__________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DecemberMarch 31, 19951996
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.)
255 Livingston Ave., New Brunswick, NJ 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908)247-4822
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed
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 JanuaryApril 19, 1996: 6,913,51310,413,513
______________________________________________________________
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 910
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 1619
Item 2. Changes in Securities. 1619
Item 3. Defaults Upon Senior Securities. 1619
Item 4. Submission of Matters to a Vote of Security
Holders. 1619
Item 6. Exhibits and Reports on Form 8-K. 1619
Signatures. 1721
Key Energy Group,Inc. and Subsidiaries
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
(unaudited)
DecemberMarch 31, June 30,
(Thousands, except share and per share data) 1996 1995 1995
- -----------------------------------------------------------------------
ASSETS
Current Assets:
Cash $503$1,598 $865
Restricted cash 4521,705 410
Restricted marketable securities 267 267
Accounts receivable, net 8,35219,183 8,133
Prepaid expenses 2251,793 358
Inventories 1,3001,764 1,257
- -----------------------------------------------------------------------
Total Current Assets 11,09926,310 11,290
- -----------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 25,45664,091 23,726
Oil and gas well drilling equipment 2,3744,682 2,014
Motor vehicles 5211,041 526
Oil and gas properties and other
related equipment,successful efforts 9,80910,270 7,652
Furniture and equipment 3341,367 332
Buildings and land 5,026 2,086
2,086
- -----------------------------------------------------------------------
40,58086,477 36,336
Accumulated depreciation & depletion (6,188)(7,334) (4,394)
- -----------------------------------------------------------------------
Net Property and Equipment 34,39279,143 31,942
- -----------------------------------------------------------------------
Other Assets 2,0205,190 2,011
- -----------------------------------------------------------------------
Total Assets $47,511$110,643 $45,243
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $3,804$9,562 $3,930
Accrued interest 168305 145
Other accrued liabilities 1,9319,539 2,612
Accrued income taxes 12449 174
Deferred tax liability 118 118
Current portion of long-term debt 1,5904,245 2,249
- -----------------------------------------------------------------------
Total Current Liabilities 7,73523,818 9,228
- -----------------------------------------------------------------------
Long-term debt, less current portion 15,23737,073 13,700
Accrued casualty insurance 4,909 -
Deferred income taxes 2,9343,333 2,204
Minority interest 1,151 -
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 10,000,00025,000,000
shares authorized, 10,413,513 and 6,913,513 shares
issued and outstanding at DecemberMarch 31, 19951996 and
June 30, 1995, respectively 6911,041 691
Additional paid-in capital 15,18632,763 15,186
Retained earnings 5,7286,555 4,234
- -----------------------------------------------------------------------
Total Stockholders' Equity 21,60540,359 20,111
- -----------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $47,511$110,643 $45,243
=======================================================================
See the accompanying notes which are an integral part of these consolidated
financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended SixNine Months Ended
DecemberMarch 31, DecemberMarch 31,
(Thousands, except per share data) 1996 1995 19941996 1995 1994
- -----------------------------------------------------------------------------
REVENUES:
Oilfield services $9,381 $10,258 $19,148 $20,923$11,916 $10,145 $31,064 $31,068
Oil and gas revenues 911 615 1,727 1,0771,016 695 2,743 1,772
Oil and gas well drilling 2,0571,370 - 3,6595,029 -
Other revenues, net 45 (92)- 209 258 (38)
- -----------------------------------------------------------------------------
12,394 10,781 24,792 21,962
- -----------------------------------------------------------------------------171
14,302 11,049 39,094 33,011
COSTS AND EXPENSES:EXPENSES
Oilfield services direct costs 6,889 7,932 14,153 16,3508,655 7,784 22,808 24,134
Oil and gas direct costs 354 166 619 431316 182 935 613
Oil and gas well drilling 1,3881,151 - 2,7353,886 -
Depreciation and depletion expense 971 684 1,794 1,2451,146 642 2,940 1,887
General and administrative expense 1,198 933 2,390 1,8221,219 1,174 3,609 2,996
Interest expense 439 343 877 627
- -----------------------------------------------------------------------------
11,239 10,058 22,568 20,475
- -----------------------------------------------------------------------------571 370 1,448 997
13,058 10,152 35,626 30,627
Income before minority interest and
and income taxes 1,155 723 2,224 1,4871,244 897 3,468 2,384
Minority interest 18 - 18 -
Income tax expense 387 231 730 476
- -----------------------------------------------------------------------------399 266 1,129 742
NET INCOME $768 $492 $1,494 $1,011
=============================================================================$827 $631 $2,321 $1,642
EARNINGS PER SHARE :
Primary:
Income before minority interest
and income taxes $0.17 $0.11 $0.32 $0.23$0.18 $0.14 $0.50 $0.36
Net income $0.11 $0.08 $0.22 $0.16$0.12 $0.10 $0.33 $0.25
Assuming full dilution:
Income before minority interest
and income taxes $0.18 $0.14 $0.50 $0.36
Net income $0.12 $0.10 $0.33 $0.25
WEIGHTED AVERAGE SHARES OUTSTANDING 6,914 6,500 6,914 6,500OUTSTANDING:
Primary 6,981 6,637 6,981 6,637
Assuming full dilution 6,986 6,637 6,986 6,637
See the accompanying notes which are an integral part of these consolidated
financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash FlowsOperations
Three Months Ended SixNine Months Ended
DecemberMarch 31, DecemberMarch 31,
(Thousands) 1996 1995 19941996 1995 1994
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $768 $492 $1,494 $1,011$827 $631 $2,321 $1,642
Adjustments to reconcile income
from operations to net cash
provided by operations:
Depreciation, depletion and
amortization 971 693 1,794 1,2451,146 642 2,940 1,887
Deferred income taxes 387 231 730 476399 266 1,129 742
Minority interest net income 18 - 18 -
Change in assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in accounts
receivable 279 (129) (219) (960)26 (148) (193) (1,108)
(Increase) decrease in other current
assets (21) 19 90 (71)(184) (654) (94) (725)
Decrease in accounts payable and
accrued expenses (533) (1,372) (807) (1,564)191 107 (616) (1,457)
(Decrease) increase in accrued
interest 10 - 23 (16)
Decrease(1) 27 22 11
(Decrease) increase in accrued
taxes (50)(75) - (50)(125) -
(Increase) decrease in other
assets - (9) (9) -
- -----------------------------------------------------------------------------(75) (1) (84) (1)
Net cash (used in) provided by operating
activities 1,811 (75) 3,046 121
- -----------------------------------------------------------------------------2,272 870 5,318 991
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell
service operations (841) (732) (1,727) (1,899)(878) (385) (2,605) (2,284)
Capital expenditures - Oil and
gas operations - -(16) (7) (7)(23)
Capital expenditures - Oil and
gas well drilling operations (220)(90) - (360)(450) -
Expenditures for oil and gas
properties (1,236) (985) (2,150) (1,211)
- -----------------------------------------------------------------------------(382) (78) (2,532) (1,289)
Net cash used in investing
activities (2,297) (1,717) (4,244) (3,117)
- -----------------------------------------------------------------------------(1,350) (479) (5,594) (3,596)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments (514) (651) (1,418) (1,047)of long-term
debt (259) (471) (1,677) (1,518)
Cash received from purchase
of WellTech 1,168 - 1,168 -
Borrowings under line-of-credit 38 383 (28) 97141 (1,377) 13 (406)
Proceeds from long-term debt 1,019 2,181 2,324 2,866
- -----------------------------------------------------------------------------476 1,310 2,800 4,176
Net cash provided by (used in)
financing activities 543 1,913 878 2,790
- -----------------------------------------------------------------------------1,426 (538) 2,304 2,252
Net increase (decrease) in cash
and restricted cash 57 121 (320) (206)2,348 (147) 2,028 (353)
Cash and restricted cash at
beginning of period 898 846955 967 1,275 1,173
- -----------------------------------------------------------------------------
Cash and restricted cash at end
of period $955 $967 $955 $967
=============================================================================$3,303 $820 $3,303 $820
Supplemental cash flow disclosures:
Interest paid $429$434 $343 $854 $611$1,288 $986
Supplemental schedule of non-cash
investing and financing transactions:
Fair marketvalue of Common Stock and Warrants
issued WellTech West Texas $- $- $- $8,647
Fair value of Common Stock issued as payment for
the WellTech West Texas
equipmentClint Hurt Drilling $- $23 $- $23
Issuance of note payable in Clint
Hurt Drilling acquisition $- $8,584$725 $725 $-
See the accompanying notes which are an integral part of these consolidated
financial statements.
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberMarch 31, 19951996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information in this report includes
the accounts of Key Energy Group, Inc. ("Key") and its
wholly-owned subsidiaries and was prepared in conformity with
accounting policies used in the Annual Report on Form 10-KSB10-K
furnished for the preceding fiscal year.
The consolidated financial information in this report includes
the threefour operating subsidiaries of the Company; Yale E. Key,
Inc. ("Yale E. Key") and WellTech Eastern, Inc. ("WellTech")
(which was acquired in March 1996 after the merger of WellTech,
Inc. "Old WellTech" into Key, see Note 2) which isare both
involved in oilwell service operations, Odessa Exploration Inc.
("OEI") which is involved in the production and exploration of
oil and natural gas and Key Energy Drilling, Inc. d/b/a Clint
Hurt Drilling ("Clint Hurt Drilling") which is involved in the
drilling for oil and natural gas. In addition, as a result of
the WellTech merger, (see Note 2) the Company acquired a 63%
ownership in Servicios WellTech, S.A. ("Servicios"), an
Argentinean corporation, which is accounted for using the
consolidation with a minority interest method.
OEI 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 based on proved reserves
expressed as net equivalent Bbls as reviewed by independent
petroleum engineers. 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.
OEI's aggregate oil and gas properties are stated at cost, not
in excess of total estimated future net revenues net of related
income tax effects.
In the opinion of Key, the accompanying unaudited condensed
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position
as of DecemberMarch 31, 1995,1996, the statement of cash flows for the three
and sixnine months ended DecemberMarch 31, 19951996 and 1994,1995, and the results
of operations for the three and sixnine month periods then ended.
The consolidated financial statements of Key have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principals for complete financial
statements. Operating results for interim periods are not
necessarily indicative of the results that may be expected for
the full year.
2. ACQUISITIONS
WellTech, Inc.
In March 1996, Key acquired, through a merger, Old WellTech.
Key was the surviving entity in the merger. Net consideration
for the merger was 3,500,000 shares of Key Common Stock and
warrants to purchase 500,000 additional shares. In the merger,
Old WellTech stockholders received an aggregate of 4,929,962 shares of Key
Common Stock and warrants to purchase 750,000 shares of Key
Common Stock at $6.75 per share. As part of the merger,
1,429,962 of the 1,635,000 shares of Key Common Stock owned by
Old WellTech and previously issued warrants to purchase 250,000
shares of Key Common Stock at $5.00 per share were cancelled.
WellTech's principal line of business is oil and gas well
servicing and it operates in the Mid-Continent and Northeast
areas of the United States and in Argentina. Until November
1995, Old WellTech also conducted certain operations in Russia.
On March 26, 1996, Key shareholders approved the merger. The
acquisition was accounted for using the purchase method.
Odessa Exploration Properties
In April of 1996, the Company announced that OEI had agreed to
purchase approximately $7.1 million of oil and gas producing
properties from two unrelated companies. The properties to be
acquired include production in 264 gross (79 net) wells with
daily average net production of 240 barrels of oil and 1.5 mmcf
of natural gas. The reserves are approximately equally divided
between oil and natural gas. Financing for the acquisition is
expected to come from bank financing. The acquisition will be
accounted for using the purchase method.
Clint Hurt Drilling
On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA")
entered into an Asset Purchase Agreement pursuant to which CHA
sold to Key all of its assets in West Texas. Such assets mainly
consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, Key paid CHA
$1,750,000,$1,725,000, of which $1,000,000 was paid in cash and the balance
in the form of a $725,000 note payable to CHA (the note was paid
in full in July 1995). Mr. Clint Hurt entered into consulting
and noncompetition agreements with Key in consideration for
which Key issued 5,000 shares of Key Common Stock. The
acquisition was accounted for using the purchase method and the
results of operations of Clint Hurt Drilling have been included
in those of Key since April 1, 1995.
3. LONG-TERM DEBT
In January 1996, prior to the completed merger described in Note
2, Key, Yale E. Key, Clint Hurt and Old WellTech entered into
new separate credit facilities with The MergerC.I.T. Group/Credit
Finance, Inc. ("C.I.T.) totaling approximately $35 million (the
combined maximum credit limit). As a result of the new 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 March 31, 1996). In August 1995, Key announced an agreement to acquire, through a
merger, WellTech. Key will beaddition, the
surviving entity ininterest rate for the merger. In the merger,Old WellTech stockholders will receivedebt was lowered from an
aggregate of 4,929,962 shares of Key Common Stockthree and warrantsone-half percent to purchase 750,000 shares of Key Common Stockone and one-quarter
percent over the stated prime rate (8.25% at $6.75 per
share. As partMarch 31, 1996).
Each of the merger, 1,429,962 of the 1,635,000
shares of Key Common Stock currently owned by WellTechC.I.T. term notes require principal and previously issued warrants to purchase 250,000 shares of Key
Common Stock at $5.00 per share will be cancelled. Net
consideration for the merger will be 3,500,000 shares of Key
Common Stock and warrants to purchase 500,000 additional shares.
WellTech's principal line of business is oil and gas well
servicing and it currently operates in the Mid-Continent and
Northeast areas of the United States and in Argentina. Until
November 1995, Welltech also conducted certain operations in
Russia. Consummation of the merger is subject to satisfaction
of various conditions including, without limitation, shareholder
approval and no assurance can be given that the merger will be
consummated. On January 23, 1996, Key filed a prospectus - proxy
statement which will, upon completion and mailing, be used to
solicit shareholder approval of the merger.
3. LONG-TERM DEBT
The Yale E. Key C.I.T. Credit Finance ("C.I.T.") term note,
($5,463,000 approximate principal balance at December 31, 1995),
as amended, requires principalinterest
payments, of approximately
$95,000, plus interest, 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, 1996.1998. The expiration of each of the lines of
credit are December 31,1998. The proceeds of the initial
borrowings were used to repay substantially all of the debt of
Key (other than that of OEI) and Old WellTech. Key believes
that such a facility will provide sufficient funds to finance
its operating and capital expenditure needs for the foreseeable
future. The indebtedness, which is currently being modified to
reflect the Welltech merger, will be the obligation of Key and
Key's subsidiaries, Yale E. Key, Clint Hurt and WellTech. At
March 31, 1996, the Company (on a combined basis) had approximately
$2 million in term and credit-line availability.
The Yale E. Key C.I.T. term note, ($9,885,000 approximate
principal balance at March 31, 1996), as amended, requires
monthly principal payments of approximately $119,000, plus
interest, rate is two and one-half percent abovewhile the stated prime rate; 8.5%Yale E. Key C.I.T. line of credit,
($2,792,000 approximate principal balance at DecemberMarch 31, 1995.1996),as
amended, requires monthly payments of interest. The note is
collateralized by all of the assets (including equipment and
inventory) of Yale E. Key.
The Yale E. Key, C.I.T. line of credit, ($3,818,000 approximate
principal balance at December 31, 1995),as amended, requires
monthly payments of interest at two and one-half percent abovewhile the stated prime rate (8.5% at December 31, 1995). The
expiration of the line of credit is December 31,1996. The line of credit is
collateralized by the accounts receivable of Yale E. Key. TheBoth
the term note and the line of credit has a maximum limitwill be guaranteed by Key.
At March 31, 1996, there was approximately $500,000 of 85%credit
line availability.
The Clint Hurt Drilling C.I.T. term note, ($1,208,000
approximate principal balance at March 31, 1996), requires
monthly principal payments of availableapproximately $14,643, plus
interest, while the Clint Hurt Drilling C.I.T. line of credit,
($588,000 approximate principal balance at March 31, 1996),as
amended, requires monthly payments of interest The note is
collateralized by all of the assets (including equipment and
inventory) of Clint Hurt Drilling while the line of credit is
collateralized by the accounts receivable or $7 million; whicheverof Clint Hurt
Drilling. Both the term note and the line of credit will be
guaranteed Key. At March 31, 1996, there was no credit line
availability.
The WellTech C.I.T. term note, ($12,125,000 approximate
principal balance at March 31, 1996), as amended, requires
monthly principal payments of approximately $141,000, plus
interest, while the WellTech C.I.T. line of credit, ($5,121,000
approximate principal balance at March 31, 1996),as amended,
requires monthly payments of interest. The note is
less.collateralized by all of the assets (including equipment and
inventory) of WellTech while the line of credit is
collateralized by the accounts receivable of WellTech. Both the
term note and the line of credit will be guaranteed by Key. At
DecemberMarch 31, 1995,1996, there was no credit line availability.
The agreement with C.I.T. includes certain restrictive and
financial covenants, the most restrictive of which prohibits Yale E. Key
from makinginclude, though not limited to;
certain financial ratios, annual capital expenditure maximums,
and restrictions on cash distributions and declaringdeclarations of
dividends on Yale E.
Key's common stock.
The OEI loan agreement, as amended, with Norwest Bank Texas,
N.A. ("Norwest") provides for a $7.5 million revolving line of
credit note subject to a borrowing base limitation
(approximately $6.5$7.0 million at DecemberMarch 31, 1995)1996). The borrowing
base is redetermined on at least a semi-annual basis. The
borrowing base is reduced by approximately $60,000 per month
through October 1997; the maturity of the note. The note's
interest rate is Norwest's prime rate (8.5% at DecemberMarch 31, 1995)1996)
plus one-half percent. The note is secured by substantially all
of the oil and gas properties of OEI and the pledge of certain collateral by current and former
officers and directors of Key. As of December 31, 1995, Norwest
waived the pledge of collateral and released the collateral to
the seven individuals who had pledged it.OEI. The note is also guaranteed by Key.
The loan agreement contains various restrictive covenants and
compliance requirements, including covenants which (a) prohibit
OEI from declaring or paying dividends on OEI's common stock,
(b) limit the incurrence of additional indebtedness by OEI and,
(c) limit the disposition of assets and various other financial
covenants.
4. CASH FLOW DISCLOSURES OF WELLTECH ACQUISITION
During March 1994, Key completed an acquisition of WellTech (see
Note 2). The Clint Hurt Drilling loan agreement with Norwest providedacquisition of WellTech,accounted for a $1 million term loan and a $200,000 lineusing the
purchase method, resulted in the following noncash investing
activities(in thousands):
Recorded amounts of credit. The $1
million term loan ($776,000 approximate principal balance at
December 31, 1995), requires principal paymentsassets acquired,
including cash acuired of approximately
$28,000 per month plus interest for 36 months with a maturity
date of April 1998. The $200,000 line of credit, ($77,000
approximate principal balance at December 31, 1995), requires
principal payments of $20,000 per month beginning July 5, 1995,
plus interest, through its maturity in April 1996. Both the
loan and line of credit have an interest rate of Norwest prime
rate (8.5% at December 31, 1995), plus 3/4 of one percent. The
notes are secured by all of the equipment of Clint Hurt
Drilling and are guaranteed by Key. In addition, the loan
agreement contains various restrictive covenants and compliance
requirements.
Each$1,168 ............ $ 58,829
Liabilities assumed .......................... (40,902)
----------
Fair value of Key (and Yale E. KeyCommon Stock issued........... $ 17,927
=====
The liabilities assumed include amounts recorded for litigation
and Clint Hurt) and WellTech
recently entered into new credit facilitiescertain other preacquisition contingencies of approximately
$17.5 million (subject to certain advance formulas) the proceeds
of the initial borrowings of which were used to repay
substantially all of the debt of Key (other than that of OEI)
and Welltech (other than that of certain affiliates),
respectively. Key believes that such a facility will provide
sufficient funds to finance its operating and capital
expenditure needs for the foreseeable future. The new
indebtedness will be the obligation of Key, as survivor of the
merger, and Key's subsidiaries, Yale E. Key and Clint Hurt. The
cross-guaranty and cross-collateralization arrangement could, if
the merger is not consummated, create contingent liabilities for
each of Key and WellTech.
The failure to consummate the merger
on or prior to April 30, 1996 will, at the option of the lender,
constitute an event of default under the new indebtedness if
WellTech fails to refinance its credit agreement on or before
July 31, 1996 or Key fails to continue to operate Welltech
pursuant to the Interim Operations Agreement. Key and WellTech
have agreed not to terminate the Interim Operations Agreement
without the consent of the lender. (See Note 2, "The Merger)
4.5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of
business are pending against Key.Key and its subsidiaries.
Management does not believe that the disposition of any of
these suits or claims will result in a material adverse impact
on the consolidated financial position of Key.
During August 1995, Key entered into employment agreements with
certain of its officers. These employment agreements generally
run to June 30, 1998, but will automatically be extended on a
yearly basis unless terminated by Key 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 36 months of the officer's base
salary. The current annual base salaries for the officers
covered under such employment agreements total approximately
$800,000.
KEY ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
QUARTER ENDED DECEMBERMARCH 31, 19951996 VERSUS QUARTER ENDED DECEMBERMARCH 31, 19941995
Overview
The following discussion provides information to assist in the
understanding of Key Energy Group, Inc.sInc.'s ("Key") financial
condition and results of operations. It should be read in
conjunction with the financial statements and related notes
appearing elsewhere in this report.
Operating results for the three and sixnine months ended DecemberMarch 31,
19951996 include Key's oilfield well service operations conducted by
its wholly-owned subsidiary,subsidiaries, Yale E. Key, Inc. ("Yale E.
Key"), its oil and natural gas exploration and production
operations conducted by its wholly-owned subsidiary, Odessa
Exploration Inc. ("OEI") and Key Energy Drilling, Inc. d/b/a
Clint Hurt Drilling ("Clint Hurt Drilling") which is engaged in
oil and natural gas well contract drilling and was acquired in
March 1995. Also included are the operating results of WellTech,
Inc. ("WellTech") for the period of March 26, 1996 (the date of
the merger, see Note 2) to March 31, 1996.
Historically, fluctuations in oilfield well service operations
and oil and gas well contract drilling activity have been
closely linked to fluctuations in crude oil and natural gas
prices. However, Key, through acquisitions, customer alliances
and agreements, and diversification of services, is seekingseeks to
minimize the effects of such fluctuations on Key's results of
operations and financial condition.
Results of Operations
The Company or Key
Revenues of Key for the three months ended DecemberMarch 31, 19951996
increased 15%$3,253,000 or 29% to $12,394,000$14,302,000 from $10,781,000$11,049,000 for
the comparable 1994fiscal 1995 quarter, while net income of $827,000
increased $196,000 or 31% from the comparable fiscal 1995
quarter total of $631,000. The increase in revenues was
primarily due to the addition of Clint Hurt Drilling on April 1,
1995, whose operations were not included in the comparable 1995
quarter results, increased oil and gas revenues from OEI,
increased oilwell service equipment utilization and the
acquisition of WellTech (see Note 2). The improvement in
quarterly net income is partially attributable to the inclusion
of Clint Hurt Drilling, but is also a result of an increase in
oilwell service equipment utilization and a decrease in total
consolidated Key costs and expenses as a percent of total
revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key and WellTech.
Yale E. Key conducts oilfield services primarily in West Texas,
while WellTech conducts oilfield services in the Mid-Continent
region of the United States (primarily in Oklahoma) through its
operating division; WellTech Mid-Con, and in the Northeastern
United States (primarily in Michigan, Pennsylvania and West
Virginia) through its operating division; WellTech Eastern. In
addition, WellTech conducts oilfield services in Argentina
through its 63% ownership in Servicios WellTech, S.A.
("Servicios"), an Argentinean corporation.
Oilfield service revenues for the quarter ended March 31, 1996
increased $1,771,000 or 17% from $10,145,000 for the quarter
ended March 31, 1995 to $11,916,000 for the current quarter
ending March 31, 1996. The increase in revenues is primarily
attributable to higher equipment utilization as the result of an
increase in demand for oilfield services and the acquisition of
WellTech whose operating results are included for the period of
March 26, 1996 (the date of the merger, see Note 2) to March 31,
1996. Yale E. Key averaged a 90% equipment utilization for the
current quarter compared to 81% for the comparable quarter of
last year. In addition, Yale E. Key continues the
diversification of oilfield services into higher margin business
segments such as oilfield frac tanks, oilfield fishing tools and
trucking operations.
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production operations are
performed by Odessa Exploration Inc. Revenues from oil and gas
activities increased $321,000 or 46% from $695,000 during the
quarter ended March 31, 1995 to $1,016,000 for the current
quarter. The increase in revenues was primarily the result of
increased production of oil and natural gas as several oil and
natural gas wells which were drilled began production during the
1996 quarter as well as higher oil and natural gas prices for
the quarter.
Of the total $1,016,000 of revenues for the quarter ended March
31, 1996, approximately $820,000 was from the sale of oil and
gas - 21,826 barrels of oil at an average price of $20.28 per
barrel and 232,049 MCF of natural gas at an average price of
$1.63 per MCF. The remaining $196,000 of revenues represented
primarily 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 years quarter are, therefore,
not available. Revenues for the quarter ended March 31, 1996
were $1,370,000.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased $504,000 or 79% from $642,000 to $1,146,000 during the
three months ended March 31, 1996 as compared with the prior
period. The increase is primarily due to oilfield service
depreciation expense, which is the result of increased capital
expenditures for the current quarter versus the prior quarter
ended March 31, 1995, and the addition of Clint Hurt Drilling
and WellTech (see Note 2). In addition, depletion expense
generated by OEI increased for the current quarter due to the
increase in the production of oil and natural gas.
Interest Expense
Interest expense for Key increased $201,000 or 54% from $370,000
during the three months ended March 31, 1995 to $571,000 for
the current quarter. The increase is primarily the result of
the Clint Hurt and WellTech acquisitions (see Note 2) and the
addition of certain oil and gas properties purchased by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, WellTech, OEI and Clint Hurt Drilling. These
expenses increased $45,000 or 32% from $1,174,000 for the
quarter ending March 31, 1995 to $1,219,000 for the current quarter. The
increase can be primarily attributed to the acquisition and
subsequent inclusion of Clint Hurt Drilling's and WellTech's
general and administrative expenses.
Income Tax Expense
Income tax expense for Key for the three months ended March 31,
1996 and 1995 was $399,000 and $266,000 respectively.
Minority Interest
The minority interest of $18,000 is that portion of net income
from Servicios WellTech attributable to the minority
shareholders (37%) for the period of acquisition until March 31,
1996 (see Note 2).
Net Income
Net income before minority interest and income taxes was
$1,244,000 for the three months ended March 31, 1996, which was
an increase of $347,000 or 39% over the comparable quarter
ending March 31, 1995 amount of $897,000. The increase in net
income before minority interest and income taxes was primarily
due to the addition of Clint Hurt Drilling and WellTech (see
Note 2), increased oil and gas revenues and higher oilfield
service equipment utilization. Net income for the three months
ended March 31, 1996 was $827,000, which was a $196,000 or 31%
increase from $631,000 for the three months ended March 31, 1995.
Cash Flow
Net cash provided by operations increased $1,402,000 from
$870,000 during the three months ended March 31, 1995 to
$2,272,000 in net cash provided by operations for the current
quarter. The increase is attributable primarily to lower
increase in other assets and accrued expenses and higher net
income and depreciation expense over the same period last year.
Net cash used in investing activities increased $871,000 from
$479,000 for the three months ended March 31, 1995 to $1,350,000
for the current quarter. The increase is primarily the result
of increased expenditures for oil and gas properties and oilwell
service operations. In addition, net cash used in investing
activities for the current quarter included $90,000 used in the
oil and gas well drilling operations.
Net cash provided by financing activities was $1,426,000 for the
three months ended March 31, 1996 as compared to $538,000 in net
cash used by financing activities for the comparable quarter.
The increase is primarily the result of net cash received from
the WellTech purchase (see Note 2) during the current quarter
and a decrease in proceeds from long-term debt during the
current quarter. Such proceeds were primarily used for the oil
and natural gas drilling program conducted by OEI.
Cash increased $2,348,000 for the three months ended March 31,
1996, as compared to a net decrease in cash of $147,000 for the
three months ended March 31, 1995.
NINE MONTHS ENDED MARCH 31, 1996 VERSUS NINE MONTHS ENDED MARCH 31, 1995
Results of Operations
The Company or Key
Revenues of Key for the nine months ended March 31, 1996
increased $6,083,000 or 18% to $39,094,000 from $33,011,000 for
the comparable fiscal 1995 period, while net income of $768,000 increased
56% over$679,000 or 41% to $2,321,000 from $1,642,000 for the prior yearcomparable
fiscal 1995 nine month total of $492,000.$1,642,000. The increase in
revenues was primarily due to the addition of Clint Hurt
Drilling on April 1, 1995, whose operations were not included in
the prior year quarter results.results, the increase in oil and gas revenues and
the acquisition of WellTech (see Note 2). The improvement in quarterly
net income is partially attributable to the inclusion of Clint
Hurt Drilling, but is also a result of an increase in net income for OEIoil and
gas revenues, the addition of WellTech (see Note 2) and a
decrease in total consolidated Key costs and expenses as a
percent of total revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key Inc.and WellTech.
Oilfield service revenue declined 9%$4,000 from $10,258,000$31,068,000 for
the prior quarternine month period ending March 31, 1995 to $9,381,000$31,064,000
for the current quarter.nine month period ending March 31, 1996. The
decline is primarily attributable to curtailed equipment
utilization as the result of adverse weather conditions and a
slight decline in demand.demand during the first and second quarters of
the Company's fiscal year. This decline in oilfield service
revenues is largely offset by an increase in oilfield service
revenues during the current quarter ended March 31, 1996. Yale
E. Key averaged an 81%86% equipment utilization for the quarter;nine
months; and due to lower expenses, and due
to the continued
diversification of services into higher margin business segments
such as oilfield frac tanks, oilfield fishing tools and trucking
operations, the gross margin increased from 21% to 24% of
revenues for the current quarternine months ended March 31, 1996.
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production are performed by
Odessa Exploration, Inc. Revenues from oil and gas activities
increased 48%$971,000 or 55% from $615,000$1,772,000 in the 1994 quarter1995 period to
$911,000$2,743,000 for the current quarternine month period despite relatively
constant crude oil and lower natural gas prices.prices during the first
and second quarters of the fiscal year. The increase in revenues
was primarily the result of increased production of oil
and natural gas as several oil and natural gas wells which were
drilled began production during the 1995
quarter.1996 period.
Of the total $911,000$2,743,000 of revenues for the quarternine months ended
DecemberMarch 31, 1995,1996, approximately $734,000$2,313,000 was from the sale of
oil and gas - 22,85766,177 barrels of oil at an average price of
$15.57$17.54 per barrel and 223,200711,198 MCF of natural gas at an average
price of $1.69$1.62 per MCF. The remaining $177,000$430,000 of revenues
represented primarily 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 Clint Hurt Drillingwhich was acquired in March 1995. Comparable
numbers for the prior quarternine month period ending March 31, 1995
are, therefore, not available. Revenues were $2.1 for the quarter compared to $1.6 million for
the priornine months
ended March 31, 1996 fiscal quarter.were $5,029,000.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased 42%$1,053,000 or 56% from $684,000$1,887,000 to $971,000$2,940,000 during
the threenine months ended DecemberMarch 31, 19951996 as compared with the prior
fiscal 1995 nine month period. The increase is primarily due to
oilfield service depreciation expense, which is the result of
increased oilfield service capital expenditure
depreciationexpenditures for the current
quarterperiod versus the prior quarter.period and the addition of WellTech and
Clint Hurt Drilling (see Note 2). In addition, depletion
expense generated by OEI increased for the quarterperiod due to the
increase in the production of oil and natural gas.
Interest Expense
Interest expense for Key increased 28%$451,000 or 45% from $343,000$997,000
during the threenine months ended DecemberMarch 31, 19941995 to $439,000$1,448,000 for
the current period. The increase is primarily the result of
acquisitions and the addition of certain oil and gas properties
by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, WellTech, OEI and Clint Hurt Drilling. These
expenses increased $265,000$613,000 or 32%20% to $1,198,000$3,609,000 during the threenine
months ended DecemberMarch 31, 19951996 as compared to $933,000$2,996,000 for the
threenine months ended DecemberMarch 31, 1994.1995. The increase can be primarily
attributed to the acquisition and subsequent inclusion of Clint
Hurt Drilling's general and administrative expenses.expenses as well as
the acquisition of WellTech (see Note 2).
Income Tax Expense
Income tax expense for Key for the threenine months ended DecemberMarch 31,
1996 and 1995 was $1,129,000 and 1994 was $387,000 and $231,000$742,000 respectively.
Minority Interest
The minority interest of $18,000 is that portion of net income
from Servicios WellTech attributable to the minority
shareholders (37%) for the period of acquisition until March 31,
1996 (see Note 2).
Net Income
Net income before minority interest and income taxes was
$1,155,000$3,468,000 for the threenine months ended DecemberMarch 31, 1995,1996, which was
an increase of $432,000$1,084,000 or 60%45% over the comparable quarterperiod of
$723,000.$2,384,000. The increase in net income before minority interest
and income taxes was primarily due to the addition of Clint Hurt
Drilling and other oilwell service acquisitions (see Note 2),
increased oilfield service equipment utilization during the
third quarter of fiscal 1996 and increased oil and gas revenues.
Net income for the threenine months ended DecemberMarch 31, 19951996 was
$768,000,$2,321,000, which was a $276,000$679,000 or 56%41% increase from $492,000$1,642,000
for the threenine months ended DecemberMarch 31, 1994.1995.
Cash Flow
Net cash provided by operations increased $1,886,000$4,327,000 from
$75,000 in net cash used by operations$991,000 during the threenine months ended DecemberMarch 31, 19941995 to
$1,811,000 in net cash provided by
operations$5,318,000 for the current period. The increase is attributable
primarily to lower decrease in accounts payable and accrued
expenses and higher net income and depreciation expense over
the same period last year.
Net cash used in investing activities increased $1,998,000 from
$1,717,000$3,596,000 for the threenine months ended December 31, 1994 to $2,297,000 for
the current period. The increase is primarily the result of
increased expenditures for oil and gas properties. In addition,
net cash used in investing activities for the current quarter
included $220,000 used in the oil and gas well drilling
operations.
Net cash provided by financing activities was $543,000, a
$1,370,000 decrease, for the three months ended DecemberMarch 31, 1995 as compared to
$1,913,000 for the comparable quarter. The
decrease is primarily the result of increased principal payments
made during the current quarter versus the prior quarter and a
decrease in proceeds from long-term debt during the current
quarter. Such proceeds were primarily used for the oil and
natural gas drilling program conducted by OEI.
Cash increased $57,000 for the three months ended December 31,
1995, as compared to a net increase in cash of $121,000 for the
three months ended December 31, 1994.
SIX MONTHS ENDED DECEMBER 31, 1995 VERSUS SIX MONTHS ENDED
DECEMBER 31, 1994
Results of Operations
Key
Revenues of Key for the six months ended December 31, 1995
increased 13% to $24,792,000 from $21,962,000 for the comparable
1994 period, while net income of $1,494,000 increased 48% over
the prior six month total of $1,011,000. The increase in
revenues was primarily due to the addition of Clint Hurt
Drilling on April 1, 1995, whose operations were not included in
the prior year quarter results. The improvement in quarterly
net income is partially attributable to the inclusion of Clint
Hurt Drilling, but is also a result of an increase in net income
for OEI and a decrease in total consolidated Key costs and
expenses as a percent of total revenues.
Yale E. Key, Inc.
Oilfield service revenue declined $1,775,000 or 9% from
$20,923,000 for the prior period to $19,148,000 for the current
period. The decline is primarily attributable to curtailed
equipment utilization as the result of adverse weather
conditions and a slight decline in demand. Yale E. Key averaged
an 82% equipment utilization for the six months; and due to
lower expenses, and due to the continued diversification of
services into higher margin business segments such as oilfield
frac tanks, oilfield fishing tools and trucking operations, the
gross margin increased from 21% to 24% of revenues for the
current quarter
Odessa Exploration, Inc.
Revenues from oil and gas activities increased 60% from
$1,077,000 in the 1994 period to $1,727,000 for the current six
month period despite relatively constant crude oil and lower
natural gas prices. The increase in revenues was primarily the
result of increased production of oil and natural gas as several
oil and natural gas wells which were drilled began production
during the 1996 period.
Of the total $1,727,000 of revenues for the six months ended
December 31, 1995, approximately $1,308,000 was from the sale of
oil and gas - 44,351 barrels of oil at an average price of
$16.19 per barrel and 479,149 MCF of natural gas at an average
price of $1.62 per MCF. The remaining $419,000 of revenues
represented primarily administrative fee income.
Clint Hurt Drilling
Clint Hurt Drilling was acquired in March 1995. Comparable
numbers for the prior six months are, therefore, not available.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased $549,000 or 44% from $1,245,000 to $1,794,000 during
the six months ended December 31, 1995 as compared with the
prior period. The increase is primarily due to oilfield service
depreciation expense, which is the result of increased capital
expenditure depreciation for the current period versus the prior
period. In addition, depletion expense generated by OEI
increased for the period due to the increase in the production
of oil and natural gas.
Interest Expense
Interest expense for Key increased 40% from $627,000 during the
six months ended December 31, 1994 to $877,000 for the current
period. The increase is primarily the result of acquisitions
and the addition of certain oil and gas properties by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, OEI and Clint Hurt Drilling. These expenses
increased $568,000 or 31% to $2,390,000 during the six months
ended December 31, 1995 as compared to $1,822,000 for the three
months ended December 31, 1994. The increase can be primarily
attributed to the acquisition and subsequent inclusion of Clint
Hurt Drilling's general and administrative expenses.
Income Tax Expense
Income tax expense for Key for the six months ended December 31,
1995 and 1994 was $730,000 and $476,000 respectively.
Net Income
Net income before income taxes was $2,224,000 for the six months
ended December 31, 1995, which was an increase of $737,000 or
50% over the comparable quarter of $1,487,000. The increase in
net income before income taxes was primarily due to the addition of Clint
Hurt Drilling (see Note 2) and increased oil and gas revenues.
Net income for the six months ended December 31, 1995 was
$1,494,000, which was a $483,000 or 48% increase from $1,011,000
for the six months ended December 31, 1994.
Cash Flow
Net cash provided by operations increased $2,925,000 from
$121,000 during the six months ended December 31, 1994 to
$3,046,000 for the current period. The increase is attributable
primarily to lower decrease in accounts payable and accrued
expenses and higher net income and depreciation expense over the
same period last year.
Net cash used in investing activities increased $1,127,000 or
36% from $3,117,000 for the six months ended December 31, 1994
to $4,244,000$5,594,000 for the current period. The increase is primarily
the result of increased expenditures for oil and gas properties.
In addition, net cash used in investing activities for the
current period included $360,000$450,000 used in the oil and gas well
drilling operations.
Net cash provided by financing activities was $878,000,$2,304,000, a
$1,912,000 decrease,$52,000 increase, for the sixnine months ended DecemberMarch 31, 19951996 as
compared to $2,790,000$2,252,000 for the comparable period. The decreaseincrease
is primarily the result of increased principal payments
madecash received from the purchase of
WellTech during the current quarter versus the prior quarter andperiod, which is partially offset by
a decrease in proceeds from long-term debt during the current
quarter. Such proceeds were primarily used for the oil and
natural gas drilling program conducted by OEI.
Cash decreased $320,000increased $2,028,000 for the sixnine months ended DecemberMarch 31,
1995,1996, as compared to a net decrease in cash of $206,000$353,000 for the
sixnine months ended DecemberMarch 31, 1994.1995.
LIQUIDITY AND CAPITAL RESOURCES
At DecemberMarch 31, 1995,1996, Key had $955,000$3,303,000 in cash and restricted
cash as compared to $1,275,000 in cash and restricted cash at
June 30, 1995.
Yale E. Key has projected $2.5$3.0 million for oilwell service
capital expenditures over the 1996 fiscal year as compared to
$2.8 million for the fiscal year ended June 30, 1995. Capital
expenditures are expected to be primarily capitalized
improvement costs (totaling over $5,000) to existing equipment
and machinery. Capital expenditures are expected to decrease
from fiscal 1995 levels due to less capital improvements for the
acquired WellTech operations of West Texas. Financing of capital expenditures is expected
to come from the operating cash flows of Yale E. Key. Capital
expenditures were $1,418,000$2,605,000 for the sixnine months ended DecemberMarch 31,
1995.1996.
OEI has forecasted approximately $3 million in oil and gas
property acquisitions for fiscal 1996 as compared to $2.8
million during fiscal 1995.1995 (which does not include the
acquisition described in Note 2). Financing of oil and gas
acquisitions is expected to come from borrowings. Oil and gas
acquisitions were $2,150,000$2,532,000 for the sixnine months ended DecemberMarch 31,
1995.1996. Financing of oil and gas acquisitions is expected to be
obtained from bank financing and/or private investors.
Bank Financing
In January 1996, prior to the completed merger described in Note
2, Key, Yale E. Key, Clint Hurt and Old WellTech entered into
new separate credit facilities with The C.I.T. Group/Credit
Finance, Inc. ("C.I.T.) totaling approximately $35 million (the
combined maximum credit limit). As a result of the new 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 March 31, 1996). In addition, the
interest rate for the Old WellTech debt was lowered from an
aggregate of three and one-half percent to one and one-quarter
percent over the stated prime rate (8.25% at March 31, 1996).
Each of the C.I.T. term notes require 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 are December 31,1998. The proceeds of the initial
borrowings were used to repay substantially all of the debt of
Key (other than that of OEI) and Old WellTech. Key believes
that such a facility will provide sufficient funds to finance
its operating and capital expenditure needs for the foreseeable
future. The indebtedness, which is currently being modified to
reflect the Welltech merger, will be the obligation of Key and
Key's subsidiaries, Yale E. Key, Clint Hurt and WellTech. At
March 31, 1996, the Company (on a combined basis) had approximately
$2 million in term and credit-line availability.
Acquisitions
WellTech, Inc.
In March 1996, Key acquired, through a merger, Old WellTech.
Key was the surviving entity in the merger. Net consideration
for the merger was 3,500,000 shares of Key Common Stock and
warrants to purchase 500,000 additional shares. In the merger, Old WellTech
stockholders received an aggregate of 4,929,962 shares of Key
Common Stock and warrants to purchase 750,000 shares of Key
Common Stock at $6.75 per share. As part of the merger,
1,429,962 of the 1,635,000 shares of Key Common Stock owned by
Old WellTech and previously issued warrants to purchase 250,000
shares of Key Common Stock at $5.00 per share were cancelled.
WellTech's principal line of business is oil and gas well
servicing and it operates in the Mid-Continent and Northeast
areas of the United States and in Argentina. Until November
1995, Old WellTech also conducted certain operations in Russia.
On March 26, 1996, Key shareholders approved the merger. The
acquisition was accounted for using the purchase method.
Odessa Exploration Properties
In April of 1996, the Company announced that OEI had agreed to
purchase approximately $7.1 million of oil and gas producing
properties from two unrelated companies. The properties to be
acquired include production in 264 gross (79 net) wells with
daily average net production of 240 barrels of oil and 1.5 mmcf
of natural gas. The reserves are approximately equally divided
between oil and natural gas. Financing for the acquisition is
expected to come from bank financing. The acquisition will be
accounted for using the purchase method.
Clint Hurt Drilling
On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA")
entered into an Asset Purchase Agreement pursuant to which CHA
sold to Key all of its assets in West Texas. Such assets mainly
consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, Key paid CHA
$1,750,000,$1,725,000, of which $1,000,000 was paid in cash and the balance
in the form of a $725,000 note payable to CHA (the note was paid
in full in July 1996)1995). Mr. Clint Hurt entered into consulting
and noncompetition agreements with Key in consideration for
which Key issued 5,000 shares of Key Common Stock. The
acquisition was accounted for using the purchase method and the
results of operations of Clint Hurt Drilling have been included
in those of Key since April 1, 1995.
The Merger
In August 1995, Key announced an agreement to acquire, through a
merger, WellTech. Key will be the surviving entity in the
merger. In the merger, WellTech stockholders will receive an
aggregate of 4,929,962 shares of Key Common Stock and warrants
to purchase 750,000 shares of Key Common Stock at $6.75 per
share. As part of the merger, 1,429,962 of the 1,635,000
shares of Key Common Stock currently owned by WellTech and
previously issued warrants to purchase 250,000 shares of Key
Common Stock at $5.00 per share will be cancelled. Net
consideration for the merger will be 3,500,000 shares of Key
Common Stock and warrants to purchase 500,000 additional shares.
WellTech's principal line of business is oil and gas well
servicing and it currently operates in the Mid-Continent and
Northeast areas of the United States and in Argentina. Until
November 1995, Welltech also conducted certain operations in
Russia. Consummation of the merger is subject to satisfaction
of various conditions including, without limitation, shareholder
approval and no assurance can be given that the merger will be
consummated. On January 23, 1996, Key filed a prospectus -
proxy statement which will, upon completion and mailing, be used
to solicit shareholder approval of the merger.
Each of Key (and Yale E. Key and Clint Hurt) and WellTech
recently entered into new credit facilities of approximately
$17.5 million (subject to certain advance formulas) the proceeds
of the initial borrowings of which were used to repay
substantially all of the debt of Key (other than that of OEI)
and Welltech (other than that of certain affiliates),
respectively. Key believes that such a facility will provide
sufficient funds to finance its operating and capital
expenditure needs for the foreseeable future. The new
indebtedness will be the obligation of Key, as survivor of the
merger, and Key's subsidiaries, Yale E. Key and Clint Hurt. The
cross-guaranty and cross-collateralization arrangement could, if
the merger is not consummated, create contingent liabilities for
each of Key and WellTech. The failure to consummate the merger
on or prior to April 30, 1996 will, at the option of the lender,
constitute an event of default under the new indebtedness if
WellTech fails to refinance its credit agreement on or before
July 31, 1996 or Key fails to continue to operate Welltech
pursuant to the Interim Operations Agreement. Key and WellTech
have agreed not to terminate the Interim Operations Agreement
without the consent of the lender. (See Note 2, "The Merger)
Impact of SFAS 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121") regarding the impairment of long-lived assets,
identifiable intangibles and goodwill related to those assets.
SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is
encouraged. The application of SFAS 121 will require periodic
determination of whether the book value of long-lived assets
exceeds the future cash flows expected to result from the use of
such assets and, if so, will require reduction of the carrying
amount of the "impaired" assets to their estimated fair values.
Key estimates that the implementation of SFAS 121 will not have
a material effect on Key's financial position. Key will adopt
SFAS 121 for the fiscal year beginning July 1, 1996.
Impact of Inflation on Operations
Although in a complex environment it is extremely difficult to
make an accurate assessment of the impact of inflation on Key's
operations, management is of the opinion that inflation has not
had a significant impact on it business.
Cautionary Statement for Purposes of The "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
Key desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of
1995. Key's Report on Form 10-Q contains statements which may
be considered "forward-looking statements" including statements
concerning projections, plans, objectives, future events or
performance and underlying assumptions and other statements
which are other than statements of historical fact. Key wishes
to caution readers that the following important factors, amoungamong
others, may have affected and could in the future affect Keys'actualKey's
actual results and could cause Key's actual results for
subsequent periods to differ materially from those expresedexpressed in
any forward-looking statement made by or on behalf of Key:
OccurencesOccurrences affecting the need for, timing and extent of Key's
capital expenditures or affecting Key's ability to obtain funds
from operations, borrowings or investments to finance needed
captialcapital expenditures;
Key's ability successfully to identify and finance oil and gas
property acquisitions and its ability successfully to operate
existing and any subsequently acquired properties;
The availability of adquateadequate funds under the newKey's credit facility
to fund operations for the foreseeable future, or if such funds
are inadquate,inadequate, the ability of Key to obtain new or additional
financing or to generatregenerate adequate funds from operations;
Key is highly leveraged due to the substantial indebtedness Key
has incurred and Welltech, prior to its merger into Key, had
incurred;
Key's ability to enter into and retain profitable oilfield
servicing and drilling contracts with customers which make
timely payments for such services;
The demand for oilfield services, drilling services and for oil
and gas, and the supply of and demand for drilingdrilling and servicing
rigs, all of which are subject to fluctuations which could adversely
affect Key's operations;
Key's ability to integrate the management of and operations of
WellTech into the ongoing management and operations of Key;
The existence on many competitors in all of Key's operations,
many of which have financial and other resources greatly in
excess of those available to Key;
The amount and rate of growth in Key's general and
admistrativeadministrative expense, including, but not limited to, the
costs of intergratingintegrating WellTech's operations into Key assuming
consummation of the Merger;Key.;
The effect of regulations and changes in regulations, including
environmental regulations with which Key must comply, the cost
of such complicancecompliance and the potentially material adverse effects
if Key were not in substantial compliance either currently or
in the future;
Key's relationship with its employees and the potential adverse
effect if labor disputes or grievances were to occur;
Uncertainties related to operations and investments outside the
United States;
The costs and other effects of legal and administrative cases
and proceedings and/or settlements, including
but not limited to environmental and workers compensation cases;
The effect of changes in accounting policies and practices or
of changes in Key's organization, compensation and benefit plan,
or of changes in Key's material
agreements of understandings with third parties.
Moreover, in connection with Key's proposed merger with
WellTech, readers should consider the important factors set forth
under the caption RISK FACTORS in the proxy statement-prospectus
forming part of Key's Registration Statement in Form S-4,
Commission File No. 333-00369, which RISK FACTORS section, as
amended from time to time, is hereby incorporated hereby by
reference.
Key undertakes no obligation to release publicly the result of
any revisions to any forward-looking statements which may be
made to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
NoneOn March 26, 1996, a meeting of the holders of Common Stock,
par value $.10 per share, was held to approve the purchase
of WellTech, Inc. and other related matters. Only holders of
record as of the close of business on March 16, 1996 were
entitled to notice of and to vote at the meeting and at any
adjournment thereof. On the Record Date, the outstanding
number of shares entitled to vote consisted of 6,914,513
shares of Common Stock. The results of the voting were as
follows:
For Against Abstain
Proposal 1
(WellTech Merger) 4,923,496 (71%) 4,752 * 5,399 *
Proposal 2
(Charter Amendment) 4,746,427 (69%) 180,751 (3%) 6,469 *
Proposal 3
(Board of Directors)** 4,759,353 (69%) 174,294 (3%) --
Proposal 4
(1995 Stock
Option Plan) 4,752,583 (69%) 175,010 (3%) 6,054 *
Proposal 5
(Outside Directors
Stock Option Plan) 4,884,489 (71%) 36,257 (1%) 12,901 *
* Less than 1%
** All Directors received the identical votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit isexhibits are filed as a part of the Form
10-Q:
Exhibit
Number Description
27 (a)Item
* 1.1 Amendment to Merger Agreement dated as of March 21,
1996
* 3.1 Amended and Restated Articles of Incorporation of Key
3.2 Amended and Restated By-Laws of Key. Incorporated
by reference to Amendment No. 2 to Key's Form S-4
Registration Statement (No.333-369).
* 4.1 Common Stock Purchase Warrant to purchase Shares of
Key Common Stock issued in connection with the merger of
WellTech, Inc. ("WellTech") into Key and supplemental
information required by Item 601(a)(4) of Regulation S-K.
4.2 Common Stock Purchase Warrant to purchase 75,000
shares of Key Common Stock issued to CIT Group/Credit
Finance, Inc. ("CIT") In corporated by reference to
Amendment No. 2 to Key's Form S-4 Registration Statement
(No. 333-369).
* 4.3 Form of Registration Rights Agreement between Key
and Certain Holders of Key Common Stock.
4.4 Registration Rights Agreement dated as of January
19, 1996 between Key and CIT. Incorporated by reference
to Amendment No. 2 to Key's Form S-4 Registration
Statement (No. 333-369).
10.1 Second Amended and Restated Loan Agreement and
Security Agreement between Key, Yale E. Key, Inc., Key
Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint
Hurt") and CIT. Incorporated by reference to Amendment No.2
to Key's Form S-4 Registration Statement (No. 333-369).
10.2 Cross-Guaranty and Cross-Collateralization Agreement between Key,
Yale E. Key, Inc., Clint Hurt, Welltech and CIT. Incorporated
by reference to Amendment No. 2 to Key's Form S-4
Registration Statement (No. 333-369).
10.3 Key 1995 Stock Option Plan. Incorporated by reference to
Amendment No. 2 to Key's Form S-4 Registration
Statement (No.333-369).
10.4 Key Outside Directors Stock Option Plan. Incorporated by
reference to Amendment No. 2 to Key's Form S-4
Registration Statement (No.333-369).
* 11 Statement - Computation of per share earnings
* 27(a) Statement - Financial Data Schedule
(Filed* Filed herewith as part of the Condensed Consolidated
Financial Statements).
99 Risk Factors disclosure from Key's Proxy Statement -
Prospectus included as part of Key's Registration
StatementStatements.
(b) Key filed a report on Form S-4, Commission File No. 33-00369.
(b) There were no reports filed on form 8-K during the quarter ended
DecemberMarch 31, 1995.1996 which was dated March 26, 1996 relating to the
consummation of the merger of WellTech with Key. The
Form 8-K incorporated by reference the financial statements
of WellTech included in Key's Form S-4 Registration Statement
(No.333-369) as well as the pro-forma financial information
included therein.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. JohnJohn_________
President, Chief Executive Officer
Dated: February 14,May 3, 1996 and Chief Financial Officer
By /s/ Danny R. EvattEvatt_________
Dated: February 14,May 3, 1996 Vice President and Chief Accounting
Officer