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 September 30,December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ________
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, Twentieth20th Floor, East Brunswick, NJ 08816
(AddressAddress of Principal executive offices) (ZIP Code)
Registrant's telephone number including area code: (732) 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 November 14, 1997: 18,148,056February 13, 1998 - 18,307,390
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
INDEXTABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations for the
Three months and six months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Three months and six months ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 1315
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19Proceedings 24
Item 2. Changes in Securities and Use of Proceeds. 19Proceeds 24
Item 3. Defaults Upon Senior Securities. 19Securities 24
Item 4. Submission of Matters to a Vote of Security Holders. 19Holders 24
Item 6. Exhibits and Reports on Form 8-K. 19
Signatures. 22
- 2 -8-K 25
Signatures 28
Key Energy Group, Inc. and SubsidiariesKEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
September 30, June 30,
(Thousands,(In thousands, except share and per share data)amounts)
December 31, June 30,
1997 1997
(Unaudited)
- -------------------------------------------------------------------------------
ASSETS
Current Assets:assets:
Cash $49,276 $41,704$ 53,770 $ 41,704
Accounts receivable, net of allowance for
doubtful accounts 64,90976,875 45,230
Inventories 6,42110,182 5,171
Prepaid expenses and other 1,954 1,228
- -------------------------------------------------------------------------------
Total current assets 995 1,228
- ------------------------------------------------------------------------------
Total Current Assets 121,601142,781 93,333
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Property and equipment, at cost:
Oilfield service equipment 301,313 176,326
Oil and gas well327,410 186,895
Oilfield drilling equipment 6,65828,522 6,319
Motor vehicles 11,848 10,569
Oil and gas properties, and other related equipment,using the successful
efforts accounting method 25,68028,713 23,622
FurnitureOther property and equipment 1,980 1,661
Buildings27,956 10,419
- -------------------------------------------------------------------------------
412,601 227,255
Less accumulated depreciation and land 10,059 8,758depletion 31,065 19,069
- ------------------------------------------------------------------------------
354,538 227,255
Accumulated depreciation & depletion (23,890) (19,069)
- ------------------------------------------------------------------------------
Net-------------------------------------------------------------------------------
Property and Equipment 330,648equipment, net 381,536 208,186
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Other Assets 45,979assets 63,266 18,576
- ------------------------------------------------------------------------------
Total Assets $501,228 $320,095
==============================================================================-------------------------------------------------------------------------------
$ 587,583 $ 320,095
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accountsliabilities:
Trade accounts payable $17,149 $15,339$ 16,842 $ 15,339
Other accrued liabilities 20,94721,005 12,507
Accrued interest 2733,314 2,102
Accrued income taxes 3,943448 1,664
Deferred tax liabilitytaxes 126 126
Current portion of long-term debt 1,2701,945 1,404
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 43,708current liabilities 43,680 33,142
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term debt, lessnet of current portion 263,712330,292 172,763
Non-currentNoncurrent accrued expenses 4,015 4,017
Deferred tax liability 61,957taxes 77,243 35,738
Minority interest - 1,256
Commitments and contingencies
Stockholders' equity:
Common stock, $.10$0.10 par value;value per share;
25,000,000 shares authorized,
17,954,67218,356,296 and 12,297,752 shares issued and outstanding at
September 30,December 31, 1997 and June 30, 1997,
respectively 1,7951,836 1,230
Additional paid-in capital 104,185110,998 55,031
Treasury stock, at cost; 416,666
shares at December 31, 1997 (9,682) -
Retained earnings 21,85629,201 16,918
- -------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 127,836stockholders' equity 132,353 73,179
- ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $501,228 $320,095
==============================================================================
See the-------------------------------------------------------------------------------
$ 587,583 $ 320,095
===============================================================================
The accompanying notes which are an integral part of these
Consolidated financial statements.
- 3 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended
September 30,
(Thousands, except per share data) 1997 1996
- -------------------------------------------------------------------------------
REVENUES:
Oilfield services $69,498 $27,311
Oil and gas 2,154 1,525
Oil and gas well drilling 2,823 2,324
Other, net 1,081 302
- ------------------------------------------------------------------------------
75,556 31,462
- ------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 48,239 19,700
Oil and gas 937 513
Oil and gas well drilling 2,263 1,881
Depreciation, depletion and amortization 5,147 2,095
General and administrative 7,701 3,527
Interest 3,438 1,350
- ------------------------------------------------------------------------------
67,725 29,066
- ------------------------------------------------------------------------------
Income before income taxes and minority interest 7,831 2,396
Income tax expense 2,893 784
Minority interest in net income - 58
- ------------------------------------------------------------------------------
NET INCOME $4,938 $1,554
==============================================================================
EARNINGS PER SHARE :
Primary:
Net income $0.32 $0.14
Assuming full dilution:
Net income $0.25 $0.13
==============================================================================
WEIGHTED AVERAGE OUTSTANDING:
Primary 15,665 10,894
Assuming full dilution 20,161 16,974
==============================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 4 -
Key Energy Group, Inc. and SubsidiariesKEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
FlowsOperations (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
(unaudited)
September 30,
(Thousands)months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------
Net income $4,938 $1,554
Adjustments to reconcile income from operations toRevenues:
Oilfield services $ 97,542 $ 31,708 $ 167,040 $ 59,019
Oilfield drilling 8,689 2,359 11,512 4,683
Oil and gas 1,949 2,088 4,067 3,613
Other, net cash provided by operations:1,493 42 2,574 344
- -------------------------------------------------------------------------------
Total revenues 109,673 36,197 185,193 67,659
- -------------------------------------------------------------------------------
Costs and expenses:
Oilfield services 68,354 23,066 116,592 42,766
Oilfield drilling 6,590 1,963 8,853 3,844
Oil and gas 893 773 1,831 1,286
General and administrative 10,370 3,735 18,036 7,262
Depreciation, depletion and
amortization 5,147 2,095
Deferred7,740 2,342 12,886 4,437
Interest expense 3,879 1,296 7,317 2,646
- -------------------------------------------------------------------------------
Total costs and expenses 97,826 33,175 165,515 62,241
- -------------------------------------------------------------------------------
Income before income taxes 2,893 784and
minority interest 11,847 3,022 19,678 5,418
Income tax provision 4,502 1,029 7,395 1,813
Minority interest in net income - 58
Change in assets and liabilities net of effects
from the acquisitions:
Increase in accounts receivable (6,224) (1,912)
Increase (decrease) in other current assets 1,400 (449)
Decrease in accounts payable and accrued expenses (972) 853
Increase (decrease) in accrued interest (1,829) 664
Other assets and liabilities (1,293) (631)(50) - ------------------------------------------------------------------------------8
- -------------------------------------------------------------------------------
Net cash provided by operating activities 4,060 3,016
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Well service operations (6,694) (2,900)
Capital expenditures - Oil and gas operations (2,058) (41)
Capital expenditures - Oil and gas well
drilling operations (339) (323)
Cash received in acquisitions 2,903 -
Acquisitions - well service operations -
net of cash acquired (107,630) -
Acquisitions - oil and gas well drilling operations (14,610) -
Acquisitions - minority partnership interests (3,426) -
Expenditures for oil and gas properties - (281)
- ------------------------------------------------------------------------------income $ 7,345 $ 2,043 $ 12,283 $ 3,597
===============================================================================
Net cash used in investing activities (131,854) (3,545)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (318) (899)
Repayment of long-term debt (197,000) (35,413)
Borrowings (payments) under line-of-credit 134,000 939
Proceeds from stock options exercised - 58
Proceeds from warrants exercised 4,123 -
Proceeds from long-term debenture - net - 50,440
Proceeds from long-term commercial paper debt - net 194,500 -
Proceeds from other long-term debt 61 -
- ------------------------------------------------------------------------------
Net cash provided by financing activities 135,366 15,125
- ------------------------------------------------------------------------------
Net increase in cash 7,572 14,596
Cash at beginning of period 41,704 4,211
- ------------------------------------------------------------------------------
Cash at end of period $49,276 $18,807
==============================================================================
See theincome per share:
Basic $ 0.40 $ 0.19 $ 0.76 $ 0.34
Diluted $ 0.36 $ 0.16 $ 0.62 $ 0.29
Weighted average shares outstanding:
Basic 18,151 10,850 16,137 10,635
Diluted 25,571 17,027 22,720 16,815
The accompanying notes which are an integral part of these consolidated
financial statements.
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
- 5-------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,345 $ 2,043 $ 12,283 $ 3,597
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation, depletion
and amortization 7,740 2,342 12,886 4,437
Deferred income taxes 1,177 1,029 4,070 1,813
Minority interest in net income -
Key Energy Group, Inc.(50) - 8
Changes in assets and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30,liabilities,
net of effects
from acquisitions:
Accounts receivable 1,890 (1,761) (4,334) (3,673)
Other current assets (1,742) 352 (342) (97)
Accounts payable and
accrued liabilities (8,666) (3,922) (9,638) (3,069)
Accrued interest 3,041 (947) 1,213 (283)
Other assets and liabilities (3,424) (175) (4,717) (806)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 7,361 (1,089) 11,421 1,927
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Property and equipment additions
related to:
Oilfield service operations (12,268) (3,049) (18,962) (5,949)
Oilfield drilling operations (1,315) (268) (3,373) (591)
Oil and gas operations (1,926) (975) (2,265) (1,297)
Acquisitions of:
Oilfield service operations,
net of cash acquired (29,933) (13,228) (134,660) (13,228)
Oilfield drilling operations,
net of cash acquired (7,256) - (21,866) -
Oil and gas operations,
net of cash acquired (600) - (600) -
Minority interest - - (3,426) -
- -------------------------------------------------------------------------------
Net cash used in investing
activities (53,298) (17,520) (185,152) (21,065)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on debt (2,229) (154) (2,547) (1,053)
Repayment of long-term debt (19,337) - (216,337) (35,413)
Borrowings under line of credit 65,000 368 199,000 1,307
Purchase of treasury stock (9,682) - (9,682) -
Proceeds from convertible
subordinated debentures, net - - - 50,440
Proceeds from long-term
commercial paper debt, net 14,000 - 208,500 -
Procceds from other
long-term debt 1,638 10,500 1,699 10,500
Proceeds from exercise
of warrants 99 - 4,222 -
Proceeds from exercise
stock options 942 - 942 58
- -------------------------------------------------------------------------------
Net cash provided by financing
activities 50,431 10,714 185,797 25,839
- -------------------------------------------------------------------------------
Net increase (decrease) in cash 4,494 (7,895) 12,066 6,701
Cash, beginning of period 49,276 18,807 41,704 4,211
- -------------------------------------------------------------------------------
Cash, end of period $ 53,770 $ 10,912 $ 53,770 $ 10,912
===============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
KEY ENERGY GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
(unaudited)(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Theunaudited consolidated
financial information in this report includes
the accountsstatements of Key Energy Group, Inc. (the "Company" or "Key") and its
wholly-owned subsidiaries and wasare prepared in conformity with generally accepted
accounting policies usedprincipals, but do not purport to be a complete presentation in as
much as all note disclosures required are not included. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of the Company and notes thereto included in
the Company's Annual Report on Form 10-K furnished for the preceding
fiscal year.
Asyear ended June 30, 1997.
In the opinion of November 14,management, the Company's unaudited consolidated financial
statements as of December 31, 1997 and for the Company operated a fleet of approximately 775
well service rigs, 608 fluid hauling and other trucks, and 27 drilling rigs
(including 17 workover rigs, 14 trucks,three months and six drilling rigs in Argentina).months ended
December 31, 1997 and 1996 contain all adjustments and accruals, consisting only
of normal recurring accrual adjustments, necessary for a fair presentation of
the results of the interim periods. These interim results are not necessarily
indicative of results for a full year.
Earnings per Share
The Company believes that, asimplemented the Statement of November 14, 1997, Key's well serviceFinancial Accounting Standards No. 128
("SFAS 128") - Earnings per Share, for the quarter ended December 31, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and workover
rig fleet and fluid hauling and other truck fleet wereis computed by dividing
income available to common shareholders by the largest active fleets
onshore inweighted-average number of common
shares outstanding for the continental United States andperiod. SFAS 128 has been applied retro-actively for
each period presented. In accordance with SFAS 128, the second largest fleet in
Argentina. The Company operates in most onshore oil and natural gas producing
regionsreconciliation of the
continental United Statesnumerators and provides a full rangedenominators of maintenancebasic EPS and workover services to major and independent oil and gas companies
in all its operating regions. In addition to maintenance and workover services,
Key also provides services which include the completiondiluted EPS is presented below:
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
--------------------- --------------------
Basic EPS Computation:
Numerator-
Net Income $ 7,345 $ 2,043 $12,283 $ 3,597
--------------------- --------------------
Denominator-
Weighted Average Common
Shares Outstanding 18,151 10,850 16,137 10,635
--------------------- --------------------
Basic EPS $ 0.40 $ 0.19 $ 0.76 $ 0.34
===================== ====================
Diluted EPS Computation:
Numerator-
Net Income $ 7,345 $ 2,043 $12,283 $ 3,597
Effect of newly drilled wells,
the re-completion of existing wells (including horizontal recompletions) and the
plugging and abandonment of wells at the end of their useful lives. Other
services include oil field fluid transportation, storage and disposal services,
frac tank rentals, fishing and rental tools, wire-line services, air drilling
and hot oiling. In addition, theDilutive
Securities,
Tax Effected:
Convertible Debentures 1,738 609 1,882 1,219
-------------------- --------------------
$ 9,083 $ 2,652 $14,165 $4,816
-------------------- --------------------
- 6 -
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
-------------------- --------------------
Denominator-
Weighted Average Common
Shares Outstanding 18,151 10,850 16,137 10,635
Warrants 82 319 235 320
Stock Options 1,256 525 1,294 527
7% Convertible Debentures 472 5,333 2,096 5,333
5% Convertible Debentures 5,610 - 2,958 -
-------------------- --------------------
25,571 17,027 22,720 16,815
-------------------- --------------------
Diluted EPS $ 0.36 $ 0.16 $ 0.62 $ 0.29
==================== ====================
2. BUSINESS AND PROPERTY ACQUISITIONS
The Company is engaged in contract drilling in West
Texas and Argentina and owns and produces oil and natural gas in the Permian
Basin.
The Company conducts its domestic operations primarily through sixeight
wholly-owned subsidiaries: Yale E. Key, Inc. ("Yale E. Key");, WellTech Eastern, Inc. (", WellTech
Eastern");Mid-Continent, Inc., Brooks Well Servicing, Inc., Key Four Corners, Inc. ("Key Four Corners");, Key
Rocky Mountain, Inc. ("Key Rocky Mountain");, Odessa Exploration Incorporated,
("Odessa Exploration"); and Key Energy Drilling,
Inc. ("Key Energy Drilling").
In addition, Key operates inThe Company's Argentina operations are conducted through its indirect wholly-owned
subsidiaries Servicios WellTech S.A. ("Servicios") and Kenting Drilling (Argentina) S.A. ("Kenting"). WellTech Eastern operates through three divisions:
WellTech Mid-Continent Division, WellTech Eastern Division and Brooks Well
Servicing Division. Yale E. Key, WellTech Eastern, Key Four Corners, Key Rocky
Mountain, Servicios and Kenting provide oil and gas well services. Odessa
Exploration is engaged in the productionS. A.
As of oil and gas, and Key Energy
Drilling, Servicious, Kenting, Brooks Well Servicing Division and Key Four
Corners provide contract oil and gas well drilling services.
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 barrels 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. Odessa 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.
- 6 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
In the opinion ofFebruary 13, 1998, the Company the accompanying unaudited condensed
consolidated financial statements contain all normal recurring adjustments
necessary to present fairly the financial position asowned a fleet of September 30, 1997, the
statement of cash flows for the three months ended September 30, 1997approximately 820 well
service rigs, 628 oilfield fluid hauling and 1996,other trucks, and the results of operations for the three month period then ended.
2. BUSINESS AND PROPERTY ACQUISITIONS59 drilling rigs,
including 16 service rigs, 14 trucks and 6 drilling rigs in Argentina.
Acquisitions Completed after September 30,During the Six Months Ended December 31, 1997
The following described acquisitions have been completed since September
30,during the six months ended
December 31, 1997. TheExcept as otherwise noted, the results of operations from
these acquisitions are not included in the Company's results of operations for the
applicable three months and six months ended September 30,December 31, 1997 (effective as of
the date of completion of the acquisition unless otherwise noted). Each of the
acquisitions was accounted for using the purchase method of accounting. Unless
otherwise noted, the purchase prices specified below are based on cash paid and
the value of the Company's common stock, par value $0.10 (the "Common Stock"),
issued at the closing of the acquisitions (with Common Stock being valued at the
closing price on the closing date), and do not include any post-closing
adjustments, if any, paid or to be paid based on a re-calculation of the working
capital of the acquired company as of the closing date.
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
Effective December 2, 1997, the Company completed the acquisition of the assets
of Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
(collectively the "Critchfield Assets") for approximately $8.5 million,
consisting of $2.7 million in cash and 240,000 shares of Common Stock. The
Critchfield Assets consisted of five land drilling rigs, five well service rigs
and other related equipment in Michigan.
- 7 -
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
Effective November 24, 1997, the Company completed the acquisition of Win-Tex
Drilling Co., Inc. and Win-Tex Trucking Corporation ("Win-Tex") for
approximately $6.7 million in cash. Win-Tex operates six land drilling rigs,
trucks, trailers and related equipment in West Texas. The operating results of
Win-Tex are included in the Company's results of operations effective December
1, 1997.
Jeter Service Co.
Effective November 18, 1997, the Company completed the acquisition of Jeter
Service Co. ("Jeter") for approximately $6.7 million in cash. Jeter operates 15
well service rigs, an oilfield supply store and an oilfield location
construction/maintenance business with 15 trucks and other related equipment in
Oklahoma. The operating results of Jeter are included in the Company's results
of operations effective December 1, 1997.
GSI Trucking Company, Inc., Kahlden Production Services, Inc. and
McCurdy Well Service, Inc.
On October 3, 1997, the Company acquired certain assets of GSI Trucking Company,
Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. ("GSI,
Kahlden and McCurdy") for approximately $1.6 million in cash. GSI, Kahlden and
McCurdy operate 12 fluid hauling trucks. Upon completion of the
acquisition, the GSI, Kahlden and McCurdy assets are operated by the Brooks Well
Servicing Division of Welltech Eastern out of Bryan,trucks in Southeast Texas. The acquisition was
accounted for using the purchase method.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.
Effective October 1, 1997, the Company completed the acquisition of
substantially all of the assets of Big A Well Service Co., Sunco Trucking Co.
and Justis Supply Co., Inc. (collectively "Big A/Sunco") for approximately $32.1
million, consisting of $28 million in cash and 125,000 shares of the Company's comon stock.Common Stock.
Big A/Sunco operates 2925 well service rigs, four drilling rigs, 75 fluid hauling
and other trucks, related equipment and a machine shop/supply store in the four cornersFour
Corners region of the Southwestern United States. The acquired Big A/Sunco assets are
operated by Key Four Corners primarily out of Farmington, New Mexico. The
acquisition was accounted for using the purchase method.
Acquisitions Completed During the Three Months Ended September 30, 1997
The following described acquisitions have been completed during the three
months ended September 30, 1997. Except as noted below, the results of
operations from these acquisitions are included in the Company's results of
operations for the three months ended September 30, 1997 (effective as of the
date of completion of the acquisition unless otherwise noted).States
Frontier Well Service, Inc.
Effective as of September 30, 1997, the Company completed the acquisition of Frontier
Well Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier
operates 12 well service rigs and related equipment in Wyoming. Frontier is operated by Key Rocky Mountain and is based in Casper, Wyoming. The operating
results of Frontier will beare included in the Company's results of operations
effective as of October 1, 1997. The acquisition was accounted for
using the purchase method.
- 7 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
Dunbar Well Service, Inc.
Effective as of September 29, 1997, the Company completed the acquisition of Dunbar
Well Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar
operates 38 well service rigs and related equipment in Wyoming. Dunbar is
operated by Key Rocky Mountain and is based in Casper, Wyoming. The operating
results of Dunbar will beare included in the Company's results of operations effective
as of October 1, 1997. The acquisition was accounted for using the
purchase method.
BRW Drilling, Inc.
Effective as of September 25, 1997, the Company completed itsthe acquisition of BRW
Drilling, Inc. ("BRW""BRW") for approximately $14.6 million in cash. BRW operates
seven drilling rigs and related equipment in the Permian Basin. The
Company plans to combine the BRW operations with the Key Energy Drilling
operations in the Permian Basin to form a thirteen rig shallow drilling
operation.region of West
Texas and Eastern New Mexico. The operating results of BRW will beare included in the
Company's results of operations effective as of October 1, 1997.
The- 8 -
Landmark Fishing & Rental, Inc.
Effective September 16, 1997, the Company completed the acquisition was
accountedof Landmark
Fishing & Rental, Inc. ("Landmark") for usingapproximately $3.3 million in cash.
Landmark operates a rental tool business in Western Oklahoma and the purchase method.Texas
Panhandle.
Waco Oil & Gas Co., Inc.
Effective as of September 1, 1997, the Company completed itsthe acquisition of certain
assets of Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0 million in
cash. The Waco assets included 12 well service rigs, three drilling rigs, 33
fluid hauling trucks and other trucks operated out of Glenville,in West Virginia. Following the
consummation of the acquisition, the three drilling rigs acquired from Waco were
sold to an independent third party for $2.3 million in cash. No gain or loss was
recognized in this transaction. The Waco assets are
operated by the WellTech Eastern Divisionsale of WellTech Eastern.these rigs. The operating results of Waco are included
in the Company's results of operations effective September 23, 1997.
The acquisition was accounted for using the purchase method.
Landmark Fishing & Rental, Inc.
Effective as of September 16, 1997, the Company completed the acquisition
of Landmark Fishing & Rental, Inc. ("Landmark") for approximately $3.3 million
in cash. Landmark operates a rental tool business in Western Oklahoma and the
Texas Panhandle. Landmark is operated by the WellTech Mid-Continent Division of
WellTech Eastern. The operating results of Landmark are included in the
Company's results of operations effective September 16, 1997. The acquisition
was accounted for using the purchase method.
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
Effective as of September 1, 1997, the Company completed the acquisition of Ram Oil
Well Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5
million in cash. Ram/Rowland operates 17 well service rigs, 93 fluid hauling and
other trucks, 290 frac tanks, three disposal and brine wells, and dirt
construction equipment in the Permian Basin region of West Texas and
SoutheastSoutheastern New Mexico. Ram/Rowland
is operated by Company's by Yale E. Key, Inc. The operating results of
Ram/Rowland are included in the Company's results of operations effective
September 1, 1997. The acquisition was accounted for using the purchase method.
- 8 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)Mexico
Mosley Well Service, Inc.
Effective as of August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley"), which operates thirty-six36 well service rigs and related
equipment in East Texas, Northern Louisiana and Arkansas, for approximately
$16.2 million in cash. The Company plans to integrate the Mosley
operations with the Brooks Well Servicing Division of WellTech Eastern. The
operating results of Mosley are included in the
Company's results of operations effective September 1, 1997.
The acquisition was accounted for using the
purchase method.
Kenting Holdings (Argentina) S.A.
Effective as of July 30, 1997, the Company completed the acquisition of Kenting
Holdings (Argentina) S.A. ("Kenting") for approximately $10.1 million in cash.
Kenting is the sole shareholder of Kenting DrilingDrilling (Argentina) S.A. which
operates six well service rigs, three drilling rigs and related equipment in
Argentina. The operating results of Kenting are included in the Company's
results of operations effective August 1, 1997.
The acquisition was accounted
for using the purchase method.
Patrick Well Service, Inc.
Effective as of July 17, 1997, the Company completed the acquisition of Patrick Well
Service, Inc. ("Patrick") for $7.0 million in cash. Patrick operates 29 well
service rigs and related equipment in Southwest Kansas, Oklahoma and Southeast
Colorado. Patrick is operated by the WellTech
Mid-Continent Division of WellTech Eastern. The operating results of Patrick are included in the Company's results
of operations effective August 1, 1997.
The
acquisition was accounted for using the purchase method.
Servicios WellTech S.A.
Minority Interest
Effective as of July 1, 1997, the Company purchased the remaining 37% minority
interest in Servicios WellTech S.A. ("Servicios") from two unrelated parties for
approximately $3.4 million in cash. As a result of the purchase, the Company now
owns 100% of Servicios.
Pending Acquisition- 9 -
Acquisitions Completed After December 31, 1997
The following acquisitions were completed after December 31, 1997. Except as
otherwise noted, the results of operations from these acquisitions are not
included in the Company's results of operations for the three and six months
ended December 31, 1997.
Sitton Drilling Company
Effective January 1, 1998, the Company completed the acquisition of Sitton
Drilling Co. ("Sitton") for approximately $14.8 million, including $12.9 million
in cash and 100,000 shares of Common Stock. Sitton operates five drilling rigs
in the Permian Basin region of West Texas.
J.W. Gibson Well Service Company
Effective as of July 31, 1997,January 8, 1998, the Company entered into a definitive
agreement forcompleted the acquisition of J.W. Gibson
Well Service Company ("Gibson") for approximately $25.5 million, consisting of
$23.9 million in cash, stock100,000 shares of Common Stock and warrants withto acquire
265,000 shares of Common Stock at an estimated value at that timeexercise price of approximately
$25.0 million.$18.00 per share, subject
to certain adjustments.
Gibson operates 74 well service rigs and related equipment in eight states.
Since July 31, 1997, the Company through Key Rocky Mountain, has
managed the operations of Gibson pursuant to an
interim operationsoperating agreement. Under the operating agreement, under which Key Rocky Mountain receivesthe Company received
a management fee equal to the net income from Gibson's operations less $25,000
per month. In addition, Key Rocky Mountainmonth and received a one-time management fee of $300,000 for the three months ended
September 30, 1997. These management fees are included in the Company's results
of operations for the three months ended September 30, 1997. On October 10,
1997, the Company entered into an amendment to the definative agreement, which
amendment provided for, among other things, an extension of the closing and the
interim operating agreement to$300,000.
Hot Oil Plus
Effective January 1998.
- 9 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
3. LONG-TERM DEBT
As of September 30, 1997, the Company had three major components of
long-term debt which are more fully described below.
7% Convertible Subordinated Debentures
In July 1996,29, 1998, the Company completed the offeringacquisition of $52,000,000Hot Oil
Plus, Inc. ("Hot Oil Plus") for approximately $1.9 million in cash. Hot Oil Plus
operates eight hot oil trucks, a pump truck and a steam heater in Southeast
Texas.
Legacy Drilling Co.
Effective January 30, 1998, the Company completed the acquisition of 7%
Convertible Subordinated Debentures due 2003 (the"7% Debentures"Legacy
Drilling Co. ("Legacy"). The offering
was for approximately $2.9 million in cash. Legacy operates
four drilling rigs in the Permian Basin region of West Texas.
Circle M Vacuum Services
Effective January 30, 1998, the Company completed the acquisition of Circle M
Vacuum Services ("Circle M") for approximately $800,000 in cash. Circle M
operates four vacuum trucks, trailers and a private offering pursuant to Rule 144A undersalt water disposal well in
Southeast Texas.
Four Corners Drilling Company
Effective February 4, 1998, the Securities Act. AsCompany completed the resultacquisition of Four
Corners Drilling Company ("Four Corners") for $10.0 million in cash. Four
Corners owns 12 drilling rigs in the Four Corners region of the conversionSouthwestern
United States.
- 10 -
Updike Brothers, Inc.
Effective February 6, 1998, the Company completed the acquisition of a significant portion of the 7% Debentures into the
Company's common stock as more fully described below, the remaining principal
balance at September 30,Updike
Brothers, Inc. ("Updike") for approximately for $10.6 million in cash. Updike
operates 25 well service rigs in Wyoming.
3. LONG-TERM DEBT
At December 31, 1997, was $4,600,000. The remaining 7% Debentures mature
on July 1, 2003 and remain convertible at any time before maturity, unless
previously redeemed, into sharesmajor components of the Company's common stock at a conversion
price of $9 3/4 per share, subject to adjustment in certain events. In addition,
the remaining holders of the Debentures who convert prior to July 1, 1999 will
be entitled to receive, in addition to the Company's common stock, a payment
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 remaining 7% Debentures is payable
semi-annually on January 1 and July 1 of each year. The Company has made
interest payments on the 7% Debentures on January 1, 1996 and July 1, 1997.
As of September 30, 1997, $47,400,000 in principal amount of the 7%
Debentures had been converted into the Company's common stock. The conversion
was at the option of the holders. The Debentures converted into 5,062,369 shares
of the Company's common stock. The conversion included 200,831 shares in excess
of the number of shares issuable at the conversion price of $9.75 per share.
Such additional consideration will be accounted forlong-term debt were as
an increase to the
Company's equity. In addition, the proportional amount of debt issuance costs
associated with the converted Debentures will be accounted for as a decrease to
the Company's equity.follows:
PNC Credit Agreement
On June 6, 1997, the Company entered into an agreement, (the"PNC(the "Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, Norwest Bank Texas,
N.A. , as collateral agent, Lehman Commercial Paper, Inc., as advisor, arranger
and a
syndication agent and theof other lenders named therein pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on the LIBOR
and the level of the Company's indebtedness and at
September 30, 1997 was LIBOR plus 2.25 percent.indebtedness. The credit facilityInitial Credit Agreement
contained certain restrictive covenants and requiresrequired the Company to maintain
certain financial ratios. At September 30, 1997, the principal balance of the PNC Credit
Agreement revolver was $57 million and there was approximately $78 million in
unused credit line facilities. On September 25, 1997, the Company repaid the term
loan and a portion of the amount then outstanding amounts under the revolver usingapplying
the proceeds from the initial closingand second closings of the Company's private
placement of the$216 million of 5% Notes, (discussed
below). On October 7, 1997, the Company again prepaid a portion of the amount
then outstanding under the revolver using the proceeds from the second closing
of the Company's private placement of the 5%Convertible Subordinated Notes (discussed
below).
Effective as of November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended Credit Agreement"), as administrative
agent and lender, pursuant to which PNC agreed to make revolving credit loans of
up to a maximum loan commitment of $200 million. The maximum commitment
decreases to $175 million on November 6, 2000 and to $125 million on November 6,
2001. The loan commitment terminates on November 6, 2002. Borrowings under the
credit facility may be either (i) Eurodollar Loans with interest payable
quarterly at LIBOR plus 1.25% subject to adjustment based on certain financial
ratios, (ii) Base Rate Loans with interest payable quarterly at the greater of
PNC Prime Rate or the Federal Funds Effective Rate plus 1/2 %,or (iii) a
combination thereof, at the Company's option. The Amended Credit Agreement
contains certain restrictive covenants and requires the Company to maintain
certain financial ratios. A change of control of the Company, as defined in the
Amended Credit Agreement, is an event of default. Borrowings under the Amended
Credit Agreement are secured by substantially all of the assets of the Company
and its domestic subsidiaries.
Effective December 3, 1997, PNC completed the re-negotiationsyndication of the - 10 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
PNCAmended Credit
Agreement by enteringand, in connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into an amendeda First Amendment to the
Amended and restated PNCRestated Credit Agreement providing for, among other things, an
increase in borrowing
availabilitythe maximum commitment from $200 million to $250 million.
At December 31, 1997, the principal balance of the Amended Credit Agreement, as
amended, was $107 million and the unused credit facility aggregated
approximately $143 million, with approximately $3 million reserved for existing
letters of credit.
7% Convertible Subordinated Debentures
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible
- 11 -
Subordinated Debentures due 2003 (the "Debentures"), pursuant to Rule 144A under
the revolverSecurities Act of 1933, as amended (the "Securities Act"). The Debentures
are subordinate to the Company's senior indebtedness, which as defined in the
indenture pursuant to which the Debentures were issued, includes the borrowings
under the Amended Credit Agreement, as amended. Interest on the Debentures is
payable on January 1 and July 1 of each year.
The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert prior
to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock
(at the Company's option), generally equal to 50% of the interest otherwise
payable from $135 millionthe date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter.
In the event of a change in control of the Company, as defined in the indenture
under which the Debentures were issued, each holder of Debentures will have the
right, at the holder's option, to $200 millionrequire the Company to repurchase all or any
part of the holder's Debentures within 60 days of such event at a price equal to
100% of the principal amount thereof, together with accrued and unpaid interest
thereon.
As of December 31, 1997, $47,400,000 in principal amount of the Debentures had
been converted into 5,062,369 shares of Common Stock at the option of the
holders. The number of shares issued included 200,831 shares in excess of the
number of shares issuable at the conversion price of $9.75 per share. These
additional shares were issued by the Company to induce conversion. Such
additional consideration was accounted for as an increase to the Company's
equity. In addition, the proportional amount of debt issuance costs associated
with the converted Debentures was accounted for as a decrease into the revolver's interest rate from LIBOR plus 2.25 percent to LIBOR plus 1.25
percent.Company's
equity.
At December 31, 1997, $4,600,000 of Debentures remained outstanding.
5% Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"5% Notes""Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of the 5% Notes pursuant to the exercise
of the remaining portion of anthe over-allotment option granted to the initial
purchasers of the 5% Notes. The placement was aplacements were made as private offeringofferings pursuant to
Rule 144A and Regulation S under the Securities Act. The 5% Notes bear interest at a
5% coupon rate and are convertible into shares ofsubordinate
to the Company's common stock at
a conversion price of $38.50 per share atsenior indebtedness, which, as defined in the holder's optionindenture under
which the Notes were issued, includes the borrowings under the Amended Credit
Agreement, as amended. Interest on the earlier of
(i) the date that the registration statement on Form S-3 required to be filed
with the Securities and Exchange Commission (the "Commission") covering resales
of the 5% Notes and the underlying common stock by the holders thereof is
declared effective by the Commission and (ii) 270 days from the date of
issuance. Interest is payable on March 15 and
September 15, commencing March 15, 1998.
The 5%Notes are convertible, at the holder's option, into shares of Common Stock
at a conversion price of $38.50 per share, subject to certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
- 12 -
In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holde's option, to require the Company to repurchase all or any part of the
holder's Notes, within 60 days of such event, at a price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest thereon.
Proceeds from the private placement of the 5% Notes were used to repay the outstanding
balances under the
Company's revolving credit facility and term loan facilityfacilities (see above). At December 31, 1997, $216,000,000
principal amount of the Notes was outstanding.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128 - Earnings per Share
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effective for periods ending on or after December 15, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted EPS.
Management believes the adoption of SFAS 128 will not have a material effect on
its financial position or results of operations of the Company.
Statement of Financial Accounting Standards No. 130 - Reporting Comprehensive
Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt SFAS 130 for the fiscal
year ended June 30, 1999. Management believes the adoption of SFAS 130 will not
have a material effect on its financial position or results of operations of the
Company.
- 11 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
Statement of Financial Accounting Standards No. 131 - Disclosures about Segments
of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
need not be applied to interim financial statements in the initial year of its
application. However, comparative information for interim periods in the initial
year of application is to be reported in the financial statements for interim
periods in the second year of application. The Company will adopt SFAS 131 for
the fiscal year ended June 30, 1999. Management believes the adoption of SFAS
131 will not have a material effect on its financial position or results of
operations of the Company.
5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.
6. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures (in thousands) for the three months and six
months ended December 31, 1997 and 1996 follows:
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
------------------ -----------------
Interest paid $ 2,667 $2,243 $6,105 $2,929
Taxes paid 3,568 - 123,568 -
- 13 -
KEY ENERGY GROUP, INC.Supplemental non-cash investing and financing disclosures (in thousands) for the
three and six months ended December 31, 1997 and 1996 follows:
Fair Value
of Issued Assumption Assumption Acquisition of
Common of of Property
Stock Debt Working Capital* and Equipment
----------- ---------- --------------- --------------
Three months ended
December 31, 1996 $12,476 $2,354 $12,220 $ 37,450
Six months ended
December 31, 1996 $12,476 $2,354 $12,220 $ 37,450
Three months ended
December 31, 1997 $ 5,812 $3,391 $ 6,798 $101,612
Six months ended
December 31, 1997 $ 5,812 $7,655 $ (970) $151,979
* - excluding current maturities of long-term debt.
7. TREASURY STOCK
During the three months ended December 31, 1997, the Company purchased 416,666
shares of Common Stock. All shares were purchased at the then prevailing market
prices. The purchased shares are accounted for as treasury stock on the
Company's balance sheet under the treasury stock method of accounting.
8. CHANGES APPROVED BY SHAREHOLDERS
At the Company's annual meeting of shareholders held on January 13, 1998, the
Company's shareholders approved an increase in the Company's authorized capital
stock from 25,000,000 shares, par value $.10 per share, to 100,000,000 shares,
par value $.10 per share, and approved the adoption of the Company's 1997
Incentive Plan.
The Company's 1997 Incentive Plan is an amendment and restatement of the
Company's 1995 Stock Option Plan and 1995 Outside Directors Stock Option Plan
(collectively, the "Prior Plans"), which authorized the issuance of up to
1,400,000 shares of Common Stock to key employees, officers and directors of the
Company, subject to the terms and conditions of options granted to such
individuals. The 1997 Incentive Plan authorizes the granting of stock options
and other stock-based incentive awards covering an aggregate of the greater of
(i) 3,000,000 shares of Common Stock or (ii) 10% of the number of shares of
Common Stock issued and outstanding on the last day of each calendar quarter,
provided, however, that a decrease in the number of issued and outstanding
shares of Common Stock from the previous calendar quarter; shall not result in a
decrease in the Common Stock available for issuance under the Company's 1997
Incentive Plan. Presently, 3,000,000 shares of Common Stock are authorized under
the 1997 Incentive Plan. Options previously granted under the Prior Plans were
assumed and continued by the 1997 Incentive Plan.
As of January 13, 1998, options to purchase 2,306,224 shares of Common Stock are
outstanding under the 1997 Incentive Plan.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's auditedAnnual Report on Form 10-K for the year ended June 30, 1997.
Current and Subsequent Events
During the three month interval beginning July 1, 1997, and ending
September 30,six months ended December 31, 1997, the Company purchased the
remaining 37% minority interest in Servicios WellTech Argentina and completed the acquisition of
sixthe following well servicing, trucking and truckingdrilling companies:
Patrick Well Service, Inc.
Kenting Holdings (Argentina) S.A.,
Mosley Well Service, Ram/RowlandInc.
Ram Oil Well Service, Inc. and Rowland Trucking Co. Inc.
Waco Oil & Gas Co., Inc.
Landmark Fishing & Rental, Inc.
BRW Drilling, Inc.
Dunbar Well Service, Inc.
Frontier Well Service, Inc.
Big A Well Service Co., Sunco Trucking Co. and
RentalJustice Supply Co., Inc.
GSI Trucking Company, Inc., Kahlden Production
Services, Inc. and Waco OilMcCurdy Well Service, Inc.
Jeter Service Co.
Win-Tex Drilling Co., Inc. and Gas.Win-Tex Trucking Corporation
Wellcorps, L.L.C., White Rhino Drilling, Inc. and
S&R Cable, Inc.
These acquisitions (which are more fully described in Note 2), collectively operate 972 to the consolidated
financial statements) involve 192 well service rigs (including six well service
rigs in Argentina), 108210 fluid hauling and other trucks and six28 drilling rigs
including(including three drilling rigs in Argentina.Argentina). The total purchase price of these
acquisitions totaled approximately $152 million, compromised of approximately
$142 million in cash and 365,000 shares of Common Stock.
Subsequent to September 30,December 31, 1997 and through February 13, 1998, the Company has announced or
completed the acquisition of sixfour well serviceservicing companies and twothree contract
drilling companies which, collectively, operate 164involving 99 well service rigs, 1721 drilling rigs and 11824 fluid
hauling and other trucks. The total purchase price of these subsequent
acquisitions aggregate approximately $63.4 million, compromised of approximately
$60 million in cash and 200,000 shares of Common Stock.
These eight announced or completed
acquisitions (which are more fully described inwere financed primarily through long-term debt borrowings
(see Note 2), have allowed3 to the consolidated financial statements) and, to a lesser extent,
through internally generated funds.
Including these recent acquisitions, as of February 13, 1998, the Company to expand its operating presence into markets it previously did not
serve, including the Rocky Mountains and the Four Corners area. Assuming
completion of the pending acquisitions, Key's operations will include 790 well
service and workoverowns
820 oilfield servicing rigs, 623628 oilfield fluid hauling and other trucks 33and 59
land drilling rigs
and numerous ancillary operations. Based uponrigs. Management believes that, as of February 13, 1998, the
number ofCompany's active well service
rigsservicing and fluid hauling and other trucks that the Company would operate assuming
the completion of all announced acquisitions, the Company believes that Key
Energy Group, Inc. will befleet is the largest active
onshore well service provider withinfleet in the continental United States and is the second largest well service provideractive
fleet in Argentina. FutureThe Company operates in most major onshore oil and gas
producing regions of the continental United States, with the exception of
California, and provides a full range of drilling, completion, maintenance,
workover and plugging and abandonment services for the oil and gas industry.
- 15 -
Impact of Declining Crude Oil Prices
During the quarter ended December 31, 1997, the posted price of West Texas
intermediate crude oil (the"West Texas Crude Oil Price") fell from prices in
excess of $20 per barrel to prices of less than $17 per barrel. From December
31, 1997 through February 13, 1998, the West Texas Crude Oil Price remained in
the range of $15.50 to $17.50 per barrel. This decline in prices is thought to
be caused primarily by an oversupply of crude oil inventory created, in part, by
an unusually warm winter in the United States and Europe, an announced increase
in crude oil production quotas for OPEC countries and a possible decline in
demand in certain Asian markets.
If such a decline in the West Texas Crude Oil Price worsens or persists for a
protracted period, the Company's oilfield service and drilling operations would
likely be affected by postponements of drilling commitments and delays in
scheduled maintenance service for marginally producing wells which, in turn,
could adversely effect the Company's service and drilling rig utilization rates,
pricing structures, revenues, net income and cash flows from operations.
Growth Strategy
Historically, the domestic well service rig and production serviceservicing industry has been highly fragmented,
characterized by a large number of smaller companies which have competed
effectively on a local basis in terms of pricing and the quality of services
offered. In recent years, however, many major and independent oil and gas
companies have placed increasing emphasis upon not only on pricing, but also on the
safety records and quality management systems of, and the breadth of services
offered by, their vendors, including well servicing contractors. This market
environment, which requires significant expenditures by smaller companies to
meet these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As a result,
the industry has seen high levels of consolidation among the competing
contractors.
Over the past eighteen months, Keythe Company has been the leading consolidator of
this industry, completing twenty-six35 acquisitions of well servicing and drilling
operations (32, including pending transactionsthrough December 31, 1997 and transaction completed subsequent
to September 30, 1997).42 such acquisitions through February
13, 1998. This consolidation has led to reduced fragmentation in the market and
has led toa more predictable demand for well services for the Company and its competitors.
Key'sThe Company's management structure is decentralized, which allows for rapid
integration of acquisitions and the retention of strong local identities of many
of the acquired businesses.
As a result of these and other factors, the Company has developed a growth
strategy to:
(i) identify,1. Identify, negotiate and consummate additional acquisitions of
complementary well servicing operations, including rigs, trucking and
- 13 -
other ancillary services;
(ii) fully-integrate2. Fully integrate acquisitions into the Company's decentralized
organizational structure and thereby attempt to maximize operating
margins;
(iii) expand3. Expand business lines and services offered by the Company in
existing areas of operations; and,
(iv) extend4. Extend the geographic scope and operating environments for the
Company's operations.
- 16 -
If the current decline in the West Texas Crude Oil Price worsens or persists for
a protracted period, the Company may curtail or halt its growth strategy until
such time as prices reach more favorable ranges.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1997 VERSUS QUARTER ENDED SEPTEMBER 30, 1996
The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the consolidated financial statements and related notes
thereto appearing elsewhere in this report.
Operating- 17 -
QUARTER ENDED DECEMBER 31, 1997 VERSUS THE QUARTER ENDED DECEMBER 31, 1996
Net Income
TheFor the quarter ended December 31, 1997, the Company Revenuesreported net income of
the Company$7,345,000 ($.40 per share - basic) as compared to $2,043,000 ($.19 per share -
basic) for the quarter ended September 30, 1997 increased
$44,094,000,December 31, 1996, representing an increase of
$5,302,000, or 140%, from $31,462,000 for the quarter ended September 30, 1996
to $75,556,000 for the current quarter. Net income for the quarter ended
increased $3,384,000, or 218%, from $1,554,000 for the quarter ended September
30, 1996 to $4,938,000 for the current quarter.260%. The increase in revenues and net income was primarily due to the completed acquisitions of well service
operations (see Note 2), increased oil and gas revenues from Odessa Exploration,
and a general increase in oil-well service equipment utilization.
Oilfield Services
Oilfield service revenues increased $42,187,000, or 154%, from $27,311,000
for the quarter ended September 30, 1996, to $69,498,000 for the current
quarter. The increase in revenues is primarily attributable to the
Company's acquisitions as
well as higher equipment usecompleted between October 1, 1996 and pricing resulting from an increase in demand
for oilfield services.
OilDecember 31, 1997,
increased service and Natural Gas Explorationdrilling rig utilization rates and Productionprice increases.
Revenues
from oil and gas activities increased $629,000, or 41%, from
$1,525,000 for the quarter ended September 30, 1996, to $2,154,000 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 during fiscal 1997 began production and higher oil and natural gas
prices for the current period. Of theCompany's total $2,154,000 of revenues for the quarter ended September 30,December 31, 1997 approximately $1,852,000 was fromincreased
by $73,476,000, or 203%, to $109,673,000 compared to $36,197,000 reported for
the salequarter ended December 31, 1996. The increase is primarily attributable to
the Company's acquisitions of oilfield service and drilling rig companies (see
Note 2 to the consolidated financial statements), increased demand for oilfield
service equipment and recent price increases for oilfield services. From October
1, 1996 through December 31, 1997, the Company has added 387 well servicing
rigs, 413 fluid hauling trucks and 31 drilling rigs to its fleet.
Oilfield service revenues for the current quarter increased by $65,834,000, or
208%, to $97,542,000 compared to $31,708,000 reported for the quarter ended
December 31, 1996. The increase is primarily attributable to recent
acquisitions, increased demand for oilfield service equipment and recent price
increases for oilfield services.
Drilling revenues for the quarter ended December 31, 1997 increased by
$6,330,000, or 268%, to $8,689,000 compared to $2,359,000 reported for the
quarter ended December 31, 1996. The increase is primarily attributable to
recent drilling rig acquisitions, higher rig utilization and price increases.
Oil and gas revenues for the quarter ended December 31, 1997 decreased by
$139,000, or 7%, to $1,949,000 compared to $2,088,000 reported for the quarter
ended December 31, 1996. The decrease is primarily attributable to lower crude
oil and natural gas with the remainder of $302,000 representing primarily
administrative fee income.
Oilprices.
Costs and Natural Gas Well Drilling
OilExpenses and natural gas well drilling revenues increased $499,000, or 22%, from
$2,324,000Operating Margins
The Company's total costs and expenses for the quarter ended September 30, 1996December 31, 1997
increased by $64,651,000, or 195%, to $2,823,000 for the
current quarter. The increase in revenues is primarily attributable$97,826,000 compared to higher
equipment utilization and an increase in pricing.
- 14 -
Operating Expenses
Oilfield Services
Oilfield service expenses increased $28,539,000, or 145%, from $19,700,000$33,175,000
reported for the quarter ended September 30, 1996December 31, 1996. The increase is directly
attributable to $48,239,000increased operating costs and expenses associated with the
Company's recent acquisitions.
Oilfield service expenses for the current quarter.
The increasequarter ended December 31, 1997 increased by
$45,288,000, or 196%, to $68,354,000 compared to $23,066,000 reported for the
quarter ended December 31, 1996. Oilfield service margins (revenues less direct
costs and expenses) increased for the quarter ended December 31, 1997 by
$20,546,000, or 238%, to $29,188 compared to $8,642,000 for the quarter ended
December 31, 1996. Oilfield service margins as a percentage of oilfield service
revenue for the quarters ended December 31, 1997 and 1996 was 30% and 27%,
respectively. Such increases are due primarily to acquisitions, and the increased demand
for oilfield services.services and increased operating efficiencies. In addition, the
Company has continued to expand its services, offering higher margin ancillary
services and equipment such as well fishing tools, blow-out preventers and well frac
tanks.
Oil- 18 -
The Company's contract drilling costs and natural Gas Exploration and Production
Expenses related to oil and gas activities increased $424,000, or 83%, from
$513,000expenses for the quarter ended
September 30, 1996December 31, 1997 increased by $4,627,000, or 236%, to $937,000 for current
quarter. The increase in expenses was primarily the result of increased
production of oil and natural gas as several oil and natural gas wells, which
were drilled during fiscal 1997, began production during the quarter.
Oil and Natural Gas Well Drilling
Expenses related$6,590,000 compared to
oil and natural gas well drilling activities increased
$382,000, or 20%, from $1,881,000$1,963,000 for the quarter ended September 30, 1996
$2,263,000December 31, 1996. Oilfield drilling margins
for current quarter. The increase in expenses is attributablethe Company's drilling operations during the quarter ended December 31, 1997
increased by $1,703,000, or 430%, to higher equipment utilization and increased revenues.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $3,052,000, or
146%, from $2,095,000$2,099,000 compared to $396,000 for the
quarter ended September 30, 1996 to $5,147,000December 31, 1996. Oilfield drilling margin as a percentage of
oilfield drilling revenue for the current quarter. The increase is primarily duequarters ended December 31, 1997 and 1996 was
24% and 17%, respectively. Such increases are attributable to oilfield service
depreciation expense, which is the resultCompany's
recent acquisition of drilling rig companies and increased oilfield service capital
expendituresoperating
efficiencies.
There was no significant change in oil and gas production costs and expenses for
the current period versus the prior period and the acquisitions
of oilfield service assets.
General and Administrative Expensesquarter ended December 31, 1997.
General and administrative expenses increased $4,174,000, or 118%, from
$3,527,000 for the quarter ended September 30, 1996December 31, 1997
increased by $6,635,000, or 180%, to $7,701,000$10,370,000 compared to $3,735,000 for the
current quarter.quarter ended December 31, 1996. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. Interest Expense
Interest expense increased $2,088,000, or 155%,General and administrative
expenses as a percentage of total revenue decreased from $1,350,00010.3% during the
quarter ended December 31, 1996 to 9.5% for the quarter ended September 30, 1996 to $3,438,000December 31, 1997.
Depreciation, depletion and amortization expense for the current quarter.quarter ended December
31, 1997 increased by $5,398,000, or 230%, to $7,740,000 compared to $2,342,000
for the quarter ended December 31, 1996. The increase is directly related to the
increase in property and equipment and long-term debt issuance cost incurred by
the Company over the past eighteen months in conjunction with its acquisitions.
Interest expense for the quarter ended December 31, 1997 increased by
$2,583,000, or 199%, to $3,879,000 compared to $1,296,000 for the quarter ended
December 31, 1996. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisition program.
Income Taxes
Income tax expense increased $2,109,000, or 269%, from $784,000 for the
quarter ended September 30, 1996, to $2,893,000 for the current quarter. The
increase in income taxes is primarily due to the increases in operating income
and a higher effective tax rate. However, the Company does not expect to be
required to remit the total amount of the $2,893,000 in total federal income tax expense for the quarter ended September 30,December 31, 1997 increased by
$3,473,000, or 338%, to $4,502,000 compared to $1,029,000 for the quarter ended
December 31, 1996. The Company does not expect to have to pay the full amount of
the income tax provision because of the availability of net operating loss carryforwards, accelerated tax
depreciation, and oil and
natural gas drilling tax attributes.
- 15 -
credits, and tax loss carry-forwards.
Cash FlowFlows
Net cash provided by operating activities increased $1,044,000, or 35%,
from $3,016,000 duringfor the quarter ended September 30, 1996,December 31,
1997 increased by $8,450,000, to $4,060,000$7,361,000 compared to the $1,089,000 used by
operating activities for the current quarter.quarter ended December 31, 1996. The increase is
primarily attributable primarilythe acquisitions, increased service and drilling
operating margins, increased service and drilling utilization rates, increased
operating efficiencies and, to increases in net
incomea lesser extent, increased prices for oilfield
service and depreciation, depletion and amortization which was largely off-set by
a decrease in accounts receivable.drilling.
Net cash used in investing activities increased $128,309,000, or 362%, from
$3,545,000 duringfor the quarter ended September 30, 1996, $131,854,000December 31, 1997
increased by $35,778,000, or 204%, to $53,298,000 compared to $17,520,000 used
for the current quarter. Thequarter ended December 31, 1996. This increase is primarily the result of increased capital
expenditures for well service operations as well asrelated to
the Company's recent acquisitions.
Net cash provided by financing activities for the quarter ended December 31,
1997 increased $120,241,000,by $39,717,000, or 795%371%, from $15,125,000to $50,431,000 compared to $10,714,000
provided during the quarter ended September 30, 1996, to $135,366,000
for the current quarter.December 31, 1996. The increase is primarily
the result of the proceeds from long-term commercial paper and borrowings under line-of-credit, and the
issuance of the Company's 5% Notesdebt (see Note 2) which are3 to consolidated
financial statements) and partially off-setoffset by the repayment of such debt.
- 19 -
SIX MONTHS ENDED DECEMBER 31, 1997 VERSUS THE SIX MONTHS ENDED DECEMBER 31, 1996
Net Income
For the six months ended December 31, 1997, the Company reported net income of
$12,283,000 ($.76 per share - basic) as compared to $3,597,000 ($.34 per share -
basic) for the six months ended December 31, 1996, an increase of $8,686,000, or
241%. The increase in net income is primarily attributable to the Company's
acquisitions completed between October 1, 1996 and December 31, 1997, increased
service and drilling rig utilization rates, increased operational efficiencies
and price increases.
Revenues
The Company's total revenues for the six months ended December 31, 1997
increased by $117,534, or 174%, to $185,193,000 compared to $67,659,000 for the
six months ended December 31, 1996. The increase is attributable to the
Company's recent acquisitions of oilfield service and drilling rig companies,
increased utilization and higher prices for oilfield services.
Oilfield service revenues for the six months ended December 31, 1997 increased
by $108,021,000, or 183%, to $167,040,000 compared to $59,019,000 reported for
the six months ended December 31, 1996. The increase is primarily attributable
to recent acquisitions, higher demand for oilfield service equipment and, to a
lesser extent, from recent price increases for oilfield services.
Drilling revenues for the six months ended December 31, 1997 increased by
$6,829,000, or 146%, to $11,512,000 compared to $4,683,000 reported for the six
months ended December 31, 1996. The revenue increase is primarily attributable
to recent drilling rig acquisitions, higher rig utilization and price increases.
Oil and gas revenues for the six months ended December 31, 1997 increased by
$454,000, or 13%, to $4,067,000 compared to $3,613,000 for the six months ended
December 31, 1996. The increase is directly attributable to increased oil and
gas production as a result of the Company's oil and gas acquisitions for the
fiscal year ended June 30, 1997 and was partially offset by lower crude oil and
natural gas prices during the last three months of calendar 1997.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the six months ended December 31,
1997 increased by $103,274,000, or 166%, to $165,515,000 compared to $62,241,000
reported for the six months ended December 31, 1996. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's recent acquisitions.
Oilfield service expenses for the six months ended December 31, 1997 increased
by $73,826,000, or 173%, to $116,592,000 compared to $42,766,000 reported for
the six months ended December 31, 1996. Oilfield service margins (revenues less
direct costs and expenses) for the six months ended December 31, 1997 increased
$34,195,000, or 210%, to $50,448, compared to $16,253,000 for the six months
ended December 31, 1996. Oilfield service margins as a percentage of oilfield
service revenues for the six months ended December 31, 1997 and 1996 was 30% and
28%, respectively. The increases in oilfield services expenses and margins are
due primarily to acquisitions, increased demand for oilfield services, the
Company's expansion of its ancillary oilfield services and equipment, such as
well fishing tools, blowout preventers and well frac tanks, and increased
operating efficiencies.
- 20 -
Drilling costs and expenses for the six months ended December 31, 1997 increased
by $5,009,000, or 130%, to $8,853,000 compared to $3,844,000 for the six months
ended December 31, 1996. Drilling margins during the six months ended December
31, 1997 increased by $1,820,000, or 217%, to $2,659,000 compared to $839,000
for the six months ended December 31, 1996. Oilfield drilling margin as a
percentage of oilfield drilling revenue for the six months ended December 31,
1997 and 1996 was 23% and 18%, respectively. These increases are attributable to
the Company's recent acquisition of drilling rig companies and increased rig
utilization and operating efficiencies.
Oil and gas production cost for the six months ended December 31, 1997 increased
by $545,000, or 42%, to $1,831,000 compared to $1,286,000 for the six months
ended December 31, 1996. The increased costs were attributable to an increase in
the number of producing oil and gas wells.
General and administrative expenses for the six months ended December 31, 1997
increased by $10,774,000, or 148%, to $18,036,000 compared to $7,262,000 for the
six months ended December 31, 1996. The increase was primarily attributable to
the Company's recent acquisitions and expanded services. General and
administrative expenses as a percentage of total revenues for the six months
ended December 31, 1997 and 1996 were 9.7% and 10.7%, respectively.
Depreciation, depletion and amortization expense for the six months ended
December 31, 1997 increased by $8,449,000, or 190%, to $12,886,000 compared to
$4,437,000 for the six months ended December 31, 1996. The increase is directly
related to the increase in property and equipment and long-term debt.debt issuance
costs incurred by the Company over the past eighteen months in conjunction with
its acquisitions.
Interest expense for the six months ended December 31, 1997 increased by
$4,671,000, or 177%, to $7,317,000 compared to $2,646,000 for the six months
ended December 31, 1996. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisitions.
Income tax expense for the six months ended December 31, 1997 increased by
$5,582,000, or 308%, to $7,395,000 compared to $1,813,000 for the six months
ended December 31, 1996. The Company does not expect to have to pay the full
amount of the income tax provision because of the availability of accelerated
tax depreciation, drilling tax credits, and tax loss carryforwards.
Cash Flows
Net cash provided by operating activities for the six months ended December 31,
1997 increased by $9,494,000, or 493%, to $11,421,000 compared to $1,927,000 for
the six months ended December 31, 1996. The increase is primarily attributable
to an increased service and drilling operating margin, increased service and
drilling utilization rates, increased operating efficiencies created by the
acquisitions and price increases for oilfield service and drilling.
Net cash used in investing activities for the six months ended December 31, 1997
increased by $164,087,000, or 779%, to $185,152,000 compared to $21,065,000 used
for the six months ended December 31, 1996. This increase is primarily related
to the Company's recent acquisitions.
Net cash provided by financing activities for the six months ended December 31,
1997 increased by $159,958,000, or 619%, to $185,797,000 compared to $25,839,000
provided during the six months ended December 31, 1996. The increase is
primarily the result of the proceeds from long-term debt (see Note 3 to
consolidated financial statements).
- 21 -
LIQUIDITY AND CAPITAL RESOURCES
The Company'sAt December 31, 1997, the Company had cash increased by $7.6of $53.8 million for the quarter ended
September 30, 1997 fromcompared to $41.7
as ofmillion at June 30, 1997 and $9.3 million at December 31, 1996. At December 31,
1997, the Company had working capital of $99.1 million compared to $49.3 million.
The$60.2 million
at June 30, 1997 and $17.1 million at December 31, 1996.
In addition to its on-going acquisition program, for fiscal 1998, the Company
has projected $40 million forof capital expenditures for fiscal
1998, as compared to $24.8improvements of existing
service and drilling rig machinery and equipment, an increase of $23.4 million
forover the $16.6 million expended during fiscal 1997. Oilfield service capitalCapital expenditures for
service and drilling rig improvements for the threesix months ended September 30,December 31, 1997
and 1996 were $6.7$22.3 million compared to $2.9and $6.5 million, during the same quarter last year. Of the total $40.0
million in capital expenditures the Company is projecting for fiscal 1998,
approximately $30 million is expected to be attributable to oilfield service
operations. Capital expenditures are expected to be primarily capitalized
improvement costs to existing equipment and machinery.respectively. The Company expects
to finance these capital expenditures utilizing thethrough internally generated operating
cash flowsflows.
The Company has projected $10.2 million of the
Company.
The Company'scapital expenditures for oil and natural gas
exploration and development operations
are forecasting outlays of approximately $8.0 million in development costs for fiscal 1998 as compared to $8.2 million duringexpended for fiscal
1997. For the quartersix months ended September 30,December 31, 1997 and 1996, the Company expended
$2.3 million and $1.3, respectively. Financing of these outlays totaled $2.1 million as compared to none
for the quarter ended September 30, 1996. Financingcosts is expected to
come from operations and available credit facilities.
The Company's oilprimary capital resources are net cash provided by operations and
natural gas well drilling operations have forecast
approximately $2.0 million in oil and natural gas drilling capital expenditures
for fiscal 1998, as compared to $1.5 million during fiscal 1997. Capital
expenditures are primarily for improvements to existing equipment and machinery.
For the quarter ended September 30, 1997, capital expenditures totaled $339,000
as compared to $323,000 for the quarter ended September 30, 1996. Financing is
expected to comeproceeds from existing cash flow.certain long-term debt facilities.
Long-Term Debt 7% Convertible Subordinated Debentures
In July 1996, the Company completed the offering of $52,000,000 of 7%
Convertible Subordinated Debentures due 2003 (the "7% Debentures"). The offering
was a private offering pursuant to Rule 144A under the Securities Act. As the
result of the conversion of a significant portion of the 7% Debentures into the
Company's common stock as more fully described below, the remaining principal
balance at September 30,
- 16 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
1997 was $4,600,000. The remaining 7% Debentures mature on July 1, 2003 and
remain convertible at any time 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, the remaining holders of
the Debentures who convert prior to July 1, 1999 will be entitled to receive, in
addition to the Company's common stock, a payment 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 remaining 7% Debentures is payable semi-annually on January 1
and July 1 of each year. The Company has made interest payments on the 7%
Debentures on January 1, 1996 and July 1, 1997.
As of September 30, 1997, $47,400,000 in principal amount of the 7%
Debentures had been converted into the Company's common stock. The conversion
was at the option of the holders. The Debentures converted into 5,062,369 shares
of the Company's common stock. The conversion included 200,831 shares in excess
of the number of shares issuable at the conversion price of $9.75 per share.
Such additional consideration will be accounted for as an increase to the
Company's equity. In addition, the proportional amount of debt issuance costs
associated with the converted Debentures will be accounted for as a decrease to
the Company's equity.
PNC Credit AgreementFacilities
On June 6, 1997, the Company entered into an agreement (the "PNCthe Initial Credit Agreement")Agreement with PNC, Bank, N.A.,
as administrative agent, Norwest Bank Texas,
N.A. , as collateral agent, Lehman Commercial Paper, Inc., as advisor, arranger
and a syndication agent and theof other lenders named therein pursuant to which
the lenders provided a $255 million credit facility, consisting of a $120
million seven-year term loan and a $135 million five-year revolver. The interest
rate on the term loan was LIBOR plus 2.75 percent. The interest rate on the
revolver varied based on the LIBOR and the level of the Company's indebtedness and at
September 30, 1997 was LIBOR plus 2.25 percent.indebtedness.
The credit facilityInitial Credit Agreement contained certain restrictive covenants and
requiresrequired the Company to maintain certain financial ratios. At September 30, 1997, the principal balance of the PNC Credit
Agreement revolver was $57 million and there was approximately $78 million in
unused credit line facilities. On September 25,
1997, the Company repaid the term loan and a portion of the amount then outstanding
amounts under the revolver usingapplying the proceeds from the initial closingand second
closings of the Company's private placement of the$216 million of 5% Notes, (discussed
below). On October 7, 1997, the Company again prepaid a portion of the amount
then outstanding under the revolver using the proceeds from the second closing
of the Company's private placement of the 5%Convertible
Subordinated Notes (discussed below).
Effective as of November 6, 1997, the Company entered into the Amended Credit
Agreement with PNC as administrative agent and lender, pursuant to which PNC
agreed to make revolving credit loans of up to a maximum loan commitment of $200
million. The maximum commitment decreases to $175 million on November 6, 2000
and to $125 million on November 6, 2001. The loan commitment terminates on
November 6, 2002
Effective December 3, 1997, PNC completed the re-negotiationsyndication of the PNCAmended Credit
Agreement by enteringand, in connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into an amendeda First Amendment to the
Amended and restated PNCRestated Credit Agreement providing for, among other things, an
increase in borrowing availabilitythe maximum commitment from $200 million to $250 million.
At December 31, 1997, the principal balance of the Amended Credit Agreement, as
amended, was $107 million and the unused credit facility aggregated
approximately $143 million, with approximately $3 million reserved for existing
letters of credit.
- 22 -
In July 1996, the Company completed a $52,000,000 private offering Debentures,
pursuant to Rule 144A under the revolver from $135 millionSecurities Act. The Debentures are subordinate
to $200 millionthe Company's senior indebtedness, which, as defined under the indenture
pursuant to which the Debentures were issued, includes the borrowings under the
Amended Credit Agreement, as amended. Interest on the Debentures is payable on
January 1 and July 1 of each year.
As of December 31, 1997, $47,400,000 in principal amount of the Debentures had
been converted into 5,062,369 shares of Common Stock at the option of the
holders. The number of shares issued included 200,831 shares in excess of the
number of shares issuable at the conversion price of $9.75 per share. These
additional shares were issued by the Company to induce conversion. Such
additional consideration was accounted for as an increase to the Company's
equity. In addition, the proportional amount of debt issuance costs associated
with the converted Debentures was accounted for as a decrease into the revolver's
interest rate from LIBOR plus 2.25 percent to LIBOR plus 1.25 percent.
5% Subordinated NotesCompany's
equity. At December 31, 1997, $4,600,000 of Debentures remained outstanding.
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004
(the "5% Notes").Notes. On October 7, 1997, the Company completed a
second closing of its private placement of an additional $16 million of the 5% Notes
pursuant to the exercise of the remaining portion of anthe over-allotment option
granted to the initial purchasers of the 5% Notes. The placement was aplacements were made as private
offeringofferings pursuant to Rule 144A and Regulation S under the Securities Act. The
5% Notes bear interest
- 17 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(unaudited)
at a 5% coupon rate and are convertible into shares ofsubordinate to the Company's common
stock at a conversion price of $38.50 per share atsenior indebtedness, which, as defined in
the holder's optionindenture under which the Notes were issued, includes the borrowings under
the Amended Credit Agreement, as amended. Interest on the earlier of (i) the date that the registration statement on Form S-3 required to
be filed with the Securities and Exchange Commission (the "Commission") covering
resales of the 5% Notes and the underlying common stock by the holders thereof
is declared effective by the Commission and (ii) 270 days from the date of
issuance. Interest is payable on
March 15 and September 15, commencing March 15, 1998. The 5% Notes are redeemableconvertible,
at the Company'sholder's option, on or after September
15, 2000, in whole or part, together with accrued and unpaid interest.into shares of Common Stock at a conversion price of
$38.50 per share, subject to certain adjustments.
Proceeds from the private placement of the 5% Notes were used to repay the outstanding
balances under the
Company's revolving credit facility and term loan facilityfacilities (see above). ImpactAt December 31, 1997, $216,000,000
principal amount of Recently Issued Accounting Standards
Statementthe Notes was outstanding.
Year 2000 Issue
The Company has made an assessment of Financial Accounting Standards No. 128 - Earnings per Share
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effectiveits Year 2000 issues. The Company has
determined that certain operating systems which the Company currently utilizes
for periods ending on or after December 15, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholdersits financial reporting will be adversely impacted by the weighted-average numberyear 2000. The
Company is currently in the process of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requiresselecting a reconciliation of the numerators and denominators of basic EPS and diluted EPS.
Management believes the adoption of SFAS 128new operating system which
will not have a material effectbe adversely impacted by the year 2000. Conversion to the new operating
system is expected to begin on its financial position or results of operations of the Company.
Statement of Financial Accounting Standards No. 130 - Reporting
Comprehensive Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130") -
Reporting Comprehensive Income, is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
for the fiscal year endedJuly 1, 1998 and be completed by June 30, 1999.
Management believes the adoption of
SFAS 130 will not have a material effect on its financial position or results of
operationsThe cost of the Company
Statement of Financial Accounting Standards No. 131 - Disclosures about
Segments of an Enterprisenew operating system and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") -
Disclosures about Segments of an Enterprise and Related Information,conversion is effective for financial statements for periods beginning after December 15,
1997. SFAS 131 need not be applied to interim financial statements in the
initial year of its application. However, comparative information for interim
periods in the initial year of application isexpected to be
reported in the financial
statements for interim periods in the second year of application. The Company
will adopt SFAS 131 for the fiscal year ended June 30, 1999. Management believes
the adoption of SFAS 131 will not have a material effect on its financial
position or results of operations of the Company Impact of Inflation on
Operations
Although in our complex environment it is extremely difficult to make an
accurate assessment of the impact of inflation on the Company's operations management is of the opinion that inflation has not had a significant impact on
its business.or financial condition.
- 1823 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities:
TheDuring the three months ended December 31, 1997, the Company
effected the following unregistered sales of its securities
duringunregistered securities:
Effective October 1, 1997, the three months ended September 30, 1997. EachCompany issued 125,000 shares of
Common Stock as part of the following
issuance'sconsideration paid in the acquisition by
Key Four Corners, Inc., a wholly-owned subsidiary of the Company, of
substantially all of the securities sold inassets of Big A Well Service Co., Sunco
Trucking Co. and Justis Supply Co., Inc., each a closely held New
Mexico corporation (collectively, the transactions referred"Sellers"). The issuance of the
Common Stock to below were not registeredthe sole shareholder of the Sellers was exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to the exemption provided under Section 4(2) thereof for transactions, as a sale of securities
not involving aany public offering:offering.
Effective as of September 25,October 7, 1997, the Company issued $200$16 million in
principal amount of its 5% Convertible Subordinated Notes due 2004
(the "Notes") pursuant to an over-allotment option exercised by
McMahan Securities Co. LP.L.P. and Lehman Brothers Inc., as intitialthe initial
purchasers in the Company's September 25, 1997 private placement of
the Notes. The Notes are generally convertible at the holders' option
at any time into shares of Common Stock at a conversion price of
$38.50 per share. The issuance of the Notes was exempt from
registration under the Securities Act because the sale of the Notes
was only to qualified institutional buyers in compliance with rule
144A and outside the United States to persons other than U.S. persons
in reliance on Regulation S of the Securities Act.
Effective December 2, 1997, the Company agreed to issue 240,000
shares of Common Stock in connection with the Company's
private placementpurchase by WellTech
Eastern, Inc., a wholly-owned subsidiary of the 5% Notes.
Effective asCompany, of
October 7, 1997, the Company issued $16 million of its 5%
Convertible Subordinated Notes due 2004 to McMahan Securities Co. LP. and Lehman
Brothers Inc., as intitial purchasers, in connection with the Company's private
placementsubstantially all of the 5% Notes.assets of White Rhino Drilling, Inc. ("White
Rhino"), S&R Cable, Inc. ("S&R Cable") and Wellcorps, L.L.C.
("Wellcorps"). Of the 240,000 shares to be issued, 212,496 were issued
to White Rhino and its designees, 72,240 of which were issued on
December 2, 1997 and 140,256 of which were issued on January 2, 1998.
The remaining 27,504 shares were issued to S&R Cable on January 2,
1998. The issuance of the Common Stock was exempt from registration
under Section 4(2) of the Securities Act as a sale of securities not
involving any public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
- 24 -
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of the Form 10-Q:
Number Description
10(a)
Stock Purchase Agreement between WellTech
Eastern, Inc. and Monty D.
Elmore dated as of July 17, 1997.
10(b) Stock Purchase Agreement between WellTech Eastern,
Inc. and Kenting
Energy Services, Inc. dated as of July 30, 1997.
10(c) Stock Purchase Agreement by and among Nabors Acquisition Corp.Corp IV,
as Seller, Key Rocky Mountain, Inc., as Buyer, and Key Energy Group,
Inc., dated as of July 31, 1997.("Gibson1997, (the "Gibson Stock Purchase Agreement")
- 19 -
10(d)(incorporated by reference to Exhibit 10(c) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)
10(b)
Amendment One to the Gibson Stock Purchase Agreement, Stock Purchase Agreement dated as of
October 10, 1997.
10(e) Stock Purchase Agreement among WellTech
Eastern, Inc., Robert E.
Mosley, Jr., Thelma Scoggin Mosley, Thomas A. Mosley,
Nancy Evans Mosley, James R.
Mosley, Dennis W. Mosley and Melanie Ostrum Mosley
dated as of August 22, 1997.
10(f) Stock Purchase Agreement (Ram Oil Well Service, Inc.)
by and among, Yale E. Key, Inc. and Robert D. Calhoon
dated as of September 1, 1997 (ncorporated by
reference to Exhibit 2.2 of the Company's Report on
Form 8-K dated September 1, 1997, File No. 1-8038).
10(g) Stock Purchase Agreement (Rowland Trucking
Co.) by and among, Yale
E. Key, Inc. and Robert D. Calhoon dated as of
September 1, 1997 (incorporated by reference to Exhibit 2.110(d) of the
Company's Quarterly Report on Form 8-K dated10-Q for the quarter ended
September 1,30, 1997, File No. 1-8038).
10(h) Asset Purchase Agreement among WellTech
Eastern, Inc., Waco Oil &
Gas Co., Inc. and I.L. Morris dated as of
September 1, 1997.
10(i)1-8038
10(c)
Asset Purchase Agreement among Key Four Corners, Inc., Key Energy
Group,Inc., Coleman Oil & Gas Co., Big A Well Service Co., Sunco
Trucking Co., Justis Supply Co., Inc. and George E. Coleman dated as
of September 2, 1997 (incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K dated October 1, 1997, File No.
1-8038).
10(j)10(d)
Asset Purchase Agreement among WellTech Eastern, Inc. and McCurdy
Well Service, Inc. effective as of October 3, 1997.
10(e)
Asset Purchase Agreement among WellTech Eastern, Inc. and GSI
Trucking Company, Inc. effective as of October 3, 1997.
10(f)
Asset Purchase Agreement among WellTech Eastern, Inc. and Kahlden
Production Services, Inc. effective as of October 3, 1997.
10(g)
Stock Purchase Agreement between WellTech Eastern, Inc. and
William
Gregory Wines datedDonald Jeter, effective as of September 16,November 11, 1997.
10(k)10(h)
Stock Purchase Agreement among,between Key Energy Drilling, Inc. and
S.K.
Rogers, Joe Dee Brooks, Lynn E. WatersRobert C. Jones and Donnie Roberts datedDana Lunette Jones, effective as of September 25,November 24,
1997.
10(l) Indenture dated as of September 25, 1997,10(i)
Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc. and AmericanWhite Rhino Drilling, Inc. and Jeff Critchfield,
effective as of December 2, 1997.
10(j)
Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc., S&R Cable, Inc., Jeff Critchfield, Royce D. Thomas,
Ronnie Shaw and Donald Tinker, effective as of December 2, 1997.
10(k)
Asset Purchase Agreement among WellTech Eastern, Inc., Wellcorps,
L.L.C. and Jeff Critchfield, Terra Energy, Ltd. And Brian Fries,
effective as of December 2, 1997.
10(l)
Stock TransferPurchase Agreement between Key Energy Group, Inc., Key
Energy Drilling, Inc. and Trust Company.Ronald M. Sitton and Frank R. Sitton,
effective as of December 12, 1997.
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10(m)
Asset Purchase Agreement between Brooks Well Servicing, Inc. and
Sam F. McKee, Individually and d/b/a Circle M Vacuum Services,
effective as of January 30, 1998.
10(n)
Stock Purchase Agreement between Key Energy Drilling, Inc. and
Jack B. Loveless, Jim Mayfield and J.W. Miller, effective as of
January 30, 1998.
10(o)
Asset Purchase Agreement between Key Four Corners, Inc. and Four
Corners Drilling, R.L. Andes and W.E. Lang, effective as of January
30, 1998.
10(p)
Asset Purchase Agreement among Key Rocky Mountain, Inc., Joseph R.DunbarUpdike
Brothers, Inc. Employee Stock Ownership Retirement Plan and JaniceTrust,
David W. Updike Trust, Dorothy A. Updike Trust, Dorothy R. Updike
Trust, Mary E. Updike, Ralph O. Updike and Daniel Updike effective
February 6, 1998.
10(q)
Asset Purchase Agreement among Brooks Well Servicing, Inc., Hot
Oil Plus, Inc., Thomas N. DunbarNovosad, Jr. and Patricia Novosad effective
January 29, 1998.
10(r)
Registration Rights Agreement among Key Energy Group, Inc.,
Lehman Brothers Inc., and McMahan Securities Co. L.P. dated as of
September 29,25, 1997.
10(n) Stock Purchase10(s)
Amended and Restated Credit Agreement among Key Rocky
Mountain, Inc., Bruce L.
Bummer, Jack Hartnett, Diane HartnettEnergy Group, Inc
and Bruce Bummer 7/14/82 Family Trustseveral other financial institutions dated November 6, 1997.
10(t)
First Amendment to the Amended and Restated Credit Agreement
June 6, 1997, as of September 30,amended and restated through November 6, 1997 dated
December 3, 1997.
11(a) Statement - Computation of per share earnings.
27(a) Statement - Financial Data Schedule
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(b) The following reports on Form 8-K were filed during the quarter ended
September 30,December 31, 1997:
The Company's Current Report on Form 8-K dated June 25,October 2, 1997,
File No. 1-8038, as
amended1-8038. The Report on Form 8-K concerned the Company's
private placement pursuant to Rule 144A of $200 million 5% convertible
subordinated notes.
The Company's Current Report on Form 8-K/A-1 dated October 9,
1997, File No. 1-8038. The Report on Form 8-K/A-1 concerned the
Company's private placement of an additional $16 million of 5%
convertible subordinated notes pursuant to an over-allotment option
exercised by the initial purchasers in the Company's reportprivate placement
of $200 million 5% convertible subordinated notes pursuant to Rule
144A.
The Company's Current Report on Form 8-K/A8-K dated June 25,October 14, 1997,
File No. 1-8038. The Report on Form 8-K concerned the appointment of
David J. Brezzano to the Company's Board of Directors replacing Van D.
Greenfield.
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The Company's Current Report on Form 8-K dated October 14, 1997,
File No. 1-8038. The Report on Form 8-K concerned the Company's
acquisition of Well-Co.substantially all of the assets of Big A Well Service
Co., Sunco Trucking Co. and Justice Supply Co.
The Company's Current Report on Form 8-K8-K/A-1 dated September 1,November 17,
1997, File No. 1-8038. The Report on Form 8-K concerned8-K/A-1 was filed to include
the Company's acquisitionfinancial statements of Ram Oil Well Service, Inc. and Rowland
Trucking Co., Inc., the stock purchases of which were reported on Form
8-K on September 1, 1997.
The Company's Current Report on Form 8-K8-K/A-1 dated September 25, 1997, File No. 1-8038,
as amended by the Company's report on Form 8-K/A dated September 25,December 15,
1997, File No. 1-8038. The Report on Form 8-K/A-1 was filed to include
the financial statements of Big A Well Service Co., Sunco Trucking Co.
and Justice Supply Co., the acquisition of whose assets was reported
on Form 8-K concerned the private placement of the
Company's 5% Notes.on October 14, 1997.
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SIGNATURE
SIGNATURES
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
Dated: NovemberFebruary 14, 19971998 President and Chief Executive Officer
By /s/ Stephen E. McGregor
Dated: NovemberFebruary 14, 19971998 Chief Financial Officer
By /s/ Danny R. Evatt
Dated: November 14, 1997 Chief Accounting Officer
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