UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
[ ] 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, 20th Floor, East Brunswick, NJ 08816
Address of Principal executive offices) (ZIP Code)
Registrant's telephone number including area code: (732) 247-4822
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court since there was a distribution of securities under a plan confirmed by a
court. Yes X No
Common Shares outstanding at February 13, 1998 - 18,307,390
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
December 31, 1997 and June 30, 1997 3
Consolidated Statements of Operations for the
Three months and six months ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Three months and six months ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 28
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
December 31, June 30,
1997 1997
(Unaudited)
- -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 53,770 $ 41,704
Accounts receivable, net 76,875 45,230
Inventories 10,182 5,171
Prepaid expenses and other 1,954 1,228
- -------------------------------------------------------------------------------
Total current assets 142,781 93,333
- -------------------------------------------------------------------------------
Property and equipment, at cost:
Oilfield service equipment 327,410 186,895
Oilfield drilling equipment 28,522 6,319
Oil and gas properties, using the successful
efforts accounting method 28,713 23,622
Other property and equipment 27,956 10,419
- -------------------------------------------------------------------------------
412,601 227,255
Less accumulated depreciation and depletion 31,065 19,069
- -------------------------------------------------------------------------------
Property and equipment, net 381,536 208,186
- -------------------------------------------------------------------------------
Other assets 63,266 18,576
- -------------------------------------------------------------------------------
$ 587,583 $ 320,095
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 16,842 $ 15,339
Other accrued liabilities 21,005 12,507
Accrued interest 3,314 2,102
Accrued income taxes 448 1,664
Deferred taxes 126 126
Current portion of long-term debt 1,945 1,404
- -------------------------------------------------------------------------------
Total current liabilities 43,680 33,142
- -------------------------------------------------------------------------------
Long-term debt, net of current portion 330,292 172,763
Noncurrent accrued expenses 4,015 4,017
Deferred taxes 77,243 35,738
Minority interest - 1,256
Commitments and contingencies
Stockholders' equity:
Common stock, $0.10 par value per share;
25,000,000 shares authorized,
18,356,296 and 12,297,752 shares issued at
December 31, 1997 and June 30, 1997,
respectively 1,836 1,230
Additional paid-in capital 110,998 55,031
Treasury stock, at cost; 416,666
shares at December 31, 1997 (9,682) -
Retained earnings 29,201 16,918
- -------------------------------------------------------------------------------
Total stockholders' equity 132,353 73,179
- -------------------------------------------------------------------------------
$ 587,583 $ 320,095
===============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Oilfield services $ 97,542 $ 31,708 $ 167,040 $ 59,019
Oilfield drilling 8,689 2,359 11,512 4,683
Oil and gas 1,949 2,088 4,067 3,613
Other, net 1,493 42 2,574 344
- -------------------------------------------------------------------------------
Total revenues 109,673 36,197 185,193 67,659
- -------------------------------------------------------------------------------
Costs and expenses:
Oilfield services 68,354 23,066 116,592 42,766
Oilfield drilling 6,590 1,963 8,853 3,844
Oil and gas 893 773 1,831 1,286
General and administrative 10,370 3,735 18,036 7,262
Depreciation, depletion and
amortization 7,740 2,342 12,886 4,437
Interest expense 3,879 1,296 7,317 2,646
- -------------------------------------------------------------------------------
Total costs and expenses 97,826 33,175 165,515 62,241
- -------------------------------------------------------------------------------
Income before income taxes and
minority interest 11,847 3,022 19,678 5,418
Income tax provision 4,502 1,029 7,395 1,813
Minority interest in income - (50) - 8
- -------------------------------------------------------------------------------
Net income $ 7,345 $ 2,043 $ 12,283 $ 3,597
===============================================================================
Net income per share:
Basic $ 0.40 $ 0.19 $ 0.76 $ 0.34
Diluted $ 0.36 $ 0.16 $ 0.62 $ 0.29
Weighted average shares outstanding:
Basic 18,151 10,850 16,137 10,635
Diluted 25,571 17,027 22,720 16,815
The accompanying notes are an integral part of these consolidated
financial statements.
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,345 $ 2,043 $ 12,283 $ 3,597
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation, depletion
and amortization 7,740 2,342 12,886 4,437
Deferred income taxes 1,177 1,029 4,070 1,813
Minority interest in net income - (50) - 8
Changes in assets and liabilities,
net of effects
from acquisitions:
Accounts receivable 1,890 (1,761) (4,334) (3,673)
Other current assets (1,742) 352 (342) (97)
Accounts payable and
accrued liabilities (8,666) (3,922) (9,638) (3,069)
Accrued interest 3,041 (947) 1,213 (283)
Other assets and liabilities (3,424) (175) (4,717) (806)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 7,361 (1,089) 11,421 1,927
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Property and equipment additions
related to:
Oilfield service operations (12,268) (3,049) (18,962) (5,949)
Oilfield drilling operations (1,315) (268) (3,373) (591)
Oil and gas operations (1,926) (975) (2,265) (1,297)
Acquisitions of:
Oilfield service operations,
net of cash acquired (29,933) (13,228) (134,660) (13,228)
Oilfield drilling operations,
net of cash acquired (7,256) - (21,866) -
Oil and gas operations,
net of cash acquired (600) - (600) -
Minority interest - - (3,426) -
- -------------------------------------------------------------------------------
Net cash used in investing
activities (53,298) (17,520) (185,152) (21,065)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on debt (2,229) (154) (2,547) (1,053)
Repayment of long-term debt (19,337) - (216,337) (35,413)
Borrowings under line of credit 65,000 368 199,000 1,307
Purchase of treasury stock (9,682) - (9,682) -
Proceeds from convertible
subordinated debentures, net - - - 50,440
Proceeds from long-term
commercial paper debt, net 14,000 - 208,500 -
Procceds from other
long-term debt 1,638 10,500 1,699 10,500
Proceeds from exercise
of warrants 99 - 4,222 -
Proceeds from exercise
stock options 942 - 942 58
- -------------------------------------------------------------------------------
Net cash provided by financing
activities 50,431 10,714 185,797 25,839
- -------------------------------------------------------------------------------
Net increase (decrease) in cash 4,494 (7,895) 12,066 6,701
Cash, beginning of period 49,276 18,807 41,704 4,211
- -------------------------------------------------------------------------------
Cash, end of period $ 53,770 $ 10,912 $ 53,770 $ 10,912
===============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
KEY ENERGY GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated
financial statements of Key Energy Group, Inc. (the "Company" or "Key") and its
wholly-owned subsidiaries are prepared in conformity with generally accepted
accounting principals, but do not purport to be a complete presentation in as
much as all note disclosures required are not included. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements of the Company and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended June 30, 1997.
In the opinion of management, the Company's unaudited consolidated financial
statements as of December 31, 1997 and for the three months and six months ended
December 31, 1997 and 1996 contain all adjustments and accruals, consisting only
of normal recurring accrual adjustments, necessary for a fair presentation of
the results of the interim periods. These interim results are not necessarily
indicative of results for a full year.
Earnings per Share
The Company implemented the Statement of Financial Accounting Standards No. 128
("SFAS 128") - Earnings per Share, for the quarter ended December 31, 1997. SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS, which excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. SFAS 128 has been applied retro-actively for
each period presented. In accordance with SFAS 128, the reconciliation of the
numerators and denominators of basic EPS and diluted EPS is presented below:
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
--------------------- --------------------
Basic EPS Computation:
Numerator-
Net Income $ 7,345 $ 2,043 $12,283 $ 3,597
--------------------- --------------------
Denominator-
Weighted Average Common
Shares Outstanding 18,151 10,850 16,137 10,635
--------------------- --------------------
Basic EPS $ 0.40 $ 0.19 $ 0.76 $ 0.34
===================== ====================
Diluted EPS Computation:
Numerator-
Net Income $ 7,345 $ 2,043 $12,283 $ 3,597
Effect of Dilutive
Securities,
Tax Effected:
Convertible Debentures 1,738 609 1,882 1,219
-------------------- --------------------
$ 9,083 $ 2,652 $14,165 $4,816
-------------------- --------------------
- 6 -
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
-------------------- --------------------
Denominator-
Weighted Average Common
Shares Outstanding 18,151 10,850 16,137 10,635
Warrants 82 319 235 320
Stock Options 1,256 525 1,294 527
7% Convertible Debentures 472 5,333 2,096 5,333
5% Convertible Debentures 5,610 - 2,958 -
-------------------- --------------------
25,571 17,027 22,720 16,815
-------------------- --------------------
Diluted EPS $ 0.36 $ 0.16 $ 0.62 $ 0.29
==================== ====================
2. BUSINESS AND PROPERTY ACQUISITIONS
The Company
The Company conducts its domestic operations primarily through eight
wholly-owned subsidiaries: Yale E. Key, Inc., WellTech Eastern, Inc., WellTech
Mid-Continent, Inc., Brooks Well Servicing, Inc., Key Four Corners, Inc., Key
Rocky Mountain, Inc., Odessa Exploration Incorporated, and Key Energy Drilling,
Inc. The Company's Argentina operations are conducted through its wholly-owned
subsidiaries Servicios WellTech S.A. and Kenting Drilling (Argentina) S. A.
As of February 13, 1998, the Company owned a fleet of approximately 820 well
service rigs, 628 oilfield fluid hauling and other trucks, and 59 drilling rigs,
including 16 service rigs, 14 trucks and 6 drilling rigs in Argentina.
Acquisitions Completed During the Six Months Ended December 31, 1997
The following acquisitions have been completed during the six months ended
December 31, 1997. Except as otherwise noted, the results of operations from
these acquisitions are included in the Company's results of operations for the
applicable three months and six months ended December 31, 1997 (effective as of
the date of completion of the acquisition unless otherwise noted). Each of the
acquisitions was accounted for using the purchase method of accounting. Unless
otherwise noted, the purchase prices specified below are based on cash paid and
the value of the Company's common stock, par value $0.10 (the "Common Stock"),
issued at the closing of the acquisitions (with Common Stock being valued at the
closing price on the closing date), and do not include any post-closing
adjustments, if any, paid or to be paid based on a re-calculation of the working
capital of the acquired company as of the closing date.
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
Effective December 2, 1997, the Company completed the acquisition of the assets
of Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
(collectively the "Critchfield Assets") for approximately $8.5 million,
consisting of $2.7 million in cash and 240,000 shares of Common Stock. The
Critchfield Assets consisted of five land drilling rigs, five well service rigs
and other related equipment in Michigan.
- 7 -
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
Effective November 24, 1997, the Company completed the acquisition of Win-Tex
Drilling Co., Inc. and Win-Tex Trucking Corporation ("Win-Tex") for
approximately $6.7 million in cash. Win-Tex operates six land drilling rigs,
trucks, trailers and related equipment in West Texas. The operating results of
Win-Tex are included in the Company's results of operations effective December
1, 1997.
Jeter Service Co.
Effective November 18, 1997, the Company completed the acquisition of Jeter
Service Co. ("Jeter") for approximately $6.7 million in cash. Jeter operates 15
well service rigs, an oilfield supply store and an oilfield location
construction/maintenance business with 15 trucks and other related equipment in
Oklahoma. The operating results of Jeter are included in the Company's results
of operations effective December 1, 1997.
GSI Trucking Company, Inc., Kahlden Production Services, Inc. and
McCurdy Well Service, Inc.
On October 3, 1997, the Company acquired certain assets of GSI Trucking Company,
Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. ("GSI,
Kahlden and McCurdy") for approximately $1.6 million in cash. GSI, Kahlden and
McCurdy operate 12 fluid hauling trucks in Southeast Texas.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.
Effective October 1, 1997, the Company completed the acquisition of
substantially all of the assets of Big A Well Service Co., Sunco Trucking Co.
and Justis Supply Co., Inc. (collectively "Big A/Sunco") for approximately $32.1
million, consisting of $28 million in cash and 125,000 shares of Common Stock.
Big A/Sunco operates 25 well service rigs, four drilling rigs, 75 fluid hauling
and other trucks, related equipment and a machine shop/supply store in the Four
Corners region of the Southwestern United States
Frontier Well Service, Inc.
Effective September 30, 1997, the Company completed the acquisition of Frontier
Well Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier
operates 12 well service rigs and related equipment in Wyoming. The operating
results of Frontier are included in the Company's results of operations
effective October 1, 1997.
Dunbar Well Service, Inc.
Effective September 29, 1997, the Company completed the acquisition of Dunbar
Well Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar
operates 38 well service rigs and related equipment in Wyoming. The operating
results of Dunbar are included in the Company's results of operations effective
October 1, 1997.
BRW Drilling, Inc.
Effective September 25, 1997, the Company completed the acquisition of BRW
Drilling, Inc. "BRW") for approximately $14.6 million in cash. BRW operates
seven drilling rigs and related equipment in the Permian Basin region of West
Texas and Eastern New Mexico. The operating results of BRW are included in the
Company's results of operations effective October 1, 1997.
- 8 -
Landmark Fishing & Rental, Inc.
Effective September 16, 1997, the Company completed the acquisition of Landmark
Fishing & Rental, Inc. ("Landmark") for approximately $3.3 million in cash.
Landmark operates a rental tool business in Western Oklahoma and the Texas
Panhandle.
Waco Oil & Gas Co., Inc.
Effective September 1, 1997, the Company completed the acquisition of certain
assets of Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0 million in
cash. The Waco assets included 12 well service rigs, three drilling rigs, 33
fluid hauling trucks and other trucks operated in West Virginia. Following the
consummation of the acquisition, the three drilling rigs acquired from Waco were
sold to an independent third party for $2.3 million in cash. No gain or loss was
recognized in the sale of these rigs. The operating results of Waco are included
in the Company's results of operations effective September 23, 1997.
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
Effective September 1, 1997, the Company completed the acquisition of Ram Oil
Well Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5
million in cash. Ram/Rowland operates 17 well service rigs, 93 fluid hauling and
other trucks, 290 frac tanks, three disposal and brine wells, and dirt
construction equipment in the Permian Basin region of West Texas and
Southeastern New Mexico
Mosley Well Service, Inc.
Effective August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley"), which operates 36 well service rigs and related
equipment in East Texas, Northern Louisiana and Arkansas, for approximately
$16.2 million in cash. The operating results of Mosley are included in the
Company's results of operations effective September 1, 1997.
Kenting Holdings (Argentina) S.A.
Effective July 30, 1997, the Company completed the acquisition of Kenting
Holdings (Argentina) S.A. ("Kenting") for approximately $10.1 million in cash.
Kenting is the sole shareholder of Kenting Drilling (Argentina) S.A. which
operates six well service rigs, three drilling rigs and related equipment in
Argentina. The operating results of Kenting are included in the Company's
results of operations effective August 1, 1997.
Patrick Well Service, Inc.
Effective July 17, 1997, the Company completed the acquisition of Patrick Well
Service, Inc. ("Patrick") for $7.0 million in cash. Patrick operates 29 well
service rigs and related equipment in Southwest Kansas, Oklahoma and Southeast
Colorado. The operating results of Patrick are included in the Company's results
of operations effective August 1, 1997.
Servicios WellTech S.A.
Effective July 1, 1997, the Company purchased the remaining 37% minority
interest in Servicios WellTech S.A. ("Servicios") from two unrelated parties for
approximately $3.4 million in cash. As a result of the purchase, the Company now
owns 100% of Servicios.
- 9 -
Acquisitions Completed After December 31, 1997
The following acquisitions were completed after December 31, 1997. Except as
otherwise noted, the results of operations from these acquisitions are not
included in the Company's results of operations for the three and six months
ended December 31, 1997.
Sitton Drilling Company
Effective January 1, 1998, the Company completed the acquisition of Sitton
Drilling Co. ("Sitton") for approximately $14.8 million, including $12.9 million
in cash and 100,000 shares of Common Stock. Sitton operates five drilling rigs
in the Permian Basin region of West Texas.
J.W. Gibson Well Service Company
Effective January 8, 1998, the Company completed the acquisition of J.W. Gibson
Well Service Company ("Gibson") for approximately $25.5 million, consisting of
$23.9 million in cash, 100,000 shares of Common Stock and warrants to acquire
265,000 shares of Common Stock at an exercise price of $18.00 per share, subject
to certain adjustments.
Gibson operates 74 well service rigs and related equipment in eight states.
Since July 31, 1997, the Company managed the operations of Gibson pursuant to an
interim operating agreement. Under the operating agreement, the Company received
a management fee equal to the net income from Gibson's operations less $25,000
per month and received a one-time management fee of $300,000.
Hot Oil Plus
Effective January 29, 1998, the Company completed the acquisition of Hot Oil
Plus, Inc. ("Hot Oil Plus") for approximately $1.9 million in cash. Hot Oil Plus
operates eight hot oil trucks, a pump truck and a steam heater in Southeast
Texas.
Legacy Drilling Co.
Effective January 30, 1998, the Company completed the acquisition of Legacy
Drilling Co. ("Legacy") for approximately $2.9 million in cash. Legacy operates
four drilling rigs in the Permian Basin region of West Texas.
Circle M Vacuum Services
Effective January 30, 1998, the Company completed the acquisition of Circle M
Vacuum Services ("Circle M") for approximately $800,000 in cash. Circle M
operates four vacuum trucks, trailers and a salt water disposal well in
Southeast Texas.
Four Corners Drilling Company
Effective February 4, 1998, the Company completed the acquisition of Four
Corners Drilling Company ("Four Corners") for $10.0 million in cash. Four
Corners owns 12 drilling rigs in the Four Corners region of the Southwestern
United States.
- 10 -
Updike Brothers, Inc.
Effective February 6, 1998, the Company completed the acquisition of Updike
Brothers, Inc. ("Updike") for approximately for $10.6 million in cash. Updike
operates 25 well service rigs in Wyoming.
3. LONG-TERM DEBT
At December 31, 1997, major components of the Company's long-term debt were as
follows:
PNC Credit Agreement
On June 6, 1997, the Company entered into an agreement, (the "Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a
syndication of other lenders pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on the LIBOR
and the level of the Company's indebtedness. The Initial Credit Agreement
contained certain restrictive covenants and required the Company to maintain
certain financial ratios. On September 25, 1997, the Company repaid the term
loan and a portion of the then outstanding amounts under the revolver applying
the proceeds from the initial and second closings of the Company's private
placement of $216 million of 5% Convertible Subordinated Notes (discussed
below).
Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended Credit Agreement"), as administrative
agent and lender, pursuant to which PNC agreed to make revolving credit loans of
up to a maximum loan commitment of $200 million. The maximum commitment
decreases to $175 million on November 6, 2000 and to $125 million on November 6,
2001. The loan commitment terminates on November 6, 2002. Borrowings under the
credit facility may be either (i) Eurodollar Loans with interest payable
quarterly at LIBOR plus 1.25% subject to adjustment based on certain financial
ratios, (ii) Base Rate Loans with interest payable quarterly at the greater of
PNC Prime Rate or the Federal Funds Effective Rate plus 1/2 %,or (iii) a
combination thereof, at the Company's option. The Amended Credit Agreement
contains certain restrictive covenants and requires the Company to maintain
certain financial ratios. A change of control of the Company, as defined in the
Amended Credit Agreement, is an event of default. Borrowings under the Amended
Credit Agreement are secured by substantially all of the assets of the Company
and its domestic subsidiaries.
Effective December 3, 1997, PNC completed the syndication of the Amended Credit
Agreement and, in connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to the
Amended and Restated Credit Agreement providing for, among other things, an
increase in the maximum commitment from $200 million to $250 million.
At December 31, 1997, the principal balance of the Amended Credit Agreement, as
amended, was $107 million and the unused credit facility aggregated
approximately $143 million, with approximately $3 million reserved for existing
letters of credit.
7% Convertible Subordinated Debentures
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible
- 11 -
Subordinated Debentures due 2003 (the "Debentures"), pursuant to Rule 144A under
the Securities Act of 1933, as amended (the "Securities Act"). The Debentures
are subordinate to the Company's senior indebtedness, which as defined in the
indenture pursuant to which the Debentures were issued, includes the borrowings
under the Amended Credit Agreement, as amended. Interest on the Debentures is
payable on January 1 and July 1 of each year.
The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert prior
to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock
(at the Company's option), generally equal to 50% of the interest otherwise
payable from the date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter.
In the event of a change in control of the Company, as defined in the indenture
under which the Debentures were issued, each holder of Debentures will have the
right, at the holder's option, to require the Company to repurchase all or any
part of the holder's Debentures within 60 days of such event at a price equal to
100% of the principal amount thereof, together with accrued and unpaid interest
thereon.
As of December 31, 1997, $47,400,000 in principal amount of the Debentures had
been converted into 5,062,369 shares of Common Stock at the option of the
holders. The number of shares issued included 200,831 shares in excess of the
number of shares issuable at the conversion price of $9.75 per share. These
additional shares were issued by the Company to induce conversion. Such
additional consideration was accounted for as an increase to the Company's
equity. In addition, the proportional amount of debt issuance costs associated
with the converted Debentures was accounted for as a decrease to the Company's
equity.
At December 31, 1997, $4,600,000 of Debentures remained outstanding.
5% Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of Notes. The placements were made as private offerings pursuant to
Rule 144A and Regulation S under the Securities Act. The Notes are subordinate
to the Company's senior indebtedness, which, as defined in the indenture under
which the Notes were issued, includes the borrowings under the Amended Credit
Agreement, as amended. Interest on the Notes is payable on March 15 and
September 15, commencing March 15, 1998.
The Notes are convertible, at the holder's option, into shares of Common Stock
at a conversion price of $38.50 per share, subject to certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
- 12 -
In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holde's option, to require the Company to repurchase all or any part of the
holder's Notes, within 60 days of such event, at a price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest thereon.
Proceeds from the placement of the Notes were used to repay balances under the
Company's credit facilities (see above). At December 31, 1997, $216,000,000
principal amount of the Notes was outstanding.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130 - Reporting Comprehensive
Income
Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt SFAS 130 for the fiscal
year ended June 30, 1999. Management believes the adoption of SFAS 130 will not
have a material effect on its financial position or results of operations of the
Company.
Statement of Financial Accounting Standards No. 131 - Disclosures about Segments
of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
need not be applied to interim financial statements in the initial year of its
application. However, comparative information for interim periods in the initial
year of application is to be reported in the financial statements for interim
periods in the second year of application. The Company will adopt SFAS 131 for
the fiscal year ended June 30, 1999. Management believes the adoption of SFAS
131 will not have a material effect on its financial position or results of
operations of the Company.
5. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.
6. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures (in thousands) for the three months and six
months ended December 31, 1997 and 1996 follows:
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
------------------ -----------------
Interest paid $ 2,667 $2,243 $6,105 $2,929
Taxes paid 3,568 - 3,568 -
- 13 -
Supplemental non-cash investing and financing disclosures (in thousands) for the
three and six months ended December 31, 1997 and 1996 follows:
Fair Value
of Issued Assumption Assumption Acquisition of
Common of of Property
Stock Debt Working Capital* and Equipment
----------- ---------- --------------- --------------
Three months ended
December 31, 1996 $12,476 $2,354 $12,220 $ 37,450
Six months ended
December 31, 1996 $12,476 $2,354 $12,220 $ 37,450
Three months ended
December 31, 1997 $ 5,812 $3,391 $ 6,798 $101,612
Six months ended
December 31, 1997 $ 5,812 $7,655 $ (970) $151,979
* - excluding current maturities of long-term debt.
7. TREASURY STOCK
During the three months ended December 31, 1997, the Company purchased 416,666
shares of Common Stock. All shares were purchased at the then prevailing market
prices. The purchased shares are accounted for as treasury stock on the
Company's balance sheet under the treasury stock method of accounting.
8. CHANGES APPROVED BY SHAREHOLDERS
At the Company's annual meeting of shareholders held on January 13, 1998, the
Company's shareholders approved an increase in the Company's authorized capital
stock from 25,000,000 shares, par value $.10 per share, to 100,000,000 shares,
par value $.10 per share, and approved the adoption of the Company's 1997
Incentive Plan.
The Company's 1997 Incentive Plan is an amendment and restatement of the
Company's 1995 Stock Option Plan and 1995 Outside Directors Stock Option Plan
(collectively, the "Prior Plans"), which authorized the issuance of up to
1,400,000 shares of Common Stock to key employees, officers and directors of the
Company, subject to the terms and conditions of options granted to such
individuals. The 1997 Incentive Plan authorizes the granting of stock options
and other stock-based incentive awards covering an aggregate of the greater of
(i) 3,000,000 shares of Common Stock or (ii) 10% of the number of shares of
Common Stock issued and outstanding on the last day of each calendar quarter,
provided, however, that a decrease in the number of issued and outstanding
shares of Common Stock from the previous calendar quarter; shall not result in a
decrease in the Common Stock available for issuance under the Company's 1997
Incentive Plan. Presently, 3,000,000 shares of Common Stock are authorized under
the 1997 Incentive Plan. Options previously granted under the Prior Plans were
assumed and continued by the 1997 Incentive Plan.
As of January 13, 1998, options to purchase 2,306,224 shares of Common Stock are
outstanding under the 1997 Incentive Plan.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1997.
Current and Subsequent Events
During the six months ended December 31, 1997, the Company purchased the
remaining 37% minority interest in Servicios and completed the acquisition of
the following well servicing, trucking and drilling companies:
Patrick Well Service, Inc.
Kenting Holdings (Argentina) S.A.
Mosley Well Service, Inc.
Ram Oil Well Service, Inc. and Rowland Trucking Co. Inc.
Waco Oil & Gas Co., Inc.
Landmark Fishing & Rental, Inc.
BRW Drilling, Inc.
Dunbar Well Service, Inc.
Frontier Well Service, Inc.
Big A Well Service Co., Sunco Trucking Co. and
Justice Supply Co., Inc.
GSI Trucking Company, Inc., Kahlden Production
Services, Inc. and McCurdy Well Service, Inc.
Jeter Service Co.
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
Wellcorps, L.L.C., White Rhino Drilling, Inc. and
S&R Cable, Inc.
These acquisitions (which are more fully described in Note 2 to the consolidated
financial statements) involve 192 well service rigs (including six well service
rigs in Argentina), 210 fluid hauling and other trucks and 28 drilling rigs
(including three drilling rigs in Argentina). The total purchase price of these
acquisitions totaled approximately $152 million, compromised of approximately
$142 million in cash and 365,000 shares of Common Stock.
Subsequent to December 31, 1997 and through February 13, 1998, the Company has
completed the acquisition of four well servicing companies and three contract
drilling companies involving 99 well service rigs, 21 drilling rigs and 24 fluid
hauling and other trucks. The total purchase price of these subsequent
acquisitions aggregate approximately $63.4 million, compromised of approximately
$60 million in cash and 200,000 shares of Common Stock.
These acquisitions were financed primarily through long-term debt borrowings
(see Note 3 to the consolidated financial statements) and, to a lesser extent,
through internally generated funds.
Including these recent acquisitions, as of February 13, 1998, the Company owns
820 oilfield servicing rigs, 628 oilfield fluid hauling and other trucks and 59
land drilling rigs. Management believes that, as of February 13, 1998, the
Company's active well servicing and fluid hauling fleet is the largest active
onshore fleet in the continental United States and is the second largest active
fleet in Argentina. The Company operates in most major onshore oil and gas
producing regions of the continental United States, with the exception of
California, and provides a full range of drilling, completion, maintenance,
workover and plugging and abandonment services for the oil and gas industry.
- 15 -
Impact of Declining Crude Oil Prices
During the quarter ended December 31, 1997, the posted price of West Texas
intermediate crude oil (the"West Texas Crude Oil Price") fell from prices in
excess of $20 per barrel to prices of less than $17 per barrel. From December
31, 1997 through February 13, 1998, the West Texas Crude Oil Price remained in
the range of $15.50 to $17.50 per barrel. This decline in prices is thought to
be caused primarily by an oversupply of crude oil inventory created, in part, by
an unusually warm winter in the United States and Europe, an announced increase
in crude oil production quotas for OPEC countries and a possible decline in
demand in certain Asian markets.
If such a decline in the West Texas Crude Oil Price worsens or persists for a
protracted period, the Company's oilfield service and drilling operations would
likely be affected by postponements of drilling commitments and delays in
scheduled maintenance service for marginally producing wells which, in turn,
could adversely effect the Company's service and drilling rig utilization rates,
pricing structures, revenues, net income and cash flows from operations.
Growth Strategy
Historically, the domestic well servicing industry has been highly fragmented,
characterized by a large number of smaller companies which have competed
effectively on a local basis in terms of pricing and the quality of services
offered. In recent years, however, many major and independent oil and gas
companies have placed increasing emphasis not only on pricing, but also on the
safety records and quality management systems of, and the breadth of services
offered by, their vendors, including well servicing contractors. This market
environment, which requires significant expenditures by smaller companies to
meet these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As a result,
the industry has seen high levels of consolidation among the competing
contractors.
Over the past eighteen months, the Company has been the leading consolidator of
this industry, completing 35 acquisitions of well servicing and drilling
operations through December 31, 1997 and 42 such acquisitions through February
13, 1998. This consolidation has led to reduced fragmentation in the market and
a more predictable demand for well services for the Company and its competitors.
The Company's management structure is decentralized, which allows for rapid
integration of acquisitions and the retention of strong local identities of many
of the acquired businesses.
As a result of these and other factors, the Company has developed a growth
strategy to:
1. Identify, negotiate and consummate additional acquisitions of
complementary well servicing operations, including rigs, trucking and
other ancillary services;
2. Fully integrate acquisitions into the Company's decentralized
organizational structure and thereby attempt to maximize operating
margins;
3. Expand business lines and services offered by the Company in
existing areas of operations; and,
4. Extend the geographic scope and operating environments for the
Company's operations.
- 16 -
If the current decline in the West Texas Crude Oil Price worsens or persists for
a protracted period, the Company may curtail or halt its growth strategy until
such time as prices reach more favorable ranges.
RESULTS OF OPERATIONS
The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the consolidated financial statements and related notes
thereto appearing elsewhere in this report.
- 17 -
QUARTER ENDED DECEMBER 31, 1997 VERSUS THE QUARTER ENDED DECEMBER 31, 1996
Net Income
For the quarter ended December 31, 1997, the Company reported net income of
$7,345,000 ($.40 per share - basic) as compared to $2,043,000 ($.19 per share -
basic) for the quarter ended December 31, 1996, representing an increase of
$5,302,000, or 260%. The increase in net income is primarily attributable to the
Company's acquisitions completed between October 1, 1996 and December 31, 1997,
increased service and drilling rig utilization rates and price increases.
Revenues
The Company's total revenues for the quarter ended December 31, 1997 increased
by $73,476,000, or 203%, to $109,673,000 compared to $36,197,000 reported for
the quarter ended December 31, 1996. The increase is primarily attributable to
the Company's acquisitions of oilfield service and drilling rig companies (see
Note 2 to the consolidated financial statements), increased demand for oilfield
service equipment and recent price increases for oilfield services. From October
1, 1996 through December 31, 1997, the Company has added 387 well servicing
rigs, 413 fluid hauling trucks and 31 drilling rigs to its fleet.
Oilfield service revenues for the current quarter increased by $65,834,000, or
208%, to $97,542,000 compared to $31,708,000 reported for the quarter ended
December 31, 1996. The increase is primarily attributable to recent
acquisitions, increased demand for oilfield service equipment and recent price
increases for oilfield services.
Drilling revenues for the quarter ended December 31, 1997 increased by
$6,330,000, or 268%, to $8,689,000 compared to $2,359,000 reported for the
quarter ended December 31, 1996. The increase is primarily attributable to
recent drilling rig acquisitions, higher rig utilization and price increases.
Oil and gas revenues for the quarter ended December 31, 1997 decreased by
$139,000, or 7%, to $1,949,000 compared to $2,088,000 reported for the quarter
ended December 31, 1996. The decrease is primarily attributable to lower crude
oil and natural gas prices.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the quarter ended December 31, 1997
increased by $64,651,000, or 195%, to $97,826,000 compared to $33,175,000
reported for the quarter ended December 31, 1996. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's recent acquisitions.
Oilfield service expenses for the quarter ended December 31, 1997 increased by
$45,288,000, or 196%, to $68,354,000 compared to $23,066,000 reported for the
quarter ended December 31, 1996. Oilfield service margins (revenues less direct
costs and expenses) increased for the quarter ended December 31, 1997 by
$20,546,000, or 238%, to $29,188 compared to $8,642,000 for the quarter ended
December 31, 1996. Oilfield service margins as a percentage of oilfield service
revenue for the quarters ended December 31, 1997 and 1996 was 30% and 27%,
respectively. Such increases are due primarily to acquisitions, increased demand
for oilfield services and increased operating efficiencies. In addition, the
Company has continued to expand its services, offering higher margin ancillary
services and equipment such as well fishing tools, blow-out preventers and frac
tanks.
- 18 -
The Company's contract drilling costs and expenses for the quarter ended
December 31, 1997 increased by $4,627,000, or 236%, to $6,590,000 compared to
$1,963,000 for the quarter ended December 31, 1996. Oilfield drilling margins
for the Company's drilling operations during the quarter ended December 31, 1997
increased by $1,703,000, or 430%, to $2,099,000 compared to $396,000 for the
quarter ended December 31, 1996. Oilfield drilling margin as a percentage of
oilfield drilling revenue for the quarters ended December 31, 1997 and 1996 was
24% and 17%, respectively. Such increases are attributable to the Company's
recent acquisition of drilling rig companies and increased operating
efficiencies.
There was no significant change in oil and gas production costs and expenses for
the quarter ended December 31, 1997.
General and administrative expenses for the quarter ended December 31, 1997
increased by $6,635,000, or 180%, to $10,370,000 compared to $3,735,000 for the
quarter ended December 31, 1996. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenue decreased from 10.3% during the
quarter ended December 31, 1996 to 9.5% for the quarter ended December 31, 1997.
Depreciation, depletion and amortization expense for the quarter ended December
31, 1997 increased by $5,398,000, or 230%, to $7,740,000 compared to $2,342,000
for the quarter ended December 31, 1996. The increase is directly related to the
increase in property and equipment and long-term debt issuance cost incurred by
the Company over the past eighteen months in conjunction with its acquisitions.
Interest expense for the quarter ended December 31, 1997 increased by
$2,583,000, or 199%, to $3,879,000 compared to $1,296,000 for the quarter ended
December 31, 1996. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisition program.
Income tax expense for the quarter ended December 31, 1997 increased by
$3,473,000, or 338%, to $4,502,000 compared to $1,029,000 for the quarter ended
December 31, 1996. The Company does not expect to have to pay the full amount of
the income tax provision because of the availability of accelerated tax
depreciation, drilling tax credits, and tax loss carry-forwards.
Cash Flows
Net cash provided by operating activities for the quarter ended December 31,
1997 increased by $8,450,000, to $7,361,000 compared to the $1,089,000 used by
operating activities for the quarter ended December 31, 1996. The increase is
primarily attributable the acquisitions, increased service and drilling
operating margins, increased service and drilling utilization rates, increased
operating efficiencies and, to a lesser extent, increased prices for oilfield
service and drilling.
Net cash used in investing activities for the quarter ended December 31, 1997
increased by $35,778,000, or 204%, to $53,298,000 compared to $17,520,000 used
for the quarter ended December 31, 1996. This increase is primarily related to
the Company's recent acquisitions.
Net cash provided by financing activities for the quarter ended December 31,
1997 increased by $39,717,000, or 371%, to $50,431,000 compared to $10,714,000
provided during the quarter ended December 31, 1996. The increase is primarily
the result of the proceeds from long-term debt (see Note 3 to consolidated
financial statements) and partially offset by the repayment of such debt.
- 19 -
SIX MONTHS ENDED DECEMBER 31, 1997 VERSUS THE SIX MONTHS ENDED DECEMBER 31, 1996
Net Income
For the six months ended December 31, 1997, the Company reported net income of
$12,283,000 ($.76 per share - basic) as compared to $3,597,000 ($.34 per share -
basic) for the six months ended December 31, 1996, an increase of $8,686,000, or
241%. The increase in net income is primarily attributable to the Company's
acquisitions completed between October 1, 1996 and December 31, 1997, increased
service and drilling rig utilization rates, increased operational efficiencies
and price increases.
Revenues
The Company's total revenues for the six months ended December 31, 1997
increased by $117,534, or 174%, to $185,193,000 compared to $67,659,000 for the
six months ended December 31, 1996. The increase is attributable to the
Company's recent acquisitions of oilfield service and drilling rig companies,
increased utilization and higher prices for oilfield services.
Oilfield service revenues for the six months ended December 31, 1997 increased
by $108,021,000, or 183%, to $167,040,000 compared to $59,019,000 reported for
the six months ended December 31, 1996. The increase is primarily attributable
to recent acquisitions, higher demand for oilfield service equipment and, to a
lesser extent, from recent price increases for oilfield services.
Drilling revenues for the six months ended December 31, 1997 increased by
$6,829,000, or 146%, to $11,512,000 compared to $4,683,000 reported for the six
months ended December 31, 1996. The revenue increase is primarily attributable
to recent drilling rig acquisitions, higher rig utilization and price increases.
Oil and gas revenues for the six months ended December 31, 1997 increased by
$454,000, or 13%, to $4,067,000 compared to $3,613,000 for the six months ended
December 31, 1996. The increase is directly attributable to increased oil and
gas production as a result of the Company's oil and gas acquisitions for the
fiscal year ended June 30, 1997 and was partially offset by lower crude oil and
natural gas prices during the last three months of calendar 1997.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the six months ended December 31,
1997 increased by $103,274,000, or 166%, to $165,515,000 compared to $62,241,000
reported for the six months ended December 31, 1996. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's recent acquisitions.
Oilfield service expenses for the six months ended December 31, 1997 increased
by $73,826,000, or 173%, to $116,592,000 compared to $42,766,000 reported for
the six months ended December 31, 1996. Oilfield service margins (revenues less
direct costs and expenses) for the six months ended December 31, 1997 increased
$34,195,000, or 210%, to $50,448, compared to $16,253,000 for the six months
ended December 31, 1996. Oilfield service margins as a percentage of oilfield
service revenues for the six months ended December 31, 1997 and 1996 was 30% and
28%, respectively. The increases in oilfield services expenses and margins are
due primarily to acquisitions, increased demand for oilfield services, the
Company's expansion of its ancillary oilfield services and equipment, such as
well fishing tools, blowout preventers and well frac tanks, and increased
operating efficiencies.
- 20 -
Drilling costs and expenses for the six months ended December 31, 1997 increased
by $5,009,000, or 130%, to $8,853,000 compared to $3,844,000 for the six months
ended December 31, 1996. Drilling margins during the six months ended December
31, 1997 increased by $1,820,000, or 217%, to $2,659,000 compared to $839,000
for the six months ended December 31, 1996. Oilfield drilling margin as a
percentage of oilfield drilling revenue for the six months ended December 31,
1997 and 1996 was 23% and 18%, respectively. These increases are attributable to
the Company's recent acquisition of drilling rig companies and increased rig
utilization and operating efficiencies.
Oil and gas production cost for the six months ended December 31, 1997 increased
by $545,000, or 42%, to $1,831,000 compared to $1,286,000 for the six months
ended December 31, 1996. The increased costs were attributable to an increase in
the number of producing oil and gas wells.
General and administrative expenses for the six months ended December 31, 1997
increased by $10,774,000, or 148%, to $18,036,000 compared to $7,262,000 for the
six months ended December 31, 1996. The increase was primarily attributable to
the Company's recent acquisitions and expanded services. General and
administrative expenses as a percentage of total revenues for the six months
ended December 31, 1997 and 1996 were 9.7% and 10.7%, respectively.
Depreciation, depletion and amortization expense for the six months ended
December 31, 1997 increased by $8,449,000, or 190%, to $12,886,000 compared to
$4,437,000 for the six months ended December 31, 1996. The increase is directly
related to the increase in property and equipment and long-term debt issuance
costs incurred by the Company over the past eighteen months in conjunction with
its acquisitions.
Interest expense for the six months ended December 31, 1997 increased by
$4,671,000, or 177%, to $7,317,000 compared to $2,646,000 for the six months
ended December 31, 1996. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisitions.
Income tax expense for the six months ended December 31, 1997 increased by
$5,582,000, or 308%, to $7,395,000 compared to $1,813,000 for the six months
ended December 31, 1996. The Company does not expect to have to pay the full
amount of the income tax provision because of the availability of accelerated
tax depreciation, drilling tax credits, and tax loss carryforwards.
Cash Flows
Net cash provided by operating activities for the six months ended December 31,
1997 increased by $9,494,000, or 493%, to $11,421,000 compared to $1,927,000 for
the six months ended December 31, 1996. The increase is primarily attributable
to an increased service and drilling operating margin, increased service and
drilling utilization rates, increased operating efficiencies created by the
acquisitions and price increases for oilfield service and drilling.
Net cash used in investing activities for the six months ended December 31, 1997
increased by $164,087,000, or 779%, to $185,152,000 compared to $21,065,000 used
for the six months ended December 31, 1996. This increase is primarily related
to the Company's recent acquisitions.
Net cash provided by financing activities for the six months ended December 31,
1997 increased by $159,958,000, or 619%, to $185,797,000 compared to $25,839,000
provided during the six months ended December 31, 1996. The increase is
primarily the result of the proceeds from long-term debt (see Note 3 to
consolidated financial statements).
- 21 -
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash of $53.8 million compared to $41.7
million at June 30, 1997 and $9.3 million at December 31, 1996. At December 31,
1997, the Company had working capital of $99.1 million compared to $60.2 million
at June 30, 1997 and $17.1 million at December 31, 1996.
In addition to its on-going acquisition program, for fiscal 1998, the Company
has projected $40 million of capital expenditures for improvements of existing
service and drilling rig machinery and equipment, an increase of $23.4 million
over the $16.6 million expended during fiscal 1997. Capital expenditures for
service and drilling rig improvements for the six months ended December 31, 1997
and 1996 were $22.3 million and $6.5 million, respectively. The Company expects
to finance these capital expenditures through internally generated operating
cash flows.
The Company has projected $10.2 million of capital expenditures for oil and gas
exploration for fiscal 1998 as compared to $8.2 million expended for fiscal
1997. For the six months ended December 31, 1997 and 1996, the Company expended
$2.3 million and $1.3, respectively. Financing of these costs is expected to
come from operations and available credit facilities.
The Company's primary capital resources are net cash provided by operations and
proceeds from certain long-term debt facilities.
Long-Term Debt Facilities
On June 6, 1997, the Company entered into the Initial Credit Agreement with PNC,
as administrative agent, and a syndication of other lenders pursuant to which
the lenders provided a $255 million credit facility, consisting of a $120
million seven-year term loan and a $135 million five-year revolver. The interest
rate on the term loan was LIBOR plus 2.75 percent. The interest rate on the
revolver varied based on the LIBOR and the level of the Company's indebtedness.
The Initial Credit Agreement contained certain restrictive covenants and
required the Company to maintain certain financial ratios. On September 25,
1997, the Company repaid the term loan and a portion of the then outstanding
amounts under the revolver applying the proceeds from the initial and second
closings of the Company's private placement of $216 million of 5% Convertible
Subordinated Notes (discussed below).
Effective November 6, 1997, the Company entered into the Amended Credit
Agreement with PNC as administrative agent and lender, pursuant to which PNC
agreed to make revolving credit loans of up to a maximum loan commitment of $200
million. The maximum commitment decreases to $175 million on November 6, 2000
and to $125 million on November 6, 2001. The loan commitment terminates on
November 6, 2002
Effective December 3, 1997, PNC completed the syndication of the Amended Credit
Agreement and, in connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to the
Amended and Restated Credit Agreement providing for, among other things, an
increase in the maximum commitment from $200 million to $250 million.
At December 31, 1997, the principal balance of the Amended Credit Agreement, as
amended, was $107 million and the unused credit facility aggregated
approximately $143 million, with approximately $3 million reserved for existing
letters of credit.
- 22 -
In July 1996, the Company completed a $52,000,000 private offering Debentures,
pursuant to Rule 144A under the Securities Act. The Debentures are subordinate
to the Company's senior indebtedness, which, as defined under the indenture
pursuant to which the Debentures were issued, includes the borrowings under the
Amended Credit Agreement, as amended. Interest on the Debentures is payable on
January 1 and July 1 of each year.
As of December 31, 1997, $47,400,000 in principal amount of the Debentures had
been converted into 5,062,369 shares of Common Stock at the option of the
holders. The number of shares issued included 200,831 shares in excess of the
number of shares issuable at the conversion price of $9.75 per share. These
additional shares were issued by the Company to induce conversion. Such
additional consideration was accounted for as an increase to the Company's
equity. In addition, the proportional amount of debt issuance costs associated
with the converted Debentures was accounted for as a decrease to the Company's
equity. At December 31, 1997, $4,600,000 of Debentures remained outstanding.
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million Notes. On October 7, 1997, the Company completed a
second closing of its private placement of an additional $16 million of Notes
pursuant to the exercise of the remaining portion of the over-allotment option
granted to the initial purchasers of Notes. The placements were made as private
offerings pursuant to Rule 144A and Regulation S under the Securities Act. The
Notes are subordinate to the Company's senior indebtedness, which, as defined in
the indenture under which the Notes were issued, includes the borrowings under
the Amended Credit Agreement, as amended. Interest on the Notes is payable on
March 15 and September 15, commencing March 15, 1998. The Notes are convertible,
at the holder's option, into shares of Common Stock at a conversion price of
$38.50 per share, subject to certain adjustments.
Proceeds from the placement of the Notes were used to repay balances under the
Company's credit facilities (see above). At December 31, 1997, $216,000,000
principal amount of the Notes was outstanding.
Year 2000 Issue
The Company has made an assessment of its Year 2000 issues. The Company has
determined that certain operating systems which the Company currently utilizes
for its financial reporting will be adversely impacted by the year 2000. The
Company is currently in the process of selecting a new operating system which
will not be adversely impacted by the year 2000. Conversion to the new operating
system is expected to begin on July 1, 1998 and be completed by June 30, 1999.
The cost of the new operating system and conversion is not expected to be
material to the Company's operations or financial condition.
- 23 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities:
During the three months ended December 31, 1997, the Company
effected the following sales of unregistered securities:
Effective October 1, 1997, the Company issued 125,000 shares of
Common Stock as part of the consideration paid in the acquisition by
Key Four Corners, Inc., a wholly-owned subsidiary of the Company, of
substantially all of the assets of Big A Well Service Co., Sunco
Trucking Co. and Justis Supply Co., Inc., each a closely held New
Mexico corporation (collectively, the "Sellers"). The issuance of the
Common Stock to the sole shareholder of the Sellers was exempt from
registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2), as a sale of securities
not involving any public offering.
Effective October 7, 1997, the Company issued $16 million in
principal amount of its 5% Convertible Subordinated Notes due 2004
(the "Notes") pursuant to an over-allotment option exercised by
McMahan Securities Co. L.P. and Lehman Brothers Inc., the initial
purchasers in the Company's September 25, 1997 private placement of
the Notes. The Notes are generally convertible at the holders' option
at any time into shares of Common Stock at a conversion price of
$38.50 per share. The issuance of the Notes was exempt from
registration under the Securities Act because the sale of the Notes
was only to qualified institutional buyers in compliance with rule
144A and outside the United States to persons other than U.S. persons
in reliance on Regulation S of the Securities Act.
Effective December 2, 1997, the Company agreed to issue 240,000
shares of Common Stock in connection with the purchase by WellTech
Eastern, Inc., a wholly-owned subsidiary of the Company, of
substantially all of the assets of White Rhino Drilling, Inc. ("White
Rhino"), S&R Cable, Inc. ("S&R Cable") and Wellcorps, L.L.C.
("Wellcorps"). Of the 240,000 shares to be issued, 212,496 were issued
to White Rhino and its designees, 72,240 of which were issued on
December 2, 1997 and 140,256 of which were issued on January 2, 1998.
The remaining 27,504 shares were issued to S&R Cable on January 2,
1998. The issuance of the Common Stock was exempt from registration
under Section 4(2) of the Securities Act as a sale of securities not
involving any public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
- 24 -
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of the Form 10-Q:
Number Description
10(a)
Stock Purchase Agreement by and among Nabors Acquisition Corp IV,
as Seller, Key Rocky Mountain, Inc., as Buyer, and Key Energy Group,
Inc., dated July 31, 1997, (the "Gibson Stock Purchase Agreement")
(incorporated by reference to Exhibit 10(c) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)
10(b)
Amendment One to the Gibson Stock Purchase Agreement, dated as of
October 10, 1997 (incorporated by reference to Exhibit 10(d) of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 1-8038
10(c)
Asset Purchase Agreement among Key Four Corners, Inc., Key Energy
Group, Inc., Coleman Oil & Gas Co., Big A Well Service Co., Sunco
Trucking Co., Justis Supply Co., Inc. and George E. Coleman dated as
of September 2, 1997 (incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K dated October 1, 1997, File No.
1-8038).
10(d)
Asset Purchase Agreement among WellTech Eastern, Inc. and McCurdy
Well Service, Inc. effective as of October 3, 1997.
10(e)
Asset Purchase Agreement among WellTech Eastern, Inc. and GSI
Trucking Company, Inc. effective as of October 3, 1997.
10(f)
Asset Purchase Agreement among WellTech Eastern, Inc. and Kahlden
Production Services, Inc. effective as of October 3, 1997.
10(g)
Stock Purchase Agreement between WellTech Eastern, Inc. and
Donald Jeter, effective as of November 11, 1997.
10(h)
Stock Purchase Agreement between Key Energy Drilling, Inc. and
Robert C. Jones and Dana Lunette Jones, effective as of November 24,
1997.
10(i)
Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc. and White Rhino Drilling, Inc. and Jeff Critchfield,
effective as of December 2, 1997.
10(j)
Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy
Group, Inc., S&R Cable, Inc., Jeff Critchfield, Royce D. Thomas,
Ronnie Shaw and Donald Tinker, effective as of December 2, 1997.
10(k)
Asset Purchase Agreement among WellTech Eastern, Inc., Wellcorps,
L.L.C. and Jeff Critchfield, Terra Energy, Ltd. And Brian Fries,
effective as of December 2, 1997.
10(l)
Stock Purchase Agreement between Key Energy Group, Inc., Key
Energy Drilling, Inc. and Ronald M. Sitton and Frank R. Sitton,
effective as of December 12, 1997.
- 25 -
10(m)
Asset Purchase Agreement between Brooks Well Servicing, Inc. and
Sam F. McKee, Individually and d/b/a Circle M Vacuum Services,
effective as of January 30, 1998.
10(n)
Stock Purchase Agreement between Key Energy Drilling, Inc. and
Jack B. Loveless, Jim Mayfield and J.W. Miller, effective as of
January 30, 1998.
10(o)
Asset Purchase Agreement between Key Four Corners, Inc. and Four
Corners Drilling, R.L. Andes and W.E. Lang, effective as of January
30, 1998.
10(p)
Asset Purchase Agreement among Key Rocky Mountain, Inc., Updike
Brothers, Inc. Employee Stock Ownership Retirement Plan and Trust,
David W. Updike Trust, Dorothy A. Updike Trust, Dorothy R. Updike
Trust, Mary E. Updike, Ralph O. Updike and Daniel Updike effective
February 6, 1998.
10(q)
Asset Purchase Agreement among Brooks Well Servicing, Inc., Hot
Oil Plus, Inc., Thomas N. Novosad, Jr. and Patricia Novosad effective
January 29, 1998.
10(r)
Registration Rights Agreement among Key Energy Group, Inc.,
Lehman Brothers Inc., and McMahan Securities Co. L.P. dated as of
September 25, 1997.
10(s)
Amended and Restated Credit Agreement among Key Energy Group, Inc
and several other financial institutions dated November 6, 1997.
10(t)
First Amendment to the Amended and Restated Credit Agreement
June 6, 1997, as amended and restated through November 6, 1997 dated
December 3, 1997.
27(a) Statement - Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
December 31, 1997:
The Company's Current Report on Form 8-K dated October 2, 1997,
File No. 1-8038. The Report on Form 8-K concerned the Company's
private placement pursuant to Rule 144A of $200 million 5% convertible
subordinated notes.
The Company's Current Report on Form 8-K/A-1 dated October 9,
1997, File No. 1-8038. The Report on Form 8-K/A-1 concerned the
Company's private placement of an additional $16 million of 5%
convertible subordinated notes pursuant to an over-allotment option
exercised by the initial purchasers in the Company's private placement
of $200 million 5% convertible subordinated notes pursuant to Rule
144A.
The Company's Current Report on Form 8-K dated October 14, 1997,
File No. 1-8038. The Report on Form 8-K concerned the appointment of
David J. Brezzano to the Company's Board of Directors replacing Van D.
Greenfield.
- 26 -
The Company's Current Report on Form 8-K dated October 14, 1997,
File No. 1-8038. The Report on Form 8-K concerned the Company's
acquisition of substantially all of the assets of Big A Well Service
Co., Sunco Trucking Co. and Justice Supply Co.
The Company's Current Report on Form 8-K/A-1 dated November 17,
1997, File No. 1-8038. The Report on Form 8-K/A-1 was filed to include
the financial statements of Ram Oil Well Service, Inc. and Rowland
Trucking Co., Inc., the stock purchases of which were reported on Form
8-K on September 1, 1997.
The Company's Current Report on Form 8-K/A-1 dated December 15,
1997, File No. 1-8038. The Report on Form 8-K/A-1 was filed to include
the financial statements of Big A Well Service Co., Sunco Trucking Co.
and Justice Supply Co., the acquisition of whose assets was reported
on Form 8-K on October 14, 1997.
- 27 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By /s/ Francis D. John
Dated: February 14, 1998 President and Chief Executive Officer
By /s/ Stephen E. McGregor
Dated: February 14, 1998 Chief Financial Officer
- 28 -