_____________________________________________________________________________________________________________________
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 March 31,September 30, 1996
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., NewTwo Tower Center, Tenth Floor, East Brunswick, NJ 0890108816
(Address of principalPrincipal executive offices) (Zip(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
since there was a distribution of securities under a plan
confirmed by a court. Yes X No
Common Shares outstanding at April 19,October 15, 1996: 10,413,513
______________________________________________________________10,425,176
________________________________________________________________
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 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 1918
Item 2. Changes in Securities. 1918
Item 3. Defaults Upon Senior Securities. 1918
Item 4. Submission of Matters to a Vote of Security
Holders. 1918
Item 6. Exhibits and Reports on Form 8-K. 1918
Signatures. 2119
Key Energy Group,Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31,September 30, June 30,
(Thousands, except share and per share data) 1996 19951996
- ----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $1,598 $865$17,116 $3,240
Restricted cash 1,705 410
Restricted marketable securities 267 2671,691 971
Accounts receivable, net 19,183 8,13322,482 20,570
Inventories 1,979 1,957
Prepaid expenses 1,793 358
Inventories 1,764 1,257and other current assets 1,170 743
- ----------------------------------------------------------------------------
Total Current Assets 26,310 11,29044,438 27,481
- ----------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 64,091 23,72669,136 66,432
Oil and gas well drilling equipment 4,682 2,0145,185 4,862
Motor vehicles 1,041 5261,260 1,159
Oil and gas properties and other related
equipment,successful efforts 10,270 7,652method 17,946 17,663
Furniture and equipment 1,367 332806 716
Buildings and land 5,026 2,086
86,477 36,3365,339 5,295
- ----------------------------------------------------------------------------
99,672 96,127
Accumulated depreciation & depletion (7,334) (4,394)(10,890) (8,920)
- ----------------------------------------------------------------------------
Net Property and Equipment 79,143 31,94288,782 87,207
- ----------------------------------------------------------------------------
Other Assets 5,190 2,0119,518 7,034
- ----------------------------------------------------------------------------
Total Assets $110,643 $45,243$142,738 $121,722
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $9,562 $3,930
Accrued interest 305 145$12,745 $11,086
Other accrued liabilities 9,539 2,61210,139 11,002
Accrued interest 1,081 417
Accrued income taxes 49 17453 53
Deferred tax liability 118 118310 310
Current portion of long-term debt 4,245 2,249869 1,471
- ----------------------------------------------------------------------------
Total Current Liabilities 23,818 9,22825,197 24,339
- ----------------------------------------------------------------------------
Long-term debt, less current portion 37,073 13,700
Accrued casualty insurance63,061 45,354
Non-current accrued expenses 4,909 -4,909
Deferred income taxes 3,333 2,2045,026 4,244
Minority interest 1,151 -
Commitments and contingencies1,309 1,252
Stockholders' equity:
Common stock, $.10 par value; 25,000,000
shares authorized, 10,413,51310,425,176 and 6,913,51310,413,513
shares issued and outstanding at March 31,September 30,
1996 and June 30, 1995, 1996,respectively 1,043 1,041 691
Additional paid-in capital 32,819 32,763 15,186
Retained earnings 6,555 4,2349,374 7,820
- ----------------------------------------------------------------------------
Total Stockholders' Equity 40,359 20,11143,236 41,624
- ----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $110,643 $45,243$142,738 $121,722
============================================================================
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
Nine Months Ended
March 31, March 31,September 30,
(Thousands, except per share data) 1996 1995
1996 1995- ---------------------------------------------------------------------------
REVENUES:
Oilfield services $11,916 $10,145 $31,064 $31,068$27,311 $9,767
Oil and gas revenues 1,016 695 2,743 1,7721,525 816
Oil and gas well drilling 1,3702,324 1,602
Other, net 302 213
- 5,029---------------------------------------------------------------------------
31,462 12,398
- Other revenues, net - 209 258 171
14,302 11,049 39,094 33,011---------------------------------------------------------------------------
COSTS AND EXPENSESEXPENSES:
Oilfield services direct costs 8,655 7,784 22,808 24,13419,700 7,264
Oil and gas direct costs 316 182 935 613513 265
Oil and gas well drilling 1,151 - 3,886 -1,881 1,347
Depreciation, depletion and depletion expense 1,146 642 2,940 1,887amortization 2,095 823
General and administrative expense 1,219 1,174 3,609 2,9963,527 1,192
Interest expense 571 370 1,448 997
13,058 10,152 35,626 30,6271,350 438
- ---------------------------------------------------------------------------
29,066 11,329
- ---------------------------------------------------------------------------
Income before income taxes and minority interest and
and income taxes 1,244 897 3,468 2,384
Minority interest 18 - 18 -2,396 1,069
Income tax expense 399 266 1,129 742784 343
Minority interest in net income 58 -
- ---------------------------------------------------------------------------
NET INCOME $827 $631 $2,321 $1,642$1,554 $726
===========================================================================
EARNINGS PER SHARE :
Primary:
Income before income taxes and
minority interest and income taxes $0.18 $0.14 $0.50 $0.36$0.22 $0.15
Net income $0.12 $0.10 $0.33 $0.25$0.14 $0.11
Assuming full dilution:
Income before income taxes and
minority interest and income taxes $0.18 $0.14 $0.50 $0.36$0.20 $0.15
Net income $0.12 $0.10 $0.33 $0.25$0.13 $0.11
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 6,981 6,637 6,981 6,63710,894 6,914
Assuming full dilution 6,986 6,637 6,986 6,63716,974 6,914
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of OperationsCash Flows
Three Months Ended
Nine Months Ended
March 31, March 31,September 30,
(Thousands) 1996 1995
1996 1995- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $827 $631 $2,321 $1,642$1,554 $726
Adjustments to reconcile income from
operations to net cash provided
by operations:
Depreciation, depletion and amortization 1,146 642 2,940 1,8872,095 823
Deferred income taxes 399 266 1,129 742784 343
Minority interest in net income 18 - 1858 -
Change in assets and liabilities net of effects
from the acquisitions:
(Increase) decreaseIncrease in accounts receivable 26 (148) (193) (1,108)
(Increase) decrease(1,912) (498)
Increase (decrease) in other current assets (184) (654) (94) (725)(449) 111
Decrease (increase) in accounts payable and
accrued expenses 191 107 (616) (1,457)
(Decrease) increase853 (274)
Increase in accrued interest (1) 27 22 11
(Decrease) increase in accrued
taxes (75)664 13
Other assets and liabilities (631) (9)
- (125) -
(Increase) decrease in other
assets (75) (1) (84) (1)---------------------------------------------------------------------------
Net cash provided by operating activities 2,272 870 5,318 9913,016 1,235
- ---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell service
operations (878) (385) (2,605) (2,284)(2,900) (886)
Capital expenditures - Oil and gas operations - (16)(41) (7) (23)
Capital expenditures - Oil and gas well
drilling operations (90)(323) (140)
Acquisitions - (450) -
Expenditures for oil and gas properties (382) (78) (2,532) (1,289)operations (281) (914)
- ---------------------------------------------------------------------------
Net cash used in investing activities (1,350) (479) (5,594) (3,596)(3,545) (1,947)
- ---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (899) (904)
Borrowings (payments) under line-of-credit 939 (66)
Proceeds from exercised stock options 58 -
Proceeds from long-term debenture, net 50,440 -
Repayment of long-term debt (259) (471) (1,677) (1,518)
Cash received from purchase
of WellTech 1,168(35,413) - 1,168 -
Borrowings under line-of-credit 41 (1,377) 13 (406)
Proceeds from long-term debt 476 1,310 2,800 4,176- other - 1,305
- ---------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 1,426 (538) 2,304 2,25215,125 335
- ---------------------------------------------------------------------------
Net increase (decrease)increase(decrease) in cash and
restricted cash 2,348 (147) 2,028 (353)14,596 (377)
Cash and restricted cash at beginning
of period 955 9674,211 1,275
1,173- ---------------------------------------------------------------------------
Cash and restricted cash at end of period $3,303 $820 $3,303 $820$18,807 $898
===========================================================================
Supplemental cash flow disclosures:
Interest paid $434 $343 $1,288 $986
Supplemental schedule of non-cash
investing and financing transactions:
Fair value of Common Stock and Warrants
issued WellTech West Texas $- $- $- $8,647
Fair value of Common Stock issued for
Clint Hurt Drilling $- $23 $- $23
Issuance of note payable in Clint
Hurt Drilling acquisition $- $725 $725 $-$686 $425
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
March 31,September 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
The consolidated financial information in this report includes
the accounts of Key Energy Group, Inc. ("Key"(the "Company") and its
wholly-owned subsidiaries and was prepared in conformity with
accounting policies used in the Annual Report on Form 10-K
furnished for the preceding fiscal year.
The consolidated financial informationCompany operates 332 well service and workover rigs, which
is the third largest fleet of well service and workover rigs in
this report includes
the United States. The Company operates in Texas, Oklahoma,
Michigan, the Appalachian Basin and Argentina and is a leader in
each of its domestic markets. The Company provides maintenance
and workover rigs to service producing oil and gas wells.
Although the range and extent of services provided varies from
region to region, as part of its well service business, the
Company generally provides a full range of maintenance and
workover rig services. These services 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 hot oiling, oil field liquid transportation,
fishing tools and services, frac tank rental and salt water
injection. The Company also is engaged in the production of oil
and natural gas and contract drilling in the Permian Basin of
West Texas.
The Company conducts operations through four operating subsidiaries of the Company;wholly-owned
subsidiaries: 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 are both
involved in oilwell service operations,Eastern"); Odessa Exploration
Inc.Incorporated ("OEI"Odessa Exploration") 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"Hurt") 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 aKey
operates in Argentina through its 63% ownership in Servicios
WellTech, S.A. ("Servicios"), an
Argentinean corporation, which. WellTech Eastern operates through
two divisions; WellTech Mid-Continent Division and WellTech
Eastern Division. Yale E. Key, WellTech Eastern and Servicios
provide oil and gas well services. Odessa Exploration is
accountedengaged in the production of oil and gas and Clint Hurt provides
contract oil and gas well drilling services.
In July 1996, the Company completed the offering of $52,000,000
of 7% convertible subordinated debentures due 2003 (the
"Offering"). The Offering was a private offering pursuant to
Rule 144A under the Securities Act. Proceeds from the Offering
were used to substantially repay existing long-term debt
(approximately $35.2 million). The remaining proceeds, together
with proceeds of borrowings under existing credit arrangements,
are intended to fund the expansion of the Company's services
through acquisitions of businesses and assets and for usingworking
capital and general corporate purposes. See Note 3 to the
consolidation withFinancial Statements for a minority interest method.
OEImore detailed description of the
Offering.
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 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'sOdessa Exploration'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 Company, the accompanying unaudited
condensed consolidated financial statements contain all normal
recurring adjustments necessary to present fairly the financial
position as of March 31,September 30, 1996, the statement of cash flows
for the three and nine months ended March 31,September 30, 1996 and 1995, and the
results of operations for the three and nine month periods then ended.
The consolidated financial statements of Key have been prepared
in accordance with generally accepted accounting principles for
interim financial information2. BUSINESS AND PROPERTY ACQUISITIONS
Subsequent and withPending Acquisitions
Woodward Well Services, Inc.
In September 1996, the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include allCompany announced the completion of the
informationacquisition of Woodward Well Services, Inc. for approximately
$719,000. Woodward Well Services, Inc., which operates in
Oklahoma and footnotes requiredoperates five oilwell service units and fishing
tools, will be operated by generally accepted accounting principals for complete financial
statements. Operating results for interim periods are not
necessarily indicativethe WellTech Mid-Continent Division
of the results that may be expectedCompany.
Hitwell Surveys, Inc.
On September 25, 1996, the Company announced an agreement to
aquire Hitwell Surveys, Inc. Consideration for the full year.
2. ACQUISITIONSaquisition will
be approximately $1.3 million. Hitwell Surveys, Inc., which operates
in the Appalachian Basin and Michigan and operates eight well logging
and perforating trucks, will be operated by the WellTech Eastern
Division of the Company.
Brooks Well Servicing, Inc.
On October 30, 1996, the Company announced an agreement to
acquire Brooks Well Servicing, Inc. Consideration for the
acquisition will be approximately one million shares of the
Company's common stock. Brooks Well Servicing, Inc. is a
wholly-owned subsidiary of Hunt Oil Co. and operates 32 oilwell
service rigs and ancillary equipment. Brooks Well Servicing,
Inc. operates in the East Texas region and will be operated by
the WellTech Mid-Continent Division of the Company.
Brownlee Well Service Inc.
In October, 1996, the Company consummated an agreement to
acquire Brownlee Well Service, Inc.("Brownlee") and Integrity
Fishing and Rental Tools Inc., a wholly-owned subsidiary of Brownlee.
Consideration for the acquisition is approximately $7 million which
is a combination of the Company's common stock and cash. Brownlee,
with operations in West Texas, owns 16 oilwell service rigs with
ancillary equipment and a variety of oilfield fishing tools.
Brownlee will be operated by Yale E. Key, Inc.
B&L Hotshot, Inc.
On October 11, 1996, the Company announced an agreement to
acquire B&L Hotshot, Inc. and five affiliated entities for
approximately $5 million. B&L Hotshot, Inc. and its affiliates
are based in Michigan and provide trucking and related services
for producing oil and natural gas wells in that region. B&L
Hotshot, Inc. will be operated by the WellTech Eastern Division
of the Company.
Completed Acquisitions
WellTech, Inc.
InOn March 26, 1996, Keythe Company 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 Stockthe
Company's 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 Stockthe Company's common stock
and warrants to purchase 750,000 shares of Key
Common Stockthe Company's common
stock at $6.75 per share. As part of the merger, 1,429,962 of
the 1,635,000 shares of Key Common Stockthe Company's common stock owned by
Old
WellTech and previously issued warrants to purchase 250,000
shares of Key Common Stockthe Company's common stock at $5.00 per share were
cancelled. WellTech's principal line of business iswas oil and
gas well servicing and it operatesoperated 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
purchaseOdessa Exploration purchased approximately
$7.1$6.9 million of oil and gas producing properties from twoan
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.company. Financing for the acquisition is
expected to comecame 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
$1,725,000, 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.method.
3. LONG-TERM DEBT
7 1/2% Convertible Subordinated Debentures
In JanuaryJuly 1996, priorthe Company completed the offering of $52,000,000
of 7 1/2% convertible subordinated debentures due 2003. The
Offering was a private offering pursuant to Rule 144A under the
completed merger describedSecurities Act. Proceeds from the Offering were approximately
$52,000,000 and were used to substantially repay existing
long-term debt (approximately $35.4 million). The remaining
proceeds are to be used to fund the expansion of the Company's
services through acquisitions of businesses and assets, for
working capital and general corporate purposes.
Long-term debt, which was repaid with proceeds from the Offering
in Note
2, Key, Yale E. Key, Clint Hurt and Old WellTech entered into
new separate credit facilitiesJuly 1996, were the term note with The C.I.T.CIT Group/Credit Finance,
Inc. ("C.I.T.CIT") totalingof approximately $35$21.2 million (the
combined maximum credit limit).and all bank debt
associated with Odessa Exploration, previously with Norwest Bank
Texas, N.A. ("Norwest") of approximately $14.2 million.
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.
The Debentures are not redeemable before July 15, 1999.
Thereafter, the Debentures will be redeemable at the option of
the Company in whole or part, at the declining redemption prices
set forth in the original Debenture prospectus, together with
accrued and unpaid interest thereon. The Debentures also may be
redeemed at the option of the holder if there is a change in
control (as defined in the original Debenture prospectus) at
100% of their principal amount, together with accrued interest
thereon.
Other Long-term Debt
As a result of the new separateOffering described above and subsequent
repayment of all long-term debt with CIT, except the lines of
credit, the Company is currently renegotiating its overall
credit facilities thewith CIT including, but not limited to,
maximum credit availability, interest rate for Yale E. Key was lowered
from two and one-half tomaturity dates.
The CIT line of credit, ($10,849,000 approximate balance at
September 30, 1996) currently requires monthly payments of
interest at one and one-quarter percent overabove the stated prime
rate (8.25%of 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.September 30, 1996. 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, while the Yale E. Key C.I.T. line of credit,
($2,792,000 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 Yale E. Key, while the line of credit is
collateralized by the accounts receivable of Yale E. Key. Both
the term note and the line of credit will be guaranteed by Key.
At March 31, 1996, there was approximately $500,000 of credit
line availability.
TheKey, Clint
Hurt Drilling C.I.T. term note, ($1,208,000
approximate principal balance at March 31, 1996), requires
monthly principal payments of approximately $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 of Clint Hurt
Drilling. Both the term note and the line of credit will be
guaranteed Key.WellTech Eastern. At March 31,September 30, 1996, there was no
credit line availability.
4. IMPAIRMENT OF LONG-LIVED ASSETS
The WellTech C.I.T. term note, ($12,125,000 approximate
principal balanceCompany adopted FAS 121 effective as of July 1, 1996. FAS
121 requires that long-lived assets held and used by an entity,
including oil and gas properties accounted for under the
successful efforts method of accounting, be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Long-lived assets to be disposed of are to be accounted for at
March 31, 1996), as amended, requires
monthly principal paymentsthe lower 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
collateralized by allcarrying amount or fair value less cost to sell
when management has committed to a plan to dispose of the
assets (including equipmentassets. All companies, including sucessful efforts oil and inventory)gas
companies, are required to adopt FAS 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 WellTech whileits oil and
gas properties and compared such future cash flows to 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
March 31, 1996, there was no credit line availability.
The agreement with C.I.T. includes certain restrictive and
financial covenants, which include, though not limited to;
certain financial ratios, annual capital expenditure maximums,
and restrictions on cash distributions and declarations of
dividends on 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 $7.0 million at March 31, 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 March 31, 1996)
plus one-half percent. The note is secured by substantially allcarrying amount of the oil and gas properties of 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 dividendsto determine if
the carrying amount was recoverable. Based 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 acquisition of WellTech,accounted for using the
purchase method, resultedthis process, no
writedown in the following noncash investing
activities(in thousands):
Recorded amountscarrying amount of assets acquired,
including cash acuired of $1,168 ............ $ 58,829
Liabilities assumed .......................... (40,902)
----------
Fair value of Key Common Stock issued........... $ 17,927
=====
The liabilities assumed include amounts recorded for litigation
and certain other preacquisition contingencies of WellTech.the Company's proved
properties was necessary at September 30, 1996.
5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of
business are pending against Key and its subsidiaries.the Company. Management does not
believe that the disposition of any of these suits or claimsitems will result
in a material adverse impact onto 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.Company.
KEY ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The following discussion and analysis should be read in
conjunction with the Company's audited 10-K for the year ended
June 30, 1996.
Overview
Fluctuations in well servicing activity historically have had a
strong correlation with fluctuations in oil and gas prices. The
Company seeks to minimize the effects of such fluctuations on
its operations and financial condition through diversification
of services, entry into new markets and customer alliances.
Since 1993, the Company has made a number of acquisitions, or is
in the process thereof, which have significantly expanded the
Company's operations:
Subsequent and Pending Acquisitions
* Woodward Well Services, Inc.
In September 1996, the Company announced the completion of the
acquisition of Woodward Well Services, Inc. for approximately
$719,000. Woodward Well Services, Inc., which operates in
Oklahoma and operates five oilwell service units and fishing
tools, will be operated by the WellTech Mid-Continent Division
of the Company.
* Hitwell Surveys, Inc.
On September 25, 1996, the Company announced an agreement to
aquire Hitwell Surveys, Inc. Consideration for the aquisition
will be approximately $1.3 million. Hitwell Surveys, Inc.,
which operates in the Appalachian Basin and Michigan and
operates eight well logging and perforating trucks, will be
operated by the WellTech Eastern Division of the Company.
* Brooks Well Servicing, Inc.
On October 30, 1996, the Company announced an agreement to
acquire Brooks Well Servicing, Inc. ("Brooks"). Brooks is a
wholly-owned subsidiary of Hunt Oil Co. and operates 32 oilwell
service rigs and ancillary equipment. Brooks operates in the
East Texas region and will be operated by the WellTech
Mid-Continent Division of the Company.
* Brownlee Well Service Inc.
In October, 1996, the Company announced an agreement to acquire
Brownlee Well Service, Inc. ("Brownlee") and Integrity Fishing
and Rental Tools Inc., a wholly-owned subsidiary of Brownlee.
Brownlee, with operations in West Texas, owns 16 oilwell
service rigs with ancillary equipment and a variety of
oilfield fishing tools. Brownlee will be operated by Yale E.
Key, Inc.
* B&L Hotshot, Inc.
On October 11, 1996, the Company announced an agreement to
acquire B&L Hotshot, Inc. and five affiliated entities for
approximately $5 million. B&L Hotshot, Inc. and its
affiliates are based in Michigan and provide trucking and
related services for producing oil and natural gas in that
region. B&L Hotshot, Inc. will be operated by the WellTech
Eastern Division of the Company.
Completed Acquisitions
* Odessa Exploration Properties
In April 1996, Odessa Exploration consummated the
purchase of $6.9 million of oil and gas properties, and as
a result, acquired additional oil and gas producing properties
with daily average net production of 240 barrels of oil and
1.5 million cubic feet of natural gas.
* WellTech
In March 1996, WellTech, a well services provider,
merged into the Company, doubling the Company's
fleet of well service and workover rigs and adding two oil and
gas drilling rigs to the Company's contract
drilling operations. WellTech now operates as WellTech
Eastern and has two operating divisions, WellTech
Mid-Continent Division and WellTech Eastern Division.
* Clint Hurt Drilling
In March 1995, the Company acquired four oil and gas
drilling rigs from Clint Hurt.
* WellTech West Texas
In August 1994, the Company acquired 58 well service
and workover rigs and other well service equipment
in West Texas from WellTech.
* Odessa Exploration, Inc.
In July 1993, the Company acquired Odessa Exploration,
an oil and gas production company.
In addition to the above acquisitions, the Company has acquired
several smaller oilwell service related entities and expanded
its ancillary equipment services.
Other Recent Developments
In July 1996, the Company completed the offering of $52,000,000
of 7% convertible subordinated debentures due 2003 (the
"Offering"). The Offering was a private offering pursuant to
Rule 144A under the Securities Act. Net proceeds from the
Offering were used substantially to repay existing long-term
debt (approximately $35.2 million). The remaining proceeds,
together with proceeds of borrowings under existing credit
arrangements, are intended to fund the expansion of the
Company's services through acquisitions of businesses and assets
and for working capital and general corporate purposes. See
Note 3 to the Financial Statements for a more detailed
description, (including an interest rate increase), of the
Offering.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31,SEPTEMBER 30, 1996 VERSUS QUARTER ENDED MARCH 31,SEPTEMBER
30, 1995
Overview
The following discussion provides information to assist in the
understanding of Key Energy Group, Inc.'s ("Key")the Company's 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 nine monthsquarter ended March 31,September 30, 1996
include Key'sthe Company's oilfield well service operations conducted
by its wholly-owned subsidiaries, Yale E. Key, Inc. ("Yale E.
Key") and WellTech Eastern, Inc., ("WellTech Eastern"), its oil
and natural gas exploration and production operations conducted
by its wholly-owned subsidiary, Odessa Exploration, Inc.
("OEI"Odessa Exploration") 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 acquireddrilling. In addition, the
Company conducts oilfield services in March 1995. Also included are the operating results ofArgentina through its 63%
ownership in Servicios WellTech, Inc.S.A. ("WellTech"Servicios") for the period of March 26, 1996 (the date of
the merger, see Note 2) to March 31, 1996., an
Argentinian corporation.
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,the Company, through acquisitions, customer
alliances and agreements, and diversification of services, seeks
to minimize the effects of such fluctuations on Key'sthe Company's
results of operations and financial condition.
Results of Operations
The Company
or Key
Revenues of Keythe Company for the three monthsquarter ended March 31,September 30, 1996
increased $3,253,000$19,064,000 or 29%154% to $14,302,000$31,462,000 from $11,049,000$12,398,000
for the comparable fiscalquarter ended September 30, 1995, quarter, while net income of
$827,000$1,554,000 increased $196,000$828,000 or 31%114% from the comparable fiscal 1995 quarter
total of $631,000.$726,000. 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,Odessa
Exploration, increased oilwell service equipment utilization and
the acquisition of the WellTech Eastern operations from the date
of acquisition of March 26, 1996 (see Note 2).2 ). The improvementincrease in
quarterly 1996 net income over the quarterly 1995 net income is
partially attributable to the inclusionacquisition of Clint Hurt Drilling,WellTech, but is
also a result of an increase in oilwell service equipment
utilization and a decrease in total consolidated KeyCompany costs
and expenses as a percent of total revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key and WellTech.WellTech
Eastern. Yale E. Key conducts oilfield services primarily in
West Texas, while WellTech Eastern conducts oilfield services in
the Mid-Continentmid-continent region of the United States (primarily in
Oklahoma) through its operating division;division, WellTech
Mid-Con,Mid-Continent, and in the Northeastern United States (primarily
in Michigan, Pennsylvania and West Virginia) through its
operating division; WellTech Eastern. In addition, WellTechthe Company
conducts oilfield services in Argentina through its 63%
ownership in Servicios WellTech, S.A. ("Servicios"), an
ArgentineanArgentinian corporation.
Oilfield service revenues increased $17,544,000 or 180% from
$9,767,000 for the 1995 quarter ended March 31, 1996
increased $1,771,000 or 17% from $10,145,000to $27,311,000 for the quarter
ended March 31, 1995 to $11,916,000 for the current quarter
ending March 31, 1996.1996
quarter. 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
Eastern 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%but not for the comparable quarter of
last year.1995 quarter. In addition,
Yale E. Key continues the
diversification ofdiversified oilfield services into higher margin
business segments such as oilfield frac tanks, oilfield fishing
tools and trucking operations.
Oilfield service expenses increased $12,436,000 or 171% from
$7,264,000 for the 1995 quarter to $19,700,000 for the current
1996 quarter. The increase was due primarily to the acquisition
of WellTech on March 26, 1996 and the increased demand for
oilfield services. In addition, the Company has continued to
expand its services, offering ancillary services and equipment
such as oilwell fishing tools, blow-out preventers and oilwell
frac tanks.
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production operations are
performed by Odessa Exploration Inc.Exploration. Revenues from oil and gas
activities increased $321,000$709,000 or 46%87% from $695,000$816,000 during the
quarter ended March 31,September 30, 1995 to $1,016,000$1,525,000 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.current year,
and the April 1996 purchase of $6.9 million of oil and gas
properties from an unrelated third party, which almost doubled
the size of Odessa Exploration.
Of the total $1,016,000$1,525,000 of revenues for the quarter ended
March
31,September 30, 1996, approximately $820,000$1,319,000 was from the sale
of oil and gas - 21,82629,823 barrels of oil at an average price of
$20.28$21.28 per barrel and 232,049337,330 MCF of natural gas at an average
price of $1.63$2.03 per MCF. The remaining $196,000$206,000 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 $642,000Expenses related 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 increased
$679,000 or 41% to $2,321,000 from $1,642,000 for the comparable
fiscal 1995 nine month total of $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 results, the increase in oil and gas revenues and
the acquisition of WellTech (see Note 2). The improvement in
net income is partially attributable to the inclusion of Clint
Hurt Drilling, but is also a result of an increase in oil 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 and WellTech.
Oilfield service revenue declined $4,000 from $31,068,000 for
the prior nine month period ending March 31, 1995 to $31,064,000
for the current 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 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 86% equipment utilization for the nine
months; and due to lower expenses, 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 nine 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 $971,000$248,000 or
55%94% from $1,772,000 in$265,000 for the 1995 periodquarter to $2,743,000$513,000 for the current
nine month period despite relatively
constant crude oil and lower natural gas prices during the first
and second quarters of the fiscal year.1996 quarter. The increase in revenuesexpenses 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
1996 and the April 1996 period.
Of the total $2,743,000purchase of revenues for the nine months ended
March 31, 1996, approximately $2,313,000 was from the sale of$6.9 million in oil and gas
- 66,177 barrelsproperties which almost doubled the size of oil at an average price of
$17.54 per barrel and 711,198 MCF of natural gas at an average
price of $1.62 per MCF. The remaining $430,000 of revenues
represented primarily administrative fee income and other
miscellaneous income.Odessa Exploration.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by
Clint Hurt Drilling which wasDrilling. Oil and natural gas well drilling revenues
increased $722,000 or 45% from $1,602,000 for the 1995 quarter
to $2,324,000 for the 1996 quarter. The increase in revenues is
primarily attributable to higher equipment utilization and an
increase pricing structure. In addition, two drilling rigs were
acquired in the March 1995. Comparable
numbers1996 merger with WellTech Eastern.
Expenses related to oil and natural gas well drilling activities
increased $534,000 or 40% from $1,347,000 for the prior nine month period ending March 31, 1995 are, therefore, not available. Revenuesquarter
to $1,881,000 for current 1996 quarter. The increase in
expenses is attributable to higher equipment utilization and the
addition of two drilling rigs as the result of the WellTech
merger.
Interest Expense
Interest expense increased $912,000 or 208% to $1,350,000 for
the nine months
ended March 31,current 1996 were $5,029,000.quarter from $438,000 for the 1995 comparable
quarter. The increase was primarily the result of the issuance
of $52 million in principal amount of 7 1/2% Convertible
Subordinated Debentures, (see Note 3).
General and Administrative Expenses
General and administrative expenses are comprised of the
Company's and all its subsidiaries general and administrative
expenses. These expenses increased $2,335,000, or 196%, to
$3,527,000 for the current 1996 quarter from $1,192,000 for the
comparable 1995 quarter. The increase was primarily
attributable to the Company's recent acquisitions and expanded
services.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased
$1,272,000, or 155%, to $2,095,000 for Key
increased $1,053,000 or 56%the current 1996 quarter
from $1,887,000 to $2,940,000 during$823,000 for the nine months ended March 31, 1996 as compared with the prior
fiscalcomparable 1995 nine month period.quarter. 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
additionacquisition of WellTech and
Clint Hurt Drilling (see Note 2).WellTech. 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 $451,000 or 45% from $997,000
during the nine months ended March 31, 1995 to $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 $613,000 or 20% to $3,609,000 during the nine
months ended March 31, 1996 as compared to $2,996,000 for the
nine months ended March 31, 1995. The increase can be primarily
attributed to the acquisition and subsequent inclusion of Clint
Hurt Drilling's general and administrative expenses as well as
the acquisition of WellTech (see Note 2).
Income Tax ExpenseTaxes
Income tax expense of $2,396,000 for Keycurrent 1996 quarter
increased from $1,069,000 in income tax expense for the
nine months ended March 31,
1996 andcomparable 1995 was $1,129,000 and $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
$3,468,000 for the nine months ended March 31, 1996, which was
an increase of $1,084,000 or 45% over the comparable period of
$2,384,000.quarter. The increase in net income before minority interest
and income taxes wasis
primarily due to the additionincreases in operating income. However,
the Company does not expect to be required to remit a
significant amount of Clint Hurt
Drillingthe $2,396,000 in total federal income
taxes for fiscal year 1997, because of the availability of net
operating loss carryforwards,accelerated depreciation 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 nine months ended March 31, 1996 was
$2,321,000, which was a $679,000 or 41% increase from $1,642,000
for the nine months ended March 31, 1995.drilling tax credits.
Cash Flow
Net cash provided by operationsoperating activities increased $4,327,000$1,839,000
from $991,000$1,235,000 during the nine months ended March 31,comparable 1995 quarter to $5,318,000$3,074,000
for the current period.1996 quarter. The increase is attributable
primarily to lower decreaseincreases in accounts payable and accrued
expenses and higher net income and increases in the
Company's depreciation, depletion and amortization expense, over
the same period last year.as
well as an increase in accounts receivable.
Net cash used in investing activities increased $1,998,000 from $3,596,000$1,947,000
for the nine months ended March 31,comparable 1995 quarter to $5,594,000$3,545,000 for the current
period.1996 quarter. The increase is primarily the result of increased
capital expenditures for oilwell service operations associated
with the acquisition of WellTech. This increase is partially
offset by a decrease in expenditures for oil and gas properties.
In addition, net cash used in investing activities for the
current period included $450,000 used in the oil and gas well
drilling operations.
Net cash provided by financing activities was $2,304,000, a
$52,000 increase,$15,067,000 for
the nine months ended March 31,current 1996 quarter as compared to $2,252,000$335,000 in net cash
provided by financing activities for the comparable period.1995
quarter. The increase is primarily the result of cash receivedthe proceeds
from the purchaseissuance of WellTech during the current period,Company's 7 1/2% debenture which is
partially offsetoff-set by a decrease in proceeds fromthe repayment of previously existing
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 $2,028,000 for the nine months ended March 31,
1996, as compared to a net decrease in cash of $353,000 for the
nine months ended March 31, 1995.debt.
LIQUIDITY AND CAPITAL RESOURCES
At March 31,September 30, 1996, Keythe Company had $3,303,000$17,116,000 in cash and restricted cash as
compared to $1,275,000$3,240,000 in cash and restricted cash at June 30, 1995.
Yale E. Key1996.
The Company has projected $3.0$6.5 million for oilwelloilfield service
capital expenditures over the 1996for fiscal year1997 as compared to $2.8$5.2 million
for fiscal 1996. Oilfield service capital expenditures for the
current quarter of $2.9 million are expected to significantly
decrease through the remaining fiscal year ended June 30, 1995.1997 fiscal year. Capital
expenditures are expected to be primarily capitalized
improvement costs (totaling over $5,000) to existing equipment and machinery. Financing ofThe
Company expects to finance these capital expenditures is expected
to come fromutilizing
the operating cash flows of Yale E. Key. Capital
expenditures were $2,605,000 for the nine months ended March 31,
1996.
OEI has forecastedCompany.
Odessa Exploration is forecasting outlays of approximately $3$6.0
million in oil and gas
property acquisitionsdevelopment costs for fiscal 19961997, as compared to
$2.8$9.8 million during fiscal 1995 (which does not include the
acquisition described in Note 2).1996. Financing of oil and gas
acquisitions is expected to come
from borrowings.
Oil and gas
acquisitions were $2,532,000Clint Hurt Drilling has forecast approximately $500,000 for the nine months ended March 31,
1996. Financing of oil
and gas acquisitionsdrilling capital expenditures for fiscal 1997 primarily
for improvements to existing equipment and machinery compared to
$598,000 for fiscal 1996. Such outlays are treated as capital
costs. Financing is expected to be
obtainedcome from bank financing and/orexisting cash flow.
Debt
In July 1996, the Company completed the offering of $52,000,000
of 7 1/2% convertible subordinated debentures due 2003. The
Offering was a private investors.
Bank Financing
In Januaryoffering pursuant to Rule 144A
under the Securities Act. Net proceeds from the Offering were
used to substantially repay existing long-term debt
(approximately $35.2 million). The remaining proceeds are
intended to fund the expansion of the Company's services through
acquisitions of businesses and assets and for working capital
and general corporate purposes. Long-term debt which was repaid
with proceeds from the Offering in July 1996 prior toincluded the completed merger described in Note
2, Key, Yale E. Key, Clint Hurt and Old WellTech entered into
new separate credit facilitiesterm
note with The C.I.T.CIT Group/Credit Finance, Inc. ("C.I.T.CIT") totalingof
approximately $35$21.2 million (the
combined maximum credit limit).and all bank debt associated with
Odessa Exploration, previously with Norwest Bank Texas, N.A.
("Norwest"), of approximately $14.2 million.
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.
The Debentures will not be redeemable before July 15, 1999.
Thereafter, the Debentures will be redeemable at the option of
the Company in whole or part, at the declining redemption prices
set forth in the original prospectus, together with accrued and
unpaid interest thereon. The Debentures also may be redeemed at
the option of the holder if there is a change in control (as
defined in the original prospectus) at 100% of their principal
amount, together with accrued interest thereon.
As a result of the new separate
credit facilities, the interest rate for Yale E. Key was lowered
from twoconvertible subordinated debenture Offering
described above 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 WellTechsubsequent repayment of all long-term 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 ofwith CIT, except 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, whichCompany is currently
being modifiedrenegotiating its overall credit facilities with CIT, including,
but not limited to, reflect the Welltech merger, will be the obligation of Keymaximum credit availability, interest rate
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
$1,725,000, 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.maturity dates.
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 ofThe Company implemented 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, 1996.1996 (see Note 4).
Impact of Inflation on Operations
Although in aour complex environment it is extremely difficult to
make an accurate assessment of the impact of inflation on Key'sthe
Company's operations, management is of the opinion that
inflation has not had a significant impact on itits 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, among
others, may have affected and could in the future affect Key's
actual results and could cause Key's actual results for
subsequent periods to differ materially from those expressed in
any forward-looking statement made by or on behalf of Key:
Occurrences 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
capital 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 adequate funds under Key's credit facility
to fund operations for the foreseeable future, or if such funds
are inadequate, the ability of Key to obtain new or additional
financing or to generate 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 drilling 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
administrative expense, including, but not limited to, the
costs of integrating WellTech's operations into Key.;
The effect of regulations and changes in regulations, including
environmental regulations with which Key must comply, the cost
of such compliance 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.
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.
On 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.None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits areexhibit is filed as a part of the Form 10-Q:
Exhibit
Number 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).
* 11Description
11(a) Statement - Computation of per share earnings
* 27(a) Statement - Financial Data Schedule
*earnings.
Filed herewith as part of the Condensed
Consolidated Financial Statements.Statements).
27(a) Statement - Financial Data Schedule (Filed
herewith as part of the Condensed Consolidated
Financial Statements).
(b) KeyThere were no reports filed a report on Formform 8-K during the
quarter ended March 31, 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.September 30, 1996.
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. John_________John
President, Chief Executive Officer
Dated: May 3,November 6, 1996 and Chief Financial Officer
By /s/ Danny R. Evatt_________Evatt
Dated: May 3,November 6, 1996 Vice President and Chief
Accounting Officer