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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
Two Tower Center, 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
7% Convertible Subordinated None
Debentures Due 2003
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Shares held by nonaffiliates of the
Registrant as of September 11, 1997 was approximately $366,091,543.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
Common Shares outstanding at September 11, 1997: 16,459,894
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. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
PART II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters. 10
Item 6. Selected Financial Data. 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation. 12
Item 8. Financial Statements and Supplementary Data. 19
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure. 52
PART III.
Item 10. Directors and Executive Officers of the Registrant. 52
Item 11. Executive Compensation. 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management. 52
Item 13. Certain Relationships and Related Transactions. 52
PART IV.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 53
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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") is a leading provider of
well services in the United States and in Argentina. As of June 30, 1997,
the Company operated a fleet of 523 well service rigs, 437 fluid hauling and
other trucks, and nine drilling rigs (including 16 workover rigs, six
trucks, and 3 drilling rigs in Argentina). As of June 30, 1997, Key's well
service and workover rig fleet and fluid hauling and other truck fleet were
the second largest and largest fleets, respectively, onshore the continental
United States. The Company operates in Texas, New Mexico, Oklahoma,
Michigan, the Appalachian Basin and Argentina. The Company generally
provides a full range of maintenance and workover services to major and
independent oil and gas companies in all of its operating regions. In
addition to maintenance and workover services, Key also provides services
which include the completion of newly drilled wells, the recompletion of
existing wells (including horizontal recompletions) and the plugging and
abandonment of wells at the end of their useful lives. Other services
include oil field fluid transportation, storage and disposal services, frac
tank rentals, fishing and rental tools, wireline services, air drilling and
hot oiling. In addition, the Company is engaged in contract drilling in West
Texas and Argentina and owns and produces oil and natural gas in the Permian
Basin.
The Company conducts 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 (wholly-
owned as of July 1, 1997) of 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, and Servicios owns
contract drilling rigs. Odessa Exploration is engaged in the production
of oil and natural gas and Clint Hurt provides contract oil and gas well
drilling services in the Permian Basin of West Texas.
Subsequent Events
Subsequent to June 30, 1997, the Company purchased the remaining 37%
interest in Servicios and completed the acquisition of four well servicing
companies which collectively operate 83 well service and workover rigs
(including six in Argentina), three drilling rigs in Argentina, and 75 fluid
hauling and other trucks. The Company has also announced, subsequent to June
30, 1997, five acquisitions of well service companies and one acquisition of
a drilling company which collectively operate 153 well service rigs, 11
drilling rigs, 91 fluid hauling and other trucks and a fishing and rental
tool business. These six announced acquisitions are currently pending and
assuming their completion, the Company will have expanded its operating
presence into markets it previously did not serve, including the Rocky
Mountains, the Four Corners area, the Hugoton Basin, Northern Louisiana and
Arkansas. Upon completion of these pending acquisitions, Key's operations
will include 764 well service and workover rigs, 603 fluid hauling and other
trucks, 23 drilling rigs and numerous ancillary operations. Following the
closing of these acquisitions, the Company believes that, based upon the
number of active well service rigs and fluid hauling and other trucks, that
it would operate at that time, it will be the largest well service provider
onshore the continental United States and the second largest well service
provider in Argentina.
Growth Strategy
The domestic well service rig and production service industry has
historically been highly fragmented, characterized by a large number of
smaller companies which have competed effectively on a local basis in
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terms of pricing and the quality of services offered. In recent years,
many major and independent oil and gas companies have placed increasing
emphasis upon not only pricing, but also on safety records and quality
management systems of, and the breadth of services offered by, their
vendors, including well servicing contractors. This market environment,
which requires significant expenditures by smaller companies to meet
these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As
a result, the industry has seen high levels of consolidation among the
competing contractors.
Over the past eighteen months, Key has been a the leading consolidator
of this industry, completing twenty-three acquisitions of well
servicing operations (twenty-eight including pending transactions).
This consolidation has led to reduced fragmentation in the market and
has led to more predictable demand for well services for the Company
and its competitors. Key's management structure is decentralized, which
allows for rapid integration of acquisitions and the retention of
strong local identities of many of the acquired businesses. As a result
of these and other factors, the Company has developed a growth strategy
to: (i) identify, negotiate and consummate additional acquisitions of
complementary well servicing operations, including rigs, trucking and
other ancillary services; (ii) fully-integrate acquisitions into the
Company's decentralized organizational structure and thereby attempt to
maximize operating margins; (iii) expand business lines and services
offered by the Company in existing areas of operations; and (iv) extend
the geographic scope and operating environments for the Company's
operations.
Oil Field Services
The Company provides a full range of well service rig services, oil
field liquid services and other production services necessary to
maintain and workover producing oil and gas wells through its
wholly-owned subsidiaries, Yale E. Key and WellTech Eastern. These
services also include the completion of newly drilled wells, the
recompletion of existing wells (including horizontal recompletions) and
the plugging and abandonment of wells at the end of their useful lives.
Other services include oil field fluid transportation, storage and
disposal services, frac tank rentals, fishing and rental tools,
wireline services, air drilling and hot oiling. 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. As of June 30, 1997, of the
Company's 523 well service and workover rigs, 273 operate in West Texas
and New Mexico, 161 in Oklahoma and East Texas, 79 in Michigan and the
Appalachian Basin, and ten in Argentina.
Well Service Rig Services. The Company utilizes its fleet to
perform four major categories of service to oil and gas
operators including:
Maintenance Services. Maintenance services are required on producing
oil and gas wells to ensure efficient and continuous operation. These
services consist of routine mechanical repairs necessary to maintain
production from the well, such as repairing parted sucker rods or
defective down-hole pumps in an oil well, or replacing defective tubing
in an oil or gas well. The Company provides the well service rigs,
equipment and crews for these maintenance services. Many of these well
service rigs also have pumps and tanks (a workover package) that can be
used for circulating fluids into and out of the well. Maintenance jobs
are often performed on a series of wells in proximity to each other and
typically take less than 48 hours per well.
Maintenance services are generally required throughout the life of a
well. The need for these services does not directly depend on the level
of drilling activity and is generally independent of short-term
fluctuations
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in oil and gas prices. Accordingly, maintenance services are generally the
most stable type of well service rig activity. The general level of
maintenance, however, is affected by changes in the total number of
producing oil and gas wells in the Company's geographic service areas.
Workover Services. In addition to periodic maintenance, producing oil and
gas wells occasionally require major repairs or modifications, called
"workovers." Workover services include extensions of existing wells to drain
new formations either through deepening well bores or through drilling of
horizontal laterals. In less extensive workovers, the Company's rigs are
used to seal off depleted zones in existing well bores and access previously
bypassed productive zones. The Company's workover rigs are also used to
convert producing wells to injection wells for enhanced recovery operations.
Workover services include major subsurface repairs such as casing repair or
replacement, recovery of tubing and removal of foreign objects in the well
bore. These extensive workover operations are normally performed by a well
service rig with a workover package , which may include rotary drilling
equipment, mud pumps, mud tanks and blowout preventers depending upon the
particular type of workover operation. Most of the Company's well service
rigs are designed for and can be equipped to perform complex workover
operations. A workover may last from a few days to several weeks.
The demand for workover services is more sensitive to expectations relating
to and changes in oil and gas prices than the demand for maintenance
services, but not as sensitive as the demand for completion services. When
oil and gas prices are low, there is little incentive to perform workovers
on wells to increase production and well operators tend to defer such
expenditures. As oil and gas prices increase, the level of workover activity
tends to increase as operators seek to increase production by enhancing the
efficiency of their wells.
Completion Services. Completion services prepare a newly drilled well for
production. The completion process may involve selectively perforating the
well casing to access producing zones, stimulating and testing these zones
and installing downhole equipment. The Company provides a well service and
workover package rig to assist in this completion process. Newly drilled
wells are frequently completed by a well service rig so that an operator can
minimize the use of a higher cost drilling rig. The completion process
typically requires a few days to several weeks, depending on the nature and
type of the completion, and generally requires additional auxiliary
equipment which the Company provides for an additional fee.
The demand for well completion services is directly related to drilling
activity levels, which are highly sensitive to expectations relating to and
changes in oil and gas prices. During periods of weak drilling demand,
drilling contractors frequently price well completion work competitively
compared to a well service rig so that the drilling rig stays on the job.
Thus, excess drilling capacity will serve to reduce the amount of completion
work available to the well servicing industry.
Plugging and Abandonment Services. Well service rigs and workover equipment
are also used in the plugging and abandonment of oil and gas wells no
longer capable of producing in economic quantities. The demand for oil and
gas does not significantly affect the demand for well plugging services.
Liquid Services. The Company provides vacuum truck services, frac tank
rentals and salt water disposal services which together provide an
integrated mix of liquid services to well site customers.
Other Production Services. The Company provides production services, which
include hot oiler unit services, pipeline installation and testing services,
slickline wire-line services and fishing and rental tool services.
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Shallow Contract Drilling Services
The Company, through Clint Hurt, owns and operates six drilling rigs
and provides contract drilling services for major and independent oil
companies, primarily in West Texas. On August 4, 1997, the Company
announced it had signed a letter of intent to acquire BRW Drilling,
Inc. ("BRW") for approximately $15.0 million in cash. BRW operates 7
drilling rigs and related equipment in the Permian Basin of West Texas.
The closing of the BRW acquisition is expected upon negotiation of a
definitive agreement, completion of the Company's standard due
diligence and receipt of regulatory clearances, if any are required.
Upon completion, the BRW acquisition will be combined with Clint Hurt's
drilling operations in the Permian Basin of West Texas to form a
thirteen rig shallow drilling operation. 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.
Production
The Company is engaged in the production of oil and natural gas in the
Permian Basin area of West Texas through its wholly-owned subsidiary,
Odessa Exploration. Odessa Exploration acquires and manages interests
in producing oil and gas properties for its own account and for
drilling partnerships it sponsors. Odessa Exploration acquires
producing oil and gas wells and related properties from major and
independent producers and, subsequently, either reworks the acquired
wells to increase production or forms drilling ventures for additional
development wells. Odessa Exploration operates oil and gas wells on
behalf of over 250 working interest owners as well as for its own
account.
Foreign Operations
The Company provides oil field services in Argentina through its 63%
ownership (wholly-owned as of July 1, 1997) of Servicios. As of June
30, 1997, Servicios owned and operated ten well servicing rigs and
three drilling rigs in Argentina (which are currently idle and
undergoing refurbishment). On August 1, 1997, the Company completed the
acquisition of Kenting Holdings (Argentina) S.A. ("Kenting") for $10.1
million in cash. The Kenting assets included six oilwell service rigs,
three drilling rigs and related equipment in Argentina. The Kenting
assets are being operated by Servicios and are expected to more than
double the size of Servicios' operations based on revenues.
COMPETITION AND OTHER EXTERNAL FACTORS
Despite a significant amount of consolidation having occurred, the
domestic well service rig and production service industry is still
highly fragmented and includes a number of companies that are capable
of competing effectively in all or part of the Company's well servicing
markets. Nonetheless, the Company believes that it is competitive in
terms of pricing, performance, equipment, safety, availability of
equipment to meet customer needs and availability of experienced,
skilled personnel in those regions in which it operates.
In the well servicing market, an important competitive factor in
establishing and maintaining long-term customer relationships is having
an experienced, skilled and well trained work force. In recent years,
many of the Company's larger customers have placed emphasis not only on
pricing, but also on safety records and quality management systems of
contractors. The Company believes that such factors will be of
increased importance in the future. The Company has directed
substantial resources toward employee safety and training programs, as
well as its employee review process. While the Company's efforts in
these areas are not unique, many competitors, particularly small
contractors, have not undertaken similar training programs for their
employees. Management believes that the Company's safety record and
reputation for quality equipment and service are among the best in the
industry.
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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, New Mexico,
Oklahoma, Michigan, the Appalachian Basin and Argentina with its two largest
customers providing 13% and 7%, of total Company revenue during fiscal 1997.
The need for oilfield services fluctuates, in part, in relation to the
demand for oil and natural gas. As demand for those commodities increases,
service and maintenance requirements increase as oil and natural gas
producers attempt to maximize the producing efficiency of their wells in a
higher priced environment.
EMPLOYEES
As of June 30, 1997, the Company employed 3,175 persons (3,047 in well
service operations, 12 in oil and gas production, 105 in contract drilling
operations and 11 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.
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.
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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, 1997:
Well Service/ Fluid Hauling and
Company Workover Rigs Other Trucks
Domestic:
Yale E. Key (West Texas
and New Mexico) 273 82
Mid-Continent Division
of WellTech Eastern (Texas
and Oklahoma) 161 105
Eastern Division of
WellTech Eastern (Michigan
and Appalachian Basin) 79 244
International:
Servicios (Argentina) 10 6
----- -----
TOTAL 523 437
===== =====
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 four and leases twelve office and yard locations. In Argentina,
Servicios leases two office and yard locations.
All operating facilities are metal one story office and/or shop
buildings. All buildings are occupied and considered to be in
satisfactory condition.
Production
Odessa Exploration's properties consist primarily of oil and gas
leases. At June 30, 1997, Odessa Exploration operated and/or owned
interests in 467 wells. Odessa Exploration's major proved producing
properties are located primarily in the Permian Basin area of West
Texas. Odessa Exploration leases office space in Odessa, Texas.
As of June 30, 1997, the Company had interests in 446 gross (127 net)
oil wells and 21 gross (10 net) gas wells. As of such date, the Company
owned 71,360 gross (19,980 net) acres of developed acreage and no
undeveloped acreage. The Company had working interests in 13 gross
(12.5 net) development wells as of the same date. During the fiscal
year ended June 30, 1997, the Company produced 178,121 bbls. of oil at
an average sales price of $22.19 per bbls., and 1.23 Mcf of gas at an
average sales price of $2.74 per Mcf. Average production (lifting)
costs were $7.89 per equivalent bbls. of oil.
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ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS.
See Item 7, Note 4 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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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, 1997, there were 498 holders of
record of 12,297,752 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.
High Low
Fiscal Year Ending 1997:
First Quarter $ 8 3/4 $ 7 1/2
Second Quarter 12 1/4 8 3/8
Third Quarter 14 7/8 11 3/8
Fourth Quarter 17 13/16 12 7/8
Fiscal Year Ending 1996:
First Quarter $ 4 3/4 $ 5 1/2
Second Quarter 4 15/16 6 7/16
Third Quarter 5 7/8 7 9/16
Fourth Quarter 7 1/16 8 1/2
There were no dividends paid on the Company's common stock during the fiscal
years ended June 30, 1997, 1996 or 1995. The Company does not intend, for
the foreseeable future, to pay dividends on its common stock.
Recent Sales of Unregistered Securities:
The Company effected the following unregistered sales of its securities
during the three months ended June 30, 1997. Each of the following issuances
by the Company of the securities sold in the transactions referred to below
were not registered under the Securities Act of 1933, as amended, pursuant
to the exemption provided under Section 4 (2) thereof for transactions not
involving a public offering:
Effective as of June 25, 1997, the Company issued 240,000 shares of the
Company's common stock to certain selling shareholders as partial
consideration for the acquisition of all of the capital stock of Well-Co Oil
Service, Inc.
The Company issued, pursuant to the Company's 1995 Employee Stock Option
Plan, various options to purchase shares of the Company's common stock.
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Item 6.
Selected Financial Data.
Five
Fiscal Year Fiscal Year(1) Fiscal Year Fiscal Year Seven Months Months (2)
Ended Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30, November 30,
(in thousands) 1997 1996 1995 1994 1993 1992
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OPERATING DATA:
- -------------------------------------------
Revenues $163,630 $66,478 $44,689 $34,621 $14,256 $10,433
Operating costs:
Direct costs 111,551 47,117 32,793 26,585 10,863 7,947
Depreciation, depletion and amortization 11,420 4,701 2,738 1,371 406 505
General and administrative 18,522 6,608 4,352 3,540 1,587 1,117
Interest 7,535 2,477 1,478 830 276 464
Income before income taxes, minority
interest, reorganization items and
extraordinary items 14,602 5,575 3,328 2,295 1,124 400
Net income 9,098 3,586 2,178 1,345 711 4,986
Income per common share:
Primary:
Net income $0.75 $0.45 $0.33 $0.26 $0.14 $0.28
Fully-diluted:
Net income $0.65 $0.44 $0.33 $0.25 $0.14 $0.03
Average common shares outstanding:
Primary 12,205 7,941 6,647 5,274 5,124 17,942
Assuming full dilution 17,963 8,114 6,647 5,288 5,138 176,508
Common shares outstanding at period end 12,298 10,414 6,914 5,274 5,124 17,942
Market price per common share at period end $17.81 $8.19 $5.06 $4.67 $3.67 n/a
Cash dividends paid on common shares $ - $ - $ - $ - $ - $ -
BALANCE SHEET DATA:
- -------------------------------------------
Cash $41,704 $4,211 $1,275 $1,173 $623 *
Current assets 93,333 27,481 11,290 9,167 4,922 *
Property and equipment 227,255 96,127 36,336 18,935 10,093 *
Property and equipment, net 208,186 87,207 31,942 17,159 9,688 *
Total assets 320,095 121,722 45,243 28,095 15,906 *
Current liabilities 33,142 24,339 9,228 8,383 4,113 *
Long-term debt, including current portion 174,167 46,825 15,949 11,501 5,374 *
Stockholders' equity 73,179 41,624 20,111 9,263 7,280 *
OTHER DATA:
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EBITDA (3) 33,557 12,752 7,544 4,496 1,806 *
Net cash (used) provided by:
Operating activities 1,306 7,121 3,258 1,842 (123) *
Investing activities (82,062) (13,551) (7,154) (5,608) (1,284) *
Financing activities 118,249 9,366 3,998 4,316 (73) *
Working capital 60,191 3,142 2,062 784 809 *
Book value per common share (4) $5.95 $4.00 $2.91 $1.76 $1.42 *
Ratio of earnings to fixed charges (5) $2.61 $2.77 $2.54 $2.65 $2.91 *
* - Not applicable due to the Company's 1992
Reorganization Plan.
(1) Financial data for the year ended June 30, 1996 includes the allocated
purchase price of WellTech Eastern and the results of their operations,
beginning March 26, 1996.
(2) Financial Data for the five months ended November 30, 1992 and prior
periods reflect the previous capital structure of Key Energy Group, Inc.
(previously "National Environmental Group, Inc.") before the Company's 1992
Reorganization Plan and are not always comparable to subsequent periods.
(3) Net income before interest exp., income taxes, depreciation, depletion and
amortization. EBITDA is presented because of its wide acceptance as a
financial indicators of a company's ability to service or incur debt.
EBITDA should not be considered as an alternative to operating net
income, as defined by generally accepted accounting principals, as
indicators of the Company's financial performance or to cash flow as a
measure of liquidity.
(4) Book value per common share are stockholders' equity at end of period
divided by the number of outstanding shares at period end.
(5) For purposes of computing the ratios of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and fixed
charges. Fixed charges consist of interest expenses, amortization of debt
issuance expenses and the portions of rentals and lease obligations
representative of the interest factor.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussion provides information to assist in
the understanding of the Company's financial condition and results of
operations. It should be read in conjunction with the financial statements and
related notes appearing elsewhere in this report.
Overview
The Company experienced its most successful year during fiscal 1997. All
regions have increased equipment use because of higher oil and gas prices,
increased emphasis on horizontal drilling, lower production costs for major and
independent oil and gas producers, renewed focus on domestic production and the
effects of several new alliances the Company entered into with its customers.
Fluctuations in well servicing activity have had a strong correlation with
fluctuations in oil and gas prices. If oil and gas prices were to drop
significantly from current levels, the Company would expect a decrease in demand
for drilling and services which would negatively affect the Company's operating
performance. 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.
FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996
Results of Operations
Operating Income
The Company
Revenues for the year ended June 30, 1997 increased $97,152,000, or 146%,
from $66,478,000 in fiscal 1996 to $163,630,000 in fiscal 1997, while net income
for fiscal 1997 increased $5,512,000, or 154% , from $3,586,000 in fiscal 1996
to $9,098,000 in fiscal 1997. The increase was primarily due to oilwell service
acquisitions throughout the year, increased oil and gas revenues from Odessa
Exploration, and increased oil and gas drilling revenues.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1997 increased
$88,452,000, or 158%, from $55,933,000 for the year ended June 30, 1996 to
$144,385,000 for the year ended June 30, 1997. The increase is primarily
attributable to acquisitions throughout the year and higher equipment use
resulting from an increase in demand for oilfield services.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $4,005,000, or 96%, from
$4,175,000 during the year ended June 30, 1996 to $8,180,000 for the current
year. The increase was primarily the result of increased production of oil and
natural gas from several wells that were drilled and began production during
fiscal 1997, higher oil and natural gas prices for fiscal 1997, and the April
1996 purchase of $6.9 million of oil and gas properties from an unrelated third
party. Of the total $8,180,000 of revenues for the year ended June 30, 1997,
approximately $6,975,000 was from the sale of oil and gas and $1,205,000
represented primarily administrative fee income.
- 12 -
Oil and Natural Gas Well Drilling
Revenues from oil and gas well drilling activities increased $3,768,000, or
61%, from $6,188,000 during the year ended June 30, 1996 to $9,956,000 for the
year ended June 30, 1997. The increase was primarily the result of increased
oilwell drilling activity and an increase in the Company's pricing structure.
Operating Expenses
Oilfield Services
Oilfield service expenses for the year ended June 30, 1997 increased
$59,629,000, or 146%, from $40,737,000 for the year ended June 30, 1996 to
$100,366,000 for the year ended June 30, 1997. The increase was due primarily to
acquisitions made throughout the fiscal year and the increased demand for
oilfield services. In addition, the Company has continued to expand its
services, offering fishing tools, blow-out preventers and oilwell frac
tanks.
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $1,680,000, or 124%,
from $1,350,000 for the year ended June 30, 1996 to $3,030,000 for the year
ended June 30, 1997. The increase was primarily the result costs associated with
several oil and natural gas wells that were drilled and began producting during
fiscal 1997 and the April 1996 purchase of $6.9 million in oil and gas
properties.
Oil and Natural Gas Well Drilling
Expenses related to oil and gas well drilling activities increased
$3,125,000, or 62%, from $5,030,000 for the year ended June 30, 1996 to
$8,155,000 for the year ended June 30, 1997. The increase was primarily the
result of increased revenues.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $6,719,000, or
143%, from $4,701,000 for fiscal 1996 to $11,420,000 for fiscal 1997. The
increase is primarily due to oilfield service depreciation expense, which is the
result of increased oilfield service capital expenditures for the current period
versus the prior period and the acquisitions completed throughout fiscal 1997.
In addition, depletion expense increased for the period due to the increase in
the production of oil and natural gas.
General and Administrative Expenses
General and administrative expenses increased $11,914,000, or 180%, from
$6,608,000 for the year ended June 30, 1996 to $18,522,000 for the year ended
June 30, 1997. The increase was primarily attributable to oilfield service
acquisitions throughout the fiscal year.
Interest Expense
Interest expense increased $5,058,000, or 204%, from $2,477,000 for fiscal
1996 to $7,535,000 in fiscal 1997. The increase was primarily the result of debt
incurred in connection with acquisitions completed throughout fiscal 1997.
- 13 -
Income Taxes
Income tax expense increased $3,612,000, or 191%, from $1,888,000 in income
tax expense for fiscal 1996 to $5,500,000 for fiscal 1997. The increase in
income taxes is primarily due to the increase in operating income. However, the
Company does not expect to be required to remit a significant amount of the
$5,500,000 in total federal income taxes for fiscal year 1997 because of the
availability of net operating loss carryforwards, accelerated depreciation and
drilling tax credits.
Cash Flow
Net cash provided by operating activities decreased $4,965,000, or 70%,
from $7,121,000 during fiscal 1996 to $2,156,000 for fiscal 1997. The decrease
is attributable primarily to increases in accounts receivable, decreases in
accounts payable and accrued expenses, but was partially offset by increases in
depreciation and net income.
Net cash used in investing activities increased $68,511,000, or 506%, from
$13,551,000 for fiscal 1996 to $82,062,000 for fiscal 1997. The increase is
primarily the result of increased capital expenditures for oilwell service
operations and oilwell service acquisitions.
Net cash provided by financing activities was $117,399,000 for fiscal 1997
as compared to $9,366,000 for fiscal 1996, which represents an increase of
$108,033,000, or 1,153%. The increase, which is partially offset by repayments
of long-term debt, is primarily the result of proceeds from the existing
Debentures and commercial paper during the current fiscal year.
- 14 -
FISCAL YEAR ENDED JUNE 30, 1996 VERSUS FISCAL YEAR ENDED JUNE 30, 1995
Operating Income
The Company
Revenues for the year ended June 30, 1996 increased $21,789,000, or 49%,
from $44,689,000 for the year ended June 30, 1995 to $66,478,000 for the year
ended June 30, 1996, while net income increased $1,408,000, or 65%, from
$2,178,000 in fiscal 1995 to $3,586,000 in fiscal 1996. The increase in revenues
was primarily due to the acquisition of Clint Hurt Drilling in March 1995, whose
operations were only included for one quarter in the 1995 year-end results,
increased oil and gas revenues from Odessa Exploration and increased oilwell
service equipment use and the acquisition of WellTech. The increase in fiscal
year 1996 net income over fiscal year 1995 net income was partially attributable
to the inclusion of Clint Hurt Drilling and the acquisition of WellTech Eastern,
but also was a result of an increase in oilwell service equipment use and a
decrease in total consolidated Company costs and expenses as a percentage of
total revenues.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1996 increased
$15,828,000, or 40%, from $40,105,000 for the year ended June 30, 1995 to
$55,933,000 for the year ended June 30, 1996. The increase in revenues was
primarily attributable to higher equipment use resulting from an increase in
demand for oilfield services and the acquisition of WellTech Eastern, whose
operating results were included for the period of March 26, 1996 to June 30,
1996.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $1,841,000, or 79%, from
$2,334,000 during the year ended June 30, 1995 to $4,175,000 for the year ended
June 30, 1996. The increase in revenues was primarily the result of increased
production of oil and natural gas from several wells that were drilled during
1996, higher oil and natural gas prices during 1995 and the April 1996 purchase
of $6.9 million of oil and gas properties from an unrelated third party.
Of the total $4,175,000 of revenues for the year ended June 30, 1996,
approximately $3,554,000 was from the sale of oil and gas and the remaining
$621,000 was attributable primarily to administrative fee income and other
miscellaneous income.
Oil and Natural Gas Well Drilling
Oil and natural gas well drilling operations are performed by Clint Hurt
Drilling which was acquired in March 1995. Comparable numbers for the prior year
are, therefore, not available. Revenues for the year ended June 30, 1996 were
$6,188,000.
Operating Expenses
Oilfield Services
Oilfield service expenses for the year ended June 30, 1996 increased
$10,145,000, or 33%, from $30,592,000 for the year ended June 30, 1995 to
$40,737,000 for the year ended June 30, 1996. The increase was due primarily to
the acquisition of WellTech Eastern on March 26, 1996, and an increased demand
for oilfield services.
- 15 -
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $593,000, or 78%, from
$757,000 for the year ended June 30, 1995 to $1,350,000 for the year ended June
30, 1996. The increase was primarily the result of increased production of oil
and natural gas from several wells that were drilled during fiscal 1996 and the
April 1996 purchase of $6.9 million in oil and gas properties.
Oil and Natural Gas Well Drilling
Clint Hurt Drilling was acquired in March 1995. Comparable numbers for the
prior year are, therefore, not available. Expenses for the year ended June 30,
1996 were $5,030,000.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $1,963,000, or
72%, from $2,738,000 for fiscal 1995 to $4,701,000 for fiscal 1996. The increase
was primarily due to oilfield service depreciation expense, which resulted from
an increase in oilfield service capital expenditures for the 1996 period versus
the prior period and the acquisition of WellTech and Clint Hurt. In addition,
depletion expense increased for the period due to the increase in the production
of oil and natural gas.
General and Administrative Expenses
General and administrative expenses increased $2,256,000, or 52%, from
$4,352,000 for the year ended June 30, 1995 to $6,608,000 for the year ended
June 30, 1996. The increase was primarily attributable to the acquisition of
contract drilling assets, the subsequent inclusion of general and administrative
expenses related to contract drilling operations and the acquisition of WellTech
Eastern.
Interest Expense
Interest expense increased $999,000, or 68%, from $1,478,000 for fiscal
1995 to $2,477,000 for fiscal 1996. The increase was primarily the result of
acquisitions and the addition of certain oil and gas properties that were
financed with proceeds from borrowings.
Income Taxes
Income tax expense for fiscal 1996 increased $738,000, or 64%, from
$1,150,000 in fiscal 1995 to $1,888,000 in fiscal 1996. The increase was
primarily due to an increase in operating income. However, the Company was not
required to remit a significant amount of the $1,888,000 in total federal income
taxes for fiscal year 1996 because of the availability of net operating loss
carryforwards, accelerated depreciation and drilling tax credits.
Cash Flow
Net cash provided by operating activities increased $3,863,000, or 119%,
from $3,258,000 during fiscal 1995 to $7,121,000 for fiscal 1996. The increase
was attributable primarily to increases in net income.
Net cash used in investing activities increased $6,397,000, or 89%, from
$7,154,000 for fiscal 1995 to $13,551,000 for fiscal 1996. The increase was
primarily the result of increased capital expenditures for oil and gas
properties and costs associated with the acquisition of WellTech. This increase
was partially offset by a decrease in oilfield service capital expenditures.
- 16 -
Net cash provided by financing activities increased $5,368,000, or 134%,
from $3,998,000 in fiscal 1995 to $9,366,000 in fiscal 1996. The increase is
primarily the result of increased principal payments during fiscal 1996. This
increase in principal payments was somewhat offset by an increase in proceeds
from long-term debt during fiscal 1996 as the result of the purchase of oil and
gas properties by Odessa Exploration and the acquisition of WellTech.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $37.5 million for the
year ended June 30, 1997 from $4.2 million as of June 30, 1996 to $41.7 million
as of June 30, 1997. This increase was primarily the result of proceeds from
the Bank Credit Agreement.
The Company has projected $20 million for oilfield service capital
expenditures for fiscal 1998 as compared to $15.1 million and $5.2 million in
fiscal 1997 and 1996, respectively. Odessa Exploration has projected outlays of
approximately $10 million in development costs for fiscal 1998, as compared to
$8.2 million and $9.8 million in fiscal 1997 and 1996, respectively. Clint Hurt
Drilling has forecast approximately $2 million for oil and gas drilling capital
expenditures for fiscal 1998, primarily for improvements to existing equipment
and machinery, as compared to $1.5 million for fiscal 1997 and $598,000 in
fiscal 1996. The Company expects to finance these capital expenditures and
development costs using cash flows from operations and available credit. The
Company believes that its cash flows and, to the extent required, borrowings
under the Bank Credit Agreement, will be sufficient to fund such
expenditures.
Debt
In June 1997, the Company entered into the Credit Agreement (the "Bank
Credit Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, Norwest
Bank Texas, N.A., as collateral agent, Lehman Commercial Paper, Inc., as
advisor, arranger and syndication agent and the lenders named therein pursuant
to which the lenders agreed to make available to the Compaany a five-year
revolving credit facilty in the amount of $135 million and a seven-year term
loan facility in the amount of $120 million. Up to $10 million of letters of
credit may be issued pursuant to the Bank Credit Agreement. The amount of
letters of credit outstanding from time to time reduces the amount of revolving
credit loans which may be outstanding.
Revolving credit loans incurred pursuant to the Bank Credit Agreement will
bear interest, at the Company's option, at PNC's base rate plus 1.00% or LIBOR
plus 2.25% and term loans will bear interest, at the Company's option, at PNC's
base rate plus 1.75% or LIBOR plus 2.75%. After September 30, 1997, the margin
applicable to revolving credit loans will fluctuate from time to time between
0.25% and 1.25% with respect to base rate loans and between 1.50% and 2.50% for
LIBOR based loans. Such fluctuations will be based on the Company's ratio of
consolidated total debt (net of cash in excess of $5 million) to a pro forma
calculation of consolidated earnings before interest expense, taxes and
depreciation, depletion and amortization.
The Company used the proceeds from the Bank Credit Agreement to: (i) repay
existing debt; (ii) make additional acquisitions and capital expenditures; and
(iii) provide working capital. Long-term debt that was repaid with proceeds from
the Bank Credit Agreement in June 1997 included all debt with CIT Group/Credit
Finance, Inc. of approximately $54.3 million and all bank debt associated with
Odessa Exploration, previously with Norwest Bank Texas, N.A., of approximately
$2.1 million.
- 17 -
Impact of SFAS 121
As of July 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 - Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). Consequently,
the Company reviews its long-lived assets to be held and used, including oil and
gas properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. Long-lived assets to be disposed of are to be
accounted for at the lower of carrying amount or fair value less cost to sell
when management has committed to a plan to dispose of the assets. All companies,
including successful efforts oil and gas companies, are required to adopt SFAS
121 for fiscal years beginning after December 15, 1995. In order to determine
whether an impairment had occurred, the Company estimated the expected future
cash flows of its income producing equipment and oil and gas properties and
compared such future cash flows to the carrying amount of the asset to determine
if the carrying amount was recoverable. Based on this process, no writedown in
the carrying amount of the Company's property was necessary at June 30, 1997.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effective for periods ending on or after December 15, 1997. FAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted
EPS.The Company will adopt SFAS 128 for the quarter ended December 31, 1997.
Statement of Financial Accounting Standards No. 130 ("SFAS 130") -
Reporting Comprehensive Income, is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
for the fiscal year ended June 30, 1999.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") -
Disclosures about Segments of an Enterprise and Related Information, is
effective for financial statements for periods beginning after December 15,
1997. SFAS 131 need not be applied to interim financial statements in the
initial year of its application. However, comparative information for interim
periods in the initial year of application is to be reported in the financial
statements for interim periods in the second year of application. The Company
will adopt SFAS 131 for the fiscal year ended June 30, 1999.
Management believes the adoption of SFAS 128, SFAS 130 and SFAS 131 will
not have a material effect on its financial position or results of operations of
the Company.
Impact of Inflation on Operations
Management is of the opinion that inflation has not had a significant
impact on the Company's business.
- 18 -
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, 1997 and 1996 and the years
ended June 30, 1997, 1996 and 1995.
Also, included is the report of KPMG Peat Marwick LLP, independent
certified public accountants, on such consolidated financial statements as
of June 30, 1997 and 1996 and for the years ended June 30, 1997, 1996 and
1995.
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets................................ 20
Consolidated Statements of Operations ..................... 21
Consolidated Statements of Cash Flows ..................... 22
Consolidated Statements of Stockholders' Equity ........... 23
Notes to Consolidated Financial Statements ................ 24
Independent Auditors' Report ................................ 51
- 19 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, June 30,
(Thousands, except share and per share data) 1997 1996
------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $41,704 $ 4,211
Accounts receivable, net of allowance for
doubtful accounts ($1,552 - 1997, $992 - 1996) 45,230 20,570
Inventories 5,171 1,957
Prepaid expenses and other current assets 1,228 743
------------------------------------------------------------------------------
Total Current Assets 93,333 27,481
------------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 176,326 66,432
Oil and gas well drilling equipment 6,319 4,862
Motor vehicles 10,569 1,159
Oil and gas properties and other related
equipment, successful efforts method 23,622 17,663
Furniture and equipment 1,661 716
Buildings and land 8,758 5,295
------------------------------------------------------------------------------
227,255 96,127
Accumulated depreciation & depletion (19,069) (8,920)
------------------------------------------------------------------------------
Net Property and Equipment 208,186 87,207
------------------------------------------------------------------------------
Other Assets 18,576 7,034
------------------------------------------------------------------------------
Total Assets $320,095 $121,722
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $15,339 $11,086
Other accrued liabilities 12,507 11,002
Accrued interest 2,102 417
Accrued income taxes 1,664 53
Deferred tax liability 126 310
Current portion of long-term debt 1,404 1,471
- -------------------------------------------------------------------------------
Total Current Liabilities 33,142 24,339
- -------------------------------------------------------------------------------
Long-term debt, less current portion 172,763 45,354
Non-current accrued expenses 4,017 4,909
Deferred tax liability 35,738 4,244
Minority interest 1,256 1,252
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 25,000,000
shares authorized, 12,297,752 and 10,413,513
sharesissued and outstanding at June 30,
1997 and 1996, respectively 1,230 1,041
Additional paid-in capital 55,031 32,763
Retained earnings 16,918 7,820
- -------------------------------------------------------------------------------
Total Stockholders' Equity 73,179 41,624
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $320,095 $121,722
===============================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
- 20 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended Year Ended Year Ended
(Thousands, except per share data) June 30, 1997 June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Oilfield services $144,385 $55,933 $40,105
Oil and gas 8,180 4,175 2,334
Oil and gas well drilling 9,956 6,188 1,932
Other, net 1,109 182 318
- ---------------------------------------------------------------------------------------------------------------------------------
163,630 66,478 44,689
- ---------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 100,366 40,737 30,592
Oil and gas 3,030 1,350 757
Oil and gas well drilling 8,155 5,030 1,444
Depreciation, depletion and amortization 11,420 4,701 2,738
General and administrative 18,522 6,608 4,352
Interest 7,535 2,477 1,478
- ---------------------------------------------------------------------------------------------------------------------------------
149,028 60,903 41,361
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 14,602 5,575 3,328
Income tax expense 5,500 1,888 1,150
Minority interest in net income 4 101 -
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $9,098 $3,586 $2,178
=================================================================================================================================
EARNINGS PER SHARE :
Primary:
Net income $0.75 $0.45 $0.33
Assuming full dilution:
Net income $0.65 $0.44 $0.33
=================================================================================================================================
WEIGHTED AVERAGE OUTSTANDING:
Primary 12,205 7,941 6,647
Assuming full dilution 17,963 8,114 6,647
=================================================================================================================================
See the accompanying notes which are an integral part of these consolidated
financial statements.
- 21 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended June 30,
---------------------------------------
(Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $9,098 $3,586 $2,178
Adjustments to reconcile income from operations to
net cash provided by operations:
Depreciation, depletion and amortization 11,420 4,701 2,738
Deferred income taxes 3,836 1,618 1,370
Minority interest in net income 4 101 -
Gain on sale of assets (235) (186) -
Other non-cash items - 6 (312)
Change in assets and liabilities net of effects
from the acquisitions:
Increase in accounts receivable (14,904) (2,180) (1,327)
Increase (decrease) in other current assets (2,811) 765 (940)
Decrease in accounts payable and
accrued expenses (5,565) (1,293) (154)
Other assets and liabilities 1,313 3 (295)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,156 7,121 3,258
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Oilwell service operations (15,084) (5,188) (2,839)
Capital expenditures - Oil and gas operations (8,188) (1,879) (2,823)
Capital expenditures - Oil and gas well drilling
operations (1,483) (598) (143)
Proceeds from sale of fixed assets 3,159 574 -
Cash received in acquisitions 2,342 1,168 -
Acquisitions - oil and gas operations - (7,895) (1,348)
Acquisitions - oilwell service operations, net of
cash acquired (62,808) - -
Redemption (purchase) of restricted
marketable securities - 267 (1)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (82,062) (13,551) (7,154)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (1,772) (2,601) (2,148)
Repayment of long-term debt (47,815) - -
Borrowings (payments) under line-of-credit - 1,100 (605)
Proceeds from stock options exercised 141 - -
Proceeds from warrants exercised 1,362 - -
Proceeds from convertible subordinated debentures
- net of debt issuance costs 49,590 - -
Proceeds from long-term commercial paper debt
- net of debt issuance costs 115,021 - -
Proceeds from other long-term debt 872 10,867 6,751
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 117,399 9,366 3,998
- --------------------------------------------------------------------------------------------------
Net increase in cash 37,493 2,936 102
Cash at beginning of period 4,211 1,275 1,173
- --------------------------------------------------------------------------------------------------
Cash at end of period $41,704 $4,211 $1,275
==================================================================================================
See the accompanying notes which are an integral part of these consolidated
financial statements.
- 22 -
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock
--------------------------------
Number of Additional
Shares Amount Paid-in Retained
(Thousands) Outstanding at par Capital Earnings Total
- ------------------------------------------------------------------------------- --------------- ------------------ ------------
Balance 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
- -------------------------------------------------------------------------------- --------------- ------------------ ------------
Issuance of common stock for Brownlee
Well Service stock 61 6 665 - 671
Issuance of common stock for Woodward
Well Service stock 75 8 555 - 563
Issuance of common stock for Brooks
Well Service stock 918 92 11,033 - 11,125
Issuance of common stock for Enerair
Oilwell Service assets 4 - 48 - 48
Issuance of common stock for Cobra
Well Service stock 175 18 2,368 - 2,386
Issuance of common stock for Tri-State
Well Service assets 84 8 992 - 1,000
Issuance of common stock for Kal-Con
Well Service assets and stock 78 8 1,103 - 1,111
Issuance of common stock for Well-Co
Well Service stock 240 24 4,026 - 4,050
Exercise of warrants 221 22 1,340 - 1,362
Exercise of options 28 3 138 - 141
Net income - - - 9,098 9,098
- -------------------------------------------------------------------------------- --------------- ------------------ ------------
Balance at June 30, 1997 12,298 $1,230 $55,031 $16,918 $73,179
================================================================================ =============== ================== ============
See the accompanying notes which are an integral part of these consolidated
financial statements.
- 23 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
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, 1997, 1996 and 1995 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. Also included in the results of operations for the fiscal year ended
June 30, 1997 and approximately three months for the fiscal year ended June 30,
1996 are those 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
Servicios WellTech, S.A. ("Servicios"), an Argentinean corporation. Servicios
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 wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated. The accounting policies
presented below have been followed in preparing the accompanying consolidated
financial statements. The Company's ownership of less than 50% owned entities
are accounted for by the cost or equity methods, depending on the Company's
ownership percentage.
Estimates and Uncertainties
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories
Inventories, which consist primarily of oilwell service parts and supplies,
are held for use in the operations of Key and are valued at the lower of average
cost or market.
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:
(table follows on next page)
- 24 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Description Years
---------------------------------------------------------------------
Oilfield service equipment 3 - 20
Oil and gas well drilling equipment 3 - 15
Motor vehicles 3 - 7
Furniture and equipment 3 - 10
Buildings and improvements 10 - 40
Gas processing facilities 10
---------------------------------------------------------------------
Upon disposition or retirement of property and equipment, the cost and
related accumulated depreciation are removed from the accounts and the gain or
loss thereon, if any, is included in the results of operations.
Odessa Exploration utilizes the successful efforts method of accounting for
its oil and gas properties. Under this method, all costs associated with
productive wells and nonproductive development wells are capitalized, while
nonproductive exploration costs and geological and geophysical costs (if any),
are expensed. Capitalized costs relating to proved properties are depleted using
the unit-of-production method. Upon disposition, the carrying amounts of
properties sold or otherwise disposed of and the related allowance for depletion
are eliminated from the accounts and any gain/loss is included in results of
operations.
Gas Balancing
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 approximately $155,000, $198,000 and $253,000 as of June
30, 1997, 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, 1997, 1996 and 1995, other assets consisted primarily of
goodwill, capitalized debt issuance costs and security and escrow deposits from
Key's workers' compensation retrospective insurance program, in addition to an
interest, (approximately 13%), in an insurance company (the insurance company is
affiliated with Key's workers' compensation carrier).
- 25 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
At June 30, 1997, 1996 and 1995, the Company classified as goodwill the
cost in excess of fair value of the net tangible 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 $622,000 for fiscal 1997 and
$100,000 for fiscal 1996 and $100,000 for fiscal 1995. Debt issuance cost
amortization expense totaled $344,000 for the year ended June 30, 1997 and is
amortized over the term of the applicable debt.
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 eligible subsidiaries file a consolidated U. S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U. S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of temporary cash investments
and trade receivables. The Company restricts investment of temporary cash
investments to financial institutions with high credit standing and by policy
limits the amount of credit exposure to any one financial institution. The
Company's customer base consists primarily of multi-national, foreign national
and independent oil and natural gas producers. See Note 12 for additional
information regarding customers which accounted for more than 10% of
consolidated revenues. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral on its trade receivables.
Such credit risk is considered by management to be limited due to the large
number of customers comprising the Company's customer base. The Company
maintains reserves for potential credit losses, and such losses have been within
management's expectations.
- 26 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Impact of SFAS 121
On July 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 - Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Adoption of this Statement
did not have an impact on the Company's financial position, results of
operations, or liquidity.
Stock-based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Accordingly, the company
has only adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). See
Note 8 for the pro forma disclosures of compensation expense determined under
the fair-value provisions of SFAS 123.
Cash Flows
For cash flow purposes, the Company considers all unrestricted highly
liquid investments with less than a three month maturity when purchased as cash
equivalents.
Reclassifications
Certain reclassifications have been made to the fiscal 1996 and 1995
consolidated financial statements to conform to the fiscal 1997 presentation.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
Statement of Financial Accounting Standards No. 128 ("SFAS 128") - Earnings
per Share, is effective for periods ending on or after December 15, 1997. FAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 also requires dual presentation of
basic EPS and diluted EPS on the face of the income statement and requires a
reconciliation of the numerators and denominators of basic EPS and diluted
EPS.The Company will adopt SFAS 128 for the quarter ended December 31, 1997.
Statement of Financial Accounting Standards No. 130 ("SFAS 130") -
Reporting Comprehensive Income, is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
for the fiscal year ended June 30, 1999.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") -
Disclosures about Segments of an Enterprise and Related Information, is
effective for financial statements for periods beginning after December 15,
1997. SFAS 131 need not be applied to interim financial statements in the
initial year of its application. However, comparative information for interim
periods in the initial year of application is to be reported in the financial
statements for interim periods in the second year of application. The Company
will adopt SFAS 131 for the fiscal year ended June 30, 1999.
- 27 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Management believes the adoption of SFAS 128, SFAS 130 and SFAS 131 will
not have a material effect on its financial position or results of operations of
the Company.
Impact of Inflation on Operations
Although in our complex environment it is extremely difficult to make an
accurate assessment of the impact of inflation on the Company's operations,
management is of the opinion that inflation has not had a significant impact on
its business.
2. BUSINESS AND PROPERTY ACQUISITIONS
The following described acquisitions have been completed during the current
year and are included in the Company's results of operations for the twelve
months ended June 30, 1997.
Well-Co Oil Service. Inc.
On June 26, 1997, the Company completed its acquisition of Well-Co Oil
Service, Inc. ("Well-Co") which operates 79 oilwell service rigs and related
equipment in west Texas. Well-Co was acquired for $17.5 million in cash and
240,000 shares of the Company's common stock. Well-Co will be operated by the
Company's west Texas subsidiary of Yale E. Key. The results of operations of
Well-Co are included in the Company's results of operations effective June 26,
1997. The acquisition was accounted for using the purchase method.
Phoenix Well Service, Inc.
On June 10, 1997, the Company completed its acquisition of Phoenix Well
Service, Inc. ("Phoenix") which operates 11 oilwell service rigs and related
equipment in west Texas. Phoenix was acquired for $2.3 million in cash. Phoenix
will be operated by the Company's west Texas subsidiary of Yale E. Key. The
results of operations of Phoenix are included in the Company's results of
operations effective June 26, 1997. The acquisition was accounted for using the
purchase method.
Southwest Oilfield Services, Inc.
On June 10, 1997, the Company completed its acquisition of Southwest
Oilfield Services, Inc. ("Southwest") which operates 3 oilwell service rigs and
related equipment in western Oklahoma. Southwest was acquired for $455,000 in
cash. Southwest will be operated by the WellTech Mid-Con Division of WellTech
Eastern, Inc. The results of operations of Southwest are included in the
Company's results of operations effective June 10, 1997. The acquisition was
accounted for using the purchase method.
Wireline and Excavation Assets
On May 1, 1997, the Company completed an acquisition of ten wireline units
and related equipment for approximately $600,000 in cash. These assets will be
operated in West Virginia by the WellTech Eastern Division of WellTech Eastern.
On May 5, 1997, the Company completed its acquisition of several dump trucks and
related excavation equipment for $410,000 in cash. These assets will be operated
in Michigan by the WellTech Eastern Division of WellTech Eastern. The results of
operations of these assets are included in the Company's results of operations
effective May 1, 1997. The acquisition was accounted for using the purchase
method.
Shreve's Well Service
On April 18, 1997, the Company completed its acquisition of the assets of
Shreve's Well Service, Inc. ("Shreve's") which operated in West Virginia.
Shreve's assets were acquired for $550,000 in cash and included five well
service rigs and related equipment. The Shreve's assets will be operated by the
WellTech Eastern Division of WellTech
- 28 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Eastern. The results of operations of Shreve's are included in the
Company's results of operations effective May 1, 1997. The acquisition was
accounted for using the purchase method.
Argentine Drilling Rigs
On April 16, 1997, the Company acquired three drilling rigs and related
equipment in Argentina from Drillers, Inc. for $1.5 million in cash. The
drilling rigs will be operated by WellTech Servicios, the Company's Argentine
subsidiary.
Diamond Well Service
On April 3, 1997, the Company completed the acquisition of the assets of
Diamond Well Service, Inc. ("Diamond") for $675,000 in cash. The Diamond assets
included four oilwell service rigs and related equipment in Oklahoma. The
Diamond assets will be operated by the WellTech Mid-Continent Division of
WellTech Eastern. The results of operations of Diamond are included in the
Company's results of operations effective April 1, 1997. The acquisition was
accounted for using the purchase method.
Kalkaska Construction Service, Inc. ,Kalkaska Oilfield Service, Inc. and
Elder Well Service, Inc.
On March 31, 1997, the Company completed the acquisition of the assets of
Kalkaska Construction Service, Inc., Kalkaska Oilfield Service, Inc. ("KalCon")
and Elder Well Service, Inc. ("Elder"), both based in Michigan. The KalCon
assets included 40 vacuum (fluid transport) trucks, 40 trucks used in oilfield
equipment hauling, seven saltwater disposal wells and other oilfield related
equipment, and were acquired for approximately $8.5 million in cash and 77,998
shares of the Company's common stock. The Elder assets included six oilwell
service rigs and related equipment and were acquired for $609,000 in cash. Both
the KalCon and Elder assets will be operated by the WellTech Eastern Division of
WellTech Eastern. The operating results of KalCon and Elder are included in the
Company's results of operations effective April 1, 1997. The acquisition was
accounted for using the purchase method.
T.S.T. Paraffin Service Co., Inc.
On March 27, 1997, the Company completed the acquisition of T.S.T. Paraffin
Service Co., Inc. ("TST") for $8.7 million in cash. TST operates approximately
61 trucks, 22 hot oil units and other related equipment in west Texas. TST will
be operated by the Company's west Texas subsidiary: Yale E. Key, Inc. The
operating results of TST are included in the Company's results of operations
effective April 1, 1997. The acquisition was accounted for using the purchase
method.
Tri-State Wellhead & Valve, Inc.
The Company completed its acquisition of the assets of Tri-State Wellhead &
Valve, Inc. ("Tri-State") on March 17, 1997 for $550,000 in cash and 83,770
shares of the Company's common stock. The Tri-State assets consisted of a
wellhead equipment rental business and five oilwell service rigs. These assets
will be operated by the WellTech Mid-Continent Division of WellTech Eastern. The
operating results from these assets are included in the Company's results of
operations effective April 1, 1997. The acquisition was accounted for using the
purchase method.
Cobra Industries, Inc.
Effective as of January 13, 1997, the Company completed the purchase of
Cobra Industries, Inc. ("Cobra") for $5 million in cash and 175,000 shares of
the Company's common stock. Cobra operates 26 oilwell service rigs in
southeastern New Mexico. The operating results from Cobra are included in the
Company's results of operations effective February 1, 1997. The acquisition was
accounted for using the purchase method.
- 29 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Talon Trucking Co.
Effective as of January 7, 1997, the Company completed the acquisition of
the assets of Talon Trucking Co. ("Talon") for $2.7 million in cash. Talon
operated three oilwell service rigs, 21 trucks and related fluid transportation
and disposal assets in Oklahoma, which assets are currently operated by the
WellTech Mid-Continent Division of WellTech Eastern. The operating results from
these assets are included in the Company's results of operations effective
January 7, 1997. The acquisition was accounted for using the purchase method.
B&L Hotshot, Inc.
Effective as of December 13, 1996, the Company completed the acquisition of
B&L Hotshot, Inc. and affiliated entities ("B&L) for $4.9 million in cash. B&L
provides trucking and related services for oil and natural gas wells in
Michigan, which operations are currently conducted by the WellTech Eastern
Division of WellTech Eastern. The operating results from B&L are included in the
Company's results of operations effective January 1, 1997. The acquisition was
accounted for using the purchase method.
Brooks Well Servicing, Inc.
Effective as of December 1, 1996, the Company completed the acquisition of
Brooks Well Servicing, Inc. ("Brooks") for 917,500 shares of the Company's
common stock. Brooks was a wholly-owned subsidiary of Hunt Oil Company and
operated 32 oilwell service rigs and ancillary equipment in east Texas, which
operations are currently conducted by the WellTech Mid-Continent Division of
WellTech Eastern. The operating results from Brooks are included in the
Company's results of operations effective December 1, 1996. The acquisition was
accounted for using the purchase method.
Hitwell Surveys, Inc.
Effective as of December 2, 1996, the Company completed the purchase of
Hitwell Surveys, Inc. ("Hitwell") for approximately $1.3 million in cash.
Hitwell operates eight oilwell logging and perforating trucks in the Appalachian
Basin and Michigan. The operating results from Hitwell are included in the
Company's results of operations effective December 1, 1996. The acquisition was
accounted for using the purchase method.
Energy Air Drilling Services Co.
Effective as of November 1, 1996, the Company completed the acquisition of
certain assets of Energy Air Drilling Services Co. ("Energy Air") for $500,000
in cash and 4,386 shares of the Company's common stock. Energy Air operated four
air drilling packages in west Texas, which operations are currently conducted by
Yale E. Key. The acquisition was accounted for using the purchase method.
Brownlee Well Service Inc.
Effective as of October 24, 1996, the Company completed the purchase of
Brownlee Well Service, Inc. ("Brownlee") and Integrity Fishing and Rental Tools
Inc., ("Integrity"). Consideration for the acquisition was $6.5 million in cash
and 61,069 shares of the Company's common stock. Brownlee and Integrity operate
16 oilwell service rigs with ancillary equipment and a variety of oilfield
fishing tools in west Texas. The operating results from Brownlee are included in
the Company's results of operations effective November 1, 1996. The acquisition
was accounted for using the purchase method.
- 30 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Woodward Well Service, Inc
Effective as of October 1, 1996, the Company completed the acquisition of
Woodward Well Service, Inc. ("Woodward") for 75,000 shares of the Company's
common stock and approximately $100,000 in cash, most of which is payable over a
four-year period. Woodward operated five oilwell service units in Oklahoma,
which operations are currently conducted by the WellTech Mid-Continent Division
of Welltech Eastern. The operating results from Woodward are included in the
Company's results of operations effective October 1, 1996. The acquisition was
accounted for using the purchase method.
Acquisitions Completed Prior to June 30, 1996
Odessa Exploration Properties
In April of 1996, Odessa Exploration purchased approximately $6.9 million
in cash of oil and gas producing properties from an unrelated company using
proceeds from bank borrowings, which indebtedness was subsequently repaid (see
Note 5). The acquisition was accounted for using the purchase method.
WellTech, Inc.
On March 26, 1996, the Company completed the merger of WellTech, Inc.
("WellTech") into the Company. The net consideration for the merger was
3,500,000 shares of the Company's common stock and warrants to purchase 500,000
additional shares of Common Stock at an exercise price of $6.75 per share.
WellTech conducted oil and gas well servicing operations in the Mid-Continent
and Northeast areas of the United States and in Argentina. The acquisition was
accounted for using the purchase method.
Pro Forma Results of Operations--(unaudited)
The following unaudited pro forma results of operations have been prepared
as though WellTech Eastern, Well-Co, Cobra and T.S.T. had been acquired on July
1, 1995. Pro-forma amounts are not necessarily indicative of the results that
may be reported in the future.
Year Ended
(Thousands, except per share data) June 30, 1997 June 30, 1996
- -------------------------------------------------------------------------------
Revenues $ 198,088 $162,988
Net income 11,591 8,964
Earnings per share $ 0.92 $ 0.76
3. OTHER ASSETS
Other assets consist of the following:
June 30,
(Thousands) 1997 1996
---------------------------------------------------------------------------
Investment in insurance company - common stock * $ 368 $ 368
Workers compensation security premiums 1,817 1,117
Debt issuance costs (net of amortization; 1997 - $344) 7,045 -
Goodwill (net of amortization: 1997 - $822, 1996 - $200) 9,256 5,400
Other 90 149
---------------------------------------------------------------------------
$18,576 $ 7,034
===========================================================================
* - Represents approximately 13% ownership.
- 31 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
4. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are
pending against the Company. Management does not believe that the disposition of
any of these items will result in a material adverse impact to the consolidated
financial position of the Company. As of June 30, 1997, the Company had reserved
$133,000 for potential 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 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
On June 6, 1997, the Company entered into an agreement (the "Bank Credit
Agreement") with PNC Bank, N.A., as administrative agent, Norwest Bank Texas,
N.A., as collateral agent. Lehman Commercial Paper, Inc., as advisor, arranger
and syndication agent and the lenders named thereas pursuant to which the
lenders provided a $255 million credit facility, consisting of a $120 million
seven-year term loan and a $135 million five-year revolver. The interest rate,
on the term loan, is LIBOR plus 2.75 percent and the interest rate on the
revolver varies based on the LIBOR and the level of the Company's indebtedness
and is currently LIBOR plus 2.25 percent. The Company used the proceeds from the
facility to: (i) repay existing bank debt; (ii) make additional acquisitions and
capital expenditures; and (iii) provide working capital. In addition, the credit
facility provides, under certain conditions, for the repurchase of a portion of
the Company's outstanding common stock in the open market from time to time. In
connection with the credit facility, the company incurred and capitalized
$4,979,000 of debt issuance costs. These costs are being amortized over the life
of the credit facility. The credit facility contains certain restrictive
covenants and requires certain financial ratios.
Long-term debt which was repaid with proceeds from the Agreement in June
1997 included all debt with CIT Group/Credit Finance, Inc. ("CIT") of
approximately $54.3 million and all bank debt associated with Odessa
Exploration, previously with Norwest Bank Texas, N.A. ("Norwest") of
approximately $2.1 million.
In July 1996, the Company completed the offering of $52,000,000 7%
convertible subordinated debentures due 2003 (the "Debentures"). In August 1996,
the interest rate on the Debentures was increased to 7 1/2%. As the result of
the Company's purchase of the remaining 37% ownership in Servicios, the interest
rate was reduced to 7% in July of 1997. The offering was a private offering
pursuant to Rule 144A under the Securities Act of 1933. Proceeds from the
offering were used to substantially repay existing long-term debt (approximately
$35.2 million). In connection with the offering of the Debentures, the Company
capitalized and incurred $2,410,000 of debt issuance costs. These costs are
being amortized over the life of the Debentures. The Debenture contains certain
restrictive covenants and requires certain financial ratios.
The Debentures mature on July 1, 2003 and are convertible at any time after
November 1, 1996 and before maturity, unless previously redeemed, into shares of
the Company's common stock at a conversion price of $9 3/4 per share, subject to
adjustment in certain events. In addition, holders of the Debentures who convert
prior to July 1, 1999 will receive, in addition to the Company's common stock, a
payment generally equal to 50% of the interest otherwise payable on the
converted Debentures from the date of conversion through July 1, 1999, payable
in cash or common stock, at the Company's option. Interest on the Debentures is
payable semi-annually on January 1 and July 1 of each year, commencing January
1, 1997. In August, 1996, the interest rate was increased from 7% to 7 1/2% due
to certain modifications in the Debenture indenture involving a certain
subsidiary's
- 32 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
inability to guarantee the obligations under the indenture,
relating to the Debentures (the "Prospectus"), (specifically, Servicios). As the
result of the Company's purchase of the remaining 37% ownership in Servicios,
the interest rate was reduced to 7% in July of 1997.
The Debentures will not be redeemable by the Company 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.(see Note 17, for
further discussion.)
In January 1996, prior to the consummation of the Bank Credit Agreement and
offering described above, the Company, Yale E. Key, Clint Hurt and WellTech
entered into separate credit facilities with CIT totaling approximately $35
million (the combined maximum credit limit). The credit facilities were combined
into one facility after the consummation of the Welltech merger. As a result of
the separate credit facilities, the interest rate for Yale E. Key was lowered
from two and one-half to one and one-quarter percent over the stated prime rate
(8.25% at June 30, 1996). Each of the CIT term notes required principal and
interest payments, due the first day of each month beginning February 1, 1996,
plus a final payment of the unpaid balance of the note due December 31, 1998.
The expiration of each of the lines of credit was December 31, 1998.
The components of long-term debt are as follows:
June 30,
(Thousands) 1997 1996
Term Note (i) $120,000 $ -
Subordinated Debentures (ii) 52,000 -
Term Note(s) - CIT, interest and
principal payable monthly (iii) - 21,062
Revolving Line(s) of Credit - CIT,
interest payable monthly (iii) - 9,910
Revolver Note - Norwest, interest
payable monthly (iv) - 6,300
Term Note(s) - Norwest, interest and principal
payable monthly (v) - 7,000
Other notes payable 2,167 2,553
174,167 46,825
Less current portion 1,404 1,471
-----------------------------------------------------------------------
Long-term debt $172,763 $ 45,354
=======================================================================
(i). Under the Bank Credit Agreement, the term loan of $120 million
requires interest payments at the termination of the LIBOR interest period.
The term loan is seven years and the interest rate is LIBOR plus 2.75
percent. Principal payments are $500,000 at June 30, 1998, $125,000 at
the end of each quarter beginning September 30, 1998 through June 30,
2002, $8,750,000 at the end of each quarter beginning September 30,
2002 through June 30, 2003 and $20,625,000 beginning September 30, 2003
with a final payment of $20,625,000 on June 30, 2004.
The Company used the proceeds from the facility to: (i) repay existing bank
debt; (ii) make additional acquisitions and capital expenditures; and (iii)
provide working capital. In addition, the credit facility, of $135 million,
provides, under certain conditions, for the repurchase of a portion of the
Company's outstanding common stock in the open market from time to time. At
June 30, 1997, there was $135 million available on the credit facility.
Under the credit facility the Company may be obligated to pay certain fees
including a commitment fee which ranges from .25% to .375% based on the
unused portion of the credit facility.
- 33 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(ii). 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"), (specifically, Servicios). As the result of
the Company's purchase of the remaining 37% ownership in Servicios, the
interest rate was reduced to 7% in July of 1997.
(iii). The CIT term note, as amended, required principal payments of
approximately $275,000, plus interest, due the first day of each month plus
a final payment of the unpaid balance of the note due December 31, 1998.
The interest rate was one and one-quarter percent above the stated prime
rate of 8.25% 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, required monthly
payments of interest at one and one-quarter percent above the stated prime
rate of 8.25% at June 30, 1996. The line of credit was collateralized by
the accounts receivable of Yale E. Key, Clint Hurt and WellTech Eastern.
The agreement with CIT included certain restrictive covenants, the most
restrictive of which prohibited the Company from making distributions and
declaring dividends on its common stock.
(iv). Prior to the Agreement and Offering described above, Odessa
Exploration had a loan agreement, as amended, with Norwest. The loan
agreement provided for a $7.5 million revolving line of credit note
subject to a borrowing base limitation (approximately $6.3 million at June
30, 1996). The borrowing base was redetermined on at least a semi-annual
basis. The borrowing base was reduced by approximately $100,000 per month
through October 1997; the maturity of the note. The note's interest rate
was one-half of one percent over Norwest's prime rate of 8.25% at June 30,
1996. The note was secured by substantially all of the oil and gas
properties of Odessa Exploration.
The loan agreement had contained various restrictive covenants and
compliance requirements, which included (a) prohibits Odessa Exploration
from declaring or paying dividends on Odessa Exploration's common stock,
(b) limiting the incurrence of additional indebtedness by Odessa
Exploration, (c) the limitation on the disposition of assets and (d)
various financial covenants.
(v). In April, 1996, as the result of the acquisition of certain
properties by Odessa Exploration, but prior to the Offering described
above, Odessa Exploration entered into a loan agreement with Norwest. The
loan agreement provided for a term loan of $9.3 million to be reduced by
$2.4 million in principal amount after the consummation of the acquisition
of certain properties by Odessa Exploration. The note's interest rate was
one-half of one percent over Norwest's prime rate of 8.25% at June 30,
1996. The note required interest payments beginning June 1, 1996. The note
was secured by substantially all of the oil and gas properties of Odessa
Exploration.
Presented below is a schedule of the repayment requirements of long-term
debt for each of the next five years and thereafter as of June 30, 1997:
- 34 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(in thousands)
Fiscal year Principal
Ended Amount
---------------------------------------------------------
1998 $ 1,404
1999 1,392
2000 701
2001 637
2002 533
Thereafter 169,500
-------
$ 174,167
=========================================================
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, other current assets and other current
liabilities approximates fair value because of the short maturity of these
instruments.
Based on the borrowing rates currently estimated to be available to the
Company for loans with similar terms, the fair value of long-term debt
approximates the carrying amount as of June 30, 1997 and 1996, except for the
subordinated convertible debentures which have a carrying value of $52 million
and a fair value of approximately $98.9 million at June 30, 1997.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30,
(Thousands) 1997 1996
---------------------------------------------------------------------------
Accrued payroll and taxes $ 6,674 $2,614
Group medical insurance 891 1,536
Workers compensation 1,683 1,067
State sales and use taxes 247 414
Gas imbalance - deferred income 155 198
Revenue distribution 145 437
Acquisition and reorganization accrual 838 3,720
Other 1,874 1,016
-----------------------
Total $ 12,507 $11,002
===========================================================================
8. STOCKHOLDERS' EQUITY
The 1995 Stock Option Plan
On March 26, 1996, a Stock Option Plan (the "1995 Plan") was approved by
the Company's stockholders. The Plan became effective July 1, 1995, and , unless
terminated earlier, will terminate July 1, 2005. The 1995 Plan is administered
by a committee (the "Committee") consisting of at least three directors of Key,
each of whom is a "disinterested person" within the meaning of rule 16b-3 under
the Exchange Act and an "outside director" within the meaning of Section 162(m)
of the Code.
- 35 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued
The total number of shares of the Company's common stock that may be
subject to options under the 1995 Plan may not exceed 1,800,000 in the
aggregate. The total amount of common stock with respect to which options
may be granted over the life of the 1995 Plan to any single employee shall
not exceed 500,000 shares in the aggregate. Options which are canceled,
forfeited or have expired or expire by their terms without being exercised
shall be available for future grants under the 1995 Plan. The Committee
may determine which key employees of the Company or any subsidiary or
other persons shall be granted options under the 1995 Plan, the terms of
the 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.
The 1995 Outside Directors Stock Option Plan
On March 26, 1996, an Outside Directors Stock Option Plan was approved by
the Company's Shareholder's (the "Directors Plan"). Individuals who are "Outside
Directors" are eligible to participate in the Directors Plan. An "Outside
Director" is defined as a member 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 400,000
shares of common stock, which may be authorized but unissued shares, treasury
shares, or shares purchased on the open market. The exercise price of the NSO
shall be the fair market value on the date of the grant.
The following table summarizes the stock option activity related to the
Company's plans:
Price
Shares Per Share
-----------------------------------------------------------------------
Outstanding, July 1, 1995
Granted 1,075,000 $ 5.00
---------
Outstanding, June 30, 1996 1,075,000
---------
Granted 175,000 $ 7.50
175,000 $8.313
50,000 $8.375
25,000 $8.50
25,000 $11.125
535,000 $13.25
25,000 $14.50
- 36 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Price
Shares Per Share
50,000 $16.875
Canceled 26,668 $5.00
Exercised 28,332 $5.00
----------
Outstanding, June 30, 1997 2,080,000
==========
Exercisable, June 30, 1997 810,417
The Company applies APB 25 and related Interpretations in accounting for
its stock option awards. Accordingly, no compensation expense has been
recognized for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with SFAS 123, the Company's net
income and net income per share, for the years ended June 30, 1997 and 1996
would have been adjusted to the following pro forma amounts:
(unaudited) Year Ended June 30,
1997 1996
---- ----
Net income (in thousands) $8,680 $2,945
Primary net income per share $ 0.71 $ 0.37
Fully-diluted net income per share $ 0.61 $ 0.35
The pro forma net income and pro forma net income per share amounts noted
above are not likely to be representative of the pro forma amounts to be
reported in future years. Pro forma adjustments in future years will include
compensation expense associated with the options granted in fiscal year 1996 and
1997 plus compensation expense associated with any options awarded in future
years. As a result, such pro forma compensation expense is likely to be higher
than the levels reflected for 1996 and 1997 if any options are awarded in future
years.
Under SFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grant in 1997 and 1996:
1997 1996
---- ----
Risk-free interest rate 6.59% 6.54%
Expected life 5 years 5 years
Expected volatility 28% 29%
Expected dividend yield 0% 0%
The total fair value of options granted at June 30, 1997 is $6,541,000.
- 37 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
9. INCOME TAXES
Components of income tax expense (benefit) are as follows:
Fiscal Year Ended June 30,
(Thousands) 1997 1996 1995
-----------------------------------------------------------------------
Federal and State:
Current $ 1,664 $ 270 $ (220)
Deferred 3,836 1,618 1,370
---------------------------------------
$ 5,500 $ 1,888 $1,150
======================================================================
Income tax expense (benefit) differs from amounts computed by applying the
statutory federal rate as follows:
Fiscal Year Ended June 30,
(Thousands) 1997 1996 1995
-----------------------------------------------------------------------
Income tax computed at
Statutory rate 35.0% 34.0% 34.0%
Amortization of goodwill disallowance 1.5 - -
Meals and entertainment disallowance 0.8 1.7 2.2
Accrual to return adjustments 0.3 (1.5) (1.0)
Other 0.1 (0.3) (0.7)
_______________________________________________________________________
37.7% 33.9% 34.5%
=======================================================================
Deferred tax assets (liabilities) are comprised of the following :
Fiscal Year Ended June 30,
(Thousands) 1997 1996 1995
-----------------------------------------------------------------------
Net operating loss carry-forwards $ 4,628 $ 6,293 $ 1,140
Property and equipment (40,410) (10,942) (3,437)
Other (82) 95 (25)
-----------------------------------------------------------------------
Net deferred tax liability $ (35,864) $ (4,554) $ (2,322)
=======================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future, management has determined that taxable income of the Company
will more likely than not be sufficient to fully utilize available carryforwards
prior to their ultimate expiration.
The Company estimates that as of June 30, 1997, the Company will have
available approximately $148,414,060 of net operating loss carryforwards (which
begin to expire in 2001). The net operating loss carryforwards are subject to an
annual limitation of approximately $940,000, under Sections 382 and 383 of the
Internal Revenue Code.
- 38 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. LEASING ARRANGEMENTS
Among other leases, the Company (primarily its subsidiaries), lease certain
automotive equipment under non-cancelable operating leases which expire at
various dates through 2002. The term of the operating leases generally run from
36 to 60 months with varying payment dates throughout each month. In addition,
in the case of Yale E. Key, each lease includes an option to purchase the
equipment and an excess mileage charge as defined in the leases.
As of June 30, 1997, the future minimum lease payments under
non-cancelable operating leases, in thousands, are as follows:
Fiscal Year Lease
Ending June 30, Payments
1998 $ 4,348
1999 3,433
2000 2,044
2001 1,122
2002 391
---------
$11,338
=========
Operating lease expense was approximately $5,299,000, $2,897,000, and
$1,930,000, for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
11. EMPLOYEE BENEFIT PLANS
At June 30, 1997, as the result of the WellTech merger (Note 2), the
Company maintains two 401-(k) plans (the "Plans") for its employees. Employees
of WellTech Eastern are eligible for participation in one Plan (the "WellTech
401-(k) Plan"), while all other employees are eligible for participation in the
other Plan (the "Key 401-(k) Plan"). The Company intends to merge the two Plans
at January 1, 1998. The 401-(k) plans cover substantially all employees of the
Company. The Company matches employees' contributions up to 10% of the
employees' contribution to the Key 401-(k) Plan. These contributions totaled
approximately $35,000, $19,000 and $20,000 for the years ended June 30, 1997,
1996 and 1995, respectively. Additionally, the Company contributed $300,000 and
$37,000 into the WellTech 401-(k) Plan for the year ended June 30, 1997 and the
period of March 26, 1996 (the date of the WellTech merger) to June 30, 1996,
respectively . The Company agreed to match employee contributions up to 50% (to
a maximum of $1,000 per employee) of the employees' contributions to the
WellTech 401-(k) Plan.
12. MAJOR CUSTOMERS
Sales to customers representing 10% or more of consolidated revenues for
the years ended June 30, 1997, 1996 and 1995 were as follows:
Fiscal Year Ended June 30,
1997 1996 1995
Customer A 13% 20% 18%
Customer B 7% 11% 10%
- 39 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13. TRANSACTIONS WITH RELATED PARTIES
WellTech Eastern paid $78,000 and $18,000 for the year ended June 30, 1997
and for the period March 26, 1996 (the date of the Welltech merger) to June 30,
1996, respectively, for office/yard rental expense in which an officer of the
Company and WellTech Eastern has an interest. In the opinion of the Board of
Directors of the Company, based on the Board's review of competitive bids, this
transaction was on terms at least as favorable to the Company as could have been
obtained from a third party.
In connection with the Odessa Exploration acquisition, (see Note 2) the
Company granted D. Kirk Edwards (President of Odessa Exploration) a percentage
reversionary working interest in five deep gas wells located in West Texas upon
repayment of $1,622,000 of the bank debt assumed by the Company in the
acquisition from the Company's earnings from the five wells. The percentage
reversionary working interest decreases based on the date of repayment of the
assumed bank debt and ranges from 20% of the earnings from the five wells if
repayment occurs on or prior to July 7, 1995, to 5% of the earnings from the
five wells if repayment occurs after July 7, 1996.
Key leases automotive equipment from an independent third party (see Note
10). The independent third party purchases the automotive equipment from an
automobile dealership in which a former officer owns a majority interest. Net
proceeds to the automobile dealership totaled $399,000 for the year ended June
30, 1995. 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.
Space left blank intentionally
- 40 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
14. CONCENTRATIONS OF CREDIT RISK
The Company has a concentration of customers in the oil and gas industry.
Substantially all of the Company's customers are major integrated oil companies,
major independent producers of oil and gas and smaller independent producers.
This may affect the Company's overall exposure to credit risk either positively
or negatively, in as much as its customers are effected by economic conditions
in the oil and gas industry, which has historically been cyclical. However,
accounts receivable are well diversified among many customers and a significant
portion of the receivables are from major oil companies, which management
believes minimizes potential credit risk. Historically, credit losses have been
insignificant. Receivables are generally not collateralized, although the
Company may generally secure a receivable at any time by filing a mechanic's and
material-mans' lien on the well serviced.
15. BUSINESS SEGMENT INFORMATION
Information about the Company's operations by business segment is as
follows:
Year Ended June 30,
(Thousands) 1997 1996 1995
----------------------------------------------------------------------------
Revenues:
Oil and gas $ 8,180 $ 4,175 $ 2,334
Oilfield services 144,385 55,933 40,105
Oil and gas well drilling services 9,956 6,188 1,932
Other 1,109 182 318
----------------------------------------------------------------------------
$163,630 $ 66,478 $44,689
============================================================================
Income before minority interest and
and income taxes:
Oil and gas $ 3,719 $ 1,596 $ 941
Oilfield services 20,639 6,482 4,105
Oil and gas well drilling services 1,036 639 367
Interest expense (7,535) (2,477) (1,478)
General corporate (3,257) (665) (607)
----------------------------------------------------------------------------
$ 14,602 $ 5,575 $ 3,328
============================================================================
Identifiable assets:
Oil and gas $ 23,544 $18,170 $ 8,289
Oilfield services 242,001 94,962 33,516
Oil and gas well drilling services 8,365 5,583 3,160
General corporate 46,185 3,007 278
----------------------------------------------------------------------------
$320,095 $121,722 $45,243
============================================================================
- 41 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Year Ended June 30,
--------------------------
(Thousands) 1997 1996 1995
----------------------------------------------------------------------------
Capital expenditures (excluding acquisitions):
Oil and gas $ 8,188 $ 1,879 $ 2,823
Oilfield services 15,084 5,188 2,839
Oil and gas well drilling services 1,483 598 143
---------------------------------------------------------------------------
$ 24,755 $ 7,665 $ 5,805
===========================================================================
Depreciation, depletion and amortization:
Oil and gas $ 870 $ 618 $ 426
Oifield services 9,198 3,862 2,279
Oil and gas well drilling services 436 221 33
General corporate 916 - -
---------------------------------------------------------------------------
$ 11,420 $ 4,701 $ 2,738
===========================================================================
Key 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.
Oil and gas production is conducted by Odessa Exploration. Odessa
Exploration acquires and manages interests in producing oil and gas properties
for its own account and for its sponsored investors. Odessa Exploration is
engaged in the drilling and production of oil and natural gas in the United
States. Odessa Exploration acquires producing oil and gas properties from major
and independent producers. After acquisition, Odessa Exploration may either
rework the acquired wells to increase production and/or form drilling
partnerships for additional development wells.
Oil and gas well drilling services are conducted by Clint Hurt Drilling.
Clint Hurt Drilling operates six drilling rigs which drill for oil and gas in
the West Texas area.
16. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price risks. The Company is exposed to credit losses in
the event of nonperformance by the counterparties to its commodity hedges. The
Company anticipates, however, that such counterparties will be able to fully
satisfy their obligations under the contracts. The Company does not obtain
collateral or other security to support financial instruments subject to credit
risk but monitors the credit standing of the counterparties.
The Company utilizes option contracts to hedge the effect of price changes
on future oil and gas production. If market prices of oil and gas exceed the
strike price of put options, the options will expire unexercised, therefore
reducing the effective price received for oil and gas sales by the cost of the
related option. As of June 30, 1996, Odessa Exploration had 6,000 Bbls of oil
per month hedged with a strike price of $19.50 per Bbl., from the period of July
1, 1996 through December 31, 1996.
Premiums paid for commodity options contracts are amortized to oil and gas
sales over the terms of the agreements. Unamortized premiums of $91,789 and $0
are included in other current assets in the consolidated balance sheet at June
30, 1996 and 1997, respectively. Amounts receivable, if any, under commodity
option contracts are accrued as an increase in oil and gas sales for the
applicable periods.
- 42 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
17. SUBSEQUENT EVENTS.
Acquisitions Announced but not yet Completed after June 30, 1997
The following described acquisitions that have been announced but not yet
completed after June 30, 1997 and are not included in the Company's results of
operations for the twelve months ended June 30, 1997.
BRW Drilling, Inc.
On August 4, 1997, the Company announced it had signed a letter of intent
to acquire BRW Drilling, Inc. ("BRW") for approximately $15.0 million in cash.
BRW operates 7 drilling rigs and related equipment in the Permian Basin of West
Texas. The closing of the BRW acquisition is expected upon negotiation of a
definitive agreement, completion of the Company's standard due diligence and
receipt of regulatory clearances, if any are required. Upon completion, the BRW
acquisition will be combined with Clint Hurt's drilling operations in the
Permian Basin of West Texas to form a thirteen rig shallow drilling operation.
Frontier Well Service, Inc.
On August 21, 1997, the Company announced a definitive agreement for the
acquisition of Frontier Well Service, Inc. ("Frontier") for approximately $3.5
million in cash. Frontier operates 12 oilwell service rigs and related equipment
in Wyoming. The closing of the Frontier acquisition is expected upon negotiation
of a definitive agreement, completion of the Company's standard due diligence
and receipt of regulatory clearances, if any are required.
Dunbar Well Service, Inc.
On August 4, 1997, the Company announced it had signed a letter of intent
to acquire Dunbar Well Service, Inc. ("Dunbar") for approximately $11.8 million
in cash. Dunbar operates 38 oilwell service rigs and related equipment in
Wyoming. The closing of the Dunbar acquisition is expected upon negotiation of a
definitive agreement, completion of the Company's standard due diligence and
receipt of regulatory clearances, if any are required.
J.W. Gibson Well Service Company
On August 4, 1997, the Company announced a definitive agreement for the
acquisition of J.W. Gibson Well Service Company ("Gibson") for cash, stock and
warrants with an estimated value of approximately $25.0 million. Gibson operates
74 oilwell service rigs and related equipment in eight western states. The
closing of the Gibson acquisition is expected in October 1997. The Company will
manage the operations of Gibson during the interim period. The acquired Rocky
Mountain operations of Gibson, together with the acquired Dunbar and Frontier
operations, will operate as a separate subsidiary of Key Energy.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co.
On July 21, 1997, the Company announced it had signed a letter of intent to
acquire Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co.
(collectively, "Big A/Sunco") for cash and stock with an estimated value of
approximately $31.0 million. Big A/Sunco operates 29 oilwell service rigs, four
drilling rigs, 75 fluid hauling and other trucks, a machine shop/supply store
and related equipment in the Four Corners region of the Southwestern United
States. The closing of the Big A/Sunco acquisition is expected upon negotiation
of a definitive agreement, completion of the Company's standard due diligence
and receipt of regulatory clearances, if any are required. The acquired Big
A/Sunco operations will operate as a separate subsidiary of Key Energy.
- 43 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Acquisitions Completed after June 30, 1997
The following described acquisitions were completed after June 30, 1997 and
are not included in the Company's results of operations for the twelve months
ended June 30, 1997.
Landmark Fishing & Rental, Inc.
On September 16, 1997, the Company closed the acquisition of Landmark
Fishing & Rental, Inc. ("Landmark") for approximately $3.3 million in cash.
Landmark operates a rental tool business in Western Oklahoma and the Texas
Panhandle. Landmark will be operated by WellTech Mid-Continent Division of
WellTech Eastern. The operating results of Landmark will be included in the
Company's results of operations effective September 16, 1997.
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
On September 1, 1997, the Company completed the acquisition of Ram Oil Well
Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5 million
in cash. Ram/Rowland operates approximately 17 oilwell service rigs, 93 fluid
hauling and other trucks, 290 frac tanks, three disposal and brine wells, and
dirt construction equipment in West Texas and Southeast New Mexico. Ram/Rowland
will be operated by the Company's west Texas subsidiary: Yale E. Key, Inc. The
operating results of Ram/Rowland will be included in the Company's results of
operations effective September 1, 1997.
Mosley Well Service, Inc.
On August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley") which operates in East Texas, Northern Louisiana and
Arkansas. Mosley was acquired for approximately $16.2 million in cash and
included thirty-six well service rigs and related equipment. Moseley will be
integrated with the Brooks Division of WellTech Eastern. The operating results
of Mosley will be included in the Company's results of operations effective
September 1, 1997.
Kenting Holdings (Argentina) S.A.
On July 30, 1997, the Company completed the acquisition of the assets of
Kenting Holdings (Argentina) S.A. ("Kenting") for $10.1 million in cash. The
Kenting assets included six oilwell service rigs, three drilling rigs and
related equipment in Argentina. The Kenting assets will be operated by
Servicios.
Patrick Well Service, Inc.
On July 17, 1997, the Company completed the acquisition of the assets of
Patrick Well Service, Inc. ("Patrick") for $7.0 million in cash. The Patrick
assets included 29 oilwell service rigs and related equipment located in
Southwest Kansas, Oklahoma and Southeast Colorado. The Patrick assets will be
operated by the WellTech Mid-Continent Division of WellTech Eastern.
- 44 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Servicios WellTech, S.A. Minority Interest
Effective July 1, 1997, the Company purchased the remaining 37% interest in
Servicios from two unrelated parties for $3.4 million in cash. As a result of
the purchase, the Company will now own 100% of Servicios.
Conversion of Convertible Subordinated Debentures
As of September 11, 1997, $33,245,000 in principal amount of the Company's
Debentures had converted into the Company's common stock. The conversion was at
the option of the holders. The Debentures converted into 3,552,539 shares of the
Company's common stock. The conversion included 188,488 shares, in addition to
the conversion of shares at $9.75 per share. Such additional consideration will
be accounted for as an increase to the Company's Equity. However, the
proportional amount of debt issuance costs associated with the converted
Debentures will be expensed as an extraordinary item in the period in which it
occurs.
18. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Summarized quarterly financial data for 1997 and 1996 are as follows:
First Second Third Fourth
(in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
1997
Revenues . . . . . . . . . . . . . . . . . . . . . $31,462 $36,197 $43,050 $52,921
Earnings from operations . . . . . . . . . . . . . 2,396 3,022 3,563 5,621
Net earnings . . . . . . . . . . . . . . . . . . . 1,554 2,043 2,365 3,136
Earnings per share . . . . . . . . . . . . . . . . .14 .18 .19 .24
Weighted average common shares
and equivalents outstanding. . . . . . . . . . . 10,894 11,634 12,572 13,294
1996
Revenues . . . . . . . . . . . . . . . . . . . . . $12,398 $12,394 $14,302 $27,384
Earnings from operations . . . . . . . . . . . . . 3,522 3,763 4,180 7,895
Net earnings . . . . . . . . . . . . . . . . . . . 726 768 827 1,265
Earnings per share . . . . . . . . . . . . . . . . .11 .11 .12 .16
Weighted average common shares
and equivalents outstanding. . . . . . . . . . . 6,914 6,914 6,981 7,941
The fourth quarter of fiscal 1997 includes an adjustment of $2 million for
previously unrecorded inventory.
- 45 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
19. SUPPLEMENTAL INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)
CAPITALIZED COSTS:
June 30,
(in thousands) 1997 1996
Oil and Gas Properties:
Proved properties $ 23,402 $ 17,290
Unproved properties - -
Less accumulated depletion (1,868) (1,364)
-------------------------------------------------------------------------
Net capitalized costs $ 21,534 $ 15,926
=========================================================================
COSTS INCURRED:
June 30,
(in thousands) 1997 1996 1995
-------------------------------------------------------------------------
Proved property acquisition costs $ - $ 7,786 $ 1,054
Development costs 8,188 1,848 2,581
-------------------------------------------------------------------------
Total costs incurred $ 8,188 $ 9,634 $ 3,635
=========================================================================
RESULTS OF OPERATIONS:
June 30,
(in thousands) 1997 1996 1995
-------------------------------------------------------------------------
Oil and gas sales $ 6,975 $ 3,555 $ 1,793
Production costs, including
production taxes (3,030) (1,350) (756)
Depletion (835) (598) (398)
Income taxes * (1,057) (546) (217)
-------------------------------------------------------------------------
Results of operations for oil and
gas producing activities ** $ 2,053 $ 1,061 $ 422
=========================================================================
* - computed at the statutory rate of 35%.
** - excludes corporate overhead and financing costs.
Oil and Gas Reserve Information
Estimates of Odessa Exploration's proved oil and gas reserves as of June
30, 1997, 1996 and 1995 were prepared by the Company and reviewed by an
independent petroleum reservoir engineering firm. Estimates were made in
accordance with guidelines established by the Securities and Exchange
Commission. Proved oil and gas reserves are the estimated quantities of crude
oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic conditions, i.e. prices and costs as of the date the
estimate is made. Prices utilized reflect consideration of changes in existing
prices provided by contractual arrangements, if any, but not of escalations
based upon future conditions. The reserve estimates are presented utilizing an
average oil price of $21.00 Bbl and an average natural gas price of $2.20 Mcf as
of June 30, 1997.
- 47 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Proved developed oil and gas reserves are reserves that can be expected to
be recovered through existing equipment and operating methods.
Proved undeveloped oil and gas reserves are proved reserves that are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion or
secondary or tertiary recovery. Reserves assigned to undrilled acreage are
limited to those drilling units that offset productive units reasonably certain
of production when drilled.
No major discovery or other favorable or adverse event has occurred since
July 1, 1997 which is believed to have caused a significant change in the
estimated proved oil and gas reserves of Odessa Exploration.
Odessa Exploration's estimate of reserves has not been filed with or
included in reports to any federal agency other than the Securities and Exchange
Commission.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
Oil and Gas Producing Activities:
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
Total Proved Reserves:
Balance, June 30, 1994 114,908 6,785,661
------------------------------------------------------------------------
Revisions of previous estimates 92,080 1,945,659
Purchases of minerals-in-place 1,515,559 6,036,937
Production (40,330) (770,197)
Balance, June 30, 1995 1,682,217 13,998,060
------------------------------------------------------------------------
Revisions of previous estimates 438,142 6,313,118
Purchases of minerals-in-place 3,162,099 16,456,993
Production (97,130) (1,026,577)
Balance, June 30, 1996 5,185,328 35,741,594
========================================================================
(table continued next page)
- 47 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
Proved Developed Reserves:
June 30, 1995 750,604 11,203,232
========================================================================
June 30, 1996 2,727,967 24,517,362
========================================================================
Standardized Measure of Discounted Future Cash Flows
The following schedules present estimates of the standardized measure of
discounted future net cash flows from the Company's proved reserves as of June
30, 1996, and an analysis of the changes in these amounts for the years ended
June 30, 1996 and 1995. June 30, 1997 information is not included, as during the
current year oil and gas producing activities are no longer considered
significant in accordance with reporting requirements under FAS 14 - Financial
Reporting for Segments of a Business Enterprise. Estimated future cash flows are
determined using year-end prices adjusted only for fixed and determinable
increases for natural gas provided by contractual agreement (if any). Estimated
future production and development costs are based on economic conditions at
year-end. Future federal income taxes are computed by applying the statutory
federal income tax rate of 34% to the difference between the future pretax net
cash flows and the tax basis of proved oil and gas properties, after considering
investment tax credits and net operating loss carry-forwards (if any),
associated with these properties.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
(in thousands) June 30, 1996 June 30, 1995
Standardized Measure:
Future cash inflows $ 171,000 $ 51,830
Future production costs (61,521) (11,852)
Future development costs (15,495) (6,160)
Future income taxes (12,092) (10,477)
_______________________________________________________________________
Future after-tax net cash flows 81,892 23,341
10% annual discount (42,188) (8,183)
------------------------------------------------------------------------
Standardized Measure $ 39,704 $ 15,158
========================================================================
(table continued next page)
- 48 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Changes in Standardized Measure:
Standardized Measure, June 30, 1994 $ 4,739
Oil and gas sales, net of production costs (1,037)
Purchases of minerals in place 13,033
Net change in income taxes (5,881)
Accretion of discount 512
Revision of quantity estimates 1,745
Change in future development costs 1,227
Net change in sales prices 79
Changes in production rates (timing) and other 741
------------------------------------------------------------------
Standardized Measure, June 30, 1995 $ 15,158
Oil and gas sales, net of production costs (2,205)
Purchases of minerals in place 24,216
Net change in income taxes 75
Accretion of discount 2,142
Revision of quantity estimates 6,189
Change in future development costs (982)
Extensions and discoveries 2,952
Net change in sales prices 1,397
Changes in production rates (timing) and other (9,238)
------------------------------------------------------------------
Standardized Measure, June 30, 1996 $ 39,704
==================================================================
20. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended June 30, 1997, 1996
and 1995 are presented below:
Year Ended June 30,
(Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Interest paid $ 5,850 $ 2,205 $1,422
Taxes paid - 391 53
Supplemental schedule of non-cash investing and financing transactions for
the years ended June 30, 1996 and 1995 are presented below:
Year Ended June 30,
(Thousands) 1996 1995
- --------------------------------------------------------------------------------
Fair value of Common Stock issued for
Clint Hurt Drilling - 23
Fair value of Common Stock and
Warrants issued for
WellTech West Texas - 8,647
Capital lease obligation reduced for
purchase of asset - 275
(table continued next page)
- 49 -
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Proceeds on sale of assets
not received - 132
Property and equipment additions and
acquisition costs not paid as of June 30th - 1,015
Issuance of note payable in Clint Hurt
Drilling acquisition - 725
Fair value of Common Stock issued for
WellTech, Inc. 17,929 -
Assumption of Welltech, Inc.
Working capital deficit 1,734 -
Assumption of Welltech, Inc.
non-current liabilities and debt 27,570 -
Acquisition of WellTech, Inc.
property and equipment 47,455 -
Supplemental schedule of non-cash investing and financing transactions
for the year ended June 30, 1997 is presented below:
Fair Value Acquisition
of Issued Assumption of Assumption of of Property
Acquisition Common Stock (1) Debt Liabilities and Equipment
- --------------------------------------------------------------------------------------------------------------------------
Brownlee Well Service Inc. $ 672 $ 1,948 $ 3,558 $ 11,234
Woodward Well Service, Inc. 562 80 771 1,351
Brooks Well Servicing, Inc. 11,125 - 6,291 16,935
Hitwell Surveys, Inc. - 176 1,425 2,655
B&L Hotshot, Inc. - - 175 4,575
Energy Air Drilling Services Co. 50 150 - 700
Talon Trucking Co. - - - 2,700
Cobra Industries, Inc. 2,384 625 3,867 10,171
T.S.T Paraffin Service Co., Inc. - 70 3,599 10,035
Tri-State Wellhead & Valve, Inc. 1,000 - - 1,339
Kalkaska Construction Service, Inc. 1,112 - 1,187 10,711
Well-Co Oilwell Co. 4,048 599 11,337 28,463
Shreve's Well Service - - 50 600
Youngs Wireline - - 225 744
Phoenix Well Service - 410 1,761 3,897
Elder Well Service, Inc. - - 40 649
Diamond Well Service, Inc. - - - 675
Southwest Oilfield Services, Inc. - - - 455
Edco Well Service - - 50 460
(1) - Fair value of issued common stock represents number of common
shares issued at the market value of Company's common stock at
acquisition date.
- 50 -
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
August 28, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEMS 10 - 13.
Pursuant to Instruction G(3) to Form 10-K, the information required in
Items 10-13 is incorporated by reference from the Company's definitive proxy
statement, which will be filed with the Commission pursuant to Regulation 14A
within 120 days of June 30, 1997.
- 52 -
PART IV.
ITEM 14. EXHIBITS FINANCIAL STATEMENTS AND REPORTS ON FORM 10-K.
(a) Index to Exhibits
The following documents are filed as part of this report:
(1) See Index to Financial Statements set forth in Item 8.
(2) Financial Statements Schedules: [None]
(3) Exhibits:
Exhibit 2.1 Agreement and Plan o f Merger dated as of November 18,
1995, between Key and WellTech, as amended. (Incorporated by
reference to the Company's Registration Statement Form S-4,
Registration No.333-369).
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, 1984,File No. 1-8038).
Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company
(Incorporated by reference to the Company's Registration
Statement on Form S-4,Registration No. 333-369).
Exhibit 3.2 Amended and Restated By-Laws of the Company (Incorporated
by reference to the Company's Registration Statement on
Form S-4 dated March 8,1996, Registration No. 333-369).
Exhibit 4.1 7% Convertible Subordinated Debenture of the Company due
July 1, 2003. (Incorporated by reference to exhibit 4.1 of the
Company's Report on Form 10-K dated June 30, 1996, File No.
1-8038).
Exhibit 4.2 Indenture for the 7% Convertible Subordinated Debenture of
the Company due July 1, 2003.(Incorporated by reference
to exhibit 4.2 of the Company's Report on Form 10-K dated
June 30, 1996, File No. 1-8038).
Exhibit 4.3 Registration Rights Agreement among the Company, McMahan
Securities Co., L.P. and Rausher Pierce Refsnes, Inc., dated as
of July 3, 1996. (Incorporated by reference to exhibit 4.3 of the
Company's Report on Form 10-K dated June 30, 1996, File No.
1-8038).
Exhibit 4.4 Registration Rights Agreement between the Company and D. Kirk
Edwards, dated as of July 20, 1993.(Incorporated by reference to
Exhibit 10 ( c ) to the Company's Report on Form 8-K/A).
- 53 -
Exhibit 4.5 Registration Rights Agreement dated as of March 2, 1996 among
the Company and certain of its stockholders. (Incorporated by
reference to the Company's Registration Statement on Form
S-4, Registration No. 353-369).
Exhibit 4.6 Registration Rights Agreement dated as of March 30, 1995 between
the Company, Clint Hurt and Associates, Inc. and Clint Hurt.
(Incorporated by reference to Exhibit 10 (d) of the Company's
Report on 10-KSB dated June 30, 1995, File No. 1-8038).
Exhibit 4.7 Form of Common Stock Purchase Warrant to Purchase Key Common
Stock issued in connection with the WellTech Merger.(Incorporated
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 1, 1996.
Exhibit 10.2 Asset Purchase Agreement dated as of March 30, 1995 between the
Company and Clint Hurt and Associates, Inc. (Incorporated by
reference to 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 3, 1995 between the
Company, Clint Hurt and Associates,Inc. and Clint Hurt.
( Incorporated by reference to Exhibit 10(f) of the Company's
Report on Form 10-KSB dated June 30, 1995, File No. 1-8038).
Exhibit 10.4 Employment Agreement between WellTech Eastern, Inc. and Kenneth
Hill, dated as of March 29, 1996.(Incorporated by reference to
Exhibit 10.4 to the Company's Report on Form 10-K dated June 30,
1996, File No. 1-8038).
Exhibit 10.5 * Employment Agreement between the Company and Kenneth Huseman,
dated as of August 3, 1996.
Exhibit 10.6 Letter Agreement between Van Greenfield and the Company dated May
15, 1996. (Incorporated by reference to Exhibit 10.6 to the
Company's Report on Form 10-K dated June 30, 1996, File
No. 1-8038).
Exhibit 10.7 Amendment No. 2 to the Company's Employment Agreement between
Francis D. John and the Company, dated as of May 15, 1996.
( Incorporated by reference to Exhibit 10.7 to the Company's
Report on Form 10-K dated June 30, 1996, File No. 1-8038).
Exhibit 10.8 Letter Agreement between Morton Wolkowitz and the Company
dated June 3, 1996. (Incorporated by reference to Exhibit
10.8 to the Company's Report on Form 10-K dated June 30,
1996, File No. 1-8038).
Exhibit 10.9 Asset Purchase Agreement between Hardy Oil & Gas USA, Inc. and
Arch Petroleum, Inc. dated as of April 1996. (Incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K dated June 30, 1996, File No. 1-8038).
Exhibit 10.10 Asset Purchase Agreement between Arch Petroleum, Inc. and Odessa
Exploration, Inc. dated as of April 18, 1996. (Incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form
10-K dated June 30, 1996, File No. 1-8038).
Exhibit 10.11 General Conveyance by Arch Petroleum, Inc. to Odessa Exploration,
Inc. dated as of January 1, 1996.(Incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K dated
June 30,1996, File No. 1-8038).
- 54 -
Exhibit 10.12 The Company's 1995 Stock Option Plan. ( Incorporated by reference
to the Company's Registration Statement on Form S-4, Registration
No. 353-369).
Exhibit 10.13 The Company's Outside Directors Stock Option Plan. (Incorporated
by reference to the Company's Registration Statement on Form S-4,
Registration No. 353-369).
Exhibit 10.14 Plan and Agreement of Merger among Key Energy Group, Inc.,
WellTech Eastern, Inc. and Woodward Well Service, Inc. dated as
of September 30, 1996. (Incorporated by reference to Exhibit 10
(a) to the Company's Quarterly Report on Form 10-Q dated December
31, 1996, File No. 1-8038).
Exhibit 10.15 Stock Purchase Agreement among Key Energy Group, Inc., Reo
Brownlee, Elvin Brownlee, Jr. And Elvin Brownlee III dated as
of October 24, 1996.(Incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q
dated December 31, 1996, File No. 1-8038).
Exhibit 10.16 Asset Purchase Agreement among Yale E. Key, Inc., Key Energy
Group, Inc., Energy Air Drilling Service Co.and Dale Rennels
dated as of November 1, 1996. (Incorporated by reference to
Exhibit 10( c ) to the Company's Quarterly Report on Form 10-Q
dated December 31, 1996, File No. 1-8038).
Exhibit 10.17 Stock Purchase Agreement among Key Energy Group, Inc., Ed Hitt,
Helen Hitt, Michael E. Thompson and Edward Monroe, Jr. Dated as
of December 2, 1996. (Incorporated by reference to Exhibit 10(d)
to the Company's Quarterly Report on Form 10-Q dated December 31
1996, File No. 1-8038).
Exhibit 10.18 Plan and Agreement of Merger among Key Energy Group, Inc.,
WellTech Eastern, Inc., Hunt Oil Company and Brooks Well
Servicing, Inc. dated as of November 22, 1996. (Incorporated by
reference to Exhibit 10(e) to the Company's Quarterly Report on
Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.19 Asset Purchase Agreement among WellTech Eastern, Inc., B&L
Hotshot, Inc., McDowell & Sons, Inc., 4 Star Trucking, Inc.,
R.B.R. Inc., Royce D. Thomas, John F. McDowell and John R.
McDowell dated as of December 13, 1996. (Incorporated by
reference to Exhibit 10(f) to the Company's Quarterly Report on
Form 10-Q dated December 31, 1996, File No. 1-8038).
Exhibit 10.20 Asset Purchase Agreement among WellTech Eastern, Inc., Talon
Trucking company and Lomak Petroleum, Inc.dated as of December
31, 1996. (Incorporated by reference to Exhibit 10(g) to the
Company's Quarterly Report on Form 10-Q dated December 31, 1996,
File No. 1-8038).
Exhibit 10.21 First Supplemental Indenture dated as of November 20, 1996 by and
between Key Energy Group, Inc. and American Stock Transfer &
Trust Company, as Trustee. (Incorporated by reference to Exhibit
10(i) to the Company's Quarterly Report on Form 10-Q dated
December 31, 1996, File No. 1-8038).
Exhibit 10.22 Stock Purchase Agreement among Key Energy Group, Inc.,
Michael and Georgia McDermett dated as of January 10, 1997.
(Incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report onForm 10-Q dated March 31, 1997, File No.
1-8038).
Exhibit 10.23 Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc. Tri State Wellhead & Valve,Inc. and John C. Bozeman
dated as of March 14, 1997. (Incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q dated March
31, 1997, File No. 1-8038).
- 55 -
Exhibit 10.24 Stock Purchase Agreement among Yale E. Key, Inc., Keith and
Leslie Neill as of March 24, 1997.(Incorporated by reference to
Exhibit 10( c ) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
Exhibit 10.25 Asset Purchase Agreement among Key Energy Group, Inc., WellTech
Eastern, Inc., Elder Well Service, Inc., Martha Elder,
Kenneth L. Ward, Nona Faye Mugraur, Lela Gaye Biehl and Johnny
Ray Johnson dated as of March 28, 1997.(Incorporated by
reference to Exhibit 10(d) to the Company's Quarterly Report
on Form 10-Q dated March 31, 1997, File No. 1-8038).
Exhibit 10.26 Asset Purchase Agreement #1 among WellTech Eastern, Inc., Key
Energy Group, Inc., Kalkaska Construction Service, Inc., Dennis
Hogerheide, LaWenda Hogerheide, David Hogerheide and Derek
Hogerheide dated March 31, 1997. (Incorporated by reference to
Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q
dated March 31,1997, File No. 1-8038).
Exhibit 10.27 Asset Purchase Agreement #2 among WellTech Eastern, Inc., Key
Energy Group, Inc., Kalkaska Construction Service, Inc., Dennis
Hogerheide,LaWenda Hogerheide, David Hogerheide and Derek
Hogerheide dated March 31, 1997. (Incorporated by reference to
Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
Exhibit 10.28 Stock Purchase Agreement among WellTech Eastern, Inc., Dennis
Hogerheide and LaWenda Hogerheide dated as of March 31,
1997.(Incorporated by reference to Exhibit 10(g) to the
Company's Quarterly Report on Form 10-Q dated March 31, 1997,
File No. 1-8038).
Exhibit 10.29 Asset Purchase Agreement among WellTech Eastern, Inc.,
Diamond Well Service, Inc., John Scott and Dwayne Wardwell dated
as of April 3,1997. (Incorporated by reference to Exhibit
10(h) to the Company's Quarterly Report on Form 10-Q dated March
31, 1997, File No. 1-8038).
Exhibit 10.30 Asset Sale Agreement among WellTech Eastern, Inc. and Drillers,
Inc. dated as of April 14, 1997.(Incorporated by reference to
Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
Exhibit 10.31 Asset Purchase Agreement among WellTech Eastern, Inc., Shreve's
Well Service, Inc. and William A. Shreve dated April 18, 1997.
(Incorporated by reference to Exhibit 10(j) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No.
1-8038).
Exhibit 10.32 Asset Purchase Agreement among WellTech Eastern, Inc. and Petro
Equipment, Inc. and Donald E. Clark dated as of May 1, 1997.
(Incorporated by reference to Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No.
1-8038).
Exhibit10.33 * Asset Purchase Agreement among WellTech Eastern, Inc.,
Southwest Oilfield Services,Inc., David Wright and Roy Wofford
dated May 29,1997.
Exhibit 10.34 *Stock Purchase Agreement among Yale E. Key, Inc. and Raleigh K.
Turn and David Butts dated June 9, 1997.
Exhibit 10.35 Stock Purchase Agreement among Key Energy Group, Inc. and Mark
Duane Massingill and Claudia Lynn Massingill dated as of June 25,
1997. (Incorporated by reference to the Company's Report on Form
8-K dated July 9, 1997, File No. 1-8038).
- 56 -
Exhibit 10.36 *Stock Purchase Agreement among WellTech Eastern, Inc. between
Monty D. Elmore dated as of July 17, 1997.(Incorporated by
reference to the Company's Report on Form 8-K dated July 9, 1997,
File No. 1-8038).
Exhibit 10.37 *Stock Purchase Agreement between WellTech Eastern, Inc. and
Kenting Energy Services, Inc. dated as of July 30, 1997.
Exhibit 10.38 *Stock Purchase Agreement between WellTech Eastern, Inc. and
Robert E. Mosley, Jr. et al dated as of August 22, 1997.
Exhibit 10.39 *Credit Agreement dated as of June 6, 1997 among Key Energy
Group, Inc., several banks and other financial institutions or
entities from time to time parties to the Agreement, PNC Bank,
N.A,Norwest Bank of Texas, N.A., and Lehman Commercial Paper Inc.
Exhibit 10.40 *Master Guarantee and Collateral Agreement made by Key Energy
Group, Inc. and certain of its Subsidiaries in favor of Norwest
Bank of Texas, N.A. dated as of June 6, 1997.
Exhibit 11(a) *Statement - Computation of per share earnings. (Filed herewith as
part of the Condensed Consolidated Financial Statements).
Exhibit 22 *Subsidiaries of the Registrant.
Exhibit 27(a) *Statement - Financial Data Schedule. (Filed herewith as part
of the Condensed Consolidated Financial Statements).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter
ended June 30, 1997.
------------------------------------
*Filed herewith.
- 57 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. John
Francis D. John
President, Chief Executive Officer
Dated: September 18, 1997 and Director
By /s/ Stephen E. McGregor
Stephen E. McGregor
Dated: September 18, 1997 Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ Francis D. John
Francis D. John
President, Chief Executive and Chief
Dated: September 18, 1997 Financial Officer and Director
By /s/ Morton Wolkowitz
Morton Wolkowitz
Dated: September 18, 1997 Chairman of the Board and Director
By /s/ Van Greenfield
Van Greenfield
Dated: September 18, 1997 Director
By /s/ William Manly
William Manly
Dated: September 18, 1997 Director
By /s/ Kevin P. Collins
Kevin P. Collins
Dated: September 18, 1997 Director
By /s/ W. Phillip Marcum
W. Phillip Marcum
Dated: September 18, 1997 Director
By /s/ Danny R. Evatt
Danny R. Evatt
Dated: September 18, 1997 Chief Accounting Officer
- 58 -