__________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
255 Livingston Ave., New Brunswick, NJ 08901
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 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.
Yes X No
Common Shares outstanding at January 19, 1996: 6,913,513
______________________________________________________________
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities. 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of Security
Holders. 16
Item 6. Exhibits and Reports on Form 8-K. 16
Signatures. 17
Key Energy Group,Inc. and Subsidiaries
Consolidated Balance Sheets
Consolidated Statements of Stockholders' Equity
(unaudited)
December 31, June 30,
(Thousands, except share and per share data) 1995 1995
- -----------------------------------------------------------------------
ASSETS
Current Assets:
Cash $503 $865
Restricted cash 452 410
Restricted marketable securities 267 267
Accounts receivable, net 8,352 8,133
Prepaid expenses 225 358
Inventories 1,300 1,257
- -----------------------------------------------------------------------
Total Current Assets 11,099 11,290
- -----------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 25,456 23,726
Oil and gas well drilling equipment 2,374 2,014
Motor vehicles 521 526
Oil and gas properties and other
related equipment, successful efforts 9,809 7,652
Furniture and equipment 334 332
Buildings and land 2,086 2,086
- -----------------------------------------------------------------------
40,580 36,336
Accumulated depreciation & depletion (6,188) (4,394)
- -----------------------------------------------------------------------
Net Property and Equipment 34,392 31,942
- -----------------------------------------------------------------------
Other Assets 2,020 2,011
- -----------------------------------------------------------------------
Total Assets $47,511 $45,243
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $3,804 $3,930
Accrued interest 168 145
Other accrued liabilities 1,931 2,612
Accrued income taxes 124 174
Deferred tax liability 118 118
Current portion of long-term debt 1,590 2,249
- -----------------------------------------------------------------------
Total Current Liabilities 7,735 9,228
- -----------------------------------------------------------------------
Long-term debt, less current portion 15,237 13,700
Deferred income taxes 2,934 2,204
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 10,000,000
shares authorized, 6,913,513 shares
issued and outstanding at December 31,
1995 and June 30, 1995, respectively 691 691
Additional paid-in capital 15,186 15,186
Retained earnings 5,728 4,234
- -----------------------------------------------------------------------
Total Stockholders' Equity 21,605 20,111
- -----------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $47,511 $45,243
=======================================================================
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group,
Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Six Months Ended
December 31, December 31,
(Thousands, except per share data) 1995 1994 1995 1994
- -----------------------------------------------------------------------------
REVENUES:
Oilfield services $9,381 $10,258 $19,148 $20,923
Oil and gas revenues 911 615 1,727 1,077
Oil and gas well drilling 2,057 - 3,659 -
Other revenues, net 45 (92) 258 (38)
- -----------------------------------------------------------------------------
12,394 10,781 24,792 21,962
- -----------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services direct costs 6,889 7,932 14,153 16,350
Oil and gas direct costs 354 166 619 431
Oil and gas well drilling 1,388 - 2,735 -
Depreciation and depletion expense 971 684 1,794 1,245
General and administrative expense 1,198 933 2,390 1,822
Interest expense 439 343 877 627
- -----------------------------------------------------------------------------
11,239 10,058 22,568 20,475
- -----------------------------------------------------------------------------
Income before income taxes 1,155 723 2,224 1,487
Income tax expense 387 231 730 476
- -----------------------------------------------------------------------------
NET INCOME $768 $492 $1,494 $1,011
=============================================================================
EARNINGS PER SHARE :
Income before income taxes $0.17 $0.11 $0.32 $0.23
Net income $0.11 $0.08 $0.22 $0.16
WEIGHTED AVERAGE SHARES OUTSTANDING 6,914 6,500 6,914 6,500
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group,
Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended Six Months Ended
December 31, December 31,
(Thousands) 1995 1994 1995 1994
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $768 $492 $1,494 $1,011
Adjustments to reconcile income from operations to
net cash provided by operations:
Depreciation, depletion and amortization 971 693 1,794 1,245
Deferred income taxes 387 231 730 476
Change in assets and liabilities, net of effects
from acquisitions:
(Increase) decrease in accounts
receivable 279 (129) (219) (960)
(Increase) decrease in other current
assets (21) 19 90 (71)
Decrease in accounts payable and
accrued expenses (533) (1,372) (807) (1,564)
(Decrease) increase in accrued interest 10 - 23 (16)
Decrease in accrued taxes (50) - (50) -
(Increase) decrease in other assets - (9) (9) -
- -----------------------------------------------------------------------------
Net cash (used in) provided by operating
activities 1,811 (75) 3,046 121
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell service
operations (841) (732) (1,727) (1,899)
Capital expenditures - Oil and gas
operations - - (7) (7)
Capital expenditures - Oil and gas well
drilling operations (220) - (360) -
Expenditures for oil and gas
properties (1,236) (985) (2,150) (1,211)
- -----------------------------------------------------------------------------
Net cash used in investing
activities (2,297) (1,717) (4,244) (3,117)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments (514) (651) (1,418) (1,047)
Borrowings under line-of-credit 38 383 (28) 971
Proceeds from long-term debt 1,019 2,181 2,324 2,866
- -----------------------------------------------------------------------------
Net cash provided by financing
activities 543 1,913 878 2,790
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and
restricted cash 57 121 (320) (206)
Cash and restricted cash at beginning of
period 898 846 1,275 1,173
- -----------------------------------------------------------------------------
Cash and restricted cash at end of
period $955 $967 $955 $967
=============================================================================
Supplemental cash flow disclosures:
Interest paid $429 $343 $854 $611
Supplemental schedule of non-cash investing and financing
transactions:
Fair market value of Common Stock issued
as payment for the WellTech West Texas
equipment $- $- $- $8,584
See the accompanying notes which are an integral part of these
consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial information in this report includes
the accounts of Key Energy Group, Inc. ("Key") and its
wholly-owned subsidiaries and was prepared in conformity with
accounting policies used in the Annual Report on Form 10-KSB
furnished for the preceding fiscal year.
The consolidated financial information in this report includes
the three operating subsidiaries of the Company; Yale E. Key,
Inc. ("Yale E. Key") which is involved in oilwell service
operations, Odessa Exploration Inc. ("OEI") which is involved in
the production and exploration of oil and natural gas and Key
Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt
Drilling") which is involved in the drilling for oil and natural
gas.
OEI utilizes the successful efforts method of accounting for its
oil and gas properties. Under this method, all costs associated
with productive wells and nonproductive development wells are
capitalized, while nonproductive exploration costs and
geological and geophysical costs (if any) are expensed.
Capitalized costs relating to proved properties are depleted
using the unit-of-production method based on proved reserves
expressed as net equivalent Bbls as reviewed by independent
petroleum engineers. The carrying amounts of properties sold or
otherwise disposed of and the related allowance for depletion
are eliminated from the accounts and any gain/loss is included
in results of operations.
OEI's aggregate oil and gas properties are stated at cost, not
in excess of total estimated future net revenues net of related
income tax effects.
In the opinion of Key, the accompanying unaudited condensed
consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the financial position
as of December 31, 1995, the statement of cash flows for the
three and six months ended December 31, 1995 and 1994, and the
results of operations for the three and six month periods then
ended.
The consolidated financial statements of Key have been prepared
in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principals for complete financial
statements. Operating results for interim periods are not
necessarily indicative of the results that may be expected for
the full year.
2. ACQUISITIONS
Clint Hurt Drilling
On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA")
entered into an Asset Purchase Agreement pursuant to which CHA
sold to Key all of its assets in West Texas. Such assets mainly
consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, Key paid CHA
$1,750,000, of which $1,000,000 was paid in cash and the balance
in the form of a $725,000 note payable to CHA, (the note was
paid in full in July 1995). Mr. Clint Hurt entered into
consulting and noncompetition agreements with Key in
consideration for which Key issued 5,000 shares of Key Common
Stock. The acquisition was accounted for using the purchase
method and the results of operations of Clint Hurt Drilling have
been included in those of Key since April 1, 1995.
The Merger
In August 1995, Key announced an agreement to acquire, through a
merger, WellTech. Key will be the surviving entity in the
merger. In the merger, WellTech stockholders will receive an
aggregate of 4,929,962 shares of Key Common Stock and warrants
to purchase 750,000 shares of Key Common Stock at $6.75 per
share. As part of the merger, 1,429,962 of the 1,635,000
shares of Key Common Stock currently owned by WellTech and
previously issued warrants to purchase 250,000 shares of Key
Common Stock at $5.00 per share will be cancelled. Net
consideration for the merger will be 3,500,000 shares of Key
Common Stock and warrants to purchase 500,000 additional shares.
WellTech's principal line of business is oil and gas well
servicing and it currently operates in the Mid-Continent and
Northeast areas of the United States and in Argentina. Until
November 1995, Welltech also conducted certain operations in
Russia. Consummation of the merger is subject to satisfaction
of various conditions including, without limitation, shareholder
approval and no assurance can be given that the merger will be
consummated. On January 23, 1996, Key filed a prospectus - proxy
statement which will, upon completion and mailing, be used to
solicit shareholder approval of the merger.
3. LONG-TERM DEBT
The Yale E. Key C.I.T. Credit Finance ("C.I.T.") term note,
($5,463,000 approximate principal balance at December 31, 1995),
as amended, requires principal payments of approximately
$95,000, plus interest, due the first day of each month plus a
final payment of the unpaid balance of the note due December 31,
1996. The interest rate is two and one-half percent above the
stated prime rate; 8.5% at December 31, 1995. The note is
collateralized by all of the assets (including equipment and
inventory) of Yale E. Key.
The Yale E. Key C.I.T. line of credit, ($3,818,000 approximate
principal balance at December 31, 1995),as amended, requires
monthly payments of interest at two and one-half percent above
the stated prime rate (8.5% at December 31, 1995). The
expiration of the line of credit is December 31,1996. The
line of credit is collateralized by the accounts receivable of
Yale E. Key. The line of credit has a maximum limit of 85% of
available accounts receivable or $7 million; whichever is less.
At December 31, 1995, there was no credit line availability.
The agreement with C.I.T. includes certain restrictive
covenants, the most restrictive of which prohibits Yale E. Key
from making distributions and declaring dividends on Yale E.
Key's common stock.
The OEI loan agreement, as amended, with Norwest Bank Texas,
N.A. ("Norwest") provides for a $7.5 million revolving line of
credit note subject to a borrowing base limitation
(approximately $6.5 million at December 31, 1995). The
borrowing base is redetermined on at least a semi-annual basis.
The borrowing base is reduced by approximately $60,000 per month
through October 1997; the maturity of the note. The note's
interest rate is Norwest's prime rate (8.5% at December 31,
1995) plus one-half percent. The note is
secured by substantially all of the oil and gas properties of
OEI and the pledge of certain collateral by current and former
officers and directors of Key. As of December 31, 1995, Norwest
waived the pledge of collateral and released the collateral to
the seven individuals who had pledged it. The note is also
guaranteed by Key.
The loan agreement contains various restrictive covenants and
compliance requirements, including covenants which (a) prohibit
OEI from declaring or paying dividends on OEI's common stock,
(b) limit the incurrence of additional indebtedness by OEI and,
(c) limit the disposition of assets and various other financial
covenants.
The Clint Hurt Drilling loan agreement with Norwest provided for
a $1 million term loan and a $200,000 line of credit. The $1
million term loan ($776,000 approximate principal balance at
December 31, 1995), requires principal payments of approximately
$28,000 per month plus interest for 36 months with a maturity
date of April 1998. The $200,000 line of credit, ($77,000
approximate principal balance at December 31, 1995), requires
principal payments of $20,000 per month beginning July 5, 1995,
plus interest, through its maturity in April 1996. Both the
loan and line of credit have an interest rate of Norwest prime
rate (8.5% at December 31, 1995), plus 3/4 of one percent. The
notes are secured by all of the equipment of Clint Hurt
Drilling and are guaranteed by Key. In addition, the loan
agreement contains various restrictive covenants and compliance
requirements.
Each of Key (and Yale E. Key and Clint Hurt) and WellTech
recently entered into new credit facilities of approximately
$17.5 million (subject to certain advance formulas) the proceeds
of the initial borrowings of which were used to repay
substantially all of the debt of Key (other than that of OEI)
and Welltech (other than that of certain affiliates),
respectively. Key believes that such a facility will provide
sufficient funds to finance its operating and capital
expenditure needs for the foreseeable future. The new
indebtedness will be the obligation of Key, as survivor of the
merger, and Key's subsidiaries, Yale E. Key and Clint Hurt. The
cross-guaranty and cross-collateralization arrangement could, if
the merger is not consummated, create contingent liabilities for
each of Key and WellTech. The failure to consummate the merger
on or prior to April 30, 1996 will, at the option of the lender,
constitute an event of default under the new indebtedness if
WellTech fails to refinance its credit agreement on or before
July 31, 1996 or Key fails to continue to operate Welltech
pursuant to the Interim Operations Agreement. Key and WellTech
have agreed not to terminate the Interim Operations Agreement
without the consent of the lender. (See Note 2, "The Merger)
4. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of
business are pending against Key. Management does not believe
that the disposition of any of these suits or claims will
result in a material adverse impact on the consolidated
financial position of Key.
During August 1995, Key entered into employment agreements with
certain of its officers. These employment agreements generally
run to June 30, 1998, but will automatically be extended on a
yearly basis unless terminated by Key or the applicable officer.
In addition to providing a base salary for each officer, the
employment agreements provide for severance payments for each
officer varying from 12 to 36 months of the officer's base
salary. The current annual base salaries for the officers
covered under such employment agreements total approximately
$800,000.
KEY ENERGY GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
QUARTER ENDED DECEMBER 31, 1995 VERSUS QUARTER ENDED DECEMBER 31, 1994
Overview
The following discussion provides information to assist in the
understanding of Key Energy Group, Inc.s ("Key") financial
condition and results of operations. It should be read in
conjunction with the financial statements and related notes
appearing elsewhere in this report.
Operating results for the three and six months ended December
31, 1995 include Key's oilfield well service operations
conducted by its wholly-owned subsidiary, Yale E. Key, Inc.
("Yale E. Key"), its oil and natural gas exploration and
production operations conducted by its wholly-owned subsidiary,
Odessa Exploration Inc. ("OEI") and Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling ("Clint Hurt Drilling") which is
engaged in oil and natural gas well contract drilling and was
acquired in March 1995.
Historically, fluctuations in oilfield well service operations
and oil and gas well contract drilling activity have been
closely linked to fluctuations in crude oil and natural gas
prices. However, Key, through customer alliances and
agreements, and diversification of services, is seeking to
minimize the effects of such fluctuations on Key's results of
operations and financial condition.
Results of Operations
Key
Revenues of Key for the three months ended December 31, 1995
increased 15% to $12,394,000 from $10,781,000 for the comparable
1994 period, while net income of $768,000 increased 56% over the
prior year total of $492,000. The increase in revenues was
primarily due to the addition of Clint Hurt Drilling on April 1,
1995, whose operations were not included in the prior year
quarter results. The improvement in quarterly net income is
partially attributable to the inclusion of Clint Hurt Drilling,
but is also a result of an increase in net income for OEI and a
decrease in total consolidated Key costs and expenses as a
percent of total revenues.
Yale E. Key, Inc.
Oilfield service revenue declined 9% from $10,258,000 for the
prior quarter to $9,381,000 for the current quarter. The
decline is primarily attributable to curtailed equipment
utilization as the result of adverse weather conditions and a
slight decline in demand. Yale E. Key averaged an 81% equipment
utilization for the quarter; and due to lower expenses and due
to the continued diversification of services into higher margin
business segments such as oilfield frac tanks, oilfield fishing
tools and trucking operations, the gross margin increased from
21% to 24% of revenues for the current quarter
Odessa Exploration, Inc.
Revenues from oil and gas activities increased 48% from $615,000
in the 1994 quarter to $911,000 for the current quarter despite
relatively constant crude oil and lower natural gas prices. The
increase in revenues was primarily the result of increased
production of oil and natural gas as several oil and natural gas
wells which were drilled began production during the 1995
quarter.
Of the total $911,000 of revenues for the quarter ended December
31, 1995, approximately $734,000 was from the sale of oil and
gas - 22,857 barrels of oil at an average price of $15.57 per
barrel and 223,200 MCF of natural gas at an average price of
$1.69 per MCF. The remaining $177,000 of revenues represented
primarily administrative fee income.
Clint Hurt Drilling
Clint Hurt Drilling was acquired in March 1995. Comparable
numbers for the prior quarter are, therefore, not available.
Revenues were $2.1 for the quarter compared to $1.6 million for
the prior 1996 fiscal quarter.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased 42% from $684,000 to $971,000 during the three months
ended December 31, 1995 as compared with the prior period. The
increase is primarily due to oilfield service depreciation
expense, which is the result of increased capital expenditure
depreciation for the current quarter versus the prior quarter.
In addition, depletion expense generated by OEI increased for
the quarter due to the increase in the production of oil and
natural gas.
Interest Expense
Interest expense for Key increased 28% from $343,000 during the
three months ended December 31, 1994 to $439,000 for the
current period. The increase is primarily the result of
acquisitions and the addition of certain oil and gas properties
by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, OEI and Clint Hurt Drilling. These expenses
increased $265,000 or 32% to $1,198,000 during the three months
ended December 31, 1995 as compared to $933,000 for the three
months ended December 31, 1994. The increase can be primarily
attributed to the acquisition and subsequent inclusion of Clint
Hurt Drilling's general and administrative expenses.
Income Tax Expense
Income tax expense for Key for the three months ended December
31, 1995 and 1994 was $387,000 and $231,000 respectively.
Net Income
Net income before income taxes was $1,155,000 for the three
months ended December 31, 1995, which was an increase of
$432,000 or 60% over the comparable quarter of $723,000. The
increase in net income before income taxes was primarily due to
the addition of Clint Hurt Drilling (see Note 2) and increased
oil and gas revenues.
Net income for the three months ended December 31, 1995 was
$768,000, which was a $276,000 or 56% increase from $492,000 for
the three months ended December 31, 1994.
Cash Flow
Net cash provided by operations increased $1,886,000 from
$75,000 in net cash used by operations during the three months
ended December 31, 1994 to $1,811,000 in net cash provided by
operations for the current period. The increase is attributable
primarily to lower decrease in accounts payable and accrued
expenses and higher net income and depreciation expense over the
same period last year.
Net cash used in investing activities increased from $1,717,000
for the three months ended December 31, 1994 to $2,297,000 for
the current period. The increase is primarily the result of
increased expenditures for oil and gas properties. In addition,
net cash used in investing activities for the current quarter
included $220,000 used in the oil and gas well drilling
operations.
Net cash provided by financing activities was $543,000, a
$1,370,000 decrease, for the three months ended December 31,
1995 as compared to $1,913,000 for the comparable quarter. The
decrease is primarily the result of increased principal payments
made during the current quarter versus the prior quarter and a
decrease in proceeds from long-term debt during the current
quarter. Such proceeds were primarily used for the oil and
natural gas drilling program conducted by OEI.
Cash increased $57,000 for the three months ended December 31,
1995, as compared to a net increase in cash of $121,000 for the
three months ended December 31, 1994.
SIX MONTHS ENDED DECEMBER 31, 1995 VERSUS SIX MONTHS ENDED
DECEMBER 31, 1994
Results of Operations
Key
Revenues of Key for the six months ended December 31, 1995
increased 13% to $24,792,000 from $21,962,000 for the comparable
1994 period, while net income of $1,494,000 increased 48% over
the prior six month total of $1,011,000. The increase in
revenues was primarily due to the addition of Clint Hurt
Drilling on April 1, 1995, whose operations were not included in
the prior year quarter results. The improvement in quarterly
net income is partially attributable to the inclusion of Clint
Hurt Drilling, but is also a result of an increase in net income
for OEI and a decrease in total consolidated Key costs and
expenses as a percent of total revenues.
Yale E. Key, Inc.
Oilfield service revenue declined $1,775,000 or 9% from
$20,923,000 for the prior period to $19,148,000 for the current
period. The decline is primarily attributable to curtailed
equipment utilization as the result of adverse weather
conditions and a slight decline in demand. Yale E. Key averaged
an 82% equipment utilization for the six months; and due to
lower expenses, and due to the continued diversification of
services into higher margin business segments such as oilfield
frac tanks, oilfield fishing tools and trucking operations, the
gross margin increased from 21% to 24% of revenues for the
current quarter
Odessa Exploration, Inc.
Revenues from oil and gas activities increased 60% from
$1,077,000 in the 1994 period to $1,727,000 for the current six
month period despite relatively constant crude oil and lower
natural gas prices. The increase in revenues was primarily the
result of increased production of oil and natural gas as several
oil and natural gas wells which were drilled began production
during the 1996 period.
Of the total $1,727,000 of revenues for the six months ended
December 31, 1995, approximately $1,308,000 was from the sale of
oil and gas - 44,351 barrels of oil at an average price of
$16.19 per barrel and 479,149 MCF of natural gas at an average
price of $1.62 per MCF. The remaining $419,000 of revenues
represented primarily administrative fee income.
Clint Hurt Drilling
Clint Hurt Drilling was acquired in March 1995. Comparable
numbers for the prior six months are, therefore, not available.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense for Key
increased $549,000 or 44% from $1,245,000 to $1,794,000 during
the six months ended December 31, 1995 as compared with the
prior period. The increase is primarily due to oilfield service
depreciation expense, which is the result of increased capital
expenditure depreciation for the current period versus the prior
period. In addition, depletion expense generated by OEI
increased for the period due to the increase in the production
of oil and natural gas.
Interest Expense
Interest expense for Key increased 40% from $627,000 during the
six months ended December 31, 1994 to $877,000 for the current
period. The increase is primarily the result of acquisitions
and the addition of certain oil and gas properties by OEI.
General and Administrative Expenses
General and administrative expenses include those of Key as well
as Yale E. Key, OEI and Clint Hurt Drilling. These expenses
increased $568,000 or 31% to $2,390,000 during the six months
ended December 31, 1995 as compared to $1,822,000 for the three
months ended December 31, 1994. The increase can be primarily
attributed to the acquisition and subsequent inclusion of Clint
Hurt Drilling's general and administrative expenses.
Income Tax Expense
Income tax expense for Key for the six months ended December 31,
1995 and 1994 was $730,000 and $476,000 respectively.
Net Income
Net income before income taxes was $2,224,000 for the six months
ended December 31, 1995, which was an increase of $737,000 or
50% over the comparable quarter of $1,487,000. The increase in
net income before income taxes was primarily due to the addition of Clint
Hurt Drilling (see Note 2) and increased oil and gas revenues.
Net income for the six months ended December 31, 1995 was
$1,494,000, which was a $483,000 or 48% increase from $1,011,000
for the six months ended December 31, 1994.
Cash Flow
Net cash provided by operations increased $2,925,000 from
$121,000 during the six months ended December 31, 1994 to
$3,046,000 for the current period. The increase is attributable
primarily to lower decrease in accounts payable and accrued
expenses and higher net income and depreciation expense over the
same period last year.
Net cash used in investing activities increased $1,127,000 or
36% from $3,117,000 for the six months ended December 31, 1994
to $4,244,000 for the current period. The increase is primarily
the result of increased expenditures for oil and gas properties.
In addition, net cash used in investing activities for the
current period included $360,000 used in the oil and gas well
drilling operations.
Net cash provided by financing activities was $878,000, a
$1,912,000 decrease, for the six months ended December 31, 1995
as compared to $2,790,000 for the comparable period. The
decrease is primarily the result of increased principal payments
made during the current quarter versus the prior quarter and a
decrease in proceeds from long-term debt during the current
quarter. Such proceeds were primarily used for the oil and
natural gas drilling program conducted by OEI.
Cash decreased $320,000 for the six months ended December 31,
1995, as compared to a net decrease in cash of $206,000 for the
six months ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, Key had $955,000 in cash and restricted
cash as compared to $1,275,000 in cash and restricted cash at
June 30, 1995.
Yale E. Key has projected $2.5 million for oilwell service
capital expenditures over the 1996 fiscal year as compared to
$2.8 million for the fiscal year ended June 30, 1995. Capital
expenditures are expected to be primarily capitalized
improvement costs (totaling over $5,000) to existing equipment
and machinery. Capital expenditures are expected to decrease
from fiscal 1995 levels due to less capital improvements for the
acquired WellTech operations of West Texas. Financing of
capital expenditures is expected to come from the operating cash
flows of Yale E. Key. Capital expenditures were $1,418,000 for
the six months ended December 31, 1995.
OEI has forecasted approximately $3 million in oil and gas
property acquisitions for fiscal 1996 as compared to $2.8
million during fiscal 1995. Financing of oil and gas
acquisitions is expected to come from borrowings. Oil and gas
acquisitions were $2,150,000 for the six months ended December
31, 1995. Financing of oil and gas acquisitions is expected to
be obtained from bank financing and/or private investors.
Acquisitions
Clint Hurt Drilling
On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA")
entered into an Asset Purchase Agreement pursuant to which CHA
sold to Key all of its assets in West Texas. Such assets mainly
consisted of four oil and gas drilling rigs and related
equipment. As consideration for the acquisition, Key paid CHA
$1,750,000, of which $1,000,000 was paid in cash and the balance
in the form of a $725,000 note payable to CHA, (the note was
paid in full in July 1996). Mr. Clint Hurt entered into
consulting and noncompetition agreements with Key in
consideration for which Key issued 5,000 shares of Key Common
Stock. The acquisition was accounted for using the purchase
method and the results of operations of Clint Hurt Drilling have
been included in those of Key since April 1, 1995.
The Merger
In August 1995, Key announced an agreement to acquire, through a
merger, WellTech. Key will be the surviving entity in the
merger. In the merger, WellTech stockholders will receive an
aggregate of 4,929,962 shares of Key Common Stock and warrants
to purchase 750,000 shares of Key Common Stock at $6.75 per
share. As part of the merger, 1,429,962 of the 1,635,000
shares of Key Common Stock currently owned by WellTech and
previously issued warrants to purchase 250,000 shares of Key
Common Stock at $5.00 per share will be cancelled. Net
consideration for the merger will be 3,500,000 shares of Key
Common Stock and warrants to purchase 500,000 additional shares.
WellTech's principal line of business is oil and gas well
servicing and it currently operates in the Mid-Continent and
Northeast areas of the United States and in Argentina. Until
November 1995, Welltech also conducted certain operations in
Russia. Consummation of the merger is subject to satisfaction
of various conditions including, without limitation, shareholder
approval and no assurance can be given that the merger will be
consummated. On January 23, 1996, Key filed a prospectus -
proxy statement which will, upon completion and mailing, be used
to solicit shareholder approval of the merger.
Each of Key (and Yale E. Key and Clint Hurt) and WellTech
recently entered into new credit facilities of approximately
$17.5 million (subject to certain advance formulas) the proceeds
of the initial borrowings of which were used to repay
substantially all of the debt of Key (other than that of OEI)
and Welltech (other than that of certain affiliates),
respectively. Key believes that such a facility will provide
sufficient funds to finance its operating and capital
expenditure needs for the foreseeable future. The new
indebtedness will be the obligation of Key, as survivor of the
merger, and Key's subsidiaries, Yale E. Key and Clint Hurt. The
cross-guaranty and cross-collateralization arrangement could, if
the merger is not consummated, create contingent liabilities for
each of Key and WellTech. The failure to consummate the merger
on or prior to April 30, 1996 will, at the option of the lender,
constitute an event of default under the new indebtedness if
WellTech fails to refinance its credit agreement on or before
July 31, 1996 or Key fails to continue to operate Welltech
pursuant to the Interim Operations Agreement. Key and WellTech
have agreed not to terminate the Interim Operations Agreement
without the consent of the lender. (See Note 2, "The Merger)
Impact of SFAS 121
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 - Accounting
for Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121") regarding the impairment of long-lived assets,
identifiable intangibles and goodwill related to those assets.
SFAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995, although earlier adoption is
encouraged. The application of SFAS 121 will require periodic
determination of whether the book value of long-lived assets
exceeds the future cash flows expected to result from the use of
such assets and, if so, will require reduction of the carrying
amount of the "impaired" assets to their estimated fair values.
Key estimates that the implementation of SFAS 121 will not have
a material effect on Key's financial position.
Impact of Inflation on Operations
Although in a complex environment it is extremely difficult to
make an accurate assessment of the impact of inflation on Key's
operations, management is of the opinion that inflation has not
had a significant impact on it business.
Cautionary Statement for Purposes of The "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
Key desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of
1995. Key's Report on Form 10-Q contains "forward-looking
statements" including statements concerning projections, plans,
objectives, future events or performance and underlying
assumptions and other statements which are other than statements
of historical fact. Key wishes to caution readers that the
following important factors, amoung others, may have affected
and could in the future affect Keys'actual results and could
cause Key's actual results for subsequent periods to differ
materially from those expresed in any forward-looking statement
made by or on behalf of Key:
Occurences affecting the need for, timing and extent of Key's
capital expenditures or affecting Key's ability to obtain funds
from operations, borrowings or investments to finance needed
captial expenditures;
Key's ability successfully to identify and finance oil and gas
property acquisitions and its ability successfully to operate
existing and any subsequently acquired properties;
The availability of adquate funds under the new credit facility
to fund operations for the foreseeable future, or if such funds
are inadquate, the ability of Key to obtain new or additional
financing or to generatre adequate funds from operations;
Key's ability to enter into and retain profitable oilfield
servicing and drilling contracts with customers which make
timely payments for such services;
The demand for oilfield services, drilling services and for oil
and gas, and the supply of and demand for driling and servicing
rigs, all of which are subject to fluctuations which could
adversely affect Key's operations;
The amount and rate of growth in Key's general and
admistrative expense, including, but not limited to, the costs
of intergrating WellTech's operations into Key assuming
consummation of the Merger;
The effect of changes in regulations, including environmental
regulations with which Key must comply, the cost of such
complicance and the potentially material adverse effects if Key
were not in substantial compliance either currently or in the
future;
Key's relationship with its employees and the potential adverse
effect if labor disputes or grievances were to occur;
The costs and other effects of legal and administrative cases
and proceedings and/or settlements, including but not limited to
environmental and workers compensation cases;
The effect of changes in accounting policies and practices or
of changes in Key's organization, compensation and benefit plan,
or of changes in Key's material agreements of understandings
with third parties.
Moreover, in connection with Key's proposed merger with
WellTech, readers should consider the important factors set forth
under the caption RISK FACTORS in the proxy statement-prospectus
forming part of Key's Registration Statement in Form S-4,
Commission File No. 333-00369, which RISK FACTORS section, as
amended from time to time, is hereby incorporated hereby by
reference.
Key undertakes no obligation to release publicly the result of any
revisions to any forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is filed as a part of the Form 10-Q:
Number Description
27 (a) Statement - Financial Data Schedule (Filed
herewith as part of the Condensed Consolidated
Financial Statements).
99 Risk Factors disclosure from Key's Proxy Statement -
Prospectus included as part of Key's Registration
Statement on Form S-4, Commission File No. 33-00369.
(b) There were no reports filed on form 8-K during the
quarter ended December 31, 1995.
SIGNATURE
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
President, Chief Executive Officer
Dated: February 14, 1996 and Chief Financial Officer
By /s/ Danny R. Evatt
Dated: February 14, 1996 Vice President and Chief Accounting
Officer
RISK FACTORS
Substantial Leverage and History of Losses. Key, as the
surviving company, will be highly leveraged due to the
substantial indebtedness Key and WellTech have incurred over
time primarily to finance acquisitions and capital expenditures,
expand operations and, in the case of WellTech, finance
operating losses. As of September 30, 1995, Key's aggregate
debt was approximately $16 million. After giving effect to the
Merger and the New Indebtedness, as of September 30, 1995, Key's
aggregate debt on a pro forma basis would have been
approximately $36 million. Key may incur additional
indebtedness to make investments, acquisitions and capital
expenditures in the future. (See "Management's Discussion and
Analysis of Results of Operations and Financial Condition of
Key--Liquidity and Capital Resources".) Key anticipates that it
will continue to have substantial indebtedness for the
foreseeable future.
WellTech has had operating losses in each of the five years
ended December 31, 1994 but had operating income for the nine
months ended September 30, 1995. WellTech has also been in
violation of certain restrictive covenants in its loan agreement
with its principal lender which has necessitated obtaining
waivers from that lender. There can be no assurance that
WellTech will not have operating losses for the year ended
December 31, 1995 or, if the Merger is consummated, that the
operations of Key subsequent to the Merger will not be adversely
affected by the same factors that contributed to WellTech's
operating losses. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of WellTech".)
In recent years, cash generated from Key's operating activities
in conjunction with borrowings and proceeds from private equity
issuances has been sufficient to meet its debt service and
acquisition, investment and capital expenditure requirements.
Key believes that cash generated from operating activities,
together with borrowing from existing and future credit
facilities and proceeds from future equity issuances, will be
sufficient to meet its future debt service requirements and to
make anticipated acquisitions, investments and capital
expenditures. However, there can be no assurance in this regard
or that the terms available for such financing would be
favorable to Key or that any such future equity issuance would
be at a price per share equal to or greater than the current
market price. Any such future equity financing would dilute the
interests of current stockholders of Key. (See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition of Key--Liquidity and Capital Resources".)
Cross-Guaranty and Cross-Collateralization of the New
Indebtedness. Key has guaranteed WellTech's obligations under
the New Indebtedness and has pledged its assets to secure such
WellTech obligations and WellTech has guaranteed Key's
obligations under the New Indebtedness and has pledged its
assets to secure such Key obligations. The obligations of Key
and WellTech under the New Indebtedness are also cross
defaulted. Accordingly, a default under the New Indebtedness by
WellTech or Key could jeopardize the assets of the other party
even if such other party were not itself in default. If the
Merger is not consummated on or before April 30, 1996, the New
Indebtedness will be in default unless WellTech refinances its
obligations on or before July 31, 1996 and Key continues to
operate WellTech under the Interim Operations Agreement until
such refinancing. There can be no assurance, particularly in
light of WellTech's operating history, that it will be able to
refinance its obligations in the event the Merger is not
consummated. In such event, the lender could foreclose on
substantially all of Key's as well as WellTech's properties and
assets.
Potential Obstacles to Integration of WellTech. The success of
Key following the Merger will be dependent partially upon Key's
ability to integrate the current management and operations of
WellTech into its ongoing management and operations. Obstacles
to such integration may arise and some of those obstacles could
adversely affect Key's ongoing operations and performance.
There can be no assurance that Key will be able effectively to
integrate its management and operations with those of WellTech
or that administrative and operational efficiencies resulting
from the Merger can be attained.
Customer Response to the Transactions. Management of Key
believes that following the Merger Key will be able to provide
its customers with a broader array of products and an increased
ability to service customer needs. However, there can be no
assurance that the current Key and WellTech customers will
respond favorable to the Merger. An unfavorable customer
response to the Merger could have an adverse effect upon the
ongoing operations of Key.
Shares Eligible for Future Sale. Upon the consummation of the
Merger, giving effect to the Key Charter Amendment, there will
be 10,413,510 shares of Key Common Stock outstanding. Of such
shares, the 4,929,962 shares of Key Common Stack and New Key
Warrants to purchase an additional 750,000 shares of Key Common
Stock issued to WellTech stockholders pursuant to the Merger
will be freely tradeable without restriction or registration
under the Securities Act, including the shares and New Key
Warrants to be issued to certain stockholders of WellTech, who
will have the benefit of an effective registration statement
under the Securities Act. Stockholders should be aware and one
group of four affiliated entities will hold approximately 38.2%
of the Key Common Stock outstanding after the Merger. All but
155,000 of the remaining shares of Key Common Stock currently
outstanding are freely tradeable, although sales of shares held
by "affiliates" of Key are subject to volume and other
limitations imposed by Rule 144 under the Securities Act.
No predictions can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have
on the market price for the Key Common Stock prevailing from
time to time. Sales of substantial amounts of Key Common Stock
in the public market could adversely affect the market price of
the Key Common Stock.
Possible Volatility of Stock Price. The Key Common Stock is
traded on the American Stock Exchange. The closing price of the
Key Common Stock on August 30, 1995, immediately prior to the
announcement of the Merger was 4-15/16, and on January 17, 1996
was 6-1/8. (See "Price Range of Key Common Stock" for
additional information with respect to the prices of the Key
Common Stock in earlier years.) The New Key Warrants are a new
issue and there exists no trading market for them. The volume
of transactions in the Key Common Stock has varied from time to
time although it has, for the most part been limited. In
addition, the stock market in recent years has experienced price
and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of a specific
company. These fluctuations could adversely affect the market
price of the Key Common Stock and the New Key Warrants. (See
"Proposals to be Voted upon at the Key Special Meeting--Item 1:
The Merger--Certain Covenants --Registrations Rights.")
No Intention to Pay Dividends. Key has no intention to pay cash
dividends on the Key Common Stock in the foreseeable future. In
addition, under the terms of the New Indebtedness, Key is
prohibited from paying cash dividends on its Common Stock. (See
"Business and Properties of Key--Recent Developments--New
Indebtedness" for a discussion of such restrictions.)
Regulation and Competition in the Well Servicing Industry. The
oil field service operations, oil and gas production activities
and oil and natural gas drilling are subject to various local,
state and federal laws and regulations intended, among other
things, to protect the environment. Both Key and WellTech
compete with many national and local independent companies, many
of which have financial and other resources greatly in excess of
those available to Key, WellTech or the surviving entity.
International Investments. WellTech has made investments in
foreign countries (Russia and Argentina) and Key may continue to
make additional investments in these and other foreign countries
and in companies located or with significant operations outside
the United States. (See "Business and Properties of
WellTech--Foreign Operations.") Such investments are subject to
risks and uncertainties relating to the indigenous political,
social and economic structures of those countries. Risks
specifically related to investments in foreign companies may
include risks of fluctuations in currency valuation,
expropriation, confiscatory taxation and nationalization,
currency conversion restrictions, increased regulation and
approval requirements and governmental policies limiting returns
to foreign investors. In that connection, stockholders should
be aware the WellTech's contract in Russia was not renewed upon
its expiration in November, 1995.
Anti-Takeover Effect of Certain Provisions of Key's Articles and
By-Laws. Certain provisions of the Key Articles and the Key
By-Laws could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding capital stock of Key
and could make it more difficult to consummate certain types of
transactions involving an actual or potential change in control
of Key, such as a merger, tender offer or proxy contest. The
most significant of these is the ability of the Board of
Directors to issue, without stockholder approval, preferred
stock containing class voting rights provided, however that the
Board of Directors may not classify or reclassify shares to
create any class of stock which (i) has more than one vote per
share, (ii) is issued in connection with any shareholder rights
plan, "poison pill" or other anti-takeover measure, or (iii) is
issued for less than fair consideration, as determined in good
faith by the Board of Directors.
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