UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, Tenth Floor, East Brunswick, NJ 08816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908)247-4822
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.10 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Shares held by
nonaffiliates of the Registrant as of August 1, 1996 was
approximately $86,562,327.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
Common Shares outstanding at August 1, 1996: 10,413,513
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy
Statement with respect to the Annual Meeting of Shareholders are
incorporated by reference in Part III of this report.
Key Energy Group, Inc. and Subsidiaries
INDEX
PART I.
Item 1. Business. 3
Item 2. Properties. 8
Item 3. Legal Proceedings. 11
Item 4. Submission of Matters to a Vote of Security
Holders. 11
PART II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters. 11
Item 6. Selected Financial Data. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation. 13
Item 8. Financial Statements and Supplementary Data. 20
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure. 46
PART III.
Item 10. Directors and Executive Officers of the Registrant. 46
Item 11. Executive Compensation. 46
Item 12. Security Ownership of Certain Beneficial
Owners and Management. 46
Item 13. Certain Relationships and Related Transactions. 46
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 47
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Key Energy Group, Inc. and Subsidiaries
PART I. ITEM 1. BUSINESS.
The Company
Key Energy Group, Inc. (the "Company" or "Key") operates 332
well service and workover rigs, which is the third largest fleet
of well service and workover rigs in the United States. The
Company operates in Texas, Oklahoma, Michigan, the Appalachian
Basin and Argentina and is a leader in each of its domestic
markets. The Company provides maintenance and workover rigs to
service producing oil and gas wells. Although the range and
extent of services provided varies from region to region, as
part of its well service business, the Company generally
provides a full range of maintenance and workover rig services.
These services include the completion of newly drilled wells,
the recompletion of existing wells (including horizontal
recompletions) and the plugging and abandonment of wells at the
end of their useful lives. Other services include hot oiling,
oil field liquid transportation, fishing tools and services,
storage and disposal services, vacuum truck services, frac tank
rental and salt water injection. The Company also is engaged in
the production of oil and natural gas and contract drilling in
the Permian Basin of West Texas.
The Company conducts operations through four wholly-owned
subsidiaries: Yale E. Key, Inc. ("Yale E. Key"); WellTech
Eastern, Inc. ("WellTech Eastern"); Odessa Exploration
Incorporated ("Odessa Exploration"); and Key Energy Drilling,
Inc. d/b/a Clint Hurt Drilling ("Clint Hurt"). In addition, Key
operates in Argentina through its 63% ownership in Servicios
WellTech, S.A. ("Servicios"). WellTech Eastern operates through
two divisions; WellTech Mid-Continent Division and WellTech
Eastern Division. Yale E. Key, WellTech Eastern and Servicios
provide oil and gas well services. Odessa Exploration is
engaged in the production of oil and gas and Clint Hurt provides
contract oil and gas well drilling services.
In March 1996, the Company completed the merger of WellTech,
Inc. ("WellTech Eastern"). WellTech Eastern was an established
oil well services company providing a broad range of workover
and production services for oil and gas wells. As a result of
the WellTech merger, the Company's fleet of workover rigs more
than doubled in number. In April 1996, Odessa Exploration
acquired approximately $6.9 million of oil and gas producing
properties from an unrelated third party.
Subsequent Event
In July 1996, the Company completed the offering of $52,000,000
7% convertible subordinated debentures due 2003 (the
"Offering"). The Offering was a private offering pursuant to
Rule 144A under the Securities Act. Net proceeds from the
Offering were used to substantially repay existing long-term
debt (approximately $35.2 million). The remaining proceeds,
together with proceeds of borrowings under existing credit
arrangements, are intended to fund the expansion of the
Company's services through acquisitions of businesses and assets
and for working capital and general corporate purposes. See
Note 5 to the Financial Statements for a more detailed
description of the Offering.
Oil Field Services
The Company provides a full range of workover rig services, oil
field liquid services and other production services necessary to
maintain and workover producing oil and gas wells through its
wholly-owned subsidiaries, Yale E. Key and WellTech Eastern.
These services include the completion of newly drilled wells,
the recompletion of existing wells (including horizontal
recompletions) and the plugging and abandonment of wells at the
end of their useful lives. Other services provided include oil
field liquid transportation, storage and
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disposal services, vacuum truck services, frac tank rental and
salt water injection. The Company has more than 750 customers
which are either major oil and gas companies or independent
producers seeking to optimize performance of oil and gas wells.
Although the mix of oil and gas wells serviced varies by
particular markets, approximately two-thirds of the Company's
overall business is attributable to oil wells. Of the Company's
332 well service and workover rigs, 135 operate in West Texas,
111 in Oklahoma and East Texas, 76 in Michigan and the
Appalachian Basin, and ten in Argentina.
Workover Rig Services. The Company operates a fleet of 332
well service and workover rigs providing maintenance, workover,
completion and plugging and abandonment services.
Maintenance Services. Maintenance services are required on
producing oil and gas wells to ensure efficient and continuous
operation. These services consist of routine mechanical repairs
necessary to maintain production from the well, such as
repairing parted sucker rods or defective downhole pumps in an
oil well, or replacing defective tubing in an oil or gas well.
The Company provides the workover rigs, equipment and crews for
these maintenance services. Many of these workover rigs also
have pumps and tanks that can be used for circulating fluids
into and out of the well. Maintenance jobs are often performed
on a series of wells in proximity to each other and typically
take less than 48 hours per well.
Maintenance services are generally required throughout the life
of a well. The need for these services does not depend on the
level of drilling activity and is generally independent of
short-term fluctuations in oil and gas prices. Accordingly,
maintenance services are generally the most stable type of well
service rig activity. The general level of maintenance,
however, is affected by changes in the total number of producing
oil and gas wells in the Company's geographic service areas.
Workover Services. In addition to periodic maintenance,
producing oil and gas wells occasionally require major repairs
or modifications, called "workovers." Workover services include
extensions of existing wells to drain new formations either
through deepening well bores or through drilling or horizontal
laterals. In less extensive workovers, the Company's rigs are
used to drill out plugs and packers in existing well bores to
access previously bypassed productive zones. The Company's
workover rigs are also used to convert producing wells to
injection wells during enhanced recovery operations. Workover
services include major subsurface repairs such as casing repair
or replacement, recovery of tubing and removal of foreign
objects in the well bore. These extensive workover operations
are normally performed by a workover rig with additional
specialized auxiliary equipment, which may include rotary
drilling equipment, mud pumps, mud tanks and blowout preventers
depending upon the particular type of workover operation. Most
of the Company's workover rigs are designed and equipped to
perform complex workover operations. A workover may last from a
few days to several weeks.
The demand for workover services is more sensitive to
expectations relating to and changes in oil and gas prices than
the demand for maintenance services, but not as sensitive as the
demand for completion services. When oil and gas prices are
low, there is little incentive to perform workovers on wells to
increase production and well operators tend to defer workover
services. As oil and gas prices increase, the level of workover
activity tends to increase as operators seek to increase
production by enhancing the efficiency of their wells.
Completion Services. Completion services prepare a newly
drilled well for production. The completion process may involve
selectively perforating the well casing to access producing
zones, stimulating and testing these zones and installing
downhole equipment. The Company provides a workover rig to
assist in this
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completion process. Newly drilled wells are frequently
completed by a well service rig so that an operator can minimize
the use of a higher cost drilling rig. The completion process
typically requires a few days to several weeks, depending on the
nature and type of the completion, and generally requires
additional auxiliary equipment which the Company provides for an
additional fee.
The demand for well completion services is directly related to
drilling activity levels, which are highly sensitive to
expectations relating to and changes in oil and gas prices.
During periods of weak drilling demand, drilling contractors
frequently price well completion work competitively compared to
a workover rig so that the drilling rig stays on the job. Thus,
excess drilling capacity will serve to reduce the amount of
completion work available to the well servicing industry.
Plugging and Abandonment Services. Workover rigs are also
used in the plugging and abandonment of oil and gas wells no
longer capable of producing in economic quantities. The demand
for oil and gas does not significantly affect the demand for
well plugging services.
Liquid Services. The Company provides vacuum truck services,
frac tank rentals and salt water injection services which
together provide an integrated mix of liquid services to well
site customers.
Other Production Services. The Company provides production
services, which include hot oiler unit services, pipeline
installation and testing services in Oklahoma, Michigan and the
Appalachian Basin, slick-line wire-line services in Michigan and
fishing and rental tool services.
Production
The Company is engaged in the production of oil and natural gas
in the Permian Basin area of West Texas through its wholly-owned
subsidiary, Odessa Exploration. Odessa Exploration acquires and
manages interests in producing oil and gas properties for its
own account and for drilling partnerships it sponsors. Odessa
Exploration acquires producing oil and gas wells and related
properties from major and independent producers and,
subsequently, either reworks the acquired wells to increase
production or forms drilling ventures for additional development
wells. Odessa Exploration operates oil and gas wells on behalf
of over 150 working interest owners as well as for its own
account.
Contract Drilling Services
The Company, through its wholly-owned subsidiary, Clint Hurt,
provides contract drilling services for major and independent
oil companies, primarily in West Texas. Clint Hurt owns and
operates six drilling rigs for this purpose. The Company
entered the land drilling business in March 1995 with the
acquisition of four drilling rigs from an independent third
party and, as the result of the WellTech merger, acquired two
additional land drilling rigs. The rigs are capable of drilling
up to 10,000 feet.
Foreign Operations
The Company provides oil field services in Argentina through its
ownership of 63% of the stock of Servicios. Currently,
Servicios owns and operates ten well servicing rigs in
Argentina. In addition, Servicios operates trucks to transport
its oil field equipment and, subject to availability, rents the
trucks to other operators to move their oil field equipment.
Servicios' principal customer is Yacimientos Petroliferos
Fiscales, the Argentine national oil company.
- 5 -
COMPETITION AND OTHER EXTERNAL FACTORS
The workover rig and production service industry is highly
fragmented and includes a large number of small companies that
are capable of competing effectively on a local basis and two
larger companies which possess greater financial and other
resources than those of the Company. In addition to those two
larger companies, both of which provide workover rig services
and liquids handling services in all or part of the Company's
domestic well servicing markets, the Company has numerous
regional competitors for each of the services which it provides.
The Company believes that it is competitive in terms of
pricing, performance, equipment, safety, availability of
equipment to meet customer needs and availability of
experienced, skilled personnel in those regions in which it
operates.
Excess capacity in the well servicing industry has resulted in
severe price competition throughout much of the past decade.
Management expects competitive pricing pressures to continue in
the foreseeable future. In the well servicing market, an
important competitive factor in establishing and maintaining
long-term customer relationships is having an experienced,
skilled and well-trained work force. In recent years, many of
the Company's larger customers have placed emphasis not only on
pricing, but also on safety records and quality management
systems. The Company believes that such factors will be of
increased importance in the future. The Company has directed
substantial resources toward employee safety and training
programs, as well as its employee review process. While the
Company's efforts in these areas are not unique, many
competitors, particularly small contractors, have not undertaken
similar training programs for their employees. Management
believes that the Company's safety record and reputation for
quality equipment and service are among the best in the industry.
The Company acquires oil and gas properties from independent and
major oil companies and competes with other independent and
integrated oil companies for the acquisition of these
properties. The Company also competes with other local oil and
gas drilling contractors, as well as national oil and gas
drilling companies. As with oil field services, the need for
drilling oil and gas wells fluctuates, in part, based on the
price of, and demand for, oil and natural gas.
The Company serves over 750 customers in West Texas, East Texas,
Oklahoma, Michigan, the Appalachian Basin and Argentina with its
two largest customers providing 20% and 11%, of total Company
revenue during fiscal 1996. The need for oilfield services
fluctuates, in part, in relation to the demand for oil and
natural gas. As demand for those commodities increases, service
and maintenance requirements increase as oil and natural gas
producers attempt to maximize the producing efficiency of their
wells in a higher priced environment.
EMPLOYEES
As of June 30, 1996, the Company employed 2,030 persons (1,925
in well service operations, 12 in oil and gas production, 85 in
contract drilling operations and 8 in corporate). None of the
Company's employees are represented by a labor union or
collective bargaining agent. The Company has experienced no
work stoppages associated with labor disputes or grievances and
considers its relations with its employees to be satisfactory.
- 6 -
REGULATIONS
The oilfield service operations and the oil and gas production
and drilling activities of the Company are subject to various
local, state and federal laws and regulations intended to
protect the environment. The Company's operations routinely
involve the handling of waste materials, some of which are
classified as hazardous substances. Consequently, the
regulations applicable to the Company's operations include those
with respect to containment, disposal and controlling the
discharge of any hazardous oil field waste and other
non-hazardous waste material into the environment, requiring
removal and cleanup under certain circumstances, or otherwise
relating to the protection of the environment. Laws and
regulations protecting the environment have become more
stringent in recent years, and may in certain circumstances
impose "strict liability," rendering a party liable for
environmental damage without regard to negligence or fault on
the part of such party. Such laws and regulations may expose
the Company to liability for the conduct of, or conditions
caused by, others, or for acts of the Company which were in
compliance with all applicable laws at the times such acts were
performed. Management of the Company believes that it is in
substantial compliance with all material federal, state and
local regulations as they relate to the environment. Although
the Company has incurred certain costs in complying with
environmental laws and regulations, such amounts have not been
material to the Company's financial condition during the three
past fiscal years.
Management believes that the Company is in substantial
compliance with all known material local, state and federal
safety guidelines and regulations. In order to comply with such
safety guidelines and regulations and increase employee
awareness of on-the-job safety, the Company employs eight safety
officers. The Company also has a safety training and education
center which is used by it for continued safety training and
awareness.
EXECUTIVE OFFICERS
Listed below are the names, ages and positions of the Company's
executive officers. Each officer of the Company holds office
until the first meeting of the Board of Directors following the
annual meeting of stockholders and until his successor shall
have been duly elected and qualified, or until he shall have
resigned or been removed as provided by the By-Laws. No family
relationship exists between any of the listed executive officers
or between any such executive officer and any Director of the
Company.
Name Age Positions
Francis D. John 42 Chairman of the Company since August
1996, President and Chief Executive
Officer since September 1989 and
President and Chief Financial
Officer of the Company since
June 1988; Director of the Company
since 1988.
Kenneth V. Huseman 43 Executive Vice President and Chief
Operating Officer of well service
operations since August 1996, Vice
President of WellTech Eastern and
Chief Executive Officer of its
Mid-Continent Division since March
1996. Mid-Continent Regional
President of WellTech from August
1994 to March 1996. Vice President
and Mid-Continent Regional Manager
of WellTech from April 1993 to
August 1994.
Danny R. Evatt 37 Vice President, Chief Accounting
Officer and Treasurer of the Company
since July 1990; Treasurer,
Secretary and Chief Financial
Officer of Yale E. Key from 1984 to
1996.
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C. Ron Laidley 50 Vice-President of the Company since
June 1996; President and Chief
Executive Officer of Yale E. Key
since April 1995. Vice President of
Yale E. Key from 1982 until April
1995.
Kenneth C. Hill 52 Vice President of the Company since
March 1996; Vice President of
WellTech Eastern and Chief
Executive Officer of its Welltech
Eastern Division since March 1996.
Northeast Regional President of
WellTech from August 1994 to March
1996, and Vice President and
Northeast Regional Manager of
WellTech from April 1990 to
August 1994.
D. Kirk Edwards 36 Executive Vice President of the
Company since March 1996, Vice
President of the Company from July
1993 until March 1996, President and
Chief Executive Officer of Odessa
Exploration since July 1993. Owner
and President of Odessa Exploration
Inc. from 1987 until 1993.
ITEM 2. PROPERTIES.
The Company's corporate offices are located in East Brunswick,
New Jersey where the Company leases office space from an
independent third party.
Oil Field Services
The following table sets forth the type, number and location of
the major equipment owned and operated by the Company's oil
field service subsidiaries as of June 30, 1996:
Slick-line
Well Service/ Hot Oil Vacuum Wire-line
Company Workover Rigs Trucks Trucks Frac Tanks Units
Domestic:
Yale E. Key
(West Texas) 135 21 6 65 -
Mid-Continent Division
of WellTech Eastern
(Texas and Oklahoma) 111 2 9 - -
Eastern Division of
WellTech Eastern
(Michigan and
Appalachian Basin) 76 11 12 16 4
International:
Servicios (Argentina) 10 - - - -
___ ___ ___ ___ ___
TOTAL 332 34 27 81 4
=== === === === ===
Yale E. Key owns ten and leases six office and yard locations.
The Mid-Continent Division of WellTech Eastern owns seven and
leases five office and yard locations. The Eastern Division of
Welltech Eastern owns two and leases six office and yard
locations. In Argentina, Servicios owns one and leases one
office and yard locations.
All operating facilities are metal or brick one story office
and/or shop buildings. All buildings are occupied and
considered in satisfactory condition.
- 8 -
All of the Company's owned oil field service operation's
properties are encumbered by security interests in favor of The
CIT Group/Credit Finance, Inc. the Company's senior lender
("CIT").
Production
Odessa Exploration's properties consist primarily of oil and gas
leases. Odessa Exploration's major proved producing properties
are located primarily in the Permian Basin area of West Texas.
Odessa Exploration leases office space in Odessa, Texas.
Producing Wells and Acreage
All wells owned and/or operated by Odessa Exploration are
located in the continental onshore United States, primarily in
West Texas. The following table sets forth the total gross and
net producing oil and gas wells and its total gross and net
developed and undeveloped acreage as of June 30, 1996. "Gross"
as it applies to wells or acreage refers to the number of wells
or acres in which a working interest is owned by Odessa
Exploration. "Net" as it applies to wells or acreage refers to
the sum of the fractional working interests owned by Odessa
Exploration in gross wells or gross acres.
Producing Wells Developed
Oil Gas Acreage Undeveloped
State Gross Net Gross Net Gross Net Gross Net
-------------- ------------- ---------------- --------------
Texas 287 206 30 10 55,240 37,277 - -
As operator, Odessa Exploration receives fees from other working
interest owners as reimbursement for the general and
administrative expenses attendant to the operation of the wells.
Odessa Exploration's oil and gas properties are subject to
royalty, overriding royalty and other outstanding interests that
are customary in the industry. The properties are also subject
to burdens such as liens incident to operating agreements,
current taxes, development obligations under oil and gas leases
and other encumbrances, easements and restrictions. Odessa
Exploration believes that the existence of any such burdens does
not materially detract from the value of its leasehold
interests. In addition, certain Odessa Exploration properties
are subject to liens securing debt (more fully described in Note
5 of the notes to consolidated financial statements).
Exploration and Development Activities
The following table shows gross and net wells drilled in which
Odessa Exploration had a working interest during the years ended
June 30, 1996, 1995 and 1994:
1996 1995 1994
Gross Net Gross Net Gross Net
------------ ------------ ------------
Exploratory:
Productive - - - - - -
Dry - - - - - -
Development:
Productive 10.0 10.0 8.0 6.2 1.0 0.1
Dry 3.0 1.0 - - - -
Total
Productive 10.0 10.0 8.0 6.2 1.0 0.1
Dry 3.0 1.0 - - - -
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During fiscal 1997, Odessa Exploration expects to participate in
or drill 15 wells on its operated properties.
Oil and Gas Reserve Information
Estimates of Odessa Exploration's proved oil and gas reserves as
of June 30, 1996, 1995 and 1994 were prepared by the Company and
reviewed by independent petroleum reservoir engineering firms.
All estimates were made in accordance with guidelines
established by the Securities and Exchange Commission. Proved
oil and gas reserves are the estimated quantities of crude oil
and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic
conditions, i.e. prices and costs as of the date the estimate is
made. Prices utilized reflect consideration of changes in
existing prices provided by contractual arrangements if any, but
not of escalations based upon future conditions.
Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing equipment and
operating methods.
Proved undeveloped oil and gas reserves are proved reserves that
are expected to be recovered from new wells on undrilled acreage
or from existing wells where a relatively major expenditure is
required for recompletion or secondary or tertiary recovery.
Reserves assigned to undrilled acreage are limited to those
drilling units that offset productive units reasonably certain
of production when drilled.
The following table summarizes oil and gas reserve data with
respect to Odessa Exploration's proved oil and gas reserves:
June 30,
1996 1995 1994
---------- ---------- -----------
Proved developed reserves
Oil (bbls) 2,727,967 750,604 114,908
Gas (mcf) 24,517,362 11,203,232 6,785,661
Proved undeveloped reserves
Oil (bbls) 2,457,361 931,613 -
Gas (mcf) 11,224,232 2,794,828 -
Additional information concerning Odessa Exploration's estimated
proved oil and gas reserves is included in Item 8, "Financial
Statements and Supplementary Data".
No major discovery or other favorable or adverse event has
occurred since July 1, 1996 which is believed to have caused a
significant change in the estimated proved oil and gas reserves
of Odessa Exploration.
Odessa Exploration's estimate of reserves has not been filed
with or included in reports to any federal agency other than the
Securities and Exchange Commission.
Production
The following table summarizes the net oil and gas production,
average sales prices, and average production (lifting) costs per
equivalent barrel of oil for the years ended June 30, 1996, 1995
and 1994.
1996 1995 1994
-------------------------------------------------------------------
Oil:
Production (bbls) 97,130 40,330 14,383
Average sales price
per bbls $17.74 $15.02 $13.54
Natural Gas:
Production (mcf) 1,026,577 770,197 552,791
Average sales price
per mcf $ 1.79 $ 1.54 $ 2.33
Production Costs:
Production (lifting) costs
per equivalent
barrel of oil (boe) $ 5.03 $ 4.48 $ 5.38
- 10 -
ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS.
See Item 8, Note 4 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is traded on the American Stock
Exchange, under the symbol "KEG". As of June 30, 1996, there
were 544 holders of record of 10,413,513 shares of common stock.
The following table sets forth for the periods indicated the
high and low closing prices of the Company's common stock on the
American Stock Exchange, as derived from published sources.
Low High
Fiscal Year Ending 1996:
First Quarter $ 4 3/4 $ 5 1/2
Second Quarter 4 15/16 6 7/16
Third Quarter 5 7/8 7 9/16
Fourth Quarter 7 1/16 8 1/2
Fiscal Year Ending 1995:
First Quarter 5 5 1/2
Second Quarter 4 3/4 5 1/2
Third Quarter 4 1/4 4 5/8
Fourth Quarter 4 3/4 5 1/2
Fiscal Year Ending 1994:
First Quarter 5 5 1/2
Second Quarter 4 3/4 5 1/2
Third Quarter 4 7/8 5 5/8
Fourth Quarter 4 7/8 5 1/2
There were no dividends paid on the Company's common stock
during the fiscal years ended June 30, 1996, 1995 or 1994. The
Company does not intend, for the foreseeable future, to pay
dividends on its common stock.
The agreements with CIT and Norwest (see Note 5 of notes to
consolidated financial statements), include certain restrictive
covenants, the most restrictive of which, prohibits the Company
and Odessa Exploration from declaring or paying dividends on the
Company's and Odessa Exploration's Common Stock in any
circumstances.
- 11 -
Item 6.
Selected Financial Data.
Five Seven
Fiscal Year Months (1) Months
Ended Ended Ended Fiscal Year
June 30, November 30, June 30, Ended June 30,
(in thousands) 1992 1992 1993 1994 1995 1996(3)
- -------------------------------------------------------------------------------
OPERATING DATA:
Revenues $21,535 $10,433 $14,256 $34,621 $44,689 $66,478
Operating costs:
Direct costs 16,299 7,947 10,863 26,585 32,793 47,118
Depreciation,
depletion
and amortization 1,136 505 406 1,371 2,738 4,701
General and
administrative 2,697 1,117 1,587 3,540 4,352 6,608
Interest 1,320 464 276 830 1,478 2,477
Income before
income taxes,
minority interest,
reorganization
items and
extraordinary
items 83 400 1,124 2,295 3,328 5,575
Net income (loss) (596) 4,986 711 1,345 2,178 3,586
Income (loss) per
common share:
Primary:
Income before
income taxes,
minority interest,
reorganization items
and extraordinary
items $0.02 $0.02 $0.21 $0.44 $0.50 $0.70
Net income (loss) (0.04) 0.28 0.14 0.26 0.33 0.45
Fully-diluted:
Income before
income taxes,
minority interest,
reorganization items
and extraordinary
items $0.01 $0.00 $0.21 $0.43 $0.50 $0.69
Net income (loss) (0.02) 0.03 0.14 0.25 0.33 0.44
Average common shares
outstanding:
Primary 14,717 17,942 5,124 5,274 6,647 7,941
Assuming full
dilution 38,339 176,508 5,138 5,288 6,647 8,114
Common shares
outstanding
at period end 17,942 17,942 5,124 5,274 6,914 10,414
Market price per
common share at
period end $0.06 n/a $3.67 $4.67 $5.06 $8.19
Cash dividends
paid on
common shares $ - $ - $ - $ - $ - $ -
BALANCE SHEET DATA:
Cash and restricted
cash $208 * $623 $1,173 $1,275 $4,211
Current assets 3,194 * 4,922 9,167 11,290 27,481
Property and
equipment 20,921 * 10,093 18,935 36,336 95,127
Property and
equipment, net 7,417 * 9,688 17,159 31,942 87,207
Total assets 12,239 * 15,906 28,095 45,243 121,722
Current
liabilities 5,296 * 4,113 8,38 9,228 24,339
Long-term debt,
incl. current
portion 13,287 * 5,374 11,501 15,949 46,825
Stockholders'
equity
(deficit) (4,938) * 7,280 9,263 20,111 41,624
OTHER DATA:
EBITDA (2) 2,539 * 1,806 4,496 7,544 12,752
Net cash (used)
provided by:
Operating
activities 1,109 * (123) 1,842 3,258 7,121
Investing
activities (1,689) * (1,284) (5,608) (7,154) (13,551)
Financing
actvities 501 * (73) 4,316 3,998 9,366
Working capital (2,102) * 809 784 2,062 3,142
Book value per
common share ($0.26) * $1.42 $1.76 $2.91 $4.00
Ratio of earnings to
fixed charges (4) 1.05 * 2.91 2.65 2.54 2.77
* - Not applicable due to the Company's 1992 Reorganization plan.
(1) Financial Data for the five months ended November 30, 1992
and prior periods, reflect the previous capital structure of
Key Energy Group, Inc. (previously "National Environmental
Group, Inc.") prior to the 1992 Reorganization Plan and are not
always comparable to subsequent periods.
(2) Net income before interest, income taxes, depreciation,
depletion and amortization. EBITDA should not be considered as
an alternative to operating or net net income, (as determined in
accordance with GAAP) or as a measure of liquidity.
(3) Financial data for the year ended June 30, 1996 includes the allocated
purchase price of WellTech Eastern, Inc. and the results of their operations,
beginning March 26, 1996.
(4) Fixed Charges are the sum of (i) interest costs, (ii) interest component
of rent expenses, and (iii) amortization of deferred financing costs (if any).
- 12 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Recent Developments
In March 1996, the Company completed the merger of WellTech,
Inc. ("WellTech"). WellTech was an established oil well
services company providing a broad range of workover and
production services for oil and gas wells. As a result of the
WellTech merger, the Company's fleet of workover rigs more than
doubled in number. In April 1996, Odessa Exploration (a
wholly-owned subsidiary of the company) acquired approximately
$6.9 million of oil and gas producing properties from an
unrelated third party.
Subsequent Event
In July 1996, the Company completed the offering of $52,000,000
7% convertible subordinated debentures due 2003 (the
"Offering"). The Offering was a private offering pursuant to
Rule 144A under the Securities Act. Net proceeds from the
Offering were used substantially to repay existing long-term
debt (approximately $35.2 million). The remaining proceeds,
together with proceeds of borrowings under existing credit
arrangements, are intended to fund the expansion of the
Company's services through acquisitions of businesses and assets
and for working capital and general corporate purposes. See
Note 5 to the Financial Statements for a more detailed
description, (including an interest rate increase), of the
Offering.
Overview
Fluctuations in well servicing activity historically have had a
strong correlation with fluctuations in oil and gas prices. The
Company seeks to minimize the effects of such fluctuations on
its operations and financial condition through diversification
of services, entry into new markets and customer alliances.
Since 1993, the Company has made a number of acquisitions, which
have significantly expanded the Company's operations:
* In April 1996, Odessa Exploration consummated the purchase of
$6.9 million of oil and gas properties, and as a result,
acquired additional oil and gas producing properties with daily
average net production of 240 barrels of oil and 1.5 million
cubic feet of natural gas.
* In March 1996, WellTech, a well services provider, merged
into the Company, doubling the Company's fleet of well
service and workover rigs and adding two oil and gas drilling
rigs to the Company's contract drilling operations. WellTech
now operates as WellTech Eastern and has two operating
divisions, WellTech Mid-Con and WellTech Eastern.
* In March 1995, the Company acquired four oil and gas drilling
rigs from Clint Hurt.
* In August 1994, the Company acquired 58 well service and
workover rigs and other well service equipment in West Texas
from WellTech.
* In July 1993, the Company acquired Odessa Exploration, an oil
and gas production company.
In addition to the above acquisitions, the Company has acquired
several smaller oilwell service related entities and expanded
its ancillary equipment services.
- 13 -
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995
The following discussion provides information to assist in the
understanding of Key Energy Group, Inc.'s ("Key" or "the
Company") financial condition and results of operations. It
should be read in conjunction with the financial statements and
related notes appearing elsewhere in this report.
Operating results for the fiscal year ended June 30, 1996
include the Company's oilfield well service operations conducted
by its wholly-owned subsidiaries, Yale E. Key, Inc. ("Yale E.
Key"), its oil and natural gas exploration and production
operations conducted by its wholly-owned subsidiary, Odessa
Exploration, Inc. ("Odessa Exploration") and Key Energy
Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling")
which is engaged in oil and natural gas well contract drilling
and was acquired in March 1995. Also included are the operating
results of WellTech Eastern for the period of March 26, 1996
(the date of the merger, See Note 2 ) to June 30, 1996.
Historically, fluctuations in oilfield well service operations
and oil and gas well contract drilling activity have been
closely linked to fluctuations in crude oil and natural gas
prices. However, the Company, through acquisitions, customer
alliances and agreements, and diversification of services, seeks
to minimize the effects of such fluctuations on the Company's
results of operations and financial condition.
Operating Income
The Company
Revenues of the Company for the year ended June 30, 1996
increased $21,789,000 or 49% to $66,478,000 from $44,689,000 for
the year ended June 30, 1995, while net income of $3,585,000
increased $1,407,000 or 65% from the 1995 fiscal year total of
$2,178,000. The increase in revenues was primarily due to the
addition of Clint Hurt Drilling on April 1, 1995, whose
operations were only included for one quarter in fiscal year
1995 results, increased oil and gas revenues from Odessa
Exploration, increased oilwell service equipment utilization and
the acquisition of WellTech operations from the date of
acquisition of March 26, 1996 (see Note 2 ). The increase in
fiscal year 1996 net income over fiscal year 1995 net income is
partially attributable to the inclusion of Clint Hurt Drilling
and the acquisition of WellTech, but is also a result of an
increase in oilwell service equipment utilization and a decrease
in total consolidated Company costs and expenses as a percent of
total revenues.
Oilfield Services
Oilfield services are performed by Yale E. Key and WellTech
Eastern. Yale E. Key conducts oilfield services primarily in
West Texas, while WellTech Eastern conducts oilfield services in
the Mid-Continent region of the United States (primarily in
Oklahoma) through its operating division, WellTech Mid-Con, and
in the Northeastern United States (primarily in Michigan,
Pennsylvania and West Virginia) through its operating division;
WellTech Eastern. In addition, the Company conducts oilfield
services in Argentina through its 63% ownership in Servicios
WellTech, S.A. ("Servicios"), an Argentinean corporation.
Oilfield service revenues increased $15,828,000 or 39% from
$40,105,000 for the 1995 fiscal year to $55,933,000 for the 1996
fiscal year. The increase in revenues is primarily attributable
to higher equipment utilization as the result of an increase in
demand for oilfield services and the acquisition of WellTech
Eastern whose operating results are included for the period of
March 26, 1996 (the date of the merger, see Note 2 ) to June 30,
1996. In addition, Yale E. Key diversified oilfield services
into higher margin business segments such as oilfield frac
tanks, oilfield fishing tools and trucking operations.
- 14 -
Oil and Natural Gas Exploration and Production
Oil and natural gas exploration and production operations are
performed by Odessa Exploration. Revenues from oil and gas
activities increased $1,841,000 or 79% from $2,334,000 during
the year ended June 30, 1995 to $4,175,000 for the current year.
The increase in revenues was primarily the result of increased
production of oil and natural gas as several oil and natural gas
wells which were drilled began production during 1996, higher
oil and natural gas prices for the current year, and the April
1996 purchase of $6.9 million of oil and gas properties from an
unrelated third party, which almost doubled the size of Odessa
Exploration.
Of the total $4,175,000 of revenues for fiscal year 1996,
approximately $3,554,000 was from the sale of oil and gas -
97,130 barrels of oil at an average price of $17.74 per barrel
and 1,026,577 MCF of natural gas at an average price of $1.79
per MCF. The remaining $621,000 of revenues represented
primarily administrative fee income and other miscellaneous
income.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by
Clint Hurt Drilling which was acquired in March 1995.
Comparable numbers for the full prior fiscal year are,
therefore, not available. In addition, two drilling rigs were
acquired in the March 1996 merger with WellTech. Revenues for
fiscal 1996 were $6,188,000.
Operating Expenses
Oilfield Services
Oilfield service expenses increased $10,145,000 or 33% from
$30,592,000 for the fiscal 1995 to $40,737,000 for fiscal year
1996. The increase was due primarily to the acquisition of
WellTech on March 26, 1996 and the increased demand for oilfield
services. In addition, the Company has continued to expand its
services, offering ancillary services and equipment such as
oilwell fishing tools, blow-out preventers and oilwell frac
tanks.
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $593,000 or
78% from $757,000 for fiscal year 1995 to $1,350,000 for fiscal
year 1996. 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 began production during
1996 and the April 1996 purchase of $6.9 million in oil and gas
properties which almost doubled the size of Odessa Exploration.
Oil and Natural Gas Well Drilling
Clint Hurt Drilling was acquired in March 1995. Comparable
numbers for the full prior fiscal year are, therefore, not
available. Expenses for fiscal year 1996 were $5,031,000.
Interest Expense
Interest expense increased $999,000 or 68% to $2,477,000 for the
fiscal year 1996 from $1,478,000 for fiscal 1995. The increase
was primarily the result of acquisitions and the addition of
certain oil and gas properties.
- 15 -
General and Administrative Expenses
General and administrative expenses increased $2,256,000, or
52%, to $6,608,000 for the fiscal year 1996 from $4,352,000 for
the fiscal year 1995. The increase was primarily attributable
to the Company's recent acquisitions and expanded services.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased
$1,963,000, or 72%, to $4,701,000 for the fiscal year 1996 from
$2,738,000 for the fiscal year 1995. The increase is primarily
due to oilfield service depreciation expense, which is the
result of increased oilfield service capital expenditures for
the current period versus the prior period and the acquisition
of WellTech and Clint Hurt. In addition, depletion expense
increased for the period due to the increase in the production
of oil and natural gas.
Income Taxes
Income tax expense of $1,888,000 for fiscal year 1996 increased
from $1,150,000 in income tax expense for fiscal year 1995.
The increase in income taxes is primarily due to the increases
in operating income. However, the Company does not expect to be
required to remit a significant amount of the $1,888,000 in
total federal income taxes for fiscal year 1996, because of the
availability of net operating loss carryforwards, accelerated
depreciation and drilling tax credits.
Cash Flow
Net cash provided by operating activities increased $3,863,000
from $3,258,000 during the fiscal year 1995 to $7,121,000 for
fiscal year 1996. The increase is attributable primarily to
increases in net income.
Net cash used in investing activities increased from $7,154,000
for fiscal year 1995 to $13,551,000 for fiscal 1996. The
increase is primarily the result of increased capital
expenditures for oil and gas properties and costs associated
with the acquisition of Welltech. This increase is partially
offset by a decrease in oilfield service capital expenditures.
Net cash provided by financing activities was $9,366,000 for
the fiscal year 1996 as compared to $3,998,000 in net cash
provided by financing activities for fiscal year 1995. The
increase is primarily the result of an increase in proceeds
from long-term debt and borrowings under the line-of-credit during
fiscal 1996 primarily as the result of the purchase of oil
and gas properties by Odessa Exploration and the acquisition of WellTech.
FISCAL YEAR ENDED JUNE 30, 1995 VERSUS FISCAL YEAR ENDED JUNE 30, 1994
Operating Income
Fiscal 1995 revenues of $44,689,000 increased $10,068,000 or
29% over fiscal 1994 revenues of $34,621,000. Fiscal 1995
revenues increased due to the acquisition of oil and gas
producing properties by Odessa Exploration, the operation of the
assets of WellTech West Texas (which included twelve months of
fiscal 1995 and seven months of fiscal 1994), and the additional
revenues from Clint Hurt Drilling (which was acquired in March
1995). In addition, the Company has continued to expand its
services offering oilwell fishing tools, blow-out preventers and
oilwell frac tanks.
- 16 -
Income before income taxes was $3,328,000 for fiscal 1995, which
was an increase from $2,295,000 in fiscal 1994. The increase in
income before income taxes was due to the increase in gross
revenues for the current fiscal year, the acquisition by Odessa
Exploration of producing oil and gas properties, the operations
of WellTech West Texas and the acquisition of Clint Hurt
Drilling.
Operating Expenses
Fiscal 1995 costs and expenses of $41,361,000 increased
$9,035,000 or 28% over fiscal 1994 costs and expenses of
$32,326,000. Fiscal 1995 costs and expenses increased
primarily due to the operations of WellTech West Texas and the
acquisition of Clint Hurt Drilling, as well as increased lease
operating costs due to acquisitions of oil and gas producing
properties by Odessa Exploration.
Interest Expense
Interest expense increased from $830,000 during fiscal 1994 to
$1,478,000 during fiscal 1995,
primarily as a result of borrowings for the acquisition and
drilling of oil and gas producing properties by Odessa
Exploration and the acquisition of Clint Hurt Drilling.
General and Administrative Expenses
General and administrative expenses include those of the
Company, Yale E. Key, Odessa Exploration and Clint Hurt
Drilling. These expenses increased $812,000 to $4,352,000
during fiscal 1995 from $3,540,000 during fiscal 1994, primarily
due to increased expenses of Odessa Exploration and the
acquisition of Clint Hurt Drilling and WellTech West Texas.
However, as a percent of gross revenues, general and
administrative expenses decreased from 10.2% of gross revenues
during fiscal 1994 to 9.7% of gross revenues during fiscal 1995.
Depreciation and Depletion Expense
Depreciation and depletion expense increased to $2,738,000 in
fiscal 1995 from $1,371,000 in fiscal 1994 due mainly to the
additional depreciation expense associated with the acquisition
of the WellTech West Texas oilfield service equipment and
subsequent capital expenditures on such equipment.
Income Taxes
Income tax expense of $1,150,000 for fiscal 1995 increased from
$950,000 in income tax expense for fiscal 1994. The increase
in income taxes is primarily due to the increase in operating
income. However, the Company does not expect to be required to
remit a significant amount of the $1,150,000 in total federal
income taxes in cash during fiscal 1996.
Cash Flow
Net cash provided by operating activities increased $1,416,000
from $1,842,000 during the 1994 fiscal year to $3,258,000 for
the 1995 fiscal period. The increases are attributable primarily
to increases in net income.
Net cash used in investing activities increased from $5,608,000
for fiscal 1994 to $7,154,000 for fiscal 1995. The increase is
primarily the result of increased capital expenditures for oil
and gas properties and costs associated with the acquisition of
Clint Hurt Drilling. This increase is partially offset by a
decrease in oilfield service capital expenditures. The capital
expenditures for the oilfield service operations during fiscal
1994 were primarily the result of the improvements necessary for
the WellTech West Texas equipment.
- 17 -
Net cash provided by financing activities was $3,998,000 for the
1995 fiscal year as compared to $4,316,000 in net cash provided
by financing activities for fiscal 1994. The decrease is
primarily the result of increased principal payments during
fiscal 1995. This increase in principal payments is somewhat
off-set by an increase in proceeds from long-term debt during
fiscal 1995 as the result of the financing of the improvement
costs to the equipment of the West Texas operations of WellTech,
the purchase of oil and gas properties by Odessa Exploration
and the acquisition of Clint Hurt Drilling.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $3,240,000 in cash as compared
to $865,000 in cash at June 30, 1995. At June 30, 1995, the
Company had $865,000 in cash (the Company also had $267,000 in
restricted marketable securities) as compared to $717,000 in
cash at June 30, 1994.
The Company has projected $6.2 million for oilfield service
capital expenditures for fiscal 1997 as compared to $5.2 million
for fiscal 1996. Capital expenditures are expected to be
primarily capitalized improvement costs to existing equipment
and machinery. The Company expects to finance these capital
expenditures utilizing the operating cash flows of the Company.
Capital expenditures were $2,839,000 in fiscal 1995.
Odessa Exploration is forecasting outlays of approximately $6.0
million in development costs for fiscal 1997, as compared to
$9.8 million during fiscal 1996. Financing is expected to come
from borrowings.
Clint Hurt Drilling has forecast approximately $250,000 for oil
and gas drilling capital expenditures for fiscal 1997 primarily
for improvements to existing equipment and machinery compared to
$598,000 for fiscal 1996. Such outlays are treated as capital
costs. Financing is expected to come from existing cash flow.
Debt
In July 1996, the Company completed the offering of $52,000,000
7% convertible subordinated debentures due 2003 (the
"Debentures" and the "Offering"). In August 1996, the interest
rate on the Debentures was increased to 7 1/2%. The Offering
was a private offering pursuant to Rule 144A under the
Securities Act. Net proceeds from the Offering were used to
substantially repay existing long-term debt (approximately $35.2
million). The remaining proceeds are intended to fund the
expansion of the Company's services through acquisitions of
businesses and assets and for working capital and general
corporate purposes.
Long-term debt which was repaid with proceeds from the Offering
in July 1996 included the term note with CIT Group/Credit
Finance, Inc. ("CIT") of approximately $21.1 million and all
bank debt associated with Odessa Exploration, previously with
Norwest Bank Texas, N.A. ("Norwest"), of approximately $14.1
million.
The Debentures mature on July 1, 2003 and are convertible at any
time after November 1, 1996 and before maturity, unless
previously redeemed, into shares of the Company's common stock
at a conversion price of $9 3/4 per share, subject to adjustment
in certain events. In addition, holders of the Debentures who
convert prior to July 1, 1999 will receive, in addition to the
Company's common stock, a payment generally equal to 50% of the
interest otherwise payable on the converted Debentures from the
date of conversion through July 1, 1999, payable in cash or
common stock, at the Company's option. Interest on the
Debentures is payable semi-annually on January 1 and July 1 of
each year, commencing January 1, 1997. In August 1996, the
interest rate was increased from 7% to 7 1/2% due to certain
modifications in the Debenture indenture involving a certain
subsidiary's inability to guarantee the obligations under the
indenture, relating to the Debentures (the "Prospectus"). The 7
1/2% effective interest rate is expected to remain for the
foreseeable future.
- 18 -
The Debentures will not be redeemable before July 15, 1999.
Thereafter, the Debentures will be redeemable at the option of
the Company in whole or part, at the declining redemption prices
set forth in the original prospectus, together with accrued and
unpaid interest thereon. The Debentures also may be redeemed at
the option of the holder if there is a change in control (as
defined in the original prospectus) at 100% of their principal
amount, together with accrued interest thereon.
In January 1996, prior to the merger with Welltech described in
Note 2, and prior to the consummation of the Offering described
above, the Company, Yale E. Key, Clint Hurt Drilling and
WellTech entered into separate credit facilities with CIT
totaling approximately $35 million (the combined maximum credit
limit). The credit facilities were combined into one facility
after the consummation of the Welltech merger. As a result of
the separate credit facilities, the interest rate for Yale E.
Key was lowered from two and one-half to one and one-quarter
percent over the stated prime rate of 8.25% at June 30, 1996.
Each of the CIT term notes required principal and interest
payments, due the first day of each month beginning February 1,
1996, plus a final payment of the unpaid balance of the note due
December 31, 1998. The expiration of each of the lines of
credit is December 31, 1998.
As a result of the convertible subordinated debenture Offering
described above and subsequent repayment of all long-term debt
with CIT, except the lines of credit, the Company is currently
renegotiating its overall credit facilities with CIT, including,
but not limited to, maximum credit availability, interest rate
and maturity dates.
Impact of SFAS 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121") regarding the impairment of long-lived assets,
identifiable intangibles and goodwill related to those assets.
SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is
encouraged. The application of SFAS 121 will require periodic
determination of whether the book value of long-lived assets
exceeds the future cash flows expected to result from the use of
such assets and, if so, will require reduction of the carrying
amount of the "impaired" assets to their estimated fair values.
The Company, currently, estimates that the implementation of
SFAS 121 will not have a material effect on the Company's
financial position. The Company will implement SFAS 121
beginning July 1, 1996.
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.
- 19 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Presented herein are the consolidated financial statements of
Key Energy Group, Inc. and Subsidiaries as of June 30, 1996 and
1995 and for the years ended June 30, 1996, 1995 and 1994.
Also, included is the report of KPMG Peat Marwick LLP,
independent certified public accountants, on such consolidated
financial statements as of June 30, 1996 and 1995 and for each of the
three years ended June 30, 1996.
INDEX to FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets............................ 21
Consolidated Statements of Operations.................. 22
Consolidated Statements of Cash Flows.................. 23
Consolidated Statements of Stockholders' Equity........ 24
Notes to Consolidated Financial Statements............. 25
Independent Auditors' Report........................... 45
- 20 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, June 30,
(Thousands, except share and per share data) 1996 1995
---------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $3,240 $865
Restricted cash 971 410
Restricted marketable securities - 267
Accounts receivable, net of allowance for
doubtful accounts of $1,942 and $133,
respectively) 20,570 8,133
Inventories 1,957 1,257
Prepaid expenses and other current assets 743 358
--------------------------------------------------------------------------
Total Current Assets 27,481 11,290
--------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 66,432 23,726
Oil and gas well drilling equipment 4,862 2,014
Motor vehicles 1,159 526
Oil and gas properties and other related
equipment,successful efforts method 17,663 7,652
Furniture and equipment 716 332
Buildings and land 5,295 2,086
--------------------------------------------------------------------------
95,127 36,336
Accumulated depreciation & depletion (8,920) (4,394)
--------------------------------------------------------------------------
Net Property and Equipment 87,207 31,942
--------------------------------------------------------------------------
Other Assets 7,034 2,011
--------------------------------------------------------------------------
Total Assets $121,722 $45,243
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $11,086 $3,930
Other accrued liabilities 11,002 2,612
Accrued interest 417 145
Accrued income taxes 53 174
Deferred tax liability 310 118
Current portion of long-term debt 1,471 2,249
--------------------------------------------------------------------------
Total Current Liabilities 24,339 9,228
--------------------------------------------------------------------------
Long-term debt,less current portion 45,354 13,700
Non-current accrued expenses 4,909 -
Deferred income taxes 4,244 2,204
Minority interest 1,252 -
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 25,000,000 shares
authorized, 10,413,513 and 6,913,513 issued and
outstanding at June 30, 1996 and 1995,
respectively 1,041 691
Additional paid-in capital 32,763 15,186
Retained earnings 7,820 4,234
--------------------------------------------------------------------------
Total Stockholders' Equity 41,624 20,111
--------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $121,722 $45,243
==========================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 21 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Fiscal Year Ended June 30,
(Thousands, except per share data) 1996 1995 1994
---------------------------------------------------------------------------
REVENUES:
Oilfield services $55,933 $40,105 $32,616
Oil and gas 4,175 2,334 1,936
Oil and gas well drilling 6,188 1,932 -
Other, net 182 318 69
---------------------------------------------------------------------------
66,478 44,689 34,621
---------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 40,737 30,592 25,992
Oil and gas 1,350 757 593
Oil and gas well drilling 5,030 1,444 -
Depreciation, depletion and
amortization 4,701 2,738 1,371
General and administrative 6,608 4,352 3,540
Interest 2,477 1,478 830
---------------------------------------------------------------------------
60,903 41,361 32,326
---------------------------------------------------------------------------
Income before income taxes and
minority interest 5,575 3,328 2,295
Income tax expense 1,888 1,150 950
Minority interest in net income 101 - -
---------------------------------------------------------------------------
NET INCOME $3,586 $2,178 $1,345
===========================================================================
EARNINGS PER SHARE :
Primary:
Income before income taxes and
minority interest $0.70 $0.50 $0.44
Net income $0.45 $0.33 $0.26
Assuming full dilution:
Income before income taxes and
minority interest $0.69 $0.50 $0.43
Net income $0.44 $0.33 $0.25
WEIGHTED AVERAGE OUTSTANDING:
Primary 7,941 6,647 5,274
Assuming full dilution 8,114 6,647 5,288
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 22 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Year Ended June 30,
(Thousands) 1996 1995 1994
---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,586 $2,178 $1,345
Adjustments to reconcile income
from operations to
net cash provided by operations:
Depreciation, depletion and
amortization 4,701 2,738 1,371
Deferred income taxes 1,618 1,370 493
Minority interest in net income 101 - -
Gain on sale of assets (186) - -
Other non-cash items 6 (312) -
Change in assets and liabilities net
of effects from the acquisitions:
Increase in accounts receivable (2,180) (1,327) (389)
Increase (decrease) in other current
assets 765 (940) (613)
Decrease in accounts payable and
accrued expenses (1,293) (154) (392)
Other assets and liabilities 3 (295) 27
---------------------------------------------------------------------------
Net cash provided by
operating activities 7,121 3,258 1,842
---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Oilwell service
operations (5,188) (2,839) (4,395)
Capital expenditures - Oil and gas
operations (1,879) (2,823) (1,253)
Capital expenditures - Oil and gas
well drilling operations (598) (143) -
Proceeds from sale of fixed assets 574 - -
Cash received in WellTech merger 1,168 - -
Acquisitions - oil and gas operations (7,895) (1,348) -
Redemption (purchase) of restricted
marketable securities 267 (1) 40
---------------------------------------------------------------------------
Net cash used in investing
activities (13,551) (7,154) (5,608)
---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (2,601) (2,148) (1,771)
Borrowings (payments) under
line-of-credit 1,100 (605) 1,551
Borrowings from long-term debt 10,867 6,751 4,536
---------------------------------------------------------------------------
Net cash provided by financing
activities 9,366 3,998 4,316
---------------------------------------------------------------------------
Net increase in cash and
restricted cash 2,936 102 550
Cash and restricted cash at
beginning of period 1,275 1,173 623
---------------------------------------------------------------------------
Cash and restricted cash at end
of period $4,211 $1,275 $1,173
===========================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 23 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock
-------------------
Number of Additional
Shares Amount Paid-in Retained
(Thousands) Outstanding at par Capital Earnings Total
--------------------------------------------------------------------------
Balance at
June 30, 1993 5,124 $512 $6,057 $711 $7,280
Issuance of common
stock for Odessa
Exploration, Inc. 150 15 623 - 638
Net income - - - 1,345 1,345
--------------------------------------------------------------------------
Balance at
June 30, 1994 5,274 $527 $6,680 $2,056 $9,263
--------------------------------------------------------------------------
Issuance of common
stock for WellTech
West Texas assets 1,635 164 8,420 - 8,584
Issuance of warrants
for WellTech West
Texas assets - - 63 - 63
Issuance of common
stock for Clint Hurt
Drilling assets 5 - 23 - 23
Net income - - - 2,178 2,178
--------------------------------------------------------------------------
Balance at
June 30, 1995 6,914 $691 $15,186 $4,234 $20,111
--------------------------------------------------------------------------
Issuance of common
stock for WellTech
merger 3,500 350 17,577 - 17,927
Net income - - - 3,586 3,586
--------------------------------------------------------------------------
Balance at
June 30, 1996 10,414 $1,041 $32,763 $7,820 $41,624
==========================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 24 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Key Energy Group, Inc. herein after referred to as the "Company"
or "Key", was organized in April 1977, and commenced operations
in July 1978. Results of operations for the twelve months ended
June 30, 1996, 1995 and 1994 include the Company's oilfield
service operations conducted by its wholly-owned subsidiary,
Yale E. Key, Inc., ("Yale E. Key"), the Company's oil and gas
exploration and production wholly-owned subsidiary, Odessa
Exploration Incorporated ("Odessa Exploration"), and the
Company's oil and gas well drilling operations conducted by the
Company's wholly-owned subsidiary, Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling ("Clint Hurt Drilling"). Clint Hurt
Drilling was acquired in March of 1995 (see Note 2). Also
included in the results of operations for the fiscal year ended
June 30, 1996 are approximately three months of operating
results from the Company's wholly-owned subsidiary; WellTech
Eastern, Inc. ("WellTech Eastern") which currently holds the
assets acquired in the merger with WellTech, Inc. ("WellTech"),
on March 26, 1996 (see Note 2). WellTech Eastern operates
through two divisions; the WellTech Mid-Continent Division and
the WellTech Eastern Division. In addition, as a result of the
Welltech acquisition, the Company acquired a 63% ownership in
Servicious WellTech, S.A. ("Servicious"), an Argentinean
corporation. Servicious conducts oilfield services operations
in Argentina and is accounted for using the consolidation with a
minority interest method.
Basis of Presentation
The Company's consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries.
All significant inter-company transactions and balances have
been eliminated. The accounting policies presented below have
been followed in preparing the accompanying financial
statements. The Company's ownership of less than 50% owned
entities are accounted for by the cost or equity methods,
depending on the Company's ownership percentage. The
preparation of these financial statements requires
the use of management estimates.
Cash, Restricted Cash and Marketable Securities
The Company holds significant cash in certain financial
institutions. Restricted cash, $971,000 and $410,000 at June
30, 1996 and 1995, respectively, consists of monies held in
Key's cash lock-box and certifcates of deposit. The cash
lock-box is a requirement under the line of credit with CIT (see
Note 5). Restricted marketable securities of $267,000 at June
30, 1995 consist primarily of an investment in a mutual fund
which invests, primarily, in short-term intermediate government
securities which are recorded at market value at June 30, 1995.
The investment was held in escrow for a letter-of-credit
(issued in the amount of approximately $244,000) for workers'
compensation insurance. During fiscal 1996, the investment was
converted into a Certificate of Deposit which is recorded at
cost.
Inventories
Inventories, which consist primarily of oilwell service parts
and supplies, are held for use in the operations of Key and are
valued at the lower of cost (first-in first-out method) or
market.
- 25 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Property and Equipment
The Company provides for depreciation and amortization of
non-oil and gas properties using the straight-line method over
the following estimated useful lives of the assets:
Description Years
------------------------------------------------
Oilfield service equipment 3 - 20
Oil and gas well drilling equipment 3 - 15
Motor vehicles 3 - 7
Furniture and equipment 3 - 10
Buildings and improvements 10 - 40
Gas processing facilities 10
------------------------------------------------
Upon disposition or retirement of property and equipment, the
cost and related accumulated depreciation are removed from the
accounts and the gain or loss thereon, if any, is included in
the results of operations. Odessa Exploration'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.
Odessa Exploration utilizes the successful efforts method of
accounting for its oil and gas properties. Under this method,
all costs associated with productive wells and nonproductive
development wells are capitalized, while nonproductive
exploration costs and geological and geophysical costs (if any),
are expensed. Capitalized costs relating to proved properties
are depleted using the unit-of-production method. Upon
disposition, the carrying amounts of properties sold or
otherwise disposed of and the related allowance for depletion
are eliminated from the accounts and any gain/loss is included
in results of operations.
Gas Balancing
Deferred income associated with gas balancing is accounted for
on the entitlements method and represents amounts received for
gas sold under gas balancing arrangements in excess of Odessa
Exploration's interest in properties covered by such agreements.
Odessa Exploration had deferred income associated with gas
balancing of $198,000 and $253,000 as of June 30, 1996 and 1995,
respectively.
Environmental
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are
constantly changing, regulate the discharge of materials into
the environment and may require the Company to remove or
mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their
future economic benefit. Expenditures that relate to an existing
condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of
a noncapital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably
estimated.
Other Assets and Goodwill
At June 30, 1996 and 1995, other assets consisted primarily of
goodwill and security and escrow deposits from Key's workers'
compensation retrospective insurance program, in addition to an
interest, (approximately 13%), in an insurance company (the
insurance company is affiliated with Key's workers' compensation
carrier).
- 26 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At June 30, 1996 and 1995, the Company classified as goodwill
the cost in excess of fair value of the net assets acquired in
purchase transactions. Goodwill is being amortized on a
straight-line basis over ten to twenty-five years. Management
continually evaluates whether events or circumstances have
occurred that indicate the remaining useful life of goodwill may
warrant revision or the remaining balance of goodwill may not be
recoverable. Goodwill amortization expense totaled $100,000 for
the year ended June 30, 1996.
Earnings per Share
Primary earnings per common share are determined by dividing net
earnings applicable to common stock by the weighted average
number of common shares actually outstanding during the year and
common equivalent shares resulting from the assumed exercise of
stock options and warrants (if any) using the treasury stock
method, except in periods with reported losses as the inclusion
of common stock equivalents would be antidilutive. Fully
diluted earnings per common share are based on the increased
number of shares that would be outstanding assuming conversion
of dilutive outstanding convertible securities using the "as if
converted" method.
Income Taxes
The Company accounts for income taxes based upon Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in
income in the period that includes the enactment date. A
valuation allowance for deferred tax assets is recognized when
it is "more likely than not" that the benefit of deferred tax
assets will not be realized. The Company and its wholly-owned
subsidiaries file a consolidated federal income tax return.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of temporary
cash investments and trade receivables. The Company restricts
investment of temporary cash investments to financial
institutions with high credit standing and by policy limits the
amount of credit exposure to any one financial institution. The
Company's customer base consists primarily of multi-national,
foreign national and independent oil and natural gas producers.
See Note 11 for additional information regarding customers which
accounted for more than 10% of consolidated revenues. The
Company performs ongoing credit evaluations of its customers and
generally does not require collateral on its trade receivables.
Such credit risk is considered by management to be limited due
to the large number of customers comprising the Company's
customer base. The Company maintains reserves for potential
credit losses, and such losses have been within management's
expectations.
Impact of SFAS 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121") regarding the impairment of long-lived assets,
identifiable intangibles and goodwill related to those assets.
SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is
encouraged. Under SFAS 121 an entity shall review long-lived
assets and certain identifiable intangibles to be held and used
for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.
- 27 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
If the book value of long-lived assets exceeds the future cash
flows expected to result from the use of such assets and a
reduction of the carrying amount of the "impaired"
assets to their estimated fair values is required. The Company, currently,
estimates that the implementation of SFAS 121 will not have a
material effect on the Company's financial position. The
Company will implement SFAS 121 beginning July 1, 1996.
Cash Flows
For cash flow purposes, the Company considers all highly liquid
investments with less than a three month maturity when purchased
as cash equivalents.
2. BUSINESS AND PROPERTY ACQUISITIONS
WellTech, Inc.
On March 26, 1996, the Company acquired, through a merger,
WellTech. Key was the surviving entity in the merger. Net
consideration for the merger was 3,500,000 shares of the
Company's common stock and warrants to purchase 500,000
additional shares. In the merger, WellTech stockholders received
an aggregate of 4,929,962 shares of the Company's common stock
and warrants to purchase 750,000 shares of the Company's common
stock at $6.75 per share. As part of the merger, 1,429,962 of
the 1,635,000 shares of the Company's common stock owned by
WellTech and previously issued warrants to purchase 250,000
shares of the Company's common stock at $5.00 per share were
cancelled. WellTech's principal line of business is oil and gas
well servicing and it operates in the Mid-Continent and
Northeast areas of the United States and in Argentina. The
acquisition was accounted for using the purchase method and the
results from operations from the acquisition have been included
in those of the Company's since March 26, 1996.
Odessa Exploration Properties
In April of 1996, Odessa Exploration purchased approximately
$6.9 million of oil and gas producing properties from an
unrelated company. Financing for the acquisition came from bank
financing. The acquisition was accounted for using the purchase
method. The results of operations of the acquired properties
are included in the consolidated statements of operations
beginning April 26, 1996.
Clint Hurt Drilling
On March 30, 1995, the Company and Clint Hurt Associates, Inc.
("CHA") entered into an asset purchase agreement pursuant to
which CHA sold to the Company all of its assets in West Texas.
Such assets mainly consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, the Company
paid CHA $1,750,000, of which $1,000,000 was paid in cash and
the balance in the form of a $725,000 note payable to CHA (the
note was paid in full in July 1995). Mr. Clint Hurt entered
into consulting and noncompetition agreements with the Company
in consideration for which the Company issued 5,000 shares of
common stock. The acquisition was accounted for using the
purchase method and the results of operations of Clint Hurt
Drilling have been included in those of the Company since April
1, 1995.
WellTech West Texas
In December 1993, the Company and WellTech entered into a
purchase agreement pursuant to which the Company purchased
substantially all assets used by Welltech in its West Texas
operations. The acquisition was dependent on shareholder
approval which occurred in August of 1994. As consideration for
the acquisition, the
- 28 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Company issued to WellTech 1,635,000 shares of common stock of
the Company and warrants to acquire 250,000 additional shares of
common stock, (at $5.00 per share which expire on February 5,
1997). The issued warrants have been subsequently modified as
the result of the WellTech merger described above. The closing
of the transaction occurred on August 11, 1994. Prior to the
closing, the Company (through its wholly-owned subsidiary; Yale
E. Key, Inc.) operated and managed the operations of the
WellTech West Texas region in connection with an interim
operating agreement. The Company's consolidated statements of
operations from December 10, 1993 through August 11, 1994,
include the direct revenues and expenses from the West Texas
operations of WellTech. For the period after August 11, 1994,
the results of operations include the effects of ownership of
WellTech West Texas.
The following unaudited pro forma results of operations have
been prepared as though WellTech Eastern, Clint Hurt Drilling
and WellTech West Texas had been acquired on July 1, 1993:
(unaudited)
Year Ended June 30,
(Thousands, except per share data) 1996 1995 1994
-----------------------------------------------------------------
Revenues $ 113,022 $ 119,645 $ 97,111
Net income 5,247 4,875 4,266
Earnings per share:
Primary $0.50 $0.48 $0.42
Fully-diluted $0.47 $0.45 $0.40
Weighted average shares outstanding:
Primary 10,414 10,106 10,106
Fully-diluted 11,106 10,798 10,798
3. OTHER ASSETS
Other assets consist of the following:
June 30,
(Thousands) 1996 1995
---------------------------------------------------------------------
Investment in insurance
company - common stock * $ 368 $ 368
Workers compensation security premiums 1,117 326
Deferred acquisition costs - 200
Goodwill (net of amortization - $200) 5,400 963
Other 149 154
---------------------------------------------------------------------
$ 7,034 $2,011
=====================================================================
* - Represents approximately 13% ownership.
4. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of
business are pending against the Company. Management does not
believe that the disposition of any of these items will result
in a material adverse impact to the consolidated financial
position of the Company. As of June 30, 1996, the Company had
reserved $425,000 for potential suits and claims.
During 1995, the Company entered into employment agreements with
certain of its officers. These employment agreements generally
run to June 30, 1997, but will automatically be extended on a
yearly basis
- 29 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
unless terminated by the Company or the applicable officer. In
addition to providing a base salary for each officer, the
employment agreements provide for severance payments for each
officer varying from 12 to 24 months of the officers base
salary. The current annual base salaries for the officers
covered under such employment agreements total approximately
$800,000.
5. LONG-TERM DEBT
In July 1996, the Company completed the offering of $52,000,000
7% convertible subordinated debentures due 2003 (the
"Debentures" or the "Offering"). The Offering was a private
offering pursuant to Rule 144A under the Securities Act.
Proceeds from the Offering were approximately $52,000,000 and
were used to substantially repay existing long-term debt
(approximately $35.2 million). The remaining proceeds are
intended to fund the expansion of the Company's services through
acquisitions of businesses and assets and for working capital
and general corporate purposes.
Long-term debt which was repaid with proceeds from the Offering
in July 1996 were the term note with CIT Group/Credit Finance,
Inc. ("CIT") of approximately $21.1 million and all bank debt
associated with Odessa Exploration, previously with Norwest Bank
Texas, N.A. ("Norwest") of approximately $14.1 million.
The Debentures mature on July 1, 2003 and are convertible at any
time after November 1, 1996 and before maturity, unless
previously redeemed, into shares of the Company's common stock
at a conversion price of $9 3/4 per share, subject to adjustment
in certain events. In addition, holders of the Debentures who
convert prior to July 1, 1999 will receive, in addition to the
Company's common stock, a payment generally equal to 50% of the
interest otherwise payable on the converted Debentures from the
date of conversion through July 1, 1999, payable in cash or
common stock, at the Company's option. Interest on the
Debentures is payable semi-annually on January 1 and July 1 of
each year, commencing January 1, 1997. In August, 1996, the
interest rate was increased from 7% to 7 1/2% due to certain
modifications in the Debenture indenture involving a certain
subsidiary's inability to guarantee the obligations under the
indenture, (specifically, Servicious). The 7 1/2% effective
interest rate is expected to remain for the foreseeable future.
The Debentures are not redeemable before July 15, 1999.
Thereafter, the Debentures will be redeemable at the option of
the Company in whole or part, at the declining redemption prices
set forth in the original Debenture prospectus, together with
accrued and unpaid interest thereon. The Debentures also may be
redeemed at the option of the holder if there is a change in
control (as defined in the original Debenture prospectus) at
100% of their principal amount, together with accrued interest
thereon.
In January 1996, prior to the completed merger described in Note
2, and prior to the consummation of the Offering described
above, the Company, Yale E. Key, Clint Hurt and WellTech entered
into separate credit facilities with CIT totaling approximately
$35 million (the combined maximum credit limit). The credit
facilities were combined into one facility after the
consummation of the Welltech merger. As a result of the
separate credit facilities, the interest rate for Yale E. Key
was lowered from two and one-half to one and one-quarter
percent over the stated prime rate of 8.25% at June 30, 1996.
Each of the CIT term notes required principal and interest
payments, due the first day of each month beginning February 1,
1996, plus a final payment of the unpaid balance of the note due
December 31, 1998. The expiration of each of the lines of
credit was December 31, 1998.
- 30 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As a result of the Offering described above and subsequent
repayment of all long-term debt with CIT, except the lines of
credit, the Company is currently renegotiating its overall
credit facilities with CIT including, but not limited to,
maximum credit availability, interest rate and maturity dates.
The components of long-term debt, prior to the Offering
described above, were as follows:
June 30,
(Thousands) 1996 1995
---------------------------------------------------------------------------
Term Note(s) - CIT, interest and
principal payable monthly (i) $ 21,062 $ 6,032
Revolving Line(s) of Credit - CIT,
interest payable monthly (i) 9,910 3,846
Revolver Note - Norwest, interest
payable monthly (ii) 6,300 4,237
Term Note(s) - Norwest, interest and
principal payable monthly (iii) 7,000 944
Other notes payable 2,554 890
---------------------------------------------------------------------------
46,826 15,949
Less current portion 1,472 2,249
---------------------------------------------------------------------------
Long-term debt $ 45,354 $ 13,700
===========================================================================
(i).Prior to the Offering described above, the CIT term note,
as amended, required principal payments of approximately
$275,000, plus interest, due the first day of each month plus a
final payment of the unpaid balance of the note due December
31, 1998. The interest rate was one and one-quarter percent
above the stated prime rate of 8.25% at June 30, 1996. The note
was collateralized by all of the assets (including equipment
and inventory) of Yale E. Key, Clint Hurt and WellTech
Eastern.
The CIT line of credit, as amended, currently requires monthly
payments of interest at one and one-quarter percent above the
stated prime rate of 8.25% at June 30, 1996. The line of credit
is collateralized by the accounts receivable of Yale E. Key,
Clint Hurt and WellTech Eastern. At June 30, 1996, there was
no credit line availability.
The agreement with CIT included certain restrictive covenants,
the most restrictive of which prohibits the Company from
making distributions and declaring dividends on its common
stock.
(ii). Prior to the Offering described above, Odessa Exploration
had a loan agreement, as amended, with Norwest. The loan
agreement provided for a $7.5 million revolving line of credit
note subject to a borrowing base limitation (approximately $6.3
million at June 30, 1996). The borrowing base was redetermined
on at least a semi-annual basis. The borrowing base was reduced
by approximately $100,000 per month through October 1997; the
maturity of the note. The note's interest rate was one-half
of one percent over Norwest's prime rate of 8.25% at June 30,
1996). The note was secured by substantially all of the oil
and gas properties of Odessa Exploration.
- 31 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The loan agreement had contained various restrictive covenants
and compliance requirements, which included (a) prohibits
Odessa Exploration from declaring or paying dividends on
Odessa Exploration's common stock, (b) limiting the incurrence
of additional indebtedness by Odessa Exploration, (c) the
limitation on the disposition of assets and (d) various
financial covenants.
(iii). In April, 1996, as the result of the acquisition of
certain properties by Odessa Exploration, but prior to the
Offering described above, Odessa Exploration entered into a loan
agreement with Norwest. The loan agreement provided for a
term loan of $9.3 million to be reduced by $2.4 million in
principal amount after the consummation of the acquisition of
certain properties by Odessa Exploration. The note's interest
rate was one-half of one percent over Norwest's prime rate of
8.25% at June 30, 1996. The note required interest payments
beginning June 1, 1996. The note was secured by substantially
all of the oil and gas properties of Odessa Exploration. As a
result of the Offering described above, the note was repaid in
full in July 1996.
In March 1995, Clint Hurt entered into a loan agreement with
Norwest. The loan agreement provided for a $1 million term
note and a $200,000 line of credit note. The $1 million term
note required principal payments of approximately $28,000 per
month plus interest with the first payment due May 5th, 1995
and monthly thereafter for 36 months with a maturity date of
April 1998. The $200,000 line of credit note required principal
payments of $20,000 per month beginning July 5, 1995, plus
interest, through its maturity in April 1996. Both notes had
an interest rate of Norwest prime rate (8.25% at June 30,
1996), plus 3/4 of one percent. The notes were secured by all
of the equipment of Clint Hurt Drilling and were guaranteed
by the Company. In January 1996, as the result of the new
credit facilities with CIT as described above, but prior to
the Offering, also described above, the Clint Hurt loan and
line of credit with Norwest was repaid in full.
Presented below is a schedule of the repayment requirements of
long-term debt, which reflects the revised payment terms of the
Offering, for each of the next five years and thereafter as of June 30, 1996:
(in thousands)
Fiscal year Principal
Ended Amount
--------------------------------
1997 $ 1,472
1998 111
1999 9,956
2000 39
2001 38
Thereafter 35,210
--------------------------------
$ 46,826
================================
- 32 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30,
(Thousands) 1996 1995
--------------------------------------------------------------------
Accrued payroll and taxes $ 2,614 $ 624
Group medical insurance 1,536 -
Workers compensation 1,067 704
State sales, use and property taxes 414 208
Gas imbalance - deferred income 198 253
Revenue distribution 437 215
Acquisition accrual 3,720 -
Other 1,016 608
--------------------------------------------------------------------
Total $ 11,002 $2,612
====================================================================
7. STOCKHOLDERS' EQUITY
The 1995 Stock Option Plan
On October 5, 1995, a Stock Option Plan (the "1995 Plan") was
approved by the Company's Board of Director's. The Plan became
effective July 1, 1995, and , unless terminated earlier, will
terminate July 1, 2005. The 1995 Plan is administered by a
committee (the "Committee") consisting of at least three
directors of Key, each of whom is a "disinterested person"
within the meaning of rule 16b-3 under the Exchange Act and an
"outside director" within the meaning of Section 162(m) of the
Code.
The total number of shares of the Company's common stock that
may be subject to options under the 1995 Plan may not exceed
1,150,000 in the aggregate. The total amount of common stock
with respect to which options may be granted over the life of
the 1995 Plan to any single employee shall not exceed 500,000
shares in the aggregate. Options which are canceled, forfeited
or have expired or expire by their terms without being exercised
shall be available for future grants under the 1995 Plan. The
Committee may determine may determine which key employees of the
Company or any subsidiary or other persons shall be granted
options under the 1995 Plan, the terms of the options and the
number of shares which may be purchased under the option.
The individuals eligible to receive options under the 1995 Plan
consist of key employees (including officers who may be members
of the Board), directors who are neither employees nor members
of the Committee and other individuals who render services of
special importance to the management, operation or development
of Key or any subsidiary, and who have contributed or may be
expected to contribute materially to the success of Key or a
subsidiary, provided, however, that only key employees are
eligible to receive options.
The price at which shares of common stock may be purchased upon
exercise of an option will be specified by the Committee at the
time the option is granted, but in the case of an individual
stock option, except under certain conditions, may not be less
than the fair market value of the common stock on the date of
grant. The duration of any option is determined by the
Committee in its discretion and shall be specified in the option
agreement. No individual stock option may be exercisable after
the expiration of ten years.
- 33 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The 1995 Outside Directors Stock Option Plan
On October 5, 1995, an Outside Directors Stock Option Plan was
approved by the Company's Board of Director's (the "Directors
Plan"). Individuals who are "Outside Directors" are eligible to
participate in the Directors Plan. An "Outside Director" is
defined as a member of the Board of Directors who is not an
employee of the Company or any of its subsidiaries. Under the
Directors Plan, Outside Directors are divided into three groups
dependent upon certain dates and length of service on the Board.
Only nonqualified stock options ("NSO's") may be granted under
the Directors Plan. An NSO granted under the Directors Plan
shall expire ten years after the date of the grant. An NSO may
not be granted under the Directors Plan after July 1, 1998.
The Directors Plan provides for the issuance of an aggregate of
300,000 shares of common stock, which may be authorized but
unissued shares, treasury shares, or shares purchased on the
open market. The exercise price of the NSO shall be the fair
market value on the date of the grant.
The following table summarizes the stock option activity
related to the Company's plans:
Price
Shares Per Share
---------------------------------------------------------
Outstanding, July 1, 1995 - $ -
Granted 1,075,000 $ 5.00 - $ 7.50
Cancelled - $ -
Exercised - $ -
----------------------------------------------------------
Outstanding, June 30, 1996 1,075,000 $ 5.00 - $ 7.50
==========================================================
Exercisable, June 30, 1996 281,250 $ 5.00 - $ 7.50
==========================================================
8. INCOME TAXES
Components of income tax expense (benefit) are as follows:
Fiscal Year Ended June 30,
(Thousands) 1996 1995 1994
--------------------------------------------------------------
Federal and State:
Current $ 270 $ (220) $ 457
Deferred 1,618 1,370 493
--------------------------------------------------------------
$1,888 $ 1,150 $ 950
==============================================================
- 34 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Income tax expense (benefit) differs from amounts computed by
applying the statutory federal rate as follows:
Fiscal Year Ended June 30,
(Thousands) 1996 1995 1994
---------------------------------------------------------------------
Income tax computed at
Statutory rate 34.0% 34.0% 34.0%
State taxes net of federal benefit - - 2.4
Expiration of capital loss carryover - - 4.4
Meals and entertainment disallowance 1.7 2.2 -
Accrual to return adjustments (1.5) (1.0) -
Other (0.3) (0.7) .5
---------------------------------------------------------------------
33.9% 34.5% 41.3%
=====================================================================
Deferred tax assets (liabilities) are comprised of the following:
Fiscal Year Ended June 30,
(Thousands) 1996 1995 1994
------------------------------------------------------------------------
Net operating loss carry-forwards, net
of allowance and Sec. 382 limitations $ 6,293 $ 1,140 $ 1,143
Property and equipment (10,942) (3,437) (2,095)
Other 95 (25) -
------------------------------------------------------------------------
Net deferred tax liability $(4,554) $(2,322) $ (952)
========================================================================
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be
realized. Based on expectations for the future, management has
determined that taxable income of the Company will more likely
than not be sufficient to fully utilize available carryforwards
prior to their ultimate expiration.
The Company estimates that as of June 30, 1996, the Company will
have available approximately $186,837,042 of net operating loss
carryforwards (which begin to expire in 2001). The net
operating loss carryforwards are subject to an annual limitation
of approximately $940,000, under Sections 382 and 383 of the
Internal Revenue Code.
9. LEASING ARRANGEMENTS
Among other leases, the Company (primarily its subsidiaries),
lease certain automotive equipment under non-cancellable
operating leases which expire at various dates through 1999.
The term of the operating leases generally run from 36 to 60
months with varying payment dates throughout each month. In
addition, in the case of Yale E. Key, each lease includes an
option to purchase the equipment and an excess mileage charge as
defined in the leases.
- 35 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
As of June 30, 1996, the future minimum lease payments under
non-cancellable operating leases, in thousands, are as follows:
Fiscal Year Lease
Ending June 30, Payments
-------------------------------------
1997 $ 2,819
1998 2,217
1999 1,371
2000 587
2001 286
-------------------------------------
$ 7,280
=====================================
Operating lease expense was approximately $2,897,000, $1,930,000
and $1,640,000 for the fiscal years ended June 30, 1996, 1995
and 1994, respectively.
10. EMPLOYEE BENEFIT PLANS
At June 30, 1996, as the result of the WellTech merger (Note 2),
the Company maintains two 401-(k) plan's (the "Plans") for its
employees. Employee's of WellTech Eastern are eligible for
participation in one Plan (the "WellTech 401-(k) Plan"), while
all other employee's are eligible for participation in the other
Plan (the "Key 401-(k) Plan"). The Company intends to merge the
two Plans during fiscal 1997. The 401-(k) plan's cover
substantially all employees of the Company. The Company did
not make a contribution to the Key 401-(k) Plan during the
fiscal year ended June 30, 1994, however, beginning July 1,
1994, the Company agreed to match employees contributions up to
10% of the employees contribution to the Key 401-(k) Plan.
These contributions totaled approximately $19,000 and $20,000
for the years ended June 30, 1996 and 1995, respectively.
Additionally, the Company contributed $37,000 into the Welltech
401-(k) Plan for the period March 26, 1996 (the date of the
WellTech merger) to June 30, 1996. The Company agreed to match
employee contributions up to 50% (to a maximum of $1,000 per
employee) of the employees contributions to the Welltech 401-(k)
Plan.
11. MAJOR CUSTOMERS
Sales to customers representing 10% or more of consolidated
revenues for the years ended June 30, 1996, 1995 and 1994 were
as follows:
Fiscal Year Ended
June 30,
1996 1995 1994
----------------------------------------------------------
Customer A 20% 18% 15%
Customer B 11% 10% 14%
The accounts receivable balance for customers A and B at June
30, 1996 were $1,603,000 and $835,000, respectively.
- 36 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
12. TRANSACTIONS WITH RELATED PARTIES
WellTech Eastern paid $18,000 for the period March 26, 1996 (the
date of the Welltech merger) to June 30, 1996, for office/yard
rental expense in which an officer of the Company and WellTech
Eastern has an interest. In the opinion of the Board of
Directors of the Company, based on the Board's review of
competitive bids, this transaction was on terms at least as
favorable to the Company as could have been obtained from a
third party.
In connection with the Odessa Exploration acquisition, (see Note
2) the Company granted D. Kirk Edwards (President of Odessa
Exploration) a percentage reversionary working interest in five
deep gas wells located in West Texas upon repayment of
$1,622,000 of the bank debt assumed by the Company in the
acquisition from the Company's earnings from the five wells.
The percentage reversionary working interest decreases based on
the date of repayment of the assumed bank debt and ranges from
20% of the earnings from the five wells if repayment occurs on
or prior to July 7, 1995, to 5% of the earnings from the five
wells if repayment occurs after July 7, 1996. The value of the
reversionary interest assigned was insignificant at July 1,
1993.
Key leases automotive equipment from an independent third party
(see Note 9). The independent third party purchases the
automotive equipment from an automobile dealership in which a
former officer owns a majority interest. Net proceeds to the
automobile dealership totaled $399,000 and $1,058,000 for years
ended June 30, 1995 and 1994, respectively. The leases are
considered operating leases. In the opinion of the Board of
Directors of the Company, the net proceeds from automotive
equipment were on terms at least as favorable to the Company as
could have been obtained from a third party. This opinion is
based on information provided by a third party leasing company,
that is not affiliated with the former officer or the Company,
to the Board of Directors regarding purchase prices and
equipment lease rentals offered by third parties.
Key paid $55,000 for the year ended June 30, 1994 for oilfield
related services and equipment to two oilfield related companies
in which two officers of Key had an interest. In the opinion of
the Board of Directors of the Company, based on the Board's
review of competitive bids, these transactions were on terms at
least as favorable to the Company as could have been obtained
from a third party.
13. CONCENTRATIONS OF CREDIT RISK
The Company has a concentration of customers in the oil and gas
industry. Substantially all of the Company's customers are
major integrated oil companies, major independent producers of
oil and gas and smaller independent producers. This may affect
the Company's overall exposure to credit risk either positively
or negatively, in as much as its customers are effected by
economic conditions in the oil and gas industry, which has
historically been cyclical. However, accounts receivable are
well diversified among many customers and a significant portion
of the receivables are from major oil companies, which
management believes minimizes potential credit risk.
Historically, credit losses have been insignificant.
Receivables are generally not collateralized, although the
Company may generally secure a receivable at any time by filing
a mechanic's and material-mans' lien on the well serviced.
- 37 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
14. BUSINESS SEGMENT INFORMATION
Information about the Company's operations by business segment
is as follows:
Year Ended June 30,
(Thousands) 1996 1995 1994
--------------------------------------------------------------------
Revenues:
Oil and gas $ 4,175 $ 2,334 $ 1,936
Oilfield services 55,933 40,105 32,616
Oil and gas well drilling services 6,188 1,932 -
Other 182 318 69
--------------------------------------------------------------------
$66,478 $ 44,689 $34,621
====================================================================
Income before minority interest and
and income taxes:
Oil and gas $ 1,596 $ 941 $ 814
Oilfield services 6,482 4,105 2,823
Oil and gas well drilling services 639 367 -
Interest expense (2,477) (1,478) (830)
General corporate (665) (607) (512)
---------------------------------------------------------------------
$ 5,575 $ 3,328 $ 2,295
=====================================================================
Identifiable assets:
Oil and gas $ 18,170 $ 8,289 $ 5,258
Oilfield services 94,962 33,516 22,022
Oil and gas well drilling services 5,583 3,160 -
General corporate 3,007 278 815
---------------------------------------------------------------------
$121,722 $ 45,243 $ 28,095
=====================================================================
Capital Expenditures:
Oil and gas $ 9,774 $ 3,736 $ 4,449
Oilfield services 5,188 11,422 4,395
Oil and gas well drilling services 598 2,141 -
---------------------------------------------------------------------
$ 15,560 $ 17,299 $ 8,844
=====================================================================
Depreciation, depletion and amortization:
Oil and gas $ 618 $ 426 $ 412
Oilfield services 3,862 2,279 959
Oil and gas well drilling services 221 33 -
---------------------------------------------------------------------
$ 4,701 $ 2,738 $ 1,371
=====================================================================
Key operates a variety of oilfield service equipment including
workover rigs, hot oil units, transports and various other
oilfield servicing equipment. In addition, Key performs a
variety of other oilfield services including fishing tools, frac
tanks and blow-out preventers.
- 38 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Oil and gas production is conducted by Odessa Exploration.
Odessa Exploration acquires and manages interests in producing
oil and gas properties for its own account and for its sponsored
investors. The Company is engaged in the drilling and
production of oil and natural gas in the United States. Odessa
Exploration acquires producing oil and gas properties from major
and independent producers. After acquisition, Odessa
Exploration may either rework the acquired well to increase
production and/or form drilling partnerships for additional
development wells.
Oil and gas well drilling services are conducted by Clint Hurt
Drilling. Clint Hurt Drilling operates six drilling rigs which
drill for oil and gas in the West Texas area.
15. INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)
CAPITALIZED COSTS:
June 30,
(in thousands) 1996 1995
---------------------------------------------------------------
Oil and Gas Properties:
Proved properties $ 17,290 $ 7,652
Unproven properties - -
Less accumulated depletion (1,364) (766)
---------------------------------------------------------------
Net capitalized costs $ 15,926 $ 6,886
===============================================================
COSTS INCURRED:
June 30,
(in thousands) 1996 1995 1994
------------------------------------------------------------------------
Proved property acquisition costs $ 7,786 $ 1,054 $ 4,390
Development costs 1,848 2,581 40
------------------------------------------------------------------------
Total Costs Incurred $ 9,634 $ 3,635 $ 4,430
========================================================================
RESULTS OF OPERATIONS:
Oil and gas sales $ 3,555 $ 1,793 $ 1,483
Production costs, including
production taxes (1,350) (756) (573)
Depletion (598) (398) (386)
Income taxes * (546) (217) (178)
-------------------------------------------------------------------------
Results of operations for oil and
gas producing activities ** $ 1,061 $ 422 $ 346
=========================================================================
* - computed at the statutory rate of 34%.
** - excludes corporate overhead and financing costs.
- 39 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Oil and Gas Reserve Information
Estimates of Odessa Exploration's proved oil and gas reserves as
of June 30, 1996, 1995 and 1994 were prepared by the Company and
reviewed by independent petroleum reservoir engineering firms.
All estimates were made in accordance with guidelines
established by the Securities and Exchange Commission. Proved
oil and gas reserves are the estimated quantities of crude oil
and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic
conditions, i.e. prices and costs as of the date the estimate is
made. Prices utilized reflect consideration of changes in
existing prices provided by contractual arrangements, if any,
but not of escalations based upon future conditions. The
reserve estimates are presented utilizing an average oil price
of $19.17 Bbl and an average natural gas price of $1.95 Mcf as
of June 30, 1996.
Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing equipment and
operating methods.
Proved undeveloped oil and gas reserves are proved reserves that
are expected to be recovered from new wells on undrilled acreage
or from existing wells where a relatively major expenditure is
required for recompletion or secondary or tertiary recovery.
Reserves assigned to undrilled acreage are limited to those
drilling units that offset productive units reasonably certain
of production when drilled.
No major discovery or other favorable or adverse event has
occurred since July 1, 1996 which is believed to have caused a
significant change in the estimated proved oil and gas reserves
of Odessa Exploration.
Odessa Exploration's estimate of reserves has not been filed
with or included in reports to any federal agency other than the
Securities and Exchange Commission.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved
reserves and in the projection of future rates of production and
the timing of development expenditures. The accuracy of such
estimates is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results
of subsequent drilling, testing and production may cause either
upward or downward revision of previous estimates. Further, the
volumes considered to be commercially recoverable fluctuate with
changes in prices and operating costs. The Company emphasizes
that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of
currently producing oil and gas properties. Accordingly, these
estimates are expected to change as additional information
becomes available in the future.
(continued next page)
- 40 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Oil and Gas Producing Activities:
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
----------------------------------------------------------------
Total Proved Reserves:
Balance, July 1, 1993: - -
Purchases of minerals-in-place 129,291 7,338,452
Production (14,383) (552,791)
----------------------------------------------------------------
Balance, June 30, 1994 114,908 6,785,661
Revisions of previous estimates 92,080 1,945,659
Purchases of minerals-in-place 1,515,559 6,036,937
Production (40,330) (770,197)
----------------------------------------------------------------
Balance, June 30, 1995 1,682,217 13,998,060
Revisions of previous estimates 275,499 4,520,007
Discoveries and extensions 162,643 1,793,111
Purchases of minerals-in-place 3,162,099 16,456,993
Production (97,130) (1,026,577)
----------------------------------------------------------------
Balance, June 30, 1996 5,185,328 35,741,594
================================================================
Proved Developed Reserves:
June 30, 1994 114,908 6,785,661
================================================================
June 30, 1995 750,604 11,203,232
================================================================
June 30, 1996 2,727,967 24,517,362
================================================================
Standardized Measure of Discounted Future Cash Flows
The following schedules present estimates of the standardized
measure of discounted future net cash flows from the Company's
proved reserves as of June 30, 1996, and an analysis of the
changes in these amounts for the years ended June 30, 1996, 1995
and 1994. Estimated future cash flows are determined using
year-end prices adjusted only for fixed and determinable
increases for natural gas provided by contractual agreement (if
any). Estimated future production and development costs are
based on economic conditions at year-end. Future federal
income taxes are computed by applying the statutory federal
income tax rate of 34% to the difference between the future
pretax net cash flows and the tax basis of proved oil and gas
properties, after considering investment tax credits and net
operating loss carry-forwards (if any), associated with these
properties.
Discounted future cash flow estimates like those shown below are
not intended to represent estimates of the fair value of oil and
gas properties. Estimates of fair value should also consider
probable reserves, anticipated future oil and gas prices, interest rates,
changes in development and production costs and risks associated
with future production. Because of these and other
considerations, any estimate of fair value is necessarily
subjective and imprecise.
- 41 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
June 30,
(in thousands) 1996 1995
-----------------------------------------------------------------------
Standardized Measure:
Future cash inflows $171,000 $ 51,830
Future production costs (61,521) (11,852)
Future development costs (15,495) (6,160)
Future income taxes (12,092) (10,477)
-----------------------------------------------------------------------
Future after-tax net cash flows 81,892 23,341
10% annual discount (42,188) (8,183)
-----------------------------------------------------------------------
Standardized Measure $ 39,704 $ 15,158
=======================================================================
Changes in Standardized Measure:
Standardized Measure, July 1, 1993 $ -
Oil and gas sales, net of production costs (910)
Purchases of minerals in place 6,030
Net change in income taxes (381)
Accretion of discount -
-------------------------------------------------------------
Standardized Measure, June 30, 1994 $ 4,739
Oil and gas sales, net of production costs (1,037)
Purchases of minerals in place 13,033
Net change in income taxes (5,881)
Accretion of discount 512
Revision of quantity estimates 1,745
Change in future development costs 1,227
Net change in sales prices 79
Changes in production rates (timing) and other 741
-------------------------------------------------------------
Standardized Measure, June 30, 1995 $ 15,158
Oil and gas sales, net of production costs (2,205)
Purchases of minerals in place 24,216
Net change in income taxes 75
Accretion of discount 2,142
Revision of quantity estimates 6,189
Change in future development costs (982)
Extensions and discoveries 2,952
Net change in sales prices 1,397
Changes in production rates (timing) and other (9,238)
-------------------------------------------------------------
Standardized Measure, June 30, 1996 $ 39,704
=============================================================
- 42 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
16. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended June 30,
1996, 1995 and 1994 are presented below:
Year Ended June 30,
(Thousands) 1996 1995 1994
--------------------------------------------------------------------------
Interest paid $ 2,205 $ 1,422 $ 759
Taxes paid 391 53 10
Supplemental schedule of non-cash investing and financing
transactions for the years ended June 30, 1996, 1995 and 1994
are presented below:
Year Ended June 30,
(Thousands) 1996 1995 1994
-------------------------------------------------------------------------
Fair value of Common Stock issued
for Odessa Exploration, Inc. $ - $ - $ 638
Assumption of Odessa Exploration,
Inc. liabilities - - 2,752
Acquisition of Odessa Exploration, Inc.
property and equipment - - 3,196
Fair value of Common Stock issued for
Clint Hurt Drilling - 23 -
Fair value of Common Stock and
Warrants issued for
WellTech West Texas - 8,647 -
Capital lease obligation reduced for
purchase of asset - 275 -
Proceeds on sale of assets
not received - 132 -
Property and equipment additions and
acquisition costs not
paid as of June 30th - 1,015 -
Issuance of note payable in Clint Hurt
Drilling acquisition - 725 -
Fair value of Common Stock issued
for WellTech, Inc. 17,729 - -
Assumption of Welltech, Inc.
working capital deficit 1,734 - -
Assumption of Welltech, Inc.
non-current liabilities
and debt 27,570 - -
Acquisition of WellTech, Inc.
property and equipment and
other assets 47,455 - -
- 43 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
17. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Summarized quarterly financial data for 1996 and 1995 are as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in thousands, except per share amounts)
----------------------------------------------------------------------------
1996
Revenues . . . . . . . . . . $12,398 $12,394 $14,302 $27,384
Earnings from operations . . 3,522 3,763 4,180 7,895
Net earnings . . . . . . . . 726 768 827 1,265
Earnings per share . . . . . .11 .11 .12 .16
Weighted average common shares
and equivalents outstanding 6,914 6,914 6,981 7,941
1995
Revenues . . . . . . . . . . $11,181 $10,781 $11,049 $11,678
Earnings from operations . . 2,645 2,683 3,083 3,485
Net earnings . . . . . . . . 519 492 631 536
Earnings per share . . . . . .09 .08 .10 .08
Weighted average common shares
and equivalents outstanding 6,091 6,500 6,637 6,647
18. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price risks. The Company is exposed to
credit losses in the event of nonperformance by the
counterparties to its commodity hedges. The Company
anticipates, however, that such counterparties will be able to
fully satisfy their obligations under the contracts. The
Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the
credit standing of the counterparties.
The Company utilizes option contracts to hedge the effect of
price changes on future oil and gas production. If market
prices of oil and gas exceed the strike price of put options,
the options will expire unexercised, therefore reducing the
effective price received for oil and gas sales by the cost of
the related option. As of June 30, 1996, Odessa Exploration had
6,000 Bbls of oil per month hedged with a strike price of $19.50
per Bbl., for the period of July 1, 1996 through December 31,
1996.
Premiums paid for commodity options contracts are amortized to
oil and gas sales, over the terms of the agreements.
Unamortized premiums of $91,789 are included in other current
assets in the consolidated balance sheet at June 30, 1996.
Amounts receivable, if any, under commodity option contracts are
accrued as an increase in oil and gas sales for the applicable
periods.
- 44 -
Independent Auditors' Report
To The Board of Directors and Stockholders
Key Energy Group, Inc.
We have audited the accompanying consolidated balance sheets of
Key Energy Group, Inc. and Subsidiaries as of June 30, 1996 and
1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years
ended June 30, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Key Energy Group, Inc. and
Subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years
ended June 30, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
September 13, 1996
- 45 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEMS 10 - 13.
Pursuant to Instruction G(3) to Form 10-K, the information
required in Items 10-13 is incorporated by reference from the
Company's definitive proxy statement, which will be filed with
the Commission pursuant to Regulation 14A within 120 days of
June 30, 1996.
- 46 -
PART IV.
TEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Reports on Form 8-K
The Company filed a report on Form 8-K during the quarter ended
June 30, 1996 which was dated June 28, 1996 relating to the
private placement offering of the Company's convertible
subordinated debentures.
(b) Index to Exhibits
The following exhibits have been filed with the Securities
and Exchange Commission:
Exhibit 2.1 Agreement and Plan of Merger dated as of November
18, 1995, between Key and WellTech, as amended. (Incorporated
by reference to the Company's Registration Statement Form S-4,
Registration No. 333-369).
Exhibit 2.2 Joint Plan of Reorganization, dated as of October
20, 1992, of the Company, ESKEY Inc. and YFC International
Finance N.V. and Order, dated December 4, 1992, of the United
States Bankruptcy Court for the District of New Jersey,
approving the Joint Plan of Reorganization (Incorporated by
reference to Exhibits 2 (a) and 28 (a) of the Company's
Report on Form 8-K dated December 14, 1992, File No.1-8038).
Exhibit 2.3 Agreement and Plan of Merger dated as of July 20,
1993, by and among the Company, OEI Acquisition Corp. and
Odessa Exploration Incorporated.
(Incorporated by reference to Exhibit 2(a) of the Company's
Report on Form 8-K dated September 2, 1993, File No. 1-8038).
Exhibit 2.4 Asset Purchase Agreement dated as of December 10,
1993 between the Company and WellTech, Inc. (Incorporated by
reference to exhibit 2(a) of the Company's report on Form 8-K
dated August 17, 1974, File No. 1-8038).
Exhibit 3.1 Amended and Restated Articles of Incorporation of
the Company (Incorporated by reference to the Company's
Registration Statement on Form S-4, Registration No. 333-369).
Exhibit 3.2 Amended and Restated By-Laws of the Company
(Incorporated by reference to the Company's Registration
Statement on Form S-4 dated March 8, 1996, Registration No.
333-369).
Exhibit 4.1* 7% Convertible Subordinated Debenture of the
Company due July 1, 2003.
Exhibit 4.2* Indenture for the 7% Convertible Subordinated
Debenture of the Company due July 1, 2003.
Exhibit 4.3* Registration Rights Agreement among the Company,
McMahan Securities Co., L.P. and Rausher Pierce Refsnes, Inc.,
dated as of July 3, 1996.
- 47 -
Exhibit 4.4 Registration Rights Agreement between the Company
and D. Kirk Edwards, dated as of July 20, 1993.
(Incorporated by reference to Exhibit 10 (c) to the Company's
Report on Form 8-K/A).
Exhibit 4.5 Registration Rights Agreement dated as of March 2,
1996 among the Company and certain of its stockholders
(Incorporated by reference to the Company's Registration
Statement on Form S-4,Registration No. 353-369).
Exhibit 4.6 Registration Rights Agreement dated as of March 30,
1995 between the Company, Clint Hurt and Associates, Inc. and
Clint Hurt (Incorporated by reference to Exhibit 10(d) of the
Company's Report on Form 10-KSB dated June 30, 1995, File No.
1-8038).
Exhibit 4.7 Form of Common Stock Purchase Warrant to Purchase
Key Common Stock issued in connection with the WellTech
Merger. (Incorporated by reference to the Company's Registration
Statement on Form S-4, Registration No. 353-369).
Exhibit 4.8 Common Stock Purchase Warrant to Purchase 75,000
shares of Key Common Stock issued to CIT Group/Credit
Finance, Inc. (Incorporated by reference to the Company's
Registration Statement on Form S-4, Registration No. 353-369).
Exhibit 10.1 Employment Agreement between the Company and D.
Kirk Edwards, dated as of July 20, 1993. (Incorporated by
reference to Exhibit 10 (b) to the Company's Report on Form
8-K/A).
Exhibit 10.2 Asset Purchase Agreement dated as of March 30, 1995
between the Company and Clint Hurt and Associates, Inc.
(Incorporated by reference to the Company's Report on Form
10-KSB dated June 30, 1995, File No. 1-8038).
Exhibit 10.3 Non-Competition Agreement dated as of March 30,
1995 between the Company, Clint Hurt and Associates, Inc. and
Clint Hurt.(Incorporated by reference to Exhibit 10(f) of the
Company's Report on Form 10-KSB dated June 30, 1995, File No.
1-8038).
Exhibit 10.4* Employment Agreement between Welltech, Inc. and
Kenneth Hill, dated as of March 29, 1996.
Exhibit 10.5* Employment Agreement between Welltech, Inc. and
Kenneth Huseman, dated as of March 29, 1996.
Exhibit 10.6* Letter Agreement between Van Greenfield and the
Company dated May 15, 1996.
Exhibit 10.7* Amendment No. 2 to the Company's Employment with
Agreement between Francis D. John and the Company, dated as
of May 15, 1996.
Exhibit 10.8* Letter Agreement between Morton Wolkowitz and the
Company dated June 3, 1996.
- 48 -
Exhibit 10.9* Third Amended and restated Loan and Security
Agreement between The CIT Group/Credit Finance, Inc., Yale E.
Key, Inc., Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling,
and Welltech Eastern, Inc.
Exhibit 10.10* Cross-Collaterization and Cross-Guaranty
Agreement among The CIT Group/Credit Finance, Inc., Yale E.
Key, Inc., Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling,
and Welltech Eastern, Inc.
Exhibit 10.11* Guaranty Agreement among The CIT Group/Credit
Finance, Inc., Yale E. Key, Inc., Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling, and Welltech Eastern, Inc.
Exhibit 10.12* Asset Purchase Agreement between Hardy Oil & Gas
USA, Inc. and Arch Petroleum, Inc. dated as of April. 1996.
Exhibit 10.13* Asset Purchase Agreement between Arch Petroleum,
Inc. to Odessa Exploration, Inc. dated as of April 18, 1996.
Exhibit 10.14* General Conveyance by Arch Petroleum, Inc. to
Odessa Exploration, Inc. dated as of January 1, 1996.
Exhibit 10.15 Company's 1995 Stock Option Plan (Incorporated
by reference to the Company's Registration Statement on Form
S-4, Registration No. 353-369).
Exhibit 10.16 The Company's Outside Directors Stock Option Plan
(Incorporated by reference to the Company's Registration
Statement on Form S-4, Registration No. 353-369).
Exhibit 22* Subsidiaries of the Registrant.
Exhibit 27* Financial Data Schedule.
______________________________________
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. John
Francis D. John
President, Chief Executive and Chief
Dated: September 25, 1996 Financial Officer and Director
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
By /s/ Francis D. John
Francis D. John
President, Chief Executive and Chief
Dated: September 25, 1996 Financial Officer and Director
By /s/ Morton Wolkowitz
Morton Wolkowitz
Dated: September 25, 1996 Chairman of the Board and Director
By /s/ Van Greenfield
Van Greenfield
Dated: September 25, 1996 Director
By /s/ William Manly
William Manly
Dated: September 25, 1996 Director
By /s/ Kevin P. Collins
Kevin P. Collins
Dated: September 25, 1996 Director
By /s/ W. Phillip Marcum
W. Phillip Marcum
Dated: September 25, 1996 Director
By /s/ Danny R. Evatt
Danny R. Evatt
Dated: September 25, 1996 Chief Accounting Officer
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