
of the interest factor.
- 11 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Special Note: Certain statements set forth below under this caption consitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" for additional factors relating to
such statements.
The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this report.
Overview
The Company experienced its most successful year during fiscal 1997. All
regions have increased equipment use because of higher oil and gas prices,
increased emphasis on horizontal drilling, lower production costs for major and
independent oil and gas producers, renewed focus on domestic production and the
effects of several new alliances the Company entered into with its customers.
FluctuationsHistorically, fluctuations in well servicing activity have had a strong
correlation with fluctuations in oil and gas prices. IfDuring fiscal 1998, oil
and gas prices werehave decreased from an average of approximately $21 per barrel for West
Texas Intermediate crude oil in July of 1997 to drop
significantly from current levels,an average of approximately $12
per barrel in June of 1998. As a result, the Company would expectexperienced a decrease in
demand for drilling and services which wouldservices. Even though the Company experienced a
successful fiscal year ended June 30, 1998, in terms of earnings and earnings
per share compared to previous years, continued low oil prices may continue to
negatively affect the Company's operating performance. The Company seeks to
minimize the effects of such low oil prices and fluctuations of pricing on its
operations and financial condition through reduction of operating and capital
costs, diversification of services, entry into new markets and customer
alliances.
FISCAL YEAR ENDED JUNE 30, 19971998 VERSUS FISCAL YEAR ENDED JUNE 30, 19961997
Results of Operations
Operating Income
The Company
Revenues for the year ended June 30, 1998 increased $257,621,000, or 159%, from
$162,425,000 in fiscal 1997 to $420,046,000 in fiscal 1998, while net income for
fiscal 1998 increased $15,077,000, or 166% , from $9,098,000 in fiscal 1997 to
$24,175,000 in fiscal 1998. The increase was primarily due to well service and
oil and gas well drilling acquisitions throughout the year and increased well
service and oil and gas drilling revenues from existing equipment through the
third quarter of fiscal 1998.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1998 increased
$230,460,000, or 160%, from $144,385,000 for the year ended June 30, 1997 to
$374,845,000 for the year ended June 30, 1998. The increase is primarily
attributable to acquisitions throughout the year and higher equipment use
through the third quarter of fiscal 1998 resulting from an increase in demand
for oilfield services.
Oil and Natural Gas Well Drilling
Revenues from oil and gas well drilling activities increased $25,139,000, or
253%, from $9,956,000 during the year ended June 30, 1997 to $35,095,000 for the
year ended June 30, 1998. The increase was primarily the result of acquisitions.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $55,000, or 1%, from $6,975,000
during the year ended June 30, 1997 to $7,030,000 for the current year. The
increase was primarily the result of increased production in the current year
which was partially offset with a decrease in the average price of oil and
natural gas for fiscal 1998 as compared to fiscal 1997.
Operating Expenses
Oilfield Services Oilfield service expenses for the year ended June 30, 1998
increased $159,129,000, or 159%, from $100,366,000 for the year ended June 30,
1997 to $259,495,000 for the year ended June 30, 1998. The increase was due
primarily to acquisitions made throughout the fiscal year and the increased
demand for oilfield services through the third quarter of fiscal 1998.
Oil and Natural Gas Well Drilling
Expenses related to oil and gas well drilling activities increased $18,318,000,
or 225%, from $8,155,000 for the year ended June 30, 1997 to $26,473,000 for the
year ended June 30, 1998. The increase was primarily the result of acquisitions
throughout fiscal 1998.
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $253,000, or 9%, from
$2,729,000 for the year ended June 30, 1997 to $2,983,000 for the year ended
June 30, 1998. The increase was primarily the result of an increase in the total
number of producing oil and gas wells from fiscal 1997 to 1998.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $19,925,000, or 180%,
from $11,076,000 for fiscal 1997 to $31,001,000 for fiscal 1998. The increase is
primarily due to oilfield service depreciation expense, which is the result of
the acquisitions completed throughout fiscal 1998 and 1997.
General and Administrative Expenses
General and administrative expenses increased $22,268,000, or 127%, from
$17,545,000 for the year ended June 30, 1997 to $39,813,000 for the year ended
June 30, 1998. The increase was primarily attributable to oilfield service and
oil and gas well drilling acquisitions throughout the fiscal year.
Interest Expense
Interest expense increased $13,597,000, or 173%, from $7,879,000 for fiscal 1997
to $21,476,000 in fiscal 1998. The increase was primarily the result of debt
incurred in connection with acquisitions completed throughout fiscal 1998 and
1997.
Income Taxes
Income tax expense increased $9,057,000, or 163%, from $5,573,000 in income tax
expense for fiscal 1997 to $14,630,000 for fiscal 1998. The increase in income
taxes is primarily due to the increase in operating income. However, the Company
does not expect to be required to remit the total amount of the $14,630,000 in
total federal income taxes for fiscal year 1998 because of the availability of
net operating loss carryforwards and accelerated depreciation.
Cash Flow
Net cash provided by operating activities increased $32,193,000, or 1,493%, from
$2,156,000 during fiscal 1997 to $34,349,000 for fiscal 1998. The increase is
attributable primarily to the increase in net income in fiscal 1998 compared to
fiscal 1997 and decreases in accounts payable and accrued expenses and increases
in depreciation.
Net cash used in investing activities increased $217,701,000, or 265%, from
$82,062,000 for fiscal 1997 to $299,763,000 for fiscal 1998. The increase is
primarily the result of increased capital expenditures for well service
operations and well service and oil and gas well drilling acquisitions.
Net cash provided by financing activities increased $131,576,000 or 112% from
$117,399,000 for fiscal 1997 to $248,975,000 for fiscal 1998. The increase is
primarily the result of proceeds from long-term commercial paper and borrowings
under the Company's existing line-of-credit during the current fiscal year.
FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996
Operating Income
The Company
Revenues for the year ended June 30, 1997 increased $97,152,000,$96,568,000, or 146%147%, from
$66,478,000$65,857,000 in fiscal 1996 to $163,630,000$162,425,000 in fiscal 1997, while net income for
fiscal 1997 increased $5,512,000, or 154% , from $3,586,000 in fiscal 1996 to
$9,098,000 in fiscal 1997. The increase was primarily due to oilwellwell service
acquisitions throughout the year, increased oil and gas revenues from Odessa
Exploration, and increased oil and gas drilling revenues.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1997 increased
$88,452,000, or 158%, from $55,933,000 for the year ended June 30, 1996 to
$144,385,000 for the year ended June 30, 1997. The increase is primarily
attributable to acquisitions throughout the year and higher equipment use
resulting from an increase in demand for oilfield services.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $4,005,000,$3,421,000, or 96%, from
$4,175,000$3,554,000 during the year ended June 30, 1996 to $8,180,000$6,975,000 for the current
year. The increase was primarily the result of increased production of oil and
natural gas from several wells that were drilled and began production during
fiscal 1997, higher oil and natural gas prices for fiscal 1997, and the April
1996 purchase of $6.9 million of oil and gas properties from an unrelated third
party.
Of the total $8,180,000 of revenues for the year ended June 30, 1997,
approximately $6,975,000 was from the sale of oil and gas and $1,205,000
represented primarily administrative fee income.
- 12 -
Oil and Natural Gas Well Drilling
Revenues from oil and gas well drilling activities increased $3,768,000, or 61%,
from $6,188,000 during the year ended June 30, 1996 to $9,956,000 for the year
ended June 30, 1997. The increase was primarily the result of increased oilwellwell
drilling activity and an increase in the Company's pricing structure.
Operating Expenses
Oilfield Services
Oilfield service expenses for the year ended June 30, 1997 increased
$59,629,000, or 146%, from $40,737,000 for the year ended June 30, 1996 to
$100,366,000 for the year ended June 30, 1997. The increase was due primarily to
acquisitions made throughout the fiscal year and the increased demand for
oilfield services. In addition, the Company has continued to expand its
services, offering fishing tools, blow-out preventers and oilwell frac tanks.
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $1,680,000,$1,534,000, or 124%128%, from
$1,350,000$1,195,000 for the year ended June 30, 1996 to $3,030,000$2,729,000 for the year ended
June 30, 1997. The increase was primarily the result of costs associated with
several oil and natural gas wells that were drilled and began productingproducing during
fiscal 1997 and the April 1996 purchase of $6.9 million in oil and gas
properties.
Oil and Natural Gas Well Drilling
Expenses related to oil and gas well drilling activities increased $3,125,000,
or 62%, from $5,030,000 for the year ended June 30, 1996 to $8,155,000 for the
year ended June 30, 1997. The increase was primarily the result of increased
revenues.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $6,719,000,$6,375,000, or 143%136%,
from $4,701,000 for fiscal 1996 to $11,420,000$11,076,000 for fiscal 1997. The increase is
primarily due to oilfield service depreciation expense, which is the result of
increased oilfield service capital expenditures for the current period versus
the prior period and the acquisitions completed throughout fiscal 1997. In
addition, depletion expense increased for the period due to the increase in the
production of oil and natural gas.gas..
General and Administrative Expenses
General and administrative expenses increased $11,914,000,$11,403,000, or 180%186%, from
$6,608,000$6,142,000 for the year ended June 30, 1996 to $18,522,000$17,545,000 for the year ended
June 30, 1997. The increase was primarily attributable to oilfield service
acquisitions throughout the fiscal year.
Interest Expense
Interest expense increased $5,058,000,$5,402,000, or 204%218%, from $2,477,000 for fiscal 1996
to $7,535,000$7,879,000 in fiscal 1997. The increase was primarily the result of debt
incurred in connection with acquisitions completed throughout fiscal 1997.
- 13 -
Income Taxes
Income tax expense increased $3,612,000,$3,685,000, or 191%195%, from $1,888,000 in income tax
expense for fiscal 1996 to $5,500,000$5,573,000 for fiscal 1997. The increase in income
taxes is primarily due to the increase in operating income. However, the Company
does not expect to be required to remit a significant amount of the $5,500,000$5,573,000
in total federal income taxes for fiscal year 1997 because of the availability
of net operating loss carryforwards, accelerated depreciation and drilling tax
credits.
Cash Flow
Net cash provided by operating activities decreased $4,965,000, or 70%, from
$7,121,000 during fiscal 1996 to $2,156,000 for fiscal 1997. The decrease is
attributable primarily to increases in accounts receivable, decreases in
accounts payable and accrued expenses, but was partially offsetoff set by increases in
depreciation and net income.
Net cash used in investing activities increased $68,511,000, or 506%, from
$13,551,000 for fiscal 1996 to $82,062,000 for fiscal 1997. The increase is
primarily the result of increased capital expenditures for oilwellwell service
operations and oilwellwell service acquisitions.
Net cash provided by financing activities was $117,399,000 for fiscal 1997 as
compared to $9,366,000 for fiscal 1996, which represents an increase of
$108,033,000, or 1,153%. The increase, which is partially offset by repayments
of long-term debt, is primarily the result of proceeds from the existing
Debentures and commercial paper during the current fiscal year.
- 14 -
FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995
Operating Income
The Company
Revenues for the year ended June 30, 1996 increased $21,789,000, or 49%,
from $44,689,000 for the year ended June 30, 1995 to $66,478,000 for the year
ended June 30, 1996, while net income increased $1,408,000, or 65%, from
$2,178,000 in fiscal 1995 to $3,586,000 in fiscal 1996. The increase in revenues
was primarily due to the acquisition of Clint Hurt Drilling in March 1995, whose
operations were only included for one quarter in the 1995 year-end results,
increased oil and gas revenues from Odessa Exploration and increased oilwell
service equipment use and the acquisition of WellTech. The increase in fiscal
year 1996 net income over fiscal year 1995 net income was partially attributable
to the inclusion of Clint Hurt Drilling and the acquisition of WellTech Eastern,
but also was a result of an increase in oilwell service equipment use and a
decrease in total consolidated Company costs and expenses as a percentage of
total revenues.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1996 increased
$15,828,000, or 40%, from $40,105,000 for the year ended June 30, 1995 to
$55,933,000 for the year ended June 30, 1996. The increase in revenues was
primarily attributable to higher equipment use resulting from an increase in
demand for oilfield services and the acquisition of WellTech Eastern, whose
operating results were included for the period of March 26, 1996 to June 30,
1996.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $1,841,000, or 79%, from
$2,334,000 during the year ended June 30, 1995 to $4,175,000 for the year ended
June 30, 1996. The increase in revenues was primarily the result of increased
production of oil and natural gas from several wells that were drilled during
1996, higher oil and natural gas prices during 1995 and the April 1996 purchase
of $6.9 million of oil and gas properties from an unrelated third party.
Of the total $4,175,000 of revenues for the year ended June 30, 1996,
approximately $3,554,000 was from the sale of oil and gas and the remaining
$621,000 was attributable primarily to administrative fee income and other
miscellaneous income.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by Clint Hurt
Drilling which was acquired in March 1995. Comparable numbers for the prior year
are, therefore, not available. Revenues for the year ended June 30, 1996 were
$6,188,000.
Operating Expenses
Oilfield Services
Oilfield service expenses for the year ended June 30, 1996 increased
$10,145,000, or 33%, from $30,592,000 for the year ended June 30, 1995 to
$40,737,000 for the year ended June 30, 1996. The increase was due primarily to
the acquisition of WellTech Eastern on March 26, 1996, and an increased demand
for oilfield services.
- 15 -
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $593,000, or 78%, from
$757,000 for the year ended June 30, 1995 to $1,350,000 for the year ended June
30, 1996. The increase was primarily the result of increased production of oil
and natural gas from several wells that were drilled during fiscal 1996 and the
April 1996 purchase of $6.9 million in oil and gas properties.
Oil and Natural Gas Well Drilling
Clint Hurt Drilling was acquired in March 1995. Comparable numbers for the
prior year are, therefore, not available. Expenses for the year ended June 30,
1996 were $5,030,000.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $1,963,000, or
72%, from $2,738,000 for fiscal 1995 to $4,701,000 for fiscal 1996. The increase
was primarily due to oilfield service depreciation expense, which resulted from
an increase in oilfield service capital expenditures for the 1996 period versus
the prior period and the acquisition of WellTech and Clint Hurt. In addition,
depletion expense increased for the period due to the increase in the production
of oil and natural gas.
General and Administrative Expenses
General and administrative expenses increased $2,256,000, or 52%, from
$4,352,000 for the year ended June 30, 1995 to $6,608,000 for the year ended
June 30, 1996. The increase was primarily attributable to the acquisition of
contract drilling assets, the subsequent inclusion of general and administrative
expenses related to contract drilling operations and the acquisition of WellTech
Eastern.
Interest Expense
Interest expense increased $999,000, or 68%, from $1,478,000 for fiscal
1995 to $2,477,000 for fiscal 1996. The increase was primarily the result of
acquisitions and the addition of certain oil and gas properties that were
financed with proceeds from borrowings.
Income Taxes
Income tax expense for fiscal 1996 increased $738,000, or 64%, from
$1,150,000 in fiscal 1995 to $1,888,000 in fiscal 1996. The increase was
primarily due to an increase in operating income. However, the Company was not
required to remit a significant amount of the $1,888,000 in total federal income
taxes for fiscal year 1996 because of the availability of net operating loss
carryforwards, accelerated depreciation and drilling tax credits.
Cash Flow
Net cash provided by operating activities increased $3,863,000, or 119%,
from $3,258,000 during fiscal 1995 to $7,121,000 for fiscal 1996. The increase
was attributable primarily to increases in net income.
Net cash used in investing activities increased $6,397,000, or 89%, from
$7,154,000 for fiscal 1995 to $13,551,000 for fiscal 1996. The increase was
primarily the result of increased capital expenditures for oil and gas
properties and costs associated with the acquisition of WellTech. This increase
was partially offset by a decrease in oilfield service capital expenditures.
- 16 -
Net cash provided by financing activities increased $5,368,000, or 134%,
from $3,998,000 in fiscal 1995 to $9,366,000 in fiscal 1996. The increase is
primarily the result of increased principal payments during fiscal 1996. This
increase in principal payments was somewhat offset by an increase in proceeds
from long-term debt during fiscal 1996 as the result of the purchase of oil and
gas properties by Odessa Exploration and the acquisition of WellTech.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increaseddecreased by $37.5$16.4 million for the year
ended June 30, 19971998 from $4.2 million as of June 30, 1996 to $41.7 million as of June 30, 1997. This increase was primarily the result1997 to $25.3 million as
of proceeds from
the Bank Credit Agreement.June 30, 1998.
The Company has projected, $20without consideration of acquisitions subsequent to
June 30, 1998, $51 million for oilfield service capital expenditures for fiscal
19981999 as compared to $15.1$44.3 million and $5.2$15 million in fiscal 19971998 and 1996,1997,
respectively. Odessa Exploration has projected outlays of approximately $10$6
million in development costs for fiscal 1998,1999, as compared to $8.2$7.8 million and
$9.8$8.2 million in fiscal 1998 and 1997, and 1996, respectively. Clint Hurt
Drilling has forecast approximately $2 million forThe Company's oil and gas
well drilling operations have forecast approximately $5 million for capital
expenditures for fiscal 1998,1999, primarily for improvements to existing equipment
and machinery, as compared to $1.5$5.4 million for fiscal 19971998 and $598,000$1.5 million in
fiscal 1996.1997. The Company expects to finance these capital expenditures and
development costs using cash flows from operations and available credit. The
Company believes that its cash flows and, to the extent required, borrowings
under the BankSecond Amended and Restated Credit Agreement, will be sufficient to
fund such expenditures.
Debt
InOn June 6, 1997, the Company entered into the Credit Agreementan agreement (the "Bank"Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, Norwest
Bank Texas, N.A., as collateral agent, Lehman Commercial Paper, Inc., as
advisor, arranger and a
syndication agent and theof other lenders named therein pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on LIBOR and
the level of the Company's indebtedness. The Initial Credit Agreement contained
certain restrictive covenants and required the Company to maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).
Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as
administrative agent and lender, pursuant to which PNC agreed to make availablerevolving
credit loans of up to a maximum loan commitment of $200 million. The maximum
commitment decreases to $175 million on November 6, 2000 and to $125 million on
November 6, 2001. The loan commitment terminates on November 6, 2002. Borrowings
under the credit facility may be either (i) Eurodollar Loans with interest
currently payable quarterly at LIBOR plus 1.25% subject to adjustment based on
certain financial ratios, (ii) Base Rate Loans with interest payable quarterly
at the greater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2%,
or (iii) a combination thereof, at the Company's option. The Amended PNC Credit
Agreement contains certain restrictive covenants and requires the Company to
maintain certain financial ratios. A change of control of the Company, as
defined in the Amended PNC Credit Agreement, is an event of default. Borrowings
under the Amended PNC Credit Agreement are secured by substantially all of the
assets of the Company and its domestic subsidiaries.
Effective December 3, 1997, PNC completed the syndication of the Amended PNC
Credit Agreement. In connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to the
Compaany a five-year
revolving credit faciltyAmended and Restated Credit Agreement (the "Amendment to Amended PNC Credit
Agreement") providing for, among other things, an increase in the amountmaximum
commitment to $250 million from $200 million.
On September 25, 1997, the Company completed an initial closing of $135 million and a seven-year term
loan facility in the amountits private
placement of $120 million. Up to $10$200 million of letters5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of credit may be issuedits
private placement of an additional $16 million of Notes pursuant to the Bank Credit Agreement.exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of the Notes. The amount of
letters of credit outstanding from time to time reduces the amount of revolving
credit loans which may be outstanding.
Revolving credit loans incurredplacements were made as private offerings pursuant
to Rule 144A under the BankSecurities Act of 1933. The Notes are subordinate to the
Company's senior indebtedness, which, as defined in the indenture under which
the Notes were issued, includes the borrowings under the Amended PNC Credit
Agreement, will
bear interest,as amended. The Notes are convertible, at the holder's option, into
shares of Common Stock at a conversion price of $38.50 per share, subject to
certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures are subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Amended PNC Credit Agreement, as amended.
The Debentures are convertible, at PNC's base rate plus 1.00% or LIBOR
plus 2.25% and term loans will bear interest,any time prior to maturity, at the Company'sholders'
option, into shares of Common Stock at PNC's
base rate plus 1.75% or LIBOR plus 2.75%. After September 30, 1997, the margin
applicablea conversion price of $9.75 per share,
subject to revolving credit loans will fluctuate from timecertain adjustments. In addition, Debenture holders who convert prior
to time between
0.25% and 1.25% with respect to base rate loans and between 1.50% and 2.50% for
LIBOR based loans. Such fluctuationsJuly 1, 1999 will be based onentitled to receive a payment, in cash or Common Stock
(at the Company's ratiooption), generally equal to 50% of consolidated total debt (netthe interest otherwise
payable from the date of cashconversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in excesscontrol of $5 million)the Company,
as defined in the indenture under which the Debentures were issued, each holder
of Debentures will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Debentures within 60 days
of such event at a pro forma
calculationprice equal to 100% of consolidated earnings beforethe principal amount thereof, together
with accrued and unpaid interest thereon.
As of June 30, 1998, $47,400,000 in principal amount of the Debentures had been
converted into 4,861,538 shares of common stock at the option of the holders. An
additional 165,423 shares of common stock were issued representing 50%
of the interest otherwise payable from the date of conversion through July 1,
1999, and an additional 35,408 shares of common stock were issued as an
inducement to convert. The additional 165,423 shares of common stock,
representing 50% of the interest otherwise payable from the date of conversion
through July 1, 1999, are included in equity. The fair value of the additional
35,408 shares of common stock issued as inducement to convert was $710,186 and
is recorded as interest expense taxes and
depreciation, depletion and amortization.
The Company usedin the proceeds fromconsolidated statement of operations. In
addition, the Bank Credit Agreement to: (i) repay
existing debt; (ii) make additional acquisitions and capital expenditures; and
(iii) provide working capital. Long-termproportional amount of unamortized debt that was repaid with proceeds from
the Bank Credit Agreement in June 1997 included all debt with CIT Group/Credit
Finance, Inc. of approximately $54.3 million and all bank debtissuance costs associated
with Odessa Exploration, previously with Norwest Bank Texas, N.A.,the converted Debentures was charged to additional paid-in capital at the
time of approximately
$2.1 million.
- 17 -
conversion.
Impact of SFAS 121
As of July 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFASFAS 121"). Consequently, the
Company reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. Long-lived assets to be disposed of are to be
accounted for at the lower of carrying amount or fair value less cost to sell
when management has committed to a plan to dispose of the assets. All companies,
including successful efforts oil and gas companies, are required to adopt SFASFAS
121 for fiscal years beginning after December 15, 1995. In order to determine
whether an impairment had occurred, the Company estimated the expected future
cash flows of its income producing equipment and oil and gas properties and
compared such future cash flows to the carrying amount of the asset to determine
if the carrying amount was recoverable. Based on this process, no writedown in
the carrying amount of the Company's property was necessary at June 30, 1997.1998.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effective for periods ending on or after December 15, 1997. FAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted
EPS.The Company will adopt SFAS 128 for the quarter ended December 31, 1997.
Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Specifially, SFAS 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
forin the first quarter of its fiscal year ended June 30, 1999.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that company's report information about
operating segments in annual financial statements and requires that those
company's report selected information about operating segments in interim
financial reports issued to shareholders. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 need not be applied to interim financial
statements in the initial year of its application. However, comparative
information for interim periods in the initial year of application is to be
reported in the financial statements for interim periods in the second year of
application. The Company will adopt SFAS 131 for the fiscal year ended June 30,
1999.
Management believes the adoption of SFAS 128, SFAS 130 and SFAS 131 will
not have a material effect on its financial position or results of operations of
the Company.
Impact of Inflation on Operations
Management is of the opinion that inflation has not had a significant impact on
the Company's business.
- 18 -
Year 2000 Issue
As a result of the acquisitions completed by the Company over the past
twenty-four months, the Company utilizes several management information systems
in connection with its business operations and financial reporting process. The
Company made an assessment of its Year 2000 issues, and determined that many of
these management information systems would be adversely impacted by the arrival
of the Year 2000.
Accordingly, for operational efficiency, and to prevent any adverse impacts that
may result from the arrival of the Year 2000, the Company is currently
implementing a new integrated management information system along with updated
hardware that will replace most of the systems currently utilized. The
implementation of the new management information system, which is Year 2000
compliant, began in July of 1998 and is scheduled to be completed by June of
1999, assuming no unforeseen circumstances which are beyond the Company's
control. Year 2000 issues as they relate to suppliers and customers remain to be
evaluated by the Company. However, based on current available information, the
Company does not anticipate that the costs associated with any necessary
modifications will be material to the Company's operations or financial
condition.
The cost of the new management information system, (a large part of which
management expects will be capitalized) is not expected to have a material
impact on the Company's business, operations or results thereof, financial
condition, liquidity or capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Presented herein are the consolidated financial statements of Key Energy Group,
Inc. and Subsidiaries as of June 30, 19971998 and 19961997 and the years ended June 30,
1998, 1997 1996 and 1995.1996.
Also, included is the report of KPMG Peat Marwick LLP, independent certified
public accountants, on such consolidated financial statements as of June 30,
19971998 and 19961997 and for the years ended June 30, 1998, 1997 1996 and 1995.1996.
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets................................Sheets 20
Consolidated Statements of Operations ..................... 21
Consolidated Statements of Cash Flows ..................... 22
Consolidated Statements of Stockholders' Equity ........... 23
Notes to Consolidated Financial Statements ................ 24
Independent Auditors' Report ................................ 51
- 19 -50
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, June 30,
(Thousands, except share and per share data) 1998 1997
1996
------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $25,265 $41,704 $ 4,211
Accounts receivable, net of allowance for
doubtful accounts ($1,552( $2,843 - 1997, $9921998, $1,552 - 1996)1997) 82,406 45,230
20,570
Inventories 13,315 5,171
1,957Deferred tax asset 1,203 -
Prepaid income taxes 537 -
Prepaid expenses and other current assets 4,831 1,228
743
------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 127,557 93,333
27,481
------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 400,731 176,326 66,432
Oil and gas well drilling equipment 61,629 6,319 4,862
Motor vehicles 19,748 10,569 1,159
Oil and gas properties and other related equipment, successful efforts method 42,638 23,622 17,663
Furniture and equipment 5,333 1,661 716
Buildings and land 17,458 8,758
5,295
------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------
547,537 227,255 96,127
Accumulated depreciation & depletion (48,385) (19,069)
(8,920)
------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 499,152 208,186
87,207
------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------
Goodwill, net of amortization ($2,264 - 1998; $822 - 1997) 44,936 9,256
Other Assets 18,576 7,034
------------------------------------------------------------------------------26,995 9,320
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $698,640 $320,095
$121,722
==============================================================================================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $20,124 $15,339 $11,086
Other accrued liabilities 22,239 12,507 11,002
Accrued interest 3,818 2,102 417
Accrued income taxes - 1,664 53
Deferred tax liability - 126 310
Current portion of long-term debt 1,848 1,404
1,471
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 48,029 33,142
24,339
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 397,931 172,763 45,354
Non-current accrued expenses 4,812 4,017 4,909
Deferred tax liability 92,940 35,738 4,244
Minority interest - 1,256 1,252
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 25,000,000100,000,000 shares authorized,
18,684,479 and 12,297,752 shares issued, respectively
at June 30, 1998 and 10,413,513
sharesissued1997, respectively 1,868 1,230
Additional paid-in capital 119,303 55,031
Treasury stock, at cost; 416,666 shares at June 30, 1998 and
outstandingnone at June 30, 1997 and 1996, respectively 1,230 1,041
Additional paid-in capital 55,031 32,763(9,682) -
Unrealized gain on available-for-sale securities 2,346 -
Retained earnings 41,093 16,918
7,820
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 154,928 73,179
41,624
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $698,640 $320,095
$121,722
===============================================================================
================================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
- 20 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended Year Ended Year Ended
(Thousands, except per share data) June 30, 1998 June 30, 1997 June 30, 1996
June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Oilfield services $374,845 $144,385 $55,933 $40,105
Oil and gas 8,180 4,175 2,334
Oil and gas well drilling 35,095 9,956 6,188
1,932Oil and gas 7,030 6,975 3,554
Other, net 3,076 1,109 182
318
- ---------------------------------------------------------------------------------------------------------------------------------
163,630 66,478 44,689--------------------------------------------------------------------------------------------------------------------------------
420,046 162,425 65,857
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 259,495 100,366 40,737 30,592
Oil and gas 3,030 1,350 757
Oil and gas well drilling 26,473 8,155 5,030
1,444Oil and gas 2,983 2,729 1,195
Depreciation, depletion and amortization 11,42031,001 11,076 4,701 2,738
General and administrative 18,522 6,608 4,35239,813 17,545 6,142
Interest 7,53521,476 7,879 2,477
1,478
- ---------------------------------------------------------------------------------------------------------------------------------
149,028 60,903 41,361--------------------------------------------------------------------------------------------------------------------------------
381,241 147,750 60,282
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 14,60238,805 14,675 5,575 3,328
Income tax expense 5,50014,630 5,573 1,888 1,150
Minority interest in net income - 4 101
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $24,175 $9,098 $3,586
$2,178
=================================================================================================================================================================================================================================================================
EARNINGS PER SHARE :
Primary:
Net income $0.75Basic $1.41 $0.81 $0.46
Diluted $1.23 $0.66 $0.45
$0.33
Assuming full dilution:
Net income $0.65 $0.44 $0.33
=================================================================================================================================================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 12,205Basic 17,153 11,216 7,789
Diluted 24,024 17,632 7,941
6,647
Assuming full dilution 17,963 8,114 6,647
=================================================================================================================================
================================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
- 21 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of
Cash Flows
Year Ended Year Ended Year Ended
June 30, ---------------------------------------June 30, June 30,
(Thousands) 1998 1997 1996
1995
- -------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $24,175 $9,098 $3,586 $2,178
Adjustments to reconcile income from operations to
net cash provided by operations:
Depreciation, depletion and amortization 11,42031,001 11,076 4,701
2,738Amortization of deferred debt costs 2,006 - -
Deferred income taxes 3,8367,287 4,180 1,618 1,370
Minority interest in net income - 4 101 -
Gain on sale of assets (189) (235) (186) -
Other non-cash items 1,313 - 6 (312)
Change in assets and liabilities net of effects
from the acquisitions:
Increase(Increase) in accounts receivable (3,173) (14,904) (2,180)
(1,327)
Increase (decrease)(Increase) decrease in other current assets (4,051) (2,811) 765 (940)
Decrease in accounts payable, accrued interest and accrued expenses (17,444) (5,565) (1,293) (154)
Other assets and liabilities (6,576) 1,313 3
(295)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 34,349 2,156 7,121
3,258
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - OilwellWell service operations (44,284) (15,084) (5,188) (2,839)
Capital expenditures - Oil and gas operations (7,849) (8,188) (1,879) (2,823)
Capital expenditures - Oil and gas well drilling operations (5,385) (1,483) (598)
(143)Capital expenditures - Other (1,748) - -
Proceeds from sale of fixed assets 1,279 3,159 574 -
Cash received in acquisitions 2,903 2,342 1,168
Acquisitions - Well service operations (172,536) (62,808) -
Acquisitions - oilOil and gas well drilling (49,440) - -
Acquisitions - Oil and gas operations (9,298) - (7,895)
(1,348)Purchase of Marketable equity securities (9,979) - -
Acquisitions - oilwell service operations, net of
cash acquired (62,808)minority interest (3,426) - -
Redemption (purchase) of restricted marketable securities - - 267
(1)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (299,763) (82,062) (13,551)
(7,154)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (6,087) (1,772) (2,601) (2,148)
Repayment of long-term debt (231,337) (47,815) -
-
Borrowings (payments) under line-of-credit -280,770 120,000 1,100 (605)
Proceeds from stock options exercised 1,042 141 - -
Proceeds from warrants exercised 4,223 1,362 -
Purchase of treasury stock (9,682) - -
Proceeds from convertible subordinated debentures - net of debt issuance costs 49,590 -52,000 -
Proceeds from long-term commercial paper debt 216,000 - net of-
Proceeds paid for debt issuance costs 115,021 -(9,270) (7,389) -
Proceeds from other long-term debt 3,316 872 10,867
6,751
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 248,975 117,399 9,366
3,998
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (16,439) 37,493 2,936 102
Cash at beginning of period 41,704 4,211 1,275
1,173
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $25,265 $41,704 $4,211
$1,275
==================================================================================================
=======================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
- 22 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock
--------------------------------
Number of Additional
Shares Amount Paid-in Retained
(Thousands) Outstanding at par Capital Earnings Total
- ------------------------------------------------------------------------------- --------------- ------------------ ------------
Balance
Common Stock Unrealized
-------------------- Gain on
Number of Additional Available
Shares Amount Paid-in Treasury Retained for Sale
(thousands) Outstanding at June 30, 1994 5,274 $527 $6,680 $2,056 $9,263par Capital Stock Earnings Securities Total
- -------------------------------------------------------------------------------- --------------- ------------------ ------------
Issuance of common stock for WellTech
West Texas assets 1,635 164 8,420 - 8,584
Issuance of warrants for WellTech
West Texas assets - - 63 - 63
Issuance of common stock for Clint Hurt
Drilling assets 5 - 23 - 23
Net income - - - 2,178 2,178
- -------------------------------------------------------------------------------- --------------- ------------------ ---------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 6,914 $691 $15,186 $ - $4,234 $ - $20,111
- -------------------------------------------------------------------------------- --------------- ------------------ ---------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for WellTech
Merger 3,500 350 17,577 - - - 17,927
Net income - - - 3,586- 3,586 - -------------------------------------------------------------------------------- --------------- ------------------ ------------3,586
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 10,414 $1,041 $32,763 - $7,820 - $41,624
- -------------------------------------------------------------------------------- --------------- ------------------ ---------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for Brownlee
Well Service stock 61 6 665 - - - 671
Issuance of common stock for Woodward
Well Service stock 75 8 555 - - - 563
Issuance of common stock for Brooks
Well Service stock 918 92 11,033 - - - 11,125
Issuance of common stock for Enerair
Oilwell Service assets 4 - 48 - - - 48
Issuance of common stock for Cobra
Well Service stock 175 18 2,368 - - - 2,386
Issuance of common stock for Tri-State
Well Service assets 84 8 992 - - - 1,000
Issuance of common stock for Kal-Con
Well Service assets and stock 78 8 1,103 - - - 1,111
Issuance of common stock for Well-Co
Well Service stock 240 24 4,026 - - - 4,050
Exercise of warrants 221 22 1,340 - - - 1,362
Exercise of options 28 3 138 - - - 141
Net income - - - 9,098- 9,098 - -------------------------------------------------------------------------------- --------------- ------------------ ------------9,098
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 12,298 $1,230 $55,031 - $16,918 - $73,179
================================================================================ =============== ================== ============
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for Big A
Well Service assets 125 12 4,066 - - - 4,078
Issuance of common stock for Critchfield
Well Service assets and stock 240 24 5,736 - - - 5,760
Issuance of common stock for Sitton
Drilling stock 100 10 2,159 - - - 2,169
Issuance of common stock for Gibson
Well Service assets 100 10 1,846 - - - 1,856
Exercise of warrants 609 61 4,162 - - - 4,223
Exercise of options 209 21 1,021 - - - 1,042
Conversion of 7% Notes 5,062 506 45,282 - - - 45,788
Purchase of treasury stock - 416,666 shares (417) - - (9,682) - - (9,682)
Mark to market of available for sale
securities - - - - - 2,346 2,346
Other (59) (6) (6)
Net income - - - - 24,175 - 24,175
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 18,267 $1,868 $119,303 $(9,682) $41,093 $2,346 $154,928
===========================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
- 23 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 1996 and 19951996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Key Energy Group, Inc. herein after referred to as the "Company" or "Key", was
organized in April 1977, and commenced operations in July 1978. Results of
operations for the twelve months ended June 30, 1998, 1997 1996 and 19951996 include the
Company's oilfield service operations conducted by its wholly-owned subsidiary,
Yale E. Key, Inc., ("Yale E. Key"), the Company's oil and gas exploration and
production wholly-owned subsidiary, Odessa Exploration Incorporated ("Odessa
Exploration"), and the Company's oil and gas well drilling operations conducted
by the Company's wholly-owned subsidiary, Key Energy Drilling, Inc. d/b/a Clint
Hurt Drilling ("Clint HurtKey Energy
Drilling"). Clint Hurt Drilling was acquired in March
of 1995. Also included in the results of operations for the fiscal year ended
June 30, 1998 and 1997 and approximately three months for the fiscal year ended
June 30, 1996 are those operating results from the Company's wholly-owned
subsidiary;subsidiary, WellTech Eastern, Inc. ("WellTech Eastern") which currently holds
the assets acquired in the merger with WellTech, Inc. ("WellTech"), on March 26,
1996 (see Note 2). WellTech Eastern operates through two divisions; the WellTech
Mid-Continent Division and the WellTech Eastern Division. In addition, as a result of the Welltech acquisition, the
Company acquired a 63% ownership in Servicios WellTech, S.A. ("Servicios"), an
ArgentineanArgentina corporation. In July 1997, the Company acquired the remaining 37%
ownership in Servicios. Servicios conducts oilfield services operations in
Argentina and is accounted for using
the consolidationwas consolidated with a minority interest method.prior to July 1997. In
addition, results of operations for a portion of the fiscal year ended June 30,
1998 are those operating results from the Company's wholly-owned subsidiaries,
Key Rocky Mountain, Inc. ("Key Rocky Mountain") and Key Four Corners, Inc. ("Key
Four Corners"), both of which were formed as the result of several acquisitions
during the fiscal year ended June 30, 1998. (see Note 2)
Basis of Presentation
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated. The accounting policies
presented below have been followed in preparing the accompanying consolidated
financial statements. The Company's ownership of less than 50% owned entities
are accounted for by the cost or equity methods, depending on the Company's
ownership percentage.
Estimates and Uncertainties
Preparation of the accompanying consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures 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.
Inventories
Inventories, which consist primarily of oilwellwell service parts and supplies areand
those parts and supplies held for use insale at the operations of Key andCompany's various retail supply
stores, are valued at the lower of average cost or market.
Property and Equipment
The Company provides for depreciation and amortization of non-oilwell service and
gas
propertiesrelated equipment using the straight-line method, with an overall average
salvage value of approximately 10%, over the following estimated useful lives of
the assets:
(table follows on next page)
- 24 -
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Description Years
-------------------------------------------------------------------------------------------------------------
Oilfield service equipment 3 - 20
Oil and gas well drilling equipment 3 - 15
Motor vehicles 3 - 7
Furniture and equipment 3 - 10
Buildings and improvements 10 - 40
Gas processing facilities 10
-------------------------------------------------------------------------------------------------------------
Upon disposition or retirement of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and the gain or loss
thereon, if any, is included in the results of operations.
Odessa Exploration utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method, all costs associated with productive
wells and nonproductive development wells are capitalized, while nonproductive
exploration costs and geological and geophysical costs (if any), are expensed.
Capitalized costs relating to proved properties are depleted using the
unit-of-production method. Upon disposition, the carrying amounts of properties
sold or otherwise disposed of and the related allowance for depletion are
eliminated from the accounts and any gain/loss is included in results of
operations.
Gas Balancing
DeferredAs of July 1, 1997 the Company changed their method of calculating depreciation
on its oil and gas well drilling rigs from the straight-line method to the
units-of-production method. The new method takes into consideration the number
of days the rigs are actually in service each month and depreciation is recorded
for at least 15 days each month for each rig that is available for service. The
Company believes the new method will more appropriately reflect its financial
results by better matching of revenues with expenses and to better reflect how
the assets are to be used over time. The effect of this change on net income associated with gas balancing is accounted for
on the
entitlements method1998, 1997 and represents amounts received for gas sold under gas
balancing arrangements in excess of Odessa Exploration's interest in properties
covered by such agreements. Odessa Exploration had deferred income associated
with gas balancing of approximately $155,000, $198,000 and $253,000 as of June
30, 1997, 1996 and 1995, respectively.was not material.
Environmental
The Company is subject to extensive federal, state and local environmental laws
and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Other Assets and Goodwill
At June 30, 1997, 1996 and 1995, otherOther assets consistedconsist primarily of goodwill, capitalized debt issuance costs,
investment in common stock (accounted for using the cost-method) and security
and escrow deposits from Key's workers' compensation retrospective insurance
program, in addition to an interest, (approximately 13%), in an insurance
company (the insurance company is affiliated with Key's workers' compensation
carrier).
- 25 -
Key Energy Group, Inc.Marketable equity securities are deemed by management to be available for sale
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)are classified in the consolidated balance sheet at fair value of
approximately $12,307,000 as other long-term assets with net unrealized gains of
approximately $2,346,000 reported within stockholders' equity.
At June 30, 1998, 1997 1996 and 1995,1996, the Company classified as goodwill the cost in
excess of fair value of the net tangible assets acquired in purchase
transactions. Goodwill of $37,122,000 was added in 1998. Goodwill is being
amortized on a straight-line basis over ten to twenty-five years. Management
continually evaluates whether events or circumstances have occurred that
indicate the remaining useful life of goodwill may warrant revision or the
remaining balance of goodwill may not be recoverable. Goodwill amortization
expense totaled $1,442,000 for fiscal 1998 and $622,000 for fiscal 1997 and
$100,000 for fiscal 1996 and $100,000 for fiscal 1995.1996. Debt issuance cost
amortization expense totaled $344,000 for the year ended June 30, 1997 and iscosts are amortized over the term of the
applicable debt.debt and such amortization is classified as interest expense.
Amortization of debt issuance costs totaled $2,006,000 and $344,000 for the
fiscal years ended 1998 and 1997, respectively.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Earnings per Share
PrimaryThe Company accounts for earnings per share upon Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128,
basic earnings per common share are determined by dividing net earnings
applicable to common stock by the weighted average number of common shares
actually outstanding during the year and common equivalent shares resulting from
the assumed exercise of stock options and warrants (if any) using the treasury
stock method, except in periods with reported losses as the inclusion of common
stock equivalents would be antidilutive. Fully dilutedyear. Diluted earnings per common share areis based
on the increased number of shares that would be outstanding assuming conversion
of dilutive outstanding convertible securities using the "as if converted"
method.
Year Ended
(thousands, except per share data)
------------------------------------
6/30/98 6/30/97 6/30/96
------------------------------------
Basic EPS Computation:
Numerator-
Net Income $ 24,175 $ 9,098 $ 3,586
Denominator-
Weighted Average Common
Shares Outstanding 17,153 11,216 7,789
-----------------------------------
Basic EPS $ 1.41 $ 0.81 $ 0.46
===================================
Diluted EPS Computation:
Numerator-
Net Income $ 24,175 $ 9,098 $ 3,586
Effect of dilutive
securities, tax effected:
Convertible Securities 5,331 2,578 -
------------------------------------
$ 29,506 $ 11,676 $ 3,586
------------------------------------
Denominator-
Weighted Average Common
Shares Outstanding: 17,153 11,216 7,789
Warrants 141 340 -
Stock options 1,266 743 152
7% Convertible Debentures 1,191 5,333 -
5% Convertible Debentures 4,273 - -
------------------------------------
24,024 17,632 7,941
------------------------------------
Diluted EPS $ 1.23 $ 0.66 $ 0.45
===================================
Income Taxes
The Company accounts for income taxes based upon Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date. A
valuation allowance for deferred tax assets is recognized when it is "more
likely than not" that the benefit of deferred tax assets will not be realized.
The Company and its eligible subsidiaries file a consolidated U. S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U. S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with high credit standing and by policy limits the amount
of credit exposure to any one financial institution. The Company's customer base
consists primarily of multi-national, foreign national and independent oil and
natural gas producers. See Note 12 for additional information regarding
customers which accounted for more than 10% of consolidated revenues. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral on its trade receivables. Such credit risk is considered
by management to be limited due to the large number of customers comprising the
Company's customer base. The Company maintains reserves for potential credit
losses, and such losses have been within management's expectations.
- 26 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Impact of SFAS 121
On July 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("SFASFAS 121"). This Statement requires
that long-lived assets, goodwill and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of this
Statement did not have an impact on the Company's consolidated financial
position, results of operations, or liquidity.
Stock-based Compensation
The Company accounts for employee stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Accordingly, the company
has only adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). See
Note 8 for the pro forma disclosures of compensation expense determined under
the fair-value provisions of SFAS 123.
Cash Flowsand Cash Equivalents
For cash flow purposes, the Company considers all unrestricted highly liquid
investments with less than a three month maturity when purchased as cash
equivalents.
Reclassifications
Certain reclassifications have been made to the fiscal 19961997 and 19951996
consolidated financial statements to conform to the fiscal 19971998 presentation.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
Statement of Financial Accounting Standards No. 128 ("SFAS 128")future:
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Earnings
per Share, is effective for periods ending on or after December 15, 1997. FAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted
EPS.The Company will adopt SFAS 128 for the quarter ended December 31, 1997.(continued)
Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Specifially, SFAS 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
forin the first quarter of its fiscal year ended June 30, 1999.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that company's report information about
operating segments in annual financial statements and requires that those
company's report selected information about operating segments in interim
financial reports issued to shareholders. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 need not be applied to interim financial
statements in the initial year of its application. However, comparative
information for interim periods in the initial year of application is to be
reported in the financial statements for interim periods in the second year of
application. The Company will adopt SFAS 131 for the fiscal year ended June 30,
1999.
- 27 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Management believes the adoption of SFAS 128, SFAS 130 and SFAS 131 will
not have a material effect on its financial position or results of operations of
the Company.
Impact of Inflation on Operations
Although in our complex environment it is extremely difficult to make an
accurate assessment of the impact of inflation on the Company's operations,
management is of the opinion that inflation has not had a significant impact on
its business.
2. BUSINESS AND PROPERTY ACQUISITIONS
The following described acquisitions have been completed during the current
year andfiscal 1998 are included
in the Company's results of operations for the twelve months ended June 30,
1998. Each of the acquisitions were accounted for using the purchase method of
accounting. Unless otherwise noted, the purchase prices specified below are
based on cash paid and/or the fair value of the Company's common stock, par
value $0.10 (the "Common Stock").
Transportes Dimopulos S.R.L.
On June 5, 1998, the Company completed the acquisition of Transportes Dimopulos
S.R.L. ("Transportes") which operates in Argentina. Transportes was acquired for
approximately $2.2 million in cash and future obligations and included
approximately 28 oilfield service trucks and trailers, all located in Argentina.
The operating results of Transportes are included in the Company's results of
operations effective June 5, 1998.
Watson Truck & Supply, Inc.
On May 19, 1998, the Company completed the acquisition of certain assets of
Watson Truck & Supply, Inc. ("Watson") for approximately $2.6 million in cash.
The asset purchased included a repair and refurbishment facility and a supply
store in Mills, Wyoming. The operating results of Watson are included in the
Company's results of operations effective June 1, 1998.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Lakota Drilling Company
On May 22, 1998, the Company completed the acquisition of the assets of Lakota
Drilling Company ("Lakota") for approximately $12 million in cash. Lakota
operates seven drilling rigs in the Permian Basin region of West Texas. The
operating results of Lakota are included in the Company's results of operations
effective June 1, 1998.
Odessa Exploration Properties
On June 14, 1998, Odessa Exploration completed the purchase of approximately
$8.7 million of oil and gas producing and undeveloped properties from a group of
sellers unrelated to the Company.
JPF Well Service, Inc. and JPF Lease Service, Inc.
On April 20, 1998, the Company completed the acquisition of the assets of JPF
Well Service, Inc. and JPF Lease Service, Inc. (collectively, "JPF") for
approximately $6.2 million in cash. JPF operates nine well service rigs and
oilfield construction equipment in Southeast Texas. The operating results of JPF
are included in the Company's results of operations effective April 20, 1998.
Edwards Transport, Inc.
On March 27, 1998, the Company completed the acquisition of the assets of
Edwards Transport, Inc. ("Edwards") for approximately $3.0 million in cash.
Edwards operates fifteen vacuum and pump trucks in West Texas. The operating
results of Edwards are included in the Company's results of operations effective
April 1, 1998.
Lundy Vacuum Service, Inc.
On March 3, 1998, the Company completed the acquisition of the assets of Lundy
Vacuum Service, Inc. ("Lundy") for approximately $1.4 million in cash. Lundy
operates eight vacuum trucks, other oilfield fluid hauling trucks and an
oilfield construction site buisiness in East Texas. The operating results of
Lundy are included in the Company's results of operations effective March 3,
1998.
Lauffer Well Service, Inc.
On March 2, 1998, the Company completed the acquisition of the assets of Lauffer
Well Service, Inc. ("Lauffer") for approximately $400,000 in cash. Lauffer
operates four well service rigs in Kentucky. The operating results of Lauffer
are included in the Company's results of operations effective March 2, 1998.
Updike Brothers, Inc.
On February 6, 1998, the Company completed the acquisition of Updike Brothers,
Inc. ("Updike") for approximately $10.6 million in cash. Updike operates 25 well
service rigs in Wyoming. The operating results of Updike are included in the
Company's results of operations effective February 6, 1998.
Four Corners Drilling Company
On February 4, 1998, the Company completed the acquisition of the assets of Four
Corners Drilling Company ("Four Corners") for approximately $10.0 million in
cash. Four Corners owns 12 drilling rigs in the four corners region of the
Southwestern United States. The operating results of Four Corners are included
in the Company's results of operations effective February 4, 1998.
Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co.
On January 30, 1998, the Company completed the acquisition of Kingley
Enterprises, Inc. d/b/a Legacy Drilling Co. ("Legacy") for approximately $2.6
million in cash. Legacy operates four drilling rigs in the Permian Basin region
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
of West Texas. The operating results of Legacy are included in the Company's
results of operations effective February 1, 1998.
Circle M Vacuum Services, Inc.
On January 30, 1998, the Company completed the acquisition of the assets of
Circle M Vacuum Services, Inc. ("Circle M") for approximately $800,000 in cash.
Circle M operates four vacuum trucks, trailers and a salt water disposal well in
Southeast Texas. The operating results of Circle M are included in the Company's
results of operations effective February 1, 1998.
Hot Oil Plus, Inc.
On January 29, 1998, the Company completed the acquisition of the assets of Hot
Oil Plus, Inc. ("Hot Oil Plus") for approximately $2.2 million in cash. Hot Oil
Plus operates eight hot oil trucks, a pump truck and a steam heater in Southeast
Texas. The operating results of Hot Oil Plus are included in the Company's
results of operations effective February 1, 1998.
J.W. Gibson Well Service Company
On January 8, 1998, the Company completed the acquisition of J.W. Gibson Well
Service Company ("Gibson") for approximately $25.8 million, consisting of $23.9
million in cash, 100,000 shares of Common Stock and warrants to acquire 265,000
shares of Common Stock at an exercise price of $18.00 per share, subject to
certain adjustments.
Gibson operates 74 well service rigs and related equipment in eight states. From
August 1, 1997 through the closing of the acquisition, the Company managed the
operations of Gibson pursuant to an interim operating agreement. Under the
operating agreement, the Company received a management fee equal to the
operating income from Gibson's operations less $25,000 per month and received a
one-time management fee of $300,000. The total management fee earned from August
1, 1997 through September 30, 1998 of $361,000 is classified as other revenue in
the consolidated statement of operations. The operating results of Gibson are
included in the Company's consolidated results of operations effective January
8, 1998. The payment of the management fee was not contingent upon closing of
this transaction.
Sitton Drilling Co.
On January 1, 1998, the Company completed the acquisition of Sitton Drilling Co.
("Sitton") for approximately $15.0 million, including $12.9 million in cash and
100,000 shares of Common Stock. Sitton operates five drilling rigs in the
Permian Basin region of West Texas. The operating results of Sitton are included
in the Company's results of operations effective January 1, 1998.
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
On December 2, 1997, the Company completed the acquisition of the assets of
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc. (collectively
the "Critchfield Assets") for approximately $8.4 million, consisting of $2.7
million in cash and 240,000 shares of Common Stock. The Critchfield Assets
consist of five land drilling rigs, five well service rigs and other related
equipment in Michigan. The operating results of Critchfield Assets are included
in the Company's results of operations effective December 2, 1997.
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
On November 24, 1997, the Company completed the acquisition of Win-Tex Drilling
Co., Inc. and Win-Tex Trucking Corporation ("Win-Tex") for approximately $6.5
million in cash. Win-Tex operates six land drilling rigs, trucks, trailers and
related equipment in West Texas. The operating results of Win-Tex are included
in the Company's results of operations effective December 1, 1997.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Jeter Service Co.
On November 18, 1997, the Company completed the acquisition of Jeter Service Co.
("Jeter") for approximately $6.7 million in cash. Jeter operates 15 well service
rigs, an oilfield supply store and an oilfield location construction/maintenance
business with 15 trucks and other related equipment in Oklahoma. The operating
results of Jeter are included in the Company's results of operations effective
December 1, 1997.
GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy Well
Service, Inc.
On October 3, 1997, the Company acquired certain assets of GSI Trucking Company,
Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. ("GSI,
Kahlden and McCurdy") for approximately $1.8 million in cash. GSI, Kahlden and
McCurdy operate 12 fluid and 5 equipment hauling trucks in Southeast Texas. The
operating results of GSI, Kahlden and McCurdy are included in the Company's
results of operations effective October 3, 1997.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.
On October 1, 1997, the Company completed the acquisition of substantially all
of the assets of Big A Well Service Co., Sunco Trucking Co. and Justis Supply
Co., Inc. (collectively "Big A/Sunco") for approximately $31.1 million,
consisting of $27 million in cash and 125,000 shares of Common Stock. Big
A/Sunco operates 25 well service rigs, four drilling rigs, 75 oilfield trucks,
related equipment and a machine shop/supply store in the Four Corners region of
the Southwestern United States. The operating results of Big A/Sunco are
included in the Company's results of operations effective October 1, 1997.
Frontier Well Service, Inc.
On September 30, 1997, the Company completed the acquisition of Frontier Well
Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier
operates 12 well service rigs and related equipment in Wyoming. The operating
results of Frontier are included in the Company's results of operations
effective October 1, 1997.
Dunbar Well Service, Inc.
On September 29, 1997, the Company completed the acquisition of Dunbar Well
Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar
operates 38 well service rigs and related equipment in Wyoming. The operating
results of Dunbar are included in the Company's results of operations effective
October 1, 1997.
BRW Drilling, Inc.
On September 25, 1997, the Company completed the acquisition of BRW Drilling,
Inc. ("BRW") for approximately $14.6 million in cash. BRW operates seven
drilling rigs and related equipment in the Permian Basin region of West Texas
and Eastern New Mexico. The operating results of BRW are included in the
Company's results of operations effective October 1, 1997.
Landmark Fishing & Rental, Inc.
On September 16, 1997, the Company completed the acquisition of Landmark Fishing
& Rental, Inc. ("Landmark") for approximately $3.8 million in cash. Landmark
operates a rental tool business in Western Oklahoma and the Texas Panhandle. The
operating results of Landmark are included in the Company's results of
operations effective September 16, 1997.
Waco Oil & Gas Co., Inc.
On September 1, 1997, the Company completed the acquisition of certain assets of
Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0 million in cash. The
Waco assets included 12 well service rigs, three drilling rigs, 33 oilfield
trucks operated in West Virginia. Following the consummation of the acquisition,
the three drilling rigs acquired from Waco were sold to an independent third
party for $2.3 million in cash. No gain or loss was recognized in the sale of
these rigs. The operating results of Waco are included in the Company's results
of operations effective September 23, 1997.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
On September 1, 1997, the Company completed the acquisition of Ram Oil Well
Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5 million
in cash. Ram/Rowland operates 17 well service rigs, 93 oilfield trucks, 290 frac
tanks, three disposal and brine wells, and dirt construction equipment in the
Permian Basin region of West Texas and Southeastern New Mexico. The operating
results of Ram/Rowland are included in the Company's results of operations
effective September 1, 1997.
Mosley Well Service, Inc.
On August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley"), which operates 36 well service rigs and related
equipment in East Texas, Northern Louisiana and Arkansas, for approximately
$17.2 million in cash. The operating results of Mosley are included in the
Company's results of operations effective August 22, 1997.
Kenting Holdings (Argentina) S.A.
On July 30, 1997, the Company completed the acquisition of Kenting Holdings
(Argentina) S.A. ("Kenting") for approximately $10.1 million in cash. Kenting is
the sole shareholder of Kenting Drilling (Argentina) S.A. which operates six
well service rigs, three drilling rigs and related equipment in Argentina. The
operating results of Kenting are included in the Company's results of operations
effective August 1, 1997.
Patrick Well Service, Inc.
On July 17, 1997, the Company completed the acquisition of Patrick Well Service,
Inc. ("Patrick") for approximately $7.0 million in cash. Patrick operates 29
well service rigs and related equipment in Southwest Kansas, Oklahoma and
Southeast Colorado. The operating results of Patrick are included in the
Company's results of operations effective August 1, 1997.
Servicios WellTech S.A.
On July 1, 1997, the Company purchased the remaining 37% minority interest in
Servicios WellTech S.A. ("Servicios") from two unrelated parties for
approximately $3.4 million in cash. As a result of the purchase, the Company now
owns 100% of Servicios. The operating results of the remaining minority interest
in Servicios are included in the Company's results of operations effective July
1, 1997.
Acquisition Completed Prior to June 30, 1997
Well-Co Oil Service. Inc.
On June 26, 1997, the Company completed its acquisition of Well-Co Oil Service,
Inc. ("Well-Co") which operates 79 oilwellwell service rigs and related equipment in
west Texas. Well-Co was acquired for $17.5 million in cash and 240,000 shares of
the Company's common stock. Well-Co will be operated by the
Company's west Texas subsidiary of Yale E. Key. The results of operations of Well-Co are included in
the Company's results of operations effective June 26, 1997. The acquisition was accounted for using the purchase method.
Phoenix Well Service, Inc.
On June 10, 1997, the Company completed its acquisition of Phoenix Well Service,
Inc. ("Phoenix") which operates 11 oilwellwell service rigs and related equipment in
west Texas. Phoenix was acquired for $2.3 million in cash. Phoenix
will be operated by the Company's west Texas subsidiary of Yale E. Key. The results of
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
operations of Phoenix are included in the Company's results of operations
effective June 26, 1997. The acquisition was accounted for using the
purchase method.
Southwest Oilfield Services, Inc.
On June 10, 1997, the Company completed its acquisition of Southwest Oilfield
Services, Inc. ("Southwest") which operates 3 oilwellwell service rigs and related
equipment in western Oklahoma. Southwest was acquired for $455,000 in cash. Southwest will be operated by the WellTech Mid-Con Division of WellTech
Eastern, Inc. The
results of operations of Southwest are included in the Company's results of
operations effective June 10, 1997. The acquisition was
accounted for using the purchase method.
Wireline and Excavation Assets
On May 1, 1997, the Company completed an acquisition of ten wireline units and
related equipment for approximately $600,000 in cash. These assets will be
operated in West Virginia by the WellTech Eastern Division of WellTech Eastern.
On May 5, 1997, the
Company completed its acquisition of several dump trucks and related excavation
equipment for $410,000 in cash. These assets will be operated
in Michigan by the WellTech Eastern Division of WellTech Eastern. The results of operations of these assets are
included in the Company's results of operations effective May 1, 1997. The acquisition was accounted for using the purchase
method.
Shreve's Well Service
On April 18, 1997, the Company completed its acquisition of the assets of
Shreve's Well Service, Inc. ("Shreve's") which operated in West Virginia.
Shreve's assets were acquired for $550,000 in cash and included five well
service rigs and related equipment. The Shreve's assets will be operated by the
WellTech Eastern Division of WellTech
- 28 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Eastern. The results of operations of Shreve's are
included in the Company's results of operations effective May 1, 1997. The acquisition was
accounted for using the purchase method.
Argentine Drilling Rigs
On April 16, 1997, the Company acquired three drilling rigs and related
equipment in Argentina from Drillers, Inc. for $1.5 million in cash. The
drilling rigs will be operated by WellTech Servicios, the Company's Argentine
subsidiary.
Diamond Well Service
On April 3, 1997, the Company completed the acquisition of the assets of Diamond
Well Service, Inc. ("Diamond") for $675,000 in cash. The Diamond assets included
four oilwell service rigs and related equipment in Oklahoma. The Diamond assets will be operated by the WellTech Mid-Continent Division of
WellTech Eastern. The results of
operations of Diamond are included in the Company's results of operations
effective April 1, 1997. The acquisition was
accounted for using the purchase method.
Kalkaska Construction Service, Inc. ,Kalkaska Oilfield Service, Inc. and Elder
Well Service, Inc.
On March 31, 1997, the Company completed the acquisition of the assets of
Kalkaska Construction Service, Inc., Kalkaska Oilfield Service, Inc. ("KalCon")
and Elder Well Service, Inc. ("Elder"), both based in Michigan. The KalCon
assets included 40 vacuum (fluid transport) trucks, 40 trucks used in oilfield
equipment hauling, seven saltwater disposal wells and other oilfield related
equipment, and were acquired for approximately $8.5 million in cash and 77,998
shares of the Company's common stock. The Elder assets included six oilwellwell service
rigs and related equipment and were acquired for $609,000 in cash. Both
the KalCon and Elder assets will be operated by the WellTech Eastern Division of
WellTech Eastern. The operating
results of KalCon and Elder are included in the Company's results of operations
effective April 1, 1997. The acquisition was
accounted for using the purchase method.
T.S.T. Paraffin Service Co., Inc.
On March 27, 1997, the Company completed the acquisition of T.S.T. Paraffin
Service Co., Inc. ("TST") for $8.7 million in cash. TST operates approximately
61 trucks, 22 hot oil units and other related equipment in west Texas. TST will
be operated by the Company's west Texas subsidiary: Yale E. Key, Inc. The
operating results of TST are included in the Company's results of operations
effective April 1, 1997.
The acquisition was accounted for using the purchase
method.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Tri-State Wellhead & Valve, Inc.
The Company completed its acquisition of the assets of Tri-State Wellhead &
Valve, Inc. ("Tri-State") on March 17, 1997 for $550,000 in cash and 83,770
shares of the Company's common stock. The Tri-State assets consisted of a
wellhead equipment rental business and five oilwellwell service rigs. These assets
will be operated by the WellTech Mid-Continent Division of WellTech Eastern. The operating
results from these assets are included in the Company's results of operations
effective April 1, 1997. The acquisition was accounted for using the
purchase method.
Cobra Industries, Inc.
Effective as of January 13, 1997, the Company completed the purchase of Cobra
Industries, Inc. ("Cobra") for $5 million in cash and 175,000 shares of the
Company's common stock. Cobra operates 26 oilwellwell service rigs in southeastern New
Mexico. The operating results from Cobra are included in the Company's results
of operations effective February 1, 1997. The acquisition was
accounted for using the purchase method.
- 29 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Talon Trucking Co.
Effective as of January 7, 1997, the Company completed the acquisition of the
assets of Talon Trucking Co. ("Talon") for $2.7 million in cash. Talon operated
three oilwellwell service rigs, 21 trucks and related fluid transportation and disposal
assets in Oklahoma, which assets are currently operated by the
WellTech Mid-Continent Division of WellTech Eastern.Oklahoma. The operating results from these assets are included in the
Company's results of operations effective January 7, 1997. The acquisition was accounted for using the purchase method.
B&L Hotshot, Inc.
Effective as of December 13, 1996, the Company completed the acquisition of B&L
Hotshot, Inc. and affiliated entities ("B&L)&L") for $4.9 million in cash. B&L
provides trucking and related services for oil and natural gas wells in
Michigan, which operations are currently conducted by the WellTech Eastern
Division of WellTech Eastern.Michigan. The operating results from B&L are included in the Company's results
of operations effective January 1, 1997. The acquisition was
accounted for using the purchase method.
Brooks Well Servicing, Inc.
Effective as of December 1, 1996, the Company completed the acquisition of
Brooks Well Servicing, Inc. ("Brooks") for 917,500 shares of the Company's
common stock. Brooks was a wholly-owned subsidiary of Hunt Oil Company and
operated 32 oilwellwell service rigs and ancillary equipment in east Texas, which
operations are currently conducted by the WellTech Mid-Continent Division of
WellTech Eastern.Texas. The
operating results from Brooks are included in the Company's results of
operations effective December 1, 1996. The acquisition was
accounted for using the purchase method.
Hitwell Surveys, Inc.
Effective as of December 2, 1996, the Company completed the purchase of Hitwell
Surveys, Inc. ("Hitwell") for approximately $1.3 million in cash. Hitwell
operates eight oilwellwell logging and perforating trucks in the Appalachian Basin and
Michigan. The operating results from Hitwell are included in the Company's
results of operations effective December 1, 1996. The acquisition was
accounted for using the purchase method.
Energy Air Drilling Services Co.
Effective as of November 1, 1996, the Company completed the acquisition of
certain assets of Energy Air Drilling Services Co. ("Energy Air") for $500,000
in cash and 4,386 shares of the Company's common stock. Energy Air operated four
air drilling packages in west Texas, which operations are currently conducted by
Yale E. Key. The acquisition was accounted for using the purchase method.Texas.
Brownlee Well Service Inc.
Effective as of October 24, 1996, the Company completed the purchase of Brownlee
Well Service, Inc. ("Brownlee") and Integrity Fishing and Rental Tools Inc.,
("Integrity"). Consideration for the acquisition was $6.5 million in cash and
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
61,069 shares of the Company's common stock. Brownlee and Integrity operate 16
oilwellwell service rigs with ancillary equipment and a variety of oilfield fishing
tools in west Texas. The operating results from Brownlee are included in the
Company's results of operations effective November 1, 1996. The acquisition
was accounted for using the purchase method.
- 30 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Woodward Well Service, Inc
Effective as of October 1, 1996, the Company completed the acquisition of
Woodward Well Service, Inc. ("Woodward") for 75,000 shares of the Company's
common stock and approximately $100,000 in cash, most of which is payable over a
four-year period. Woodward operated five oilwellwell service units in Oklahoma,
which operations are currently conducted by the WellTech Mid-Continent Division
of Welltech Eastern.Oklahoma. The
operating results from Woodward are included in the Company's results of
operations effective October 1, 1996. The acquisition was
accounted for using the purchase method.
Acquisitions Completed Prior to June 30, 1996
Odessa Exploration Properties
In April of 1996, Odessa Exploration purchased approximately $6.9 million in
cash of oil and gas producing properties from an unrelated company using
proceeds from bank borrowings, which indebtedness was subsequently repaid (see
Note 5). The acquisition was accounted for using the purchase method.repaid.
WellTech, Inc.
On March 26, 1996, the Company completed the merger of WellTech, Inc.
("WellTech") into the Company. The net consideration for the merger was
3,500,000 shares of the Company's common stock and warrants to purchase 500,000
additional shares of Common Stock at an exercise price of $6.75 per share.
WellTech conducted oil and gas well servicing operations in the Mid-Continent
and Northeast areas of the United States and in Argentina.
The acquisition was
accounted for using the purchase method.
Pro Forma Results of Operations--Operations - (unaudited)
The following unaudited pro forma results of operations have been prepared as
though WellTech Eastern, Well-Co, Cobra and T.S.T., Ram/Rowland, Coleman, Dunbar, Gibson, Updike
and Lakota had been acquired on July 1, 1995. Pro-forma1996. Proforma amounts are not
necessarily indicative of the results that may be reported in the future.
Year Ended
----------------------------------------
(Thousands, except per share data) June 30, 19971998 June 30, 1996
- -------------------------------------------------------------------------------1997
-----------------------------------------------------------------------------
Revenues $ 198,088 $162,988459,764 $316,656
Net income 11,591 8,964
Earnings26,075 13,342
Basic earnings per share $ 0.921.52 $ 0.761.19
3. OTHER ASSETS
Other assets consist of the following:
June 30,
(Thousands) 1998 1997 1996
---------------------------------------------------------------------------
Investment in insurance companysecurities $12,325 $ - common stock * $ 368 $ 368
Workers compensation security premiumsdeposits 1,418 1,817 1,117
Debt issuance costs (net of amortization;
1998 - $2,350, 1997 - $344) 11,869 7,045
-
Goodwill (net of amortization: 1997 - $822, 1996 - $200) 9,256 5,400
Other 90 1491,383 458
---------------------------------------------------------------------------
$18,576 $ 7,034$26,995 $9,320
===========================================================================
* - Represents approximately 13% ownership.
- 31 -
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
4. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.
As of June 30, 1997, the Company had reserved
$133,000 for potential suitsDuring 1995 and claims.
During 1995,subsequent fiscal years, the Company entered into employment
agreements with certain of its officers. These employment agreements generally
run to June 30, 1997,for two fiscal years, but willcan be automatically be extended on a yearly basis
unless terminated by the Company or the applicable officer. In addition to
providing a base salary for each officer, the employment agreements provide for
severance payments for each officer varying from 12 to 24 months of the officers
base salary. The current annual base salaries for the officers covered under
such employment agreements total approximately $800,000.$1,189,000.
5. LONG-TERM DEBT
The components of long-term debt are as follows:
June 30,
(Thousands) 1998 1997
-----------------------------------------------------------------
PNC Credit Facility (i) $172,000 $120,000
5% Subordinated Debentures (ii) 216,000 -
7% Subordinated Debentures (iii) 4,600 52,000
Other notes payable (iv) 7,179 2,167
-----------------------------------------------------------------
399,779 174,167
Less current portion 1,848 1,404
-----------------------------------------------------------------
Long-term debt $397,931 $172,763
=================================================================
(i) PNC Credit Facility
On June 6, 1997, the Company entered into an agreement (the "Bank"Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, Norwest Bank Texas,
N.A., as collateral agent. Lehman Commercial Paper, Inc., as advisor, arranger
and a
syndication agent and theof other lenders named thereas pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan iswas LIBOR
plus 2.75 percent and thepercent. The interest rate on the revolver variesvaried based on the LIBOR and
the level of the Company's indebtednessindebtedness. The Initial Credit Agreement contained
certain restrictive covenants and is currently LIBOR plus 2.25 percent. Therequired the Company usedto maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the facility to: (i) repay existing bank debt; (ii)initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).
Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as
administrative agent and lender, pursuant to which PNC agreed to make additional acquisitionsrevolving
credit loans of up to a maximum loan commitment of $200 million. The maximum
commitment decreases to $175 million on November 6, 2000 and capital expenditures; and (iii) provide working capital. In addition,to $125 million on
November 6, 2001. The loan commitment terminates on November 6, 2002. Borrowings
under the credit facility provides, undermay be either (i) Eurodollar Loans with interest
currently payable quarterly at LIBOR plus 1.25% subject to adjustment based on
certain conditions, forfinancial ratios, (ii) Base Rate Loans with interest payable quarterly
at the repurchasegreater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2%,
or (iii) a portion ofcombination thereof, at the Company's outstanding common stock in the open market from time to time. In
connection with the credit facility, the company incurred and capitalized
$4,979,000 of debt issuance costs. These costs are being amortized over the life
of the credit facility.option. The credit facilityAmended PNC Credit
Agreement contains certain restrictive covenants and requires the Company to
maintain certain financial ratios. Long-term debt which was repaid with proceeds from the Agreement in June
1997 included all debt with CIT Group/Credit Finance, Inc. ("CIT")A change of approximately $54.3 million and all bank debt associated with Odessa
Exploration, previously with Norwest Bank Texas, N.A. ("Norwest")control of
approximately $2.1 million.
In July 1996, the Company, completedas
defined in the offeringAmended PNC Credit Agreement, is an event of $52,000,000 7%
convertible subordinated debentures due 2003 (the "Debentures"). In August 1996,default. Borrowings
under the interest rate on the Debentures was increased to 7 1/2%. As the resultAmended PNC Credit Agreement are secured by substantially all of the
Company's purchaseassets of the remaining 37% ownership in Servicios, the interest
rate was reduced to 7% in July of 1997. The offering was a private offering
pursuant to Rule 144A under the Securities Act of 1933. Proceeds from the
offering were used to substantially repay existing long-term debt (approximately
$35.2 million). In connection with the offering of the Debentures, the Company capitalized and incurred $2,410,000 of debt issuance costs. These costs are
being amortized over the life of the Debentures. The Debenture contains certain
restrictive covenants and requires certain financial ratios.
The Debentures mature on July 1, 2003 and are convertible at any time after
November 1, 1996 and before maturity, unless previously redeemed, into shares of
the Company's common stock at a conversion price of $9 3/4 per share, subject to
adjustment in certain events. In addition, holders of the Debentures who convert
prior to July 1, 1999 will receive, in addition to the Company's common stock, a
payment generally equal to 50% of the interest otherwise payable on the
converted Debentures from the date of conversion through July 1, 1999, payable
in cash or common stock, at the Company's option. Interest on the Debentures is
payable semi-annually on January 1 and July 1 of each year, commencing January
1, 1997. In August, 1996, the interest rate was increased from 7% to 7 1/2% due
to certain modifications in the Debenture indenture involving a certain
subsidiary's
- 32 -its domestic subsidiaries.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
inabilityEffective December 3, 1997, PNC completed the syndication of the Amended PNC
Credit Agreement. In connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to guaranteethe
Amended PNC Credit Agreement providing for, among other things, an increase in
the maximum commitment to $250 million from $200 million.
In connection with the acquisition of Dawson, the total consideration paid for
the Dawson Shares pursuant to the Tender Offer and the First Merger was
approximately $181.7 million. The Company's source of funds to pay such amount,
certain outstanding debt of Dawson and the Company and related fees and expenses
was (i) a bridge loan agreement in the amount of $150,000,000, dated as of
September 14, 1998, among the Company, Lehman Brothers Inc., as Arranger, and
Lehman Commercial Paper Inc., as Administrative Agent, and the other lenders
party thereto (the "Bridge Loan Agreement") and (ii) a $550,000,000 Second
Amended and Restated Credit Agreement, dated as of June 6, 1997, as amended and
restated through September 14, 1998, among the Company, PNC Bank, National
Association, as Administrative Agent, Norwest Bank Texas, N.A., as Collateral
Agent, PNC Capital Markets, Inc., as Arranger and the other lenders named from
time to time parties thereto (the "Second Amended and Restated Credit
Agreement"). In connection with the Bridge Loan Agreement, the Company entered
into Registration Rights Agreements (the "Registration Rights Agreements") with
Lehman Brothers Inc. and Lehman Commercial Paper Inc. pursuant to which the
Company agreed to file with the Securities and Exchange Commission (the
"Commission") within a certain time period a registration statement with respect
to (i) an offer to exchange borrowings under the Bridge Loan Agreement for a new
issue of debt securities of the Company, and (ii) the resale of warrants (and
the shares of common stock of the Company to be issued upon the exercise of such
warrant) to purchase shares of common stock of the Company issued to Lehman
Brothers Inc. in connection with the Bridge Loan Agreement. Loans outstanding
after one year pursuant to the Bridge Loan Agreement will convert into term
loans which may be exchanged by the holders thereof for exchange notes issued
pursuant to an Indenture dated as of September 14, 1998 (the "Indenture"),
between the Company and The Bank of New York, trustee.
In addition, the Company, its subsidiaries and U.S. Trust Company of Texas,
N.A., trustee ("U.S. Trust"), entered into a Supplemental Indenture dated
September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company
assumed the obligations of Dawson under the Indenture dated February 20, 1997
(the "Dawson Indenture") between Dawson and U.S. Trust, most of the Company's
subsidiaries guarantied those obligations and the notes issued pursuant to the
Dawson Indenture were equally and ratably secured with the obligations under the
indenture,
relatingSecond Amended and Restated Credit Agreement. Under the terms of the Dawson
Indenture, the Company is required to commence a cash tender offer to purchase
at 101% of the aggregate principal amount of the outstanding notes (which the
outstanding amount is $140 million) by mid-October 1998, the source of funds for
which will be borrowings under the Second Amended and Restated Credit Agreement.
Additionally, the Company has outstanding letters of credit of $2,612,000 as of
fiscal 1998 and 1997, related to its workers compensation insurance. Also, the
Company is contractually restricted from paying dividends under the terms of the
Bridge Loan Agreement and the First Amendment to the DebenturesAmended PNC Credit
Agreement.
(ii) 5% Convertible Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Prospectus""Notes"), (specifically, Servicios). AsOn October 7, 1997, the resultCompany completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the Company's purchaseexercise
of the remaining 37% ownershipportion of the over-allotment option granted to the initial
purchasers of Notes. The placements were made as private offerings pursuant to
Rule 144A and Regulation S under the Securities Act. The Notes are subordinate
to the Company's senior indebtedness, which, as defined in Servicios,
the interest rate was reducedindenture under
which the Notes were issued, includes the borrowings under the Amended PNC
Credit Agreement, as amended. The Notes are convertible, at the holder's option,
into shares of Common Stock at a conversion price of $38.50 per share, subject
to 7% in July of 1997.certain adjustments.
The Debentures will not be redeemable by the Company before July 15, 1999.
Thereafter, the Debentures will beNotes are redeemable, at the Company's option, of the Companyon or after September 15,
2000, in whole or part, at the declining redemption prices set forth in the original
Prospectus, together with accrued and unpaid interest thereon.(see Note 17,interest. The initial
redemption price is 102.86% for further discussion.)
In January 1996, prior to the consummation of the Bank Credit Agreement and
offering described above, the Company, Yale E. Key, Clint Hurt and WellTech
entered into separate credit facilities with CIT totaling approximately $35
million (the combined maximum credit limit). The credit facilities were combined
into one facility after the consummation of the Welltech merger. As a result of
the separate credit facilities, the interest rate for Yale E. Key was lowered
from two and one-half to one and one-quarter percent over the stated prime rate
(8.25% at June 30, 1996). Each of the CIT term notes required principal and
interest payments, due the first day of each month beginning February 1, 1996,
plus a final payment of the unpaid balance of the note due December 31, 1998.
The expiration of each of the lines of credit was December 31, 1998.
The components of long-term debt are as follows:
June 30,
(Thousands) 1997 1996
Term Note (i) $120,000 $ -
Subordinated Debentures (ii) 52,000 -
Term Note(s) - CIT, interest and
principal payable monthly (iii) - 21,062
Revolving Line(s) of Credit - CIT,
interest payable monthly (iii) - 9,910
Revolver Note - Norwest, interest
payable monthly (iv) - 6,300
Term Note(s) - Norwest, interest and principal
payable monthly (v) - 7,000
Other notes payable 2,167 2,553
174,167 46,825
Less current portion 1,404 1,471
-----------------------------------------------------------------------
Long-term debt $172,763 $ 45,354
=======================================================================
(i). Under the Bank Credit Agreement, the term loan of $120 million
requires interest payments at the termination of the LIBOR interest period.
The term loan is seven years and the interest rate is LIBOR plus 2.75
percent. Principal payments are $500,000 at June 30, 1998, $125,000 at
the end of each quarteryear beginning September 30, 1998 through June 30,
2002, $8,750,000 at the end of each quarter beginning September 30,
2002 through June 30, 200315, 2000 and
$20,625,000 beginning September 30, 2003
with a final payment of $20,625,000declines ratably thereafter on June 30, 2004.
The Company used the proceeds from the facility to: (i) repay existing bank
debt; (ii) make additional acquisitions and capital expenditures; and (iii)
provide working capital. In addition, the credit facility, of $135 million,
provides, under certain conditions, for the repurchase of a portion of the
Company's outstanding common stock in the open market from time to time. At
June 30, 1997, there was $135 million available on the credit facility.
Under the credit facility the Company may be obligated to pay certain fees
including a commitment fee which ranges from .25% to .375% based on the
unused portion of the credit facility.
- 33 -an annual basis.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(ii)In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holder's option, to require the Company to repurchase all or any part of the
holder's Notes, within 60 days of such event, at a price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest thereon.
Proceeds from the placement of the Notes were used to repay balances under the
Company's credit facilities (see above). At June 30, 1998, $216,000,000
principal amount of the Notes was outstanding. Interest on the Notes is payable
on March 15 and September 15. Interest of approximately $5.1 million was paid on
March 15, 1998.
(iii) 7% Convertible Subordinated Debentures
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures mature on July 1, 2003 andare subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Amended PNC Credit Agreement, as amended.
The Debentures are convertible, at any time after November 1, 1996 and beforeprior to maturity, unless previously redeemed,at the holders'
option, into shares of the Company's common stockCommon Stock at a conversion price of $9 3/4$9.75 per share,
subject to adjustment in certain events.adjustments. In addition, Debenture holders of
the Debentures who convert prior
to July 1, 1999 will be entitled to receive a payment, in addition
tocash or Common Stock
(at the Company's common stock, a paymentoption), generally equal to 50% of the interest otherwise
payable from the date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in control of the Company,
as defined in the indenture under which the Debentures were issued, each holder
of Debentures will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Debentures within 60 days
of such event at a price equal to 100% of the principal amount thereof, together
with accrued and unpaid interest thereon.
As of June 30, 1998, $47,400,000 in principal amount of the Debentures had been
converted Debenturesinto 4,861,538 shares of common stock at the option of the holders. An
additional 165,423 shares of common stock were issued representing 50% of the
interest otherwise payable from the date of conversion through July 1, 1999 payable in cash orand
an additional 35,408 shares of common stock were issued as an inducement to
convert. The additional 165,423 shares of common stock, representing 50% of the
interest otherwise payable from the date of conversion through July 1, 1999, are
included in equity. The fair value of the additional 35,408 shares of common
stock issued as inducement to convert was $710,186 and is recorded as interest
expense in the consolidated statement of operations. In addition, the
proportional amount of unamortized debt issuance costs associated with the
converted Debentures was charged to additional paid-in capital at the Company's option.time of
conversion.
At June 30, 1998, $4,600,000 principal amount of the Debentures remained
outstanding. Interest on the Debentures is payable semi-annually on January 1 and July 1 of
each year, commencing January 1, 1997. In August,
1996, the interest rate was increased from 7% to 7 1/2% due to certain
modifications in the Debenture indenture involving a certain subsidiary's
inability to guarantee the obligations under the indenture, relating to the
Debentures (the "Prospectus"), (specifically, Servicios). As the result of
the Company's purchase of the remaining 37% ownership in Servicios, the
interest rate was reduced to 7% in July of 1997.
(iii). The CIT term note, as amended, required principal payments of
approximately $275,000, plus interest, due the first day of each month plus
a final payment of the unpaid balance of the note due December 31, 1998.
The interest rate was one and one-quarter percent above the stated prime
rate of 8.25% atyear.
(iv) Other Notes Payable
At June 30, 1996. The note was collateralized by all1998, other notes payable consist primarily of the
assets (includingcapital leases for
automotive equipment and inventory) of Yale E.equipment leases with varying interest rates and
principal and interest payments.
Key Clint HurtEnergy Group Inc. and WellTech Eastern. The CIT line of credit, as amended, required monthly
payments of interest at one and one-quarter percent above the stated prime
rate of 8.25% at June 30, 1996. The line of credit was collateralized by
the accounts receivable of Yale E. Key, Clint Hurt and WellTech Eastern.
The agreement with CIT included certain restrictive covenants, the most
restrictive of which prohibited the Company from making distributions and
declaring dividends on its common stock.
(iv). Prior to the Agreement and Offering described above, Odessa
Exploration had a loan agreement, as amended, with Norwest. The loan
agreement provided for a $7.5 million revolving line of credit note
subject to a borrowing base limitation (approximately $6.3 million at June
30, 1996). The borrowing base was redetermined on at least a semi-annual
basis. The borrowing base was reduced by approximately $100,000 per month
through October 1997; the maturity of the note. The note's interest rate
was one-half of one percent over Norwest's prime rate of 8.25% at June 30,
1996. The note was secured by substantially all of the oil and gas
properties of Odessa Exploration.
The loan agreement had contained various restrictive covenants and
compliance requirements, which included (a) prohibits Odessa Exploration
from declaring or paying dividends on Odessa Exploration's common stock,
(b) limiting the incurrence of additional indebtedness by Odessa
Exploration, (c) the limitation on the disposition of assets and (d)
various financial covenants.
(v). In April, 1996, as the result of the acquisition of certain
properties by Odessa Exploration, but prior to the Offering described
above, Odessa Exploration entered into a loan agreement with Norwest. The
loan agreement provided for a term loan of $9.3 million to be reduced by
$2.4 million in principal amount after the consummation of the acquisition
of certain properties by Odessa Exploration. The note's interest rate was
one-half of one percent over Norwest's prime rate of 8.25% at June 30,
1996. The note required interest payments beginning June 1, 1996. The note
was secured by substantially all of the oil and gas properties of Odessa
Exploration.Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Presented below is a schedule of the repayment requirements of long-term debt
for each of the next five years and thereafter as of June 30, 1997:
- 34 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)1998:
(in thousands)
Fiscal year Principal
Ended Amount
---------------------------------------------------------
1998----------------------------------------------
1999 $ 1,404
1999 1,3921,848
2000 7012,194
2001 6371,417
2002 533991
2003 177,329
Thereafter 169,500
-------216,000
----------------------------------------------
$ 174,167
=========================================================399,779
==============================================
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, other current assets and other current liabilities
approximates fair value because of the short maturity of these instruments.
BasedMarketable equity securities with a total cost of approximately $9,961,000 are
deemed by management to be available for sale and are classified in the
consolidated balance sheet at fair value of approximately $12,307,000 as other
long-term assets with net unrealized gains of approximately $2,346,000 reported
within stockholders equity.
The fair value of the Company's borrowing under its PNC Credit Facility
approximates the carrying amount as of June 30, 1998 and 1997, based on the
borrowing rates currently estimated to be available to the Company for loans
with similar terms, the fair value of long-term debt
approximates the carrying amount as of June 30, 1997 and 1996, except for theterms.
The 7% subordinated convertible debentures which have a carrying value of $4.6 million
and $52 million and a fair value of approximately $6.7 million and $98.9 million
at June 30, 1997.1998 and 1997, respectively. In addition, the 5% Notes have a
carrying value of $216 million and a fair value of approximately $164.1 million
at June 30, 1998. The fair value of these debentures was estimated using quoted
market prices.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30,
(Thousands) 1998 1997
1996
-------------------------------------------------------------------------------------------------------------------------------------------------
Accrued payroll and taxes $10,852 $ 6,674
$2,614Unvouchered accounts payable 3,428 -
Group medical insurance 695 891 1,536
Workers compensation 794 1,683 1,067
State sales, use and useother taxes 1,030 247 414
Gas imbalance - deferred income - 155
198
RevenueOil and Gas revenue distribution 201 145 437
Acquisition and reorganization accrual 2,066 838
3,720401(k) monies payable 405 -
Other 2,768 1,874
1,016
---------------------------------------------------------------------------------------------
Total $22,239 $ 12,507
$11,002
===========================================================================
8. STOCKHOLDERS' EQUITY
The 1995 Stock Option Plan
On March 26, 1996, a Stock Option Plan (the "1995 Plan") was approved by
the Company's stockholders. The Plan became effective July 1, 1995, and , unless
terminated earlier, will terminate July 1, 2005. The 1995 Plan is administered
by a committee (the "Committee") consisting of at least three directors of Key,
each of whom is a "disinterested person" within the meaning of rule 16b-3 under
the Exchange Act and an "outside director" within the meaning of Section 162(m)
of the Code.
- 35 -======================================================================
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued(continued)
8. STOCKHOLDERS' EQUITY
On January 13, 1998 the Company's shareholders approved the Key Energy Group,
Inc. 1997 Incentive Plan (the "1997 Incentive Plan"). The total number of shares1997 Incentive Plan is
an amendment and restatement of the Company's common stock that may be
subject to options underplans formerly known as the "Key Energy
Group, Inc. 1995 Plan may not exceed 1,800,000 in the
aggregate. The total amount of common stock with respect to which options
may be granted over the life of the 1995 Plan to any single employee shall
not exceed 500,000 shares in the aggregate. Options which are canceled,
forfeited or have expired or expire by their terms without being exercised
shall be available for future grants under the 1995 Plan. The Committee
may determine which key employees of the Company or any subsidiary or
other persons shall be granted options under the 1995 Plan, the terms of
the optionsStock Option Plan" (the "1995 Option Plan") and the number of shares which may be purchased under the
option.
The individuals eligible to receive options under the 1995 Plan consist of
key employees (including officers who may be members of the Board), directors
who are neither employees nor members of the Committee and other individuals who
render services of special importance to the management, operation or
development of Key or any subsidiary, and who have contributed or may be
expected to contribute materially to the success of Key or a subsidiary,
provided, however, that only key employees are eligible to receive options.
The price at which shares of common stock may be purchased upon exercise of
an option will be specified by the Committee at the time the option is granted,
but in the case of an individual stock option, except under certain conditions,
may not be less than the fair market value of the common stock on the date of
grant. The duration of any option is determined by the Committee in its
discretion and shall be specified in the option agreement. No individual stock
option may be exercisable after the expiration of ten years.
The"Key Energy
Group, Inc. 1995 Outside Directors Stock Option Plan" (the "1995 Directors
Plan") (collectively, the "Prior Plans"). All outstanding options previously
granted under the Prior Plans and outstanding as of November 17, 1997 (the date
on which the Company's Board of Directors adopted the plan)were assumed and
continued, without modification, under the 1997 Incentive Plan.
Under the 1997 Incentive Plan, On March 26, 1996,the Company may grant the following awards to key
employees, Directors who are not employees ("Outside Directors") and consultants
of the Company, its controlled subsidiaries, and its parent corporation, if any:
(i) incentive stock options ("ISOs") as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), (ii) "nonstatutory" stock options
("NSOs"), (iii) stock appreciation rights ("SARs"), (iv) shares of the
restricted stock, (v) performance shares and performance units, (vi) other
stock-based awards and (vii) supplemental tax bonuses (collectively, ("Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options".
The Company may grant Incentive Awards covering an Outside Directorsaggregate of the greater of
(i) 3,000,000 shares of the Company's Common Stock Optionand (ii) 10% of the shares of
Common Stock issued and outstanding on the last day of each calendar quarter,
provided, however, that a decrease in the number of issued and outstanding
shares of Common Stock from the previous calendar quarter shall not result in a
decrease in Common Stock available for issuance under the 1997 Incentive Plan.
Up to 3,000,000 shares of Common Stock shall be available for Incentive Stock
Options.
Any shares of Common Stock that are issued and are forfeited or are subject to
Incentive Awards under the 1997 Incentive Plan was approvedthat expire or terminate for any
reason will remain available for issuance with respect to the granting of
Incentive Awards during the term of the 1997 Incentive Plan, except as may
otherwise be provided by applicable law. Shares of Common Stock issued under the
1997 Incentive Plan may be either newly issued or treasury shares, including
shares of Common Stock that the Company receives in connection with the exercise
of an Incentive Awards. The number and kind of securities that may be issued
under the 1997 Incentive Plan and pursuant to then outstanding Incentive Awards
are subject to adjustments to prevent enlargement or dilution of rights
resulting from stock dividends, stock splits, recapitalizations, reorganization
or similar transactions.
The maximum number of shares of Common Stock subject to Incentive Awards that
may be granted or that may vest, as applicable, to any one Covered Employee
(defined below) during any calendar year shall be 500,000 shares, subject to
adjustment under the provisions of the 1997 Incentive Plan.
The maximum aggregate cash payout subject to Incentive Awards (including SARs,
performance units and performance shares payable in cash, or other stock-based
awards payable in cash) that may be granted to any one Covered Employee during
any calendar year is $2,500,000. For purposes of the 1997 Incentive Plan,
"Covered Employees" means a named executive officer who is one of the group
covered employees as defined in Section 162(m) of the Code and the regulation
promulgated thereunder (ie., generally the chief executive officer and the other
four most highly compensated executives for a given year.)
The 1997 Incentive Plan is administrated by the Company's Shareholder's (the "Directors Plan"). Individuals who are "Outside
Directors" are eligible to participate in the Directors Plan. An "Outside
Director" is defined as a member ofCompensation Committee appointed
by the Board of Directors who(the "Committee") consisting of not less than two
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
directors each of whom is not(i) an employee"outside director" under Section 162(m) of the
Company or any of its subsidiaries. Under the Directors Plan,
Outside Directors are divided into three groups dependent upon certain datesCode and length of service on the Board. Only nonqualified stock options ("NSO's") may be
granted(ii) a "non-employee director" under the Directors Plan. An NSO granted under the Directors Plan shall
expire ten years after the dateRule 16b-3 of the grant. An NSO may not be granted under
the Directors Plan after July 1, 1998.
The Directors Plan provides for the issuanceSecurities
Exchange Act of an aggregate of 400,000
shares of common stock, which may be authorized but unissued shares, treasury
shares, or shares purchased on the open market. The exercise price of the NSO
shall be the fair market value on the date of the grant.1934 .
The following table summarizes the stock option activity related to the
Company's plans:
Price
Shares Per Share
----------------------------------------------------------------------------------------------------------------------------------------
Outstanding, July 1, 1995 - -
Granted 1,075,000 $ 5.00
------------------------------------------------------------------------
Outstanding, June 30, 1996 1,075,000
------------------------------------------------------------------------
Granted 175,000 $ 7.50
Granted 175,000 $8.313$ 8.313
Granted 50,000 $8.375$ 8.375
Granted 25,000 $8.50$ 8.50
Granted 25,000 $11.125
Granted 535,000 $13.25
Granted 25,000 $14.50
- 36 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Price
Shares Per ShareGranted 50,000 $16.875
Canceled 26,668 $5.00(27,000) $ 5.00
Exercised 28,332 $5.00
----------(28,000) $ 5.00
---------------------------------------------------------------
Outstanding, June 30, 1997 2,080,000
==========
Exercisable,---------------------------------------------------------------
Granted 20,000 $18.125
Granted 250,000 $20.4375
Granted 15,000 $20.50
Granted 116,000 $15.00
Granted 15,000 $16.00
Exercised (209,000) $ 5.00
---------------------------------------------------------------
Outstanding, June 30, 1997 810,4171998 2,287,000
===============================================================
The Company applies APB 25 and related Interpretations in accounting for its
stock option awards. Accordingly, no compensation expense has been recognized
for its stock option awards. If compensation expense for the stock option awards
had been determined consistent with SFAS 123, the Company's net income and net
income per share, for the years ended June 30, 19971998 and 19961997 would have been
adjusted to the following pro forma amounts:
(unaudited)
Year Ended June 30,
1998 1997
1996
---- ------------------------------------------------------------
Net income (in thousands) $22,452 $8,680
$2,945
PrimaryBasic net income per share $ 1.31 $ 0.71
$ 0.37
Fully-dilutedDiluted net income per share $ 0.611.14 $ 0.350.61
The pro forma net income and pro forma net income per share amounts noted above
are not likely to be representative of the pro forma amounts to be reported in
future years. Pro forma adjustments in future years will include compensation
expense associated with the options granted in fiscal year 19961998 and 1997 plus
compensation expense associated with any options awarded in future years. As a
result, such pro forma compensation expense is likely to be higher than the
levels reflected for 19961998 and 1997 if any options are awarded in future years.
Under SFAS 123, the fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grant in 1998 and 1997:
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1998 1997
and 1996:
1997 1996
---- -------------------------------------------------------------------
Risk-free interest rate 5.79% 6.59% 6.54%
Expected life 5 years 5 years
Expected volatility 136% 28% 29%
Expected dividend yield 0% 0%
The total fair value of options granted at June 30, 1998 and 1997 is $6,541,000.
- 37 -
Key Energy Group, Inc.$14,098,000
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)$6,541,000, respectively.
9. INCOME TAXES
Components of income tax expense (benefit) are as follows:
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
1995
-----------------------------------------------------------------------------------------------------------------------------------------------------
Federal and State:
Current $ 7,343 $ 1,664 $ 270
$ (220)
Deferred 7,287 3,836 1,618
1,370
---------------------------------------------------------------------------------------------------------------------
$14,630 $ 5,500 $ 1,888
$1,150
====================================================================================================================================================
Income tax expense (benefit) differs from amounts computed by applying the statutory
federal rate as follows:
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
1995
----------------------------------------------------------------------------------------------------------------------------------------------------
Income tax computed at
Statutory rate 35.0% 34.0%35.0% 34.0%
Amortization of goodwill
disallowance 1.1 1.5 - -
Meals and entertainment
disallowance 0.7 0.8 1.7
2.2
Accrual to return adjustments 0.3 (1.5) (1.0)State taxes 0.7 .2 -
Other 0.1 (0.3) (0.7)
_______________________________________________________________________0.2 0.4 (1.8)
------------------------------------------------------------------------------
37.7% 37.9% 33.9%
34.5%
=====================================================================================================================================================
Deferred tax assets (liabilities) are comprised of the following :
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
1995
----------------------------------------------------------------------------------------------------------------------------------------------------
Net operating loss and
tax credit
carry-forwards $ 5,564 $ 4,628 $ 6,293
$ 1,140
Property and equipment (99,664) (40,410) (10,942)
(3,437)
Other 2,363 (82) 95
(25)
-----------------------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax
liability $ 91,737 $ (35,864) $ (4,554)
$ (2,322)
=====================================================================================================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future, management has determined that taxable income of the Company
will more likely than not be sufficient to fully utilize available carryforwards
prior to their ultimate expiration.
The Company estimates that as of June 30, 1997,1998, the Company will have available
approximately $148,414,060$3,290,000 of net operating loss carryforwards (which begin to
expire in 2001). The net operating loss carryforwards are subject to an annual
limitation of approximately $940,000, under Sections 382 and 383 of the Internal
Revenue Code.
- 38 -
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. LEASING ARRANGEMENTS
Among other leases, the Company (primarily its subsidiaries), lease leases certain
automotive equipment under non-cancelable operating leases which expire at
various dates through 2002. The term of the operating leases generally run from
36 to 60 months with varying payment dates throughout each month. In addition,
in the case of Yale E. Key, each lease includes an option to purchase the
equipment and an excess mileage charge as defined in the leases.
As of June 30, 1997,1998, the future minimum lease payments under non-cancelable
operating leases, in thousands, are as follows:
Lease
Fiscal Year LeasePayments
Ending June 30, Payments
1998(thousands)
--------------------------------------------------
1999 $ 4,348
1999 3,4337,249
2000 2,0446,022
2001 1,1223,492
2002 391
---------
$11,338
=========1,641
2003 660
---------------------------------------------------
$19,064
===================================================
Operating lease expense was approximately $8,002,000, $5,299,000, $2,897,000, and
$1,930,000,$2,897,000, for the fiscal years ended June 30, 1998, 1997 1996 and 1995,1996,
respectively.
11. EMPLOYEE BENEFIT PLANS
At June 30, 1997, as the result of the WellTech merger (Note 2),Prior to January 1, 1998, the Company maintainsmaintained two 401-(k)401(k) plans (the "Plans""Old
Plans") for its employees. Employeesemployees such that employees of WellTech Eastern arewere eligible
for participation in one Plan (the "WellTech 401-(k)401(k) Plan"), while all other
employees arewere eligible for participation in the other Plan (the "Key 401-(k)401(k)
Plan"). TheAt January 1, 1998, the Company intends to mergemerged the two Old Plans at January 1, 1998. The 401-(k) plansinto one plan
(the "New Plan"). Both the Old Plans and the New Plan cover substantially all
employees of the Company.
TheAfter January 1, 1998, under the New Plan, the Company matches 100% of the
employees' contributions up to a maximum of $1,000 per participant per year.
Contributions to the New Plan after January 1, 1998 totaled $699,108. Prior to
January 1, 1998, under the Old Plans, the Company matched employees'
contributions up to 10% of the employees' contribution to the Key 401-(k)401(k) Plan.
These contributions totaled approximately $36,000, $35,000 and $19,000 for the
six month period ended December 31, 1997 and $20,000 for the years ended June 30, 1997 1996 and
1995,1996, respectively. Additionally, the Company contributed $300,000$172,401 and $37,000$300,000
into the WellTech 401-(k)401(k) Plan for the six month period ended December 31, 1997
and the year ended June 30, 1997, and the
period of March 26, 1996 (the date of the WellTech merger) to June 30, 1996,
respectively . The Company agreed to matchmatched employee
contributions up to 50% (to a maximum of $1,000 per employee) of the employees'
contributions to the WellTech 401-(k)401(k) Plan.
12. MAJOR CUSTOMERS
Sales to customers representing 10% or more of consolidated revenues for the
years ended June 30, 1997, 1996 and 1995 were as follows:
Fiscal Year Ended June 30,
1997 1996
1995------------------------------------------------
Customer A 13% 20%
18%
Customer B 7% 11%
The Company did not have any one customer which represented 10% - 39 -or more of
consolidated revenues for the fiscal year ended June 30, 1998.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13. TRANSACTIONS WITH RELATED PARTIES
WellTech Eastern paid $78,000$108,000 and $18,000$78,000 for the yearyears ended June 30, 19971998 and
for the period March 26, 1996 (the date of the Welltech merger) to June 30,
1996,1997, respectively, for office/yard rental expense in which an officer of the
Company and WellTech Eastern has an interest. In the opinion of the Board of
Directors of the Company, based on the Board's review of competitive bids, this
transaction was on terms at least as favorable to the Company as could have been
obtained from a third party.
In connection with the Odessa Exploration acquisition, (see Note 2) the
Company granted D. Kirk Edwards (President of Odessa Exploration) a percentage
reversionary working interest in five deep gas wells located in West Texas upon
repayment of $1,622,000 of the bank debt assumed by the Company in the
acquisition from the Company's earnings from the five wells. The percentage
reversionary working interest decreases based on the date of repayment of the
assumed bank debt and ranges from 20% of the earnings from the five wells if
repayment occurs on or prior to July 7, 1995, to 5% of the earnings from the
five wells if repayment occurs after July 7, 1996.
Key leases automotive equipment from an independent third party (see Note
10). The independent third party purchases the automotive equipment from an
automobile dealership in which a former officer owns a majority interest. Net
proceeds to the automobile dealership totaled $399,000paid $702,000 for the year ended June 30, 1995. The leases are considered operating leases. In1998 for certain
oil and gas assets in a transaction involving a company, the opinionpresident of which
is an outside director of the Board of Directors ofCompany. At June 30, 1998, the Company the net proceeds from automotive equipment
were on terms at least as favorableowed
$300,000 to the Company as could have been obtained
from a third party. This opinion is based on information provided by a third
party leasing company, that is not affiliated with the former officer or the
Company, to the Board of Directors regarding purchase prices and equipment lease
rentals offered by third parties.
Space left blank intentionally
- 40 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)same company.
14. CONCENTRATIONS OF CREDIT RISK
The Company has a concentration of customers in the oil and gas industry.
Substantially all of the Company's customers are major integrated oil companies,
major independent producers of oil and gas and smaller independent producers.
This may affect the Company's overall exposure to credit risk either positively
or negatively, in as much as its customers are effected by economic conditions
in the oil and gas industry, which has historically been cyclical. However,
accounts receivable are well diversified among many customers and a significant
portion of the receivables are from major oil companies, which management
believes minimizes potential credit risk. Historically, credit losses have been
insignificant. Receivables are generally not collateralized, although the
Company may generally secure a receivable at any time by filing a mechanic's and
material-mans' lien on the well serviced.
15. BUSINESS SEGMENT INFORMATION
Information about the Company's operations by business segment is as follows:
Year Ended June 30,
(Thousands) 1998 1997 1996
1995
----------------------------------------------------------------------------
Revenues:
Oil and gas $ 8,180 $ 4,175 $ 2,334---------------------------------------------------------------------------
Identifiable assets:
Oilfield services 144,385 55,933 40,105$513,583 $242,001 $94,962
Oil and gas well drilling services 9,956 6,188 1,932
Other 1,109 182 318
----------------------------------------------------------------------------
$163,630 $ 66,478 $44,689
============================================================================
Income before minority interest and
and income taxes:84,579 8,365 5,583
Oil and gas $ 3,719 $ 1,596 $ 94139,047 23,544 18,170
General corporate 61,431 46,185 3,007
---------------------------------------------------------------------------
$698,640 $320,095 $121,722
===========================================================================
Capital expenditures (excluding acquisitions):
Oilfield services 20,639 6,482 4,105$ 44,284 $ 15,084 $ 5,188
Oil and gas well drilling services 1,036 639 367
Interest expense (7,535) (2,477) (1,478)
General corporate (3,257) (665) (607)
----------------------------------------------------------------------------
$ 14,602 $ 5,575 $ 3,328
============================================================================
Identifiable assets:5,385 1,483 598
Oil and gas 7,849 8,188 1,879
---------------------------------------------------------------------------
$ 23,544 $18,17057,518 $ 8,28924,755 $ 7,665
===========================================================================
Depreciation, depletion and amortization:
Oilfield services 242,001 94,962 33,516$ 26,060 $ 9,198 $ 3,862
Oil and gas well drilling services 8,365 5,583 3,1602,450 436 221
Oil and gas 2,043 870 618
General corporate 46,185 3,007 278
----------------------------------------------------------------------------
$320,095 $121,722 $45,243
============================================================================448 572 -
41 ----------------------------------------------------------------------------
$ 31,001 $ 11,076 $ 4,701
===========================================================================
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Year Ended June 30,
--------------------------
(Thousands) 1997 1996 1995
----------------------------------------------------------------------------
Capital expenditures (excluding acquisitions):
Oil and gas $ 8,188 $ 1,879 $ 2,823
OilfieldThe Company's oilfield services 15,084 5,188 2,839
Oil and gas well drilling services 1,483 598 143
---------------------------------------------------------------------------
$ 24,755 $ 7,665 $ 5,805
===========================================================================
Depreciation, depletion and amortization:
Oil and gas $ 870 $ 618 $ 426
Oifield services 9,198 3,862 2,279
Oil and gas well drilling services 436 221 33
General corporate 916 - -
---------------------------------------------------------------------------
$ 11,420 $ 4,701 $ 2,738
===========================================================================
Key operatessubsidiaries operate a variety of oilfield
service equipment including workover rigs, hot oil units, transports and various
other oilfield servicing equipment. In addition, Key performsthey perform a variety of other
oilfield services including fishing tools, frac tanks and blow-out preventers.
Oil and gas production is conducted by Odessa Exploration. Odessa Exploration
acquires and manages interests in producing oil and gas properties for its own
account and for its sponsored investors. Odessa Exploration is engaged in the
drilling and production of oil and natural gas in the United States. Odessa
Exploration acquires producing oil and gas properties from major and independent
producers. After acquisition, Odessa Exploration may either rework the acquired
wells to increase production and/or form drilling partnerships for additional
development wells.
Oil and gas well drilling services are conducted primarily by Clint HurtKey Energy
Drilling. Clint HurtKey Energy Drilling operates sixforty drilling rigs which drill for oil
and gas in the West Texas and New Mexico area.
16. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price risks. The Company is exposed to credit losses in
the event of nonperformance by the counterparties to its commodity hedges. The
Company anticipates, however, that such counterparties will be able to fully
satisfy their obligations under the contracts. The Company does not obtain
collateral or other security to support financial instruments subject to credit
risk but monitors the credit standing of the counterparties.
The Company utilizes option contracts to hedge the effect of price changes
on future oil and gas production. If market prices of oil and gas exceed the
strike price of put options, the options will expire unexercised, therefore
reducing the effective price received for oil and gas sales by the cost of the
related option. As of June 30, 1996, Odessa Exploration had 6,000 Bbls of oil
per month hedged with a strike price of $19.50 per Bbl., from the period of July
1, 1996 through December 31, 1996.
Premiums paid for commodity options contracts are amortized to oil and gas
sales over the terms of the agreements. Unamortized premiums of $91,789 and $0
are included in other current assets in the consolidated balance sheet at June
30, 1996 and 1997, respectively. Amounts receivable, if any, under commodity
option contracts are accrued as an increase in oil and gas sales for the
applicable periods.
- 42 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
17. SUBSEQUENT EVENTS.
Acquisitions Announced but not yet Completed after June 30, 19971998
The following described acquisitions that have been announced but not yet completed after June 30, 19971998 and are not
included in the Company's results of operations for the twelve months ended June
30, 1997.
BRW Drilling, Inc.
On August 4, 1997, the Company announced it had signed a letter of intent
to acquire BRW Drilling, Inc. ("BRW") for approximately $15.0 million in cash.
BRW operates 7 drilling rigs and related equipment in the Permian Basin of West
Texas. The closing of the BRW acquisition is expected upon negotiation of a
definitive agreement, completion of the Company's standard due diligence and
receipt of regulatory clearances, if any are required. Upon completion, the BRW
acquisition will be combined with Clint Hurt's drilling operations in the
Permian Basin of West Texas to form a thirteen rig shallow drilling operation.
Frontier1998.
Colorado Well Service, Inc.
On August 21, 1997,July 15, 1998, the Company announced a definitive agreement forclosed the acquisition of Frontierthe assets of Colorado
Well Service, Inc. ("Frontier"Colorado") for approximately $3.5$6.5 million in cash. FrontierColorado
operates 12 oilwellseventeen well service rigs and related equipmentone drilling rig in Wyoming. The closing of the Frontier acquisition is expected upon negotiation
of a definitive agreement, completion of the Company's standard due diligenceUtah and receipt of regulatory clearances, if any are required.
Dunbar Well Service, Inc.Colorado.
TransTexas Assets
On August 4, 1997,19, 1998, the Company announced it had signed a lettercompleted the acquisition of intent
to acquire Dunbar Well Service, Inc.certain oilfield
service assets of TransTexas Gas Corporation ("Dunbar"TransTexas") for approximately
$11.8$20.5 million in cash and future obligations. The TransTexas assets are based in
Laredo, Texas and include nine well service rigs, approximately 80 oilfield
service trucks and 173 frac and other tanks.
Flint Asset Purchase
On September 16, 1998, the Company closed the acquisition of certain assets of
Flint Engineering & Construction Co., a subsidiary of Flint Industries, Inc.
("Flint") for approximately $11.9 million in cash. DunbarFlint operates 38 oilwell55 well
service rigs and related equipment25 oilfield trucks in Wyoming. The closing of the Dunbar acquisition is expected upon negotiation of a
definitive agreement, completion of the Company's standard due diligenceRocky Mountains, Four Corners Area,
MidContinent Region, Permian Basin and receipt of regulatory clearances, if any are required.
J.W. Gibson Well Service CompanyArkLaTex Region.
Iceberg, S.A.
On August 4, 1997,September 24, 1998, the Company announced a definitive agreement forclosed the acquisition of J.W. Gibson Well Service Companythe assets of
Iceberg, S.A. ("Gibson"Iceberg") for cash, stock and
warrants with an estimated value of approximately $25.0 million. Gibson$4.4 million in cash. Iceberg
operates 74 oilwellfour well service rigs and related equipment in eight western states. The
closingComodoro Rivadavia, Argentina.
HSI Group
On September 24, 1998, the Company closed the acquisition of substantially all
of the Gibson acquisition is expected in October 1997. The Company will
manage the operationsoperating assets of Gibson during the interim period. The acquired Rocky
Mountain operations of Gibson, together with the acquired DunbarHellums Services II, Inc., Superior Completion
Services, Inc., South Texas Disposal, Inc. and Frontier
operations, will operate as a separate subsidiary of Key Energy.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co.
On July 21, 1997, the Company announced it had signed a letter of intent to
acquire Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co.
(collectively, "Big A/Sunco"Elsik II, Inc. ("HSI Group") for
cash$47.9 million in cash. HSI Group operates, among other assets, approximately 80
oilfield trucks and stock with an estimated value of
approximately $31.0 million. Big A/Sunco operates 29 oilwelleight well service rigs four
drilling rigs, 75 fluid hauling and other trucks, a machine shop/supply store
and related equipment in the Four Corners region of the Southwestern United
States. The closing of the Big A/Sunco acquisition is expected upon negotiation
of a definitive agreement, completion of the Company's standard due diligence
and receipt of regulatory clearances, if any are required. The acquired Big
A/Sunco operations will operate as a separate subsidiary of Key Energy.
- 43 -South Texas.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Acquisitions Completed after June 30, 1997
The following described acquisitions were completed after June 30, 1997 and
are not included in the Company's results of operations for the twelve months
ended June 30, 1997.
Landmark Fishing & Rental,Dawson Production Services Inc.
On September 16, 1997, the Company closed the acquisition15, 1998, Midland Acquisition Corporation ("Midland"), a New Jersey
corporation and a wholly-owned subsidiary of Landmark
Fishing & Rental, Inc. ("Landmark") for approximately $3.3 million in cash.
Landmark operates a rental tool business in Western Oklahoma and the Texas
Panhandle. Landmark will be operated by WellTech Mid-Continent Division of
WellTech Eastern. The operating results of Landmark will be included in the
Company's results of operations effective September 16, 1997.
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
On September 1, 1997, the Company, completed the acquisition of Ram Oil Well
Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland"its cash
tender offer (the "Tender Offer") for $21.5 millionall outstanding shares of common stock,
par value $0.01 per share (the "Dawson Shares"), including the associated common
stock purchase rights, of Dawson at a price of $17.50 per share. The Tender
Offer expired at 8:30 a.m., New York City Time, on Tuesday, September 15, 1998.
Midland accepted for payment 10,021,601 Dawson Shares for a total purchase price
of approximately $175.4 million. The acceptance of tendered Dawson Shares,
together with Dawson Shares previously owned by Midland and the Company prior to
the commencement of the Tender Offer resulted in Midland and the Company
acquiring approximately 97.0% of the outstanding Dawson Shares. The purchase
price for Dawson Shares pursuant to the Tender Offer and the merger agreement
was determined pursuant to arms-length negotiations between the parties and was
based on a variety of factors, including, without limitation, the anticipated
earnings and cash flows of Dawson.
The Tender Offer was made pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of August 11, 1998, by and among, Midland, the
Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger
Agreement, Midland was merged with and into Dawson (the "First Merger") under
the laws of the States of New Jersey and Texas and all Dawson Shares not owned
by Midland were cancelled and retired and converted into the right to receive
$17.50 in cash. Ram/RowlandOn September 21, 1998, Dawson was merged with and into the
Company (the "Second Merger") pursuant to the laws of the States of Maryland and
Texas.
The total consideration paid for the Dawson Shares pursuant to the Tender Offer
and the First Merger was approximately $181.7 million.
Dawson operates approximately 17 oilwell527 well service rigs, 93 fluid
hauling200 oilfield trucks, and other trucks, 290 frac tanks, three disposal21
production testing units in South Texas and brine wells,the Gulf Coast, East Texas and
dirt construction equipment inLouisiana, the Permian Basin of West Texas and Southeast New Mexico. Ram/Rowland
will be operated byMexico, the Company's westAnadarko Basin of
Texas subsidiary: Yale E. Key, Inc. The
operating results of Ram/Rowland will be includedand Oklahoma, California, and in the Company's results of
operations effective September 1, 1997.
Mosley Well Service, Inc.
On August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley") which operates in East Texas, Northern Louisiana and
Arkansas. Mosley was acquired for approximately $16.2 million in cash and
included thirty-six well service rigs and related equipment. Moseley will be
integrated with the Brooks Division of WellTech Eastern. The operating results
of Mosley will be included in the Company's results of operations effective
September 1, 1997.
Kenting Holdings (Argentina) S.A.
On July 30, 1997, the Company completed the acquisitioninland waters of the assetsGulf of Kenting Holdings (Argentina) S.A. ("Kenting") for $10.1 million in cash. The
Kenting assets included six oilwell service rigs, three drilling rigs and
related equipment in Argentina. The Kenting assets will be operated by
Servicios.
Patrick Well Service, Inc.
On July 17, 1997, the Company completed the acquisition of the assets of
Patrick Well Service, Inc. ("Patrick") for $7.0 million in cash. The Patrick
assets included 29 oilwell service rigs and related equipment located in
Southwest Kansas, Oklahoma and Southeast Colorado. The Patrick assets will be
operated by the WellTech Mid-Continent Division of WellTech Eastern.
- 44 -Mexico.
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Servicios WellTech, S.A. Minority Interest
Effective July 1, 1997, the Company purchased the remaining 37% interest in
Servicios from two unrelated parties for $3.4 million in cash. As a result of
the purchase, the Company will now own 100% of Servicios.
Conversion of Convertible Subordinated Debentures
As of September 11, 1997, $33,245,000 in principal amount of the Company's
Debentures had converted into the Company's common stock. The conversion was at
the option of the holders. The Debentures converted into 3,552,539 shares of the
Company's common stock. The conversion included 188,488 shares, in addition to
the conversion of shares at $9.75 per share. Such additional consideration will
be accounted for as an increase to the Company's Equity. However, the
proportional amount of debt issuance costs associated with the converted
Debentures will be expensed as an extraordinary item in the period in which it
occurs.
18. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Summarized quarterly financial data for 1997 and 1996 are as follows:
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
1997
Revenues . . . . . . . . . . . . . . . . . . . . . $31,462 $36,197 $43,050 $52,921
Earnings from operations . . . . . . . . . . . . . 2,396 3,022 3,563 5,621
Net earnings . . . . . . . . . . . . . . . . . . . 1,554 2,043 2,365 3,136
Earnings per share . . . . . . . . . . . . . . . . .14 .18 .19 .24
Weighted average common shares
and equivalents outstanding. . . . . . . . . . . 10,894 11,634 12,572 13,294
1996
Revenues . . . . . . . . . . . . . . . . . . . . . $12,398 $12,394 $14,302 $27,384
Earnings from operations . . . . . . . . . . . . . 3,522 3,763 4,180 7,895
Net earnings . . . . . . . . . . . . . . . . . . . 726 768 827 1,265
Earnings per share . . . . . . . . . . . . . . . . .11 .11 .12 .16
Weighted average common shares
and equivalents outstanding. . . . . . . . . . . 6,914 6,914 6,981 7,941
The fourth quarter of fiscal 1997 includes an adjustment of $2 million for
previously unrecorded inventory.
- 45 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
19. SUPPLEMENTAL INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)
CAPITALIZED COSTS:
June 30,
(in thousands) 1997 1996
Oil and Gas Properties:
Proved properties $ 23,402 $ 17,290
Unproved properties - -
Less accumulated depletion (1,868) (1,364)
-------------------------------------------------------------------------
Net capitalized costs $ 21,534 $ 15,926
=========================================================================
COSTS INCURRED:
June 30,
(in thousands) 1997 1996 1995
-------------------------------------------------------------------------
Proved property acquisition costs $ - $ 7,786 $ 1,054
Development costs 8,188 1,848 2,581
-------------------------------------------------------------------------
Total costs incurred $ 8,188 $ 9,634 $ 3,635
=========================================================================
RESULTS OF OPERATIONS:
June 30,
(in thousands) 1997 1996 1995
-------------------------------------------------------------------------
Oil and gas sales $ 6,975 $ 3,555 $ 1,793
Production costs, including
production taxes (3,030) (1,350) (756)
Depletion (835) (598) (398)
Income taxes * (1,057) (546) (217)
-------------------------------------------------------------------------
Results of operations for oil and
gas producing activities ** $ 2,053 $ 1,061 $ 422
=========================================================================
* - computed at the statutory rate of 35%.
** - excludes corporate overhead and financing costs.
Oil and Gas Reserve Information
Estimates of Odessa Exploration's proved oil and gas reserves as of June
30, 1997, 1996 and 1995 were prepared by the Company and reviewed by an
independent petroleum reservoir engineering firm. Estimates were made in
accordance with guidelines established by the Securities and Exchange
Commission. Proved oil and gas reserves are the estimated quantities of crude
oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic conditions, i.e. prices and costs as of the date the
estimate is made. Prices utilized reflect consideration of changes in existing
prices provided by contractual arrangements, if any, but not of escalations
based upon future conditions. The reserve estimates are presented utilizing an
average oil price of $21.00 Bbl and an average natural gas price of $2.20 Mcf as
of June 30, 1997.
- 47 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Proved developed oil and gas reserves are reserves that can be expected to
be recovered through existing equipment and operating methods.
Proved undeveloped oil and gas reserves are proved reserves that are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion or
secondary or tertiary recovery. Reserves assigned to undrilled acreage are
limited to those drilling units that offset productive units reasonably certain
of production when drilled.
No major discovery or other favorable or adverse event has occurred since
July 1, 1997 which is believed to have caused a significant change in the
estimated proved oil and gas reserves of Odessa Exploration.
Odessa Exploration's estimate of reserves has not been filed with or
included in reports to any federal agency other than the Securities and Exchange
Commission.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
Oil and Gas Producing Activities:
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
Total Proved Reserves:
Balance, June 30, 1994 114,908 6,785,661
------------------------------------------------------------------------
Revisions of previous estimates 92,080 1,945,659
Purchases of minerals-in-place 1,515,559 6,036,937
Production (40,330) (770,197)
Balance, June 30, 1995 1,682,217 13,998,060
------------------------------------------------------------------------
Revisions of previous estimates 438,142 6,313,118
Purchases of minerals-in-place 3,162,099 16,456,993
Production (97,130) (1,026,577)
Balance, June 30, 1996 5,185,328 35,741,594
========================================================================
(table continued next page)
- 47 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
Proved Developed Reserves:
June 30, 1995 750,604 11,203,232
========================================================================
June 30, 1996 2,727,967 24,517,362
========================================================================
Standardized Measure of Discounted Future Cash Flows
The following schedules present estimates of the standardized measure of
discounted future net cash flows from the Company's proved reserves as of June
30, 1996, and an analysis of the changes in these amounts for the years ended
June 30, 1996 and 1995. June 30, 1997 information is not included, as during the
current year oil and gas producing activities are no longer considered
significant in accordance with reporting requirements under FAS 14 - Financial
Reporting for Segments of a Business Enterprise. Estimated future cash flows are
determined using year-end prices adjusted only for fixed and determinable
increases for natural gas provided by contractual agreement (if any). Estimated
future production and development costs are based on economic conditions at
year-end. Future federal income taxes are computed by applying the statutory
federal income tax rate of 34% to the difference between the future pretax net
cash flows and the tax basis of proved oil and gas properties, after considering
investment tax credits and net operating loss carry-forwards (if any),
associated with these properties.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
(in thousands) June 30, 1996 June 30, 1995
Standardized Measure:
Future cash inflows $ 171,000 $ 51,830
Future production costs (61,521) (11,852)
Future development costs (15,495) (6,160)
Future income taxes (12,092) (10,477)
_______________________________________________________________________
Future after-tax net cash flows 81,892 23,341
10% annual discount (42,188) (8,183)
------------------------------------------------------------------------
Standardized Measure $ 39,704 $ 15,158
========================================================================
(table continued next page)
- 48 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Changes in Standardized Measure:
Standardized Measure, June 30, 1994 $ 4,739
Oil and gas sales, net of production costs (1,037)
Purchases of minerals in place 13,033
Net change in income taxes (5,881)
Accretion of discount 512
Revision of quantity estimates 1,745
Change in future development costs 1,227
Net change in sales prices 79
Changes in production rates (timing) and other 741
------------------------------------------------------------------
Standardized Measure, June 30, 1995 $ 15,158
Oil and gas sales, net of production costs (2,205)
Purchases of minerals in place 24,216
Net change in income taxes 75
Accretion of discount 2,142
Revision of quantity estimates 6,189
Change in future development costs (982)
Extensions and discoveries 2,952
Net change in sales prices 1,397
Changes in production rates (timing) and other (9,238)
------------------------------------------------------------------
Standardized Measure, June 30, 1996 $ 39,704
==================================================================
20.17. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended June 30, 1998, 1997 1996
and
19951996 are presented below:
Year Ended June 30,
(Thousands) 1998 1997 1996
1995
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Interest paid $ 16,441 $ 5,850 $ 2,205 $1,422$2,205
Taxes paid 9,024 - 391
53
Supplemental schedule detailing the purchase price of acquisitions including
non-cash investing and financing transactionsconsideration paid for the yearsyear ended June 30, 1996 and 1995 areis presented below:
Year Ended June 30,
(Thousands) 1996 1995
- --------------------------------------------------------------------------------
Fair value of Common Stock issued for
Clint Hurt Drilling - 23
Fair value of Common Stock and
Warrants issued for
WellTech West Texas - 8,647
Capital lease obligation reduced for
purchase of asset - 275
(table continued next page)
- 49 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Proceeds on sale of assets
not received - 132
Property and equipment additions and
acquisition costs not paid as of June 30th - 1,015
Issuance of note payable in Clint Hurt
Drilling acquisition - 725(thousands)
--------------------------------------------------------------------
Fair value of Common Stock issued for
WellTech, Inc. 17,929 -$17,929
Assumption of Welltech, Inc.
Working capital deficit 1,734 -
Assumption of Welltech, Inc.
non-current liabilities and debt 27,570
-
Acquisition of WellTech, Inc.
property and equipment 47,455
-
Supplemental schedule detailing the purchase price of acquisitions including
non-cash investing and financing transactionsconsideration paid for the year ended June 30, 1997 is presented
below:below (in thousands):
Acquisition Fair Value Acquisition
of Issued Assumption of Assumption of of Property
Acquisition Common Stock (1) Debt Liabilities and Equipment
- --------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Brownlee Well Service Inc. $ 672671 $ 1,948 $ 3,558 $ 11,234
Woodward Well Service, Inc. 562563 80 771 1,351
Brooks Well Servicing, Inc. 11,125 - 6,291 16,935
Hitwell Surveys, Inc. - 176 1,425 2,655
B&L Hotshot, Inc. - - 175 4,575
Energy Air Drilling Services Co. 5048 150 - 700
Talon Trucking Co. - - - 2,700
Cobra Industries, Inc. 2,3842,386 625 3,867 10,171
T.S.T Paraffin Service Co., Inc. - 70 3,599 10,035
Tri-State Wellhead & Valve, Inc. 1,000 - - 1,339
Kalkaska Construction
Service, Inc. 1,1121,111 - 1,187 10,711
Well-Co Oilwell Co. 4,048Oil Service, Inc. 4,050 599 11,337 28,463
Shreve's Well Service - - 50 600
Youngs Wireline - - 225 744
Phoenix Well Service - 410 1,761 3,897
Elder Well Service, Inc. - - 40 649
Diamond Well Service, Inc. - - - 675
Southwest Oilfield Services, Inc. - - - 455
Edco Well Service - - 50 460
(1)
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Fair value(continued)
Supplemental schedule detailing the purchase price of issued common stock represents numberacquisitions including
non-cash consideration paid for the year ended June 30, 1998 is presented below
(in thousands):
Fair Value Acquisition
of Issued Assumption of Assumption of of Property
Acquisition Common Stock Debt Liabilities and Equipment
- -------------------------------------------------------------------------------------------------------------
Watson Truck & Supply, Inc. $ - $ - $ 100 $ 1,370
Lakota Drilling Company - - 6 11,900
JPF Well Service, Inc.
and JPF Lease Service, Inc. - - 6 4,500
Edwards Transport, Inc. - - - 1,037
Lundy Vacuum Service, Inc. - - - 1,061
Lauffer Well Service, Inc. - - 50 350
Updike Brothers, Inc. - 1,197 7,748 10,595
Four Corners Drilling Company - - 150 9,600
Kingsley Enterprises, Inc. - 300 3,692 4,866
Circle M Vacuum Services, Inc. - - - 700
Hot Oil Plus, Inc. - 200 - 1,900
J.W. Gibson Well Service Company 1,856 - 4,532 22,214
Sitton Drilling Co. 2,169 - 4,071 10,642
Wellcorps,
L.L.C., White Rhino Drilling,
Inc. and S&R Cable, Inc. 5,760 - 500 6,439
Jeter Service Co. - 1,802 3,686 6,553
GSI Trucking Company, Inc., Kahlden
Production Services, Inc. and
McCurdy Well Service, Inc. - 51 - 1,181
Big A Well Service Co., Sunco
Trucking Co. and Justis
Supply Co., Inc 4,078 359 2,504 24,618
Frontier Well Service, Inc. - - 2,118 5,478
Dunbar Well Service, Inc. - - 6,273 15,206
BRW Drilling, Inc. - 1,919 6,194 14,140
Landmark Fishing & Rental, Inc. - 539 2,386 5,180
Waco Oil & Gas Co., Inc. - - 500 7,644
Ram Oil Well Service, Inc. and
Rowland Trucking Co., Inc. - - 7,669 19,918
Mosley Well Service, Inc. - 933 406 25,246
Kenting Holdings (Argentina) S.A. - - - -
Patrick Well Service, Inc. - 563 625 9,263
Win-Tex Drilling and Trucking - 295 3,942 7,392
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
18. Unaudited Supplementary Information - Quarterly Results of Operations
Summarized quarterly financial data for 1998 and 1997 are as follows:
(in thousands, except per First Second Third Fourth
share amounts Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------
1998
Revenues $75,399 $109,595 $120,724 $114,328
Earnings from operations 22,780 33,960 37,281 37,074
Net earnings 4,111 7,345 7,082 5,637
Earnings per share .29 .40 .39 .31
Weighted average common shares
issued atand equivalents outstanding 14,126 18,151 18,295 18,261
1997
Revenues $31,462 $36,197 $43,050 $52,921
Earnings from operations 2,396 3,022 3,563 5,621
Net earnings 1,554 2,043 2,365 3,136
Earnings per share .15 .19 .20 .26
Weighted average common shares
and equivalents outstanding 10,425 10,850 11,612 11,979
The fourth quarter of fiscal 1997 includes an adjustment of $2 million for
previously unrecorded inventory.
Amounts reported for the market valuefirst quarter of Company's common stock at
acquisition date.
- 50 -1998 differ from the amounts
previously reported on Form 10-Q, filed for the quarter ended September 30,
1997, due to non-cash adjustments recorded in the fourth quarter which are
associated with the 7% debentures converted in the first quarter of fiscal year
1998.
Independent Auditors' Report
To The Board of Directors and Stockholders
Key Energy Group, Inc.
We have audited the accompanying consolidated balance sheets of Key Energy
Group, Inc. and Subsidiaries as of June 30, 19971998 and 1996,1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997.1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Key
Energy Group, Inc. and Subsidiaries as of June 30, 19971998 and 1996,1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997,1998, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
August 28, 1997September 1, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEMS 10 - 13.
Pursuant to Instruction G(3) to Form 10-K, the information required in Items
10-13 is incorporated by reference from the Company's definitive proxy
statement, which will be filed with the Commission pursuant to Regulation 14A
within 120 days of June 30, 1997.
- 52 -1998.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 10-K.8-K.
(a) Index to Exhibits
The following documents are filed as part of this report:
(1) See Index to Financial Statements set forth in Item 8.
(2) Financial Statements Schedules: [None]
(3) Exhibits:
Exhibit 2.1 Agreement and Plan o f Merger dated as of November 18, 1995, between Key
and WellTech, as amended. (Incorporated by reference to the Company's
Registration Statement Form S-4, Registration No.333-369)No. 333-369).
Exhibit
2.2 Joint Plan of Reorganization, dated as of October 20, 1992, of the Company,
ESKEY Inc.andInc. and YFC International Finance N.V. and Order, dated December 4,
1992, of the United States Bankruptcy Court for the District of New Jersey,
approving the Joint Plan of Reorganization (Incorporated by reference to
Exhibits 2 (a) and 28 (a) of the Company's Current Report on Form 8-K dated
December 14, 1992,File No. 1-8038).
Exhibit
2.3 Agreement and Plan of Merger dated as of July 20, 1993, by and among the
Company, OEI Acquisition Corp. and Odessa Exploration Incorporated.
(Incorporated by reference to Exhibit 2(a) of the Company's Current Report
on Form 8-K dated September 2, 1993, File No. 1-8038).
Exhibit 2.4 Asset Purchase Agreement dated as of December 10,199310, 1993 between the Company
and WellTech, Inc.(Incorporated (Incorporated by reference to exhibitExhibit 2(a) of the
Company's reportCurrent Report on formForm 8-K dated August 17, 1984,File No.
1-8038).
Exhibit
3.1 Amended and Restated Articles of Incorporation of the Company (Incorporated
by reference to the Company's Registration Statement on Form S-4,Registration No. 333-369).
Exhibit
3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to
the Company's Registration Statement on Form S-4 dated March 8,1996,8, 1996,
Registration No. 333-369).
3.3 Amendment to the Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 000-22665, and incorporated herein by
reference).
4.1 7% Convertible Subordinated Debenture of the Company due July 1, 2003.
(Incorporated by reference to exhibitExhibit 4.1 of the Company's Annual Report on
Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit
4.2 Indenture for the 7% Convertible Subordinated Debenture of the Company due
July 1, 2003.(Incorporated (Incorporated by reference to exhibitExhibit 4.2 of the Company's
Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit
4.3 Registration Rights Agreement among the Company, McMahan Securities Co.,
L.P. and Rausher Pierce Refsnes, Inc., dated as of July 3, 1996.
(Incorporated by reference to exhibitExhibit 4.3 of the Company's Annual Report on
Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit
4.4 Registration Rights Agreement between the Company and D. Kirk Edwards,
dated as of July 20, 1993.(Incorporated (Incorporated by reference to Exhibit 10 ( c )
to the Company's Current Report on Form 8-K/A).
- 53 -
Exhibit
4.5 Registration Rights Agreement dated as of March 2, 1996 among the Company
and certain of its stockholders. (Incorporated by reference to the
Company's Registration Statement on Form S-4, Registration No. 353-369).
Exhibit 4.6 Registration Rights Agreement dated as of March 30, 1995 between the
Company, Clint Hurt and Associates, Inc. and Clint Hurt. (Incorporated by
reference to Exhibit 10 (d) of the Company's Annual Report on 10-KSB dated
June 30, 1995, File No. 1-8038).
Exhibit
4.7 Form of Common Stock Purchase Warrant to Purchase Key Common Stock issued
in connection with the WellTech Merger.(Incorporated (Incorporated by reference to the
Company's Registration Statement on Form S-4, Registration No. 353-369).
4.8 Indenture dated as of September 25, 1997, among Key Energy Group, Inc. and
American Stock Transfer and Trust Company. (Incorporated by reference to
Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 1-8038)
4.9 Registration Rights Agreement among Key Energy Group, Inc., Lehman Brothers
Inc., and McMahan Securities Co. L.P. dated as of September 25, 1997.
(Incorporated by reference to Exhibit 10(a) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)
10.1 * Employment Agreement between the Company and D. Kirk Edwards, dated as of
July 1, 1996. Exhibit 10.2 Asset Purchase Agreement dated as of March 30, 1995 between the
Company and Clint Hurt and Associates, Inc. (Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-KSB dated10-K for the year ended June 30, 1995, File No.1-8038).
Exhibit 10.3 Non-Competition Agreement dated as of March 3, 1995 between the
Company, Clint Hurt and Associates,Inc. and Clint Hurt.
( Incorporated by reference to Exhibit 10(f) of the Company's
Report on Form 10-KSB dated June 30, 1995,1997, File No.
1-8038).
Exhibit 10.4
10.2 Employment Agreement between WellTech Eastern, Inc. and Kenneth Hill, dated
as of March 29, 1996.(Incorporated (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit 10.5 *10.3 Employment Agreement between the Company and Kenneth Huseman, dated as of
August 3, 1996. (Incorporated by reference to Exhibit 10.610.5 of the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, File No.
1-8038)
10.4 Letter Agreement between Van Greenfield and the Company dated May 15, 1996.
(Incorporated by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit 10.710.5 Amendment No. 2 to the Company's Employment Agreement between Francis D.
John and the Company, dated as of May 15, 1996. ( Incorporated by reference
to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
Exhibit 10.810.6 Letter Agreement between Morton Wolkowitz and the Company dated June 3,
1996. (Incorporated( Incorporated by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit 10.9
10.7 Asset Purchase Agreement between Hardy Oil & Gas USA, Inc. and Arch
Petroleum, Inc. dated as of April 1996. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
Exhibit 10.1010.8 Asset Purchase Agreement between Arch Petroleum, Inc. and Odessa
Exploration, Inc. dated as of April 18, 1996. (Incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
Exhibit 10.1110.9 General Conveyance by Arch Petroleum, Inc. to Odessa Exploration, Inc.
dated as of January 1, 1996.(Incorporated (Incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K dated June 30,1996,30, 1996, File No.
1-8038).
- 54 -
Exhibit 10.12 The Company's 1995 Stock Option Plan. ( Incorporated by reference
to the Company's Registration Statement on Form S-4, Registration
No. 353-369).
Exhibit 10.13 The Company's Outside Directors Stock Option Plan. (Incorporated
by reference to the Company's Registration Statement on Form S-4,
Registration No. 353-369).
Exhibit 10.14 Plan10.10Plan and Agreement of Merger among Key Energy Group, Inc., WellTech
Eastern, Inc. and Woodward Well Service, Inc. dated as of September 30,
1996. (Incorporated by reference to Exhibit 10
(a)10(a) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.15 Stock10.11Stock Purchase Agreement among Key Energy Group, Inc., Reo Brownlee, Elvin
Brownlee, Jr. And Elvin Brownlee III dated as of October 24, 1996.(Incorporated
(Incorporated by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.16 Asset10.12Asset Purchase Agreement among Yale E. Key, Inc., Key Energy Group, Inc.,
Energy Air Drilling Service Co.andCo. and Dale Rennels dated as of November 1,
1996. (Incorporated by reference to Exhibit 10( c ) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.17 Stock10.13Stock Purchase Agreement among Key Energy Group, Inc., Ed Hitt, Helen
Hitt, Michael E. Thompson and Edward Monroe, Jr. Dated as of December 2,
1996. (Incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.18 Plan10.14Plan and Agreement of Merger among Key Energy Group, Inc., WellTech
Eastern, Inc., Hunt Oil Company and Brooks Well Servicing, Inc. dated as of
November 22, 1996. (Incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No.
1-8038).
Exhibit 10.19 Asset10.15Asset Purchase Agreement among WellTech Eastern, Inc., B&L Hotshot, Inc.,
McDowell & Sons, Inc., 4 Star Trucking, Inc., R.B.R. Inc., Royce D. Thomas,
John F. McDowell and John R. McDowell dated as of December 13, 1996.
(Incorporated by reference to Exhibit 10(f) to the Company's Quarterly
Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.20 Asset10.16Asset Purchase Agreement among WellTech Eastern, Inc., Talon Trucking
company and Lomak Petroleum, Inc.datedInc. dated as of December 31, 1996.
(Incorporated by reference to Exhibit 10(g) to the Company's Quarterly
Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.21 First10.17First Supplemental Indenture dated as of November 20, 1996 by and between
Key Energy Group, Inc. and American Stock Transfer & Trust Company, as
Trustee. (Incorporated by reference to Exhibit 10(i) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.22 Stock10.18Stock Purchase Agreement among Key Energy Group, Inc., Michael and Georgia
McDermett dated as of January 10, 1997. (Incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report onFormon Form 10-Q dated March
31, 1997, File No. 1-8038).
Exhibit 10.23 Asset
10.19Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group,
Inc. Tri State Wellhead & Valve,Inc. and John C. Bozeman dated as of March
14, 1997. (Incorporated by reference to Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
- 55 -
Exhibit 10.24 Stock10.20Stock Purchase Agreement among Yale E. Key, Inc., Keith and Leslie Neill
as of March 24, 1997.(Incorporated (Incorporated by reference to Exhibit 10( c ) to the
Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No.
1-8038).
Exhibit 10.25 Asset10.21Asset Purchase Agreement among Key Energy Group, Inc., WellTech Eastern,
Inc., Elder Well Service, Inc., Martha Elder, Kenneth L. Ward, Nona Faye
Mugraur, Lela Gaye Biehl and Johnny Ray Johnson dated as of March 28, 1997.(Incorporated
(Incorporated by reference to Exhibit 10(d) to the Company's Quarterly
Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
Exhibit 10.26 Asset10.22Asset Purchase Agreement #1 among WellTech Eastern, Inc., Key Energy
Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide,
LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31,
1997. (Incorporated by reference to Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q dated March 31,1997,31, 1997, File No. 1-8038).
Exhibit 10.27 Asset10.23Asset Purchase Agreement #2 among WellTech Eastern, Inc., Key Energy
Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide,LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31,
1997. (Incorporated by reference to Exhibit 10(f) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
Exhibit 10.28 Stock10.24Stock Purchase Agreement among WellTech Eastern, Inc., Dennis Hogerheide
and LaWenda Hogerheide dated as of March 31, 1997.(Incorporated (Incorporated by
reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
Exhibit 10.29 Asset10.25Asset Purchase Agreement among WellTech Eastern, Inc., Diamond Well
Service, Inc., John Scott and Dwayne Wardwell dated as of April 3,1997.3, 1997.
(Incorporated by reference to Exhibit 10(h) to the Company's Quarterly
Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
Exhibit 10.30 Asset10.26Asset Sale Agreement among WellTech Eastern, Inc. and Drillers, Inc. dated
as of April 14, 1997.(Incorporated (Incorporated by reference to Exhibit 10(i) to the
Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No.
1-8038).
Exhibit 10.31 Asset10.27Asset Purchase Agreement among WellTech Eastern, Inc., Shreve's Well
Service, Inc. and William A. Shreve dated April 18, 1997. (Incorporated by
reference to Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
Exhibit 10.32 Asset10.28Asset Purchase Agreement among WellTech Eastern, Inc. and Petro Equipment,
Inc. and Donald E. Clark dated as of May 1, 1997. (Incorporated by
reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
Exhibit10.33 * Asset10.29Asset Purchase Agreement among WellTech Eastern, Inc., Southwest Oilfield
Services,Inc., David Wright and Roy Wofford dated May 29,1997.29, 1997. .
(Incorporated by reference to Exhibit 10.34 *Stock10.33 to the Company's Annual Report
on Form 10-K dated June 30, 1997, File No. 1-8038).
10.30Stock Purchase Agreement among Yale E. Key, Inc. and Raleigh K. Turn and
David Butts dated June 9, 1997. (Incorporated by reference to Exhibit 10.35 Stock10.34
to the Company's Annual Report on Form 10-K dated June 30, 1997, File No.
1-8038).
10.31Stock Purchase Agreement among Key Energy Group, Inc. and Mark Duane
Massingill and Claudia Lynn Massingill dated as of June 25, 1997.
(Incorporated by reference to the Company's Current Report on Form 8-K
dated July 9, 1997, File No. 1-8038).
- 56 -
Exhibit 10.36 *Stock10.32Stock Purchase Agreement among WellTech Eastern, Inc. between Monty D.
Elmore dated as of July 17, 1997.(Incorporated (Incorporated by reference to the
Company's Annual Report on Form 8-K10-K dated July 9,June 30, 1997, File No. 1-8038).
Exhibit 10.37 *Stock10.33Stock Purchase Agreement between WellTech Eastern, Inc. and Kenting Energy
Services, Inc. dated as of July 30, 1997. (Incorporated by reference to
Exhibit 10.38 *Stock10.37 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1997, File No. 1-8038)
10.34Stock Purchase Agreement between WellTech Eastern, Inc. and Robert E.
Mosley, Jr. et al dated as of August 22, 1997. (Incorporated by reference
to Exhibit 10.39 *Credit10.38 to the Company's Annual Report on Form 10-K dated June 30,
1997, File No. 1-8038).
10.35Credit Agreement dated as of June 6, 1997 among Key Energy Group, Inc.,
several banks and other financial institutions or entities from time to
time parties to the Agreement, PNC Bank, N.A,N.A., Norwest Bank of Texas, N.A.,
and Lehman Commercial Paper Inc. (Incorporated by reference to Exhibit
10.40 *Master10.39 to the Company's Annual Report on Form 10-K dated June 30, 1997, File
No. 1-8038).
10.36Master Guarantee and Collateral Agreement made by Key Energy Group, Inc.
and certain of its Subsidiaries in favor of Norwest Bank of Texas, N.A.
dated as of June 6, 1997. (Incorporated by reference to Exhibit 11(a) *Statement - Computation10.33 to
the Company's Annual Report on Form 10-K dated June 30, 1997, File No.
1-8038).
10.37Stock Purchase Agreement by and among Nabors Acquisition Corp. IV, as
Seller, Key Rocky Mountain, Inc., as Buyer, and Key Energy Group, Inc.
dated as of per share earnings. (Filed herewith as
partJuly 31, 1997. ("Gibson Stock Purchase Agreement.")
(Incorporated by reference to Exhibit 10(c) of the Condensed Consolidated Financial Statements).Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)
10.38Amendment One to the Gibson Stock Purchase Agreement dated as of October
10, 1997.(Incorporated by reference to Exhibit 22 *Subsidiaries10(d) of the Registrant.Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997,
File No. 1-8038)
10.39Stock Purchase Agreement (Ram Oil Well Service, Inc.) by and among, Yale E.
Key, Inc. and Robert D. Calhoon dated as of September 1, 1997 (incorporated
by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K
dated September 1, 1997, File No. 1-8038).
10.40Stock Purchase Agreement (Rowland Trucking Co.) by and among, Yale E. Key,
Inc. and Robert D. Calhoon dated as of September 1, 1997 (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated
September 1, 1997,File No. 1-8038).
10.41Asset Purchase Agreement among WellTech Eastern, Inc., Waco Oil & Gas Co.,
Inc. and I.L. Morris dated as of September 1, 1997. (Incorporated by
reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, File No. 1-8038)
10.42Asset Purchase Agreement among Key Four Corners, Inc., Key Energy
Group,Inc., Coleman Oil & Gas Co., Big A Well Service Co., Sunco Trucking
Co., Justis Supply Co., Inc. and George E. Coleman dated as of September 2,
1997 (incorporated by reference to Exhibit 2.1 of the Company's Report on
Form 8-K dated October 1, 1997, File No. 1-8038).
10.43Stock Purchase Agreement between WellTech Eastern, Inc. and William
Gregory Wines dated as of September 16, 1997. (Incorporated by reference to
Exhibit 10(j) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 1-8038)
10.44Stock Purchase Agreement among, Key Energy Drilling, Inc. and S.K. Rogers,
Joe Dee Brooks, Lynn E. Waters and Donnie Roberts dated as of September 25,
1997. (Incorporated by reference to Exhibit 10(k) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997,
File No. 1-8038)
10.45Stock Purchase Agreement among Key Rocky Mountain, Inc., Joseph R. Dunbar
and Janice N. Dunbar dated as of September 29, 1997. (Incorporated by
reference to Exhibit 10(m) of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, File No. 1-8038)
10.46Stock Purchase Agreement among Key Rocky Mountain, Inc., Bruce L. Bummer,
Jack Hartnett, Diane Hartnett and Bruce Bummer 7/14/82 Family Trust dated
as of September 30, 1997. (Incorporated by reference to Exhibit 10(n) of
the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, File No. 1-8038)
10.47Amended and Restated Credit Agreement among Key Energy Group, Inc. and
several other financial institutions dated as of June 6, 1997 as amended
and restated through November 6, 1997. (Incorporated by reference to
Exhibit 10(s) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997, File No. 1-8038)
10.48First Amendment to the Amended and Restated Credit Agreement dated as of
June 6, 1997, as amended and restated through November 6, 1997 dated
December 3, 1997. (Incorporated by reference to Exhibit 10(t) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038)
10.49Asset Purchase Agreement among WellTech Eastern, Inc. and McCurdy Well
Service, Inc. effective as of October 3, 1997. (Incorporated by reference
to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997, File No. 1-8038)
10.50Asset Purchase Agreement among WellTech Eastern, Inc. and GSI Trucking
Company, Inc. effective as of October 3, 1997. (Incorporated by reference
to Exhibit 10(e) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997, File No. 1-8038)
10.51Asset Purchase Agreement among WellTech Eastern, Inc. and Kahlden
Production Services, Inc. effective as of October 3, 1997. (Incorporated by
reference to Exhibit 10(f) of the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997, File No. 1-8038)
10.52Stock Purchase Agreement between WellTech Eastern, Inc. and Donald Jeter,
effective as of November 11, 1997. (Incorporated by reference to Exhibit
10(g) of the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997, File No. 1-8038)
10.53Stock Purchase Agreement between Key Energy Drilling, Inc. and Robert C.
Jones and Dana Lunette Jones, effective as of November 24, 1997.
(Incorporated by reference to Exhibit 10(h) of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997, File No.
1-8038)
10.54Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group,
Inc. and White Rhino Drilling, Inc. and Jeff Critchfield, effective as of
December 2, 1997. (Incorporated by reference to Exhibit 10(i) of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, File No. 1-8038)
10.55Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group,
Inc., S&R Cable, Inc., Jeff Critchfield, Royce D. Thomas, Ronnie Shaw and
Donald Tinker, effective as of December 2, 1997. (Incorporated by reference
to Exhibit 10(j) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 1-8038)
10.56Asset Purchase Agreement among WellTech Eastern, Inc., Wellcorps, L.L.C.
and Jeff Critchfield, Terra Energy, Ltd. And Brian Fries, effective as of
December 2, 1997. (Incorporated by reference to Exhibit 10(k) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038).
10.57Employment Agreement dated December 5, 1997 by and between Stephen E.
McGregor and the Company. (Incorporated by reference to Exhibit 10(e) of
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, File No. 1-8038)
10.58Stock Purchase Agreement between Key Energy Group, Inc., Key Energy
Drilling, Inc. and Ronald M. Sitton and Frank R. Sitton, effective as of
December 12, 1997. (Incorporated by reference to Exhibit 10(l) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038)
10.59Asset Purchase Agreement between Brooks Well Servicing, Inc. and Sam F.
McKee, Individually and d/b/a Circle M Vacuum Services, effective as of
January 30, 1998. (Incorporated by reference to Exhibit 10(m) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038)
10.60Stock Purchase Agreement between Key Energy Drilling, Inc. and Jack B.
Loveless, Jim Mayfield and J.W. Miller, effective as of January 30, 1998.
(Incorporated by reference to Exhibit 10(n) of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997, File No.
1-8038)
10.61Asset Purchase Agreement between Key Four Corners, Inc. and Four Corners
Drilling, R.L. Andes and W.E. Lang, effective as of January 30, 1998.
(Incorporated by reference to Exhibit 10(o) of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997, File No.
1-8038)
10.62Asset Purchase Agreement among Key Rocky Mountain, Inc., Updike Brothers,
Inc. Employee Stock Ownership Retirement Plan and Trust, David W. Updike
Trust, Dorothy A. Updike Trust, Dorothy R. Updike Trust, Mary E. Updike,
Ralph O. Updike and Daniel Updike effective February 6, 1998. (Incorporated
by reference to Exhibit 10(p) of the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997, File No. 1-8038)
10.63Asset Purchase Agreement among Brooks Well Servicing, Inc., Hot Oil Plus,
Inc., Thomas N. Novosad, Jr. and Patricia Novosad effective January 29,
1998. (Incorporated by reference to Exhibit 10(q) of the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File
No. 1-8038)
10.64Asset Purchase Agreement among Brooks Well Servicing, Inc., Lundy Vacuum
Service, Inc. and Peyton E. Lundy effective March 3, 1998. (Incorporated by
reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, File No. 1-8038)
10.65Asset Purchase Agreement among Yale E. Key, Inc., Edwards Transport, Inc.
and Tom Nations effective March 26, 1998. (Incorporated by reference to
Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8038)
10.66Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF Well
Service Inc., effective April 20, 1998. (Incorporated by reference to
Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8038)
10.67Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF Lease
Service Inc., effective April 20, 1998. (Incorporated by reference to
Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8038)
* 10.68 Asset Purchase Agreement between Watson Oilfield Service & Supply,
Inc. and Watson Truck & Supply, Inc. dated May 19, 1998
* 10.69 Purchase and Sale Agreement among Burnett Corporation, B.O.
Cornelius, Ann C. Fatheree, James R. Corbin, Mary Jo Mitton, Birke B.
Marsh, H. Cobb, Birke B. Marsh, Trustee of the Corbin Trust, Jamie Kim
Corbin, Josh Alan Corbin, Jason J. Corbin, Wilbanks Exploration, Inc. and
Odessa Exploration, Inc. dated May 20, 1998.
* 10.70 Asset Purchase Agreement among Key Energy Drilling, Inc., Lakota
Drilling Company and Reed Gilmore, Priscilla Gilmore, M. Reed Gilmore, Jr.,
Valerie G. Griess, Joan G. Lindquist, James C. Gilmore, L. E. Grimes and
Larry V. Bohannon dated May 22, 1998.
10.71Key Energy Group, Inc. 1997 Incentive Plan (Incorporated by reference
to Exhibit B of the Company's definitive proxy statement dated
November 28, 1997.
* 23.1 Consent of KPMG Peat Marwick LLP
* 27(a) *StatementStatement - Financial Data Schedule. (Filed herewith as part of
the Condensed Consolidated Financial Statements).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended June 30,
1997.
------------------------------------1998.
*Filed herewith.
- 57 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. John
Francis D. John
President, Chief Executive Officer
Dated: September 18, 199728, 1998 and Director
By /s/ Stephen E. McGregor
Stephen E. McGregor
Dated: September 18, 199728, 1998 Chief Financial Officer
Pursuant to the requirements of the Securities and 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.indicated
By /s/ Francis D. John
Francis D. John
President, Chief Executive and Chief
Dated: September 18, 199728, 1998 Financial Officer and Director
By /s/ Morton Wolkowitz
Morton Wolkowitz
Dated: September 18, 199728, 1998 Chairman of the Board and Director
By /s/ Van Greenfield
Van GreenfieldDavid J. Breazzano
David J. Breazzano
Dated: September 18, 199728, 1998 Director
By /s/ William Manly
William Manly
Dated: September 18, 199728, 1998 Director
By /s/ Kevin P. Collins
Kevin P. Collins
Dated: September 18, 199728, 1998 Director
By /s/ W. Phillip Marcum
W. Phillip Marcum
Dated: September 18, 199728, 1998 Director
By /s/ Danny R. Evatt
Danny R. Evatt
Dated: September 18, 199728, 1998 Chief Accounting Officer
- 58 -