_______________________________________
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 March 31, 1998
[ ] 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
Common Shares outstanding at May 13, 1998 - 18,327,390
_______________________________________
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1998 (unaudited) and June 30, 1997 3
Unaudited Consolidated Statements of Operations for the
Three months and nine months ended March 31,
1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the
Three months and nine months ended March 31,
1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
March 31, June 30,
1998 1997
---------- ---------
(Unaudited)
ASSETS
Current assets:
Cash $26,874 $41,704
Accounts receivable, net 85,629 45,230
Inventories 14,781 5,171
Prepaid expenses and other 4,140 1,228
-------- -------
Total current assets 131,424 93,333
Property and equipment, at cost:
Oilfield service equipment 376,666 186,895
Oilfield drilling equipment 47,591 6,319
Oil and gas properties, using the
successful efforts accounting method 31,890 23,622
Other property and equipment 32,908 10,419
-------- --------
489,055 227,255
Less accumulated depreciation and depletion 39,622 19,069
-------- --------
Property and equipment, net 449,433 208,186
-------- --------
Goodwill, net 43,024 16,387
Other assets 14,452 2,189
-------- --------
TOTAL ASSETS $638,333 $320,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $16,707 $15,339
Other accrued liabilities 23,583 12,507
Accrued interest 1,325 2,102
Accrued income taxes 326 1,664
Deferred taxes 98 126
Current portion of long-term debt 2,591 1,404
-------- --------
Total current liabilities 44,630 33,142
Long-term debt, net of current portion 356,043 172,763
Noncurrent accrued expenses 5,365 4,017
Deferred taxes 85,333 35,738
Minority interest - 1,256
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.10 par value per share;
100,000,000 shares authorized,
18,724,056 and 12,297,752 shares issued at
March 31, 1998 and June 30, 1997,
respectively 1,872 1,230
Additional paid-in capital 118,489 55,031
Treasury stock, at cost; 416,666 shares
and zero shares at March 31, 1998 and June
June 30, 1997, respectivily (9,682) -
Retained earnings 36,283 16,918
-------- --------
Total Stockholders' Equity 146,962 73,179
-------- --------
$638,333 $320,095
======== ========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
Revenues: --------------------- --------------------
Oilfield services $104,014 $38,308 $271,505 $97,327
Oilfield drilling 14,078 2,414 25,590 7,097
Oil and gas 1,730 2,250 5,422 5,863
Other, net 902 78 3,201 422
-------- -------- -------- --------
Total revenues 120,724 43,050 305,718 110,709
-------- -------- -------- --------
Costs and expenses:
Oilfield services 72,222 26,502 188,814 69,268
Oilfield drilling 10,434 2,061 19,287 5,905
Oil and gas 787 899 2,282 2,185
General and administrative 11,774 4,914 29,947 12,176
Depreciation, depletion
and amortization 9,215 3,250 22,101 7,687
Interest expense 5,063 1,861 12,380 4,507
-------- -------- -------- --------
Total costs and expenses 109,495 39,487 274,811 101,728
-------- -------- -------- --------
Income before income taxes and
minority interest 11,229 3,563 30,907 8,981
Income tax provision 4,147 1,207 11,542 3,020
Minority interest in income - (9) - (1)
-------- -------- -------- --------
Net income $7,082 $2,365 $19,365 $5,962
======== ======== ======== ========
Net income per share:
Basic $0.39 $0.20 $1.15 $0.54
Diluted $0.35 $0.17 $0.97 $0.46
Weighted average shares outstanding:
Basic 18,295 11,612 16,843 10,961
Diluted 25,449 18,162 23,725 17,251
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
------------------ ------------------
Cash flows from operating activities:
Net income $7,082 $2,365 $19,365 $5,962
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation, depletion
and amortization 9,215 3,250 22,101 7,687
Deferred income taxes (261) 1,207 3,809 3,020
Minority interest in
net income - (9) - (1)
Changes in assets and
liabilities, net of effects
from acquisitions:
Accounts receivable (2,062) (3,462) (6,396) (7,135)
Other current assets (4,104) (1,253) (4,446) (1,350)
Accounts payable and
accrued liabilities (7,483) (1,541) (17,121) (4,610)
Accrued interest (1,989) 1,158 (776) 875
Other assets and
liabilities 1,317 699 (3,400) (107)
------- -------- -------- --------
Net cash provided by
(used in) operating activities 1,715 2,414 13,136 4,341
------- -------- -------- --------
Cash flows from investing activities:
Property and equipment
additions related to:
Oilfield service operations (9,965) (3,108) (28,927) (9,057)
Oilfield drilling operations (1,593) (485) (4,966) (1,076)
Oil and gas operations (1,815) (1,623) (4,080) (2,639)
Acquisitions of:
Oilfield service operations,
net of cash acquired (24,654) (8,494) (159,314) (21,722)
Oilfield drilling operations,
net of cash acquired (15,216) - (37,082) -
Oil and gas operations,
net of cash acquired - - (600) (281)
Minority interest - - (3,426) -
------- ------- -------- --------
Net cash used in
investing activities (53,243) (13,710) (238,395) (34,775)
------- ------- -------- --------
Cash flows from financing activities:
Principal payments on debt (936) (200) (3,483) (1,253)
Repayment of long-term debt - (1,675) (216,337) (37,088)
Borrowings under line of credit 25,000 1,980 224,000 3,287
Purchase of treasury stock - - (9,682) -
Proceeds from convertible
subordinated debentures, net - - - 50,440
Proceeds from long-term
commercial paper debt, net - - 208,500 -
Procceds from other
long-term debt 568 15,000 2,267 25,500
Proceeds from exercise of
warrants - 375 4,222 375
Proceeds from exercise
stock options - - 942 58
-------- -------- -------- --------
Net cash provided by
financing activities 24,632 15,480 210,429 41,319
-------- -------- -------- ---------
Net increase (decrease)
in cash (26,896) 4,184 (14,830) 10,885
Cash, beginning of period 53,770 10,912 41,704 4,211
-------- -------- -------- --------
Cash, end of period $26,874 $15,096 $26,874 $15,096
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
KEY ENERGY GROUP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Key Energy Group, Inc. (collectively
with its subsidiaries, the "Company" or "Key") and its wholly-owned subsidiaries
for the interim period as of March 31, 1998 and 1997, and for the three and nine
months ended March 31, 1998 and 1997 are unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, in the opinion of management, these
interim financial statements include all the necessary adjustments to fairly
present the results of the interim periods. The results of operations for the
three and nine months ended March 31, 1998 are not necessarily indicative of the
results of operations for the full fiscal year ended June 30, 1998. These
unaudited interim consolidated financial statements should be read in
conjunction with the audited financial statements for the fiscal year ended June
30, 1997 included in the Company's 1997 Annual Report on Form 10-K.
Earnings per Share
The Company implemented 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 for diluted EPS is presented below:
Three MonthsEnded Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
----------------- -----------------
Diluted EPS Computation:
Numerator-
Net Income $ 7,082 $ 2,365 $19,365 $ 5,962
Effect of Dilutive Securities,
Tax Effected:
Convertible debt 1,752 634 3,599 1,901
------ ------ ------ ------
$ 8,834 $ 2,999 $22,964 $7,863
------ ------ ------ ------
Denominator-
Weighted Average Common
Shares Outstanding 18,295 11,612 16,843 10,961
Warrants 74 411 199 309
Stock Options 997 806 1,357 648
7% Convertible Subordinated Debentures 472 5,333 1,497 5,333
5% Convertible Subordinated Notes 5,610 - 3,829 -
------ ------ ------ ------
25,449 18,162 23,725 17,251
------ ------ ------ ------
Diluted EPS $ 0.35 $ 0.17 $ 0.97 $ 0.46
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 May 15, 1998, the Company owned a fleet of approximately 830 well service
rigs, 700 oilfield fluid, haul and other trucks, and 63 land drilling rigs,
including 16 well service rigs, 14 trucks and 6 drilling rigs in Argentina.
Acquisitions Completed During the Nine Months Ended March 31, 1998
The following acquisitions were completed during the nine months ended March 31,
1998. 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 nine months ended March 31, 1998. 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 the 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 upon a re-calculation of the
working capital of the acquired company as of the closing date.
Edwards Transport, Inc.
On March 27, 1998, the Company completed the acquisition of Edwards Transport,
Inc. ("Edwards") for approximately $3.0 million in cash. Edwards operates
fifteen vacuum and pump trucks in West Texas. The operating results of Edwards
will be included in the Company's results of operations effective April 1, 1998.
Lundy Vacuum Service, Inc.
On March 3, 1998, the Company completed the acquisition of Lundy Vacuum Service,
Inc. ("Lundy") for approximately $1.4 million in cash. Lundy operates eight
vacuum trucks, other oilfield fluid hauling trucks and an oilfield construction
site buisiness in East Texas. The operating results of Lundy will be included in
the Company's results of operations effective March 3, 1998.
Lauffer Well Service, Inc.
On March 2, 1998, the Company completed the acquisition of the assets of Lauffer
Well Service, Inc. ("Lauffer") for approximately $400,000 in cash. Lauffer
operates four well service rigs in Kentucky. The operating results of Lauffer
will be included in the Company's results of operations effective March 2, 1998.
Updike Brothers, Inc.
On February 6, 1998, the Company completed the acquisition of Updike Brothers,
Inc. ("Updike") for approximately for approximately $10.6 million in cash.
Updike operates 25 well service rigs in Wyoming. The operating results of Updike
are included in the Company's results of operations effective February 6, 1998.
Four Corners Drilling Company
On February 4, 1998, the Company completed the acquisition of Four Corners
Drilling Company ("Four Corners") for approximately $10.0 million in cash. Four
Corners owns 12 drilling rigs in the four corners region of the Southwestern
United States. The operating results of Four Corners are included in the
Company's results of operations effective February 4, 1998.
Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co.
On January 30, 1998, the Company completed the acquisition of Legacy Drilling
Co. ("Legacy") for approximately $3.6 million in cash. Legacy operates four
drilling rigs in the Permian Basin region of West Texas. The operating results
of Legacy are included in the Company's results of operations effective February
1, 1998
Circle M Vacuum Services, Inc.
On January 30, 1998, the Company completed the acquisition of Circle M Vacuum
Services, Inc. ("Circle M") for approximately $800,000 in cash. Circle M
operates four vacuum trucks, trailers and a salt water disposal well in
Southeast Texas. The operating results of Circle M are included in the Company's
results of operations effective February 1, 1998
Hot Oil Plus, Inc.
On January 29, 1998, the Company completed the acquisition of Hot Oil Plus, Inc.
("Hot Oil Plus") for approximately $1.8 million in cash. Hot Oil Plus operates
eight hot oil trucks, a pump truck and a steam heater in Southeast Texas. The
operating results of Hot Oil Plus are included in the Company's results of
operations effective February 1, 1998.
J.W. Gibson Well Service Company
On 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. From
August 1, 1997 through the closing of the acquisition, 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
operating income from Gibson's operations less $25,000 per month and received a
one-time management fee of $300,000. The full operating results of Gibson are
included in the Company's consolidated results of operations effective January
8, 1998.
Sitton Drilling Co.
On 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. The operating results of Sitton are included
in the Company's results of operations effective January 1, 1998.
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
On 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
consist of five land drilling rigs, five well service rigs and other related
equipment in Michigan. The operating results of Critchfield Assets are included
in the Company's results of operations effective December 2, 1997.
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
On 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.
On 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 and 5 equipment hauling trucks in Southeast Texas. The
operating results of GSI, Kahlden and McCurdy are included in the Company's
results of operations effective October 3, 1997.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.
On 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. The operating results of Big
A/Sunco are included in the Company's results of operations effective October 1,
1997.
Frontier Well Service, Inc.
On 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.
On 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.
On 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.
Landmark Fishing & Rental, Inc.
On 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. The
operating results of Landmark are included in the Company's results of
operations effective September 16, 1997.
Waco Oil & Gas Co., Inc.
On 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.
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 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.
The operating results of Ram/Rowland are 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 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 August 22, 1997.
Kenting Holdings (Argentina) S.A.
On 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.
On July 17, 1997, the Company completed the acquisition of Patrick Well Service,
Inc. ("Patrick") for approximately $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.
On 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. The operating results of Servicios are included in the
Company's results of operations effective July 17, 1997.
Acquisition Completed After March 31, 1998
The following acquisition was completed after March 31, 1998. The results of
operations from this acquisition are not included in the Company's results of
operations for the three and nine months ended March 31, 1998.
JPF Well Service, Inc. and JPF Lease Service, Inc.
On April 20, 1998, the Company completed the acquisition of JPF Well Service,
Inc. and JPF Lease Service, Inc. (collectively, "JPF") for approximately $6.2
million in cash. JPF operates nine well service rigs and oilfield construction
equipment in Southeast Texas.
3. LONG-TERM DEBT
At March 31, 1998, 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 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 by 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 currently
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. 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 to $250 million from $200 million.
At March 31, 1998, the principal balance of the Amended Credit Agreement, as
amended, was $132 million and the unused credit facility aggregated
approximately $118 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 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 March 31, 1998, $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 March 31, 1998, $4,600,000 principal amount of the Debentures remained
outstanding.
5% Convertible 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 the 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 of each year. Interest of approximately $5.1 million was
paid on 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.
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 holder'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 March 31, 1998, $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 nine
months ended March 31, 1998 and 1997 follows:
Three months ended Nine months ended
March 31, March 31,
1998 1997 1998 1997
----- ----- ----- -----
Interest paid $ 5,402 $703 $11,507 $3,632
Taxes paid 5,036 - 8,604 -
Supplemental non-cash investing and financing disclosures (in thousands) for the
three and nine months ended March 31, 1998 and 1997 follows:
Fair Value
of Issued Assumption Assumption Acquisition of
Common of of Property
Stock Debt Working Capital* and Equipment
Three months ended
March 31, 1998 $4,025 $1,697 $ 10,625 $ 63,165
====== ====== ======== =========
Nine months ended
March 31, 1998 $17,366 $7,595 $ 11,500 $ 213,633
======= ====== ======== =========
Three months ended
March 31, 1997 $ 4,496 $ 695 $ (3,023) $ 34,229
======= ====== ========= =========
Nine months ended
March 31, 1997 $ 16,905 $ 3,049 $(15,243) $ 71,679
======== ======= ========= =========
* - excluding current maturities of long-term debt.
7. TREASURY STOCK
During the nine months ended March 31, 1998, 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.
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 nine months ended March 31, 1998, the Company purchased the remaining
37% minority interest in Servicios and completed the acquisition of the
following well servicing, trucking, drilling and ancillary equipment 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 Justis Supply Co., Inc.
GSI Trucking Company, Inc.
Kahlden Production Services, Inc.
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.
Sitton Drilling Co.
J.W. Gibson Well Service Company
Hot Oil Plus, Inc.
Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co.
Circle M Vacuum Services, Inc.
Four Corners Drilling Company
Updike Brothers, Inc.
Lauffer Well Service, Inc.
Lundy Vacuum Service Inc.
Edwards Transport, Inc.
These acquisitions (which are more fully described in Note 2 to the unaudited
consolidated financial statements) included 295 well service rigs (including six
well service rigs in Argentina), 257 fluid hauling and other trucks and 49
drilling rigs (including three drilling rigs in Argentina). The total purchase
price of these acquisitions totaled approximately $220 million, comprised of
approximately $210 million in cash and 565,000 shares of Common Stock.
Subsequent to March 31, 1998 and through May 13, 1998, the Company completed the
acquisition of JPF Well Service, Inc. and JPF Lease Service, Inc., related
companies that operate nine well service rigs and engages in oilfield
construction. The purchase price of this subsequent acquisition was
approximately $6.2 million. This acquisition was financed through long-term debt
borrowings (see Note 3 to the unaudited consolidated financial statements).
As of May 13, 1998, the Company owns approximately 830 oilfield servicing rigs,
700 oilfield fluid hauling and other trucks and 63 land drilling rigs.
Management currently believes that 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.
Impact of Lower Crude Oil Prices
During the six months ended March 31, 1998, 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 $15 per barrel. From March 31,
1998 through May 13, 1998, the West Texas Crude Oil Price has remained in the
range of $14.50 to $15.50 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, over production of crude
oil from OPEC and non-OPEC countries and a decline in demand from Asian markets.
As the result of lower crude oil prices, the Company has experienced a reduction
in well completion, workover and drilling activities. This reduction adversely
impacted the Company's revenues, net income and cash flows from operations for
the quarter ended March 31, 1998 and is expected to similarly impact the
Company's results of operations until crude oil prices increase to a level
substantially above the current prices and remain at such a price for an
extended period of time.
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 twenty-one months, the Company has been the leading consolidator
of this industry, completing 45 acquisitions of well servicing and drilling
operations through March 31, 1998 and 46 such acquisitions through May 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.
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 oil 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.
QUARTER ENDED MARCH 31, 1998 VERSUS QUARTER ENDED MARCH 31, 1997
Net Income
For the quarter ended March 31, 1998, the Company reported net income of
$7,082,000 ($.39 per share - basic) as compared to $2,365,000 ($.20 per share -
basic) for the quarter ended March 31, 1997, representing an increase of
$4,717,000, or 199% (95% increase in basic earnings per share). The increase in
net income is primarily attributable to the Company's acquisitions completed
between April 1, 1997 and March 31, 1998, increased service and drilling rig
utilization rates and price increases.
Revenues
The Company's total revenues for the quarter ended March 31, 1998 increased by
$77,674,000, or 180%, to $120,724,000 compared to $43,050,000 reported for the
quarter ended March 31, 1997. 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 price increases for oilfield services. From October 1,
1996 through March 31, 1998, the Company added 490 well servicing rigs, 460
fluid hauling trucks and 52 drilling rigs to its fleet.
Oilfield service revenues for the current quarter increased by $65,706,000, or
172%, to $104,014,000 compared to $38,308,000 reported for the quarter ended
March 31, 1997. The increase is primarily attributable to recent acquisitions,
increased demand for oilfield service equipment and price increases for oilfield
services.
Drilling revenues for the quarter ended March 31, 1998 increased by $11,664,000,
or 483%, to $14,078,000 compared to $2,414,000 reported for the quarter ended
March 31, 1997. The increase is primarily attributable to recent contract
drilling acquisitions, higher utilization and price increases.
Oil and gas revenues for the quarter ended March 31, 1998 decreased by $520,000,
or 23%, to $1,730,000 compared to $2,250,000 reported for the quarter ended
March 31, 1997. The decrease is primarily attributable to lower crude oil
prices.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the quarter ended March 31, 1998
increased by $70,008,000, or 177%, to $109,495,000 compared to $39,487,000
reported for the quarter ended March 31, 1997. 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 March 31, 1998 increased by
$45,720,000, or 173%, to $72,222,000 compared to $26,502,000 reported for the
quarter ended March 31, 1997. Oilfield service margins (revenues less direct
costs and expenses) increased for the quarter ended March 31, 1998 by
$19,986,000, or 169%, to $31,792,000 compared to $11,806,000 for the quarter
ended March 31, 1997. Oilfield service margins as a percentage of oilfield
service revenue for the quarters ended March 31, 1998 and 1997 was 31% and 31%,
respectively. In addition, the Company has continued to expand its services,
offering higher margin ancillary services and equipment such as well fishing
tools, blow-out preventors and frac tanks.
The Company's contract drilling costs and expenses for the quarter ended March
31, 1998 increased by $8,373,000, or 406%, to $10,434,000 compared to $2,061,000
for the quarter ended March 31, 1997. Oilfield drilling margins for the
Company's drilling operations during the quarter ended March 31, 1998 increased
by $3,291,000, or 932%, to $3,644,000 compared to $353,000 for the quarter ended
March 31, 1997. Oilfield drilling margin as a percentage of oilfield drilling
revenue for the quarters ended March 31, 1998 and 1997 was 26% and 15%,
respectively. Such increases are attributable to the Company's recent
acquisitions of contract drilling companies, increased activity and operating
efficiencies.
There was no significant change in oil and gas production costs and expenses for
the quarter ended March 31, 1998.
General and administrative expenses for the quarter ended March 31, 1998
increased by $6,860,000, or 140%, to $11,774,000 compared to $4,914,000 for the
quarter ended March 31, 1997. 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 11% during the quarter
ended March 31, 1997 to 10% for the quarter ended March 31, 1998.
Depreciation, depletion and amortization expense for the quarter ended March 31,
1998 increased by $5,965,000, or 184%, to $9,215,000 compared to $3,250,000 for
the quarter ended March 31, 1997. The increase is directly related to the
increase in property and equipment, increased goodwill, 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 March 31, 1998 increased by $3,202,000,
or 172%, to $5,063,000 compared to $1,861,000 for the quarter ended March 31,
1997. 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 March 31, 1998 increased by $2,940,000,
or 244%, to $4,147,000 compared to $1,207,000 for the quarter ended March 31,
1997. 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 March 31, 1998
decreased by $699,000 or 29%, to $1,715,000 compared to the $2,414,000 used by
operating activities for the quarter ended March 31, 1997. The decrease is
primarily attributable to interest paid in the current quarter, an increase in
accounts receivable and a decrease in accounts payable, net of current quarter
acquisitions.
Net cash used in investing activities for the quarter ended March 31, 1998
increased by $39,533,000, or 288%, to $53,243,000 compared to $13,710,000 used
for the quarter ended March 31, 1997. This increase is primarily related to the
Company's recent acquisitions.
Net cash provided by financing activities for the quarter ended March 31, 1998
increased by $9,152,000 or 59%, to $24,632,000 compared to $15,480,000 provided
during the quarter ended March 31, 1997. The increase is primarily the result of
the proceeds from long-term debt (see Note 3 to consolidated financial
statements.
NINE MONTHS ENDED MARCH 31, 1998 VERSUS NINE MONTHS ENDED MARCH 31, 1997
Net Income
For the nine months ended March 31, 1998, the Company reported net income of
$19,365,000 ($1.15 per share - basic) as compared to $5,962,000 ($.54 per share
- - basic) for the nine months ended March 31, 1997, an increase of $13,403,000,
or 225%. The increase in net income is primarily attributable to the Company's
acquisitions completed between April 1, 1997 and March 31, 1998, increased
service and drilling rig utilization rates, increased operational efficiencies
and price increases.
Revenues
The Company's total revenues for the nine months ended March 31, 1998 increased
by $195,009,000 or 176%, to $305,718,000 compared to $110,709,000 for the nine
months ended March 31, 1997. 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 nine months ended March 31, 1998 increased by
$174,178,000, or 179%, to $271,505,000 compared to $97,327,000 reported for the
nine months ended March 31, 1997. 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 nine months ended March 31, 1998 increased by
$18,493,000, or 261%, to $25,590,000 compared to $7,097,000 reported for the
nine months ended March 31, 1997. The revenue increase is primarily attributable
to recent contract drilling acquisitions, higher rig utilization and price
increases.
Oil and gas revenues for the nine months ended March 31, 1998 decreased by
$441,000, or 8%, to $5,422,000 compared to $5,863,000 for the nine months ended
March 31, 1997. The decrease is primarily attributable to lower crude oil
prices.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the nine months ended March 31, 1998
increased by $173,083,000, or 170%, to $274,811,000 compared to $101,728,000
reported for the nine months ended March 31, 1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's recent acquisitions.
Oilfield service expenses for the nine months ended March 31, 1998 increased by
$119,546,000, or 173%, to $188,814,000 compared to $69,268,000 reported for the
nine months ended March 31, 1997. Oilfield service margins (revenues less direct
costs and expenses) for the nine months ended March 31, 1998 increased
$54,632,000, or 195%, to $82,691,000 compared to $28,059,000 for the nine months
ended March 31, 1997. Oilfield service margins as a percentage of oilfield
service revenues for the nine months ended March 31, 1998 and 1997 was 30% and
29%, 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 frac tanks, and increased operating
efficiencies.
Drilling costs and expenses for the nine months ended March 31, 1998 increased
by $13,382,000, or 227%, to $19,287,000 compared to $5,905,000 for the nine
months ended March 31, 1997. Drilling margins during the nine months ended March
31, 1998 increased by $5,111,000, or 429%, to $6,303,000 compared to $1,192,000
for the nine months ended March 31, 1997. Oilfield drilling margin as a
percentage of oilfield drilling revenue for the nine months ended March 31, 1998
and 1997 was 25% and 17%, respectively. These increases are attributable to the
Company's recent acquisitions of contract drilling companies and increased
activity and operating efficiencies.
There was no significant change in oil and gas production costs and expenses for
nine months ended March 31, 1998 as compared to the nine months ended March 31,
1997.
General and administrative expenses for the nine months ended March 31, 1998
increased by $17,771,000, or 146%, to $29,947,000 compared to $12,176,000 for
nine months ended March 31, 1997. 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 nine months ended March 31,
1998 and 1997 were 10% and 11%, respectively.
Depreciation, depletion and amortization expense for the nine months ended March
31, 1998 increased by $14,414,000, or 188%, to $22,101,000 compared to
$7,687,000 for the nine months ended March 31, 1997. The increase is directly
related to the increase in property and equipment, increased goodwill and
long-term debt issuance costs incurred by the Company over the past two years in
conjunction with its acquisitions.
Interest expense for the nine months ended March 31, 1998 increased by
$7,873,000, or 175%, to $12,380,000 compared to $4,507,000 for the nine months
ended March 31, 1997. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisitions.
Income tax expense for the nine months ended March 31, 1998 increased by
$8,522,000, or 282%, to $11,542,000 compared to $3,020,000 for the nine months
ended March 31, 1997. 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 nine months ended March 31,
1998 increased by $8,795,000 or 203%, to $13,136,000 compared to $4,341,000 for
the nine months ended March 31, 1997. 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 nine months ended March 31, 1998
increased by $203,620,000, or 586%, to $238,395,000 compared to $34,775,000 used
for the nine months ended March 31, 1997. This increase is primarily related to
the Company's recent acquisitions.
Net cash provided by financing activities for the nine months ended March 31,
1998 increased by $169,110,000, or 409%, to $210,429,000 compared to $41,319,000
provided during the nine months ended March 31, 1997. The increase is primarily
the result of the proceeds from long-term debt (see Note 3 to consolidated
financial statements), partially offset by the repayment of debt.
LIQUIDITY, CAPITAL COMMITMENTS AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash of $26.9 million compared to $41.7
million at June 30, 1997 and $11.5 million at March 31, 1997. At March 31, 1998,
the Company had working capital of $86.8 million compared to $60.2 million at
June 30, 1997 and $22.0 million at March 31, 1997.
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. The Company expects to
finance these capital expenditures through internally generated operating cash
flows. Capital expenditures for service and drilling rig improvements for the
nine months ended March 31, 1998 and 1997 were $11.6 million and $3.6 million,
respectively.
The Company has projected $10.2 million of capital expenditures for oil and gas
development for fiscal 1998 as compared to $8.2 million expended for fiscal
1997. Financing of these costs is expected to come from operations and available
credit facilities. For the nine months ended March 31, 1998 and 1997, the
Company expended $4.1 million and $2.6 million, respectively.
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 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 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 by 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
Effective December 3, 1997, PNC completed the syndication of the Amended Credit
Agreement. 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 March 31, 1998, the principal balance of the Amended Credit Agreement, as
amended, was $132 million and the unused credit facility aggregated
approximately $118 million, with approximately $3 million reserved for existing
letters of credit.
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible 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 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 March 31, 1998, $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
March 31, 1998, $4,600,000 principal amount of the Debentures remained
outstanding.
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"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 March 31, 1998, $216,000,000
principal amount of the Notes was outstanding.
Year 2000 Issue
As a result of the acquisitions completed by the Company over the past
twenty-one months, the Company currently utilizes several management information
systems in connection with its business operations and financial reporting
process. The Company has made an assessment of its Year 2000 issues, and has
determined that many of these management information systems would be adversely
impacted by the arrival of the Year 2000.
For operational efficiency, the Company had previously determined to implement a
new integrated management information system to replace the systems currently
utilized by it. Since the new system will be designed to be year 2000 compliant,
management expects that a collateral benefit of it will be to prevent adverse
impacts that may result from the arrival of the year 2000. The implementation of
the new management information system began in May 1998 and is expected to be
completed by July 1999.
The Company does not expect the amounts required to be expensed for the new
integrated management information system over the next year to have a material
effect on its financial position or results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(a) See the disclosure set forth in Item 4 below with respect to the amendment
to the Company's Amended and Restated Articles of Incorporation below,
which is incorporated herein by reference.
(c) Recent Sales of Unregistered Securities:
During the three months ended March 31, 1998, the Company effected the following
sales of unregistered securities:
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. 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.
Effective January 5, 1998, the Company issued 100,000 shares of Common Stock as
partial consideration in connection with the purchase by Key Energy Drilling, a
wholly-owned subsidiary of the Company, of substantially all the capital stock
of Sitton Drilling Co. 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.
Effective January 8, 1998, the Company issued 100,000 shares of Common Stock as
partial consideration in connection with the purchase by Key Rocky Mountain, a
wholly-owned subsidiary of the Company, of substantially all the capital stock
of J.W. Gibson Well Service Company. 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.
On January 13, 1998, a meeting of the holders of Common Stock was held to elect
the Company's Board of Directors and to vote on certain other matters. Only the
holders of record as of the close of business on November 14, 1997 (the "Record
Date") were entitled to notice of and to vote at the meeting and at any
adjournment thereof. On the Record Date, the outstanding number of shares
entitled to vote consisted of 18,087,455 shares of Common Stock. The
shareholders took the following actions at the meeting:
1. Elected the following six Directors, with the votes indicated opposite each
director's name:
For Against Abstain
Francis D. John 17,265,527 397,505 0
Kevin P. Collins 17,253,927 409,105 0
William Manly 17,265,587 397,445 0
W. Phillip Marcum 17,253,927 409,105 0
David J. Breazzano 17,262,484 400,548 0
Morton Wolkowitz 17,265,593 397,439 0
2. Approved the amendment to the Company's Amended and Restated Articles of
Incorporation to increase the authorized shares of capital stock, par value
$0.10 per share, from 25,000,000 shares to 100,000,000 shares authorized to be
issued. The vote was 16,582,418 for and 719,218 against, with 177,321
abstentions and 184,075 broker non-votes.
3. Approved the adoption of the Key Energy Group, Inc. 1997 Incentive Plan. The
vote was 7,571,692 for and 6,086,129 against, with 175,142 abstentions and
3,830,069 broker non-votes.
Item 5. Other Information.
Pursuant to a Registration Statement on Form 8-A that became effective on March
31, 1998, shares of Common Stock were listed for trading on the New York Stock
Exchange ("NYSE"). Trading in the Common Stock on the NYSE commenced at the
opening of business on April 6, 1998. Concurrently therewith trading in the
Common Stock was suspended on the American Stock Exchange ("ASE"). The Company
has filed an application for withdrawal from listing of its Common Stock with
the ASE, which is currently pending.
This Quarterly Report on Form 10-Q may contain statements which constitute or
contain "forward-looking" statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 (the "Act") or by the Securities and
Exchange Commission in its rules, regulations or releases. All statements other
than statements of historical facts included in this report including, without
limitation, statements regarding the Company's business strategy, plans,
objectives, capital expenditures and beliefs of management for future operations
are forward-looking statements. Although the Company believes the expectations
and beliefs reflected in such forward looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct. The
Company cautions investors that any such forward-looking statements made by the
Company are not guarantees of future performance and that actual results may
differ materially from those in the forward-looking statements. Important
factors that could cause actual results to differ materially from the Company's
expectations are discussed in the Company's Registration Statement on Form S-3
under the Securities Act of 1933, File No. 333-44677 (filed with the Commission
on January 22, 1998), under the caption "Risk Factors."
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
3(a) Amendment to the Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 000-22665, and incorporated here in by reference).
10(a) Asset Purchase Agreement among Brooks Well Servicing, Inc., Lundy
Vacuum Service, Inc. and Peyton E. Lundy effective March 3, 1998.
10(b) Asset Purchase Agreement among Yale E. Key, Inc., Edwards Transport,
Inc. and Tom Nations effective March 26, 1998.
10(c) Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF
Well Service Inc., effective April 20, 1998.
10(d) Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF
Lease Service Inc., effective April 20, 1998.
10(e) Employment Agreement dated December 5, 1997 by and between Stephen E.
McGregor and the Company.
27(a) Statement - Financial Data Schedule
99 Form 8-A of the Company for Registration of Certain Classes of
Securities Pursuant to Section 12(b) or (g) of the Securities Exchange Act of
1934, File No. 001-08038 incorporated by reference.
(b) The following report on Form 8-K was filed during the quarter ended March
31, 1998:
The Company's Current Report on Form 8-K dated February 2, 1998, File No.
001-08038. The Report on Form 8-K concerned the increase of authorized capital
stock from 25,000,000 to 100,000,000 shares of Common Stock, par value $.10 per
share.
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: May 15, 1998 President and Chief Executive Officer
By /s/ Stephen E. McGregor
Dated: May 15, 1998 Chief Financial Officer
By /s/ Danny R.Evatt
Dated: May 15, 1998 Chief Accounting Officer