As filed with the Securities and Exchange Commission on March 1, 1996
Registration No. 333-369
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------
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 Identification No.)
incorporation or organization)
255 Livingston Avenue, New Brunswick, New Jersey 08901
(908) 247-4822
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
--------------------
FRANCIS D. JOHN
KEY ENERGY GROUP, INC.
255 Livingston Avenue
New Brunswick, New Jersey 08901
(908) 247-4822
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
Copy to:
KAREN L. LINSLEY, ESQ.
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, MA 02109
(617) 338-2800
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective and all
other conditions to the merger of WellTech, Inc. with and into Key Energy Group,
Inc. pursuant to the Agreement and Plan of Merger described in the accompanying
Proxy Statement--Prospectus have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reimbursement plans, check the following box. |X|
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant will file a
further amendment which specifically states that this Registration Statement
will thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until this Registration Statement will become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
<TABLE>
<CAPTION>
KEY ENERGY GROUP, INC.
CROSS REFERENCE SHEET
Showing Location in the Proxy Statement--Prospectus
of Information Required by Items in Form S-4
Items in Form S-4 Caption in Proxy Statement--Prospectus
<S> <C>
A. Information About the Transaction
Item 1. Forepart of the Registration Statement and Outside Cover Page of Registration Statement; Cross Reference
Front Cover Page of Prospectus....................... Sheet; Outside Front Cover Page of Proxy
Statement--Prospectus
Item 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Proxy
Prospectus........................................... Statement--Prospectus; Table of Contents; Available
Information
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges and Summary; Risk Factors
Other Information....................................
Item 4. Terms of the Transaction............................. Summary; Certain Considerations Relating to the
Transaction; Proposals to be Voted upon at the Key
Special Meeting -- Item 1: The Merger; Description of Key
Common Stock; Comparison of Rights of Stockholders of
Key and WellTech; Certain Federal Income Tax
Considerations; Experts
Item 5. Pro Forma Financial Information...................... Summary; Key Energy Group, Inc. Unaudited Pro Forma
Combined Financial Statements
Item 6. Material Contacts with the Company Being The Merger; Business and Properties of Key - Recent
Acquired............................................. Developments
Item 7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters........ Resales of Securities
Item 8. Interests of Named Experts and Counsel............... *
Item 9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities....... Undertakings
B. Information About the Registrant
Item 10. Information With Respect to S-3 Registrants.......... *
Item 11. Incorporation of Certain Information by Reference.... *
Item 12. Information With Respect to S-2 or S-3 Registrants... *
Item 13. Incorporation of Certain Information by Reference.... *
Item 14. Information With Respect to Registrants Other Than Proxy Statement---Prospectus Cover Page; Summary;
S-3 or S-2 Registrants............................... The Special Meeting - Ownership of Key Securities;
Business and Properties of Key; Price Range of Key
Common Stock; Selected Financial Data of Key;
Consolidated Financial Statements of Key; Management's
Discussion and Analysis of Results of Operations and
Financial Condition of Key
C. Information About the Company Being Acquired
Item 15. Information With Respect to S-3 Companies............ *
<PAGE>
Items in Form S-4 Caption in Proxy Statement--Prospectus
Item 16. Information With Respect to S-2 or S-3 Companies..... *
Item 17. Information with Respect to Companies Other Than Proxy Statement--Prospectus Cover Page; The Special
S-3 or S-2 Companies................................. Meeting -- Ownership of WellTech Securities; Summary;
Business and Properties of WellTech; Selected Financial
Data of WellTech; Consolidated Financial Statements of
WellTech; Management's Discussion and Analysis of
Results of Operations and Financial Condition of WellTech
D. Voting and Management Information
Item 18. Information if Proxies, Consents or Authorizations Proxy Statement--Prospectus Cover Page; Summary; The
Are to Be Solicited.................................. Special Meeting; Certain Considerations Relating to the
Transaction; Proposals to be Voted upon at the Key
Special Meeting --Item 1: The Merger; --Item 3: Election
of Board of Directors; --Item 4: Adoption and Approval of the Key
1995 Stock Option Plan; --Item 5: Adoption and Approval of
Outside Directors Stock Option Plan; Certain Relationships and
Related Transactions of Key; Business and Properties of WellTech;
Business and Properties of Key; Rights of Dissenting
Stockholders of WellTech
Item 19. Information if Proxies, Consents or Authorizations *
Are Not to be Solicited in an Exchange Offer.........
</TABLE>
- -------------------------
* Omitted because inapplicable or answer is in the negative.
<PAGE>
KEY ENERGY GROUP, INC.
March __, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting in Lieu of the
Annual Meeting of Stockholders (the "Key Special Meeting") of Key Energy Group,
Inc. ("Key") to be held on March 26, 1996 at 11:00 a.m., local time, at the
Hyatt Regency, Two Albany Street, New Brunswick, New Jersey.
At the Key Special Meeting, stockholders will be asked to approve and
adopt an Agreement and Plan of Merger (the "Merger Agreement") entered into on
November 18, 1995 providing for the merger of WellTech, Inc. ("WellTech") with
and into Key (the "Merger").
As a result of the Merger, all outstanding shares of common stock of
WellTech will be converted into shares of Key Common Stock and five-year
warrants to purchase shares of Key Common Stock (the "New Key Warrants").
WellTech currently owns 1,635,000 shares (23.6%) of Key Common Stock and holds
warrants (the "Existing Key Warrants") to purchase an additional 250,000 shares
of Key Common Stock at $5.00 per share. As part of the Merger, 1,429,962 of the
1,635,000 shares of Key Common Stock and the Existing Key Warrants currently
owned by WellTech will be canceled. Assuming that no appraisal rights are
asserted by the WellTech stockholders in the Merger, Key will issue to WellTech
stockholders an aggregate of 4,929,962 shares of Key Common Stock and New Key
Warrants to purchase 750,000 shares of Key Common Stock at $6.75 per share.
Taking into account the cancellation of the 1,429,962 shares of Key Common Stock
and the Existing Key Warrants currently held by WellTech, net Merger
consideration will consist of 3,500,000 shares of Key Common Stock and warrants
to purchase 500,000 additional shares of Key Common Stock.
The Merger is subject to various conditions, described in this Proxy
Statement--Prospectus. It is expected that the Merger will be completed during
the first quarter of 1996.
Your Board of Directors has carefully considered the terms of the
proposed Merger and believes that the Merger and related transactions are
advisable and in the best interests of Key and its stockholders. The Board has
unanimously approved the Merger and the related transactions and recommends that
stockholders vote FOR that proposal.
In order to permit Key to issue shares of Key Common Stock to the
WellTech stockholders as provided in the Merger Agreement, to provide for future
equity financings or acquisitions and to simplify the Company's organizational
documents which, as a result of various corporate transactions and
restructurings, have become overly complex, Key stockholders will also be asked
to approve and adopt an amendment to the Articles of Incorporation of Key
amending and restating those Articles in their entirety (the "Key Charter
Amendment"), which, among other things, will increase the total number of
authorized shares of Key Common Stock from 10,000,000 to 25,000,000 and permit
the Board to classify and reclassify unissued shares of Common Stock into
preferred or preference stock, subject to certain limitations. The Board has
unanimously approved the Key Charter Amendment and recommends that stockholders
vote FOR that proposal.
The stockholders will also be asked to elect the Board of Directors
which, assuming the Merger is consummated, will include two nominees of WellTech
and to approve the adoption of the Key 1995 Stock Option Plan for officers,
directors and other employees covering an aggregate of 1,150,000 shares of Key
Common Stock and the adoption of the Key Outside Directors Stock Option Plan
covering an aggregate of 300,000 shares of Key Common Stock.
We hope you will be able to attend the meeting. However, even if you
anticipate attending in person, we urge you to complete, sign, date and return
the enclosed proxy card promptly to ensure that your shares will be represented
at the Key Special Meeting. If you do attend, you will, of course, be entitled
to vote in person.
Thank you and I look forward to seeing you at the meeting.
Sincerely,
Francis D. John
President and Chief Executive Officer
<PAGE>
KEY ENERGY GROUP, INC.
NOTICE OF SPECIAL MEETING
IN LIEU OF THE ANNUAL MEETING OF STOCKHOLDERS
To Be Held On March 26, 1996
TO THE STOCKHOLDERS OF KEY ENERGY GROUP, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting in Lieu of the Annual
Meeting of Stockholders (the "Key Special Meeting") of Key Energy Group, Inc.
("Key") will be held on March 26, 1996 at 11:00 a.m., local time, at the Hyatt
Regency, Two Albany Street, New Brunswick, New Jersey, for the purpose of
considering and voting upon the following matters (collectively, the "Key
Proposals"):
o A proposal to approve and adopt the Agreement and Plan of Merger,
dated as of November 18, 1995, as heretofore amended (the "Merger Agreement"),
by and between Key and WellTech, Inc. ("WellTech"), and each of the transactions
contemplated thereby, including the merger (the "Merger") of WellTech with and
into Key, upon the terms and subject to the conditions set forth in the Merger
Agreement, as more fully described in the accompanying Proxy
Statement--Prospectus. A copy of the Merger Agreement is attached as Annex I to
the accompanying Proxy Statement--Prospectus and certain related documents are
attached as exhibits thereto;
o A proposal to approve and adopt an amendment to the Articles of
Incorporation of Key amending and restating those Articles in their entirety
(the "Key Charter Amendment"), including, among other things, to increase the
total number of authorized shares of Common Stock, par value $.10 per share (the
"Key Common Stock"), from 10,000,000 to 25,000,000 and permit the Board to
classify and reclassify unissued shares of capital stock subject to certain
limitations;
o Assuming the Merger is consummated, the election of a Board of
Directors, including, two nominees of WellTech; if the Merger is not
consummated, the election of a Board of Directors not including any nominees of
WellTech;
o The adoption and approval of the Key 1995 Stock Option Plan covering
an aggregate of 1,150,000 shares of Key Common Stock;
o The adoption and approval of the Key Outside Directors Stock Option
Plan covering an aggregate of 300,000 shares of Key Common Stock; and
o Such other business as may properly come before the Key Special
Meeting or any adjournments or postponements thereof.
The Key Board of Directors has fixed the close of business on March 1,
1996 as the record date for the determination of stockholders entitled to notice
of and to vote at the Key Special Meeting and any adjournments or postponements
thereof. Only stockholders of record at the close of business on such date are
entitled to notice of and to vote at such meeting. A list of Key stockholders
entitled to vote at the Key Special Meeting or any adjournments or postponements
thereof will be available for examination for any purpose germane to the Key
Special Meeting, for ten days prior to the Key Special Meeting during ordinary
business hours, at the principal executive offices of Key located at 255
Livingston Avenue, New Brunswick, New Jersey.
<PAGE>
Shares of the Key Common Stock are the only securities of Key whose
holders are entitled to vote upon the Key Proposals to be presented at the Key
Special Meeting.
Each Key Proposal will be voted upon separately by the Key stockholders
entitled to vote at the Key Special Meeting; however, failure of either proposal
1 or 2 described above to be approved by the stockholders will result in the
abandonment by Key of the Merger, and failure of proposal 1 will result in the
election of a Board of Directors of five persons not including any nominees of
WellTech.
Your vote is important regardless of the number of shares you own.
Approval of the Merger and the Key Charter Amendment each requires the
affirmative vote of the holders of not less than a majority of the issued and
outstanding shares of Key Common Stock. The proposal relating to the election of
the Board of Directors will be determined by a plurality of the votes entitled
to be cast by the holders of the Key Common Stock. All other proposals must be
approved by the affirmative vote of a majority of the outstanding Key Common
Stock present in person or by proxy and entitled to vote at the meeting. Each
stockholder, even though he or she now plans to attend the Key Special Meeting,
is requested to sign, date and return the enclosed Proxy without delay in the
enclosed postage-paid return envelope. You may revoke your Proxy at any time
prior to its exercise. Any stockholder present at the Key Special Meeting or at
any adjournments or postponements thereof may revoke his or her Proxy and vote
personally on each matter brought before the Key Special Meeting.
By Order of the Board of Directors,
Diane Mack, Secretary
March ___, 1996
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED
THEREBY, FOR THE PROPOSAL TO APPROVE AND ADOPT THE KEY CHARTER AMENDMENT; FOR
THE ELECTION OF DIRECTORS OF KEY; AND FOR THE PROPOSALS TO ADOPT AND APPROVE
EACH OF THE KEY STOCK OPTION PLANS.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
-2-
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH___, 1996
KEY ENERGY GROUP, INC.
Proxy Statement
For Special Meetings of Stockholders
To Be Held March 15, 1996
KEY ENERGY GROUP, INC.
PROSPECTUS
5,679,962 Shares of Common Stock, $.10 Par Value Per Share
Five-Year Warrants to Purchase 750,000 Shares of
Common Stock, $.10 Par Value Per Share
This Proxy Statement--Prospectus (this "Proxy Statement-- Prospectus")
is being furnished to stockholders of Key Energy Group, Inc., a Maryland
corporation ("Key", which term includes its consolidated subsidiaries unless the
context indicates otherwise), in connection with the solicitation of proxies by
the Board of Directors of Key for use at its Special Meeting in lieu of Annual
Meeting of Stockholders (the "Key Special Meeting" or the "Special Meeting")
(including any adjournments or postponements of such meeting) to be held on
March 26, 1996 at the time and place and for the purposes specified in the
accompanying Notice of Special Meeting and at any adjournments or postponements
of the Special Meeting. This Proxy Statement--Prospectus and form of Proxy for
the Special Meeting will be mailed to the stockholders of Key on or about March
__, 1995. This Proxy Statement-Prospectus is also being furnished to
stockholders of WellTech, Inc., a Delaware corporation ("WellTech," which term
includes its consolidated subsidiaries unless the context indicates otherwise)
in connection with the offering of shares of Common Stock, $.10 par value per
share ("Key Common Stock") and five-year warrants to purchase an aggregate of
750,000 shares of Key Common Stock at an exercise price of $6.75 per share,
subject to certain anti-dilution provisions (the "New Key Warrants") to
stockholders of WellTech in connection with the proposed merger (the "Merger")
of WellTech with and into Key.
The above matters are discussed in detail in this Proxy
Statement--Prospectus. The proposed Merger and related transactions described
herein are complex transactions. Stockholders of Key are strongly urged to read
carefully and consider this Proxy Statement--Prospectus in its entirety and
should carefully consider the "Risk Factors" set forth herein beginning on page
27.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT--PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------------
The date of this Proxy Statement--Prospectus is March , 1996
<PAGE>
This Proxy Statement--Prospectus relates to the Agreement and Plan of
Merger, dated as of November 18, 1995, as heretofore amended (the "Merger
Agreement"), by and between Key and WellTech, a copy of which is attached hereto
as Annex I, and certain related transactions. Pursuant to the Merger Agreement,
WellTech will merge with and into Key, and Key will be the surviving
corporation.
At the Key Special Meeting, Key stockholders will be asked to consider
and vote upon the following proposals (the "Key Proposals"): (i) the Merger
Agreement; (ii) the restatement and amendment of the Articles of Incorporation
of Key (the "Key Charter Amendment") to, among other things, increase the total
number of authorized shares of Key Common Stock from 10,000,000 to 25,000,000
and permit the Board to classify and reclassify unissued shares of Common Stock
into preferred or preference stock, subject to certain limitations; (iii) the
election of a Board of Directors of six persons, including, assuming the Merger
is consummated, two nominees of WellTech, or, if the Merger is not consummated,
the election of a Board of Directors of five persons, not including any nominees
of WellTech; (iv) the adoption and approval of the Key 1995 Stock Option Plan
covering an aggregate of 1,150,000 shares of Key Common Stock; and (v) the
approval and adoption of the Key Outside Directors Stock Option Plan covering an
aggregate of 300,000 shares of Key Common Stock.
Each of the Key Proposals will be voted upon separately by the holders
of Key Common Stock; however, failure of either the Merger Agreement or the Key
Charter Amendment to be approved by the Key stockholders will result in the
abandonment by Key of the Merger (even if the Merger is separately approved).
Moreover, it is a condition of WellTech's obligation to consummate the Merger
that two of its nominees be elected as directors of Key. The proposals relating
to the approval and adoption of the Merger Agreement and each of the
transactions contemplated thereby and the approval and adoption of the Key
Charter Amendment must be approved by the holders of a majority of the votes
entitled to be cast by holders of the Key Common Stock. The proposal relating to
the election of the Board of Directors will be determined by a plurality of the
votes entitled to be cast by the holders of the Key Common Stock. All other
proposals must be approved by the affirmative vote of a majority of the
outstanding Key Common Stock present in person or by proxy and entitled to vote
at the meeting.
Pursuant to the Merger, Key will issue an aggregate of 4,929,962 shares
of Key Common Stock and New Key Warrants to purchase an aggregate of 750,000
shares of Key Common Stock at an exercise price of $6.75 per share, subject to
certain anti-dilution provisions. As a condition to consummation of the Merger,
however, 1,429,962 of the 1,635,000 shares of Key Common Stock (the "Existing
Key Shares") and the existing five-year warrants (the "Existing Key Warrants")
to purchase an aggregate of 250,000 shares of Key Common Stock at $5.00 per
share presently owned by WellTech will be canceled. The remaining 205,038 shares
have been distributed by WellTech to its directors . Accordingly, based solely
on the securities to be issued to the WellTech stockholders pursuant to the
Merger, such stockholders would own in the aggregate approximately 47.3% of the
shares of Key Common Stock before giving effect to the exercise of any of the
New Key Warrants (or any other outstanding options or warrants). Assuming the
exercise in their entirety of the New Key Warrants (but not of any other options
or warrants), such holders would own in the aggregate approximately 50.9% of the
shares of Key Common Stock. (See "Proposals to be Voted upon at the Key Special
Meeting--Item 1: The Merger.)
(ii)
<PAGE>
The Board of Directors of Key recommends that stockholders of Key vote
FOR each of the Key Proposals.
At the effective time of the Merger (the "Effective Time"), the shares
of Key Common Stock issued in connection with the Merger and the shares issuable
upon exercise of the New Key Warrants will be listed for trading on the American
Stock Exchange upon official notice of issuance.
All information contained in this Proxy Statement--Prospectus relating
to Key and its subsidiaries has been supplied by Key, and all information
contained in this Proxy Statement--Prospectus relating to WellTech and its
subsidiaries has been supplied by WellTech. The pro forma financial information
contained herein relating to Key has been prepared by Key and includes
historical financial information regarding WellTech that was supplied to Key by
WellTech.
This Proxy Statement--Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Key on or about March ___, 1996.
______________
No person is authorized to give any information or to make any
representation with respect to the matters described in this Proxy
Statement--Prospectus other than those contained herein, in connection with the
solicitation of proxies or the offering of securities made hereby and, if given
or made, such information or representations must not be relied upon as having
been authorized by Key. This Proxy Statement--Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, any securities, or the
solicitation of a proxy, in any jurisdiction to or from any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Proxy Statement--Prospectus nor any distribution of securities
made hereunder will, under any circumstances, create any implication that there
has been no change in the affairs of Key since the date of this Proxy
Statement--Prospectus or that information herein is correct as of any time
subsequent to its date.
_______________
(iii)
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ................................................................. 2
The Companies.................................................... 2
Key..................................................... 2
WellTech................................................ 2
The Special Meeting.............................................. 2
The Merger Agreement............................................. 3
The Key Charter Amendment ....................................... 4
Security Ownership of Key Management............................. 4
Merger Related Arrangements...................................... 4
Interim Operations Agreement............................ 4
New Indebtedness........................................ 4
Dawson WellTech Arrangements. ......................... 5
Delivery of Key Securities....................................... 5
Ownership of Key Common Stock after the Merger................... 5
Reason for the Merger; Recommendation of the Key Board
of Directors................................................... 6
Opinion of Financial Advisor..................................... 7
Effective Time of Merger......................................... 7
Conditions to the Merger......................................... 7
Acquisition Proposals............................................ 7
Registration Rights.............................................. 8
Termination of the Merger Agreement.............................. 8
Corporate Governance............................................. 8
Certain Federal Income Tax Considerations; Tax Opinion............8
Accounting Treatment............................................. 9
Rights of Dissenting Stockholders................................ 9
Key..................................................... 9
WellTech................................................ 9
Comparison of Rights of Stockholders............................. 9
Market Prices and Dividend Data..................................10
Key.....................................................10
WellTech................................................10
Key Summary Consolidated Historical Information................. 11
WellTech Summary Financial Data................................. 13
Key Selected Pro Forma Financial Data........................... 14
THE SPECIAL MEETING...................................................... 15
Matters to Be Discussed at the Special Meeting.................. 15
Record Dates; Stock Entitled to Vote; Quorum.................... 15
Required Vote................................................... 16
Solicitation and Voting of Proxies.............................. 16
Ownership of Key Securities..................................... 17
Ownership of WellTech Securities................................ 20
(iv)
<PAGE>
CERTAIN CONSIDERATIONS RELATING TO THE TRANSACTION....................... 22
Reasons for the Transaction; Recommendation of
Key Board of Directors........................................ 22
Opinion of Financial Advisor to Key............................. 22
Comparative Per Share Information............................... 27
RISK FACTORS............................................................ 28
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation
Reform Act of 1995............................................ 28
Substantial Leverage and History of Losses...................... 29
Cross-Guaranty and Cross-Collateralization of the
New Indebtedness.............................................. 29
Potential Obstacles to Integration of WellTech.................. 30
Customer Response to the Transaction............................ 30
WellTech Shareholder Ownership of Key Common Stock.............. 30
Possible Volatility of Stock Price.............................. 30
No Intention to Pay Dividends................................... 31
Regulation and Competition in the Well
Servicing Industry............................................ 31
International Investments....................................... 31
Anti-Takeover Effect of Certain Provisions of
Key's Articles and By-Laws..................................... 31
BUSINESS AND PROPERTIES OF KEY .......................................... 32
General ....................................................... 32
Recent Developments ............................................ 32
The Merger and the Interim Operations Agreement........ 32
New Indebtedness....................................... 33
Acquisition of Clint Hurt Assets....................... 34
Acquisition of WellTech West Texas..................... 34
Business ....................................................... 34
Oil Field Services..................................... 34
Oil and Gas Production................................. 35
Oil and Gas Drilling................................... 37
Competition and Other External Factors.......................... 38
Property ....................................................... 38
Employees....................................................... 39
Regulation...................................................... 39
Legal Proceedings............................................... 39
PRICE RANGE OF KEY COMMON STOCK.......................................... 40
BUSINESS AND PROPERTIES OF WELLTECH...................................... 41
General ....................................................... 41
Recent Developments............................................. 42
The Merger and the Interim Operations Agreement........ 42
Dawson WellTech........................................ 42
Domestic Operations............................................. 42
Foreign Operations.............................................. 42
Employees....................................................... 43
Legal Proceedings............................................... 43
Competition and Other External Factors.......................... 43
Regulation...................................................... 44
(v)
<PAGE>
MANAGEMENT OF KEY ....................................................... 45
Executive Compensation.......................................... 46
Stock Grant Plan....................................... 47
1995 Stock Option Plan................................. 48
Outside Directors Stock Option Plan.................... 49
Yale E. Key Plan. .................................... 49
Employment Agreements with Executive Officers.......... 49
Other Compensation..................................... 51
Compensation Committee Interlocks and Insider
Participation........................................ 51
Compensation Committee Report.......................... 51
Shareholder Return Performance Presentation............ 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF KEY.................... 54
SELECTED FINANCIAL DATA OF KEY........................................... 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF KEY........... 57
SELECTED FINANCIAL DATA OF WELLTECH...................................... 66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION OF WELLTECH................. 67
PROPOSALS TO BE VOTED UPON
AT THE KEY SPECIAL MEETING...................................... 73
ITEM 1. THE MERGER...................................................... 73
General Provisions.............................................. 73
Share Exchange.................................................. 73
Articles of Incorporation and By-Laws; Directors................ 75
Effective Time of Merger........................................ 76
Conditions Precedent............................................ 76
Conditions to the Obligations of Key and WellTech...... 76
Conditions to Obligations of WellTech............................77
Conditions to Obligations of Key................................ 78
Certain Covenants............................................... 78
Certain Rights with Respect to Key's Board of Directors......... 78
Commission Filings.............................................. 79
Registration Rights............................................. 79
Acquisition Proposals........................................... 79
Representations and Warranties.................................. 80
Termination..................................................... 80
Fees and Expenses .............................................. 82
Regulatory and Other Third Party Approvals...................... 82
Amendment; Waiver............................................... 82
Ownership of Key Stock after the Merger......................... 82
Description of Key Common Stock................................. 82
Description of the New Key Warrants............................. 83
Exercise of Warrant............................................. 83
Dividends....................................................... 83
(vi)
<PAGE>
Adjustment of Exercise Price.................................... 83
Voting and Information Rights................................... 84
Notice of Certain Actions....................................... 84
Transfers....................................................... 84
Amendment. .................................................... 84
Comparison of Rights of Stockholders of Key and WellTech........ 85
Required Vote for Certain Business Combinations................. 85
Charter Amendments.............................................. 85
By-Law Amendments............................................... 86
Voting Rights................................................... 86
Preemptive Rights............................................... 86
Transferability of Shares....................................... 87
Special Meetings................................................ 87
Corporate Action Without A Meeting.............................. 87
Dividends....................................................... 87
Appraisal or Dissenters' Rights................................. 88
Provisions Relating to Directors and Officers................... 88
Removal of Directors............................................ 89
Derivative Suits................................................ 89
Anti-Takeover Provisions........................................ 90
Rights Of Dissenting Stockholders Of WellTech................... 90
Certain Federal Income Tax Considerations....................... 93
Federal Income Tax Consequences of Certain Transactions......... 93
Backup Withholding.............................................. 94
ITEM 2: KEY CHARTER AMENDMENT........................................... 94
ITEM 3: ELECTION OF BOARD OF DIRECTORS.................................. 96
Committees of the Board......................................... 96
Compensation of Directors....................................... 97
Biographical Information.........................................97
Compliance with Section 16(a) of the Securities Exchange
Act of 1934.................................................. 98
(vii)
<PAGE>
ITEM 4: ADOPTION AND APPROVAL OF THE KEY 1995 STOCK OPTION PLAN......... 98
Adoption and Duration of the Key 1995 Stock Option Plan......... 98
Administration................................................... 99
Options. ........................................................ 99
Eligibility..................................................... 99
Method of Granting Options...................................... 99
Option Price.................................................... 100
Duration of Options............................................. 100
Exercise of Options............................................. 100
Restrictions on Exercise of Options............................. 101
Transferability of Options...................................... 101
Effect of Certain Corporate Transactions on Options............. 101
Other Terms and Conditions of Options........................... 102
Termination of Employment....................................... 102
Forfeiture as a Result of Termination for Cause................. 103
Amendments of the 1995 Plan..................................... 103
Tax Status of the 1995 Plan..................................... 103
Tax Treatment of NSOs........................................... 103
Tax Treatment of ISOs........................................... 104
Alternative Minimum Tax Treatment of ISOs....................... 105
Exercise by Delivery of Stock................................... 105
Restrictions on Resale Imposed by Securities Law................ 105
ITEM 5: ADOPTION AND APPROVAL OF OUTSIDE DIRECTORS STOCK OPTION
PLAN ................................................. 107
Eligibility..................................................... 107
Options ....................................................... 107
Shares Available................................................ 107
Grants of Options............................................... 107
Cessation of Service, Retirement or Death....................... 108
Administration, Amendment and Termination of the
Directors Plan.............................................. 108
Other Terms..................................................... 108
MISCELLANEOUS ........................................................... 111
LEGAL MATTERS............................................................. 111
EXPERTS ................................................................. 111
INDEX TO FINANCIAL STATEMENTS..................................................
ANNEX I - THE MERGER AGREEMENT.............................................AI-1
ANNEX II - OPINION OF SIMMONS & COMPANY INTERNATIONAL.....................AII-1
ANNEX III - RIGHTS OF DISSENTING SHAREHOLDERS............................AIII-1
(viii)
<PAGE>
AVAILABLE INFORMATION
Key has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Key Common Stock and New Key Warrants (and the Key Common
Stock issuable upon exercise thereof) described in this Proxy
Statement--Prospectus. This Proxy Statement--Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. Such additional information can be obtained from the Commission's
principal office in Washington, D.C. Statements contained in this Proxy
Statement--Prospectus as to the contents of any contract or other document
referred to herein are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
Key is also subject to informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxies and other information statements with the
Commission. The Registration Statement and exhibits thereto, and reports and
other information filed by Key can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511, and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such materials can be obtained by mail from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Key Common Stock is listed on the
American Stock Exchange and its reports and proxy statements and other
information concerning Key can be inspected at such exchange.
<PAGE>
SUMMARY
The following is a summary of certain information contained in this Proxy
Statement--Prospectus. This summary is not intended to be complete and is
qualified in its entirety by reference to the more detailed information set
forth elsewhere in this Proxy Statement--Prospectus and its Annexes, all of
which should be reviewed carefully.
The Companies
Key. Key is a holding company with diversified energy operations in the
Permian Basin area of West Texas and New Mexico. Through its three operating
entities, each of which is a wholly- owned subsidiary, Key (a) operates oil
field services activities primarily in the Permian Basin area of West Texas for
both major and independent oil companies (Yale E. Key, Inc. ("Yale E. Key")),
(b) owns and operates interests in various oil and gas properties in West Texas
(Odessa Exploration Incorporated ("Odessa Exploration")), and (c) drills oil and
gas wells in West Texas (Key Energy Drilling, Inc., d/b/a Clint Hurt Drilling
("Clint Hurt")).
Key was incorporated in the State of Maryland in 1977. Key's principal
offices are located at 255 Livingston Avenue, New Brunswick, New Jersey 08901,
and its telephone number is (908) 247- 4822. Unless the context otherwise
indicates, the term "Key" refers to Key and its consolidated subsidiaries.
WellTech. WellTech is engaged in the oil and gas well service business in
Oklahoma, Texas, Michigan, Pennsylvania and West Virginia and has operations in
Argentina. WellTech had been engaged in the well service business in West Texas
prior to selling that business to Key in 1994 and in Russia prior to the
completion of its contract in late 1995.
WellTech was incorporated in the State of Delaware in 1973. Its principal
executive offices are located at 3535 Briarpark, Suite 200, Houston, Texas
77042, and its telephone number is (713) 975- 1600. Unless the context otherwise
indicates, the term "WellTech" refers to WellTech and its consoli dated
subsidiaries.
The Special Meeting
The Key Special Meeting will be held at the Hyatt Regency, Two Albany
Street, New Brunswick, New Jersey, on March 26, 1996, beginning at 11:00 a.m.,
local time. The purpose of the Key Special Meeting is to consider and vote upon
the Key Proposals. (See "The Special Meeting--Matters to Be Discussed at the
Special Meeting" and "Proposals to be Voted upon at the Key Special Meeting".)
The record date for the Key Special Meeting is March 1, 1995 (the "Record
Date"). Accordingly, holders of record of Key Common Stock as of the Record Date
will be entitled to notice of, and to vote at, the Key Special Meeting. The
presence in person or by proxy of shares representing a majority of votes
entitled to be cast by holders of the Key Common Stock as of the Record Date is
required to constitute a quorum for the transaction of business at the Key
Special Meeting.
-2-
<PAGE>
The Merger Agreement and each of the transactions contemplated thereby,
including the Merger, and the Key Charter Amendment, must be approved by a
majority of the votes entitled to be cast by the holders of the Key Common
Stock. The proposal relating to the election of the Board of Directors will be
determined by a plurality of the votes entitled to the cast by the holders of
the Key Common Stock. All other proposals must be approved by the affirmative
vote of a majority of the outstanding Key Common Stock present in person or by
proxy and entitled to vote at the meeting.
The Merger Agreement
The Merger Agreement provides that, subject to the adoption and approval
by WellTech's stockholders and Key's stockholders of the Merger and certain
related transactions and the satisfaction or waiver of certain other conditions,
at the Effective Time, WellTech will be merged with and into Key, the separate
existence of WellTech will cease and Key will continue as the surviving
corporation. As a result of the Merger, Key will acquire all of the business and
property of WellTech and assume all of its obligations and liabilities. No
change in the outstanding shares of Key Common Stock will occur and, except as
noted below with respect to an aggregate of 1,429,962 shares of Key Common Stock
owned by WellTech, each share of Key Common Stock outstanding prior to the
Merger will continue to be outstanding following the Merger.
In the Merger, holders of shares of WellTech Common Stock outstanding
immediately prior to the Merger will receive an aggregate of 4,929,962 shares of
Key Common Stock and New Key Warrants to purchase an aggregate of 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 owned by WellTech (the "Existing Key
Shares") and the warrants to purchase an aggregate of 250,000 shares of Key
Common Stock at $5.00 per share (the "Existing Key Warrants") will be canceled.
The remaining 205,038 shares of Key Common Stock will be distributed to
directors of WellTech prior to the Merger. Based on the 352,941 shares of
WellTech Common Stock outstanding, each share of WellTech Common Stock will be
converted into 13.9682 shares of Key Common Stock and New Key Warrants to
purchase 2.125 shares of Key Common Stock. This conversion price was determined
as a result of arm's length negotiation between the parties to the Merger,
taking into account the earnings power of Key and WellTech, the savings and
efficiencies to be realized as a result of the Merger and the total valuation of
the two companies. The conversion ratios were then calculated mathematically.
The Merger Agreement provides that no fractional shares of Key Common
Stock will be issued in connection with the Merger. In lieu of any such
fractional interests, each holder of WellTech Common Stock entitled to receive
Key Common Stock and New Key Warrants pursuant to the Merger will be entitled to
receive an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying the closing price of the Key Common Stock on the day
prior to the consummation of the Merger by the fractional interest in the share
of Key Common Stock to which such holder would otherwise be entitled (after
taking into account all shares of Key Common Stock being issued to such holder
pursuant to the Merger Agreement).
-3-
<PAGE>
The number of shares of Key Common Stock to be issued will be adjusted if
between November 18, 1995 and the Effective Time the outstanding shares of Key
Common Stock or WellTech Common Stock will have been further changed into a
different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares. However, the Merger Agreement provides that, without the
consent of the other party, neither Key nor WellTech may issue any shares of
capital stock, convertible securities or rights, options or warrants to acquire
capital stock or convertible securities, except, in the case of Key, in
connection with its 1995 Stock Option Plan, its Outside Directors Stock Option
Plan and the warrant to purchase 75,000 shares of Key Common Stock issued to
Key's senior lender in connection with the New Indebtedness.
The Key Charter Amendment
The Key Charter Amendment restates and amends the Articles of
Incorporation of Key in their entirety, by, among other things, increasing the
number of authorized shares of Key Common Stock from 10,000,000 to 25,000,000
and permitting the Board of Directors to classify and reclassify unissued shares
of Common Stock into preferred or preference stock subject to certain
limitations.
Security Ownership of Key Management
As of January 1, 1996, directors and executive officers of Key and their
respective affiliates may be deemed to be the beneficial owners of 809,185
shares of the outstanding Key Common Stock which constitute in the aggregate
approximately 11.2% of the total votes entitled to be cast by the holders of Key
Common Stock. It is anticipated that each of such directors, executive officers
and their respective affiliates will vote their shares in favor of each of the
Key Proposals. (See "The Special Meeting--Ownership of Key Securities.")
Merger Related Arrangements
Prior to and as a condition to the Merger, each of the following
transactions has been consummated. (See "Business and Properties of Key--Recent
Developments" and "Business Properties of WellTech--Recent Developments" for a
more complete description of these transactions.)
o Interim Operations Agreement. Simultaneously with the execution of the
Merger Agreement, Key and WellTech entered into an Interim Operations Agreement
pursuant to which Key has agreed to manage and operate, subject to certain
limitations, and is currently operating and managing, all of WellTech's oil and
gas well servicing and other businesses. (See "Business and Properties of
Key--Recent Development--The Merger and the Interim Operations Agreement".)
o New Indebtedness. Key and WellTech have each entered into a credit
agreement with the same lender to refinance certain existing indebtedness of Key
and WellTech (collectively, the "New Indebtedness"). The aggregate principal
amount available under Key's new credit agreement will be not less than $17.5
-4-
<PAGE>
million (subject to certain advance formulas) and the aggregate principal amount
available under WellTech's new credit agreement will be not less than $17.5
million (subject to certain advance formulas). The New Indebtedness is in the
form of a three-year revolving credit arrangement and a three-year term loan.
The initial three-year term is renewable for successive two-year terms, unless
either the lender or the borrower gives notice of termination. After giving
effect to the repayment of all then existing debt of Key (other than that of
Odessa Exploration) and WellTech (other than that of certain affiliates) out of
the proceeds of such borrowing, Key has available to it approximately $5.6
million of borrowing capacity, depending, in part, on the amount of its accounts
receivable and machinery and equipment and WellTech has available to it
approximately $1.4 million of borrowing capacity, depending, in part, upon the
same factors. The New Indebtedness is cross- guaranteed by Key, Yale E. Key,
Clint Hurt and WellTech and cross-collateralized by their respective assets.
Upon consummation of the Merger, 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 until such refinancing. (See "Business and
Properties of Key - Recent Developments - New Indebtedness".)
o Dawson WellTech Arrangements. Dawson WellTech, L.C., a Texas limited
liability company, was owned 61% by Dawson Production Services, Inc. (formerly
Dawson Well Servicing, Inc. ("Dawson")), and 39% by WellTech. Effective November
1, 1995, WellTech exchanged its 39% interest in Dawson WellTech, L.C. for
309,186 shares of Dawson, and effective December 31, 1995 Dawson WellTech,
L.C. was merged into Dawson. WellTech has directed Dawson to distribute the
stock of Dawson to the WellTech shareholders and directors . In addition,
WellTech has agreed to perform consulting services for Dawson in return for
11.7% of Dawson's consolidated pre-tax earnings. This consulting agreement will
terminate on the earliest of (i) March 31, 1996, (ii) the date Dawson closes and
funds an initial public offering of its securities, or (iii) the date upon which
Dawson shall engage in a business combination or sell substantially all of its
assets to another party. (See "Business and Properties of WellTech--Recent
Developments--Dawson WellTech.")
Delivery of Key Securities
A description of the method of delivery of shares of Key Common Stock and
New Key Warrants to be issued to the WellTech stockholders in the Merger will be
furnished, along with the appropriate transmittal forms, prior to or immediately
following the consummation of the Merger. WELLTECH STOCKHOLDERS SHOULD NOT SEND
IN THEIR CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
Ownership of Key Common Stock after the Merger
Based solely on the securities to be issued to the WellTech
stockholders pursuant to the Merger, such stockholders would own in the
aggregate approximately 47.3% of the outstanding shares of Key Common Stock
-5-
<PAGE>
before giving effect to the exercise of any of the New Key Warrants (or any
other outstanding options or warrants). Assuming the exercise in their entirety
of the New Key Warrants (but not of any other options or warrants), such holders
would own in the aggregate approximately 50.9% of the outstanding shares of Key
Common Stock. Such ownership percentages do not include 205,038 shares of Key
Common Stock currently owned by WellTech to be distributed to directors of
WellTech prior to the consummation of the Merger or shares owned by affiliates
of certain stockholders of WellTech. (See "Ownership of WellTech Securities" and
"Proposals to be Voted upon at the Key Special Meeting--Item 1: The
Merger--Ownership of Key Stock after the Merger".)
Reason for the Merger; Recommendation of the Key Board of Directors
The Board of Directors of Key has unanimously approved and adopted the
Merger Agreement, each of the transactions contemplated thereby relating to Key,
including the Merger, and the Key Charter Amendment, and believes that such
actions are advisable and in the best interests of Key and its stockholders.
Accordingly, the Key Board of Directors recommends that Key stockholders vote
for each of these proposals. For a detailed description of the factors
considered by the Key Board of Directors and the reasons for its approval and
adoption of the Merger Agreement and the Key Charter Amendment, and each of the
transactions contemplated thereby, including the Merger, see "Certain
Considerations Relating to the Transactions--Reasons for the Transactions;
Recommendation of Key Board of Directors".
The Key Board's conclusion was based on the considerations discussed in
"Certain Considerations Relating to the Transaction." The Key Board determined
that, among other factors, the Merger would provide enhanced opportunities for
growth as well as cost savings and efficiencies. The Key Board also considered
the advice and opinion of Simmons & Company International ("Simmons"), its
financial advisor. The Key Board reached its conclusion notwithstanding certain
negative aspects of the Merger, including (i) WellTech's five-year history of
operating losses; (ii) the discontinuation of WellTech's Russian operations;
(iii) the risks and uncertainties associated with the integration of the
WellTech operations with those of Key and (iv) the fact that Key has incurred
substantial expense and devoted a significant amount of the time and resources,
and will continue to do so, in connection with the consummation of the Merger.
-6-
<PAGE>
Opinion of Financial Advisor
Simmons rendered to the Board of Directors of Key its oral opinion (which
was subsequently confirmed in writing) to the effect that, as of November 18,
1995, the Merger was fair, from a financial point of view, to the stockholders
of Key. The full text of Simmons' opinion dated December 29, 1995, which sets
forth assumptions made, matters considered and attendant limitations, is
attached hereto as Annex II and is incorporated herein by reference. Key
stockholders are urged to, and should, read such opinion carefully in its
entirety. (See "Certain Considerations Relating to the Transaction--Opinion of
Financial Advisor to Key".)
Effective Time of Merger
The Merger will become effective upon the filing of a certificate of
merger with the Secretary of State of the State of Delaware and articles of
merger with the Department of Assessments and Taxation of the State of Maryland
in accordance with applicable law, or at such later date as the certificate of
merger and articles of merger may specify.
Conditions to the Merger
Consummation of the Merger and each of the transactions contemplated
thereby is conditioned on, among other things, (i) approval of the Merger and
the Key Charter Amendment by the holders of Key Common Stock and the Merger by
the holders of WellTech Common Stock, (ii) the incurrence of the New
Indebtedness, (iii) no injunction or order or certain other actions of any
governmental authority which prohibits or makes illegal any of the transactions
contemplated by the Merger Agreement or which could have an Adverse Effect
(which, as defined in the Merger Agreement, contemplates a material loss of
benefits) on Key, assuming consummation of the Merger, (iv) receipt, in the case
of Key, of an opinion of its tax counsel as to the tax-free nature of the
Merger, and (v) the performance in all material respects by each party to the
Merger Agreement of its respective obligations thereunder. (See "Proposals to be
Voted upon at the Key Special Meeting--Item 1: The Merger".)
Acquisition Proposals
The Merger Agreement prohibits WellTech, Key and their respective
subsidiaries and their respective officers, directors, representatives and
agents from, directly or indirectly, knowingly soliciting, initiating or
participating in any way in proposals, discussions or negotiations with, or
knowingly providing any confidential information to, any person (other than to
the other or any affiliate or associate of the other and their respective
directors, officers, employees, representatives and agents) concerning any
merger, consolidation, share exchange or similar transaction involving WellTech
or Key, respectively. However, each of WellTech's and Key's Board of Directors
may make such disclosure to its stockholders as, in the judgment of its Board of
Directors with the written advice of outside counsel, may be required under
applicable law. Each of WellTech and Key has agreed to notify the other promptly
if any such proposal or inquiry is received by, any such information is
requested from, or any such negotiations or discussions are sought to be
-7-
<PAGE>
initiated with, WellTech or Key and to furnish the other with a copy of any such
proposal. (See "Termination of the Merger Agreement" below for information with
respect to payments required to be made by WellTech or Key in the event it
terminates the Merger Agreement and consummates an "Other Transaction" as
defined in the Merger Agreement within nine months of such termination.)
Registration Rights
Simultaneously with the execution of the Merger Agreement, Key agreed to
enter into a registration rights agreement with certain stockholders of WellTech
relating to the Key Common Stock and New Key Warrants (and the shares issuable
upon exercise thereof) to be issued pursuant to the Merger. This Prospectus has
been prepared for use by such stockholders of WellTech for the resale of the Key
Common Stock and Warrants. See "Resale of Securities."
Termination of the Merger Agreement
The Merger Agreement may be terminated at any time prior to the Effective
Time by mutual written consent of Key and WellTech, or by either Key or WellTech
individually under certain specified circumstances. If the Merger Agreement is
terminated by either party because the Board of Directors of the terminating
party shall have withdrawn, modified or changed its recommendation so that it is
no longer in favor of the Merger or shall have recommended an Other Transaction,
and if the terminating party consummates an Other Transaction within nine months
of such termination, it will be required to pay to the other party $500,000.
(See "Proposals to be Voted upon at the Key Special Meeting--Item 1: The
Merger--Termination.")
Corporate Governance
All of the officers and Directors of Key immediately prior to the
Effective Time will continue as officers and, except for D. Kirk Edwards,
Directors after the Effective Time. Pursuant to the Merger Agreement two persons
nominated by WellTech to the Board of Directors of Key (the "WellTech Nominees")
shall have been elected, and it is anticipated that certain officers of WellTech
will become officers of Key or its subsidiaries. If the Merger is not
consummated, it is anticipated that Mr. Edwards will continue to serve as a
Director and that the Board of Directors will consist of five persons and will
not include any WellTech nominees. (See "Proposals to be Voted upon at the Key
Special Meeting--Item 3: Election of Board of Directors.") Under an existing
agreement between WellTech and Key which would survive if the Merger is not
consummated, WellTech has the right to designate one Director to the Key Board.
Certain Federal Income Tax Considerations; Tax Opinion
Consummation of the Merger is conditioned, in the case of Key, on its
receipt of a favorable tax opinion from Sullivan & Worcester LLP, special tax
counsel to Key, to the effect that the Merger will qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code").
(See "Proposals to be Voted upon at the Key Special Meeting - Item 1: The Merger
- -Certain Federal Income Tax Considerations .")
-8-
<PAGE>
Accounting Treatment
The Merger will be accounted for using the purchase method of accounting.
Key will be treated as the acquiror of the WellTech business and, as a result,
the assets of WellTech will be recorded at their estimated fair values. See
Key's Pro Forma Combined Condensed Balance Sheet as of December 31, 1995 for a
description of the adjustments expected to be recorded to WellTech's financial
statements.
Rights of Dissenting Stockholders
Key. Holders of Key Common Stock who object to or vote their shares
against the Merger do not have appraisal rights pursuant to the Maryland General
Corporation Law ("MGCL" or "Maryland Law").
WellTech. Pursuant to Delaware General Corporation Law ("DGCL" or
"Delaware Law"), any holder of WellTech Common Stock (i) who files a demand for
appraisal in writing prior to the vote taken at the WellTech Special Meeting and
(ii) whose shares are not voted in favor of the Merger, will be entitled to
appraisal rights under Section 262 of the DGCL ("Section 262"). (See "Proposals
to be Voted upon at the Key Special Meeting - Item 1: The Merger - Rights of
Dissenting Stockholders of WellTech.")
Comparison of Rights of Stockholders
The rights of holders of WellTech Common Stock currently are governed by
Delaware Law and the Certificate of Incorporation, as amended (the "WellTech
Charter") and By-Laws (the "WellTech By-Laws") of WellTech. Upon the
consummation of the Merger, WellTech stockholders who do not exercise and
perfect their appraisal rights will become Key stockholders, and their rights
will be governed by the MGCL and the Key Articles of Incorporation, as amended
(the "Key Articles") and the Key By-Laws, as amended (the "Key By-Laws"). (See
"Proposals to be Voted upon at the Key Special Meeting - Item 1: The Merger -
Comparison of Rights of Stockholders of WellTech and Key.")
-9-
<PAGE>
Market Prices and Dividend Data
Key. The following table sets forth for the periods indicated the high
and low closing prices of Key's Common Stock on the American Stock Exchange, as
derived from published sources.
Fiscal Year and Quarter High Low
1996:
First Quarter 5 1/2 4 7/8
Second Quarter 6 1/2 4 15/16
Third Quarter 6 7/8 5 7/8
(through February 26, 1996)
1995:
First Quarter 5 1/2 5
Second Quarter 5 1/2 4 3/4
Third Quarter 4 5/8 4 1/4
Fourth Quarter 5 1/2 4 3/4
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 February 26, 1996 was 6.
(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. Key has not paid
cash dividends on the Key Common Stock and has no present intention of so doing
after the Merger. The payment of future dividends, if any, will be determined by
the Key Board of Directors in light of conditions then existing, including
earnings, financial condition and requirements, restrictions in financing
agreements, business conditions and other factors. The New Indebtedness contains
provisions that prohibit cash dividends and stock repurchases by Key. (See
"Business and Properties of Key- Recent Developments- New Indebtedness.")
As of February 26, 1996 there were 6,913,513 shares of Key Common Stock
outstanding, held by approximately 541 holders of record. After giving effect to
the Merger there will be 10,413,513 shares of Key Common Stock outstanding.
WellTech. No established public trading market exists for the WellTech
Common Stock, and accordingly no high and low bid information or quotations are
available with respect to the WellTech Common Stock. As of February 28, 1996,
there were 24 holders of record of WellTech Common Stock, holding a total of
352,941 shares. The most recent transaction involving WellTech Common Stock was
the transfer of 1,152 shares from a single holder to designees of an insider at
$55.50 per share. WellTech has not declared any cash dividends on its common
stock for the past two years.
-10-
<PAGE>
<TABLE>
<CAPTION>
Key Summary Consolidated Historical Information
(In thousands, except per share amounts and ratios)
Six Months Year Year Seven Months Five Months Year Year
Ended Ended Ended Ended Ended Ended Ended
December 31, June 30, June 30, June 30, Nov. 30, June 30, June 30,
1995 1994 1995 1994 1993 1992(3) 1992(3) 1991(3)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues: $ 24,792 $ 21,962 $ 44,689 $ 34,621 $ 14,256 $ 10,433 $ 21,535 $ 24,223
Costs and expenses: 22,568 20,475 41,361 32,326 13,132 10,033 21,452 22,507
Income from continuing
operations before reorganization
items, income taxes and
extraordinary item 2,224 1,487 3,328 2,295 1,124 400 83 1,716
Reorganization items -- -- -- -- -- 1,718 -- --
Income from continuing operations
before income taxes and
extraordinary item 2,224 1,487 3,328 2,295 1,124 2,118 83 1,716
Income tax expense (benefit) 730 476 1,150 950 413 -- (474) 705
Income before extraordinary item 1,494 1,011 2,178 1,345 711 2,118 557 1,011
Extraordinary gain on discharge of
pre-petition liabilities -- -- -- -- -- 2,868 -- --
Net income (loss) 1,494 1,011 2,178 1,345 711 4,986 (596) (5,571)
Net Income (loss) per share from
continuing operations before
reorganization items income
taxes and extraordinary item $ 0.32 0.23 $ 0.50 $ 0.44 $ 0.21 $ 0.02 $ 0.02 $ 0.05
Net income (loss) per share:
Primary $ 0.22 $ 0.16 $ 0.33 $ 0.26 $ 0.14 $ 0.28 $ (0.04) $ (0.44)
Assuming full dilution $ 0.22 $ 0.16 $ 0.33 $ 0.25 $ 0.14 $ 0.03 $ (0.02) $ (0.14)
</TABLE>
As of December 31 As of June 30,
1995 1994 1995
(unaudited)
Balance Sheet Data:
Total assets: $47,511 $39,379 $45,243
Long-term debt, including current
portion 16,827 14,291 15,949
Stockholders' equity 21,605 18,861 20,111
<TABLE>
<CAPTION>
Six Months Year Year Seven Months Five Months Year Year
Ended Ended Ended Ended Ended Ended Ended
December 31, June 30, June 30, June 30, Nov. 30, June 30, June 30,
1995 1994 1995 1994 1993 1992 1992 1991
Financial Ratios and Other Data: (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA(1) $ 4,895 $ 3,359 $ 7,544 $ 4,496 $ 1,806 $ 1,369 $ 2,539 $ 3,977
EBITDA as a % of revenues(1) 19.7% 15.3% 16.9% 13.0% 12.7% 13.1% 11.8% 16.4%
Total debt as a % of EBITDA(1) n/a n/a 211.4% 255.8% n/a n/a 504.8% 304.9%
EBITDA to fixed charges(11)(2) 4.2 3.6 3.6 3.3 4.0 2.3 1.6 2.6
Net cash (used) provided by:
Operating activities 3,046 121 3,258 1,842 (123) 441 1,109 756
Investing activities (4,244) (3,117) (7,154) (5,608) (1,284) (537) (1,689) (2,319)
Financing activities 878 2,790 3,998 4,316 (73) 1,991 501 1,678
Capital expenditures 4,244 3,177 5,805 5,648 1,033 537 1,302 1,987
Book value per share $ 3.12 $ 2.73 $ 2.91 $ 1.76 $ 1.42 n/a $ (0.26) $ (0.27)
</TABLE>
-11-
<PAGE>
- ---------------------------------------------
n/a - Not applicable to interim periods.
(continued)
(1) Income before extraordinary item, reorganization items, interest,
taxes, depreciation and amortization. EBITDA should not be
considered as an alternative to operating or net income, (as
determined in accordance with GAAP), as an indicator of Key's
performance or as an alternative to cash flows from operating
activities (as determined in accordance with GAAP) or as a
measure of liquidity. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Key .")
(2) Fixed charges are the sum of (i) interest costs, (ii) interest
component of rent expenses, and (iii) amortization of deferred
financing costs.
(3) Earnings per common share for the five months ended November
30,1992 and prior period, reflect the previous capital structure
of Key Energy Group, Inc. (previously "National Environmental
Group, Inc.") prior to the 1992 Reorganization Plan and are not
comparable to subsequent periods. See Note 3 to Key's
Consolidated Financial Statements for the years ended June 30,
1995 and 1994 and for the seven months ended June 30, 1993 and
five months ended November 30, 1992.
-12-
<PAGE>
<TABLE>
<CAPTION>
WellTech Summary Financial Data
(In thousands, except per share amounts and ratios)
Nine Months Ended
September 30, Year Ended December 31,
--------------- ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
(unaudited)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 52,180 $ 34,974 $ 49,043 $ 56,157 $ 58,680 $ 70,463 $ 70,070
Operating costs and expenses 50,970 35,997 50,299 58,137 61,290 75,944 71,324
Operating income (loss) 1,210 (1,023) (1,256) (1,980) (2,610) (5,481) (1,254)
Other income (expense), net (976) 2,003 1,045 (3,227) (5,210) (6,443) (4,662)
Income (loss) before income taxes 234 980 (211) (5,207) (7,820) (11,924) (5,916)
Net income (loss) 234 980 (211) (5,207) (7,820) (10,335) (5,916)
Net income (loss) per share(1) $ 0.66 $ 2.78 $ (0.61) $ (16.73) $ (25.12) $ (3.33) $ (2.50)
</TABLE>
As of As of
September 30, 1995 December 31, 1994
(unaudited)
Balance Sheet Data:
Total assets $ 68,998 $ 58,176
Debt, including current portion 16,752 7,418
Stockholders' equity (deficit) 36,882 36,189
<TABLE>
<CAPTION>
Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C> <C>
EBITDA(2) $ 4,172 $ 3,299 $ 1,106 (1,229) (3,825) $ 1,378
EBITDA as % of revenues(2) 8.0% 6.7% 2.0% -2.1% -5.4% 2.0%
Total debt as % of EBITDA(2) 401.5% 224.9% 3010.2% -2705.0% -783.3% 2,226.0%
EBITDA to fixed charges(2)(3) 223.6% 263.7% 27.8% -31.2% -78.9% 33.1%
Net cash (used) provided by:
Operating activities (1,803) 4,631 933 (824) 1,439 (3,017)
Financing activities 5,691 9,429 (619) 2,040 642 7,657
Investing activities (3,703) (14,125) (1) (3,277) (6,502) (1,867)
Capital expenditures 5,103 13,738 1,748 1,979 6,445 3,061
Book value per share 104.50 104.15 (8.57) 8.16 3.33 3.63
</TABLE>
- -----------------------------------
(1)Reflects ten for one reverse stock split in 1992.
(2)Net income loss before interest, income taxes, depreciation and
amortization. EBITDA should not be considered as an alternative to operating
or net income, (as determined in accordance with GAAP), as an indicator of
Key's performance or as an alternative to cash flows from operating
activities (as determined in accordance with GAAP) or as a measure of
liquidity. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of WellTech.")
(3)Fixed charges are the sum of (i) interest costs, (ii) interest component
of rent expenses, and (iii) amortization of deferred financing costs.
-13-
<PAGE>
Key Selected Pro Forma Financial Data
The following selected pro forma financial data has been derived from
the unaudited pro forma condensed financial statements included elsewhere
herein. The information for the year ended June 30, 1995 combines the audited
results of Key for its fiscal year then ended, and the unaudited results for the
twelve month period ended June 30, 1995 for WellTech, and for the six months
ended December 31, 1995 the results of Key for that period and for WellTech the
six months ended November 30, 1995. The balance sheet data reflects the
combination of balance sheet data for Key as of December 31, 1995 with
comparable information for WellTech as of November 30, 1995. The pro forma
results are not necessarily indicative of the combined results of future
operations and do not reflect any synergies that may result from the Merger.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1995 June 30, 1995
Income Statement Data: (in thousands except per share data)
<S> <C> <C>
Revenues........................................... $55,821 $ 119,645
Operating costs and expenses....................... 51,907 112,402
Income before income taxes......................... 3,914 7,243
Income tax expense................................. 1,312 2,368
Net income ........................................ 2,602 4,875
Net income per share............................... 0.25 0.48
At December 31, 1995
Balance Sheet Data: (in thousands)
Total assets........................................ $103,281
Long-term debt, including current portion........... 35,379
Stockholders' equity................................ 42,855
Six Months Ended Year Ended
December 31, 1995 June 30, 1995
Financial Ratios and Other Data: (in thousands except ratios)
EBITDA(1)........................................ 8,575 16,167
EBITDA as a % of revenues(1)..................... 15.4% 13.5%
Total debt as a % of EBITDA(1)................... N/A(3) 225.1%
EBITDA to fixed charges(1)(2).................... 4.2 4.1
</TABLE>
Future Debt Service Requirements (4)
Year Ended Principal
June 30, & Interest
(in thousands)
1996 $ 5,615
1997 5,826
1998 11,293
1999 4,271
2000 4,055
- ----------------
(1) Net income before interest, taxes, depreciation and amortization. EBITDA
should not be considered as an alternative to operating or net income, (as
determined in accordance with GAAP), as an indicator of Key's performance or
as an alternative to cash flows from operating activities (as determined in
accordance with GAAP), or as a measure of liquidity. (See "Management's
Discussion and Analysis of Results of Operations and Financial Condition of
Key .")
(2) Fixed charges are the sum of (i) interest costs, (ii) interest component
of rent expenses, and (iii) amortization of deferred financing costs.
(3) Not applicable to interim periods.
(4)Calcuated based on interest rates in effect on outstanding long-term
debt at December 31, 1995.
-14-
<PAGE>
THE SPECIAL MEETING
Matters to Be Discussed at the Special Meeting
This Proxy Statement--Prospectus is being furnished by Key to holders
of shares of Key Common Stock in connection with the solicitation of proxies
from such stockholders for use at the Key Special Meeting.
At the Key Special Meeting or any adjournments or postponements
thereof, holders of shares of Key Common Stock will be asked to approve and
adopt the Key Proposals, which include (i) the approval and adoption of the
Merger Agreement and each of the transactions contemplated thereby relating to
Key, including the merger of WellTech with and into Key; (ii) the approval and
adoption of the Key Charter Amendment which, among other things, increases the
total number of authorized shares of Key Common Stock from 10,000,000 to
25,000,000; (iii) the election of the Board of Directors of six persons,
including, assuming the Merger is consummated, two nominees of WellTech, or if
the Merger is not consummated, the election of the Board of Directors of five
persons not including any nominees of WellTech; (iv) the adoption and approval
of the Key 1995 Stock Option Plan covering an aggregate of 1,150,000 shares of
Key Common Stock; and (v) the adoption and approval of the Key Outside Directors
Stock Option Plan covering an aggregate of 300,000 shares of Key Common Stock.
Such stockholders will also consider and vote upon such other matters as may
properly be brought before the Key Special Meeting.
THE BOARD OF DIRECTORS OF KEY HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE KEY CHARTER AMENDMENT AND RECOMMENDS A VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND THE KEY CHARTER AMENDMENT AND FOR EACH OF
THE OTHER PROPOSALS BEING SUBMITTED AT THE KEY SPECIAL MEETING.
Record Dates; Stock Entitled to Vote; Quorum
The Record Date for the determination of shares of those holders of Key
Common Stock entitled to notice of, and to vote at, the Key Special Meeting is
March 1, 1996. Only holders of record of shares of Key Common Stock at the close
of business on the Record Date will be entitled to notice of, and to vote at,
the Key Special Meeting or any adjournments or postponements thereof. As of the
Record Date, there were 6,913,513 shares of Key Common Stock outstanding and
entitled to vote, held by approximately 541 holders of record.
The presence in person or by proxy of shares representing a majority of
votes (3,456,756 votes) entitled to be cast by holders of Key Common Stock
issued and outstanding and entitled to vote as of the Record Date is required to
constitute a quorum for the transaction of business at any meeting of Key
stockholders. Abstentions and broker non-votes are included in the determination
of the number of shares of Key Common Stock present at the Key Special Meeting.
-15-
<PAGE>
Required Vote
The affirmative vote of a majority of the votes (3,456,756 votes) of
holders of the outstanding shares of the Key Common Stock is the only vote of
Key stockholders required to approve the Merger and the Key Charter Amendment
under the MGCL, the Key Articles and the Key By-Laws. The proposal relating to
the election of the Board of Directors will be determined by a plurality of the
votes entitled to be cast by the holders of the Key Common Stock. All other
proposals must be approved by the affirmative vote of a majority of the
outstanding Key Common Stock present in person or by proxy and entitled to vote
at the meeting. Abstentions and broker non- votes are not counted in tabulations
of the total votes cast on proposals presented to stockholders. When the vote of
a majority of outstanding shares is required for approval of a proposal,
abstentions and broker non-votes have the effect of a vote against the proposal.
Each Key Proposal will be voted upon separately by the Key stockholders
entitled to vote at the Key Special Meeting; however, failure of either the
Merger Agreement or the Key Charter Amendment to be approved by the Key
stockholders will result in the abandonment by Key of the Merger and, if the
Merger is not approved, the two WellTech nominees to the Board of Directors of
Key will not be elected as Directors. Under such circumstances, however,
WellTech would have the right, under an existing agreement with Key which would
remain in effect, to designate one member of the Key Board of Directors.
Solicitation and Voting of Proxies
Stockholders of record on the Record Date are entitled to cast their
votes, in person or by properly executed proxy, at the Key Special Meeting. All
shares represented at the Key Special Meeting by properly executed proxies
received prior to or at the Key Special Meeting and not properly revoked will be
voted at the Key Special Meeting in accordance with the instructions indicated
in such proxies. If no instructions are indicated, such proxies will be voted
FOR approval of each of the Key Proposals. The Board of Directors of Key does
not know of any matters, other than the matters described in the Key Notice of
Special Meeting attached to this Proxy Statement--Prospectus, that will come
before the Key Special Meeting.
If a quorum is not present at the time the Key Special Meeting is
convened, or if for any other reason Key believes that additional time should be
allowed for the solicitation of proxies or for the satisfaction of conditions to
the Merger or the transactions contemplated thereby, Key may adjourn the Key
Special Meeting with a vote of the holders of a majority of the voting power
represented by the Key Common Stock present at such meeting. If Key proposes to
adjourn the Key Special Meeting, the persons named in the enclosed proxy card
will vote all shares for which they have voting authority in favor of such
adjournment.
-16-
<PAGE>
Any proxy given pursuant to this solicitation may be revoked by the
person giving it any time before it is voted in the following manner. Proxies
may be revoked by (i) filing with the Secretary of Key, at or before the Key
Special Meeting, a written notice of revocation bearing a date later than the
date of the proxy, (ii) duly executing a subsequent proxy relating to the same
shares and delivering it to the Secretary of Key at or before the Key Special
Meeting, or (iii) attending the Key Special Meeting and voting in person
(although attendance at the Key Special Meeting will not in and of itself
constitute revocation of a proxy). Any written notice revoking a proxy and any
subsequent proxy should be sent to Key Energy Group, Inc., 255 Livingston
Avenue, New Brunswick, New Jersey 08901, Attention: Francis D. John, President
and Chief Executive Officer.
Proxies are being solicited by and on behalf of the Key Board of
Directors. All expenses of this solicitation, including the cost of preparing
and mailing this Proxy Statement--Prospectus, will be borne by Key. In addition
to solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Key in person or by telephone, telegram or other means
of communication. Such directors, officers and employees will not be
additionally compensated but may be reimbursed for out-of-pocket expenses in
connection with such solicitation. Arrangements will be made with custodians,
nominees and fiduciaries for forwarding of proxy solicitation materials to
beneficial owners of Key Common Stock held of record by such persons, and Key
may reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
Ownership of Key Securities
The following table provides information as of January 1, 1996 with
respect to the shares of Key Common Stock beneficially owned by (i) each person
known by Key to own more than 5% of the outstanding Key Common Stock; (ii) each
director of Key and each nominee to the Board of Directors; (iii) each executive
officer required to be identified in the Summary Compensation Table of Key; and
(iv) by all directors and executive officers of Key as a group. The table
includes shares which may be acquired upon exercise of options granted under the
Key 1995 Stock Option Plan and the Key Outside Directors Stock Option Plan,
subject to shareholder approval and excludes shares granted under the Key Stock
Grant Plan, which has been terminated subject to approval of the Key 1995 Stock
Option Plan. (See "Management of Key--Executive Compensation.") The number of
shares beneficially owned by each director or executive officer is determined
according to rules of the Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power. As a consequence, several
persons may be deemed to be the "beneficial owners" of the same shares. Except
as noted below, each holder has sole voting and investment power with respect to
all shares of Key Common Stock listed as owned by such person or entity. The
address of each of Messrs. John, Greenfield, Manly, Wolkowitz, Edwards, Evatt
and Laidley is c/o The Company, 255 Livingston Avenue, New Brunswick, New Jersey
08901.
-17-
<PAGE>
<TABLE>
<CAPTION>
Number of Shares As Adjusted
Number of Shares Percentage of Beneficially Percentage of
of Key Common Outstanding Shares Owned (Adjusted Shares of Key
Name and Address Stock Beneficially of Key Common to Reflect Common
of Beneficial Owner Owned (1) Stock (2) the Merger) Stock (3)
- ------------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Francis D. John (4) 141,266 2.0% 141,266 1.4%
Van D. Greenfield (5) 69,884 1.0% 69,884 *
William Manly (6) 25,326 * 25,326 *
Morton Wolkowitz (7) 308,959 4.4% 308,959 3.0%
D. Kirk Edwards (8) 175,000 2.5% 175,000 1.7%
Danny R. Evatt (9) 12,500 * 12,500 *
C. Ron Laidley (10) 76,250 1.1% 76,250 *
Kevin P. Collins (11) -- -- 55,072 *
W. Phillip Marcum (12) -- -- 55,072 *
Kenneth C. Hill -- -- -- --
Kenneth V. Huseman -- -- -- --
Directors and
Executive Officers as a
group (7 persons; 11 809,185 11.2% 919,329 8.6%
persons, as adjusted)
Morton Cohn (13) 626,422 9.1% 626,422 6.0%
FMR Corp. (14) 611,000 8.8% 611,000 5.9%
WellTech, Inc. (15) 1,885,000 27.3% -- --
</TABLE>
- -----------------
* Less than 1%
(1) Under the rules for determining beneficial ownership, each director,
director nominee and officer is deemed to own that number of shares
of Key Common Stock which he or she may purchase or acquire pursuant
to a warrant, option or convertible security within 60 days as if he
or she had exercised the warrant or option or had converted the
convertible security. The number of shares of Key Common Stock that
each person is so deemed to own goes into both the numerator and the
denominator in calculating that person's percentage ownership. The
footnotes indicate the number of shares of Key Common Stock, if any,
that are deemed to be owned by each person pursuant to this rule.
(2) Based on 6,913,513 shares of outstanding Key Common Stock at
February 26, 1996.
(3) Based on 10,413,513 shares of outstanding Key Common Stock, after
giving effect to the Merger assuming no exercise of any New Key
Warrants or any other options or warrants.
(4) The number shown under the Key Common Stock column includes (i)
2,371 shares owned directly by Mr. John, (ii) 50,045 shares held by
Mr. John as custodian for his two children as to which Mr. John
disclaims any beneficial interest, and (iii) 1,350 shares held by
Mr. John's wife, as to which Mr. John disclaims any beneficial
interest. Includes 87,500 shares purchasable at $5.00 per share upon
exercise of an option granted on July 6, 1995; does not include
412,500 shares purchasable upon exercise of such option.
-18-
<PAGE>
(5) Includes 50,000 shares purchasable at $5.00 per share pursuant to an
option granted on July 6, 1995. Mr. Greenfield disclaims beneficial
ownership of shares owned by the Green-Cohn Group, Inc. of which he
is President. See Note (13) below.
(6) Includes 25,000 shares purchasable at $5.00 per share pursuant to an
option granted on July 6, 1995.
(7) Includes 50,000 shares purchasable at $5.00 per share pursuant to an
option granted on July 6, 1995.
(8) Includes 25,000 shares purchasable at $5.00 per share pursuant to an
option granted on July 6, 1995; does not include 75,000 shares
purchasable upon exercise of such option.
(9) Includes 12,500 shares purchasable at $5.00 per share pursuant to an
option granted on July 6, 1995; does not include 37,500 shares
purchasable upon exercise of such option.
(10)Includes 31,250 shares purchasable at $5.00 per share pursuant to
an option granted on July 6, 1995; does not include 93,750 shares
purchasable upon exercise of such option.
(11)Prior to consummation of the Merger, Mr. Collins is expected to
receive 55,072 shares of Key Common Stock from WellTech pursuant to
an agreement with WellTech to compensate certain of its directors.
(12)Prior to consummation of the Merger, Mr. Marcum is expected to
receive 55,072 shares of Key Common Stock from WellTech pursuant to
an agreement with WellTech to compensate certain of its directors.
(13)The number shown under the Key Common Stock column includes (i)
167,364 shares owned directly by Mr. Cohn, and (ii) 459,058 shares
owned indirectly through his ownership of Green-Cohn Group, Inc. Mr.
Cohn's address is c/o Green-Cohn Group, Inc., 45 Broadway, New York,
New York 10006.
(14)The number of shares shown under the Key Common Stock column are
beneficially owned indirectly by FMR Corp., a Massachusetts
corporation ("FMR") with an address at 82 Devonshire Street, Boston,
MA 02109. Such shares are owned directly by portfolios of investment
companies registered under Section 8 of the Investment Company Act
of 1940, as amended, which are advised by Fidelity Management &
Research Company, a wholly-owned subsidiary of FMR and an investment
adviser registered under Section 203 of the Investment Advisers Act
of 1940. Number of shares owned by FMR does not include any shares
of Key Common Stock which FMR might be deemed to beneficially own
indirectly by virtue of its ownership of WellTech Common Stock. (See
"Ownership of WellTech Securities .")
(15)The number shown under the Key Common Stock column includes (i)
1,635,000 shares owned directly by WellTech, Inc. and (ii) 250,000
shares subject to purchase upon exercise of the Existing Key
Warrants.
-19-
<PAGE>
Ownership of WellTech Securities
The following table sets forth information as of February 28, 1996 with
respect to the shares of WellTech Common Stock beneficially owned by (i) each
person known by WellTech to own beneficially more than 5% of WellTech Common
Stock; (ii) each director of WellTech; and (iii) all directors and executive
officers of WellTech as a group. The number of shares beneficially owned by each
director or executive officer is determined according to rules of the
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership includes
any shares as to which the individual or entity has sole or shared voting power
or investment power. As a consequence, several persons may be deemed to be the
"beneficial owners" of the same shares. Except as noted below, each holder has
sole voting and investment power with respect to shares of WellTech Common Stock
listed as owned by such person or entity.
<TABLE>
<CAPTION>
Number of
Shares Number of Shares
WellTech of Key Common As Adjusted
Common Percentage of Stock Beneficially Percentage of
Name and Address Stock Outstanding Shares Owned (Adjusted Shares of Key
of Beneficial Beneficially of WellTech to Reflect Common
Owner Owned Common Stock (1) the Merger) Stock (2)
- ------------------------------- --------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
FMR Corp. (3) 220,966 62.6% 4,167,046 38.3%
Neptune Management Partners,
L.P., as Agent and Nominee(4) 47,102 13.3% 758,022 7.2%
Roughneck Partners, L.P.(5) 18,467 5.2% 297,193 2.8%
CCF/WellTech, L.P.(6) 28,240 8.0% 454,472 4.3%
W. Phillip Marcum(7) -- -- 55,072 *
Kevin Collins(7) -- -- 55,072 *
Francisco Garcia (7) (8) -- --
George Konomos (9) -- --
Douglas B. Thompson (7) (10) 3,982 * 76,105 *
Directors as a group(5 persons) 3,982 *
</TABLE>
- -------------------------
* Less than 1%
(1) Based on 352,941 shares of outstanding WellTech Common Stock at
February 28, 1996.
-20-
<PAGE>
(2) Based on 10,413,510 shares of outstanding Key Common Stock, after
giving effect to the Merger, assuming the exercise of the New Key
Warrants and no exercise of any other options or warrants. Under the
rules for determining beneficial ownership, each director, director
nominee and officer is deemed to own that number of shares of Key
Common Stock which he or she may purchase or acquire pursuant to a
warrant, option or convertible security within 60 days as if he or
she had exercised the warrant or option or had converted the
convertible security. The number of shares of Key Common Stock that
each person is so deemed to own goes into both the numerator and the
denominator in calculating that person's percentage ownership. The
footnotes indicate the number of shares of Key Common Stock, if any,
that are deemed to be owned by each person pursuant to this rule.
(3) Such shares are beneficially owned indirectly by FMR Corp., a
Massachusetts corporation ("FMR") with an address at 82 Devonshire
Street, Boston, Massachusetts 02109. Such shares are owned directly
by (a) a portfolio of an investment company registered under Section
8 of the Investment Company Act of 1940, as amended, which is
advised by Fidelity Management & Research Company ("FMRC"), a
wholly-owned subsidiary of FMR and an investment adviser registered
under Section 203 of the Investment Advisers Act of 1940, and (b)
two private investment accounts advised by Fidelity Management Trust
Company ("FMTC"), a bank as defined in Section 3(a)(6) of the
Securities Exchange Act of 1934 and a wholly-owned subsidiary of
FMR. Includes 469,551 shares of Key Common Stock that may be
acquired upon the exercise of New Key Warrants and 611,000 shares of
Key Common Stock owned beneficially by FMR Corp., prior to the
Merger. See Note (14) under "Ownership of Key Securities."
(4) Includes 100,091 shares of Key Common Stock that maybe acquired upon
the exercise of New Key Warrants.
(5) Includes 39,242 shares of Key Common Stock that maybe acquired upon
the exercise of New Key Warrants.
(6) Includes 60,010 shares of Key Common Stock that maybe acquired upon
the exercise of New Key Warrants.
(7) As adjusted column includes shares of Key Common Stock to be
distributed by WellTech to the director before consummation of the
Merger and, in the case of Mr. Thompson, (a) includes 11,105 shares
of Key Common Stock held by Mr. Thompson in a retirement account and
65,000 shares of Key Common Stock issuable upon consummation of the
Merger and (b) does not include 13,550 shares of Key Common Stock
held in a retirement account by Mr. Thompson's wife, as to which Mr.
Thompson disclaims beneficial ownership.
(8) Mr. Garcia disclaims beneficial ownership of WellTech Common Stock
owned by Neptune Management Partners, L.P. ("Neptune"), of which Mr.
Garcia is a manager. Does not include 18,689 shares of Key Common
Stock to be distributed by WellTech to Mr. Garcia before
consummation of the Merger, which shares shall be contributed to
Neptune.
(9) Mr. Konomos disclaims beneficial ownership of WellTech Common Stock
owned by CCF/WellTech, L.P. ("CCFW") of which Mr. Konomos is a
manager. Does not include 11,205 shares of Key Common Stock to be
distributed by WellTech to Mr. Konomos before consummation of the
Merger, which shares shall be contributed to CCFW.
(10)Mr. Thompson is a 100% owner of Jupiter Management Co. ("Jupiter")
and he is deemed to beneficially own 3,982 shares of WellTech Common
Stock owned by Jupiter. Does not include 1,152 shares of WellTech
Common Stock held in a retirement account maintained by Mr.
Thompson's mother as to which Mr. Thompson disclaims beneficial
ownership .
-21-
<PAGE>
CERTAIN CONSIDERATIONS RELATING TO THE TRANSACTION
Reasons for the Transaction; Recommendation of Key Board of Directors
At the meeting of the Board of Directors of Key held on November 18,
1995, the Key Board received a presentation by members of Key management and its
legal advisors regarding, and reviewed the terms of, the Merger Agreement and
the transactions contemplated thereby. By unanimous vote of Directors, the Key
Board determined that the Merger is advisable, fair to, and in the best
interests of, Key and its stockholders, approved the Merger and the Key Charter
Amendment, and resolved to recommend that stockholders of Key vote FOR approval
and adoption of the Merger Agreement and each of the transactions contemplated
thereby and FOR approval and adoption of the Key Charter Amendment.
In reaching its determination, the members of the Key Board considered
a number of factors, including without limitation, the following: (i) the Key
Board's familiarity with and review of Key's and WellTech's business,
operations, financial condition, earnings and prospects; (ii) the business,
operations, earnings and financial condition of WellTech and the enhanced
opportunities for growth that the Merger makes possible; (iii) the report and
opinion of Key's financial advisor; (iv) a variety of factors affecting and
relating to the overall strategic focus of Key, including without limitation
growth in assets and earnings; (v) other opportunities available to Key; (vi)
the terms of the Merger Agreement; and (vii) the anticipated cost savings and
efficiencies available as a result of the Merger. The Key Board also considered
negative aspects of the Merger, including (i) WellTech's five-year history of
operating losses; (ii) the discontinuation of WellTech's Russian operations;
(iii) the risks and uncertainties associated with the integration of the
WellTech operations with those of Key; and (iv) the fact that Key has incurred
substantial expense and devoted a significant amount of the time and resources,
and will continue to do so, in connection with the consummation of the Merger.
In view of the wide variety of factors considered by the Key Board of
Directors, the Key Board did not find it practicable to quantify or otherwise
attempt to assign relative weights to the specific factors considered in making
its determination. Consequently, the Key Board did not quantify the assumptions
and results of its analyses in reaching its determination that the Merger is
advisable, fair to, and in the best interests of, Key and its stockholders.
However, as a general matter, the Key Board believed that the factors in items
(i) through (vii) above supported its determination.
THE BOARD OF DIRECTORS OF KEY UNANIMOUSLY RECOMMENDS THAT KEY
STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR
APPROVAL AND ADOPTION OF THE KEY CHARTER AMENDMENT.
Opinion of Financial Advisor to Key
Key retained Simmons to act as its financial advisor and to render a
fairness opinion in connection with the Merger. Simmons rendered its oral
opinion (which was subsequently confirmed in writing) to the Board of Directors
of Key to the effect that, as of November 18, 1995, the Merger was fair from a
financial point of view to the holders of Key Common Stock.
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<PAGE>
Simmons is a specialized energy - related investment banking firm
engaged in, among other things, the valuation of businesses and their securities
in connection with mergers and acquisitions, the management and underwriting of
sales of equity and debt to the public and private placements of equity and
debt. Key selected Simmons to act as its financial advisor in connection with
the Merger on the basis of Simmons' expertise in the oil and gas service and
equipment industry.
The full text of Simmons' opinion dated December 29, 1995 is attached
as Annex II to this Proxy Statement-Prospectus. Holders of Key Common Stock are
urged to read such opinion carefully in its entirety in conjunction with the
Proxy Statement-Prospectus for assumptions made, matters considered and limits
of the review by Simmons. Simmons' opinion addresses only the fairness of the
Merger from a financial point of view and does not constitute a recommendation
to any holder of Key Common Stock as to how such stockholder should vote on the
Merger. The summary of Simmons' opinion set forth in this Proxy
Statement-Prospectus is qualified in its entirety by reference to the full text
of such opinion.
In connection with the rendering of its opinion, Simmons has reviewed
and analyzed, among other things, the following: (i) the Merger Agreement; (ii)
the financial statements and other information concerning Key, including the
Annual Reports on Form 10-K of Key for each of the years in the three-year
period ended June 30, 1995 and the Quarterly Report on form 10-Q of Key for the
quarter ended September 30, 1995; (iii) certain near-term forecasts and other
internal information, primarily financial in nature, concerning the business and
operations of Key furnished by Key for purposes of Simmons' analysis; (iv)
certain publicly available information concerning the trading of, and the
trading market for, Key Common Stock; (v) certain information concerning
WellTech, including the audited financial statements for each of the years in
the three-year period ended December 31, 1994 and certain unaudited financial
statements, prepared by WellTech, for interim periods during the year ended
December 31, 1994 and the ten months ended October 31, 1995; (vi) certain
near-term forecasts and other internal information, primarily financial in
nature, concerning the business and operations of WellTech furnished by WellTech
for purposes of Simmons' analysis; (vii) certain publicly available information
with respect to certain other companies that Simmons believes to be comparable
to Key or WellTech and the trading markets for certain of such other companies'
securities; (viii) certain publicly available information concerning the
estimate of the future operating performance of Key and the comparable companies
prepared by industry experts unaffiliated with either Key or WellTech; and (ix)
certain publicly available information concerning the nature and terms of
certain other transactions considered relevant to the inquiry. Simmons has also
met with certain officers and employees of Key and WellTech to discuss the
foregoing, as well as other matters believed relevant to the inquiry.
In arriving at its opinion, Simmons has assumed and relied upon the
accuracy and completeness of all of the financial and other information provided
or publicly available, including, without limitation, information with respect
to the amount and timing of cost savings pursuant to the Merger provided by Key
and WellTech, and has not attempted independently to verify any of such
information. Simmons has not conducted a physical inspection of any of the
assets, properties or facilities of Key or WellTech, nor has Simmons made or
obtained any independent evaluations or appraisals of any of such assets,
properties or facilities.
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In conducting its analysis and arriving at its opinion expressed
herein, Simmons has considered such financial and other factors as it deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial position and results of Key and WellTech;
(ii) the business prospects of Key and WellTech; (iii) estimates of pro forma
combination benefits pursuant to the Merger prepared by Key and WellTech, (iv)
the historical and current market for Key Common Stock and for the equity
securities of certain other companies believed to be comparable to Key or
WellTech; (iv) the respective contributions in terms of various financial
measures of Key and WellTech to the combined company, and the relative ownership
of Key after the proposed transaction by the current holders of Key Common Stock
and WellTech Common Stock; (v) the pro forma effect of the transaction on Key's
capitalization ratios, earnings per share and cash flow per share; and (vi) the
nature and terms of certain other acquisition transactions that Simmons believes
to be relevant. Simmons has also taken into account its assessment of general
economic, market and financial conditions and its experience in connection with
similar transactions and securities' valuation generally. Simmons' opinion
necessarily is based upon conditions as they exist and can be evaluated on, and
on the information made available at, the date of such opinion. Simmons did not
express any opinion as to the price or range or prices at which the shares of
Key Common Stock will trade subsequent to the consummation of the Merger.
In connection with its fairness opinion, Simmons performed a variety of
financial analyses with respect to Key and WellTech, including those described
below:
Analysis of Selected Publicly-Traded Comparable Companies. Simmons
reviewed certain publicly available financial, operating and stock market
information as of November 17, 1995 for Key, WellTech and certain
publicly-traded companies (the "Comparable Companies") that Simmons considers to
be comparable to Key or WellTech. For the Comparable Companies, Simmons
calculated, among other things, multiples of market stock price to trailing
twelve months' ("TTM") earnings per share and cash flow per share and multiples
of Adjusted Market Value (total market capitalization less cash in excess of
five percent of revenues) to TTM revenues, TTM earnings before depreciation,
depletion and amortization, interest and taxes ("EBDIT") and Adjusted Book Value
(total book capitalization less cash in excess of five percent of revenues). All
multiples calculated for WellTech were based on the most recent available
results of WellTech for the TTM period, including certain adjustments for
non-recurring and/or extraordinary items, and exclude the results attributable
to WellTech's Russian operations. In addition, the multiples related to the
acquisition of WellTech were based on an acquisition price (the "Implied
Consideration") calculated using the net number of additional shares to be
issued and Key's closing share price at November 17, 1995 ($5.00 per share),
plus the estimated value of the New Key Warrants, less the estimated value of
the Existing Key Warrants, plus assumed debt to be assumed. Unless otherwise
noted, WellTech's results were not restated to reflect any benefit associated
with the cost savings estimated by the managements of Key and WellTech.
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<PAGE>
An analysis of the multiples of market stock price to TTM earnings per
share and cash flow per share yielded averages for the Comparable Companies of
15.9x and 5.7x, respectively. This compared to 14.9x TTM cash flow per share for
WellTech at the Implied Consideration (5.9x for WellTech at the Implied
Consideration including 50% of cost savings estimated by Key and WellTech). TTM
earnings per share multiples related to the acquisition were not calculated as
WellTech generated negative earnings for the most recent available twelve month
period. An analysis of the multiples of Adjusted Market Value to TTM revenues
yielded an average of 0.8x for the Comparable Companies, compared to 0.6x for
WellTech at the Impled Consideration. An analysis of the multiples of Adjusted
Market Value to TTM EBDIT yielded an average of 6.4x for the Comparable
Companies, compared to 9.9x for WellTech at the Implied Consideration (6.2x for
WellTech at the Implied Consideration including 50% of cost savings estimated by
Key and WellTech). An analysis of the multiples of Adjusted Market Value to
Adjusted Book Value yielded an average of 1.3x for the Comparable Companies,
compared to 0.9x for WellTech at the Implied Consideration.
Analysis of Selected Comparable Transactions. Simmons reviewed several
transactions involving the acquisition of oil service and equipment companies.
Simmons calculated multiples of acquisition price, or transaction value, to the
revenues and EBDIT generated in the 12 months prior to acquisition. These
calculations yielded a range of acquisition price to EBDIT of 4.7x to 31.5x,
with an average excluding the high and low value of 6.2x, and a range of
acquisition price to revenues of 0.4x to 1.6x with an average excluding the high
and low value of 1.0x. The average transaction EBDIT multiple of 6.2x (excluding
the high and low value) compared to a 9.9x multiple for WellTech at the Implied
Consideration (6.2x for WellTech at the Implied Consideration including 50% of
cost savings estimated by Key and WellTech), and the average transaction revenue
multiple 1.0x (excluding the high and low value) compares to a 0.6x multiple for
WellTech at the Implied Consideration.
Relative Contribution Analysis. Simmons analyzed the relative
contributions of Key and WellTech to, among other things, the combined pro forma
historical revenues, EBDIT, net income, cash flow, total assets, total book
capitalization and book equity value. Simmons also analyzed the relative
contributions of Key and WellTech to total market capitalization and market
equity value based on the Implied Consideration. The analysis assumes certain
pro forma adjustments for recent acquisitions and non-recurring or extraordinary
items in the historical financial statements of Key and WellTech, and, in some
cases, a certain level of cost savings estimated by Key and WellTech. Based on
the most recent available data for the companies, Simmons calculated
contributions by WellTech of approximately 53% of combined revenues, 34% of
combined EBDIT, 28% of combined cash flow, 5% of combined net income, 53% of
combined total assets, 49% of combined total book capitalization and 51% of
combined book equity value.
Based on the Implied Consideration, Simmons calculated pro forma
contributions by WellTech of approximately 40% of combined total market
capitalization and 35% of combined market equity value.
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Discounted Cash Flow Analysis. Simmons performed various discounted
cash flow calculations of WellTech. Net present values were based on the
projected unlevered cash flows for five years and employed an estimated terminal
value derived as a multiple of six times EBDIT. Cost savings estimated by Key
and WellTech were not incorporated into the analysis.
Simmons discounted to present value projected future cash flows and
terminal values of WellTech by applying after-tax discount rates ranging from 12
to 15 percent. Based on these calculations, Simmons derived net present values
of WellTech of approximately $34 to $38 million.
The foregoing summary does not purport to be a complete description of
the analyses performed by Simmons. The preparation of financial analyses and
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. Simmons believes that its analyses (and
the summary set forth above) must be considered as a whole, and that selecting
portions of such analyses and of the factors considered by Simmons, without
considering all of such analyses and factors, could create an incomplete view of
the process underlying its opinion. Simmons made no attempt to assign specific
weights to particular analyses. Any estimates contained in Simmons' analyses are
not necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth herein. Estimates of values of companies do no
purport to be appraisals or necessarily reflect the prices at which companies
may actually be sold. Because such estimates are inherently subject to
uncertainty, Simmons does not assume any responsibility for their accuracy.
Simmons confirmed, as of January 17, 1996 its opinion dated December
29, 1995. In rendering such confirmations, Simmons performs certain procedures
related to its opinion and reviews the assumptions on which such opinion was
based and the factors considered in connection therewith. Simmons has
considered, and will consider, among other things, Key's and WellTech's recent
financial performance and recent market conditions and developments based on the
foregoing.
As compensation for rendering its fairness opinion and other financial
advisory services, Key has agreed to pay Simmons as its financial advisor total
fees of approximately $440,000, of which approximately $405,000 will be
outstanding and payable upon consummation of the Merger. Key has also agreed to
reimburse Simmons for certain expenses incurred in connection with its
engagement and to indemnify Simmons and certain related persons against certain
liabilities and expenses relating to or arising out of its engagement, including
certain liabilities under federal securities laws. There were no material
relationships between Key or WellTech and Simmons at its financial advisor and
no compensation was paid, except as noted above, by Key to Simmons during the
past two years. Simmons did not negotiate the terms of the Merger between Key
and WellTech.
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Comparative Per Share Information
The comparative historical per share information presented below is
derived from the historical financial statements of each company. Pro forma
information for Key is derived from the unaudited pro forma combined
information. Equivalent pro forma information for WellTech is the pro forma Key
amount multiplied by the effective proposed exchange ratio (13.9682:1).
<TABLE>
<CAPTION>
Key WellTech
Equivalent
Historical Pro forma Historical Pro forma
Year ended June 30, 1995
<S> <C> <C> <C> <C>
Dividends -- -- -- --
Income from continuing
operations $0.33 $0.48 $(0.78) $6.70
Six months ended December 31, 1995
Dividends -- -- -- --
Income from continuing $0.22 $0.25 $1.02 $3.49
operations
Book value per share
As of June 30, 1995 $2.91 $3.97 $103.49 $55.45
As of December 31, 1995 $3.12 $4.12 $104.50 $57.55
</TABLE>
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RISK FACTORS
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
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Statements made herein and in documents incorporated herein by reference,
other than statements of historical fact, are "forward-looking statements." Key
wishes to caution prospective purchasers that the following important factors,
among others, may have affected and could in the future affect Key's actual
results and could cause Key's actual results for subsequent periods to differ
materially from those expressed in any forward- looking statement made by or on
behalf of Key:
-Occurrences 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 capital 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 adequate funds under the New Indebtedness to fund
operations for the foreseeable future, or if such funds are inadequate, the
ability of Key to obtain new or additional financing or to generate
adequate funds from operations;
-Key's ability to enter into and retain profitable oil field servicing and
drilling contracts with customers which make timely payments for such
services;
-The demand for oil field services, drilling services and for oil and gas,
and the supply of and demand for drilling 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 administrative
expenses, including, but not limited to, the costs of integrating
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 compliance 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 plans, or of changes in
Key's material agreements or understandings with third parties.
In addition, prospective purchasers should consider the following risk
factors:
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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 December 31, 1995, Key's aggregate debt was approximately $17
million. After giving effect to the Merger and the New Indebtedness, as of
December 31, 1995, Key's aggregate debt on a pro forma basis would have been
approximately $35 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. 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 borrowings 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.
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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 favorably to the Merger. An unfavorable customer response to the Merger
could have an adverse effect upon the ongoing operations of Key.
WellTech Shareholder Ownership of Key Common Stock. Upon the
consummation of the Merger, there will be 10,413,513 shares of Key Common Stock
outstanding. Of such shares, the 4,929,962 shares of Key Common Stock 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 that 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 February 26, 1996 was $6. (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--Registration Rights.")
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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. 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 that 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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<PAGE>
BUSINESS AND PROPERTIES OF KEY
General
Key is a holding company with diversified energy operations in the
Permian Basin area of West Texas and New Mexico. Key was organized in April 1977
and commenced operations in July 1978. Key currently has three wholly-owned
operating subsidiaries: Yale E. Key, Odessa Exploration and Clint Hurt. Yale E.
Key is involved in oil field services and operates primarily in the Permian
Basin area of West Texas and New Mexico, performing services for both major and
independent oil companies. Odessa Exploration, acquired in July 1993, operates
and owns an interest in various oil and gas properties in West Texas. Clint
Hurt, acquired in March 1995, is involved in drilling oil and gas wells in West
Texas.
On October 20, 1992, Key, then known as National Environmental Group,
Inc. ("NEGI") and several affiliated companies, filed a Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code (the "Prepackaged Plan").
Under the Prepackaged Plan, holders of the various debt issues, preferred
stockholders and common stockholders of NEGI and affiliates received shares of
Key Common Stock in exchange for their claims. On December 4, 1992, the
Prepackaged Plan was confirmed. The confirmation of the Prepackaged Plan
converted approximately $7.4 million in debt, approximately $700,000 in accrued
interest, 1,150,664 shares of preferred stock and 17,942,108 shares of common
stock of NEGI into approximately 4.2 million shares of Key Common Stock. In
addition, Key issued an aggregate of 970,000 shares of Key Common Stock through
a rights offering to former preferred and common shareholders for approximately
$1.8 million in cash. See Note 3 of Notes to Consolidated Financial Statements
of Key.
Recent Developments
The Merger and the Interim Operations Agreement. On November 18, 1995,
Key and WellTech entered into the Merger Agreement pursuant to which WellTech
will merge with and into Key. (See "Proposals to be Voted upon at the Key
Special Meeting--Item 1: The Merger.") Simultaneously with the execution of the
Merger Agreement, Key and WellTech entered into an interim operations agreement
(the "Interim Operations Agreement") pursuant to which WellTech has employed Key
as an interim manager of WellTech's business, property and operations. Key is
required to obtain consent of the Interim Committee of the WellTech Board of
Directors ("Interim Committee"), a committee charged with the oversight of the
Interim Operations Agreement, prior to (i) extending, terminating or entering
into any material lease, contract or a transaction not in the ordinary course of
business on behalf of WellTech, (ii) hiring or terminating executive or key
officers of WellTech, or (iii) making or committing to any loan on behalf of
WellTech. In addition, Key is required to consult regularly with the Interim
Committee concerning the business, property and operations of WellTech, provide
such reports as are requested and take no action requiring approval of the
WellTech Board of Directors under Delaware law, the WellTech Charter or the
WellTech By-Laws without first obtaining the Interim Committee's consent.
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WellTech has agreed to pay all reasonable costs and expenses incurred by Key in
connection with its management services under the Interim Operations Agreement.
If the Merger is not consummated, Key will receive a management fee of $25,000
per month for its services, payable after the Merger Agreement has been
terminated. The Interim Operations Agreement may be terminated by either party
at any time after May 31, 1996 if the Merger is not consummated, upon
commencement of any bankruptcy or insolvency proceedings or upon the termination
of the Merger Agreement provided, however that so long as any obligation of
WellTech is outstanding under the New Indebtedness, neither Key nor WellTech may
terminate the Interim Operations Agreement without the consent of the lender.
The Interim Operations Agreement will automatically terminate on the Closing
Date. In the event the Merger is not consummated, for a period of three years,
Key will be prohibited from offering employment to certain WellTech employees
and both Key and WellTech will be prohibited from disclosing certain
confidential information.
New Indebtedness. On January 19, 1996, Key and WellTech entered into
credit agreements with The CIT Group/Credit Finance, Inc. ("CIT") to refinance
substantially all of the existing indebtedness of Key (other than that of Odessa
Exploration) and WellTech (other than indebtedness to certain affiliates),
respectively. The aggregate principal amount available under such credit
arrangements to each of Key and WellTech is $17.5 million (subject to a certain
advance formula). The New Indebtedness is in the form of three-year revolving
credit or term-loan arrangements, automatically renewed for successive two-year
periods, unless terminated by either CIT or Key. After giving effect to the
repayment of all such existing debt of Key (other than that of Odessa
Exploration) and WellTech (other than indebtedness to certain affiliates) out of
the proceeds of such borrowing, Key and WellTech have available approximately
$5.6 million and $1.4 million, respectively, of borrowing capacity, depending,
in part, on the amount of their respective accounts receivable and the value of
their respective equipment. The borrowing arrangements prior to the Merger
entail separate borrowings by, on the one hand, Key, Yale E. Key and Clint Hurt,
jointly and severally, up to an aggregate of $17.5 million principal amount of
revolving credit loans less the aggregate principal amount of term loans
(currently aggregating approximately $10.1 million) and, on the other hand,
WellTech of up to an aggregate of $17.5 million principal amount of revolving
credit loans less the aggregate principal amount of term loans (currently
aggregating approximately $16.1 million) . Each of the borrowers has also,
jointly and severally, cross-guaranteed the obligations of each other borrower
and the obligations of all borrowers are cross-collateralized and
cross-defaulted. Accordingly, Key is liable for all borrowings by WellTech. In
an attempt to protect Key, should the Merger not be consummated, Key negotiated
the management and operational power and authority it has under the Interim
Operations Agreement. At the option of CIT, the loans will be immediately due
and payable if the Merger has not been consummated on or before April 30, 1996
and WellTech has failed to refinance its borrowings on or prior to July 31, 1996
or Key ceases to continue to operate WellTech under the Interim Operations
Agreement until such refinancing. Key and WellTech have agreed that so long as
any obligation of WellTech to CIT is outstanding, neither Key nor WellTech will
terminate the Interim Operations Agreement without CIT's consent. There can, of
course, be no assurance that, should the Merger not be consummated, Key will not
suffer a significant loss with respect to its guaranty of WellTech indebtedness
pursuant to these arrangements.
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<PAGE>
The loans are secured by a first lien on substantially all the assets
of Key (other than the assets of Odessa Exploration) and of WellTech (other than
the Existing Key Shares, the Existing Key Warrants and shares in Dawson owned by
WellTech). The loans bear interest at an annual rate of 1.25% in excess of the
"prime" rate of Chemical Bank, New York, New York. CIT is also entitled to
various fees, including a closing commitment fee of $100,000, interest based on
certain minimum borrowing levels, whether or not such amounts are or could be
(because of borrowing formula limitations) outstanding, and to certain
prepayment penalties including for early termination of the revolving credit
arrangements.
Acquisition of Clint Hurt Assets. In March 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 for an aggregate of
approximately $1.7 million, of which $1.0 million was paid in cash and the
balance was paid in the form of a 60-day promissory note, which was paid in full
on July 2, 1995. The acquired assets consisted principally of four oil and gas
drilling rigs and related equipment. Mr. Clint Hurt entered into a consulting
agreement and a noncompetition agreement with Key, pursuant to which neither he
nor CHA may directly or indirectly engage in providing contract drilling
services or engage in the well service business in Texas until April 1, 1998. In
connection with the consulting and non-competition agreement, Key issued 5,000
shares of Key Common Stock to Mr. Hurt.
Acquisition of WellTech West Texas. On December 10, 1993, Key and
WellTech entered into an Asset Purchase Agreement pursuant to which WellTech
sold Key all of the assets and liabilities of WellTech's West Texas region. The
assets purchased included 58 well service workover rigs, various trucks, parcels
of real estate, inventory and office furniture and equipment. The acquisition
was consummated in August 1994. Consideration for the acquisition consisted of
the issuance by Key to WellTech of 1,635,000 shares of Key Common Stock,
warrants to acquire 250,000 additional shares of Key Common Stock at $5.00 per
share and the assumption of certain current liabilities related to WellTech's
West Texas operations. Those shares and warrants are referred to elsewhere
herein as the Existing Key Stock and the Existing Key Warrants and will (except
for 205,038 shares) be surrendered to Key pursuant to the Merger. In connection
with the WellTech West Texas acquisition, WellTech was granted the right to
designate one nominee to serve on Key's Board of Directors. (See "Proposals to
be Voted upon at the Key Special Meeting--Item 3: Election of Board of
Directors.") Since December 1993, Key has operated the WellTech's West Texas
well service business.
Business
Oil Field Services. Yale E. Key performs a variety of services
involving the production and exploration of oil and natural gas, including
workovers, well maintenance, operation of hot oilers and trucking equipment and
well completions. Yale E. Key operates a variety of oil field service equipment,
including 136 workover rigs, 28 hot oil units and 12 transports. Yale E. Key
serves over 200 customers in West Texas, with its two largest customers (Parker
& Parsley and Texaco) providing approximately 18% and 10%, respectively, of
Key's total revenue during fiscal 1995, 15% and 14%, respectively, of Key's
total revenue during fiscal 1994, and 23% and 26%, respectively, of Key's total
revenue during fiscal 1993.
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<PAGE>
Workovers are performed to remedy downhole equipment failure,
reactivate a shut-in well, convert a producing well into an injection well for
enhanced recovery projects, repair casing leaks and recomplete wells from which
production has declined. Yale E. Key's equipment and crews are used to drill out
plugs and packers and to remove downhole equipment from the well bore, which is
then replaced or repaired and repositioned. Well maintenance services are
required throughout the lives of most wells to keep them producing economically.
Yale E. Key's rigs are used to remove and replace worn or broken sucker rods,
production tubing, down-hole pumps and other artificial lift equipment.
Maintenance services are usually of short duration, lasting fewer than 48 hours.
Hot oil units are used to inject heated oil and water into the production
tubing, casing and flow line to melt paraffin which solidifies and obstructs the
flow of oil, as well as to treat oil in producers' storage tanks to upgrade the
quality for sale to pipelines. Yale E. Key's crews perform routine maintenance
at the well site and its transport vehicles carry water to and from the well
site for well stimulation operations and for disposal.
When a well has been drilled, the casing has been set and it has been
determined that the well will produce oil or gas in commercial quantities, the
expensive drilling rig is moved off the well site and a more economical well
service rig is moved on the well site to perform completion services. Yale E.
Key's rig crews are responsible for rigging the derrick, operating rig
machinery, handling pipe and tools, circulating well fluids, and assisting in
various completion activities performed by other contractors.
Oil and Gas Production. Odessa Exploration is engaged in the drilling
and production of oil and natural gas in the Permian Basin of West Texas. Odessa
Exploration acquires and manages interests in producing oil and gas properties
for its own account and for drilling partnerships it sponsors. Odessa
Exploration acquires producing oil and gas properties from major and independent
producers and, subsequently, either reworks the acquired well to increase
production and/or forms drilling ventures for additional development wells.
Odessa Exploration operates oil and gas wells on behalf of over 150 working
interest owners as well as for its own account. During fiscal 1995, it acquired
approximately $1.0 million in additional oil and gas properties with estimated
proved developed and undeveloped reserves of 1,132,000 bbls (barrels) of oil and
3.2 bcf (billion cubic feet) of natural gas. As of June 30, 1995, Odessa
Exploration's proved oil and gas reserves were estimated at 1,682,000 bbls of
oil and 14 bcf of natural gas and operated and/or owned an interest in 90 wells.
Producing Wells and Acreage. The major proved producing properties of
Odessa Exploration are located primarily in the Permian Basin area of West
Texas. The following table sets forth Odessa Exploration's total gross and net
producing oil and gas wells and its total gross and net developed acreage as of
June 30, 1995. As of such date, Key did not have any undeveloped acreage.
"Gross" as it applies to wells or acreage refers to the number of wells or acres
in which a working interest is owned by Odessa Exploration. "Net" as it applies
to wells or acreage refers to the sum of the fractional working interests owned
in gross wells or gross acres.
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<PAGE>
Producing Wells
Oil Gas Developed Acreage
Gross Net Gross Net Gross Net
75 42 15 5 21,320 11,037
In addition, Odessa Exploration serves as operator of two injection wells. As
operator, Odessa Exploration receives fees from other working interest owners as
reimbursement for the general and administrative expenses attendant to the
operation of the wells.
Odessa Exploration's oil and gas properties are subject to royalty,
overriding royalty and other outstanding interests customary in the industry.
The properties are also subject to burdens such as liens incident to operating
agreements, current taxes, development obligations under oil and gas leases and
other encumbrances, easements and restrictions. Management believes that the
existence of such burdens does not materially detract from the value of its
leasehold interests. Moreover, certain of Odessa Exploration's properties are
subject to liens securing debt. See Note 5 of Notes to Consolidated Financial
Statements of Key.
Exploration and Development Activities. The following table shows gross
and net wells drilled in which Odessa Exploration had a working interest (all of
which were developed wells) during the years ended June 30, 1995 and 1994:
1995 1994
------------------ ----------------
Gross Net Gross Net
Productive 8.0 6.2 1.0 0.1
Dry - - - -
Since the beginning of the current fiscal year, Odessa Exploration has
participated in or drilled five wells on its operated properties, and it expects
the total number of such wells for the current fiscal year to be 14.
Oil and Gas Reserve Information. Estimates of Odessa Exploration's
proved oil and gas reserves as of June 30, 1995 and 1994 were prepared by Key
and reviewed by Victor J. Sirgo, P.E., an independent petroleum reservoir
engineer. All estimates were made in accordance with guidelines established by
the Commission. Proved oil and gas reserves are the estimated quantities of
crude oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic conditions, that is, prices and costs as of the date the
estimate is made. Prices utilized reflect consideration of changes in existing
prices provided by contractual arrangements if any, but not of escalations based
upon future conditions.
Proved developed oil and gas reserves are reserves that can be expected
to be recovered through existing equipment and operating methods. Proved
undeveloped oil and gas reserves are proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
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<PAGE>
relatively major expenditure is required for recompletion or secondary or
tertiary recovery. Reserves assigned to undrilled acreage are limited to those
drilling units that offset productive units reasonably certain of production
when drilled. The following table summarizes oil and gas reserve data with
respect to Odessa Exploration's proved oil and gas reserves at June 30, 1995 and
1994:
June 30,
1995 1994
Proved developed reserves
Oil (bbls) 750,604 114,908
Gas (mcf) 11,203,232 6,785,661
Proved undeveloped reserves
Oil (bbls) 931,613 -
Gas (mcf) 2,794,828 -
Management is not aware of any major discovery or other favorable or
adverse event which has occurred since July 1, 1995 and which is believed to
have caused a significant change in the estimated proved oil and gas reserves of
Odessa Exploration. The estimate of reserves has not been filed with or included
in reports to any federal agency other than the Commission. Additional
information concerning estimated proved oil and gas reserves is included in Note
15 of Notes to the Consolidated Financial Statements of Key.
Production. The following table summarizes the net oil and gas
production, average sales prices, and average production (lifting) costs per
equivalent barrel of oil for the years ended June 30, 1995 and 1994:
1995 1994
-------- -----
Oil
Production (bbls) 40,330 4,383
Average sales price per bbls $15.02 13.54
Natural Gas
Production (mcf) 770,197 552,791
Average sales price per mcf $ 1.54 $ 2.33
Production Costs
Production (lifting) costs per
equivalent barrel of oil (boe) $ 4.48 $ 5.38
Oil and Gas Drilling. Clint Hurt operates four drilling rigs which
drill for oil and natural gas for independent and major oil companies, primarily
in West Texas. Clint Hurt completed 18 wells at an average depth of 7,900 feet
during the three months ended September 30, 1995.
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Competition and Other External Factors
The need for oil field services fluctuates, in part, from the demand
for oil and natural gas. As demand for those commodities increases, service and
maintenance requirements increase. Yale E. Key competes with other local oil
field service companies as well as national service companies. Yale E. Key
believes it is the largest oil well service company in West Texas (based on
number of workover rigs and employees). Key believes that the reputation that
Yale E. Key (including its predecessors) has developed over its 48 years in oil
field service operations contributes greatly to its competitive position.
Odessa Exploration acquires various oil and gas properties by
purchasing them from independent and major oil companies and competes with other
independent and integrated oil companies for the acquisition of these
properties.
Clint Hurt competes with other local oil and gas drilling contractors,
as well as national oil and gas drilling companies. As with Yale E. Key, the
need for drilling oil and gas wells fluctuates, in part, from the demand for oil
and natural gas.
Property
Key leases approximately 1,500 square feet for its principal executive
offices in New Brunswick, New Jersey.
The following table sets forth information with respect to Yale E.
Key's operating facilities at December 31, 1995, all of which were used in the
operations of Yale E. Key and are located in Texas, including those acquired in
August of 1994 as part of the WellTech West Texas acquisition.
Approximate Ownership
Location Square Footage Interest
Lamesa 3,350 Fee
Midland 18,250 Fee
Odessa 10,000 Fee
Seminole 12,500 Fee
Big Lake 3,500 Fee
Odessa * 10,000 Fee
Snyder * 10,000 Fee
Kermit * 7,000 Fee
Forsan * 10,000 Fee
Big Lake * 8,000 Lease
Sterling City 1,400 Lease
Andrews * 5,000 Lease
- -----------
* Former WellTech locations.
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<PAGE>
All of Yale E. Key's operating facilities are metal one story combination office
and shop buildings and are considered to be in good condition. All of these
properties are encumbered by security interests in favor of certain lenders. See
Note 5 of Notes to Consolidated Financial Statements of Key.
Odessa Exploration leases approximately 3,300 square feet of office space
in Odessa, Texas.
Employees
As of December 31, 1995, Key employed approximately 827 persons (737 at
Yale E. Key, five at Odessa Exploration, 83 at Clint Hurt and three at Key).
None of Key's employees are represented by a labor union or collective
bargaining agent. Key has experienced no work stoppages associated with labor
disputes or grievances and considers its relations with its employees to be
satisfactory.
Regulation
The oil field service operations, the oil and gas production activities
and the oil and natural gas drilling of Key are subject to various local, state
and federal laws and regulations intended to protect the environment. Management
of Key believes that it is in substantial compliance with all material known
existing federal, state and local regulations as they relate to the environment.
Although Key has incurred certain costs relating to compliance with
environmental laws and regulations, such amounts were not material during the
past three fiscal years.
Management believes that Key is in substantial compliance with all known
material local, state and federal safety guidelines and regulations. In order to
comply with such safety guidelines and regulations and increase employee
awareness of on-the-job safety, Yale E. Key employs four safety officers. Yale
E. Key also has a safety training and education center which is used by it for
continued safety training and awareness.
Legal Proceedings
There are no material pending legal proceedings against Key. Key is
subject to legal proceedings and claims which arise in the ordinary course of
business, none of which, in the opinion of management, have a material impact on
Key's financial condition or results of operations.
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<PAGE>
PRICE RANGE OF KEY COMMON STOCK
The Key Common Stock is traded on the American Stock Exchange, under the
symbol "KEG." The following table sets forth for the periods indicated the high
and low closing prices of Key's Common Stock on the American Stock Exchange, as
derived from published sources.
Fiscal Quarter High Low
1996
First Quarter 5 1/2 4 7/8
Second Quarter 6 1/2 4 15/16
Third Quarter (through 6 7/8 5 7/8
February 26, 1996)
1995
First Quarter 5 1/2 5
Second Quarter 5 1/2 4 3/4
Third Quarter 4 5/8 4 1/4
Fourth Quarter 5 1/2 4 3/4
1994
First Quarter 5 1/2 5
Second Quarter 5 1/2 4 3/4
Third Quarter 5 5/8 4 7/8
Fourth Quarter 5 1/2 4 7/8
On August 30, 1995, the date prior to the public announcement of the
merger of Key and WellTech, the closing price of the Key Common Stock on the
American Stock Exchange was 4 15/16. As of February 26, 1996 there were
541 holders of record of Key Common Stock.
There were no dividends paid on the Key Common Stock during the fiscal
years ended June 30, 1994 or 1995 or since June 30, 1995. Key does not intend,
for the foreseeable future, to pay dividends on its Common Stock. The New
Indebtedness prohibits the payment of cash dividends by Key. See Note 5 of Notes
to Consolidated Financial Statements of Key.
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<PAGE>
BUSINESS AND PROPERTIES OF WELLTECH
General
WellTech provides a broad range of workover and production services for
oil and gas wells in Oklahoma, Texas, Michigan, Pennsylvania and West Virginia.
WellTech is engaged in the business of providing: (i) workover rig services,
including completion of new wells, maintenance and recompletion of existing
wells (including horizontal recompletions) and plugging and abandonment of wells
at the end of their useful lives; (ii) oil field liquid transportation, storage
and disposal services, including vacuum truck services, frac tank rental and
salt water injection; and (iii) other services, including pipeline installation
and testing, slickline wireline services, fishing and rental tool services and
general oil field roustabout services. WellTech's services are utilized by major
oil and gas companies as well as independent producers to optimize performance
of oil and gas wells. In addition to its domestic operations, WellTech provides
equipment and services in Argentina and, until November 1995, conducted certain
operations in Russia. For the ten months ended October 31, 1995, WellTech
derived approximately 65%, 9% and 26% of its revenues from its workover rig
services, liquid services and other services, respectively.
WellTech was established in 1973 as a well servicing business. It
undertook significant expansion activities principally through internal growth
and the acquisition of well servicing assets in diverse geographic areas.
Commencing in 1992, WellTech consolidated its operations in those geographic
areas where it believed it could be the dominant or a significant factor in the
well servicing business and could realize consolidation savings through
operation of a greater number of rigs with lower management and overhead costs
per rig operated. In addition to expanding its workover rig service business,
WellTech entered into complimentary businesses thereby increasing its asset base
and market share through diversification by service line. At the same time,
WellTech commenced to withdraw operations from less profitable geographic areas
where lower costs could not be realized.
WellTech believes that its ability to offer a wide range of services
provides it with a competitive advantage by allowing its customers to
consolidate with fewer vendors the procurement of workover and production
services. Customers may thereby lower their costs by streamlining production
decisions and increasing operational efficiencies. WellTech believes that no
single competitor in WellTech's primary market areas provides a range of
services as extensive as the services provided by WellTech. WellTech believes
that its strategy creates cross-marketing opportunities for its services and
appeals to a broader customer base by enhancing its position as a one-step
source for workover and production services.
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<PAGE>
Recent Developments
The Merger and the Interim Operations Agreement. On November 18, 1995,
Key and WellTech entered into the Merger Agreement pursuant to which WellTech
will merge with and into Key. (See "Proposals to be Voted upon at the Key
Special Meeting--Item 1: The Merger.") Simultaneously with the execution of the
Merger Agreement, Key and WellTech entered into the Interim Operations
Agreement. (See "Business and Properties of Key--Recent Developments--The Merger
and the Interim Operations Agreement.") In January 1996, WellTech entered into a
credit agreement with CIT. (See "Business and Properties of Key--Recent
Developments--New Indebtedness .")
Dawson WellTech. Dawson WellTech, L.C., a Texas limited liability
company, was owned 61% by Dawson and 39% by WellTech. Effective November 1,
1995, WellTech exchanged its 39% interest in Dawson WellTech, L.C. for 309,186
shares of Dawson and effective December 31, 1995 Dawson WellTech, L.C. was
merged into Dawson. WellTech has directed Dawson to distribute the Dawson stock
to the WellTech shareholders and directors prior to the Merger. In addition,
WellTech has agreed to perform consulting services to Dawson in return for 11.7%
of Dawson's consolidated pre-tax earnings. This consulting agreement will
terminate on the earlier of (i) March 31, 1996, (ii) the date Dawson closes and
funds an initial public offering of its securities, or (iii) the date upon which
Dawson shall engage in a business combination or sell substantially all of its
assets to another party.
Domestic Operations
Presently, WellTech conducts its domestic operations in two regions: the
Mid-Continent Region with approximately 110 rigs, 12 water haul trucks, and
other well servicing assets operating principally in Oklahoma and Texas
(confined to East Texas); and the Northeast Region with approximately 60 rigs,
68 water haul trucks, and other well servicing assets operating principally in
Michigan, Pennsylvania and West Virginia.
WellTech provides services pursuant to the terms and provisions of
written (approximately 60%) and verbal (approximately 40%) contracts,
specifying, in general, the equipment to be used, crew component, hourly or
daily rate, payment terms and other terms customary in the industry. During the
first three quarters of 1995, the major customers in the Mid-Continent Region
were Amoco Production Co., Exxon Co. U.S.A., Texaco Exploration and Production,
Inc., and Maxus Exploration, Inc.; and in the Northeastern Region were U.S.
Steel Mining Co., Amoco Production Co., Bethlehem Steel Corporation, and
Angerman Associates, Inc. No single customer accounted for 10% or more of
WellTech's revenues during any of its last three fiscal years. WellTech
considers its customer relations to be good.
Foreign Operations
In 1993 WellTech entered into an agreement with a foreign subsidiary of
M.D. Seis ("Seis") for the procurement and mobilization of two well servicing
rigs to operate near Kogalym, Russia, under a 700 (initially 500) well servicing
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contract between the Russian Oil Ministry and Seis. In addition, WellTech
provided supervisory and rig personnel during the term of the contract pursuant
to the provisions of a labor contract. The contract was completed in November
1995. WellTech no longer conducts operations in Russia although discussions
continue for additional opportunities in Russia.
In 1992 WellTech, with two Argentine corporate partners, formed
Servicios WellTech, S.A. ("Servicios") for the purpose of conducing well
servicing operations in Argentina. WellTech owns 63% of the stock of Servicios.
Currently, Servicios owns and operates 10 well servicing rigs in Argentina. In
addition, Servicios operates trucks to transport its oilfield equipment from one
location to another and, subject to availability, rents the trucks to other
operators to move their oilfield equipment. Servicios' principal customer is
Yacimientos Petroliferos Fiscales, the Argentine government owned and operated
oil company. Servicios believes that it provides superior equipment and services
and enjoys a high level of customer satisfaction. Servicos competes with three
drilling/workover companies with dominant market share, each with 40 to 90 rigs.
Profitability of Servicios has been adversely affected by undercapitalization
and high interest rates on funds required to expand operations.
Employees
As of January 12, 1996, WellTech employed approximately 1,125 persons
(including 250 persons employed by Servicios), consisting of 580 in the
Mid-Continent Region, 285 in the Northeast Region, 10 in the Houston, Texas
corporate office, and 250 in Argentina. Employees provided by the Northeast
Region in the State of Indiana for a certain industrial facility were provided
pursuant to a union agreement with International Union of Operating Engineers.
Efforts in late 1995 of the International Union of Operating Engineers to
organize WellTech's labor force in Countyline, Oklahoma were unsuccessful.
WellTech has experienced no work stoppages associated with labor disputes or
grievances and considers its relations with its employees to be satisfactory.
Legal Proceedings
WellTech is a party to numerous workers' compensation claims, general
and automotive liability actions and other types of lawsuits, none of which is
expected to have a material adverse effect on the financial condition or results
of operations of WellTech.
Competition and Other External Factors
The need for oil field services fluctuates, in part, from the demand for
oil and natural gas. As demand for those commodities increases, service and
maintenance requirements increase. WellTech competes with other local oil field
service companies as well as national service companies. WellTech believes that
the reputation that it has developed in oil field service operations contributes
greatly to its competitive position.
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Regulation
The oil field service operations, the oil and gas production activities
and the oil and natural gas drilling of WellTech are subject to various local,
state and federal laws and regulations intended to protect the environment.
Management of WellTech believes that it is in substantial compliance with all
material known existing federal, state and local regulations as they relate to
the environment. Although WellTech has incurred certain costs relating to
compliance with environmental laws and regulations, such amounts were not
material during the past three fiscal years.
Management believes that WellTech is in substantial compliance with all
known material local, state and federal safety guidelines and regulations.
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<PAGE>
MANAGEMENT OF KEY
The following table sets forth the names and ages of each of the executive
officers of Key and includes the positions each officer currently holds as well
as positions held for the past five years.
Name Age Positions
Francis D. John 42 President and Chief Executive Officer since September 1989
and Chief Financial Officer of Key since June 1988; Co-
Chairman of the Board of Directors of Key since March
1994; Chairman of the Board of Directors of Yale E. Key
from March 1990 to February 1995 and currently a Director
and Executive Vice President of Yale E. Key, Odessa
Exploration and Clint Hurt. Director of Aerosonics Corp.,a
company which produces components for aircraft.
C. Ron Laidley 50 President and Chief Executive Officer of Yale E. Key since
March 1995. Vice President of Yale E. Key from 1982 until
March 1995.
D. Kirk Edwards 36 Vice President of Key since July 1993, President and Chief
Executive Officer of Odessa Exploration since July 1993.
Owner and President of Odessa Exploration Inc. from 1986
to July 1993. Director of Key since July 1993.
Danny R. Evatt 37 Chief Accounting Officer and Treasurer of Key since July
1990; Treasurer, Secretary and Chief Financial Officer of
Yale E. Key since 1983. Director of Yale E. Key since 1992.
Each officer of Key holds office until the first meeting of the Board
of Directors following the annual meeting of stockholders and until his
successor has been duly elected and qualified, or until he has resigned or been
removed as provided by the Key By-Laws. No family relationship exists between
any of the above listed executive officers or between any such executive officer
and any director of Key.
Subsequent to consummation of the Merger, the management of Key is
expected to consist of the officers named above, and the following individuals
who are currently executive employees of WellTech:
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<PAGE>
Name Age Positions
Kenneth C. Hill 51 Northeast Regional President of WellTech since
August 18, 1994, and Vice President and Northeast
Regional Manager of WellTech from April 5,
1990, to August 18, 1994. Mr. Hill will become
President and Chief Executive Officer of Key's
Northeast operating subsidiary upon
consummation of the Merger.
Kenneth V. Huseman 43 Mid-Continent Regional President of WellTech
since August 18, 1994, and Vice President and
Mid-Continent Regional Manager of WellTech
from April 23, 1993, to August 18, 1994. Mr.
Huseman will become President and Chief
Executive Officer of Key's Mid-Continent
operating subsidiary upon consummation of the
Merger.
For information concerning the Directors of Key, see "Proposals to be
Voted upon at the Key Special Meeting--Item 3: Election of Board of Directors."
Executive Compensation
`
The following table sets forth the compensation, including bonuses,
paid by Key and its subsidiaries for services rendered in all capacities to Key
and its subsidiaries during each of the three fiscal years ended June 30, 1995
to the Chief Executive Officer and to each of the four most highly compensated
executive officers of Key and its subsidiaries.
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<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted
Name and Other Stock Options LTIP All Other
Principal Salary Bonus Annual Award(s) SARs Payouts Compen-
Position Year ($) ($) Compensation ($) (1) (#) ($) sation ($)
- -------------------------------- ------------- ------------ ------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Francis D. John 1995 $225,000 --- --- --- --- ---
Chief Executive 1994 215,000
Officer 1993 200,000 $25,000
C. Ron Laidley 1995 155,000 --- --- --- --- --- ---
Chief Executive 1994 155,000
Officer of Yale 1993 155,000
E. Key
Danny R. Evatt 1995 95,000 --- --- --- --- --- ---
Chief Accounting 1994 93,000
Officer 1993 93,000
D. Kirk Edwards 1995 125,000 10,000 --- --- --- --- ---
Chief Executive 1994 125,000
Officer of
Odessa
Exploration
Max Emmert III 1995 129,000(2) --- --- --- --- --- ---
1994 225,000
1993 215,000
</TABLE>
(1) Although restricted stock awards were approved by the Compensation
Committee pursuant to Key's Stock Grant Plan, none of the shares have
been issued and, upon and subject to approval of the Key 1995 Stock
Option Plan at the Key Special Meeting, the Stock Grant Plan
will be canceled. See "--Stock Grant Plan" below for information
concerning shares reserved for award thereunder.
(2) Mr. Emmert retired from his position as an executive officer of Key as
of February 1, 1995. Amount in column (c) represents salary paid to
Mr. Emmert from July 1, 1994 to January 31, 1995.
For information concerning employment agreements entered into with
Messrs. John, Laidley, and Evatt effective July 1, 1995, see "--Employment
Agreements with Executive Officers" below.
Stock Grant Plan. On September 27, 1993, a Stock Grant Plan (the "Grant
Plan") was adopted by the Board, subject to the approval of Key's stockholders,
which approval was obtained on July 25, 1994. The Grant Plan authorizes a
Compensation and Stock Grant Plan Committee of the Board (the "Committee") to
recommend to the Board the award of up to 600,000 shares of Key Common Stock to
key employees between October 15, 1993 and December 31, 2003. Under the Grant
Plan, a specified number of shares of Key Common Stock have been reserved for
grant to each of six executive officers and a specified number has been reserved
for grant to non-executive officers of Key's subsidiaries as a group. Upon and
subject to approval of the Key 1995 Stock Option Plan described below by the Key
stockholders at the Key Special Meeting, the Grant Plan will be canceled and
will be replaced in its entirety by the 1995 Stock Option Plan. See "--1995
Stock Option Plan" below.
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<PAGE>
1995 Stock Option Plan. On July 6, 1995, Key's Compensation Committee
adopted Key 1995 Stock Option Plan (the "1995 Plan") and granted certain options
under the 1995 Plan effective July 6, 1995 subject to the Board of Directors and
stockholder approval. The Board approved the 1995 Plan and the option grants on
October 5, 1995. Approval of the 1995 Plan is one of the items to be considered
at the Key Special Meeting. (See "Proposals to be Voted upon at the Key Special
Meeting--Item 4: Adoption and Approval of the Key 1995 Stock Option Plan"). Upon
and subject to approval of the 1995 Plan, the Grant Plan will be canceled and
will be replaced in its entirety by the 1995 Plan.
The 1995 Plan provides for the grant of options designed to qualify as
"incentive stock options" ("ISOs") within the meaning of Section 422 of the Code
and options not designed to qualify for such special tax treatment ("NSOs"), to
purchase up to an aggregate of 1,150,000 shares of Key Common Stock. Unless
sooner terminated, the 1995 Plan will terminate on July 1, 2005 and no options
may be granted pursuant to the 1995 Plan after June 30, 2005. The 1995 Plan will
be administered by the Committee consisting of at least three (3) directors of
Key, each of whom is, to the extent so required, both a "disinterested person"
within the meaning of Rule 16b-3 of the Exchange Act and an "outside director"
within the meaning of Section 162(b) of the Code. The Committee currently
consists of Messrs. Greenfield, Manly and Wolkowitz.
Subject to approval by Key stockholders, options to purchase the
respective number of shares of Key Common Stock shown below were granted,
effective July 6, 1995, to executive officers and other key employees of Key
under the 1995 Plan:
Optionee Number of Shares
Francis D. John 500,000
C. Ron Laidley 125,000
D. Kirk Edwards 100,000
Danny Evatt 50,000
Other key employees 175,000
-------
Total 950,000
All of such options are exercisable at $5.00 per share, the closing
price of Key Common Stock on July 6, 1995, the date of the grant, and, with the
exception of 150,000 options granted to Mr. John, will generally vest in four
annual installments, with the first installment to vest effective July 6, 1995,
subject to acceleration of vesting upon the occurrence of certain events. Upon
approval of the 1995 Plan by the stockholders, compensation expense associated
with these options will be recorded over the vesting period beginning in fiscal
1996. Compensation expense to be recognized over such period will be calculated
based on the value of the options at the date 1995 Plan is approved by the
shareholders. Options to purchase 150,000 shares granted to Mr. John will vest
on the first date (occurring on or after July 1, 1995 but prior to July 1, 1999)
on which the fair market value of Key Common Stock equals at least $9.50 per
share. Compensation expense will be measured as the value of the options on the
first date on which vesting becomes probable. (See "Proposals to be Voted upon
at the Key Special Meeting--Item 4: Adoption and Approval of the Key 1995 Stock
Option Plan.")
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<PAGE>
Outside Directors Stock Option Plan. On July 6, 1995, the Compensation
Committee adopted, subject to Board of Directors and stockholder approval, a
stock option plan for its outside directors (the "Outside Directors Plan") which
provides for the grant of options to purchase a total of 300,000 shares of Key
Common Stock to the outside directors of Key. The Board approved the Outside
Directors Plan on October 5, 1995. Under the Outside Directors Plan, each
outside director who was a member of the Executive Committee on July 1, 1995 and
remains an Outside Director at the time of stockholder approval of the Outside
Directors Plan will automatically receive an option to purchase 50,000 shares on
July 6, 1995 and an option to purchase 25,000 shares on July 1, 1996; each
outside director who was not a member of the Executive Committee on July 1, 1995
and remains an Outside Director at the time of stockholder approval of the
Outside Directors Plan will automatically receive an option to purchase 25,000
shares effective July 5, 1995 and an option to purchase 25,000 shares effective
July 1, 1996; and each outside director who first becomes an outside director
after July 1, 1995, but prior to July 1, 1996, will automatically receive an
option purchase 50,000 shares on July 1, 1996. The exercise price of each option
will be the fair market value of Key Common Stock on the date of the grant.
Compensation expense relative to such options will be measured in a manner
similar to options issued under the 1995 Stock Option Plan. The expenses, if
any, will be recognized over the two-year period ended June 30, 1997. The
Outside Directors Plan is one of the items to be considered at the Key Special
Meeting. (See "Proposals to be Voted upon at the Key Special Meeting--Item 5:
Adoption and Approval of the Outside Directors Stock Option Plan.")
Yale E. Key Plan. Yale E. Key maintains a 401-(k) Plan which covers
substantially all of the employees of Yale E. Key. Key made a contribution to
the 401-(k) Plan in fiscal 1995 in the amount of $20,000, but did not make a
contribution in fiscal 1994 or 1993.
Employment Agreements with Executive Officers. Until July 1, 1995, Mr.
John was a party to an employment letter agreement (the "Letter Agreement") with
Key which provided that Mr. John would receive $225,000 in salary per year and
would also be eligible to earn a cash bonus, Common Stock grant or options based
on his individual and Key's performance. In addition, if Mr. John were
terminated, the Letter Agreement provided that he would receive severance
payments in an amount of up to approximately $244,000 and benefits, comprised of
life insurance, health insurance and use of a car, for up to 13 months after the
date of termination.
Effective as of July 1, 1995, Key entered into a new employment
agreement with Mr. John which provides that Mr. John will serve as President,
Chief Executive Officer and a Director of Key for a three year term commencing
July 1, 1995 and continuing until June 30, 1998, and thereafter the term will be
automatically extended for successive one year terms unless terminated no later
than 30 days prior to the commencement of an extension term. Under the
agreement, Mr. John will receive a base compensation of $325,000 per year and
will be eligible for annual incentive compensation of up to 30% of base
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<PAGE>
compensation contingent upon Key's achievement of goals to be set forth in a
strategic plan to be developed by the Executive Committee. Base compensation
will be reviewed annually and may be increased (but not decreased) by the Board
of Directors in its discretion. Pursuant to the agreement, upon and subject to
completion by Key of a significant merger or other major corporate transaction
in fiscal 1996 or 1997, Mr. John will also receive a bonus of $250,000 payable
in four equal installments, commencing on the date of completion of the merger
or other transaction and thereafter at equal intervals determined so that the
final installment is paid on January 1, 1998. Payments made after July 1, 1995
will bear interest at 6%. The determination of when a merger is "significant" or
other corporate transaction "major", so as to entitle Mr. John to the bonus,
will be made by the Board of Directors. The Board has determined that the Merger
is a significant merger and, accordingly, Mr. John will be entitled to a bonus
as described above. The agreement also provides for the grant of options to Mr.
John described above under "1995 Stock Option Plan." If during the term of the
agreement Mr. John is terminated by Key for any reason other than cause, or if
he terminates his employment for a good reason or following a change of control,
he will receive severance compensation equal to three times his base
compensation in effect at the time of termination, payable in 36 equal monthly
installments, provided, however, that if termination results from a change of
control, severance compensation will be payable in a lump sum on the date of
termination. Mr. John is also subject to restrictions on competition during the
term of the agreement and, with certain exceptions, the severance period. Mr.
John has waived his rights with respect to a change of control resulting from
the Merger with WellTech.
Key has also entered into employment agreements as of July 1, 1995 with
Messrs. Laidley and Evatt. Mr. Laidley's agreement provides that he will serve
as President of Yale E Key for a three year term commencing July 1, 1995 and
thereafter for successive one year terms unless terminated 30 days prior to the
commencement of an extension term, receive base compensation of $192,000 per
year, participate in an incentive compensation plan providing for cash bonuses
up to 50% of base compensation, and receive stock options under 1995 Stock
Option Plan. Mr. Evatt's agreement provides that he will serve as Key's Chief
Accounting Officer and Treasurer for a term identical to the term in Mr.
Laidley's agreement, receive base compensation of $105,000 per year, participate
in an incentive compensation plan, providing for cash bonuses up to 30% of base
compensation, and receive stock options under 1995 Plan.
In connection with the acquisition of Odessa Exploration, Key entered
into a three year employment agreement with D. Kirk Edwards. The agreement
provides for an annual salary of $125,000 and a bonus contingent upon Key's
attainment of certain earnings criteria from certain wells. The amount of such
bonus for fiscal 1995 and fiscal 1994 is reflected in the compensation table
above.
Effective February 1, 1995, Max Emmert III retired as a Director and
Vice President of Key and as President and Chief Executive Officer of Yale E.
Key. During the three year period commencing February 1, 1995, Mr. Emmert will
receive $112,500 per year, reimbursement of reasonable automobile expenses and
health and life insurance and will serve as a consultant and Chairman of the
Board of Directors of Yale E. Key. Mr. Emmert has also agreed that for a five
year period, commencing February 1, 1995, he will not directly or indirectly
compete with Key or its subsidiaries.
Effective as of and subject to consummation of the Merger, Key and each
of Messrs. Hill and Huseman have agreed to enter into employment agreements. The
employment agreements are expected to be for three years and to provide for base
compensation of $180,000 per year, participation in an incentive compensation
plan providing for cash bonuses up to 50% of base compensation and participation
in Key's 1995 Stock Option Plan. Mr. Hill will serve as President and Chief
Executive Officer of the Key subsidiary which will operate WellTech's NorthEast
operations subsequent to the Merger, and Mr. Huseman will serve as President and
Chief Executive Officer of the Key subsidiary which will operate WellTech's
Mid-Continent operations subsequent to the Merger.
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<PAGE>
Other Compensation. Key has no other deferred compensation, pension or
retirement plans in which executive officers participate.
Compensation Committee Interlocks and Insider Participation. The
following persons served as members of the Compensation and Stock Grant
Committee of the Board of Directors (the "Compensation Committee") during the
year ended June 30, 1995: Van Greenfield, William Manly, and Morton Wolkowitz.
None of the members of the Compensation Committee were employees of Key.
Compensation Committee Report. The Compensation Committee is
responsible for establishing Key's compensation philosophy and policies, setting
the terms of and administering the Key 1995 Stock Option Plan and other stock
option or stock grant plans which may from time to time be adopted by Key,
reviewing and approving employment contracts and salary recommendations for
executive officers of Key and setting the compensation for the Chief Executive
Officer of Key. Key's overall compensation philosophy is to align the financial
interest of Key's management with those of its stockholders, taking into account
Key's expectations for growth and profitability, the necessity to attract and
retain the best possible executive talent and to reward its executives
commensurate with their ability to enhance stockholder value. Accordingly,
employment agreements with the executive officers approved by the Compensation
Committee provide for compensation consisting of base salary, participation in
an incentive compensation plan based upon performance and stock options. The
Compensation Committee's decision to recommend termination of Key's Stock Grant
Plan and adoption of the Key 1995 Stock Option Plan was taken, in part, to align
more closely the financial interests of executive officers and key employees
with those of Key's stockholders. The Compensation Committee believes that
providing executives with opportunities to acquire significant stakes in the
growth and prosperity of Key through grants of stock options will both enable
Key to attract and retain executives with the outstanding managerial abilities
essential to Key's success, motivate these executives to perform to their full
potential and enhance stockholder value.
In approving base and incentive compensation levels for executive
officers, the Compensation Committee has considered the actual results of
operations of Key compared with Key's internal projections and target levels for
revenues, income before taxes and extraordinary items, net income and earnings
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<PAGE>
per share. The Compensation Committee determined that in each of the three years
ended June 30, 1995, Key exceeded its internal projections and target levels.
During the three year period, salary increases and bonuses had been conservative
and modest compared with Key's performance, in large part due to the
Compensation Committee's and the Board of Directors' cautious and conservative
approach following Key's successful reorganization in December 1992. In lieu of
bonuses for the fiscal year ended 1995, the Compensation Committee elected to
approve the employment agreements with executive officers which are described
elsewhere in this Proxy Statement-Prospectus. These employment agreements
provide for significant bonuses in future years based upon an incentive plan
adopted by Key. Bonus awards under the incentive plan will be based upon both
Key or Key's respective operating subsidiary achieving certain earnings goals
and the attainment of individual qualitative goals relating to the employee's
position and responsibilities with Key. The Board of Directors determines Key's
overall earnings goals and, with the review and approval of the Compensation
Committee, the Chief Executive Officer sets the earnings and individual
qualitative goals for Key's operating subsidiaries.
The employment agreements also provide for option grants under the 1995
Stock Option Plan. In determining stock option grants for executive employees
under the 1995 Stock Option Plan, the Compensation Committee considered, among
other things, the value of the shares reserved for grant to such employees under
the Grant Plan, rights to which are being surrendered in connection with
adoption of the 1995 Stock Option Plan and the employee's position with and
contributions to Key, performance, salary and the price of the Key Common Stock.
Fiscal year 1995 compensation for Mr. John as Chief Executive Officer
and Chief Financial Officer consisted of his base salary of $250,000 under the
now superseded Employment Letter. In lieu of bonus compensation for fiscal 1995
and in consideration of the other factors described herein, the Compensation
Committee structured the new employment agreement with Mr. John. Compensation
under and the other terms and conditions of Mr. John's new employment agreement
were determined after consideration and analysis of, among other things, the
following factors: Key's three year performance history and the relationship of
Key's performance to internal projections and targets, all of which were
exceeded; the modest salary increases and conservative bonuses paid to the Chief
Executive Officer during the three year period; average cash and other
compensation and equity positions of chief executive officers of selected
companies deemed by the Compensation Committee to be comparable; the Chief
Executive Officer's central role in Key's successful reorganization and
operating results since the reorganization; Key's deferral of payment of
emergence or success bonuses to its Chief Executive Officer; the fact that the
Chief Executive Officer has also performed the functions of the Chief Financial
Officer thereby reducing corporate overhead; the fact that the Chief Executive
Officer has identified, negotiated and structured several beneficial
acquisitions and financings without payment of investment banking or finders'
fees or receipt of bonuses with respect thereto; and Key's determination to
shift from a stock grant to a stock option plan, including certain options
linked directly to increases in the price of Key's Common Stock, and the Chief
Executive Officer's agreement to forego designated and committed awards under
the Stock Grant Plan.
Since Key's reorganization in December 1992, total shareholder value
has increased from a negative net worth of $5.6 million at November 30, 1992 to
a positive net worth of $20.8 million at September 30, 1995, an increase in net
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<PAGE>
worth of over $26 million. In addition to leading Key through its critical
post-reorganization period, Mr. John strengthened Key's position through
strategic acquisitions, including the acquisitions of Odessa Exploration, the
WellTech West Texas assets and Clint Hurt, and by negotiating and structuring
financings for Key. The Merger with WellTech now in progress is an important
step in positioning Key as a leader in the well servicing business. Corporate
overhead has remained low and staffing patterns lean. In these and other
initiatives, Mr. John has enhanced Key's ability to compete effectively and has
positioned Key to participate in future growth in the industry and to enhance
stockholder value.
The Compensation Committee believes that its current policies have been
and will continue to be successful in aligning the financial interests of
executive officers with those of Key's stockholders and Key's performance.
Nevertheless, the Compensation Committee intends to continue to review whether
and how to modify its policies to further link executive compensation with both
individual and Company performance.
Van Greenfield
William Manly
Morton Wolkowitz
Shareholder Return Performance Presentation. Set forth below is a chart
comparing the yearly change in Key's Common Stock against the S&P 500 Index and
the SCI Production/Well Service Group Index ("Peer Group") provided by Simmons
for the last three years.
1992 1993 1994 1995
---- ---- ---- ----
Key 100 200.0 171.1 231.1
S&P 500 100 110.1 111.5 153.4
Peer Group 100 133.9 104.3 133.0
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF KEY
On August 5, 1993, Key completed the acquisition of Odessa Exploration,
which was effective as of July 1, 1993, in consideration of the issuance of
150,000 shares of Key Common Stock to D. Kirk Edwards, the former owner and the
now current President and Chief Executive Officer of Odessa Exploration, and the
assumption of approximately $1.8 million in bank debt. Key has guaranteed all of
the assumed bank debt. In connection with the acquisition, Key granted Mr.
Edwards a percentage reversionary working interest in five deep gas wells
located in west Texas upon repayment of approximately $1.6 million of the
assumed bank debt from Key's earnings from the five wells. The percentage
reversionary working interest decreases based on the date of repayment of the
assumed bank debt and ranges from 20% of the earnings from the five wells if
repayment occurs on or prior to July 7, 1995, to 5% of the earnings from the
five wells if repayment occurs after July 7, 1996.
Key leases automotive equipment from an independent third party, which
purchases the equipment from an automobile dealership in which Mr. Emmert, a
former officer and director of Key, has a majority interest. The net proceeds to
the automotive dealership totaled $399,000, $1,058,000, and $713,000 for fiscal
1995, fiscal 1994 and the twelve months ended June 30, 1993, respectively. In
the opinion of the Board of Directors of Key, the purchases of automotive
equipment were on terms at least as favorable to Key as could have been obtained
from a third party. This opinion is based on information provided by a third
party leasing company, that is not affiliated with the officer or Key, to the
Board regarding purchase prices and equipment lease rentals offered by third
parties and the conclusion of the Board that the leases of automotive equipment
were as favorable as leases of automotive equipment from third party leasing
companies, who did not make purchases from Mr. Emmert's automobile dealership.
Key paid $55,000 and $90,000 for fiscal 1994 and the twelve months
ended June 30, 1993, respectively, for oil field related services and equipment
to two oil field related companies in which Mr. Laidley and Mr. Emmert have an
interest. In the opinion of the Board of Directors of Key, based on its review
of competitive bids, these transactions were on terms at least as favorable to
Key as could have been obtained from a third party.
In March of 1995, Odessa Exploration entered into a credit agreement
with Norwest Bank Texas, Midland, N.A. ("Norwest"). As part of this transaction,
seven individuals, including Messrs. Wolkowitz, Emmert, Laidley, Edwards and
John, as attorney in fact for one of his children, pledged approximately $2.7
million in collateral to secure Odessa Exploration's credit facility. As
compensation for such pledge, Key paid these individuals a one-time fee equal to
1% of the collateral each individual pledged. Key also agreed to pay these
individuals a monthly fee equal to 3% per annum of the collateral pledge. The
aggregate fees paid to such seven individuals during 1995 were $72,250. Key's
Board of Directors believes that these fees were on terms at least as favorable
to Odessa Exploration as could have been obtained from a third party. As of
December 31, 1995, Norwest waived the pledge of collateral and released the
collateral to the seven individuals who had pledged it.
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<PAGE>
SELECTED FINANCIAL DATA OF KEY
The following table sets forth the selected consolidated financial data
of Key for the five years ended June 30, 1995 and for the six months ended
December 31, 1995 and 1994. This data should be read in conjunction with Key's
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Results of Operations and Financial Condition of Key", which
follows.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal
Six Months Year Year Seven Months Five Months Year Year
Ended Ended Ended Ended Ended Ended Ended
December 31, June 30, June 30, June 30, Nov. 30, June 30, June 30,
1995 1994 1995 1994 1993 1992(3) 1992(3) 1991(3)
(unaudited)
(in thousands except per share data)
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 24,792 $ 21,962 $ 44,689 $ 34,621 $ 14,256 $ 10,433 $ 21,535 $ 24,223
Income from continuing operations
before reorganization items, income
taxes and extraordinary item 2,224 1,487 3,328 2,295 1,124 400 83 1,716
Income from continuing operations
before extraordinary item 1,494 1,011 2,178 1,345 711 2,118 557 1,011
Income (loss) before
extraordinary item 1,494 1,011 2,178 1,345 711 2,118 (345) (5,216)
Net income (loss) 1,494 1,011 2,178 1,345 711 4,986 (345) (5,186)
Income (loss) applicable to common
shareholders 1,494 1,011 2,178 1,345 711 4,986 (596) (5,571)
Income (loss) per common share:
Primary:
Income from continuing operations
before reorganization items,
income taxes and
extraordinary item $ 0.32 $ 0.23 $ 0.50 $ 0.44 $ 0.21 $ 0.02 $ 0.02 $ 0.05
Income from continuing
operations before
extraordinary item $ 0.22 $ 0.16 $ 0.33 0.26 0.21 $ 0.12 $ 0.02 0.05
Income (loss) before
extraordinary 0.22 0.16 0.33 0.26 0.14 0.12 (0.04) (0.44)
Net income (loss) 0.22 0.16 0.33 0.26 0.14 0.28 (0.04) (0.44)
Assuming full dilution:
Income from continuing operations
before reorganization items,
income taxes and
extraordinary item $ 0.32 $ 0.23 $ 0.50 $ 0.43 $ 0.21 $ 0.00 $ 0.01 $ 0.02
Income from continuing
operations before
extraordinary item $ 0.22 $ 0.16 $ 0.33 0.25 $.21 0$01 $.01 0.02
Income (loss) before
extraordinary 0.22 0.16 0.33 0.25 0.14 0.01 (0.02) (0.14)
Net income (loss) 0.22 0.16 0.33 0.25 0.14 0.03 (0.02) (0.14)
Average common shares outstanding:
Primary 6,914 6,500 6,647 5,274 5,124 17,942 14,717 12,684
Assuming full dilution 6,914 6,500 6,647 5,288 5,138 176,508 38,339 40,720
Common shares outstanding
at period end 6,914 6,914 6,914 5,274 5,124 17,942 17,942 14,717
Market price per common share
at period end $ 6.38 $ 4.63 $ 5.06 4.67 3.67 * $ 0.06 0.19
Cash dividends paid on
common shares $ - $ - $ - $ - $ - $ - $ - -
</TABLE>
(continued)
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal
Six Months Year Year Seven Months Five Months Year Year
Ended Ended Ended Ended Ended Ended Ended
December 31, June 30, June 30, June 30, Nov. 30, June 30, June 30,
1995 1994 1995 1994 1993 1992(3) 1992(3) 1991(3)
(unaudited)
(in thousands except per share data)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property and equipment, net $ 34,392 $ 28,415 $ 31,942 $ 17,159 $ 9,688 * $ 7,417 $ 7,079
Total assets 47,511 39,379 45,243 28,095 15,906 * 12,239 11,829
Long-term debt 15,237 12,837 13,700 9,497 4,396 * 4,483 3,939
Liabilities subject to compromise - - - - - * 7,398 7,398
Preferred stock - - - - - * 115 115
Stockholders' equity (deficit) 21,605 18,861 20,111 9,263 7,280 * (4,938) (4,287)
Book value per common share $ 3.12 $ 2.73 $ 2.91 $ 1.76 $ 1.42 * $ (0.26) (0.27)
* - Not applicable due to Key's
1992 Reorganization Plan.
</TABLE>
* - Not applicable due to Key's 1992
Reorganization Plan.
(1) Earnings per common share for the five months ended November 30, 1992
and prior period, reflect the previous capital structure of Key Energy
Group, Inc. (previously "National Environmental Group, Inc.") prior to
the 1992 Reorganization Plan and are not comparable to subsequent
periods.
See Note 3 to Key's Consolidated Financial Statements for the years
ended June 30, 1995 and 1994 and for the seven months ended June 30,
1993 and five months ended November 20, 1992.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF KEY
The following discussion provides information to assist in the
understanding of Key's financial condition and results of operations. It should
be read in conjunction with the consolidated financial statements and the notes
thereto of Key appearing elsewhere herein.
Six Months Ended December 31, 1995 Compared to Six Months Ended
December 31, 1994
Operating results for the six months ended December 31, 1995 include
Key's oil field well service operations conducted by Yale E. Key, its oil and
natural gas exploration and production operations conducted by Odessa
Exploration, and oil and natural gas well contract drilling conducted by Clint
Hurt.
Historically, fluctuations in oilfield well service operations 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 its results of operations and financial condition.
Results of Operations
Key. Revenues 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 on April 1,
1995, whose operations were not included in the prior year's quarterly results.
The improvement in quarterly net income is partially attributable to the
inclusion of Clint Hurt, but is also a result of an increase in net income for
Odessa Exploration and a decrease in total consolidated Key costs and expenses
as a percent of total revenues.
Yale E. Key. Oilfield service revenue declined 8% from $20,923,000 for
the prior six months to $19,148,000 for the current quarter. The decline was
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 period. However, the gross margin increased
from 22% to 26% of revenues for the current period due to lower expenses and
costs and to the continued diversification of services into higher margin
business segments such as oilfield frac tanks, oilfield fishing tools and
trucking operations.
Odessa Exploration. Revenues from oil and gas activities increased 60%
from $1,077,000 in the prior period to $1,727,000 for the 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 drilled oil and natural gas wells began production during the 1996
period.
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<PAGE>
Of the total of $1,727,000 in 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. Clint Hurt was acquired in March 1995 . Comparable numbers
for the prior quarter are, therefore, not available.
Depreciation, Depletion and Amortization
Depreciation , depletion and amortization expense increased 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 was primarily due to oilfield
service depreciation expense, which resulted from increased capital expenditure
depreciation for the current period compared to the prior period. In addition,
depletion expense, generated by Odessa Exploration, increased for the current
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
was primarily the result of acquisitions and the addition of certain oil and gas
properties by Odessa Exploration .
General and Administrative Expenses
General and administrative expenses include those of Key as well as
Yale E. Key, Odessa Exploration and Clint Hurt. These expenses increased 31% to
$2,390,000 during the six months ended December 31, 1995 as compared to
$1,822,000 for the three months ended September 30, 1994. The increase was
primarily attributed to the acquisition and subsequent inclusion of Clint Hurt'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 $1,487,000 for
the comparable quarter in 1994. The increase in net income before income taxes
was primarily due to the addition of Clint Hurt and increased oil and gas
revenues. Net income for the six months ended December 31, 1995 was $1,494,000,
an increase of 48% from $1,011,000 for the six months ended December 31, 1994.
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<PAGE>
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 was attributable primarily to a smaller increase in
accounts payable and accrued expenses and higher net income and depreciation
expense compared to the same period last year.
Net cash used in investing activities increased from $3,117,000 for the
six months ended December 31, 1994 to $4,244,000 for the current period. The
increase was 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 decreased to $878,000 for the
six months ended December 31, 1995 as compared to $2,790,000 for the comparable
period in 1994. The decrease was primarily the result of increased principal
payments made during the current period compared to the prior period, and a
decrease in proceeds from long-term debt during the current period. Such
proceeds were primarily used for the oil and natural gas drilling program
conducted by Odessa Exploration.
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994
Results of Operations
Results of operations for the fiscal years ended June 30, 1994 and 1995
include Key's oil field well service operations, its oil and gas operations and
its oil and gas drilling operations. Comparative results during the period were
effected to a significant extent by the several acquisitions made by during the
period as follows:
o In March 1995, Key acquired from Clint Hurt & Associates ("CHA") all of
CHA's assets in West Texas, which consisted principally of four oil and
gas drilling rigs and related equipment. As a result of this
acquisition, Key entered into the business of drilling oil and natural
gas wells for independent and major oil companies primarily in the West
Texas region.
o In August 1994, Key consummated the acquisition of substantially all of
WellTech's assets used in its oil and gas well servicing business in
West Texas. Prior to consummation of the acquisition, in December
1993, Key entered into an interim operating agreement under which it
operated the West Texas division of WellTech.
o In August 1993, Key acquired Odessa Exploration and, as a consequence,
commenced operation of oil and natural gas wells and exploration for
oil and natural gas in the Permian Basin area of West Texas.
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Operating Income
Fiscal 1995 revenues of $44,689,000 increased $10,068,000 or 29% over
fiscal 1994 revenues of $34,621,000. Fiscal 1995 revenues increased due to the
acquisition of oil and gas producing properties by Odessa Exploration, the
operation of the assets of WellTech West Texas (which included twelve months of
fiscal 1995 and seven months of fiscal 1994), and the additional revenues from
Clint Hurt (which was acquired in March 1995). In addition, Key continued to
expand its services offering oil well fishing tools, blow-out preventers and oil
well frac tanks.
Fiscal 1995 costs and expenses of $41,361,000 increased $9,035,000 or
28% over fiscal 1994 costs and expenses of $32,326,000. Fiscal 1995 costs and
expenses increased primarily due to the operations of WellTech West Texas and
the acquisition of Clint Hurt as well as increased lease operating costs due to
acquisitions of oil and gas producing properties by Odessa Exploration.
Income before income taxes was $3,328,000 for fiscal 1995, which was a
45% increase from $2,295,000 in fiscal 1994. The increase in income before
income taxes was due to the increase in revenues for the current fiscal year,
the acquisition by Odessa Exploration of producing oil and gas properties, the
operations of WellTech West Texas and the acquisition of Clint Hurt.
Interest Expense
Interest expense increased from $830,000 during fiscal 1994 to
$1,478,000 during fiscal 1995, primarily as a result of borrowings for the
acquisition and drilling of oil and gas producing properties by Odessa
Exploration and the acquisition of Clint Hurt.
General and Administrative Expenses
General and administrative expenses increased 23% or $812,000 to
$4,352,000 during fiscal 1995 from $3,540,000 during fiscal 1994, primarily due
to increased expenses of Odessa Exploration and the acquisition of Clint Hurt
and WellTech West Texas. However, as a percent of revenues, general and
administrative expenses decreased from 10.2% of revenues during fiscal 1994 to
9.7% of revenues during fiscal 1995.
Depreciation and Depletion Expense
Depreciation and depletion expense increased 100% to $2,738,000 in
fiscal 1995 from $1,371,000 in fiscal 1994 due mainly to the additional
depreciation expense associated with the acquisition of the WellTech West Texas
oil field service equipment and subsequent capital expenditures on such
equipment.
Income Taxes
Income tax expense of $1,150,000 for fiscal 1995 increased from
$950,000 in income tax expense for fiscal 1994. The increase in income taxes was
primarily due to the increase in operating income. However, Key does not expect
to be required to remit a significant amount of the $1,150,000 in federal income
taxes in cash during fiscal 1996, because of the availability of net operating
loss carry forwards.
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Net Income
Net income for fiscal 1995 was $2,178,000 compared to $1,345,000 for
fiscal 1994, a 62% increase, as a consequence of the foregoing factors.
Cash Flow
Net cash provided by operating activities increased 77% or $1,416,000,
from $1,842,000 during the 1994 fiscal year to $3,258,000 for the 1995 fiscal
period. The increase was attributable primarily to an increase in net income.
Net cash used in investing activities increased 28% from $5,608,000 for
fiscal 1994 to $7,154,000 for fiscal 1995. The increase was primarily the result
of increased capital expenditures for oil and gas properties and costs
associated with the acquisition of Clint Hurt. This increase was partially
offset by a decrease in oil field service capital expenditures. The capital
expenditures for the oil field service operations during fiscal 1994 were
primarily the result of the improvements necessary for the WellTech West Texas
equipment.
Net cash provided by financing activities was $3,998,000 for the 1995
fiscal year as compared to $4,316,000 for fiscal 1994. The decrease was
primarily the result of increased principal payments during fiscal 1995. This
increase in principal payments was somewhat off-set by an increase in proceeds
from long-term debt during fiscal 1995 as the result of the financing of the
improvement costs to the equipment of the West Texas operations of WellTech, the
purchase of oil and gas properties by Odessa Exploration and the acquisition of
Clint Hurt.
Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30, 1993
Results of operations for the fiscal year ended June 30, 1994 include
Key's oil field well service operations and its oil and gas operations. Results
of operations for the five months ended November 30, 1992 (prior to emergence
from bankruptcy) and the seven months ended June 30, 1993 have been combined for
fiscal 1993 for comparison to fiscal 1994.
Operating Income
Fiscal 1994 revenues of $34,621,000 increased $9,932,000 or 40% over
fiscal 1993 revenues of $24,689,000 due to the acquisition of Odessa Exploration
and the operation of the assets of WellTech West Texas. In addition, Yale E. Key
expanded its services to offer oil well fishing tools, blow-out preventors and
oil well frac tanks.
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Fiscal 1994 costs and expenses increased $9,161,000 or 40% over fiscal
1993 costs and expenses of $23,165,000 due to the acquisition of Odessa
Exploration and the West Texas operations of WellTech as well as start-up costs
for the several new services offered by Yale E. Key.
Income before reorganization items, income taxes and extraordinary
items was $2,295,000 for the year ended June 30, 1994, which was an increase of
51% from $1,524,000 in fiscal 1993. The increase in income before reorganization
items, income taxes and extraordinary items was due to the increase in gross
revenues for 1994 fiscal and the acquisition of Odessa Exploration and the
operations of WellTech West Texas.
Net income for fiscal 1994 was $1,345,000, a 21% increase from
$1,111,000 for fiscal 1993, before an adjustment of $4,586,000 related to the
1992 reorganization plan, pursuant to which Key emerged from bankruptcy (the
"1992 Reorganization Plan").
Interest Expense
Interest expense increased 12% from $740,000 during fiscal 1993 to
$830,000 during fiscal 1994, primarily as a result of the acquisition of Odessa
Exploration. The increase in interest expense was partially offset by a decrease
in interest expense for the seven months ended June 30, 1993 as a result of the
successful consummation of the 1992 Reorganization Plan.
General and Administrative Expenses
General and administrative expenses increased $836,000 or 31% to
$3,540,000 during fiscal 1994 from $2,704,000 during fiscal 1993, primarily due
to the acquisition of Odessa Exploration and the West Texas operations of
WellTech. However, as a percent of revenues, general and administrative expenses
decreased from 11% of revenues during fiscal 1993 to 10% of revenues during
fiscal 1994.
Depreciation and Depletion Expense
Depreciation and depletion expense increased to $1,371,000 in fiscal
1994 from $911,000 in fiscal 1993 due mainly to the acquisition of Odessa
Exploration which contributed $386,000 in depletion expense for fiscal 1994. The
increase was partially offset by a decrease in depreciation expense for the
seven months ended June 30, 1993 as the result of Key's adoption of "fresh start
reporting" upon emergence from bankruptcy. See Note 3 of Notes to Consolidated
Financial Statements of Key.
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Income Taxes
Income tax expenses of $950,000 for fiscal 1994 increased from $413,000
in income tax expense for fiscal 1993. The increase in income tax expense was
due to the increase in income before extraordinary items. Because of Key's
adoption of "fresh-start reporting," it is required to report any utilization of
net operating loss carryforwards arising prior to the 1992 Reorganization as an
increase in stockholders' equity rather than as a credit to income tax expense.
(See Note 3 of Notes to Consolidated Financial Statements of Key.)
Extraordinary Item
During fiscal 1993, Key recorded an extraordinary gain on discharge of
indebtedness of $2,868,000 in connection with the 1992 Reorganization Plan. See
Note 3 of Notes to Consolidated Financial Statements of Key.
Net Income
Net income for fiscal 1994 was $1,345,000, a 21% increase from
$1,111,000 for fiscal 1993, before an adjustment of $4,586,000 related to the
1992 Reorganization Plan.
Cash Flow
Net cash provided by operating activities increased $1,524,000 from
$318,000 during the 1994 fiscal year to $1,842,000 for the 1993 period. The
increase was attributable primarily to an increase in net income.
Net cash used in investing activities increased from $1,821,000 for the
1993 period to $5,608,000 for fiscal 1994. The increase was primarily the result
of increased capital expenditures for the oil well service operations during
1994 and $850,000 for expenditures for oil gas properties. Increased oil well
service capital expenditures was primarily the result of improvements necessary
for the WellTech West Texas equipment.
Net cash provided by financing activities was $4,316,000 for fiscal
1994 as compared to $1,918,000 for fiscal 1993. The increase was primarily the
result of the proceeds from long-term debt during fiscal 1994 primarily as a
result of the financing of the improvement costs to the equipment of the West
Texas operations of WellTech and to finance the purchase of oil and gas
properties by Odessa Exploration.
Liquidity and Capital Resources
At December 31, 1995, Key had $955,000 in cash and restricted cash.
Yale E. Key has projected $2.5 million for oil field service capital
expenditures for fiscal 1996 as compared to approximately $2.8 million for
fiscal 1995. Capital expenditures are expected to be primarily capitalized
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improvement costs to existing equipment and machinery. Capital expenditures are
expected to decrease from fiscal 1995 levels due to less capital improvements
for the WellTech West Texas operations acquired during fiscal 1995. Financing of
capital expenditures is expected to come from the operating cash flows of Yale
E. Key. Working capital requirements for WellTech West Texas were met through
the additional cash flows generated from the additional equipment, the acquired
WellTech West Texas accounts receivable and the additional borrowings. Capital
expenditures were approximately $4.4 million in fiscal 1994.
Odessa Exploration is forecasting approximately $3.0 million in oil and
gas property acquisitions for fiscal 1996 compared to $2.8 million during fiscal
1995, and $6.0 million in development costs for fiscal 1996 as compared to $3.7
million during fiscal 1995. Oil and gas acquisitions aggregated $2,150,000 for
the six months ended December 31, 1995. Financing of oil and gas acquisitions is
expected to come from borrowings and/or private investors.
Clint Hurt has forecast approximately $500,000 for oil and gas drilling
capital expenditures for fiscal 1996 primarily for improvements to existing
equipment and machinery. Such outlays are treated as capital costs. Financing is
expected to come from existing cash flow.
In January 1995, Key received $2.5 million in term note proceeds from
its principal lender. The term note is collateralized by the additional
equipment Key received from the WellTech West Texas acquisition and was used for
working capital purposes. The term note, requires monthly principal payments of
approximately $42,000 plus interest, with the unpaid balance of the note due
December 31, 1996. The interest rate is 2 1/2% above the stated prime rate, 9.0%
at June 30, 1995. A portion of the note has been classified as current in the
accompanying balance sheet.
During March 1995, Odessa Exploration refinanced its debt
(approximately $2.8 million at March 31, 1995) with Norwest Bank Texas, Midland,
N.A. ("Norwest"). The refinanced debt consists of a $7.5 million reducing
revolver with a current borrowing base of $5.3 million. As of September 30,
1995, $5.5 million principal amount of debt was outstanding under this
arrangement. The revolver requires the borrowing base to be reduced by
approximately $60,000 per month. The revolver has an interest rate of Norwest
prime rate (9.0% at June 30, 1995), plus 1/2 of one percent, payable monthly.
The note matures on October 15, 1997. The revolver is secured by substantially
all of the oil and gas properties of Odessa Exploration and is guaranteed by
Key. In addition, the revolver has cross-default provisions and
cross-collateralization provisions with Clint Hurt.
As a result of the purchase of the Clint Hurt drilling equipment, Clint
Hurt borrowed $1.0 million from Norwest. The loan requires monthly principal
payments of approximately $28,000 until maturity in April 1998. The loan bears
interest at the Norwest prime rate (9.0% at June 30, 1995), plus 3/4 of one
percent, is secured by all of the equipment of Clint Hurt and is guaranteed by
Key. In addition, Clint Hurt obtained a working capital line of credit with
Norwest in the amount of $200,000. The line of credit requires monthly principal
and interest payments of $20,000, bears interest at the Norwest prime rate (9.0%
at June 30, 1995), plus 3/4 of one percent, is secured by all of the equipment
of Clint Hurt and is guaranteed by Key.
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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 Odessa
Exploration) and WellTech (other than that owed to certain affiliates),
respectively. Key believes that such facility will provide sufficient funds to
finance its operating and capital expenditure needs for the foreseeable future.
The New Indebtedness has been cross-guaranteed by Key, Yale E. Key, Clint Hurt
and WellTech and cross-collateralized by their respective assets. Upon
consummation of the Merger, 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 until such refinancing. Key and WellTech have agreed not to terminate
the Interim Operations agreement without the consent of the lender. (See
"Business and Properties of Key--New Indebtedness.")
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 our 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
its business.
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SELECTED FINANCIAL DATA OF WELLTECH
The following table sets forth the selected consolidated financial data
of WellTech for the five years ended December 31, 1994 and the nine months ended
September 30, 1995. These data should be read in conjunction with WellTech's
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Results of Operations and Financial Condition of WellTech," which
follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended Year Ended Year Ended Year Ended Year Ended Year Ended
Sept. 30, Sept. 30 Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1995 1994 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------
(unaudited) (in thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues from continuing operations $ 52,180 $ 34,974 $ 49,043 $ 56,157 $ 58,680 $ 70,463 $ 70,070
Operating costs and expenses:
Direct operating 40,867 27,897 39,050 45,522 45,986 58,020 55,509
General and administrative 7,579 5,872 8,474 9,520 11,732 13,350 11,579
Depreciation and amortization 2,524 2,228 2,775 3,095 3,572 4,574 4,236
Other (income) expense 976 (2,003) (1,045) 3,227 5,210 4,874 4,662
Income (loss) before extraordinary items 234 980 (211) (5,207) (7,820) (11,924) (5,916)
Net income (loss) 234 980 (211) (5,207) (7,820) (10,355) (5,916)
Income (loss) per common share:
Primary:
Income (loss) before extraordinary item 0.66 2.82 (0.61) (16.73) (25.12) (3.83) (2.50)
Net income (loss) 0.66 2.82 (0.61) (16.73) (25.12) (3.33) (2.50)
Assuming full dilution:
Income (loss) before extraordinary item 0.66 2.82 (0.61) (16.73) (25.12) (3.83) (2.50)
Net Income (loss) 0.66 2.82 (0.61) (16.73) (25.12) (3.33) (2.50)
Average common shares outstanding:
Primary 353 347 347 311 311 3,113 2,363
Assuming full dilution 353 347 347 311 311 3,113 2,363
Common shares outstanding at end of period 353 347 347 311 311 3,113 2,363
Market price per common share at end of
period N/A N/A N/A N/A N/A N/A N/A
Cash dividends paid on common shares -- -- -- -- -- --
Balance Sheet Data:
Property and equipment, net $ 30,897 $ 21,755 $ 24,905 $ 18,209 $ 26,394 $ 32,317 33,988
Total assets 68,998 52,027 58,176 44,563 48,853 52,590 58,022
Long-term debt 9,983 5,237 6,620 32,782 32,736 29,769 30,674
Stockholders' equity (deficit) 36,882 37,381 36,189 (2,668) 2,539 10,359 8,567
Book value per share 104.50 107.58 104.15 (8.57) 8.16 3.33 3.63
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION OF WELLTECH
The following discussion should be read in conjunction with the
financial statements of WellTech and related notes appearing elsewhere herein.
Operating Losses
WellTech has generated losses during each of the past five years. These
losses were primarily attributable to the operations of certain unprofitable
locations which have been sold or joint ventured over the past several years.
WellTech has also expanded its profitable operations and acquired additional
profitable operations during this time period (1991 - 1995) resulting in
declining losses. In addition to the unprofitable operations, WellTech's
overhead and level of outstanding debt was more than the profitable operations
could service. Steps were also taken in these and other areas to reduce losses
and improve profitability. From the year ended December 31, 1991 to the nine
months ended September 30, 1995, direct operating costs as a percentage of
revenues have decreased from 82.3% to 78.3%, general and administrative expenses
have decreased from 18.9% of revenues to 14.5% and long term debt has decreased
from approximately $30.0 million to $10.0 million.
Nine Months Ended September 30, 1995 versus Nine Months Ended September 30, 1994
Results of Operations
Revenues
Revenues increased to $52.2 million for the nine months ended September
30, 1995 compared to $35.0 million for the nine months ended September 30, 1994,
an increase of $17.2 million or 49%. This increase was due to increases in
nearly all of WellTech's operations including drilling ($3.9 million), Mid
Continent ($5.0 million), Eastern ($1.1 million), Russia ($1.6 million) and the
consolidation of Servicios effective April 1995 ($6.2 million).
Operating Expenses
Operating expenses as a percentage of revenues were 78.3% for the nine
months ended September 30, 1995 versus 79.8% for the nine months ended September
30, 1994. This decrease was due to a provision for workers compensation losses
recorded in 1994. This was partially offset by the lower gross margins generated
by WellTech's drilling operations which were begun in late 1994.
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Depreciation Expense
Depreciation expense increased by $0.3 million or 13.3% from $2.2
million for the nine months ended September 30, 1994 to $2.5 million for the
comparable fiscal 1995 period primarily as a result of the consolidation of
Servicios in 1995.
General and Administrative Expense
General and administrative expenses increased from $5.9 million to $7.6
million, an increase of $1.7 million or 29% during the nine months ended
September 30, 1995 compared with the nine months ended September 30, 1994.
Approximately 53% of this increase related to the consolidation of Servicios in
1995. The remaining increase was the result of increases in several of
WellTech's operating areas including drilling ($319,000), Mid Continent
($554,000) and Eastern ($175,000) partially offset by cost reductions at the
corporate level.
Interest Expense
Interest expense increased from $550,000 to $1.4 million, an increase
of $850,000 or 155%, during the nine months ended September 30, 1995 compared
with the nine months ended September 30, 1994, primarily due to the bank
financing which was completed in January 1995 ($535,000) and the consolidation
of Servicios during the nine months ended September 30, 1995 ($325,000).
Gain on Disposition of Assets
The gain on disposition of assets decreased to $390,000 for the nine
months ended September 30, 1995 compared with $2,499,000 for the comparable 1994
period because the gain of approximately $3.0 million from the sale of the West
Texas operations to Key was included in the nine months ended September 30,
1994.
Cash Flow
Net cash provided by operating activities decreased by $2.4 million, to
$(1.8) million, during the nine months ended September 30, 1995 from $0.6
million for the comparable 1994 period. Of this decrease $4.0 million was the
result of changes in working capital components offset by $1.5 million higher
cashflows from operations during the 1995 period. Net cashflows required for
investing activities decreased $4.0 million, from $7.7 million in 1994 to $3.7
million in 1995 primarily due to a decrease in contributions to unconsolidated
operations ($1.2 million) and a decrease in capital expenditures ($4.0 million).
These were offset by a decrease in proceeds from asset sales ($1.1 million). Net
cash from financing activities decreased by $2.0 million during the 1995 period
versus the 1994 period. While there was no new equity in 1995 as compared to
$4.6 million in 1994 there was an increase in the additions to new debt of $5.6
million in 1995. This net increase was offset by an increase in debt repayments
of $2.7 million.
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Year Ended December 31, 1994 Versus Year Ended December 31, 1993
Results of Operations
Revenues
Revenues for 1994 of $49.0 million were $7.1 million or 13% less than
1993 revenues of $56.2 million. The primary cause of the decrease was the sale
of WellTech's West Texas operations to Key effective December 1, 1993, ($13.5
million) with additional decreases in WellTech's drilling activities and the
operations in the Eastern region. These decreases were partially offset by
increases which resulted from the expansion of WellTech's Mid Continent
operations during 1993 and the start up of its Russia operations in December
1993.
Operating Expenses
Operating expenses of $39.1 million represented 79.6% of revenues in
1994 compared to $45.5 million or 81.1% of revenues in 1993. The primary cause
of the decrease related to the sale of WellTech's West Texas operations to Key
effective December 1993 as the gross margin of the West Texas operations was
generally less than WellTech's other well servicing operations. In addition, the
gross margin of WellTech's Russian operations was generally greater than
WellTech's other operations.
General and Administrative Costs
General and administrative costs of $8.5 million in 1994 decreased by
$1.0 million or 11% from $9.5 million in 1993. This decrease was due to the sale
of the West Texas operations and cost reductions at the corporate level
partially offset by increases which resulted from the expansion of the Mid
Continent and Eastern operations and the start up of the Russian operations.
Depreciation Expense
The $300,000 decrease in depreciation expense from $3.1 million in 1993
to $2.8 million in 1994 related primarily to the sale of the West Texas
operations.
Interest Expense
The $2.5 million, or 78%, decrease in interest expense from $3.2
million in 1993 to $700,000 in 1994 related to the conversion of approximately
$31 million of debt into equity in January 1994. This reduction was partially
offset by the issuance of new debt of approximately $5.5 million during 1994.
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Investment Valuation Provision
There were no investment valuation provisions recorded in 1994 as
compared to the $582,000 write down recorded in 1993.
Equity in (Earnings) Losses of Unconsolidated Affiliates
The $580,000 or 659% decrease in the earnings of unconsolidated
affiliates to a loss of $492,000 in 1994 compared to income of $88,000 in 1993,
related primarily to an increase in the losses from Servicios of $536,000.
Gain on Disposition of Assets
The gain on disposition of assets of $2.9 million in 1994 compared with
$0.3 million in 1993, related primarily to the gain recognized upon the sale of
WellTech's West Texas operations to Key.
Cash Flow
Net cash provided by operating activities of $4.6 million in 1994
increased by $3.7 million over the $933,000 generated in 1993. Of this increase,
$2.3 million was the result of changes in working capital components with the
balance of $1.4 million due to increased cash flows from operations in 1994. Net
cash flows required for investing activities increased in 1994 by $14.1 million.
This increase was due to a substantial increase in capital expenditures ($12.0
million), increased contributions to unconsolidated operations ($2.6 million)
and reduced distributions from Dawson ($363,000) offset by an increase in
property sales proceeds of $822,000. The 1994 capital expenditures program
included significant capital expenditures related to expansion, consisting
primarily of expanded rig operations ($3.7 million), drilling operations ($1.8
million) and expansion into the trucking and disposal business ($4.3 million).
The balance ($3.9 million) was primarily for refurbishments and improvements to
existing machinery and equipment. Net cash from financing activities increased
by $10.0 million from 1993 to 1994 due to an increase in debt proceeds ($5.5
million) and a sale of common stock ($4.5 million). During 1993, there were no
new equity proceeds and an insignificant amount of new debt proceeds.
Year Ended December 31, 1993 Versus Year Ended December 31, 1992
Results of Operations
Revenues
Revenues for 1993 were $2.5 million or 4% less than 1992. This decrease
was due to WellTech's contribution of its Gulf Coast operations into Dawson
effective November 1992. WellTech's investment in Dawson is accounted for in
accordance with the equity method. This was partially offset by an increase due
to the expansion of the Mid Continent operations during 1993.
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Operating Expenses
Operating expenses represented 81.1% of the revenues in 1993 versus
78.4% in 1992. This increase was the result of lower insurance costs in 1992 and
additional costs incurred in connection with the expansion of the Mid Continent
and Eastern operations during 1993.
General and Administrative Expenses
General and administrative expenses decreased by $2.2 million or 19% in
1993 versus 1992. This decrease was due to the contribution of the Gulf Coast
operation into Dawson in late 1992 and extensive cost cutting efforts at the
corporate level. This was offset by a slight increase due to the expansion of
the Mid Continent operations during 1993.
Depreciation Expense
The 13 % decrease in depreciation expense from 1992 to 1993 of $477,000
related to the contribution of the Gulf Coast operation into Dawson in November
1992.
Investment Valuation Provision
In 1992, WellTech reassessed the carrying value of certain of its
non-well servicing investments and recorded a provision of $2.4 million to write
these investments down to their estimated net realizable value. In 1993, a
similar assessment was made and a provision of $582,000 was recorded.
Cash Flow
Net cash provided by operating activities increased $1.8 million from
($824,000) in 1992 to $933,000 in 1993. Of this increase, $2.0 million was the
result of changes in working capital components offset by $300,000 lower cash
flows from operations in 1993. Net cashflows required for investing activities
decreased in 1993 by $3.3 million primarily due to a decrease in the
contributions to unconsolidated operations ($2.1 million) and an increase in
distributions from Dawson ($775,000). Net cash from financing activities
decreased by $2.7 million from 1992 to 1993 due to a decrease in proceeds from
the issuance of debt ($2.3 million) and an increase in payments on debt
($366,000).
Liquidity And Capital Resources
During 1993, capital expenditures were generally limited to
refurbishments and improvements to existing machinery and equipment and were
funded with the proceeds from the sale of obsolete or unused property and
equipment. The cash provided by operating activities along with the
distributions from Dawson funded the contributions to unconsolidated operations
and the debt service requirements.
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During 1994, there were extensive capital expenditures, acquisitions
and contributions to unconsolidated operations totalling approximately $17.3
million. These expenditures were funded from operations ($4.6 million), property
and equipment sales ($2.8 million), proceeds from debt issuance ($5.5 million)
and sale of common stock ($4.5 million).
WellTech recently entered into a new credit facility of approximately
$17.5 million (subject to certain advance formulas) the proceeds of the initial
borrowings of which were used to repay substantially all debt of WellTech,
including debt to Shawmut, except debt to certain affiliates. WellTech believes
that such facility will provide sufficient funds to finance its operating and
capital expenditure needs until the Merger. The New Indebtedness has been
cross-guaranteed by Key, Yale E. Key, Clint Hurt and WellTech and
cross-collateralized by their respective assets. Upon consummation of the
Merger, 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 until such financing. Key and WellTech have agreed not to terminate
the Interim Operations Agreement without the consent of the lender. (See
"Business and Properties of Key--Recent Developments--New Indebtedness.")
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PROPOSALS TO BE VOTED UPON
AT THE KEY SPECIAL MEETING
The matters discussed below will be voted upon at the Key Special
Meeting. The Board of Directors of Key recommends a vote FOR approval and
adoption of each of the Merger, the Key Charter Amendment, the Election of Board
of Directors, the Key 1995 Stock Option Plan and the Key Outside Directors Stock
Option Plan. A vote of at least a majority of all outstanding Key Common Stock
is required to approve the Merger and the Key Charter Amendment. The proposal
relating to the election of the Board of Directors will be determined by a
plurality of the votes entitled to be cast by the holders of the Key Common
Stock. All other proposals must be approved by the affirmative vote of a
majority of the outstanding Key Common Stock present in person or by proxy and
entitled to vote at the meeting. Each proposal will be voted upon separately by
the Key stockholders entitled to vote at the Key Special Meeting. Failure,
however, of either the Merger Agreement or the Key Charter Amendment to be
approved will result in the abandonment by Key of the Merger and, if the Merger
is not approved, WellTech's two nominees will not be elected to the Board and it
is proposed that the Board consist of five Directors none of whom will be
WellTech nominees. Abstentions and broker non-votes will have the effect of a
vote against the proposal.
ITEM 1. THE MERGER
The following description of certain provisions of the Merger Agreement
and the exhibits and schedules thereto is only a summary and does not purport to
be complete. This description is qualified in its entirety by reference to the
complete text of the Merger Agreement, a conformed copy of which is attached
hereto as Annex I and incorporated herein by reference. Certain terms used in
this Section without definition are defined in the Merger Agreement .
General Provisions
Share Exchange. The Merger Agreement provides that, subject to the
requisite adoption and approval by WellTech's stockholders and Key's
stockholders of the Merger and certain related transactions and the satisfaction
or waiver of certain other conditions, at the Effective Time, WellTech will be
merged with and into Key, the separate existence of WellTech will cease and Key
will continue as the surviving corporation. As a result of the Merger, Key will
acquire all of the business and assets of WellTech and will assume all of its
obligations and liabilities, and shares of WellTech Common Stock outstanding
immediately prior to the Merger will be converted into shares of Key Common
Stock and New Key Warrants.
Pursuant to the Merger Agreement, by virtue of the Merger and without
any action on the part of the any holder of shares of capital stock:
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o Each share of WellTech Common Stock outstanding immediately prior to
the Merger (other than those owned directly or indirectly by WellTech as
treasury stock or by any of its subsidiaries) will be converted into and will
become 13.9682 shares of fully paid and nonassessable shares of Key Common Stock
and New Key Warrants to purchase 2.125 fully paid and nonassessable shares of
Key Common Stock;
o Each share of the capital stock of WellTech issued and outstanding
immediately prior to the Merger and owned directly or indirectly by WellTech as
treasury stock or by any of its subsidiaries will be canceled, and no
consideration will be delivered in exchange therefor;
o Each share of Key Common Stock issued and outstanding immediately
prior to the Merger (other than 1,429,962 shares owned directly by WellTech)
will remain outstanding; and
o An aggregate of 1,429,962 shares of Key Common Stock and each
Existing Key Warrant issued and outstanding immediately prior to the Merger and
owned by WellTech will be canceled, and no consideration will be delivered in
exchange therefor. As of the date of this Proxy Statement--Prospectus, WellTech
owns, an aggregate of 1,635,000 shares of Key Common Stock and Existing Key
Warrants to purchase an aggregate of 250,000 shares of Key Common Stock. The
remaining 205,038 shares of Key Common Stock owned by WellTech will be
distributed to directors of WellTech prior to the Merger.
The holder of any shares of WellTech Common Stock outstanding
immediately prior to the Merger which has validly exercised such holder's
appraisal rights under Delaware Law will not be entitled to receive, in respect
of the shares of WellTech Common Stock as to which such holder has validly
exercised appraisal rights, the shares of Key Common Stock and New Key Warrants
to which such holder would have been entitled had such holder not exercised
appraisal rights. WellTech and Key have reached certain agreements relating to
any such exercise of appraisal rights, including Key's agreement, as the
surviving corporation of the Merger, to pay any amount payable to any such
stockholder who becomes entitled under Delaware Law to payment for such holder's
shares of WellTech Common Stock. (See "Rights of Dissenting Stockholders of
WellTech" for further information concerning the rights to appraisal of
WellTech's stockholders.)
The Merger Agreement provides that no fractional shares of Key Common
Stock and no fractional New Key Warrants will be issued in connection with the
Merger. In lieu of any such fractional interests, Key will pay an amount in cash
(without interest), rounded to the nearest cent, determined by multiplying the
closing price of the Key Common Stock on the day prior to the consummation of
the Merger by the fractional interest in the share of Key Common Stock to which
such holder would otherwise be entitled (after taking into account all shares of
Key Common Stock being issued to such holder pursuant to the Merger Agreement).
The number of shares of Key Common Stock to be issued will be further
adjusted if between November 18, 1995 and the Effective Time the outstanding
shares of Key Common Stock or WellTech Common Stock have been changed into a
different number of shares or a different class, by reason of any stock
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dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares. However, the Merger Agreement prohibits Key and WellTech
from issuing any equity securities or rights, options or warrants to purchase
equity securities without the consent of the other, except in the case of Key
for issuances pursuant to the Key 1995 Stock Option Plan, the Key Outside
Directors Stock Option Plan and the warrant to purchase 75,000 shares of Key
Common Stock issued to CIT in connection with the New Indebtedness.
The holders of WellTech Common Stock will receive an aggregate of
4,929,962 shares of Key Common Stock and New Key Warrants to purchase an
aggregate of 750,000 shares of Key Common Stock at $6.75 per share. For a
description of the rights and preferences, if any, of the Key Common Stock and
the New Key Warrants, see "Description of Key Common Stock" and "Description of
the New Key Warrants" below.
A description of the method of delivery of shares of Key Common Stock
and New Key Warrants to be issued in the Merger will be furnished, along with
the appropriate transmittal forms,
prior to or immediately following consummation of the Merger. WellTech
stockholders should not send in their certificates until they receive a letter
of transmittal.
Articles of Incorporation and By-Laws; Directors. The Merger Agreement
provides that the Key Articles, as proposed to be amended and restated by the
Key Charter Amendment, and the Key By-Laws, each as in effect immediately prior
to the Effective Time, will be the Articles of Incorporation and By-Laws of the
surviving corporation. In addition, subject to the approval of the Key
stockholders at the Key Special Meeting, the directors of Key immediately prior
to the Effective Time, except Mr. Edwards, who will resign immediately prior to
the Effective Time, and Messrs. Collins and Marcum will be the directors of the
surviving corporation and the officers of Key immediately prior to the Effective
Time will be the officers of the surviving corporation. In addition, certain
officers of WellTech will become officers of Key. From and after the Effective
Time, the Merger will have all the effects provided by applicable law.
Fairness Opinion. Simmons rendered to the Key Board its opinion to the
effect that as of November 18, 1995, the Merger was fair, from a financial point
of view, to the stockholders of Key.
In conducting its analysis and arriving at its opinion, Simmons
considered such financial and other factors as it deemed appropriate under the
circumstances including, among others, the following: (i) the historical and
current financial position and results of Key and WellTech; (ii) the business
prospects of Key and WellTech; (iii) estimates of pro forma combination benefits
pursuant to the Merger prepared by Key and WellTech, (iv) the historical and
current market for Key Common Stock and for the equity securities of certain
other companies believed to be comparable to Key or WellTech; (v) the respective
contributions in terms or various financial measures of Key and WellTech to the
combined company, and the relative ownership of Key after the proposed
transaction by the current holders of Key Common Stock and WellTech Common
Stock; (vi) the pro forma effect of the transaction on Key's capitalization
ratios, earnings per share and cash flow per share; and (vii) the nature and
terms of certain other acquisition transactions that Simmons believed to be
relevant. Simmons has also taken into account its assessment of general
economic, market and financial conditions and its experience in connection with
similar transactions and securities' valuation generally. Simmons' opinion
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necessarily is based upon conditions as they exist and can be evaluated on, and
on the information made available at, the date of such opinion. Simmons did not
express any opinion as to the price or range or prices at which the shares of
Key Common Stock will trade subsequent to the consummation of the Merger.
In connection with its fairness opinion, Simmons performed a variety of
financial analysis with respect to Key and WellTech, including a review of
certain publicly available financial, operating and stock market information as
of November 17, 1995 for Key, WellTech and certain publicly-traded companies
that Simmons considers to be comparable to Key or WellTech, an analyses of
selected comparable transactions, an analysis of the relative contributions of
Key and WellTech to, among other things, the combined pro forma historical
revenues, net income, cash flow, total assets, total book capitalization and
book equity values, and various discounted cash flow calculations of WellTech.
See "Certain Considerations Relating to the Transaction."
Effective Time of Merger. The Merger will become effective upon the
filing of a certificate of merger with the Secretary of State of the State of
Delaware and articles of merger with the Department of Assessment and Taxation
of the State of Maryland in accordance with applicable law, or at such later
date as the certificate of merger and articles of merger may specify.
Conditions Precedent
Conditions to the Obligations of Key and WellTech. The respective
obligations of WellTech and Key to consummate the transactions contemplated by
the Merger Agreement are subject to the requirements that:
o The Merger shall have been approved and adopted by the stockholders
of Key and WellTech;
o No Legal Action shall be pending before or threatened by any
Authority seeking to restrain, prohibit, make illegal or delay materially, or
seeking material damages or to impose any Adverse (i.e., a "material" loss of
benefits) conditions in connection with, the consummation of the Merger, or
which is likely to have an Adverse Effect on Key and its subsidiaries taken as a
whole assuming consummation of the Merger;
o All authorizations, consents, waivers, orders or approvals required
to be obtained, and all filings, submissions, registrations, notices or
declarations required to be made by Key and WellTech prior to the consummation
of the Merger shall have been obtained from, and made with, all required
authorities, except for such authorizations, consents, waivers, orders,
approvals, filings, registrations, notices or declarations the failure to obtain
or make would not, assuming consummation of the Merger, have an Adverse Effect
on Key and its subsidiaries taken as a whole;
o Key and one or more banks or other financial institutions shall have
entered into credit facilities substantially on the terms and conditions
described in this Proxy Statement-- Prospectus, all documents required in
connection therewith shall have been executed and delivered, and the closings
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with respect thereto shall have been authorized by Key and such banks or other
financial institutions subject to the consummation of the Merger; the New
Indebtedness described elsewhere in this Proxy Statement--Prospectus satisfies
this condition;
o The Registration Statement (of which this Proxy Statement--Prospectus
is a part) shall have become effective under the Securities Act and no stop
order suspending its effectiveness or any part thereof shall have been issued
and remain in effect and no proceedings for that purpose shall be pending or
contemplated under the Securities Act; and
o The shares of Key Common Stock to be issued in the Merger and the
shares of Key Stock issuable upon exercise of the New Key Warrants shall have
been approved for listing on the American Stock Exchange, subject to official
notice of issuance.
Conditions to Obligations of WellTech. The obligations of WellTech to
effect the transactions contemplated by the Merger Agreement are subject to the
satisfaction, on or prior to the Effective Time, of the following additional
conditions, among others:
o The representations and warranties of Key in the Merger Agreement or
in any other document delivered pursuant thereto will be true and correct in all
material respects on and as of the Closing Date with the same effect as if made
on and as of the Closing Date, and Key will have delivered to WellTech a
certificate to that effect;
o Each of the obligations of Key to be performed on or before the
Closing Date pursuant to the terms of the Merger Agreement will have been duly
performed in all material respects on or before the Closing Date, and Key will
have delivered to WellTech a certificate to that effect;
o WellTech will have received an opinion from Sullivan & Worcester LLP,
counsel to Key, dated the Closing Date, with respect to the matters set forth in
the Merger Agreement, in form and substance reasonably satisfactory to WellTech
and its counsel;
o The Shelf Registration Statement shall have become effective under
the Securities Act and no stop order suspending its effectiveness or any part
thereof shall have been issued and remain in effect and no proceedings for that
purpose shall be pending or contemplated under the Securities Act;
o Two nominees of WellTech shall have been elected as members of the
Board of Directors of Key to hold office until the next annual meeting of
stockholders of Key and until their respective successors shall have been
elected and qualified, or the earlier resignation or removal of such nominees,
as a consequence of which the Board of Directors of Key shall consist of two
nominees of WellTech and four other directors; and
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o As of the Closing Date, there shall not have occurred and be
continuing any Adverse Change affecting Key and its subsidiaries taken as a
whole from that reflected in the most recent Key financial statements.
Conditions to Obligations of Key. The obligations of Key to effect the
transactions contemplated by the Merger Agreement are subject to the
satisfaction, on or prior to the Effective Time, of the following conditions,
among others:
o The representations and warranties of WellTech contained in the
Merger Agreement or in any other document delivered pursuant thereto will be
true and correct in all material respects on and as of the Closing Date with the
same effect as if made on and as of the Closing Date, and WellTech will have
delivered to Key a certificate to that effect;
o Each of the obligations of WellTech to be performed on or before the
Closing Date pursuant to the terms of the Merger Agreement will have been duly
performed in all material respects on or before the Closing Date, and WellTech
will have delivered to Key a certificate to that effect;
o Key will have received an opinion of Porter & Hedges, L.L.P., counsel
for WellTech, dated as of the Closing Date, with respect to the matters set
forth in the Merger Agreement, in form and substance reasonably satisfactory to
Key and its counsel;
o Key shall have received a favorable opinion, dated the Closing Date
of Sullivan & Worcester LLP, its special tax counsel, to the effect that the
Merger Agreement constitutes a plan of reorganization within the provisions of
Section 368(a)(1)(A) of the Code and as to the Federal income tax consequences
thereof to Key and Key's stockholders;
o As of the Closing Date, there shall not have occurred and be
continuing any Adverse Change affecting WellTech and its subsidiaries taken as a
whole from that reflected in the most recent WellTech financial statements;
o Each officer and director of WellTech and each of its subsidiaries
shall have submitted his unqualified written resignation, dated as of the
Closing Date, from such position held;
and
o The Interim Operations Agreement shall have remained in full force
and effect at all times up to the Effective Time and WellTech shall not be in
breach or default in any Adverse
respect.
Certain Covenants
Certain Rights with Respect to Key's Board of Directors. The Merger
Agreement provides that at the Effective Time, the WellTech Nominees will be
designated as directors of Key. WellTech has designated Kevin P. Collins and W.
Phillip Marcum as the WellTech Nominees; however, the Merger Agreement permits
WellTech to change the WellTech Nominees prior to the Merger.
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Commission Filings. The Merger Agreement provides that, as promptly as
practicable after the date thereof, WellTech and Key will prepare and file any
filings required to be filed by each under the Securities Act, the Exchange Act
or any other federal or state laws relating to the transactions contemplated by
the Merger Agreement and will use their best efforts to respond to any comments
of the Commission or any other appropriate government official with respect
thereto. In addition, WellTech and Key have agreed to cooperate with each other
and provide to each other all information necessary in order to prepare such
filings, including this Proxy Statement--Prospectus, Key's Registration
Statement as to which this Proxy Statement--Prospectus forms a part and the
Shelf Registration Statement of Key under the Securities Act.
Registration Rights. Simultaneously with the execution of the Merger
Agreement, Key agreed to enter into an agreement (the "Registration Rights
Agreement") pursuant to which it agreed with those stockholders of WellTech
which are parties thereto that all shares of Key Common Stock and the New Key
Warrants (together with the shares of Key Common Stock issuable upon exercise
thereof) to be issued pursuant to the Merger to such WellTech stockholders shall
be registered under the Securities Act for resale by such stockholders. This
Prospectus has been prepared for use by such stockholders of WellTech for the
resale of the Key Common Stock and Warrants. See "Resales of Securities." The
Registration Rights Agreement requires Key to keep such registration statement
effective for a period of three years. The WellTech stockholders agreed to
certain so-called "standback" provisions and to refrain from selling during
certain periods, which provisions are designed to facilitate underwritten public
offerings by Key of its equity securities. Key will file a shelf registration
statement to become effective on the effective date of the Merger to enable such
stockholders to resell the shares of Key Common Stock and New Key Warrants
(together with the shares of Key Common Stock issuable upon exercise thereof)
received in the Merger. Effectiveness of such shelf registration statement is a
condition of WellTech's obligation to consummate the Merger.
Acquisition Proposals. The Merger Agreement prohibits each of WellTech
and Key and their respective subsidiaries, officers, directors, representatives
and agents from, directly or indirectly, knowingly soliciting, initiating or
participating in any way in proposals, discussions or negotiations with, or
knowingly providing any confidential information to, any person (other than the
other or any affiliate or associate of the other and their respective directors,
officers, employees, representatives and agents) which constitutes, or may
reasonably be expected to lead to, a proposal to seek or effect any Other
Transaction (as defined below). However, each of WellTech's and Key's Board of
Directors may make such disclosure to WellTech's or Key's stockholders as, in
the judgment of WellTech's or Key's Board of Directors with the written advice
of outside counsel, may be required under applicable law.
Each party has agreed to notify the other promptly if any such proposal
or inquiry is received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated with, either party and to
furnish the other with a copy of any proposal that relates to an Other
Transaction. An "Other Transaction" is a transaction or series of related
transactions (other than the Merger and the related transactions) resulting in
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(a) any change of control of WellTech or Key, (b) any merger or consolidation of
WellTech or Key, or any of their subsidiaries, regardless of whether WellTech or
Key (or any such subsidiary) is the surviving corporation, (c) any tender offer
or exchange offer for, or any acquisitions of, any securities of WellTech or
Key, (d) any sale or other disposition of assets of WellTech or Key, or any of
their subsidiaries, not otherwise permitted under the Merger Agreement, or (e)
so long as the Merger Agreement remains in effect, any issue or sale, or any
agreement to issue or sell, any capital stock, Convertible Securities or Option
Securities by WellTech or Key not otherwise permitted under the Merger
Agreement.
If either party terminates the Merger Agreement because of an "Other
Transaction" proposal, and if, prior to such termination or within nine months
thereafter, the terminating party consummates an Other Transaction, it will pay
to the other party $500,000, which amount is in recognition of, among other
things, the out-of-pocket costs and expenses of the other party, its reliance on
the terminating party's fulfillment of its obligations under the Merger
Agreement, the costs in delayed opportunity to the other party and the benefit
to the terminating party.
Representations and Warranties
The Merger Agreement contains various representations and warranties of
WellTech and Key. The representations and warranties will not survive beyond the
Closing Date. The representations of WellTech and Key are made with respect to
those companies and their respective subsidiaries and relate generally to: due
organization, qualification and authority; absence of violations of, among other
things, their respective charter documents, by-laws, certain contracts, and law;
required consents and approvals of governmental authorities; approval by their
respective Boards of Directors of the Merger Agreement and the transactions
contemplated thereby; their capital structures; the accuracy of information,
including financial statements, contained in the Merger Agreement and this Proxy
Statement-Prospectus; the absence of certain material changes or undisclosed
liabilities; compliance with applicable laws, including environmental laws, and
material agreements; taxes; litigation; employee benefits; labor matters; title
to properties; and brokers and finders.
Termination
The Merger Agreement may be terminated and the transactions
contemplated thereby, including the Merger, abandoned at any time prior to the
Effective Time as follows:
(a) by either Key or WellTech:
(i) if any permanent injunction, decree or judgment by any
governmental authority preventing the consummation of the Merger shall
have become final and nonappealable; or
(ii) if the Merger and the transactions contemplated thereby
have not been consummated prior to the Termination Date (defined
below); or
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(b) by WellTech:
(i) in the event (A) WellTech is not in breach of the Merger
Agreement and none of its material representations or warranties shall
have become and continue to be untrue in any material respect, and (B)
Key is in breach of the Merger Agreement or any of its material
representations or warranties shall have become and continue to be
untrue in any material respect, unless such breach or untruth is
capable of being cured by and will not prevent or delay consummation of
the Merger by or beyond the Termination Date; or
(ii) if (A) the Board of Directors of Key shall (1) withdraw,
modify or change its recommendation so that it is not in favor of the
Merger Agreement, the Merger or the related transactions, or shall have
resolved to do any of the foregoing, or (2) have recommended or
resolved to recommend to its stockholders an Other Transaction, or (B)
Key shall have entered into or agreed to enter into an Other
Transaction; or
(c) by Key:
(i) in the event (A) Key is not in breach of the Merger
Agreement and none of its material representations or warranties shall
have become and continue to be untrue in any material respect, and (B)
WellTech is in breach of the Merger Agreement or any of its material
representations or warranties shall have become and continue to be
untrue in any material respect, unless such breach or untruth is
capable of being cured by and will not prevent or delay consummation of
the Merger by or beyond the Termination Date; or
(ii) if (A) the Board of Directors of WellTech shall (1)
withdraw, modify or change its recommendation so that it is not in
favor of the Merger Agreement, the Merger or the related transactions,
or shall have resolved to do any of the foregoing, or (2) have
recommended or resolved to recommend to its stockholders an Other
Transaction, or (B) WellTech shall have entered into or agreed to enter
into an Other Transaction.
The term "Termination Date" is defined in the Merger Agreement as March
29, 1996 or such other date as the parties may, from time to time, mutually
agree; provided, however, that notwithstanding the foregoing, either Key or
WellTech may, in its sole discretion, elect to extend such date, from time to
time, to not later than May 31, 1996 in the event that (a) in its reasonable
business judgment not all of the conditions of the obligations of the parties to
consummate the Merger set forth in the Merger Agreement are likely to be
satisfied by the then current Termination Date and (b) either (i) it is not in
material breach of the Merger Agreement and none of its material representations
and warranties has become untrue in any material respect or (ii) if such a
breach or untruth exists, such breach or untruth is capable of being cured by
and will not prevent or delay consummation of the Merger by or beyond the date
to which it proposes to extend the Termination Date.
In the event of the termination of the Merger Agreement, it shall
become void, and there shall be no liability on the part of either party, or any
of their respective officers or directors, to the other and all rights and
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obligations of either party shall cease, except that no such termination shall
relieve either party from liability for the intentional breach of any of its
representations, warranties, covenants or agreements set forth in the Merger
Agreement.
Fees and Expenses
All costs and expenses, incurred in connection with the Merger
Agreement, the Merger and the related transactions, including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants, incurred by the parties hereto shall be borne solely and entirely
by the party which has incurred such costs and expenses, except that Key has
agreed that WellTech may pay the costs and expenses of WellTech's stockholders
up to an aggregate amount of $150,000.
Regulatory and Other Third Party Approvals
Consummation of the Merger requires consents or waivers from certain
third parties which have a business relationship with WellTech and Key. There
are no significant consents or waivers required from any governmental
authorities.
Amendment; Waiver
Subject to applicable law, (a) the Merger Agreement may be amended at
any time prior to the Effective Time (including after the approval of the Merger
and after the approval of the Key Proposals) by an instrument in writing signed
on behalf of all of the parties thereto and (b) the parties may extend the time
for performance of any of the obligations of the other parties to the Merger
Agreement and may waive inaccuracies in the representations and warranties or
compliance with any of the agreements or conditions for their respective benefit
therein.
Ownership of Key Stock after the Merger
Pursuant to the Merger, Key will issue an aggregate of 4,929,962 shares
of Key Common Stock and the New Key Warrants. As a condition to consummation of
the Merger, however, 1,429,962 of the 1,635,000 shares of Key Common Stock and
the Existing Key Warrants will be canceled. Accordingly, based solely on the
securities to be issued to the WellTech stockholders pursuant to the Merger,
such stockholders would own in the aggregate approximately 47.3% of the shares
of Key Common Stock before giving effect to the exercise of any of the New Key
Warrants (or any other outstanding options or warrants). Assuming the exercise
in their entirety of the New Key Warrants (but not of any other options or
warrants), such holders would own in the aggregate approximately 50.9% of the
shares of Key Common Stock.
Description of Key Common Stock
Key is currently authorized to issue 10,000,000 shares of Key Common
Stock, of which an aggregate of 6,913,513 shares are issued and outstanding. The
outstanding shares of Key Common Stock are fully paid and nonassessable. Each
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share is entitled to one vote in the election of directors and other corporate
matters. The holders of Key Common Stock do not have cumulative voting rights,
which means that the holders of a majority of the votes entitled to be cast by
holders of the outstanding Key Common Stock are able to elect all directors of
Key. Key Common Stock has no redemption provisions and the holders thereof have
no preemptive rights. The holders of Key Common Stock are entitled to receive
dividends in such amounts as may be declared by the Board of Directors, as
permitted by applicable law, and upon liquidation, dissolution, or winding up of
Key, subject to the rights of any preferred stock then outstanding, the holders
of Key Common Stock are entitled to share ratably in the assets of Key,
according to the number of shares they hold. The Key Common Stock is listed on
the American Stock Exchange.
For a description of proposed amendments to the Key Articles which
affect Key Common Stock see "Proposals to be Voted upon at the Key Special
Meeting--Item 2: Key Charter Amendment."
Description of the New Key Warrants
Pursuant to the Merger, Key will issue New Key Warrants to purchase an
aggregate of 750,000 shares of Key Common Stock at an exercise price of $6.75
per share. Warrants to purchase 250,000 shares of Key Common Stock currently
owned by WellTech will be canceled. The following is a summary of the material
terms of the New Key Warrants.
Exercise of Warrant. A New Key Warrant is exercisable in full or in
part at any time during a five year period from the date of issue. If a New Key
Warrant is exercised in respect of fewer than the full number of shares
issuable, a new Warrant shall be issued providing for the difference. Key does
not have to issue fractional shares upon the exercise of a New Key Warrant and
may substitute cash in lieu of fractional shares.
Dividends. If Key declares a dividend (other than Key Common Stock) or
makes a distribution of property, cash, securities or options (other than Key
Common Stock) the holder of a New Key Warrant shall receive the dividend or
distribution as if such holder had exercised the New Key Warrant.
Adjustment of Exercise Price. The exercise price will be adjusted if
Key changes the number of outstanding shares by declaring a stock dividend,
subdividing, combining or reclassifying the outstanding shares. The exercise
price will be multiplied by the number of shares of Key Common Stock outstanding
before the transaction, then divided by the number of shares of Key Common Stock
outstanding after the transaction. In the event that Key issues options,
warrants or convertible securities to its stockholders which enable the holder
to purchase Key Common Stock for less than Market Price (as defined in the New
Key Warrants), the exercise price shall be multiplied by the number of shares of
Key Common Stock outstanding before the transaction plus the number of shares
which could be purchased at Market Price with the aggregate offering price. That
figure is then divided by the number of shares of Key Common Stock outstanding
plus the number of shares offered for purchase in the transaction. If Key
proposes to make a distribution of (i) any class of stock other than Key Common
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Stock, (ii) debt, (iii) certain assets or (iv) rights, options, warrants or
convertible securities which are not covered by the above scenarios, the
exercise price shall be multiplied by a fraction, the numerator of which will be
the number of shares of Key Common Stock outstanding on the record date
multiplied by the Market Price less the aggregate fair market value (as
determined by the Board of Directors) of the assets or securities being
distributed and the denominator of which will be the number of shares of Key
Common Stock outstanding before the transaction multiplied by the Market Price
per share. The Market Price on any given date shall be the average of the daily
closing price of the Key Common Stock for 20 trading days prior to the date. No
adjustment to the exercise price must be made unless it will result in at least
a 1% change in the exercise price. Transactions which do not meet this threshold
carry over and count toward future transactions. Reorganizations or mergers will
not affect the validity of the New Key Warrant, but the Board of Directors may
adjust the application of the above-mentioned provisions.
Voting and Information Rights. A holder of a New Key Warrant is not
entitled to vote or to consent as a stockholder in respect of any stockholder
meeting. Key must furnish the New Key Warrant holder with copies of all
financial statements, reports, notices and proxy statements as they become
available.
Notice of Certain Actions. In the event Key (i) declares any dividend
payable in stock or makes a distribution other than cash to the holders of Key
Common Stock, (ii) offers to the holders of Key Common Stock the right to
subscribe for or purchase any shares of any class of stock or any other rights
or options or (iii) effects any reclassification of the Key Common Stock,
capital reorganization, consolidation or merger, sale, transfer or other
disposition of all or substantially all of its assets, or liquidation,
dissolution or winding up of the corporation, it will serve a notice of such
proposed action to the holders of the New Key Warrants. Such notice shall
specify the record date for determining eligibility to receive a dividend or
distribution, the date on which any action described in (iii) shall take place,
and the date as of which it is expected that the holders of record of Key Common
Stock shall be entitled to receive securities or other property deliverable upon
such action.
Transfers. A New Key Warrant may be transferred by surrendering it and
submitting a written instrument of transfer, duly executed by the registered
holder. Another New Key Warrant shall be issued to the transferee and the
surrendered New Key Warrant shall be canceled. If a transfer is not made
pursuant to an effective registration statement under the Securities Act, Key
may request that the New Key Warrant holder deliver a legal opinion that the New
Key Warrant may be sold publicly without registration under the Securities Act,
an investment covenant signed by the proposed transferee, an agreement by such
transferee to adhere to the restrictive investment covenant on the face of the
New Key Warrant and an agreement to be bound by the terms of the New Key
Warrant.
Amendment. A New Key Warrant may not be amended or modified except by a
written instrument signed by Key and the holder of the New Key Warrant.
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Comparison of Rights of Stockholders of Key and WellTech
Key and WellTech are incorporated in Maryland and Delaware,
respectively. Upon consummation of the Merger, stockholders of WellTech, whose
rights as stockholders are currently governed by DGCL, the WellTech Charter, and
the WellTech By-Laws, will automatically become stockholders of Key. As
stockholders of Key, their rights will be governed by MGCL and by the Key
Articles, as amended and restated pursuant to the Key Charter Amendment, and the
Key ByLaws. The following is a summary of certain material differences between
the rights of holders of WellTech Stock and the rights of holders of Key Common
Stock. The following does not purport to be a complete description of the
differences between the rights of Key and WellTech stockholders. Such
differences may be determined in full by reference to the MGCL, DGCL, the Key
Articles, the WellTech Charter and the Key and WellTech By-Laws.
Required Vote for Certain Business Combinations
Key. MGCL provides that unless the charter states otherwise, an
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter is required to approve the Merger. The Key Articles provide, as permitted
by the MGCL, that only an affirmative vote of majority of the total number of
shares of all classes outstanding and entitled to vote thereon is necessary.
Maryland Law also provides that, unless the corporate charter states otherwise,
the vote of the stockholders of a surviving corporation is not required to
approve a merger if (a) the plan of merger does not reclassify or change its
outstanding stock or otherwise amend the corporation's charter and (b) the
number of shares of common stock to be issued or transferred in the merger does
not exceed 15% of the number of its shares of the same class outstanding
immediately before the merger becomes effective. MGCL has extensive provisions
governing certain business combinations with certain interested parties, which
provisions are not applicable to Key.
WellTech. DGCL requires approval of a merger, consolidation,
dissolution or sale of all or substantially all of a corporation's assets by the
affirmative vote of the holders of a majority of the outstanding shares of stock
of the corporation entitled to vote thereon. Pursuant to DGCL, unless the
corporate charter provides otherwise, no vote of the stockholders of a surviving
corporation is required to approve a merger if (a) the agreement of merger does
not amend in any respect the surviving corporation's charter; (b) each share of
the corporation's stock outstanding immediately prior to the effective date of
the merger is to remain outstanding; and (c) the number of shares of the
surviving corporation's common stock (including shares issuable upon conversion
of any convertible securities) to be issued or delivered under the plan of
merger does not exceed 20% of the surviving corporation's common stock
outstanding immediately prior to the effective date of the merger. For
transactions falling outside the enumerated exceptions, majority stockholder
approval is required.
Charter Amendments
Key. MGCL provides that unless the charter states otherwise, a vote of
two-thirds of all votes entitled to be cast is required to approve a charter
amendment; however, the Key Articles provide, as permitted by MGCL, that any
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action that requires under MGCL a vote of more than a majority of shares shall
be valid if authorized by a majority of the total shares of all classes
outstanding and entitled to vote thereon.
WellTech. DGCL generally requires the affirmative vote of the holders
of a majority of the outstanding shares entitled to vote thereon. It provides
for any class or series of stock to vote as a class for the proposed amendment
if the amendment would increase or decrease the number of authorized shares or
change the number or par value of the aggregate authorized shares of a class or
series, unless the charter provides otherwise and also provides for class voting
if the amendment would alter or modify the powers, preferences or special rights
of the shares of such class to affect such class adversely.
By-Law Amendments
Key. Under MGCL, the power to adopt, alter and repeal by-laws of the
corporation is vested in the stockholders, unless the charter or the by-laws
provide otherwise. The Key By-Laws grant the power to amend such By-Laws to both
the stockholders and the Board of Directors.
WellTech. DGCL provides that the by-laws of a corporation may be
amended by the vote of a majority of the Board of Directors if so provided in
the charter. WellTech Charter and By-Laws permit the Board of Directors to amend
the By-Laws by a majority vote. The Board of Directors authority to adopt, amend
or repeal the by-laws of a corporation does not divest or limit the power of
stockholders to adopt, amend or repeal by-laws. Any amendment by the Board of
Directors to the by-laws may be subsequently changed by the affirmative vote of
holders of a majority of the shares entitled to vote thereon.
Voting Rights
Both DGCL and MGCL provide that, unless otherwise provided in a
corporation's charter, each share of stock is entitled to one vote. The Key
Articles prohibit the Board of Directors from creating any class of stock that
will have more than one vote per share. MGCL also limits certain voting rights
of "control shares" held by persons who, directly or indirectly, have the power
to exercise (i) one-fifth or more, but less than one-third, (ii) one-third or
more, but less than a majority, or (iii) a majority or more of all voting power
in the election of directors. Under the Key By-Laws, Key is not subject to these
restrictions. There is no similar limitation under DGCL.
Preemptive Rights
Unless otherwise provided in the charter, DGCL does not grant any
preemptive rights to the stockholders. The WellTech Charter does not grant
preemptive rights. MGCL provided preemptive rights with respect to charters
filed before October 1, 1995 unless the charter stated otherwise. The Key
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Articles, both prior and subsequent to the Key Charter Amendment, allow only
such preemptive rights as the Key Board of Directors, in its sole discretion,
may authorize. At this time, the Key Board has not authorized any such rights.
Transferability of Shares
Neither the Key Articles nor the WellTech Charter limits the
transferability of any shares of stock.
Special Meetings
Key. MGCL permits a special meeting of stockholders to be called by the
President, the Board of Directors, by holders of at least 25% of shares entitled
to vote or any other person specified in the charter or by-laws. The Key By-Laws
permit a special meeting of stockholders to be called by the Chairman of the
Board, the President, a majority of the Board of Directors or upon a written
request of at least 25% of all votes entitled to be cast. Unless requested by
stockholders entitled to cast a majority of all votes, a special meeting need
not be called to consider any matter which is substantially the same as a matter
voted on at any special meeting during the previous 12 months.
WellTech. Under DGCL, a special meeting of stockholders may be called
by the Board of Directors or such other persons as are authorized by the
certificate of incorporation or by-laws. The WellTech By-Laws authorize the
Board of Directors or the holders of at least 1/10th of all outstanding shares
of stock entitled to vote to call a special meeting.
Corporate Action Without A Meeting
Key. Under MGCL, any action to be taken at a meeting of stockholders
may be taken without a meeting if a unanimous written consent is signed by each
stockholder entitled to vote on the matter. The Key By-Laws permit corporate
action without a meeting of stockholders in accordance with the parameters set
forth in MGCL.
WellTech. Unless otherwise provided for in charter or by-laws, DGCL
permits corporate action without a stockholders' meeting, without prior notice
and without a vote of stockholders, upon receipt of the written consent of that
number of shares that would be necessary to authorize the proposed corporate
action at a meeting at which all shares entitled to vote thereon were present
and voting. WellTech's Charter and By-Laws do not prohibit such action. Prompt
notice of the taking of action without a meeting by less than unanimous written
consent must be given to all stockholders who have not consented in writing.
Dividends
Key. Under MGCL, the Board of Directors has the power to declare and
pay dividends in cash, property or securities of the corporation unless the
declaration of such dividends would be contrary to the charter. MGCL further
provides that no distribution may be made (i) if the corporation would become
unable to pay its debts as they become due in the usual course of business or
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(ii) the corporation's total assets would be less than the sum of its
liabilities plus, unless the charter permits otherwise, the amount that would be
needed, if the corporation were to be dissolved at the time of the distribution,
to satisfy any preferential rights upon dissolution. The Key Articles provide
for a ratable payment of dividends to holders of Common Stock in accordance with
Maryland Law.
WellTech. Under DGCL, the directors of a corporation are generally
permitted to declare and pay dividends out of surplus or out of net profits for
the current and/or preceding fiscal year, provided that such dividends will not
reduce capital below the amount of capital represented by all classes of issued
and outstanding stock having a preference upon the distribution of assets. Also
under DGCL, a corporation may generally redeem or purchase shares of its stock
if such redemption or purchase will not impair the capital of the corporation.
Appraisal or Dissenters' Rights
Key. Under MGCL, appraisal rights are available in connection with a
(a) merger or consolidation, (b) share exchange, (c) transfer of assets
requiring stockholder approval, (d) amendment of charter which alters the
contract rights of any outstanding stock and substantially adversely affects
stockholder rights or (e) business combination transaction. However, no
appraisal rights are available if the stock of the corporation is listed on a
national securities exchange or is designated as a national market system
security on an interdealer quotation system by The NASD. Accordingly, Key
stockholders are not entitled to appraisal rights.
WellTech. Under DGCL, appraisal rights are available in connection with
a statutory merger or consolidation in certain specified situations. Appraisal
rights are not available when a corporation is to be a surviving corporation,
and no vote of its stockholders is required to approve the merger. In addition,
unless otherwise provided in the charter, no appraisal rights are available to
holders of shares of any class of stock which, as of the record date, is either:
(a) listed on a national securities exchange or designated as a national market
system security and quoted on NASDAQ or (b) held of record by more than 2,000
stockholders, unless such stockholders are required by the terms of the merger
to accept anything other than (i) shares of stock of the surviving corporation;
(ii) shares of stock of another corporation which are or will be so listed on a
national securities exchange or designated as a national market system security
and quoted on NASDAQ or held of record by more than 2,000 stockholders; (iii)
cash in lieu of fractional shares of such stock; or (iv) any combination
thereof. (See "Rights of Dissenting Stockholders of WellTech.")
Provisions Relating to Directors and Officers
Key. Under MGCL, a corporation must have at least three directors. MGCL
provides that corporation's charter or by-laws may permit classification of the
Board of Directors, provided that no term of a director may be longer than five
years and the term of at least one class shall expire each year. Each share of
stock may be voted for as many individuals as there are directors to be elected
and for whose election the share is entitled to be voted.
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The Key Articles sets the number of directors at five, which number may
be increased or decreased subject to Key By-Laws and MGCL. Under the Key
By-Laws, the number of directors may be set by an action of stockholders or of a
majority of the Board of Directors, but there may be no less than three and no
more than 25 directors. Assuming approval of the Merger, the number of Directors
will be fixed at six. A vacancy resulting from the removal of a director may be
similarly filled by an action of stockholders or of a majority of the remaining
directors. A director elected by the stockholders will serve for the remainder
of the term of the removed director. A director elected by the Board of
Directors to fill a vacancy will serve until the next annual meeting of the
stockholders and until the successor is elected and qualified.
WellTech. Under DGCL, a corporation must have a Board of Directors
consisting of at least one director. A corporation's charter may (i) confer upon
holders of any class or series of stock the right to elect one or more directors
to serve for such term and to have such voting powers as may be specified
therein, (ii) permit classification of the Board of Directors, and (iii) permit
cumulative voting of the election of directors. The WellTech By-Laws provide
that there shall be at least three directors and a director shall serve until a
successor is elected and qualified. No cumulative voting is permitted under the
WellTech By-Laws.
Removal of Directors
Key. Under MGCL, unless the charter of the corporation provides
otherwise, stockholders may remove a director, with or without cause, by vote of
a majority of stockholders entitled to vote.
WellTech. Under DGCL, any director or the entire Board of Directors of
a corporation may be removed, with or without cause, by the holders of a
majority of the shares then entitled to elect directors. In the case of a
corporation whose Board is classified, stockholders may effect such removal only
for cause unless the charter provides otherwise. The WellTech By-Laws provide
that any director may be removed, with or without cause, at any time upon
recommendation of the Board by holders of the majority of stock entitled to
vote.
Derivative Suits
Key. There is no statutory right to bring a derivative suit under MGCL;
however, there is a clear common law right in Maryland to bring a derivative
suit.
WellTech. Under DGCL, stockholders may bring suit on behalf of the
corporation to enforce the rights of the corporation, but a stockholder may
institute and maintain a suit only if such person was a stockholder at the time
of the transaction which is the subject of the suit.
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Anti-Takeover Provisions
Key. MGCL has detailed provisions concerning business combinations
which are not generally applicable to Key because Key was not automatically
subject to such provisions as of the date of their enactment by reason of having
an "interested stockholder" as of such date and Key did not subsequently opt to
become subject to or governed by such provisions. The Key Charter prohibits
creation of any class of stock which shall be issued in connection with any
so-called "shareholder rights plan", "poison pill" or other anti-takeover
measure.
WellTech. DGCL has detailed provisions concerning business combinations
which are not applicable to WellTech because WellTech does not have voting stock
which is (i) listed on a national securities exchange, (ii) authorized for
quotation on NASDAQ or (iii) held by more than 2,000 stockholders.
Rights Of Dissenting Stockholders Of WellTech
SECTION 262 OF DGCL IS REPRINTED IN ITS ENTIRETY AS ANNEX III TO THIS
PROXY STATEMENT-PROSPECTUS. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT
OF THE LAW RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO ANNEX III. THIS DISCUSSION AND ANNEX III SHOULD BE REVIEWED
CAREFULLY BY ANY WELLTECH STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH
THE PROCEDURES SET FORTH HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL
RIGHTS.
A holder of record of WellTech Common Stock as of the WellTech record
date who makes the demand described below with respect to such shares, who
continuously is the record holder of such shares through the Effective Time, who
otherwise complies with the statutory requirements of Section 262 of DGCL and
who neither votes in favor of the Merger Agreement nor consents thereto in
writing may be entitled to an appraisal by the Delaware Court of Chancery (the
"Delaware Court") of the fair value of his, her or its shares of WellTech Common
Stock. All references in this summary of appraisal rights to a "stockholder" is
to the record holder or holders of shares of WellTech Stock. Except as set forth
herein, stockholders of WellTech will not be entitled to appraisal rights in
connection with the Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders not less than 20 days prior to the meeting, each
constituent corporation must notify each of the holders of its stock for which
appraisal rights are available that such appraisal rights are available and
include in each such notice a copy of Section 262.
WellTech stockholders who desire to exercise their appraisal rights
must not vote in favor the Merger Agreement or the Merger and must deliver a
separate written demand for appraisal to WellTech prior to the vote by the
stockholders of WellTech on the Merger Agreement and the Merger. A demand for
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appraisal must be executed by or on behalf of the stockholder of record and must
reasonably inform WellTech of the identity of the stockholder of record and that
such record stockholder intends thereby to demand appraisal of the WellTech
Common Stock. A person having a beneficial interest in shares of WellTech Common
Stock that are held of record in the name of another person, such as a broker,
fiduciary or other nominee, must act promptly to cause the record holder to
follow the steps summarized herein properly and in a timely manner to perfect
whatever appraisal rights are available. If the shares of WellTech Common Stock
are owned of record by a person other than the beneficial owner, including a
broker, fiduciary (such as a trustee, guardian or custodian) or other nominee,
such demand must be executed by or for the record owner. If the shares of
WellTech Common Stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, such demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of WellTech Common Stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all beneficial
owners of shares as to which such person is the record owner. In such case, the
written demand must set forth the number of shares covered by such demand. Where
the number of shares is not expressly stated, the demand will be presumed to
cover all shares of WellTech Common Stock outstanding in the name of such record
owner.
A stockholder who elects to exercise appraisal rights, if available,
should mail or deliver his, her or its written demand to: WellTech, Inc., 3535
Briarpark, Suite 200, Houston, TX 77042.
The written demand for appraisal should specify the stockholder's name
and mailing address, the number of shares of WellTech Common Stock owned, and
that the stockholder is thereby demanding appraisal of his, her or its shares. A
vote against the Merger Agreement will not itself constitute such a demand.
Within ten days after the Effective Time, the surviving corporation must provide
notice of the Effective Time to all stockholders who have complied with Section
262.
Within 120 days after the Effective Time, either the surviving
corporation or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on the
surviving corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. Accordingly, WellTech stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time periods and in the manner prescribed in Section
262. If appraisal rights are available, within 120 days after the Effective
Time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of WellTech Common Stock not voting in favor of the Merger Agreement and
with respect to which demands for appraisal were received by WellTech and the
number of holders of such shares. Such statement must be mailed within 10 days
after the written request therefor has been received by the surviving
corporation.
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If a petition for an appraisal is timely filed and assuming appraisal rights are
available, at the hearing on such petition, the Delaware Court will determine
which stockholders, if any, are entitled to appraisal rights. The Delaware Court
may require the stockholders who have demanded an appraisal for their shares and
who hold stock represented by certificates to submit their certificates of stock
to the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Delaware Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the shares of WellTech Common Stock owned by such stockholders,
determining the fair value of such shares exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. In determining fair value, the Delaware Court is to take into
account all relevant factors. In Weinberger v UOP Inc., the Delaware Supreme
Court discussed the factors that could be considered in determining fair value
in an appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered, and that "fair price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value, the court must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts
ascertainable as of the date of the merger that throw light on future prospects
of the merged corporation. In Weinberger, the Delaware Supreme Court stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262, however, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
The cost of the appraisal proceeding may be determined by the Delaware
Court and taxed against the parties as the Delaware Court deems equitable in the
circumstances. Upon application of a dissenting stockholder of WellTech, the
Delaware Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of stock entitled
to appraisal.
Any holder of shares of WellTech Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any stockholder
will have the right to withdraw such demand for appraisal; after this period,
the stockholder may withdraw such demand for appraisal only with the consent of
the surviving corporation. If no petition for appraisal is filed with the
Delaware Court within 120 days after the Effective Time, stockholders' rights to
appraisal shall cease. Any stockholder may withdraw such stockholder's demand
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for appraisal by delivering to the surviving corporation a written withdrawal of
his or her demand for appraisal and acceptance of the Merger, except that (i)
any such attempt to withdraw made more than 60 days after the Effective Time
will require written approval of the surviving corporation and (ii) no appraisal
proceeding in the Delaware Court shall be dismissed as to any stockholder
without the approval of the Delaware Court, and such approval may be conditioned
upon such terms as the Delaware Court deems just.
Certain Federal Income Tax Considerations
The following is a discussion of the material federal income tax
consequences to Key and Key's stockholders of the Merger and the transactions
contemplated thereby. The tax treatment of a stockholder may vary depending upon
his particular situation, and certain stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
and persons who are neither citizens nor residents of the United States, or who
are foreign corporations, foreign partnerships or foreign estates or trusts as
to the United States) may be subject to special rules not discussed below.
EACH STOCKHOLDER OF KEY IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTIONS
DESCRIBED HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.
THIS DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES DOES NOT
APPLY TO STOCKHOLDERS OF WELLTECH, EACH OF WHOM IS URGED TO CONSULT HIS, HER OR
ITS OWN TAX ADVISOR AS TO THE TAX CONSEQUENCES OF THE MERGER.
Federal Income Tax Consequences of Certain Transactions
Consummation of the Merger and the transactions contemplated thereby
are conditioned upon the receipt by Key of a favorable opinion from Sullivan &
Worcester LLP its special tax counsel, with respect to the applicable following
matters:
(i) The Merger will qualify as a reorganization under Section
368 (a)(1)(A) .
(ii) A Key stockholder will not recognize any income, gain or
loss as a result of the Merger and his tax basis and holding period
will be the same following the Merger as they were preceding; and
(iii) Neither Key nor WellTech will recognize any income, gain
or loss as a result of the Merger.
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An opinion of counsel is not binding on the Internal Revenue Service
(the "Service") or the courts. Further, the opinion of tax counsel will be based
on, among other things, current law and certain representations as to factual
matters made by, among others, WellTech and Key which, if incorrect in certain
material respects, would jeopardize the conclusions reached by counsel in its
opinion. Neither WellTech nor Key is currently aware of any facts and
circumstances which would cause any such representations made by it to tax
counsel to be untrue or incorrect in any material respect.
If the Merger failed to qualify under Section 368(a)(1)(A) of the Code,
WellTech would recognize gain equal to the excess of the fair market value of
the Key Common Stock and New Key Warrants distributed to the WellTech
stockholders in the Merger plus the amount of WellTech liabilities over
WellTech's basis in the assets transferred to Key pursuant thereto. Any
resulting corporate income tax on such gain would be payable by Key, as the
successor to WellTech.
Backup Withholding
Under the backup withholding rules, a holder of Key Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends and
proceeds of redemption, unless such stockholder (a) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact or (b) provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules. Any amount withheld
under these rules will be credited against the stockholder's federal income tax
liability. Key may require holders of Key Common Stock to establish an exemption
from backup withholding or to make arrangements satisfactory to Key with respect
to the payment of backup withholding. A stockholder who does not provide Key
with his, her or its current taxpayer identification number may be subject to
penalties imposed by the Service.
ITEM 2: KEY CHARTER AMENDMENT
One of the purposes of the Key Special Meeting is the approval of the
Key Charter Amendment. The Board of Directors of Key approved the Key Charter
Amendment at a meeting held on October 5, 1995 and found that it was advisable
and in the best interests of Key and its stockholders. The Key Charter Amendment
provides, among other things, for an increase in the total number of authorized
shares of Key Common Stock from 10,000,000 to 25,000,000.
After giving effect to the consummation of the Merger (and the
reservation of 750,000 shares of Key Common Stock for issue upon exercise of the
New Key Warrants, 1,150,000 shares of Key Common Stock for issue upon exercise
of options granted or to be granted under the Key 1995 Stock Option Plan,
300,000 shares for issue upon exercise of options granted or to be granted under
the Key Outside Directors Stock Option Plan and 75,000 shares for issue upon
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exercise of the warrant issued to CIT in connection with the New Indebtedness),
assuming approval of the Key Charter Amendment, Key would have an aggregate of
approximately 12,311,490 shares of Key Common Stock authorized and unissued and
not reserved for issue. The Board of Directors believes that it is in the best
interests of Key and its stockholders to have available a significant number of
shares of Key Common Stock, which would be available to be issued in connection
with public and private equity financings or mergers and acquisitions, or other
corporate transactions including benefit programs. Moreover, under the MGCL, the
Board of Directors has the power, without the need of any stockholder action, to
redesignate all or any of the unauthorized and unissued shares of Common Stock
into one or more series of preferred or preference stock and to establish the
rights and preferences (including without limitation dividend and liquidity
preferences, voting rights and conversion provisions), except that the Key
Articles provides that no such class of series of shares (i) may have more than
one vote per share, (ii) may be issued in connection with any shareholder rights
plan, "poison pill" or other anti-takeover measure, or (iii) may be issued for
less than fair consideration, as determined in good faith by the Board of
Directors. All of such shares, including any such preferred or preference stock,
could be issued by the Board of Directors, without the necessity of any
stockholder action, except to the extent otherwise required by the rules of the
American Stock Exchange. Those rules generally require stockholder approval if
more than 20% of the outstanding common stock of a company is to be issued in a
single transaction or group of related transactions.
The Charter Amendment also clarifies certain other provisions
including:
o Dividends on Key Common Stock may be paid in cash or property at such
time and in such amounts as Key Board of Directors deems advisable; under the
terms of the New Indebtedness, however, Key is prohibited from paying cash
dividends on its stock. (See "Business and Properties of Key--Recent
Developments--New Indebtedness.")
o The holders of Key Common Stock are entitled to one vote per share.
o Upon liquidation, dissolution or winding up of Key, the holders of
Key Common Stock are entitled to share ratably (based on the number of shares
held) in all assets available for distribution after payment of debts and other
liabilities and payment to any holders of a class of stock having a preference
on distribution.
o The Key Board of Directors will consist of six directors, which
number may be increased or decreased pursuant to Key By-Laws, to the extent
permitted under MGCL.
o The Board of Directors shall have the power, in its sole discretion,
to determine corporate profits, earnings, surplus or net assets, reserves or
retained earnings, dividends and stockholder rights to inspect the books,
accounts and documents of Key, as well as the right to adopt, alter and repeal
Key By-Laws, subject to rights vested in the stockholders under MGCL.
o The Key Charter Amendment removes the prohibition on the issuance of
a class of non-voting stock to the extent such prohibition was imposed under the
bankruptcy laws.
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ITEM 3: ELECTION OF BOARD OF DIRECTORS
Another purpose of the Key Special Meeting is the election of the Board
of Directors of Key, including, assuming consummation of the Merger, two persons
nominated by WellTech. It is proposed that proxies for the Key Special Meeting
not limited to the contrary will be voted to elect Messrs. John, Greenfield,
Manly and Wolkowitz, four of the current members of the Board of Directors, and,
if the Merger is consummated, to elect Messrs. Collins and Marcum, the WellTech
Nominees. If the Merger is not consummated, it is proposed that proxies for the
Key Special Meeting will be voted to elect Mr. Edwards in addition to Messrs.
John, Greenfield, Manly and Wolkowitz and Messrs. Collins and Marcum will not be
elected to the Board.
In connection with Key's acquisition of WellTech's West Texas assets,
WellTech was granted the right to designate one nominee to serve on Key's Board
of Directors. WellTech's nominee resigned from Key's Board effective August 29,
1995. If the Merger is not consummated, WellTech will retain the right to
designate one nominee to serve on Key's Board.
The Board of Directors of Key meets to review significant developments
affecting Key and to act on matters requiring Board approval. During the fiscal
year ended June 30, 1995, the Board of Directors held 4 meetings, including
regular, special and telephonic meetings. Each director attended at least 75% of
the aggregate of the total number of meetings of the Board held during the
period for which he has been a director and any committee on which such director
served during the periods that he served.
Committees of the Board. In order to facilitate the various functions
of the Board of Directors, the Board has created an Audit Committee, the
Compensation Committee and an Executive Committee. There is no standing
Nominating Committee of the Board.
The Audit Committee meets with Key's independent auditors at least
twice annually to review financial results, internal financial controls and
procedures, audit plans and recommendations. The Audit Committee also recommends
the selection, retention or termination of independent public accountants,
approves services provided by the independent public accountants prior to
providing such services, and evaluates the possible effect performance of such
services will have on their independence. Messrs. Greenfield and Wolkowitz serve
on the Audit Committee with Mr. Wolkowitz serving as Chairman. The Audit
Committee held two meetings during fiscal year 1995 concerning audits and
financial statements in conjunction with meetings of the entire Board of
Directors.
The Compensation Committee recommends to the Board the compensation of
Executive Officers and Directors and the adoption of stock grant and stock
option plans by Key and approves stock grants and stock options. Messrs.
Greenfield, Manly and Wolkowitz serve on the Compensation and Stock Grant Plan
Committee with Mr. Wolkowitz serving as Chairman. The Compensation and Stock
Grant Plan Committee held six meetings during fiscal year 1995 in conjunction
with meetings of the entire Board of Directors.
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The Executive Committee may take such actions as the Board delegates to
it, consistent with MGCL. Messrs. Greenfield, John and Wolkowitz serve on the
Executive Committee, with Mr. John serving as Chairman. The Executive Committee
held twelve meetings during fiscal 1995, exclusive of the regular meetings of
the Board of Directors.
Compensation of Directors. Compensation for the non-officer Directors
for fiscal year 1995 was $5,000 per quarter. Directors are reimbursed for travel
and other expenses directly associated with Company business. All fees for
fiscal year 1995 were paid in cash.
Biographical Information. Following are summaries of biographical
information about each current director and director nominee of Key. There are
no family relationships among the persons listed or with any Executive Officer
of Key. The summaries list the names and ages of each person, all positions and
offices with Key, the period(s) during which he has served as such, his business
experience during the past five years and any other directorships held in any
public companies or regulated investment companies. The biographical information
is as of December 15, 1995. Information with respect to the executive officers
(other than Messrs. John and Edwards) is set forth under "Management of Key ."
Francis D. John (42), is the President, Chief Executive Officer, Chief
Financial Officer of Key and, since March 1994, Co-Chair of the Board of
Directors. He has been the President, Chief Financial Officer and a Director of
Key since June 1988. He is also a director of Yale E. Key and Chairman of the
Board of Odessa Exploration and Clint Hurt. Since July 1992, Mr. John has been a
director of Aerosonics Corp., a company which produces components for aircraft.
Van D. Greenfield (50), has been a Director of Key since 1988 and,
since March 1994, has been Co-Chair of the Board of Directors of Key. He has
been the President of Green-Cohn Group, Inc. ("Green-Cohn"), a firm involved in
investment banking, since 1989. Green-Cohn is a member of the National
Association of Securities Dealers. Mr. Greenfield has also served as President
of Van D. Greenfield, Inc. since 1980 and as Chairman of the Board of
Progressive Savings Bank from 1986 until 1990.
William Manly (73), has been a Director of Key since December 1989. He
retired from his position as an Executive Vice President of Cabot Corporation in
1986, a diversified industrial conglomerate, a position he had held since 1978.
Mr. Manly is a Director and a twenty-five percent owner of Metallamics, Inc.,
which is involved with high performance metals and also serves as a Director of
Forge Performance Products, Inc.
Morton Wolkowitz (66), has been a Director of Key since December 1989.
He also serves as a Director of Yale E. Key. From 1988 through 1991 Mr.
Wolkowitz served as the President and Chief Executive Officer of Wolkow Braker
Roofing Corporation, a company that provides a variety of roofing services.
Since July 1992, he has served as a Director of Aerosonics Corp, a company which
produces components for aircraft.
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D. Kirk Edwards (36), has been a Director of Key since July 1993. He
has been the President, Chief Executive Officer and Director of Odessa
Exploration since July 1993. Mr. Edwards formerly was President of Odessa
Exploration Incorporated, a Texas corporation engaged in development, drilling
and operation of oil and gas wells and ownership and development of other
mineral interests, a position he had occupied since 1986. Mr. Edwards will
resign as a Director of Key effective upon consummation of the Merger. If the
Merger is not consummated, it is anticipated that Mr. Edwards will be reelected
to the Board.
W. Phillip Marcum (51), has been a Director of WellTech since January
19, 1994. Since October, 1995, Mr. Marcum has been the non-executive acting
Chairman of the Board of Directors of WellTech. He has been a Chairman of the
Board, President and Chief Executive Officer of Marcum Natural Gas Services,
Inc. since January 1, 1991, and has been a Director of Homefree Village Resorts,
Inc., a corporation engaged in the manufacture of housing for travel resort
properties in Arizona and Florida since the late 1970s.
Kevin P. Collins (45), has been a Director of WellTech since January
19, 1994. He has been the principal of JHP Enterprises, a merchant banking firm,
since 1992. From 1986 to 1991, Mr. Collins served as a Senior Vice President of
DG Investment Bank, Ltd.
If some unexpected occurrence should make necessary, in the judgment of
the Board of Directors, the substitution of some other person for any of the
nominees, it is the intention of the persons named in the proxy for the Key
Special Meeting to vote for the election of such other person as may be
designated by the Board of Directors of Key, in the case of Messrs. John,
Greenfield, Manly or Wolkowitz, and of WellTech, in the case of Mr. Collins or
Mr. Marcum. Each of the Directors elected at the Key Special Meeting will serve
until the 1996 Annual Meeting and until his successor is elected and qualified.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Exchange Act requires officers and directors, and persons
who own more than 10% of Key Common Stock, to file reports of ownership and
changes in ownership (Form 5) with the Securities and Exchange Commission and
the American Stock Exchange. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish Key with copies of all
Section 16(a) forms they file. Based solely on review of the copies of such
forms furnished to Key, or written representations that no Forms 5 were
required, Key believes that during the fiscal year ended June 30, 1995, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were complied with.
ITEM 4: ADOPTION AND APPROVAL OF THE KEY 1995 STOCK OPTION PLAN
Adoption and Duration of the Key 1995 Stock Option Plan. If approved by
Key shareholders, the Key 1995 Stock Option Plan (hereinafter the "1995 Plan")
shall become effective as of July 1, 1995, and, unless terminated earlier, will
terminate July 1, 2005. No option may be granted pursuant to the 1995 Plan after
June 30, 2005. Upon and subject to approval of the 1995 Plan, Key's Grant Plan
together with all prior awards thereunder will be canceled and will be replaced
in its entirety by the 1995 Plan. (See "Management of Key--Executive
Compensation--Stock Grant Plan.")
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Administration. The 1995 Plan is to be administered by a committee (the
"Committee") consisting of at least three directors of Key, each of whom is a
"disinterested person" within the meaning of Rule 16b-3 under the Exchange Act
and an "outside director" within the meaning of Section 162(m) of the Code. The
Committee may include those directors who serve on the Compensation Committee of
the Board. The Committee has the sole authority to adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable in the
administration of the 1995 Plan. All questions of interpretation and application
of the rules and regulations of the 1995 Plan and of options will be subject to
the determination of the Committee, which determination is final and binding;
however, the Committee will have no discretionary or interpretive power or
authority with respect to any grant under the 1995 Plan which would cause any
non-employee director to fail to be a "disinterested person." The members of the
Committee, all of whom serve at the pleasure of the Board, are currently Messrs.
Greenfield, Manly and Wolkowitz, who are the members of the Compensation
Committee.
Options. The total number of shares of Key Common Stock that may be
subject to options under the 1995 Plan may not exceed 1,150,000 in the aggregate
(the "Reserved Shares"). The total amount of Common Stock with respect to which
options may be granted over the life of the 1995 Plan to any single employee
shall not exceed 500,000 in the aggregate. For purposes of calculating this
individual limit, options which have been canceled, forfeited or have expired by
their terms are counted and options which are repriced are treated as
cancellation of old options and issuance of new options. Options which are
canceled, forfeited or expire by their terms without being exercised shall be
available for future grants under the 1995 Plan. The Committee may determine
which key employees of Key or any subsidiary or other persons shall be granted
options under the 1995 Plan, the terms of the options (including whether an
option shall be an ISO or a nonqualified stock option ("NSO") and the number of
shares which may be purchased under the option. The Committee may grant options
designated as an ISO to eligible employees and options that constitute a NSO to
eligible directors, employees or other persons. The number of shares of Common
Stock to be covered by any option shall be as determined by the Committee.
Eligibility. The individuals eligible to receive Options under the 1995
Plan consist of key employees (including officers who may be members of the
Board), directors who are neither employees nor members of the Committee and
other individuals who render services of special importance to the management,
operation or development of Key or any subsidiary, and who have contributed or
may be expected to contribute materially to the success of Key or a subsidiary,
provided, however, that only key employees are eligible to receive ISOs.
Method of Granting Options. The Committee shall determine and specify
the number of shares of Common Stock granted under an Option in an option
agreement which must be signed by the Optionee and by Chief Executive Officer of
Key.
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Option Price. The price at which shares of Common Stock may be
purchased upon exercise of an Option will be specified by the Committee at the
time the Option is granted, but in the case of an ISO, except as set forth in
the following sentence, may not be less than the fair market value of Common
Stock subject to the Option on the date the ISO is granted. In the case of an
employee who owns (or is considered to own under Section 424(d) of the Code) Key
Common Stock possessing more than ten percent of the total combined voting power
of stock of Key or any subsidiary, the price at which shares may be purchased
pursuant to an ISO may not be less than 110% of the fair market value of the
Common Stock on the date the ISO is granted.
The "fair market value" of a share of Common Stock at any particular
date shall mean (a) the last reported sales price or the average of the reported
closing bid and asked prices (i) as reported on the American Stock Exchange
Composite Tape, or (ii) if Key Common Stock is not listed or admitted to trading
on the American Stock Exchange, on the principal national securities exchange on
which such security is listed or admitted to trading, or (iii) if not then
listed or admitted to trading on any national securities exchange, on the NASDAQ
National Market System; or (b) if Key Common Stock is not quoted on such
National Market System, (i) the average of the closing bid and asked prices on
such date in the over-the-counter market as reported by NASDAQ, or (ii) if bid
and asked prices for such security on such date shall not have been reported
through NASDAQ, the average of the bid and asked prices of such date as
furnished by any American or New York Stock Exchange member firm regularly
making a market in such security selected for such purpose by the Committee; or
(c) if Key Common Stock is not then listed or admitted to trading on any
national exchange or quoted in the over-the-counter market, the fair value
thereof determined in good faith by the Committee as of a date which is within
30 days of the date as of which the termination is to be made.
As of the date of this Prospectus, shares of Key Common Stock are
traded on AMEX.
Duration of Options. The duration of any Option is determined by the
Committee in its discretion and shall be specified in the Option Agreement. No
ISO may be exercisable after the expiration of 10 years, and no NSO may be
exercisable after the expiration of 10 years and one day, from the date of
grant, except that in the case of any employee who owns (or is considered to own
under Section 424(d) of the Code) Common Stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of Key of any
subsidiary, no ISO may be exercisable after the expiration of five (5) years
from the date of grant.
Exercise of Options. Payment of the exercise price may be made in cash,
check made payable to Key, or, at Committee's discretion, in shares of Common
Stock; provided, however, that the Optionee may not make payment in shares of
Common Stock previously acquired by him pursuant to the exercise of an ISO,
unless such shares have been held by him for at least two (2) years from the
date of grant of the ISO and at least one (1) year from the date the ISO was
exercised. If the option agreement permits, payment of the option price may be
made in part by a promissory note executed by the Optionee and containing the
following terms and conditions: (a) it shall be secured by the shares of Common
Stock obtained upon exercise of the Option; (b) repayment shall be made on
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demand by Key and, in any event, no later than three years from the date of
exercise; and (c) the note shall bear interest at an annual rate equal to the
then applicable short-term federal rate, payable monthly by payroll deductions;
provided however, that an amount not less than the par value of the shares of
Common Stock with respect to which the Option is being exercised must be paid in
cash, cash equivalents, or shares of Common Stock.
Alternatively, if the option agreement permits, a NSO may be exercised
by means of a "cashless exercise" procedure in which a broker (i) transmits to
Key the exercise price in cash or cash equivalents, either as a margin loan or
against the Optionee's notice of exercise and confirmation by Key that it will
issue and deliver to the broker stock certificates for at least that number of
shares of Common Stock having an aggregate fair market value equal to the
exercise price, or (ii) agrees to pay the exercise price to Key in cash or cash
equivalents upon its receipt of stock certificates as described in clause (i),
subject to such conditions as the Committee shall reasonably require.
Restrictions on Exercise of Options. The aggregate fair market value
(determined as of the time the Option is granted) of the Common Stock with
respect to which ISOs may be exercisable for the first time by an Optionee
during any calendar year (under the 1995 Plan or any other incentive stock
option plan(s) of Key or any subsidiary) shall not exceed $100,000. The Optionee
shall notify Key promptly in the event that he or she sells, transfers,
exchanges or otherwise disposes of any shares of Common Stock issued upon
exercise of an ISO before the later of (a) the second anniversary of the date of
grant of the ISO, and (b) the first anniversary of the date the shares were
issued upon his or her exercise of the ISO.
The Committee may further restrict the exercise of any Option by
prohibiting such exercise at any time during which and for such period of time
as any Optionee is engaged in any activity determined by the Committee, after
full consideration of the facts presented on behalf of Key and the Optionee, to
be detrimental to the best interests of Key and its shareholders. The Committee
shall notify the Optionee in writing of any such determination and of the scope
and duration of any such restriction. The decision of the Committee as to the
detrimental nature of the Optionee's activities shall be final, binding and
conclusive.
Transferability of Options. Options are not transferable by the
Optionee otherwise than by will or under the laws of descent and distribution,
and are exercisable during his lifetime only by the Optionee. Optionee may be
able to transfer NSOs to members of his immediate family or trusts or
partnerships for the benefit of such person by gift. However, Key may refuse to
permit transfer of shares of Common Stock or of any Option if, in the opinion of
its legal counsel, such transfer would violate federal or state securities laws
or subject Key to liability thereunder.
Effect of Certain Corporate Transactions on Options. The number of
Reserved Shares, the number of shares of Common Stock covered by any outstanding
option and the price per share payable upon exercise thereof, may be
proportionally adjusted for any increase or decrease in the number of issued and
outstanding shares of Common Stock resulting from a reorganization,
recapitalization, exchange of shares, stock split, combination of shares or
dividend payable in shares or other securities. Any adjustment made by the
Committee shall be conclusive and binding upon all affected persons, including
Key and all Optionees.
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If Key merges or consolidates with a wholly-owned subsidiary for the
purpose of reincorporating itself under the laws of another jurisdiction, the
Optionees will be entitled to acquire shares of stock of the reincorporated
company upon the same terms and conditions as were in effect immediately prior
to such reincorporation (unless such reincorporation involves a change in the
number of shares or capitalization of Key) and the 1995 Plan will remain the
1995 Plan of the reincorporated Company.
If Key is merged or consolidated with another corporation or if Key is
liquidated or sells or otherwise disposes of all or substantially all of its
assets while unexercised Options remain outstanding under the 1995 Plan, or in
other circumstances as the Board in its sole discretion deems appropriate (a)
subject to the provisions of clause (c) below, after the effective date of such
merger, consolidation, liquidation, sale or other event (in each case, an
"Applicable Event"), each holder of an outstanding Option shall be entitled,
upon exercise of such Option, to receive in lieu of shares of Common Stock, such
stock or other securities or property as would have been received had the Option
been exercised immediately prior to the Applicable Event; (b) the Board may, in
its sole discretion, waive certain limitations imposed under the 1995 Plan so
that some or all Options from and after a date prior to the effective date of
such Applicable Event shall be exercisable in full; and (c) except as otherwise
provided in any Option Agreement, all outstanding and unexercised Options may,
in its sole discretion be canceled by the Board as of the effective date of any
such Applicable Event. Notice of any such cancellation shall be given to each
holder of an Option not less than 30 days preceding the effective date of such
Applicable Event and all such Options shall be fully exercisable during such 30
day period.
Other Terms and Conditions of Options. An Optionee shall have no rights
as a stockholder with respect to any shares covered by an Option until the date
a stock certificate for the shares is issued, and, unless otherwise stated in
the 1995 Plan, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date of issuance of such certificate.
Termination of Employment. Unless an Option Agreement establishes a
longer or shorter period, an Optionee's right to exercise the option following
termination of employment will be as follows: After the Optionee's termination
of employment with Key, including his retirement in good standing for reasons of
age, the Option shall terminate on the earlier of the date of its expiration or
three months after the date of such termination or retirement. If the holder of
any Option dies before the date of expiration of such Option and while in the
employ of Key or during the three month period described in the preceding
sentence, or in the event of the retirement of the Optionee for reasons of
disability (within the meaning of Section 22(e)(3) of the Code), such Option
shall terminate on the earlier of such date of expiration or one year following
the date of such death or disability retirement. After the death of the
Optionee, his or her executors, administrators or any persons to whom his or her
Option may be transferred by will or by the laws of descent and distribution
shall have the right at any time prior to such termination to exercise the
Option to the extent to which the Optionee was entitled to exercise the Option
on the date of his or her death.
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Forfeiture as a Result of Termination for Cause. If the Committee
determines, after full consideration of the facts presented on behalf of Key and
an Optionee, that (a) the Optionee has been engaged in fraud, embezzlement,
theft, commission of a felony or dishonesty, has made unauthorized disclosure of
trade secrets or other proprietary information of Key or any subsidiary in the
course of his or her employment, or has materially breached any noncompetition
covenant of the Optionee in favor of Key or a subsidiary; or (b) the Optionee's
employment or involvement was otherwise terminated for "cause" as defined in any
employment agreement with the Optionee or as determined by Key, then the
Optionee's right to exercise an Option shall, except to the extent otherwise
expressly provided in any Option Agreement or in a written employment agreement
with the Optionee, terminate as of the date of such act or such termination and
the Optionee shall forfeit all unexercised Options. The decision of the
Committee as to the cause of an Optionee's discharge and the damage done to Key
or a subsidiary shall be final, binding and conclusive. No decision of the
Committee, however, shall affect in any manner the finality of the discharge of
such Optionee by Key or a subsidiary.
Amendments of the 1995 Plan. The Board may modify, revise or terminate
the 1995 Plan at any time and from time to time; provided, however, that without
the further approval of the holders of at least a majority of the outstanding
shares of Common Stock, the Board may not (a) materially increase the benefits
accruing to Optionees under the 1995 Plan or make any "modifications" as that
term is defined under Section 424(h)(3) of the Code if such increase in benefits
or modifications would adversely affect (i) the availability to the 1995 Plan of
the protections of Rule 16b-3 of the Exchange Act, or (ii) the qualification of
the 1995 Plan or any Options for "incentive stock option" treatment under
Section 422 of the Code; (b) change the aggregate number of shares of Common
Stock available for Options under the 1995 Plan or the aggregate number of
shares of Common Stock for which options may be issued to any single employee
over the life of the Plan, or (c) change the class of employees eligible to
receive Options. Notwithstanding the preceding sentence, the Board shall in all
events have the power and authority to make such changes as, in the opinion of
counsel for Key, may be necessary or appropriate from time to time to enable any
Option granted pursuant to the 1995 Plan to qualify as an incentive stock option
or such other stock option as may be defined under the Code, so as to receive
preferential federal income tax treatment. No amendment shall adversely affect
outstanding Options, and no termination of the 1995 Plan shall terminate
outstanding Options, without the consent of the Optionee.
Tax Status of the 1995 Plan. The federal income tax treatment of
Options is governed by Section 83 (as to NSOs) and Section 422 (as to ISOs) of
the Code. Special rules apply to the taxation of Options exercised by delivery
of stock.
Tax Treatment of NSOs. Under Section 83 of the Code, an Optionee
realizes no taxable income when a NSO is granted. Instead, the difference
between the fair market value of the Common Stock subject to NSO and the
exercise price paid is taxed as ordinary compensation income, on or after the
date on which the NSO is exercised. The difference is measured and taxed as of
the date of exercise if the stock is "substantially vested" as defined in
regulations under Section 83. The stock will be "substantially nonvested" for
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the purposes of Section 83 while it is both subject to a "substantial risk of
forfeiture" and nontransferable. If stock received upon exercise of an option is
substantially nonvested, the difference is measured as of the date or dates on
which the stock becomes substantially vested. The 1995 Plan permits the
Committee to impose repurchase rights that should create a "substantial risk of
forfeiture" on Common Stock acquired upon exercise of Options and cause the
Common Stock to be nontransferable. For example, a right to repurchase the
Common Stock for par value in the event that the Optionee's performance of
services for Key ceases within two years after the date of exercise of the NSO.
Common Stock acquired by exercise of NSOs by insiders is treated under
Section 83(c) of the Code as being subject to a "substantial risk of forfeiture"
and nontransferable during the period in which the Common Stock cannot be sold
without violating Section 16(b) of the Exchange Act. Since the sale of stock
acquired pursuant to the exercise of a NSO within six months of the date the
Option was granted would violate Section 16(b), the income taxed by reason of
the exercise of a NSO by an Optionee within six months after the date of grant
of the Option generally would not be measured until six months after the date of
the grant, and the Optionee's holding period for the Common Stock would not
begin until that date, unless he made the election described in the following
paragraph.
An Optionee may elect, in accordance with Section 83(b) of the Code, to
be taxed on the difference between the exercise price and the fair market value
of the Common Stock on the date of exercise, even though some or all of the
Common Stock acquired is subject to a "substantial risk of forfeiture." Such an
election must be made in writing to the Internal Revenue Service within 30 days
of the date the Option is exercised, and an election is irrevocable at the end
of that period.
Key receives no tax deduction on the grant of a NSO, but is entitled to
a tax deduction when the Optionee recognizes taxable income on or after exercise
of the NSO, in the same amount as the income recognized by the Optionee
(subject, in the case of certain insiders, to the limitation on deduction of
executive compensation under Section 162(m) of the Code). If an NSO is granted
with an exercise price at least equal to the fair market value of the Common
Stock on the date of the grant, it should constitute "performance based"
compensation for purposes of Section 162(m); and Key's deduction on account of
the exercise of a NSO by such an insider should not be limited under that
provision.
Tax Treatment of ISOs. Except with respect to any applicable
"alternative minimum tax," Section 422 of the Code provides that an Optionee
incurs no federal income tax liability on either the grant or the exercise of an
ISO. Provided that the stock acquired on exercise of the ISO is held for at
least one year after the date the ISO is exercised and at least two years after
the date the ISO was granted, any gain realized on the subsequent sale of the
stock will be taxed as long-term capital gain. If the stock is disposed of
within a shorter period of time (a "disqualifying disposition"), the Optionee
will be taxed as if he had then received ordinary compensation income in an
amount equal to the difference between the lesser of (i) the fair market value
of the stock on the date of exercise of the Option or (ii) the sale price of the
-104-
<PAGE>
shares received in the disqualifying disposition, over the ISO exercise price.
Any excess of the sale price over the fair market value of the shares on the
exercise date will be taxed as long-term capital gain if the Option Shares were
held more than one year from the date of exercise, and as short-term capital
gain if held for one year or less. Section 424(c) of the Code defines a
"disposition" of stock for this purpose as any sale, gift or transfer of legal
title (except a transfer by will or inheritance), and most types of exchanges.
Optionees will be advised that they should consult their own tax advisors
concerning the implications of the alternative minimum tax.
Key receives no tax deduction on the grant or exercise of an ISO, but
is entitled to a tax deduction if the Optionee recognizes taxable income on
account of a disqualifying disposition of ISO stock, in the same amount and at
the same time as the Optionee's recognition of ordinary compensation income.
Alternative Minimum Tax Treatment of ISOs. The alternative minimum tax
is payable by a taxpayer for a given year only to the extent that it exceeds his
tax liability determined by the regular method. A taxpayer's alternative minimum
taxable income includes the difference between the exercise price and the fair
market value of the Key Common Stock as of the time the taxpayer's rights in the
stock are freely transferable or are not subject to a substantial risk of
forfeiture. Thus, if stock acquired through the exercise of an ISO is not
subject to any restrictions, the taxpayer recognizes this difference, for
alternative minimum tax purposes, in the year of exercise. Basis of the stock
for alternative minimum tax purposes is adjusted to reflect any income thus
realized. The portion of a taxpayer's alternative minimum tax attributable to
the exercise of ISOs and other items of tax preference is credited against the
taxpayer's regular tax liability in later years to the extent that liability
exceeds the alternative minimum tax in those years.
Exercise by Delivery of Stock. In Revenue Ruling 80-244, the Service
took the position that if an optionee pays part or all of the exercise price of
an option by delivering shares of stock already owned, the optionee recognizes
no taxable gain on the shares delivered. The shares so received upon exercise of
the option are divided into two groups as to their subsequent tax treatment. A
number of shares equal to the number of shares delivered in payment is
considered to be received by the optionee in an exchange subject to Section
1036(a) of the Code, so that the optionee's basis and holding period in the new
shares are identical to his basis and holding period in the old shares. If the
optionee receives more shares than he delivers, the additional shares are taxed
in accordance with Section 83 (if the option is a NSO) or 422 (if the option is
an ISO). His basis in those shares is equal to the sum of the cash, if any, paid
on exercise of the option, and the amount of ordinary income on which he is
taxed with respect to the shares under Section 83 or 422.
This favorable tax treatment is unavailable with regard to the exercise
of an ISO by delivery of stock acquired pursuant to another ISO, a qualified
stock option, an employee stock purchase plan option or a statutory restricted
stock option, if the statutory holding period for the delivered stock has not
been fulfilled.
Restrictions on Resale Imposed by Securities Law. Officers and
directors of Key, and persons who own beneficially 10% or more of Key Common
Stock are subject to Section 16(b) of the Exchange Act, which requires that
profits made by them on any purchase and sale or sale and purchase of equity
securities of Key within any six-month period inure to Key. The grant of an
-105-
<PAGE>
Option under the 1995 Plan is not treated as a purchase of stock, provided that
the Optionee does not dispose of the stock acquired upon exercise of the Option
within six months after the date on which the Option was granted. If the
Optionee disposes of the stock acquired on exercise of the Option within six
months after the date that the Option was granted, then the grant of the Option
is treated as a purchase for purposes of the short-swing profit rules. The
exercise of an Option under the 1995 Plan is not treated as a purchase or a sale
for purposes of Section 16(b). An Optionee's delivery of stock in payment of the
exercise price of an Option will not be considered a sale of the delivered
shares. However, a "cashless exercise", does constitute a sale of the stock used
to pay the exercise price.
The shares to be issued upon exercise of options granted under the 1995
Plan have not been registered under the Securities Act are being issued in
reliance on an exemption from registration thereunder, and may not be sold or
otherwise transferred except pursuant to an effective registration statement or
an exemption from registration under the Securities Act.
The following table sets forth certain information relating to option grants
pursuant to Key 1995 Stock Option Plan, effective July 6, 1995.
<TABLE>
<CAPTION>
Number of
Shares of Potential Realizable Value
Common Stock % of Total at Assumed Annual Rates of
Underlying Options Exercise Stock Price Appreciation
Options Granted to Price Expiration for Option Term(3)
Name Granted(1) Employees(2) per Share Date (in thousands)
---- ---------- --------- --------- ------ ---------------
5% 10%
<S> <C> <C> <C> <C> <C> <C>
-- ---
Francis D. John 350,000 36.8% $5.00 6/30/2005 $1,134 $2,989
150,000 15.8% $5.00 6/30/2005 (4) 1,281
C. Ron Laidley 80,000 8.4% $5.00 7/1/2005 259 683
45,000 4.7% $5.00 6/30/2005 146 384
D. Kirk Edwards 100,000 10.5% $5.00 6/30/2005 324 854
Danny Evatt 50,000 5.3% $5.00 6/30/2005 162 427
</TABLE>
(1) With the exception of the options granted to Mr. John, the options vest
in four annual installments commencing upon the effective date of the
plan. Of options granted to Mr. John, options to purchase 350,000
shares vest in four annual installments commencing on the effective
date of the grant and options to purchase 150,000 shares will vest on
the first date (occurring on or after July 1, 1995 but prior to July 1,
1999) on which the fair market value of Key Common Stock equals at
least $9.50 per share.
(2) Based on options to purchase a total of 950,000 shares of Common Stock
granted under the 1995 Plan.
(3) Potential Realizable Value is based on the assumed growth rates for the
ten-year option term. 5% annual growth results in a stock price per
share of $8.24 and 10% results in a stock price per share of $13.54.
The actual value, if any, an executive may realize will depend on the
excess of the stock price over the exercise price on the date the
option is exercised, so that there is no assurance the value realized
by an executive will be at or near the amounts reflected in this table.
(4) Options to purchase 150,000 shares will not vest until the fair market
value of Key Common Stock equals at least $9.50 per share, therefore,
Potential Realizable Value cannot be calculated at 5% assumed growth
rate.
-106-
<PAGE>
ITEM 5: ADOPTION AND APPROVAL OF OUTSIDE DIRECTORS STOCK OPTION PLAN
Eligibility. Individuals who are "Outside Directors" are eligible to
participate in the Outside Directors Stock Option Plan (hereinafter, the
"Directors Plan"). "Outside Director" means a member of the Board of Directors
who is not an employee of Key or any of its subsidiaries. Under the Directors
Plan, Outside Directors are divided into three groups:
"Group A Outside Directors" are Outside Directors who as of July 1,
1995 were members of the Executive Committee of the Board of Directors and are
Outside Directors as of the date of stockholder approval of the Directors Plan;
"Group B Outside Directors" are any Outside Directors who as of July 1, 1995
were neither Group A nor Group C Outside Directors and are Outside Directors as
of the date of the shareholder approval of the Directors Plan; and "Group C
Outside Directors" means any Outside Directors who first become Outside
Directors subsequent to July 1, 1995 but prior to July 1, 1996, and are, or are
designated to become, Outside Directors as of the date of stockholder approval
of the Directors Plan.
Options. Only NSOs may be granted under the Directors Plan. An NSO
granted under the Directors Plan shall expire 10 years after the date of grant
("Option Period"). An NSO may not be granted under the Directors Plan after July
1, 1998, but NSOs granted prior to that date shall continue to become
exercisable and may be exercised according to the terms of the Directors Plan.
Shares Available. The Directors Plan provides for the issuance of an
aggregate of 300,000 shares of Common Stock, which may be authorized but
unissued shares, treasury shares, or shares purchased on the open market. The
number of shares of Common Stock reserved for awards under the Directors Plan,
the exercise price and the securities issuable under any outstanding NSOs shall
be subject to appropriate adjustment by the Committee to reflect any stock
split, stock dividend, recapitalization, merger, consolidation, reorganization,
combination, or exchange of shares or other similar event. All determinations
made by the Committee with respect to adjustment shall be conclusive and binding
for all purposes of the Directors Plan.
Grants of Options. Effective as of July 6, 1995, each individual Group
A Outside Director shall automatically receive an NSO to purchase 50,000 shares,
and each individual Group B Outside Director shall automatically receive an NSO
to purchase 25,000 shares. Effective as of July 1, 1996, each individual Group A
Outside Director shall automatically receive an NSO to purchase 25,000 shares,
each individual Group B Outside Director shall automatically receive a NSO to
purchase 25,000 shares, and each individual Group C Outside Director shall
automatically receive an NSO to purchase 50,000 shares. If on the effective date
of such grants, the Board determines, in its sole discretion, that Key is in
possession of material, undisclosed information about Key, then the annual grant
of NSO's to Outside Directors shall be suspended until the second day after
public dissemination of such information. If Common Stock is not traded on the
American Stock Exchange on any date a grant would otherwise be made, then the
grant shall be made as of the next day thereafter on which Common Stock is so
traded.
-107-
<PAGE>
The exercise price of the NSO shall be the Fair Market Value on the
date of the grant. "Fair Market Value" means the mean of the high and low prices
at which the Common Stock is traded on the date in question, as reported on the
composite American Stock Exchange tape. The exercise price of an NSO shall be
paid in U.S. Dollars on the date of exercise.
All NSOs granted to Group A Outside Directors and Group B Outside
Directors effective as of July 6, 1995 shall vest immediately. NSOs granted to
Group A Outside Directors and Group B Outside Directors as of July 1, 1996 shall
vest in two installments of NSOs to purchase 8,333 shares each on July 1 1996
and July 1, 1997 and a third installment of NSOs to purchase 8,334 shares on
July 1, 1998. NSOs granted to Group C Outside Directors effective as of July 1,
1996 shall vest in four installments with the first installment of NSOs to
purchase 10,000 shares to vest July 1, 1996, two installments of 13,333 shares
each to vest on July 1, 1997 and July 1, 1998, respectively, and a final
installment to purchase 13,334 shares to vest on July 1, 1999.
Cessation of Service, Retirement or Death. Upon cessation of service as
an Outside Director (other than for reasons of retirement, death or removal for
cause), NSOs exercisable on the date of cessation of service shall continue to
be exercisable by the grantee for 90 days following cessation of service, but in
no event after the expiration of the Option Period. If a grantee ceases to serve
as an Outside Director having reached the age of 65 years, NSOs exercisable on
the date of cessation of service shall continue to be exercisable by the grantee
for 12 months following the date of retirement from the Board, but in no event
after the expiration of the Option Period. Upon the death of a grantee, NSOs
exercisable on the date of death shall be exercisable by the grantee's legal
representative or heirs for 12 months from date of death, but in no event after
expiration of the Option Period. If (a) an Outside Director is removed as a
director of Key for cause, (b) a NSO is not exercisable on the date on which the
grantee ceases to serve as an Outside Director, or (c) a NSO is not exercised in
full before it ceases to be exercisable, then, the NSO shall, to the extent not
previously exercised, thereupon be forfeited.
Administration, Amendment and Termination of the Directors Plan. The
Directors Plan shall be administered by the Committee and may be terminated or
amended by the Committee as it deems advisable. However, an amendment revising
the size or frequency of awards or the exercise price, date of exercisability or
Option Period of a NSO shall not be made more frequently than every six months
unless necessary to comply with the Code. No amendment may revoke or alter in a
manner unfavorable to the grantees any NSOs then outstanding, nor may the
Committee amend the Directors Plan without stockholder approval where the
absence of such approval would cause the Directors Plan to fail to comply with
Rule 16b-3 under the Exchange Act, or cause any recipient under the Plan to fail
to be a "disinterested person" under Rule 16b-3.
Other Terms. No NSO granted under the Directors Plan is transferable
other than by will or the laws of descent and distribution; provided that, at
the discretion of the Committee, an NSO may be transferred by a grantee solely
to members of his or her immediate family or trusts or partnerships for the
benefit of such persons by gift. During the grantee's lifetime, an NSO may only
be exercised by the grantee or the grantee's guardian or legal representative.
Except as provided in the Directors Plan, no Outside Director shall have any
claim or right to be granted an NSO under the Directors Plan. Neither the
Directors Plan nor any action thereunder shall be construed as giving any
director any right to be retained in the services of Key.
-108-
<PAGE>
For discussion of tax considerations of the Outside Directors Stock
Option Plan see discussion under Key 1995 Stock Option Plan.
The following table sets forth certain information relating to option grants
pursuant to the Outside Directors Stock Option Plan, effective as of July 6,
1995.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of Shares of at Assumed Annual Rates of
Common Stock Stock Price Appreciation
Underlying % of Total Options Exercise Price Expiration for Option Term(3)
Name Options Granted(1) Granted(2) per Share Date (in thousands)
---- ------------------ ------------ ----------- ------ ---------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Morton Wolkowitz 50,000 40% $5.00 7/6/2005 $162 $427
Van Greenfield 50,000 40% $5.00 7/6/2005 162 427
William Manly 25,000 20% $5.00 7/6/2005 81 214
</TABLE>
(1) All options granted to Group A Outside Directors and Group B Outside
Directors on July 6, 1995 vested immediately upon such date.
(2) Based on 125,000 shares of Common Stock granted on July 6, 1995 under
the Outside Directors Stock Option Plan.
(3) Potential Realizable Value is based on the assumed growth rates for the
ten-year option term. 5% annual growth results in a stock price per
share of $8.24 and 10% results in a stock price per share of $13.54.
The actual value, if any, an executive may realize will depend on the
excess of the stock price over the exercise price on the date the
option is exercised, so that there is no assurance the value realized
by an executive will be at or near the amounts reflected in this table
RESALES OF SECURITIES
Key Common Stock and Warrants issued to the WellTech stockholders under
this Prospectus will be freely transferable under the Securities Act, except for
Securities issued to persons who may be deemed to be an "underwriter" within the
meaning of Section 2(11) of the Securities Act and Rule 145(c) thereunder.
Generally, these are persons, including certain WellTech stockholders, who are
deemed to control, be controlled by, or under common control with WellTech
("Affiliates"). Key Common Stock and Warrants issued in connection with the
Merger to persons who constitute "underwriters" within the meaning of Section
2(11) and Rule 145(c) may not be publicly reoffered or resold by such person
except pursuant to an effective registration statement under the Securities Act
covering such Securities or, in certain circumstances, pursuant to Rule 145(d)
or any other applicable exemption under the Securities Act.
This Prospectus, as appropriately amended or supplemented, has also
been prepared for use by Affiliates. Such Affiliates may be entitled to offer
and sell such Key Common Stock and Warrants, on terms then attainable, under
circumstances requiring the use of a Prospectus; provided, however, that no such
Affiliate will be authorized to use this Prospectus for any offer or sale of
such Key Common Stock or Warrants without first giving Key prior written notice
and an opportunity to make any required or appropriate amendments or supplements
to this Prospectus. A broker or dealer selling shares of Key Common Stock or
Warrants for such a person or purchasing shares of Key Common Stock or Warrants
from such a person may be deemed to be an underwriter under the Securities Act,
and any compensation received by any such broker or dealer may be deemed
underwriting compensation. Key will not receive any of the proceeds of the same
of shares of Key Common Stock or Warrants by any such person.
-109-
<PAGE>
The ownership of the Key Common Stock and Warrants by the Affiliates
are described below:
<TABLE>
<CAPTION>
Key Common Stock Key Common Stock
Issuable Upon Issuable Upon
Key Common Stock Key Common Stock Exercise of Exercise of
Name of Owned Prior to Owned After Warrants Owned Warrants Owned
Securityholder(1) Offering Offering Prior to Offering After Offering
<S> <C> <C> <C> <C>
Belmont Capital
Partners II, L.P. 165,383 -0- 351,438 -0-
Belmont Fund, L.P. 23,626 -0- 50,205 -0-
Fidelity Capital 31,957 -0- 67,908 -0-
and Income Fund
</TABLE>
- ----------------
(1) Assumes that the Affiliates sell all of the Key Common Stock and
Warrants and do not acquire additional Key Common Stock and Warrants.
-110-
<PAGE>
MISCELLANEOUS
Independent Accountants
KPMG Peat Marwick, LLP has been Key's independent public accountants
since 1994. Key is not required to submit the ratification and approval of the
selection of its accountants to a vote of stockholders. A representative of KPMG
Peat Marwick LLP is expected to be present at the Key Special Meeting to respond
to questions and to make a statement if he desires to do so.
Stockholder Proposals
The 1996 Annual Meeting of Key is expected to be held on or about
November 7, 1996. Stockholder proposals must be received by Key on or before
July 9, 1996 to be considered for inclusion in the proxy statement and presented
at the 1996 Annual Meeting of Key.
LEGAL MATTERS
Certain legal matters relating to the validity of the shares of Key
Common Stock to be issued in the Merger will be passed upon by Sullivan &
Worcester LLP ("Sullivan & Worcester"). Sullivan & Worcester will rely as to all
matters of Maryland law on the opinion of Piper & Marbury L.L.P. Sullivan &
Worcester will also render an opinion with respect to certain tax matters
relating to the Merger
EXPERTS
The consolidated financial statements of Key and subsidiaries as of
June 30, 1995 and 1994, and for the years then ended, have been included herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated statements of operations, stockholders' equity
(deficit) and cash flows of Key and subsidiaries for the seven months ended June
30, 1993 and the five months ended November 30, 1992 have been included herein
and in the Registration Statement in reliance upon the report of Coopers &
Lybrand, L.L.P., independent public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of WellTech and subsidiaries as
of December 31, 1994 and 1993 and for the three years ended December 31, 1994,
included in this Proxy Statement -Prospectus and elsewhere in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
-111-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
I. KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Independent Auditors' Report.........................................F-2
Report of Independent Accountants....................................F-3
Consolidated Balance Sheets, June 30, 1995 and 1994..................F-4
Consolidated Statements of Operations, Years Ended
June 30, 1995 and 1994, Seven Months Ended June 30,
1993 and Five Months Ended November 30, 1992.......................F-5
Consolidated Statements of Cash Flows, Years Ended
June 30, 1995 and 1994, Seven Months Ended June 30,
1993 and Five Months Ended November 30, 1992.......................F-6
Consolidated Statements of Stockholders' Equity
(Deficit), Years Ended June 30, 1995 and 1994,
Seven Months Ended June 30, 1993 and Five Months Ended
November 30, 1992..................................................F-7
Notes to Consolidated Financial Statements,
June 30, 1995, 1994 and 1993.......................................F-8
Consolidated Balance Sheet, December 31, 1995 (unaudited)..........F-29
Consolidated Statements of Operations, Six Months Ended
December 31, 1995 and 1994 (unaudited)............................F-31
Consolidated Statements of Cash Flows, Six Months Ended
December 31, 1995 and 1994 (unaudited)............................F-32
Notes to Consolidated Financial Statements,
December 31, 1995 (unaudited).....................................F-33
II. WELLTECH, INC.
Report of Independent Public Accountants............................F-37
Consolidated Balance Sheets as of December 31, 1994 and 1993........F-38
Consolidated Statements of Operations for the Years
Ended December 31, 1994, 1993 and 1992..............................F-40
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1994, 1993 and 1992.......F-41
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994, 1993 and 1992............................F-42
Notes to Consolidated Financial Statements..........................F-43
Unaudited Consolidated Balance Sheet, September 30, 1995............F-55
Unaudited Consolidated Statements of Operations for the
Nine Months Ended September 30, 1995 and 1994.....................F-57
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994.....................F-58
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1995...............F-59
Notes to Unaudited Consolidated Financial Statements................F-60
III. KEY ENERGY GROUP, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Balance Sheet as of
December 31, 1995.................................................F-64
Unaudited Pro Forma Combined Statement of
Operations, Twelve Months Ended June 30, 1995.....................F-66
Unaudited Pro Forma Combined Statement of Operations,
Six Months Ended December 31, 1995...............................F-67
Notes to Unaudited Pro Forma Combined Financial Statements..........F-68
<PAGE>
Independent Auditors' Report
To The Board of Directors and Stockholders
Key Energy Group, Inc.
We have audited the accompanying consolidated balance sheets of Key Energy
Group, Inc. and Subsidiaries as of June 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Key Energy Group,
Inc. and Subsidiaries as of June 30, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
September 14, 1995 (except with respect to the matters
discussed in Note 18, as to which the
date is November 28, 1995)
F-2
<PAGE>
Report of Independent Accountants
To The Board of Directors
Key Energy Group, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows of Key Energy Group, Inc. and
Subsidiaries for the seven months ended June 30, 1993 and the five months ended
November 30, 1992. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company emerged from bankruptcy on December 4, 1992. The reorganization was
accounted for as of November 30, 1992, at which time Key adopted "fresh start
reporting". As a result, the Company's consolidated financial statements for the
seven months ended June 30, 1993 representing the consolidated results of
operation of the reorganized entity are not comparable to the Company's
consolidated financial statements for the five months ended November 30, 1992.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Key Energy Group, Inc. and Subsidiaries for the seven months ended June 30, 1993
and the five months ended November 30, 1992 in conformity with generally
accepted accounting principles.
Coopers & Lybrand
Dallas, Texas
September 7, 1993
F-3
<PAGE>
<TABLE>
<CAPTION>
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share & per share data) June 30, 1995 June 30, 1994
===============================================================================================================
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 865 $ 717
Restricted cash 410 456
Restricted marketable securities 267 251
Accounts receivable, net of allowance for doubtful
accounts ( $133 - 1995, $103 - 1994) 8,133 6,674
Inventories 1,257 964
Prepaid expenses and other current assets 358 105
===============================================================================================================
Total Current Assets 11,290 9,167
===============================================================================================================
Property and Equipment:
Oilfield service equipment 23,726 12,412
Oil and gas well equipment 2,014 -
Motor vehicles 526 422
Oil and gas properties and other related equipment,
successful efforts method 7,652 4,430
Furniture and equipment 332 157
Buildings and land 2,086 1,514
===============================================================================================================
36,336 18,935
Accumulated depreciation & depletion (4,394) (1,776)
===============================================================================================================
Net Property and Equipment 31,942 17,159
===============================================================================================================
Other Assets 2,011 1,769
===============================================================================================================
Total Assets $ 45,243 $ 28,095
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,930 $ 3,117
Accrued interest 145 89
Other accrued liabilities 2,612 2,726
Accrued income taxes 174 447
Deferred tax liability 118 -
Current portion of long-term debt 2,249 2,004
===============================================================================================================
Total Current Liabilities 9,228 8,383
===============================================================================================================
Long-term debt, less current portion 13,700 9,497
Deferred income taxes 2,204 952
Commitments and contingencies
Stockholders' equity:
Common stock, $.10 par value; 10,000,000 shares authorized,
6,913, 510 and 5,273,513 shares issued and
outstanding at June 30, 1995 and 1994, respectively 691 527
Additional paid-in capital 15,186 6,680
Retained earnings 4,234 2,056
Total Stockholders' Equity 20,111 9,263
===============================================================================================================
Total Liabilities and Stockholders' Equity $ 45,243 $ 28,095
===============================================================================================================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Seven Months Five Months
Year Ended Year Ended Ended Ended
(In thousands, except per share data) June 30, 1995 June 30, 1994 June 30, 1993 November 30, 1992
===================================================================================================================================
<S> <C> <C> <C> <C>
REVENUES:
Oilfield services $40,105 $32,616 $14,304 $10,156
Oil and gas 2,334 1,936 - -
Oil and gas well drilling 1,932 - - -
Other, net 318 69 (48) 277
===================================================================================================================================
44,689 34,621 14,256 10,433
===================================================================================================================================
COSTS AND EXPENSES:
Oilfield services 30,592 25,992 10,863 7,947
Oil and gas 757 593 - -
Oil and gas well drilling 1,444 - - -
Depreciation, depletion and amortization 2,738 1,371 406 505
General and administrative 4,352 3,540 1,587 1,117
Interest 1,478 830 276 464
===================================================================================================================================
41,361 32,326 13,132 10,033
===================================================================================================================================
Income before reorganization items, income taxes and
extraordinary item 3,328 2,295 1,124 400
===================================================================================================================================
Reorganization items:
Reorganization costs - - - (150)
Adjust accounts to fair value - - - 1,868
===================================================================================================================================
Income before income taxes and extraordinary item 3,328 2,295 1,124 2,118
Income tax expense 1,150 950 413 -
===================================================================================================================================
Income before extraordinary item 2,178 1,345 711 2,118
Extraordinary gain on discharge of pre-petition liabilities - - - 2,868
===================================================================================================================================
NET INCOME $2,178 $1,345 $711 $4,986
===================================================================================================================================
EARNINGS PER SHARE *
Primary:
Income before reorganization items, income taxes and
extraordinary item $0.50 $0.44 $0.21 $0.02
Income before extraordinary item 0.33 0.26 0.14 0.12
Extraordinary item - - - 0.16
Net income 0.33 0.26 0.14 0.28
Assuming full dilution:
Income before reorganization items, income taxes and
extraordinary item $0.50 $0.43 $0.21 $0.00**
Income before extraordinary item 0.33 0.25 0.14 0.01
Extraordinary item - - - 0.02
Net income 0.33 0.25 0.14 0.03
===================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 6,647 5,274 5,124 17,942
Assuming full dilution 6,647 5,288 5,138 176,508
===================================================================================================================================
</TABLE>
* - Earnings per common share for the five months ended November 30, 1992
reflect the previous capital structure of Key Energy Group, Inc.
(previously "National Environmental Group, Inc.") prior to the 1992
Reorganization
Plan (see Note 3).
** - Earnings per common share less than $0.01.
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Seven Five Months
Year Ended Year Ended Months Ended Ended
(In thousands) June 30, 1995 June 30, 1994 June 30, 1993 November 30, 1992
====================================================================================================================================
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,178 $1,345 $711 $4,986
Extraordinary item - - - (2,868)
===================================================================================================================================
Income before extraordinary item 2,178 1,345 711 2,118
Adjust accounts to fair value - - - (1,868)
Reorganization costs - - - 150
===================================================================================================================================
Income from operations 2,178 1,345 711 400
===================================================================================================================================
Adjustments to reconcile income from operations to
net cash provided by operations:
Depreciation, depletion and amortization 2,738 1,371 406 505
Deferred income taxes 1,370 493 382 -
Other non-cash items (312) - - (248)
Change in assets and liabilities net of effects
from the acquisitions:
Increase in accounts receivable (1,327) (389) (253) (489)
Increase in other current assets (940) (613) (91) 22
Decrease in accounts payable and
accrued expenses (154) (392) (1,250) (387)
(Decrease) increase in accrued interest 56 53 (4) 246
(Decrease) increase in accrued taxes (273) 447 31 -
Increase in other assets (78) (473) (55) 392
===================================================================================================================================
Net cash (used in) provided by operating activities 3,258 1,842 (123) 441
===================================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell service operations (2,839) (4,395) (1,033) (537)
Capital expenditures - Oil and gas operations (2,823) (1,253) - -
Capital expenditures - Oil and gas well drilling operations (143) - - -
Acquisitions (1,348) - - -
Purchase of restricted marketable securities and other (1) 40 (251) -
===================================================================================================================================
Net cash used in investing activities (7,154) (5,608) (1,284) (537)
===================================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (2,148) (1,771) (538) (386)
Principal payments, line-of-credit - - (14,024) (9,458)
Proceeds under line-of-credit - - 14,159 (10,123)
Borrowings (payments) under line-of-credit (605) 1,551 - -
Decrease in cash overdraft - - - (129)
Proceeds from rights offering - - - 1,841
Proceeds from debt 6,751 4,536 330 -
===================================================================================================================================
Net cash provided by (used in) financing activities 3,998 4,316 (73) 1,991
===================================================================================================================================
Net increase (decrease) in cash and restricted cash 102 550 (1,480) 1,895
Cash and restricted cash at beginning of period 1,173 623 2,103 208
===================================================================================================================================
Cash and restricted cash at end of period $1,275 $1,173 $623 $2,103
===================================================================================================================================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock Common Stock
Number of Number of Additional Retained
Shares Amount Shares Amount Paid-in Earnings
(In thousands) Outstanding at par Outstanding at par Capital (Deficit) Total
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1992 1,151 $115 17,942 $1,794 $ 24,811 $(31,658) $(4,938)
==================================================================================================================================
1992 Reorganization Plan:
Exchange of "old" preferred and common
stock for "new" common stock (1,151) (115) (17,942) (1,794) 1,757 - (152)
Issuance of "new" common stock - - 1,520 152 - - 152
Exchange of debt for "new" common stock - - 2,634 263 4,985 2,868 8,116
Issuance of "new" common stock for cash - - 970 97 - - 97
"Fresh-start" reporting adjustments - - - - (25,878) 23,804 (2,074)
Net income (for the five months ended
November 30, 1992) - - - - - 4,986 4,986
==================================================================================================================================
Balance at November 30, 1992 - - 5,124 $512 $5,675 - $6,187
==================================================================================================================================
Change in valuation allowance related to
deferred tax assets - - - - 382 - 382
Net income (for the seven months ended
June 30, 1993). - - - - - 711 711
==================================================================================================================================
Balance at June 30, 1993 - - $5,124 $512 $6,057 $711 $7,280
==================================================================================================================================
Issuance of common stock for Odessa
Exploration - - 150 15 623 - 638
Net income - - - - - 1,345 1,345
==================================================================================================================================
Balance at June 30, 1994 - - 5,274 $527 $6,680 $2,056 $9,263
==================================================================================================================================
Issuance of common stock for WellTech
West Texas assets - - 1,635 164 8,420 - 8,584
Issuance of warrants for WellTech West
Texas assets - - - - 63 - 63
Issuance of common stock for Clint Hurt
Drilling assets - - 5 - 23 - 23
Net income - - - - - 2,178 2,178
==================================================================================================================================
Balance at June 30, 1995 - - 6,914 $691 $15,186 $4,234 $20,111
==================================================================================================================================
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-7
<PAGE>
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1995, June 30, 1994 and June 30, 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Key
Key Energy Group, Inc. ("Key") was organized in April 1977, and commenced
operations in July 1978. Results of operations for the seven months ended June
30, 1993 and the five months ended November 30, 1992 include Key's oil field
service operations conducted by Key's wholly-owned subsidiary, Yale E. Key, Inc.
("Yale E. Key"). Results of operations for the twelve months ended June 30, 1995
and 1994 include Key, Yale E. Key's oil and gas exploration and production
wholly-owned subsidiary, Odessa Exploration Incorporated ("OEI"), and Key's oil
and gas well drilling operations conducted by Key's wholly-owned subsidiary, Key
Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling"). Clint
Hurt Drilling was acquired in March of 1995 (see Note 2).
Basis of Presentation
Key's consolidated financial statements include the accounts of Key and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The accounting policies presented below have been
followed in preparing the accompanying financial statements. Subsequent to the
adoption of "fresh-start reporting" (see Note 3), Key will continue to utilize
the same policies. However, due to the material nature of the "fresh-start
reporting" adjustments, the financial statements issued prior to November 30,
1992 will not be comparable to those issued subsequent to November 30, 1992.
Key's ownership of less than 50% owned entities are accounted for by the cost or
equity methods, depending on Key's ownership percentage.
Cash, Restricted Cash and Marketable Securities
Key holds significant cash in certain financial institutions. Restricted cash,
$410,000 and $456,000 at June 30, 1995 and 1994, respectively, consists of
monies held in Key's cash lock-box. The cash lock-box is a requirement under the
line of credit with CIT (see Note 5). Restricted marketable securities, $267,000
and $251,000 at June 30, 1995 and 1994, respectively, consist primarily of an
investment in a mutual fund which invests, mostly, in short-term intermediate
government securities which are recorded at market value. The mutual fund
investment is held in escrow for a letter-of-credit (issued in the amount of
approximately $244,000) for workers' compensation insurance.
F-8
<PAGE>
Inventories
Inventories, which consist primarily of parts and supplies, are held for use in
the operations of Key and are valued at the lower of cost (first-in first-out
method) or market.
Property and Equipment
Key provides for depreciation and amortization of non-oil and gas properties
using the straight-line method over the following estimated useful lives of the
assets:
Post-confirmation Pre-confirmation
Description Years Years
- -------------------------------------------------------------------------------
Oil field service equipment 3 - 15 5 - 10
Oil and gas well drilling equipment 3 - 15 -
Motor vehicles 3 - 7 3 - 10
Furniture and equipment 3 - 7 3 - 15
Buildings and improvements 10 - 15 15 - 25
Gas processing facilities 10 -
- -------------------------------------------------------------------------------
Upon disposition or retirement of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and the gain or loss
thereon, if any, is included in the results of operations. 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.
For Key, property and equipment values prior to November 30, 1992 were carried
at cost less accumulated depreciation. Property and equipment were adjusted at
November 30, 1992 to their estimated fair values and accumulated depreciation
was eliminated (see Note 3). Additions after November 30, 1992 are recorded at
cost.
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 (barrels) 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.
Gas Balancing
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under gas
balancing arrangements in excess of OEI's interest in properties covered by such
agreements. OEI had deferred income associated with gas balancing at June 30,
1995 and 1994 (see Note 7).
F-9
<PAGE>
Environmental
Key is subject to extensive federal, state and local environmental laws and
regulations. These laws, which are constantly changing, regulate the discharge
of materials into the environment and may require Key to remove or mitigate the
environmental effects of the disposal or release of petroleum or chemical
substances at various sites. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. Expenditures that relate
to an existing condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of a noncapital
nature are recorded when environmental assessment and/or remediation is
probable, and the costs can be reasonably estimated.
Goodwill
At June 30, 1995, Key classified as Goodwill the cost in excess of fair value of
the net assets acquired in purchase transactions. Goodwill is being amortized on
a straight-line basis over ten years. Goodwill is included in other assets in
the consolidated balance sheet at June 30, 1995. Key evaluates the existence of
Goodwill impairment on the basis of whether Goodwill is fully recoverable from
projected, undiscounted net cash flows of the related assets.
Earnings per Share
Primary earnings per share are determined by dividing net earnings applicable to
common stock by the weighted average number of common shares actually
outstanding during the period and common equivalent shares resulting from the
assumed exercise of stock options and warrants (if any) using the treasury stock
method, except in periods with reported losses as the inclusion of common stock
equivalents would be antidilutive. Fully diluted earnings per share are based on
the increased number of shares that would be outstanding assuming conversion of
dilutive outstanding convertible securities using the "as if converted" method.
Earnings per share for the five months ended November 30, 1992 reflect the
previous capital structure of Key prior to the 1992 Reorganization Plan (see
Note 3).
Income Taxes
On November 30, 1992, as part of Key's "fresh-start reporting", Key adopted
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for
Income Taxes. The adoption of SFAS 109 changed Key's method of accounting for
income taxes from the deferred method (APB 11) to an asset and liability
approach. Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
F-10
<PAGE>
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rate is recognized in income in the period that
includes the enactment date. Under SFAS 109, a valuation allowance for the
deferred tax assets is recognized when it is "more likely than not" that the
benefit of deferred tax assets will not be realized. Adoption of SFAS 109
resulted in the recording of a net deferred tax credit of $50,000 as of November
30, 1992 as part of "fresh-start reporting". The cumulative effect of SFAS 109
at July 1, 1992 was not material. Financial statements of Key prior to November
30, 1992 do not reflect the adoption of SFAS 109.
Key and its wholly-owned subsidiaries file a consolidated federal income tax
return.
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 his assets in
West Texas. Such assets mainly consisted of four (4) oil and gas drilling rigs
and related equipment. As consideration for the acquisition, Key paid CHA
$1,725,000, of which $1,000,000 was paid in cash and the balance in
the form of a 60-day promissory note. Mr. Clint Hurt entered into consulting and
noncompetition agreements with Key in connection with which Key issued 5,000
shares of its common stock to Mr. Hurt. Key Energy Drilling, Inc., a
wholly-owned subsidiary of Key, operates as Clint Hurt Drilling. 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.
WellTech West Texas
On December 10, 1993, Key and WellTech, Inc. ("WellTech") entered into an Asset
Purchase Agreement pursuant to which Key purchased substantially all assets used
by WellTech in its West Texas operations. The transaction was consummated in
August 1994. As consideration for the acquisition, Key issued to WellTech
1,635,000 shares of Common Stock of Key and warrants to acquire 250,000
additional shares of Common Stock, at $5.00 per share, which expire on February
5, 1997.
Commencing December 10, 1993, Key (through Yale E. Key) operated and managed the
operations of the WellTech West Texas region in connection with an interim
operating agreement (the "Interim Operations Agreement"). In addition, as part
of the Interim Operations Agreement, Key assumed ownership of WellTech West
Texas current assets and current liabilities. The working capital items assumed
were immaterial. Key's consolidated statements of operations from December 10,
1993 through August 11, 1994, include the direct revenues and expenses from the
West Texas operations of WellTech. For the period after August 11, 1994, the
results of operations include the effects of ownership of WellTech West Texas.
F-11
<PAGE>
Odessa Exploration Incorporated
On August 5, 1993, Key acquired Odessa Exploration Incorporated ("OEI"). The
effective date of the OEI acquisition was July 1, 1993, when Key took effective
control. OEI is engaged in the operation of oil and natural gas wells and
exploration for oil and natural gas. OEI was acquired in consideration of the
issuance of 150,000 shares of Key Common Stock (which had a closing market value
of approximately $638,000 at July 1, 1993) to Mr. D. Kirk Edwards, the former
owner and the now current President and CEO of OEI, and the assumption of
approximately $1,811,000 in bank debt. Key guaranteed all of the assumed OEI
bank debt. The acquisition was accounted for as a purchase.
The following unaudited pro forma results of operations have been prepared as
though Clint Hurt Drilling and WellTech West Texas had been acquired on July 1,
1993:
(unaudited)
Year Ended
June 30, 1995 June 30, 1994
(In thousands, except share data)
Revenues $50,485 $ 48,069
Net income 2,798 2,146
Earnings per share:
Net income $0.40 $0.31
Weighted average shares outstanding: 6,924 6,914
3. 1992 REORGANIZATION PLAN
On October 20, 1992, Key, then known as National Environmental Group, Inc.
("NEGI") and several affiliated companies, filed a Joint Plan of Reorganization
under Chapter 11 of the Bankruptcy Code (the "Prepackaged Plan"). Under the
Prepackaged Plan, holders of the various debt issues, preferred stockholders and
common stockholders of Key and affiliates received shares of Key Common Stock in
exchange for their claims. On December 4, 1992, the Prepackaged Plan was
confirmed. The Prepackaged Plan was implemented by merging Key Energy Group,
Inc., a newly formed, wholly-owned subsidiary of NEGI, with and into NEGI,
merging ESKEY Inc., a wholly-owned subsidiary of NEGI, into NEGI, and
liquidating YFC International, N.V., another wholly-owned subsidiary of NEGI.
The Articles of Incorporation of NEGI were amended to (a) reduce Key's
authorized capital stock to 10,000,000 shares, (b) prohibit the issuance of
non-voting equity securities and (c) change the name to Key Energy Group, Inc.
In connection with the reorganization, a reverse stock split of the common stock
occurred as a result of which each share of NEGI common stock converted into
.0178 shares of Key Common Stock, and each share of NEGI preferred stock
converted into 1.04 shares of Key Common Stock.
F-12
<PAGE>
The confirmation of the Prepackaged Plan converted approximately $7.4 million in
debt, approximately $700,000 in accrued interest, 1,150,664 shares of preferred
stock and 17,942,108 shares of common stock of NEGI into approximately 4.2
million shares of Key Common Stock. In addition, Key issued an aggregate of
970,000 shares of Common Stock through a rights offering to former preferred and
common shareholders for approximately $1.8 million in cash.
The sum of the allowed claims plus post-petition liabilities exceeded the value
of preconfirmation assets. Also, Key experienced a change in control as
pre-reorganization equity holders received less than 50% of the new Key Common
Stock issued pursuant to the Prepackaged Plan.
As a result of these circumstances, Key was required to adopt AICPA SOP 90-7
("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. SOP 90-7 requires that a new reporting entity be created and
assets and liabilities be recorded at their fair values. This accounting
treatment is referred to in this report as "fresh start reporting". "Fresh start
reporting" reorganization value was determined with the assistance of
independent advisors. The methodology employed involved estimation of values
(i.e., the market values of Key's assets, liabilities and equity), taking into
account a discounted cash flow analysis. The discounted cash flow analysis was
based on ten-year cash flow projections prepared by management. Cash flows were
discounted at a debt-free cost of equity of 10.0%. Terminal value calculation
was based on 50% of the discounted ten-year cash flow projection assumed above.
The ten-year cash flow projections were based on estimates and assumptions about
circumstances and events that have not yet taken place. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties and contingencies beyond the control of Key, including, but not
limited to, those with respect to the future courses of Key's business activity.
Accordingly, there will usually be differences between projections and actual
results because events and circumstances frequently do not occur as expected,
and those differences may be material.
The "fresh start reporting" referred to above was reflected as of November 30,
1992. Commencing with the seven months ended June 30,1993, consolidated
financial statements have been prepared as if Key is a new reporting entity. A
black line, therefore, separates the seven month period ended June 30, 1993 from
prior period information since it has not been prepared on a comparable basis of
accounting.
F-13
<PAGE>
4. OTHER ASSETS
Other assets consist of the following:
June 30,
1995 1994
(in thousands)
Investment in insurance company * $ 368 $ 368
Workers compensation security premiums 326 450
Deferred acquisition costs 200 800
Goodwill (net of amortization - $100) 963 --
Other 154 151
------ ------
$2,011 $1,769
====== ======
* Represents approximately 13% ownership.
5. LONG-TERM DEBT
The components of long-term debt are as follows:
June 30,
1995 1994
(in thousands)
Term Note - CIT Corporation, interest and
principal payable monthly (a) $ 6,032 $ 4,327
Revolving Line of Credit - CIT Corporation,
interest payable monthly (a) 3,846 4,452
Revolver Note - Norwest, interest
payable monthly (b) 4,237 --
Term Note - Norwest, interest and principal
payable monthly (c) 944 --
Term Note - NationsBank, interest and principal
payable monthly -- 1,908
Other notes payable 890 814
-------- ------
15,949 11,501
Less current portion 2,249 2,004
-------- ------
Long-term debt $ 13,700 $ 9,497
======== =======
(a) The CIT term note, 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, 9.0% at June 30, 1995 and 1994. The note is collateralized
by all of the assets (including equipment and inventory) of Yale E.
Key.
F-14
<PAGE>
The CIT line of credit, as amended, requires monthly payments of
interest at two and one-half percent above the stated prime rate (9.0%
at June 30, 1995 and 1994). 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 June 30, 1995, there was no credit line availability.
The agreement with CIT includes certain restrictive covenants, the most
restrictive of which prohibits Yale E. Key from making distributions
and declaring dividends on the Key Common Stock.
(b) In March 1995, OEI entered into a loan agreement, as amended, with
Norwest Bank Texas, N.A. ("Norwest"). The loan agreement provides for a
$7.5 million revolving line of credit note subject to a borrowing base
limitation (approximately $5.3 million at June 30, 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 (9.0% at June 30, 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 (see note 13). The note is also guaranteed by Key.
The loan agreement contains various restrictive covenants and
compliance requirements, which include (a) prohibition of OEI from
declaring or paying dividends on OEI's common stock, (b) limiting the
incurrence of additional indebtedness by OEI, (c) limitation on the
disposition of assets and (d) various financial covenants.
(c) In March 1995, Clint Hurt Drilling entered into a loan agreement
with Norwest. The loan agreement provided for a $1 million term note
and a $200,000 line of credit note. The $1 million term note requires
principal payments of approximately $28,000 per month plus interest
with the first payment due May 5, 1995 and monthly thereafter for 36
months with a maturity date of April 1998. The $200,000 line of credit
note requires principal payments of $20,000 per month beginning July 5,
1995, plus interest, through its maturity in April 1996. Both notes
have an interest rate of Norwest prime rate (9.0% at June 30, 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.
As of June 30, 1995, Key was not in compliance with various covenants of its
loan agreements. Subsequent to June 30, 1995, Key has obtained waivers of the
events of non-compliance from the various lenders. Such waivers were obtained
either for the remaining term of the related loan or for a period exceeding one
year.
F-15
<PAGE>
Presented below is a schedule of the repayment requirements of long-term debt
for each of the next five years and thereafter as of June 30, 1995:
Fiscal year Principal
Ended Amount
(in thousands)
1996 $ 2,249
1997 9,527
1998 4,125
1999 -
2000 -
Thereafter 48
---------
$ 15,949
6. 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
items will result in a material adverse impact on the consolidated financial
position or results of operations 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
officer. In addition to providing a base salary for the officer, each employment
agreement provides for a severance payment in amount varying from 12 to 24
months of the officer's base salary. The current annual base salaries for the
officers covered under such employment agreements total approximately $800,000.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30,
1995 1994
(in thousands)
Accrued payroll and taxes $ 624 $ 597
Workers compensation 704 540
State sales and use taxes 129 109
Accrued property taxes 79 --
Gas imbalance - deferred income 253 454
Revenue distribution 215 399
Other 608 627
----- -----
Total $2,612 $2,726
====== ======
F-16
<PAGE>
8. STOCKHOLDERS' EQUITY
On September 27, 1993, a Stock Grant Plan (the "Plan") was adopted by the Board
and was approved by Key's stockholders on July 25, 1994. The Plan authorized a
Compensation and Stock Grant Plan Committee of the Board (the "Committee") to
recommend to the Board the award of up to 600,000 shares of Key's Common Stock
to key employees between October 15, 1993 and December 31, 2003. Subsequent to
June 30, 1995, the Board has voted to terminate the Plan subject to shareholder
approval of 1995 Stock Option Plan. No shares have been awarded under the Plan.
9. INCOME TAXES
As discussed in Note 3, Key adopted SFAS 109 effective November 30, 1992 by
recording a net deferred tax liability of $50,000 as part of Key's "fresh-start
reporting". The cumulative effect of SFAS 109 at July 1, 1992 was not material.
Financial statements of Key prior to November 30, 1992 do not reflect the
adoption of SFAS 109.
Income tax expense for the fiscal years ended June 30, 1995 and 1994 was
$1,150,000 and $950,000, respectively, and $413,000 for the seven months ended
June 30, 1993.
Components of income tax expense (benefit) are as follows:
Seven Months Five Months
Year Ended Ended Ended
June 30, June 30, June 30, November 30,
1995 1994 1993 1992
------- -------- ----------- ------------
(in thousands)
Federal and State:
Current $ (220) $ 457 $ 413 $ -
Deferred 1,370 493 - -
----- ------ ------- -------
$1,150 $ 950 $ 413 $ -
====== ====== ====== =======
F-17
<PAGE>
Income tax expense (benefit) differs from amounts computed by applying the
statutory federal rate as follows:
<TABLE>
<CAPTION>
Seven Months Five Months
Year Ended Ended Ended
June 30, June 30, June 30, November 30,
1995 1994 1993 1992
------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Income tax computed at
Statutory rate 34.0% 34.0% 34.0% 34.0%
State taxes net of federal benefit - 2.4 2.7 2.4
Expiration of capital loss carryover - 4.4 - -
Book net operating loss benefit - - - (2.7)
Reorganization items - - - (30.0)
Foreign income tax effects - - - (0.3)
Meals and entertainment
disallowance 2.2 - - -
Accrual to return adjustments (1.0) - - -
Other (0.7) 0.5 - (3.4)
------- ------- ------ ------
34.5% 41.3% 36.7% 0.0%
======= ======= ====== ======
</TABLE>
Deferred tax assets (liabilities) are comprised of the following :
June, 30
1995 1994
----------------------------
Net operating loss carry-forwards $ 1,140 $ 1,143
Property and equipment (3,437) (2,095)
Other (25) -
----------- ---------
Net deferred tax liability $(2,322) $ (952)
=========== =========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future, management has determined that taxable income of Key will more
likely than not be sufficient to fully utilize available carryforwards prior to
their ultimate expiration.
Key estimates that as of June 30, 1995, Key will have available approximately
$3,352,000 of net operating loss carryforwards (which begin to expire in 2006).
The net operating loss carryforwards are subject to an annual limitation of
approximately $270,000, under Sections 382 and 383 of the Internal Revenue Code
of 1986, as amended.
F-18
<PAGE>
10. LEASING ARRANGEMENTS
Among other leases, Key leases certain automotive equipment under
non-cancellable operating leases which expire at various dates through 1998. The
terms of the operating leases are 36 months with varying payment dates
throughout each month. In addition, each lease includes an option to purchase
the equipment and an excess mileage charge as defined in the leases.
As of June 30, 1995, the future minimum lease payments under non-cancellable
operating leases, in thousands, are as follows:
Fiscal Year Lease
Ending June 30, Payments
1996 $1,107
1997 509
1998 147
1999 47
$1,810
Operating lease expense was approximately $1,930,000 and $1,640,000 for the
fiscal years ended June 30, 1995 and 1994, respectively, and $529,000 and
$364,000 for the seven months ended June 30, 1993 and the five months ended
November 30, 1992, respectively.
11. EMPLOYEE BENEFIT PLANS
Yale E. Key maintains a 401-(k) plan which plan covers substantially all of its
employees. Yale E. Key did not make a contribution to the 401-(k) plan during
the fiscal year ended June 30, 1994, the seven months ended June 30, 1993 or the
five months ended November 30, 1992. Beginning July 1, 1994, it has agreed to
match up to 10% of the employees' contributions, which contributions totaled
approximately $20,000 for the year ended June 30, 1995.
12. MAJOR CUSTOMERS
Sales to customers representing 10% or more of consolidated revenues for the
years ended June 30, 1995, 1994 and 1993 were as follows:
Fiscal Year Ended
June 30,
1995 1994 1993
Customer A 18% 15% 23%
Customer B 10% 14% 26%
The accounts receivable balance for customer A and B at June 30, 1995 were
$1,807,000 and $243,000, respectively.
F-19
<PAGE>
13. TRANSACTIONS WITH RELATED PARTIES
In connection with the OEI acquisition (see Note 2), Key has agreed to grant D.
Kirk Edwards (President and CEO of OEI) a percentage reversionary working
interest in five deep gas wells located in West Texas upon repayment of
$1,622,000 of the assumed bank debt from Key's earnings from the five wells. The
percentage reversionary working interest decreases based on the date of
repayment of the assumed bank debt and ranges from 20% of the earnings from the
five wells if repayment occurs on or prior to July 7, 1995, to 5% of the
earnings from the five wells if repayment occurs after July 7, 1996. The value
of the reversionary interest assigned was insignificant at July 1, 1993.
Key leases automotive equipment from an independent third party (see Note 10),
which purchases the automotive equipment from an automobile dealership in which
a former officer owns a majority interest. Net proceeds to the automobile
dealership totaled $399,000 and $1,058,000 for years ended June 30, 1995 and
1994, respectively, and $449,000 and $132,000 for the seven months ended June
30, 1993 and the five months ended November 30, 1992, respectively. The leases
are considered operating leases. In the opinion of the Board of Directors of
Key, the net proceeds from automotive equipment were on terms at least as
favorable to Key as could have been obtained from a third party. This opinion is
based on information provided by a third party leasing company, that is not
affiliated with the former officer or Key, to the Board of Directors regarding
purchase prices and equipment lease rentals offered by third parties.
Key paid $55,000, $57,000 and $33,000 for the year ended June 30, 1994, the
seven months ended June 30, 1993 and the five months ended November 30, 1992,
respectively (none during fiscal 1995), for oil field related services and
equipment to two oil field related companies in which two officers of Key have
an interest. In the opinion of the Board of Directors of Key, based on the
Board's review of competitive bids, these transactions were on terms at least as
favorable to Key as could have been obtained from a third party.
During fiscal 1992, two officers of Key loaned Key $90,000 to purchase a shop
and office building from a related party. The note bears interest at 8% with
interest payable monthly beginning January 19, 1992. The principal balance is
due and payable on December 19, 1993. Key paid approximately $6,000 in principal
and interest during fiscal 1992. The principal balance of the note was $32,000
at November 30, 1992 and June 30, 1992. At June 30, 1992, the two officers who
held the note agreed to reduce the note by $57,000 in lieu of accounts
receivable due to Key from the same two officers. During fiscal 1994, the same
two officers agreed to forgive $32,000, the balance of the note, due from Key.
On February 27, 1991, Key completed the private placement of $525,000 principal
amount of Senior Convertible Notes (the "Notes") due 1995 with individual and
institutional investors, some of whom are current officers and directors of Key.
The principal amount at June 30, 1994 and 1993 was $19,000 and $149,000,
respectively. The Notes bear interest at 8%, and the principal balance is to be
paid over 20 equal monthly installments. In addition, each $1,000 Note is
accompanied by a warrant to purchase Key's Common Stock for $14.50 per share.
F-20
<PAGE>
In March of 1995, OEI entered into a credit agreement with Norwest (see Note 5).
As part of this arrangement, seven individuals, some of whom are officers and/or
directors of Key, pledged approximately $2.7 million in collateral to secure
OEI's credit facility. As compensation for this, Key paid these individuals a
one-time fee equal to 1% of the collateral each individual placed and will pay a
monthly fee in the amount of 3% (annual rate) of the collateral pledged. As of
December 31, 1995, Norwest waived the pledge of collateral and released the
collateral to the seven individuals who had pledged it.
14. BUSINESS SEGMENT INFORMATION
Information about Key's operations by business segment is as follows:
<TABLE>
<CAPTION>
Seven Months Five Months
Year Ended Year Ended Ended Ended
June 30, June 30, June 30, November 30,
1995 1994 1993 1992
---------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas $ 2,334 $ 1,936 $ - $ -
Oil field services 40,105 32,616 14,304 10,156
Oil and gas well drilling
services 1,932 - - -
Other 318 69 (48) 277
------------------------------------------------ -------------------
$44,689 $34,621 $14,256 $10,433
====================================================================
Income before reorganization item, income taxes
and extraordinary items:
Oil and gas $ 941 $ 814 $ - $ -
Oil field services 4,105 2,823 2,987 1,981
Oil and gas well drilling
services 367 - - -
Interest expense (1,478) (830) (276) (464)
General corporate 607) (512) (1,587) (1,117)
---------------------------------------------------------------------
$ 3,328 $ 2,295 $1,124 $ 400
=====================================================================
Identifiable assets:
Oil and gas $ 8,289 $ 5,258 $ - $ -
Oil field services 33,516 22,022 15,906 16,109
Oil and gas well drilling
services 3,160 - - -
General corporate 278 815
----------------------------------------------------------------------
$45,243 $28,095 $15,906 $16,109
======================================================================
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Seven Months Five Months
Year Ended Year Ended Ended Ended
June 30, June 30, June 30, November 30,
1995 1994 1993 1992
-----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Capital Expenditures:
Oil and gas $ 3,736 $ 4,449 $ - $ -
Oil field services 11,422 4,395 1,033 537
Oil and gas well drilling
services 2,141 - -
--------------------------------------------------------------------
$ 17,299 $ 8,844 $ 1,033 $ 537
====================================================================
Depreciation, depletion
and amortization:
Oil and gas $ 426 $ 412 $ - $ -
Oil field services 2,279 959 406 505
Oil and gas well drilling
services 33 - - -
--------------------------------------------------------------------
$ 2,738 $ 1,371 $ 406 $ 505
====================================================================
</TABLE>
* - Includes adjustments related to Key's 1992 Reorganization Plan (see
Note 3).
Key operates a variety of oil field service equipment including workover rigs,
hot oil units, transports and various other oil field servicing equipment. In
addition, Key performs a variety of other oil field services including fishing
tools, frac tanks and blow-out preventers.
OEI is engaged in the drilling and production of oil and natural gas in the
United States. OEI acquires and manages interests in producing oil and gas
properties for its own account and for its sponsored investors. After an
acquisition, OEI reworks the acquired well to increase production and/or forms
drilling partnerships for additional development wells.
Clint Hurt Drilling conducts oil and gas well drilling services and operates
four drilling rigs which drill for oil and gas in the West Texas area.
F-22
<PAGE>
15. INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)
CAPITALIZED COSTS: June 30, 1995 June 30, 1994
------------- -------------
Oil and Gas Properties:
Proved properties $7,652,000 $4,430,000
Unproven properties - -
Less accumulated depletion (766,000) (386,000)
--------- ---------
Net Capitalized costs $6,886,000 $4,044,000
========== ==========
Year Ended Year Ended
COSTS INCURRED: June 30, 1995 June 30, 1994
------------- -------------
Proved property acquisition costs $1,054,000 $4,390,000
Development costs 2,581,000 40,000
--------- ------
Total Costs Incurred $3,635,000 $4,430,000
========== ==========
RESULTS OF OPERATIONS:
Oil and gas sales $1,793,000 $1,483,000
Production costs, including production
taxes (756,000) (573,000)
Depletion (398,000) (386,000)
Income Taxes* (217,000) (178,000)
--------- ---------
Results of operations for oil and gas
producing activities** $ 422,000 $ 346,000
========== ==========
* - Computed at the statutory rate of 34%.
** - Excludes corporate overhead and financing costs.
Oil and Gas Reserve Information
Estimates of OEI's proved oil and gas reserves as of June 30, 1995 and 1994 were
prepared in-house and reviewed by an independent petroleum reservoir engineering
firm. All estimates were made in accordance with guidelines established by the
Securities and Exchange Commission. Proved oil and gas reserves are the
estimated quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic conditions (i.e.
prices and costs as of the date the estimate is made.) Prices utilized reflect
consideration of changes in existing prices provided by contractual
arrangements, if any, but not of escalations based upon future conditions.
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing equipment and operating methods.
F-23
<PAGE>
Proved undeveloped oil and gas reserves are proved reserves that are expected to
be recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion or secondary or
tertiary recovery. Reserves assigned to undrilled acreage are limited to those
drilling units that offset productive units reasonably certain of production
when drilled.
No major discovery or other favorable or adverse event has occurred since July
1, 1995 which is believed to have caused a significant change in the estimated
proved oil and gas reserves of OEI.
OEI's estimate of reserves has not been filed with or included in reports to any
federal agency other than the Securities and Exchange Commission.
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. Key emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
F-24
<PAGE>
<TABLE>
<CAPTION>
Oil and Gas Producing Activities:
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
Total Proved Reserves:
<S> <C> <C>
Balance, July 1, 1993 - -
Purchases of minerals-in-place 129,291 7,338,452
Production (14,383) (552,791)
- -----------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 114,908 6,785,661
Revisions of previous estimates 92,080 1,945,659
Purchases of minerals-in-place 1,515,559 6,036,937
Production (40,330) (770,197)
- -----------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 1,682,217 13,998,060
===========================================================================================================
Proved Developed Reserves:
July 1, 1993 - -
June 30, 1994 114,908 6,785,661
June 30, 1995 750,604 11,203,232
===========================================================================================================
</TABLE>
Standardized Measure of Discounted Future Cash Flows
The following schedules present estimates of the standardized measure of
discounted future net cash flows from Key's proved reserves as of June 30, 1995,
and an analysis of the changes in these amounts for the years ended June 30,
1995 and 1994. Estimated future cash flows are determined using year-end prices
adjusted only for fixed and determinable increases for natural gas provided by
contractual agreement (if any). Estimated future production and development
costs are based on economic conditions at year-end. Future federal income taxes
are computed by applying the statutory federal income tax rate of 34% to the
difference between the future pretax net cash flows and the tax basis of proved
oil and gas properties, after considering investment tax credits and net
operating loss carry forwards (if any), associated with these properties.
Discounted future cash flow estimates like those shown below are not intended to
represent estimates of the fair value of oil and gas properties. Estimates of
fair value should also consider probable reserves, anticipated future oil and
gas prices, interest rates, changes in development and production costs and
risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
F-25
<PAGE>
June 30, 1995 June 30, 1994
(in thousands)
Standardized Measure:
Future cash inflows $ 51,830 $ 11,355
Future production costs (11,852) (3,478)
Future development costs (6,160) --
Future income taxes (10,477) (1,318)
_______________________________________________________________________________
Future after-tax net cash flows 23,341 6,559
10% annual discount (8,183) (1,820)
_______________________________________________________________________________
Standardized Measure, June 30, 1995 and 1994 $ 15,158 $ 4,739
===============================================================================
Changes in Standardized Measure:
Standardized Measure, July 1, 1993 $ --
Oil and gas sales, net of production costs (910)
Purchases of minerals in place 6,030
Net change in income taxes (381)
Accretion of discount --
_______________________________________________________________________________
Standardized Measure, June 30, 1994 $ 4,739
Oil and gas sales, net of production costs (1,037)
Purchases of minerals in place 13,033
Net change in income taxes (5,881)
Accretion of discount 512
Revision of quantity estimates 1,745
Change in future development costs 1,227
Other 820
_______________________________________________________________________________
Standardized Measure, June 30, 1995 $ 15,158
===============================================================================
F-26
<PAGE>
16. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended June 30, 1995 and 1994,
the seven months ended June 30, 1993 and the five months ended November 30, 1992
are presented below:
Seven Months Five Months
Year Ended Year Ended Ended Ended
June 30, June 30, June 30, November 30,
1995 1994 1993 1992
------------------------------------------------------
Interest paid $1,422 $759 $276 $215
Taxes paid 53 10 - -
Supplemental schedule of non-cash investing and financing transactions for the
years ended June 30, 1995 and 1994, the seven months ended June 30, 1993 and the
five months ended November 30, 1992, are presented below:
<TABLE>
<CAPTION>
Seven Months Five Months
Year Ended Year Ended Ended Ended
June 30, June 30, November 30, November 30,
1995 1994 1993 1992
---------------------------------------------------------------
( in thousands)
<S> <C> <C> <C> <C>
Fair value of Common Stock issued
for OEI $ - $ 638 $ - $ -
Assumption of OEI liabilities - 2,752 - -
Acquisition of OEI
property and equipment - 3,196 - -
Fair value of Common Stock issued
for Clint Hurt 23 - - -
Fair value of Common Stock and
Warrants issued for
WellTech West Texas 8,647 - - -
Capital lease obligation reduced
for purchase of assets 275 - - -
Proceeds on sale of assets
not received 132 - - -
Property and equipment additions
and acquisition costs not
paid as of June 30th 1,015 - - -
Issuance of note payable in Clint
Hurt Drilling acquisition 725 - - -
</TABLE>
F-27
<PAGE>
17. CONCENTRATIONS OF CREDIT RISK
Key has a concentration of customers in the oil and gas industry. Substantially
all of Key's customers are major integrated oil companies, major independent
producers of oil and gas and smaller independent producers. This may affect
Key's overall exposure to credit risk either positively or negatively, inasmuch
as its customers are effected by economic conditions in the oil and gas
industry, which has historically been cyclical. However, accounts receivable are
well diversified among many customers and a significant portion of the
receivables are from major oil companies, which management believes minimizes
potential credit risk. Historically, credit losses have been insignificant.
Receivables are generally not collateralized, although Key may generally secure
a receivable at any time by filing a mechanic's and materialmans' lien on the
well serviced.
18. SUBSEQUENT EVENT
In August 1995, Key announced an agreement to acquire, through a merger,
WellTech. A definitive merger agreement was reached on November 18, 1995. Key
will be the surviving entity in the Merger. Consideration for the Merger will be
4,929,962 shares of Key Common Stock and warrants to purchase 750,000 shares at
$6.75 per share of Key Common Stock. As part of the Merger, 1,429,962 of the
1,635,000 shares of Key Common Stock owned by WellTech and warrants to purchase
an aggregate 250,000 shares of Key Common Stock at $5.00 per share will be
cancelled. WellTech currently operates in the Southwest and Northeast areas of
the United States and in Russia and Argentina. 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. WellTech's principal line of business is oil and gas well
servicing.
F-28
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(unaudited)
December 31,
1995
(In thousands)
ASSETS
Current Assets:
Cash $ 503
Restricted cash 452
Restricted marketable securities 267
Accounts receivable, net 8,352
Inventories 1,300
Prepaid expenses and other current assets 225
----------
Total Current Assets 11,099
__________________________________________________________________
Property and Equipment:
Oilfield service equipment 25,456
Oil and gas well drilling equipment 2,374
Motor vehicles 521
Oil and gas properties and other related
equipment, successful efforts method 9,809
Furniture and equipment 334
Buildings and land 2,086
Total Property and Equipment 40,580
__________________________________________________________________
Accumulated depreciation & depletion (6,188)
Net Property and Equipment 34,392
__________________________________________________________________
Other assets 2,020
__________________________________________________________________
TOTAL ASSETS $47,511
==================================================================
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-29
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheet
(unaudited)
December 31,
1995
In thousands,
except share and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,804
Accrued interest 168
Other accrued liabilities 1,931
Accrued income taxes 124
Deferred tax liability 118
Current portion of long-term debt 1,590
Total Current Liabilities 7,735
Long-term debt, less current portion 15,237
Deferred income taxes 2,934
Commitments and contingencies
Stockholders' Equity:
Common stock, $.10 par value; 10,000,000
shares authorized, 6,913,513 shares
issued and outstanding 691
Additional paid-in capital 15,186
Retained earnings 5,728
Total Stockholders' Equity 21,605
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 47,511
=====================================================================
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-30
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Six Six
Months Ended Months Ended
December 31, 1995 December 31, 1994
(In thousands except per share data)
REVENUES:
Oilfield services $19,148 $20,923
Oil and gas revenues 1,727 1,077
Oil and gas well drilling 3,659 -
Other revenues, net 258 (38)
___________________________________________________________________________
24,792 21,962
___________________________________________________________________________
COSTS AND EXPENSES:
Oilfield services direct costs 14,153 16,350
Oil and gas direct costs 619 431
Oil and gas well drilling 2,735 -
Depreciation and depletion expense 1,794 1,245
General and administrative expense 2,390 1,822
Interest expense 877 627
___________________________________________________________________________
22,568 20,475
___________________________________________________________________________
Income before income taxes 2,224 1,487
Income tax expense 730 476
NET INCOME $ 1,494 $ 1,011
===========================================================================
EARNINGS PER SHARE:
Income before income taxes $ 0.32 $ 0.23
Net income $ 0.22 $ 0.16
WEIGHTED AVERAGE SHARES
OUTSTANDING: 6,914 6,500
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-31
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
December 31, 1995 December 31, 1994
(In thousands, except per share data)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,494 $1,011
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation, depletion and amortization 1,794 1,245
Deferred income taxes 730 476
Changes in operating assets and liabilities, net of
effects from the acquisitions:
Increase in accounts receivable (219) (960)
Increase (decrease) in other
current assets 90 (71)
Decrease in accounts payable and
accrued expenses (807) (1,564)
(Decrease) increase in accrued interest 23 (16)
Decrease in accrued taxes (50) -
(Increase) decrease in other assets (9) -
--------- -------
Net cash provided by operating activities 3,046 121
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - Oilwell service operations (1,727) (1,899)
Capital expenditures - Oil and gas operations (7) (7)
Capital expenditures - Oil and gas well
drilling operations (360) -
Expenditures for oil and gas properties (2,150) (1,211)
--------- -------
Net cash used in investing activities (4,244) (3,117)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (1,418) (1,047)
Borrowings (payments) under line-of-credit (28) 971
Proceeds from long-term debt 2,324 2,866
-------- -------
Net cash provided by financing activities 878 2,790
--------- -------
Net increase (decrease) in cash and restricted cash (320) (206)
Cash and restricted cash at beginning of period 1,275 1,173
------- --------
Cash and restricted cash at end of period $ 955 $ 967
========= =========
Supplemental cash flow disclosures:
Interest paid $ 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
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
F-32
<PAGE>
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Key
The consolidated financial information in this report includes Yale E. Key which
is involved in oilwell service operations, OEI which is involved in the
production and exploration of oil and natural gas and 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 Energy Group, Inc. ("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 six months ended December 31, 1995
and 1994, and the results of operations for the six month periods then ended.
These unaudited consolidated financial statements should be read in conjunction
with consolidated financial statements and notes thereto included herein for the
year ended June 30, 1995.
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 principles for complete financial statements.
Operating results for interim periods are not necessarily indicative of the
results that may be expected for the full year.
F-33
<PAGE>
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
$1,725,000, 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.
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 2.5% 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 2.5%
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 and 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.
F-34
<PAGE>
The agreement with C.I.T. includes certain restrictive covenants, the most
restrictive of which prohibits 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. The
term 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 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.
F-35
<PAGE>
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.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of WellTech, Inc.:
We have audited the accompanying consolidated balance sheets of WellTech, Inc.
(a Delaware Corporation) and subsidiaries (WellTech) as of December 31, 1994 and
1993, and the related consolidated statements of operations, stockholders'
equity and cash flows for the three years in the period ended December 31, 1994.
These consolidated financial statements are the responsibility of WellTech's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As further discussed in Note 12 to the consolidated financial statements, during
1995 WellTech was not in compliance with certain of the restrictive covenants of
its loan agreement and received a waiver for such events on non-compliance. On
January 19, 1996, WellTech entered into a three-year term loan agreement to
refinance such indebtedness. The new loan agreement does not contain any
restrictive covenants until WellTech's merger with Key Energy Group, Inc.
("Key") is completed, at which time the new indebtedness will be the obligation
of Key, as survivor of the merger. However, failure to consummate the merger by
April 30, 1996 could constitute an event of default if WellTech fails to
refinance the new indebtedness by July 31, 1996, or if Key fails to continue to
operate WellTech pursuant to the Interim Operations Agreement until such
refinancing is completed. If and when such refinancing becomes necessary, there
can be no assurances that it will be available upon terms satisfactory to
WellTech.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of WellTech, Inc. and subsidiaries
as of December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 31, 1995 (except with respect to the matters discussed in Note 12, as
to which the date is January 19, 1996)
F-37
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(In Thousands)
ASSETS
1994 1993
CURRENT ASSETS:
Cash and cash equivalents $ 624 $ 689
Accounts receivable, less allowance for 11,375 9,160
doubtful accounts of $995 and $372,
respectively
Prepaid insurance losses 510 1,570
Prepaid expenses and other 271 484
-------- --------
Total Current Assets 12,780 11,903
------ ------
INVESTMENT IN UNCONSOLIDATED
WELL SERVICING OPERATIONS:
Dawson WellTech, LLC 6,511 4,899
Key Energy Group, Inc. 8,401 -
Servicios WellTech, S.A. 2,727 1,906
------ -----
17,639 6,805
PROPERTY AND EQUIPMENT:
Well servicing equipment 31,733 26,002
Land, buildings and other 4,426 3,801
------- ------
36,159 29,803
Accumulated depreciation (11,254) (11,594)
------- --------
Net Property and Equipment 24,905 18,209
-------- ---------
OTHER ASSETS:
Net assets held for sale - 5,323
Debt restructuring costs - 641
Other 2,852 1,682
--------- -----
Total Assets $58,176 $44,563
======= =======
The accompanying notes are an integral
part of these consolidated financial
F-38
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1993
CURRENT LIABILITIES:
Current maturities of long-term debt
and capital lease obligation $ 798 $ 511
Accounts payable 6,371 3,135
Accrued payroll and related taxes 680 207
Accrued casualty insurance 2,614 1,624
Income taxes payable 557 -
Other accrued and current liabilities 2,707 1,828
-------- --------
Total Current Liabilities 13,727 7,305
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt and capital lease obligation,
net of current maturities 6,620 32,782
Deferred interest - 4,764
Accrued casualty insurance 1,640 2,380
------ -------
Total Non-Current Liabilities 8,260 39,926
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Deficit):
Common stock, $1.00 par; 500,000 shares
authorized; 347,471 and 311,256 issued
and outstanding at December 31,
1994 and 1993, respectively 347 311
Capital in excess of par value 92,003 52,971
Accumulated deficit (56,161) (55,950)
-------- ---------
Total Stockholders' Equity (Deficit) 36,189 (2,668)
-------- ---------
Total Liabilities and Stockholders' Equity $ 58,176 $ 44,563
======== ========
The accompanying notes are an integral
part of these consolidated financial
statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
WELLTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(In Thousands)
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
REVENUES $ 49,043 $56,157 $58,680
-------- ------- -------
OPERATING COSTS AND EXPENSES:
Direct operating 39,050 45,522 45,986
General and administrative 8,474 9,520 11,732
Depreciation and amortization 2,775 3,095 3,572
-------- ------- -------
Total operating costs and expenses 50,299 58,137 61,290
-------- ------ -------
LOSS FROM OPERATIONS (1,256) (1,980) (2,610)
------- ------- --------
OTHER (INCOME) AND EXPENSE
Interest expense 735 3,218 3,019
Interest income (130) (71) (203)
Investment valuation provision - 582 2,369
Equity in (earnings) losses of
unconsolidated affiliates 492 (88) (68)
Gain on disposition of assets (2,943) (336) (49)
Other (income) expense, net 801 (78) 142
--------- ------- ------
Total Other (Income) and Expense (1,045) 3,227 5,210
LOSS BEFORE INCOME TAXES (211) (5,207) (7,820)
INCOME TAX EXPENSE - - -
-------- --------- ---------
NET LOSS $ (211) $(5,207) $(7,820)
========= ========= ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial
statements.
F-40
<PAGE>
<TABLE>
<CAPTION>
WELLTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(In Thousands)
Common Stock
Shares Issued Capital
and $1.00 in Excess Accumulated
Outstanding Par Value of Par Value Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991 3,112,617 $3,113 $50,169 $(42,923) $10,359
10 for 1 reverse stock split (2,801,361) (2,802) 2,802 - -
Net loss for year - - - (7,820) (7,820)
---------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 1992 311,256 311 52,971 (50,743) 2,539
Net loss for year - - - (5,207) (5,207)
---------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 1993 311,256 311 52,971 (55,950) (2,668)
10 for 1 reverse stock split (280,430) (280) 280 - -
Conversion of debt to equity, net of 277,436 277 34,037 - 34,314
costs
Sale of Common Stock 39,209 39 4,715 - 4,754
Net loss for year - - - (211) (211)
--------- -------- -------- --------- ---------
BALANCE, DECEMBER 31, 1994 347,471 $347 $92,003 $(56,161) $36,189
========= ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral
part of these consolidated financial
statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
WELLTECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(In Thousands)
1994 1993 1992
------ ------ -----
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $(211) $(5,207) $(7,820)
Non-cash charges included in net loss:
Depreciation and amortization 2,775 3,095 3,572
Investment valuation provision - 582 2,369
Amortization of loan discount - 668 1,014
Gain on disposition of assets (2,943) (336) (49)
Equity in (earnings) losses of unconsolidated affiliates 492 (88) (68)
Changes in components of working capital:
(Increase) decrease in accounts receivable, net (2,215) (1,846) 73
(Increase) decrease in prepaid insurance losses and expenses and
other 1,573 622 (369)
Increase (decrease) in accounts payable 3,236 (99) (249)
Increase (decrease) in accrued liabilities 1,948 1,484 (662)
Increase in deferred interest - 2,020 1,740
Other, net (24) 38 (375)
-------- ------ ------
Net Cash Provided by (Used in) Operating Activities 4,631 933 (824)
------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 2,764 1,942 1,809
Capital expenditures (13,738) (1,748) (1,979)
Cash distributions from Dawson WellTech, LLC 412 775 --
Contributions to unconsolidated operations (3,563) (970) (3,107)
-------- ------ -------
Net Cash Used in Investment Activities (14,125) (1) (3,277)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 5,555 44 2,337
Payments on notes payable and capital lease (680) (663) (297)
Sale of common stock and conversion of debt 4,554 - -
------ ------- -------
Net Cash Provided by (Used in) Financing Activities 9,429 (619) 2,040
------ ------- ------
Increase (Decrease) in Cash and Cash Equivalents (65) 313 (2,061)
Cash and Cash Equivalents, Beginning of Year 689 376 2,437
----- ----- -------
Cash and Cash Equivalents, End of Year $ 624 $ 689 $ 376
======= ====== ======
</TABLE>
The accompanying notes are an integral
part of these consolidated financial
statements.
F-42
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Organization and Control-
WellTech, Inc. (a Delaware corporation) and subsidiaries ("WellTech" or
the "Company") are engaged in the oil and gas well servicing industry in the
United States, South America and Russia.
(2) Summary of Significant Accounting Policies-
Principles of consolidation - The consolidated financial statements
include the accounts of WellTech, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to the prior period financial statements to
conform with the current year's presentation.
Investments - WellTech owns a 39% interest in Dawson WellTech, LLC and
a 24% interest in Key Energy Group, Inc., both domestic well servicing
companies. WellTech also owns a 50% interest in Servicios WellTech, S. A. a
joint venture well servicing company operating in Argentina.
These investments are accounted for by the equity method.
WellTech also has certain non-well servicing investments which are
accounted for by the cost method. During 1993 and 1992 WellTech reassessed the
carrying value of its non-well servicing investments and recorded provisions of
$582,000 and 2,369,000, respectively, to write these investments down to their
estimated net realizable value.
Cash and cash equivalents - Cash equivalents include all highly liquid
short-term investments with maturities of three months or less.
Property and equipment - Property and equipment consists principally of
well servicing rigs and related equipment. Additions, renewals and betterments
that add materially to the productive capacity or extend the useful life of an
asset are capitalized. Expenditures for maintenance and repairs are expensed as
incurred. Upon retirement or disposal, the asset and related allowance for
depreciation accounts are eliminated. Any gains or losses on such transactions
are included in income.
Depreciation is provided for financial reporting purposes on a
straight-line basis over the following estimated useful lives:
Well servicing equipment 3 to 20 years
Buildings and other 3 to 30 years
F-43
<PAGE>
Debt restructuring costs - Debt restructuring costs represent costs
associated with the restructuring of the Renewal Notes in conjunction with the
June 1991 Recapitalization. The debt restructuring costs were being amortized to
interest expense over the life of the Renewal Notes. During each of the years
1993 and 1992, WellTech amortized approximately $80,000 of debt restructuring
costs. In connection with the January 1994 Recapitalization discussed in Note 4
below, the remaining unamortized debt restructuring costs were included in the
debt converted to equity.
(3) Financing -
In January 1994, WellTech completed a financial restructuring and
recapitalization (the "1994 Recapitalization") with its principal lenders and
shareholders. As a result, WellTech's $34 million Renewal Notes, with a
discounted book value of approximately $30.8 million, plus the associated
deferred interest payable, net of unamortized debt issue expense, were converted
into 277,436 shares of WellTech common stock. Simultaneous with this conversion
of debt to equity, Welltech sold 39,209 shares of common stock for $4.7 million
and issued a new term note for $3 million.
A summary of outstanding long-term debt and capital lease obligation is
presented below (in thousands):
December 31,
1993 1994
Renewal Notes $ - $34,231
Less unamortized discount - ( 3,481)
---- --------
- 30,750
New Term Debt 4,900 1,900
Obligation under capital
lease through 1995 65 244
Notes Payable 2,453 399
------ ---------
Total long-term debt and
capital lease obligation 7,418 33,293
Less current maturities 798 511
------- ---------
Long-term debt and capital
lease obligation, less
current maturities $ 6,620 $32,782
======= =======
In November 1992, certain lenders, who are also stockholders, provided
a $2 million loan to WellTech. These funds were placed into a cash collateral
account with WellTech's insurance provider to be used to pay future claims under
WellTech's self insurance program. In January 1994, the $1.9 million principal
balance remaining on this note was rolled into new notes with a principal
balance of $4.9 million. The accrued interest on the $1.9 million note was paid
through January 19, 1994, the date of the issuance of the new notes. Interest is
payable semi-annually on July 6 and January 6 commencing July 6, 1995. All
principal and accrued and unpaid interest is payable in full by January 7, 1998.
The interest rate is 12% per annum. In connection with the bank financing
concluded in January 1995, discussed below, the accrued interest on the $4.9
million notes was paid through January 6, 1995 and the terms of these notes were
modified.
F-44
<PAGE>
The payment of interest on these notes is restricted by the terms of an
intercreditor agreement between these note holders and Shawmut (see below).
Interest on $2.0 million of these notes is not payable currently if WellTech
does not achieve certain levels of cash flows. These minimum levels of cash flow
were not achieved and the related interest was not paid on July 6, 1995.
Interest on the remaining $2.9 million of these notes is not payable currently
if WellTech is in default of certain covenants of the Loan Agreement with
Shawmut. WellTech was in default on July 6, 1995 and the payment of interest on
these notes has been deferred.
In November 1991, WellTech entered into a lease agreement to obtain the
necessary financing for a computer system. The lease agreement has been recorded
as a capital lease with the corresponding property and equipment being included
in the accompanying consolidated balance sheet.
During 1994, WellTech used seller financing to provide the capital to
fund several expansion opportunities. These notes payable which are secured by
the purchased assets bear interest at rates ranging from 5.3% to prime + 2%.
Negotiated repayment terms, which are fixed or based upon cash flow or asset
utilization, range from 3 to 5 years.
On January 6, 1995, WellTech entered into a Loan Agreement with
Barclays Business Credit, Inc. (subsequently acquired by Shawmut), whereby
Shawmut agreed to provide WellTech with a term loan of $2.5 million and a
revolving credit facility of up to $6.5 million. The Shawmut Term Loan, which
bears interest at Shawmut prime plus 1.75% is generally secured by WellTech's
rigs and equipment and is payable in 84 equal monthly installments of principal
plus interest. The availability under the revolving credit facility is a
function of available accounts receivable collateral, as defined in the Loan
Agreement. The interest rate on the revolver is Shawmut prime plus 1.75%. The
original term of the Loan Agreement is for a three (3) year period and includes
certain restrictive covenants relative to the maintenance of certain levels of
tangible net worth, working capital, aged accounts payable and cash flows and
contains restrictions on the purchase and sale of certain assets and capital
expenditures. See Note 12 for further discussion of WellTech's credit facility
and financing arrangements.
Aggregate loan maturities for the next five fiscal years are as
follows: 1995-$798,000; 1996- $353,000; 1997-$273,000; 1998-$5,073,000 and 1999
and thereafter $921,000.
Letters of Credit - WellTech had a letter of credit of $421,000
outstanding at December 31, 1994. In March 1995, Shawmut issued, under
WellTech's revolving credit facility, an additional letter of credit in the
amount of $1,080,000. These letters of credit provide collateral for the payment
of the self-insured retention under certain of WellTech's liability insurance
policies. The letter of credit in the amount of $421,000 is guaranteed by a
former stockholder of WellTech.
In addition to the above letters of credit, WellTech was contingently
obligated through January 6, 1995, to an officer and shareholder in the amount
of $292,000, for securities placed by him as collateral on behalf of WellTech to
further support the self-insured retention under WellTech's liability insurance
policies. In connection with the Shawmut financing, WellTech paid this amount
into its self-insurance cash collateral account and the officer's collateral was
returned to him.
F-45
<PAGE>
(4) Investments in Unconsolidated Well Servicing Operations -
The following is a summary of WellTech's net investment and the equity
in the earnings (losses) of its unconsolidated investments (amounts in
thousands):
<TABLE>
<CAPTION>
Ownership Net Investment Equity in Earnings (Losses)
Percent 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C>
Dawson WellTech, LLC 39% $ 6,511 $4,899 $ 620 $ 711
Key Energy Group, Inc. 24% 8,401 - 47 -
Servicios WellTech, S.A. 50% 2,727 1,906 (1,159) (623)
----- ----- ------ -----
$17,639 $6,805 $ ( 492) $ 88
======= ====== ========= =======
</TABLE>
Dawson WellTech, LLC - Effective November 1, 1992, WellTech and Dawson
Well Servicing, Inc. formed Dawson WellTech, LLC ("DWT"), a limited liability
corporation. The net book value of the assets contributed exceeded WellTech's
share of DWT's net assets at inception by $1.1 million. This amount is being
amortized and charged against equity in earnings of DWT over a period of eight
years.
In January 1995, WellTech contributed an additional $1.4 million in
cash to finance its share of the non-bank financed portion of the stock
acquisition of Well Solutions, Inc. by DWT for $20 million. Well Solutions, Inc.
is a regional company providing vacuum truck, frac tank, disposal well and
production testing and rental tool services in Texas. The agreement with the
bank which provided the financing for this acquisition, limits the cash
distributions from DWT to an amount equal to income before taxes times the
statutory tax rate.
DWT has a fiscal year ended March 31. The condensed financial
information presented below as of December 31, 1994 and 1993 and for the twelve
month periods then ended is unaudited. The summary information presented below
as of March 31, 1995 and 1994 and for the twelve month periods then ended has
been derived from audited financial statements. As stated above, DWT was
established in November of 1992. Its results of operations did not have a
material effect on WellTech's results of operations for the year ended December
31, 1992. Therefore, condensed financial information has not been presented for
that period.
F-46
<PAGE>
<TABLE>
<CAPTION>
(In Thousands)
December 31 March 31
----------- --------
1994 1993 1995 1994
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data
Current Assets $ 6,419 $ 4,156 $ 8,331 $ 4,026
Noncurrent Assets $ 27,228 $ 8,228 $ 26,777 $ 8,309
Current Liabilities $ 3,700 $ 1,587 $ 6,661 $ 1,746
Noncurrent Liabilities $ 15,264 $ 263 $ 13,495 $ 563
Operating Statement-Data
Revenues $ 22,837 $ 22,017 $ 29,763 $ 21,436
Gross Margin $ 6,597 $ 5,017 $ 10,028 $ 6,207
Income Before Taxes $ 2,128 $ 2,299 $ 2,673 $ 2,259
Net Income $ 2,063 $ 2,299 $ 2,602 $ 2,194
</TABLE>
Key Energy Group, Inc. - In December 1993, WellTech entered into an
agreement to sell its West Texas operations and the working capital attributable
to the West Texas operations, including the assumption of certain of WellTech's
insurance liabilities, to Key Energy Group, Inc. ("Key") for 1,635,000 shares of
Key common stock and warrants to purchase an additional 250,000 shares of Key's
common stock at $5 per share. The transaction which was subject to the approval
of Key's shareholders was formally concluded in August 1994. Pending such
approval, WellTech entered into an Interim Operations Agreement with Key
effective December 1, 1993, whereby Key (i) assumed responsibility for the
operations and management of WellTech's West Texas operations, (ii) leased
WellTech's real estate and equipment employed in the West Texas operations, and
(iii) acquired equal amounts of the associated current assets and current
liabilities attributable to the West Texas operations.
At December 31, 1993, WellTech classified net property and equipment
and certain non-current assets of its West Texas operations as "Net Assets Held
for Sale" in the accompanying consolidated balance sheets. Additionally, in 1994
and 1993, $350,000 and $55,000, respectively, is included in revenues and
related to an amount billed to Key, pursuant to the Interim Operations
Agreement, for the lease of the West Texas assets from December 1, 1993 to
August 10, 1994.
F-47
<PAGE>
The following sets forth selected financial information relative to
WellTech's West Texas operations which are included in the consolidated
financial statements for 1993 (in thousands):
December 31, 1993
Balance Sheet
Current Assets $ 558
Total Assets $ 5,826
Current Liabilities $ 674
Statement of Operations
Revenues $13,591
Direct Operating Expenses $11,543
General and Administrative Expenses $ 1,443
Depreciation $ 669
In August 1994, the transaction was approved by Key's shareholders and
1,635,000 shares of Key stock and warrants were issued to WellTech in exchange
for its West Texas Operations. The investment in the Key stock was recorded at
the market value of the stock on the date of the shareholders' approval ($5.125
per share) and a gain of approximately $3 million was recognized. On that date,
WellTech's investment exceeded its pro rata share of Key's equity by $3.9
million. This amount is being amortized and charged against equity in earnings
of Key over a period of 10 years. At December 31, 1994, the market value of the
stock was $4.625 per share.
Key's condensed financial information presented below (in thousands) as
of December 31, 1994 and for the six months then ended is unaudited. As stated
above, WellTech acquired its ownership interest in Key in August of 1994,
consequently information for periods prior to 1994 has not been presented.
December 31, 1994
(Unaudited)
Balance Sheet
Current Assets $ 9,992
Noncurrent Assets $29,387
Current Liabilities $ 6,253
Noncurrent Liabilities $14,265
Statement of Operations
Revenues $21,962
Gross Margin $ 3,641
Income Before Taxes $ 1,487
Net Income $ 1,011
Servicios WellTech - In July 1992, WellTech entered into a joint
venture agreement with two Argentinean entities to form Servicios WellTech, S.A.
("SWT") to provide oil and gas well servicing in Argentina.
F-48
<PAGE>
During 1992, WellTech made an initial contribution of $50,000 and
subsequent contributions of $1.3 million. During 1993 and 1994, WellTech made
additional contributions to SWT of approximately $1.9 million.
During 1993, WellTech sold two rigs and related equipment to SWT. No
gain was recognized on the sale of this equipment. At December 31, 1993
receivables from equipment sales of approximately $233,000 are included in
WellTech's investment in SWT. During 1994, the amount of this receivable along
with an additional $1.1 million in cash and cost basis of two rigs and related
equipment were contributed to SWT.
In April 1995, SWT was recapitalized and the ownership interests were
modified based upon previous and agreed upon future contributions. As a result
of this recapitalization, WellTech's ownership interest in SWT increased from
50% to 63%.
SWT has a fiscal year ended March 31. The condensed financial
information presented below as of December 31, 1994 and 1993 is unaudited. The
summary information presented below as of March 31, 1995 and 1994 and for the
twelve months then ended has been derived from audited financial statements. As
stated above, SWT was established in July of 1992. Its results of operations did
not have a material effect on WellTech's results of operations for the year
ended December 31, 1992. Therefore condensed financial information has not been
presented for that period.
(In Thousands)
December 31 March 31
----------- --------
1994 1993 1995 1994
---- ---- ---- ----
(Unaudited)
Balance Sheet
Current Assets $ 2,977 $ 1,869 $ 3,295 $ 2,296
Noncurrent Assets $ 7,341 $ 5,471 $ 6,254 $ 5,425
Current Liabilities $ 7,229 $ 2,802 $ 6,280 $ 3,580
Noncurrent Liabilities $ 630 $ 1,229 $ 2,329 $ 38
Statement of Operations
Revenues $ 7,881 $ 3,992 $ 9,807 $ 4,985
Gross Margin $ 623 $ 1,129 $ 2,579 $ 1,138
Net Loss $(2,318) $(1,246) $(1,978) $(1,398)
In connection with the audit of the SWT financial statements as of
March 31, 1995 and for the year then ended there were certain adjustments
recorded in SWT's fourth quarter. These adjustments were not material to
WellTech and consequently have been recorded in WellTech's 1995 results.
F-49
<PAGE>
(5) Common Stock-
In January 1994, the Certificate of Incorporation of WellTech was
amended and restated in its entirety to provide for only one class of stock,
common stock $1 par value. In addition, pursuant to the 1994 Recapitalization,
WellTech's Board of Directors authorized a ten-for-one reverse stock split
effective January 18, 1994.
(6) Income Taxes -
WellTech adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", effective January 1, 1993. The adoption of
SFAS No. 109 changed WellTech's method of accounting for income taxes from the
deferred approach to an asset and liability approach. The asset and liability
approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
reporting basis and tax basis of assets and liabilities. The cumulative effect
of the change in accounting principle on prior years at January 1, 1993, the
date of adoption, was not material to the results of operations or financial
position of WellTech.
During the years ended December 31, 1994 and 1993, WellTech incurred
pre-tax losses and had available net operating loss (NOL) carryforwards.
Consequently, for financial reporting purposes WellTech did not record income
tax expense. In connection with the conversion of debt to equity in the 1994
Recapitalization discussed in Note 4 above, WellTech recognized an approximately
$18 million taxable gain, and recorded as a direct charge to capital in excess
of par value an accrual of $360,000 for alternative minimum taxes.
At December 31, 1994 and 1993, WellTech had a net deferred tax asset of
approximately $69 million and $77 million, respectively, and has provided an
equal amount for a valuation allowance at each date. Deferred tax (assets)
liabilities are comprised of the following (in thousands):
1994 1993
---- ----
(Assets) Liabilities
Net tax operating loss carryforwards $(57,493) $(66,262)
General business credits (11,335) (12,144)
AMT credits ( 433) -
Depreciation differences on PP&E 2,470 2,227
Prepaid Expenses 266 1,221
Accrued insurance losses and other liabilities ( 1,563) ( 2,114)
Allowance for doubtful accounts ( 338) ( 130)
Differences between book and tax basis
of partnership interests ( 236) ( 119)
Other, net ( 189) 224
--------- -------
(68,851) (77,097)
Valuation Allowance 68,851 77,097
------- -------
Net Deferred Tax Asset $ - $ -
=========== ===========
F-50
<PAGE>
For tax purposes WellTech had available, as of December 31, 1994,
substantial NOL carryforwards which begin to expire in 1998. Utilization of
pre-June 1991 Recapitalization NOL carryforwards is generally limited to
approximately $1.3 million per year effective as of June 1991. As a result of
the 1994 recapitalization, utilization of NOL carryforwards from the period June
1991 through December 31, 1993, is expected to be generally limited to $950,000
per year. WellTech also has available investment tax credit carryforwards of
approximately $11 million, portions of which expire each year. As presented
above, a valuation allowance has been established for those NOL carryforwards
and tax credits which have not met the recognition requirements of SFAS No. 109.
(7) Capital Accumulation 401(k) Plan
WellTech established a capital accumulation 401(k) plan for the benefit
of its employees during 1987. Employees may, after the completion of one year's
service, contribute up to 15% of their salaries (subject to certain maximums) to
the plan. Contributions to the plan by WellTech are made at the discretion of
the Board of Directors. WellTech did not make contributions to the plan during
1994 or 1993.
In November 1994, the Board of Directors authorized WellTech to begin
making contributions to the plan in 1995. These contributions are limited to 50%
of the employees' contributions up to a maximum of $1,000. While employees may
generally contribute up to 15% of their pay, WellTech's matching contribution is
limited to the first 6%.
(8) Commitments and Contingencies
At December 31, 1994, the minimum future payments under long-term
non-cancelable operating lease obligations amounted to (in thousands):
1995 $ 359
1996 313
1997 161
1998 94
1999 73
Thereafter 168
-----
$1,168
Total rentals under operating leases charged against income amounted to
approximately $1,548,000 and $2,273,000 in 1994 and 1993, respectively, which
includes $1,231,000 and $1,727,000 in 1994 and 1993, respectively, for vehicle
rentals under cancelable leases.
WellTech accrues for the self-insured retention under its casualty
insurance policies. These amounts represent losses payable as a result of
WellTech's claims experience, subject to certain policy maximums. A charge to
income is provided currently based on the assessment of the expected costs of
claims incurred. The estimated costs of casualty claims are based on WellTech's
historical loss experience, type of claim, knowledge of the specific
circumstances of the claim and judgement of the possible effect that future
economic and legal factors might have on the ultimate settlement of the claim.
As of December 31, 1994 and 1993, $4,254,000 and $4,004,000, respectively, was
accrued for the estimated cost of resolving actual and potential claims under
casualty insurance policies.
F-51
<PAGE>
WellTech is involved in disputes and litigation arising in the normal
course of business. In management's opinion, the resolution of such disputes and
litigation will not have a material adverse effect on the financial position or
results of operations of WellTech.
(9) Concentrations of Credit Risk
WellTech has a concentration of customers in the oil and gas industry.
Substantially all of WellTech's customers are major integrated oil companies,
major independent producers of oil and gas, and smaller independent producers.
This may affect WellTech's overall exposure to credit risk either positively or
negatively, inasmuch as its customers are affected by economic conditions in the
oil and gas industry, which has historically been cyclical. However, accounts
receivable are well diversified among many customers, and a significant portion
of the receivables are from major oil companies, which management believes
minimizes potential credit risk. Historically, credit losses have been
insignificant. Receivables are generally not collateralized, although WellTech
may generally secure a receivable at any time by filing a mechanics' and
materialmans' lien on the well serviced.
(10) Operations by Geographic Area
Substantially all of WellTech's operations are in the well servicing
segment. Information about WellTech's operations for the year ended December 31,
1994 by geographic area is shown below. During 1994, WellTech did not have any
significant operations or separately identifiable assets other than from the
United States and Russia. Prior to 1994, WellTech did not have significant
operations in geographic areas other than the United States.
Year Ended December 31, 1994
(in thousands)
United
Total States Russia
Revenues $49,043 $43,013 $ 6,030
Operating Income (Loss) $( 1,256) $( 2,352) $ 1,096
Identifiable Assets $58,176 $57,614 $ 562
F-52
<PAGE>
(11) Supplemental Cash Flow Information
Cash paid for interest and income taxes follows (in thousands):
1994 1993 1992
------ ------ -----
Interest $ 400 $ 466 $ 108
Income taxes - - -
Information regarding certain non-cash transactions follows (in thousands):
1994 1993 1992
----- ----- -----
Contribution of net assets of
Gulf Coast operations for equity
investment in DWT $ - $ - $4,161
Contribution of net assets for
equity investment in Servicios
WellTech 90 181 394
Transfer of current assets and
current liabilities to Key Energy
Group, Inc.:
Accounts receivable, net - 2,524 -
Accounts payable - 1,605 -
Accrued payroll and related taxes - 301 -
Accrued liabilities - 618 -
Conversion of debt to equity 34,874 - -
(12) Subsequent Event -
Key Energy Group, Inc. Merger
On August 29, 1995, WellTech signed a letter of intent to effect a
merger with Key Energy Group, Inc. and on November 18, 1995, the definitive
merger agreement was finalized. Under the terms of the merger agreement, Key
will issue an aggregate of 4,929,962 shares of Key Common Stock and five-year
warrants to purchase an aggregate of 750,000 shares of Key Common Stock at an
exercise price of $6.75. 1,429,962 of the 1,635,000 shares of Key Common Stock
and existing warrants to purchase an aggregate of 250,000 shares of Key Common
Stock at $5.00 per share presently owned by WellTech will be cancelled. WellTech
stockholders will retain their investment in Dawson WellTech, LLC. In addition,
WellTech has entered into an Interim Operations Agreement in which Key has
assumed day to day management of WellTech's operations until the shareholders
approve the transaction and the merger is consummated. Completion of the merger
is subject to customary closing conditions which include the approval of Key
shareholders which is currently anticipated to be completed in March 1996.
F-53
<PAGE>
Financing Arrangements
During 1995, WellTech was not in compliance with certain of the
restrictive covenants of its Loan Agreement with Shawmut and received waivers
for such events of non compliance. On January 19, 1996, WellTech entered into a
credit agreement with a new lender, the CIT Group/Credit Finance ("CIT") to
refinance certain existing indebtedness, which enabled WellTech to repay all
indebtedness to Shawmut (approximately $5 million). The new indebtedness is in
the form of a three year revolving credit arrangement and a three year term loan
and is cross guaranteed by Key and cross collateralized by their assets. Upon
consummation of the merger, the new indebtedness will be the obligation of Key,
as survivor of the merger. There are no restrictive financial covenants until
the merger is completed. However, failure to consummate the merger by April 30,
1996, may, at the option of CIT, constitute an event of default if WellTech
fails to refinance this credit facility by July 31, 1996, or if Key fails to
continue to operate WellTech pursuant to the Interim Operations Agreement until
such refinancing is completed.
F-54
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
(In Thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,013
Accounts receivable, less allowance 16,610
for doubtful accounts of $997
Prepaid insurance losses 1,252
Prepaid expenses and other 794
------
Total Current Assets 19,669
------
INVESTMENT IN UNCONSOLIDATED
WELL SERVICING OPERATIONS:
Dawson WellTech, LLC 7,158
Key Energy Group, Inc. 8,545
------
15,703
------
PROPERTY AND EQUIPMENT:
Property and equipment 44,638
Less accumulated depreciation (13,741)
------
Net Property and Equipment 30,897
OTHER ASSETS 2,729
------
Total Assets $68,998
=======
See accompanying notes to unaudited consolidated financial statements
F-55
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
(In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $6,769
Accounts payable 5,931
Accrued payroll and related taxes 1,429
Accrued casualty insurance 2,009
Other accrued and current liabilities 2,311
--------
Total Current Liabilities 18,449
--------
NON-CURRENT LIABILITIES
Long-term debt, net of current maturities 9,983
Accrued casualty insurance 2,219
--------
Total Non-Current Liabilities 12,202
COMMITMENTS AND CONTINGENCIES (Note 5)
MINORITY INTEREST 1,465
--------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par; 500,000 shares
authorized; 352,941 issued and outstanding 353
Capital in excess of par value 92,456
Accumulated deficit (55,927)
---------
Total Stockholders' Equity 36,882
---------
Total Liabilities and Stockholders' Equity $68,998
=========
See accompanying notes to unaudited consolidated financial statements.
F-56
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In Thousands)
1995 1994
----- ----
REVENUES $52,180 $34,974
------- -------
OPERATING COSTS AND EXPENSES
Direct operating 40,867 27,897
General and administrative 7,579 5,872
Depreciation and amortization 2,524 2,228
-------- --------
Total operating costs and expenses 50,970 35,997
-------- --------
INCOME (LOSS) FROM OPERATIONS 1,210 (1,023)
-------- --------
OTHER (INCOME) AND EXPENSE
Interest expense 1,414 554
Interest income (4) (121)
Equity in earnings of unconsolidated investees (552) (295)
Gain on disposition of assets (390) (2,499)
Other (income) expense, net 369 358
-------- --------
Total Other (Income) and Expense 837 (2,003)
-------- --------
INCOME BEFORE MINORITY INTEREST AND
INCOME TAXES 373 980
MINORITY INTEREST 139 --
INCOME TAX EXPENSE -- --
-------- --------
NET INCOME $ 234 $ 980
======== ========
See accompanying notes to unaudited consolidated financial statements.
F-57
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(In Thousands)
1995 1994
----- ----
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES:
Net Income 234 980
Non-cash charges included in net income:
Depreciation and amortization 2,524 2,228
Gain on disposition of assets (390) (2,499)
Equity in earnings of unconsolidated investees (552) (295)
Minority interest net income 139 --
Changes in components of working capital:
Increase in accounts receivable, net (2,533) (595)
(Increase) decrease in prepaid insurance losses
and expenses and other (322) 1,301
Decrease in accounts payable (1,570) (577)
Increase in accrued liabilities 503 71
Other, net 164 5
------- -------
Net Cash Provided by (used in) Operating Activities (1,803) 619
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,038 2,166
Capital expenditures (5,103) (9,024)
Cash distributions from unconsolidated investees 362 344
Contributions to unconsolidated operations -- (1,179)
------- -------
Net Cash Used in Investing Activities (3,703) (7,693)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity investment -- 4,561
Additions to long term debt 9,282 3,678
Repayments of debt (3,278) (608)
Debt issue costs (313) --
------- -------
Net Cash Provided by Financing Activities 5,691 7,631
------- -------
Increase in Cash and Cash Equivalents 185 557
Cash and Cash Equivalents, Beginning of Year 828 689
------- -------
Cash and Cash Equivalents, End of Year $ 1,013 $ 1,246
======= =======
See accompanying notes to unaudited consolidated financial statements.
F-58
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Capital
Shares $1.00 in Excess
Issued and Par of Accumulated
Outstanding Value Par Value Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 347,471 $ 347 $ 92,003 $(56,161) $ 36,189
Exchange of stock for
property and equipment 5,470 6 453 -- 459
Net income for period -- -- -- 234 234
-------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 1995 352,941 $ 353 $ 92,456 $(55,927) $ 36,882
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-59
<PAGE>
WELLTECH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(1) General
The accompanying unaudited consolidated financial statements of
WellTech, Inc. and subsidiaries ("WellTech") or the ("Company") have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
These unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included herein for
the year ended December 31, 1994.
In Management's opinion, the accompanying unaudited consolidated
financial statements contain all adjustments (including all normal recurring
accruals) necessary to present fairly the financial position of the Company at
September 30, 1995 and the results of its operations and cashflows for the nine
months ended September 30, 1994 and 1995. These interim results are not
necessarily indicative of results for a full year.
(2) Financing
On August 31, 1995, WellTech entered into a loan agreement with
Rockport Resources Corporation ("Rockport Agreement") whereby WellTech borrowed
$1.8 million, secured by two drilling rigs. Shawmut released its lien on these
rigs in exchange for a principal payment of $325,000 on the term loan. The $1.8
million loan is for a term of one year and bears interest at the rate of 15% per
annum payable monthly. The principal is payable after one year or upon the sale
of the rigs, which ever occurs first. It is WellTech's intention to sell these
rigs and retire this debt as quickly as possible; consequently, the Rockport
Agreement also provides for the payment of additional amounts each 90 days to
retain this right.
These payments are required as follows:
At closing $ 42,850
November 30, 1995 21,425
February 28, 1996 42,850
May 31, 1996 64,275
----------
$171,400
==========
F-60
<PAGE>
The net proceeds from this transaction were used to retire $325,000 of Shawmut
Term Debt, to make additional investments in Servicios WellTech of approximately
$1,000,000 and for additional vendor payments.
Letter of Credit - In October, November and December 1995, Shawmut
issued, under WellTech's revolving credit facility, an additional $300,000 in
letters of credit making the total outstanding $1,380,000. These letters of
credit provide collateral for the payment of the self-insured retention under
certain of WellTech's liability insurance policies. The additional $300,000 is
the complete collateral requirement for WellTech's 95-96 policy year.
During 1995, WellTech was not in compliance with certain of the
restrictive covenants of its Loan Agreement with Shawmut and received waivers
for such events of non compliance. On January 19, 1996, WellTech entered into a
credit agreement with a new lender, the CIT Group/Credit Finance ("CIT") to
refinance certain existing indebtedness, which enabled WellTech to repay all
indebtedness to Shawmut (approximately $5 million). The new indebtedness is in
the form of a three year revolving credit arrangement and a three year term loan
and is cross guaranteed by Key and cross collateralized by their assets. Upon
consummation of the merger, the new indebtedness will be the obligation of Key,
as survivor of the merger. There are no restrictive financial covenants until
the merger is completed. However, failure to consummate the merger by April 30,
1996, may, at the option of CIT, constitute an event of default if WellTech
fails to refinance this credit facility by July 31, 1996, or if Key fails to
continue to operate WellTech pursuant to the Interim Operations Agreement until
such refinancing is completed.
(3) Equity Transactions
On March 31, 1995, WellTech issued 5,470 shares of common stock in
exchange for certain well servicing assets. This transaction was valued at
$459,000.
(4) Investments in Unconsolidated Well Servicing Operations
Servicios WellTech - In April 1995, Servicios WellTech, S.A. ("SWT")
was recapitalized and WellTech's ownership interest increased from 50% to 63%.
Consequently, effective April 1, 1995, WellTech changed its method of accounting
for SWT from the equity method to consolidation with a minority interest.
F-61
<PAGE>
Presented below is certain condensed financial information for Dawson WellTech,
L.L.C. ("DWT") and Key Energy Group, Inc. ("Key"). WellTech did not acquire its
ownership interest in Key until August of 1994, therefore the information
presented below does not include the nine months ended September 30, 1994 for
Key.
DWT Key
Nine Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------
1995 1994 1995
---- ----- -----
Revenues $34,528 $15,458 $35,125
Gross Margins $11,464 $ 4,936 $11,777
Income Before Tax $ 2,980 $ 1,413 $ 2,910
Net Income $ 2,909 $ 1,347 $ 1,893
(5) Commitments and Contingencies
WellTech is involved in disputes and litigation arising in the normal
course of business. In management's opinion, the resolution of such disputes and
litigation will not have a material adverse effect on the financial position or
results of operations of WellTech.
F-62
<PAGE>
KEY ENERGY GROUP, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Combined Financial Statements of Key have been
prepared to give effect to the acquisition of the West Texas assets of WellTech,
Inc. ("WellTech West Texas") in August 1994, the acquisition of certain assets
of Clint Hurt Drilling in April 1995, the Merger and WellTech's increased
ownership of Servicios WellTech S.A. ("Servicios") in April 1995. The Unaudited
Pro Forma Combined Financial Statements of Key are not necessarily indicative of
the financial results for the periods presented had the acquisitions of WellTech
West Texas and Clint Hurt Drilling and the Merger and WellTech's increased
ownership of Servicios taken place on July 1, 1994. In addition, future results
may vary significantly from the results reflected in the accompanying Unaudited
Pro Forma Combined Financial Statements because of, among other factors, normal
oil and gas production declines, changes in products and services prices and
future acquisitions. This information should be read in conjunction with the
consolidated financial statements of Key (and related notes) and the
consolidated financial statements of WellTech (and related notes), all included
elsewhere in this Proxy Statement-Prospectus.
F-63
<PAGE>
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
as of December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro Forma Pro Forma
Key WellTech, Inc Entries Combined
ASSETS:
Current Assets:
Cash $ 503 $ 1,267 $ 1,200 (c) $ 2,970
Restricted cash 452 - 452
Restricted marketable securities 267 - 267
Accounts receivable, net 8,352 14,477 22,829
Inventories 1,300 - 1,300
Prepaid expenses and other current assets 225 2,333 2,558
- ----------------------------------------------------------------------------------- -----------------
Total Current Assets 11,099 18,077 30,376
- ----------------------------------------------------------------------------------- -----------------
Equity in Unconsolidated Well Servicing
Operations:
Dawson WellTech, LLC - 7,175 (7,175) (b) -
Key Energy Group, Inc. - 8,572 (8,572) (b) -
- ----------------------------------------------------------------------------------- -----------------
Total - 15,747 -
- ----------------------------------------------------------------------------------- -----------------
Property and Equipment:
Oilfield service equipment 25,456 37,631 (12,707) (a) 50,380
Oil and gas well drilling equipment 2,374 2,751 (938) (a) 4,187
Motor vehicles 521 525 1,046
Oil and gas properties and related equipment,
successful efforts method 9,809 - 9,809
Furniture and equipment 334 1,026 1,360
Buildings and land 2,086 3,231 5,317
- ----------------------------------------------------------------------------------- -----------------
40,580 45,164 72,099
Accumulated depreciation & depletion (6,188) (14,384) 14,384 (a) (6,188)
- ----------------------------------------------------------------------------------- -----------------
Net Property and Equipment 34,392 30,780 65,911
- ----------------------------------------------------------------------------------- -----------------
Other Assets 2,020 2,928 1,946 (a) 6,994
100 (c)
- ----------------------------------------------------------------------------------- -----------------
Total Assets $47,511 $67,532 $103,281
================================================================================== =================
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-64
<PAGE>
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
as of December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro Forma Pro Forma
Key WellTech, Inc Entries Combined
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,804 $ 5,789 (1,650) (c) $ 7,943
Other accrued liabilities 1,931 5,884 2,000 (a) 9,815
Accrued interest 168 505 (400) (c) 273
Accrued income taxes 124 257 381
Deferred tax liability 118 - 118
Current portion of long-term debt 1,590 5,697 (4,948) (c) 2,339
- ----------------------------------------------------------------------------------- -----------------
Total Current Liabilities 7,735 18,132 20,869
- ----------------------------------------------------------------------------------- -----------------
Long-term debt, less current portion 15,237 9,505 8,298 (c) 33,040
Deferred income taxes 2,934 - 2,934
Accrued casualty insurance - 2,219 2,219
Minority interest in consolidated subsidiary - 1,364 1,364
Commitments and contingencies
Stockholders' equity:
Common stock 691 353 (3) (a) 1,041
Additional paid-in capital 15,186 92,456 (55,809) (a) 36,086
(15,747) (b)
Retained earnings (deficit) 5,728 (56,497) 56,497 (a) 5,728
Total Stockholders' Equity 21,605 36,312 42,855
- ----------------------------------------------------------------------------------- -----------------
Total Liabilities and Stockholders' Equity $47,511 $67,532 $103,281
================================================================================== =================
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-65
<PAGE>
<TABLE>
<CAPTION>
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Twelve Months Ended June 30, 1995
(In thousands, except share and per share data)
WellTech, Clint Hurt Servicios Pro Forma Pro Forma
Key Inc Drilling WellTech Entries Combined
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Oilfield service $ 40,105 $ 55,507 $ - $ 7,898 $ 103,510
Oil and gas 2,334 - - - 2,334
Oil and gas well drilling 1,932 3,565 5,797 - 11,294
Other, net 318 2,587 - (398) 2,507
- ----------------------------------------------------------------------------------------------------- -----------
44,689 61,659 5,797 7,500 119,645
- ----------------------------------------------------------------------------------------------------- -----------
COSTS AND EXPENSES
Oilfield services 30,592 43,705 - 5,620 (2,175) (f) 77,742
Oil and gas 757 - - - 757
Oil and gas well drilling 1,444 3,858 4,333 - (325) (f) 9,310
Depreciation, depletion and amortization 2,738 2,863 - 534 100 (d) 6,235
General and administrative 4,352 9,557 1,165 2,609 (1,500) (f) 16,183
Interest 1,478 1,227 - 370 (386) (c) 2,689
Equity in (earnings) losses of
unconsolidated investees
- 632 - - (632) (b) -
Minority interest in net loss (income)
of consolidated subsidiary - 90 - - (604) (e) (514)
- ----------------------------------------------------------------------------------------------------- -----------
41,361 61,932 5,498 9,133 112,402
- ----------------------------------------------------------------------------------------------------- -----------
Income (loss) before income taxes 3,328 (273) 299 (1,633) 7,243
Income tax expense 1,150 - - - 1,218 (g) 2,368
- ----------------------------------------------------------------------------------------------------- -----------
NET INCOME (LOSS) $ 2,178 $ (273) $ 299 $ (1,633) $ 4,875
===================================================================================================== ===========
EARNINGS PER SHARE :
Income (loss) before income taxes $0.50 ($0.78) $0.70
Net income (loss) $0.33 ($0.78) $0.48
WEIGHTED AVERAGE SHARES OUTSTANDING: 6,647 349 10,106
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements
F-66
<PAGE>
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Six Months Ended December 31, 1995
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pro Forma Pro Forma
Key WellTech, Inc Entries Combined
REVENUES:
Oilfield service $ 19,148 $ 29,471 $ 48,619
Oil and gas 1,727 - 1,727
Oil and gas well drilling 3,659 1,558 5,217
Other, net 258 - 258
- ------------------------------------------------------------------------------------- ---------------
24,792 31,029 55,821
- ------------------------------------------------------------------------------------- ---------------
COSTS AND EXPENSES
Oilfield services 14,153 23,014 (1,000) (f) 36,167
Oil and gas 619 - 619
Oil and gas well drilling 2,735 1,712 (150) (f) 4,297
Depreciation, depletion and amortization 1,794 1,524 3,318
General and administrative 2,390 4,523 (750) (f) 6,163
Interest 877 716 (250) (c) 1,343
Equity in (earnings) losses of
unconsolidated investees - (741) 741 (b) -
- ------------------------------------------------------------------------------------- ---------------
22,568 30,748 51,907
- ------------------------------------------------------------------------------------- ---------------
Income before income taxes 2,224 281 3,914
Income tax expense 730 - 582 (g) 1,312
- ------------------------------------------------------------------------------------- ---------------
NET INCOME $ 1,494 $ 281 $ 2,602
===================================================================================== ================
EARNINGS PER SHARE :
Income before income taxes $ 0.32 $ 0.80 $ 0.38
Net income $ 0.22 $ 0.80 $ 0.25
WEIGHTED AVERAGE SHARES
OUTSTANDING: 6,914 353 10,414
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-67
<PAGE>
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
June 30, 1995 and December 31, 1995
1. Basis of Presentation
The accompanying unaudited pro forma combined financial information of Key
Energy Group, Inc. and Subsidiaries ("Key") is presented to reflect (a) the
acquisition of the West Texas assets of WellTech, Inc. ("WellTech West Texas")
in August 1994, (b) the acquisition of certain assets of Clint Hurt Drilling in
April 1995, and (c) the proposed merger of WellTech, Inc. ("WellTech") into Key,
(items (a), (b) and (c) collectively referred to herein as, "the Acquisitions"),
and (d) WellTech's increase in ownership of Servicios WellTech S.A.
("Servicios") in April 1995 from a 50% to 63%. The unaudited pro forma combined
balance sheet is presented as if the acquisition of WellTech occurred at the
balance sheet date. The unaudited pro forma combined statements of operations
are presented as if the Acquisitions and the increase of WellTech's ownership in
Servicios each occurred on July 1, 1994.
Key - Represents the consolidated balance sheet of Key Energy Group,
Inc. and Subsidiaries as of December 31, 1995 and the consolidated statements of
operations of Key Energy Group, Inc. and Subsidiaries for the year ended June
30, 1995 and the six months ended December 31, 1995.
WellTech, Inc. - Represents the consolidated balance sheet of WellTech,
Inc. as of November 30, 1995 and the unaudited consolidated statements of
operations of WellTech, Inc. for the year ended June 30, 1995, (which was
derived by subtracting the statement of operations amounts for the six months
ended June 30, 1994 from the audited statement of operations amounts for the
year ended December 31, 1994 and adding the statement of operations amounts for
the six months ended June 30, 1995) and the six months ended November 30, 1995.
Prior to the merger, WellTech will distribute 205,038 shares of Key Common Stock
to its directors as compensation. A charge to earnings for the fair value of
such shares will be made to the earnings of WellTech upon such distribution.
Servicios WellTech, S.A. - Represents the statement of operations of
Servicios WellTech, S.A. for the nine months ended March 31, 1995 (which was
derived by subtracting the statement of operations amounts for the three months
ended June 30, 1994 from the audited statement of operations amounts for the
year ended March 31, 1995). For the period from July 1, 1994 to March 31, 1995,
WellTech recorded its investment in Servicios WellTech, S.A. utilizing the
equity method. Subsequent to March 31, 1995, as a result of increasing its
ownership from 50% to 63%, WellTech consolidated the operations of Servicios
WellTech, S.A. in its consolidated statement of operations.
Clint Hurt Drilling - Reflects the historical revenues and direct
operating expenses of certain assets of Clint Hurt Drilling for the nine months
ended March 31, 1995. Subsequent to March 31, 1995, the revenues and direct
operating expenses of Clint Hurt Drilling are included in the consolidated
statement of operations of Key.
F-68
<PAGE>
2. Pro Forma Entries
(a) To record the acquisition of WellTech using the purchase method of
accounting. The allocation of the purchase price to the acquired assets and
liabilities of WellTech is preliminary, and therefore, subject to change.
(b) To eliminate the investment and equity in earnings (losses) in
Dawson WellTech, LLC, ("Dawson"). WellTech's investment in Dawson will be
distributed to the shareholders and directors of WellTech prior to the proposed
merger of WellTech into Key.
Also, to eliminate the investment and equity in earnings (losses) in
Key for the common stock of Key currently owned by WellTech and the equity in
earnings of Services WellTech prior to its consolidation during the year ended
June 30, 1995.
If the expected distribution to WellTech directors of 205,038 shares of
Key Common Stock and 7,280 shares of Dawson common stock had been made on
December 31, 1995, WellTech would have recorded a related charge to earnings of
$1,515,000.
(c) To adjust the debt and accrued interest for certain debt
instruments of Key and WellTech as a result of refinancing certain debt
instruments. Key has a commitment from a banking institution to refinance
certain debt obligations of the Company and WellTech and to provide Key with
approximately $1.2 million in incremental working capital.
Also, to adjust interest expense and debt issuance costs resulting from
(i) the borrowings for the acquisition of Clint Hurt Drilling, and (ii) the
refinancing of certain debt instruments of Key and WellTech and the receipt of
working capital.
(d) To adjust depreciation, depletion and amortization for the WellTech
West Texas assets.
(e) To adjust the minority interest in losses of a consolidated
subsidiary for the operations of Servicios for the nine months ended March 31,
1995.
(f) To record the estimated savings in general and administrative
expenses and operating costs due to the Acquisitions. The estimated savings in
expenses is solely a result of changed circumstances brought about by the
consummation of the Acquisitions, principally the closing of duplicate
administrative facilities and the elimination of duplicate administrative
positions, including executive positions. Duplicative administrative facilities
expected to be closed consist of the leased executive offices of WellTech
located in Houston, Texas. Approximately 10 employees are expected to be
effected. Not included is any additional compensation under the 1995 Stock
Option Plan or the Outside Directors' Stock Option Plan, if any. The Company
would have recorded deferred compensation of approximately $1,200,000 to be
recognized as expense over a 4 year period under the 1995 Stock Option Plan and
$187,500 under the Outside Directors' Stock Option Plan to be recognized over a
two year period had such plans gone into effect on December 31, 1995. (See
"Management of Key - Executive Compensation; - 1995 Stock Option Plan; - Outside
Directors' Stock Plan".)
(g) To adjust income tax expense for each tax jurisdiction.
F-69
<PAGE>
3. Income Taxes
Key accounts for income taxes pursuant to the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Deferred income taxes have been provided on all significant
difference between the book and tax basis of the assets and liabilities of the
Acquisitions. In accordance with Statement 109, Key prepares separate tax
calculations for each tax jurisdiction in which Key is subject to income taxes.
Income taxes are not reflected in the historical financial information of Clint
Hurt Drilling as it was not a taxable entity.
4. Income (loss) from Operations per Share
Income (loss) from operations per share is calculated based on the weighted
average number of shares and share equivalents, if more than 3% dilutive,
outstanding during the period. Fully diluted income (loss) per common and common
equivalent share is not presented since the effect would be antidilutive. Pro
forma income (loss) per share has been calculated taking into account the
issuance of shares of Key's Common Stock in the Acquisitions as if such shares
were issued on July 1, 1994.
F-70
<PAGE>
Annex I
AGREEMENT AND PLAN OF MERGER
By and Between
KEY ENERGY GROUP, INC.
and
WELLTECH, INC.
Dated as of
November 18, 1995
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<PAGE>
TABLE OF CONTENTS
ARTICLE 1 THE MERGER.....................................................AI-6
SECTION 1.1 The Merger.................................................AI-6
SECTION 1.2 Action by Stockholders.....................................AI-6
SECTION 1.3 Closing....................................................AI-6
SECTION 1.4 Effective Time.............................................AI-6
SECTION 1.5 Effect of the Merger.......................................AI-7
SECTION 1.6 Articles of Incorporation..................................AI-7
SECTION 1.7 Bylaws.....................................................AI-7
SECTION 1.8 Directors and Officers.....................................AI-7
ARTICLE 2 CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES.............AI-7
SECTION 2.1 Conversion of Securities...................................AI-7
SECTION 2.2 Exchange of Certificates...................................AI-8
SECTION 2.3 Stock Transfer Books.......................................AI-10
SECTION 2.4 Option Securities and Convertible Securities;
Payment Rights...........................................AI-10
SECTION 2.5 Dissenting Shares..........................................AI-10
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................AI-10
SECTION 3.1 Organization and Business; Power and Authority;
Effect of Transaction....................................AI-11
SECTION 3.2 Financial and Other Information............................AI-12
SECTION 3.3 Changes in Condition.......................................AI-13
SECTION 3.4 Liabilities................................................AI-13
SECTION 3.5 Title to Properties; Leases................................AI-13
SECTION 3.6 Compliance with Private Authorizations.....................AI-15
SECTION 3.7 Compliance with Governmental Authorizations
and Applicable Law.......................................AI-15
SECTION 3.8 Intangible Assets. .......................................AI-16
SECTION 3.9 Related Transactions.......................................AI-16
SECTION 3.10 Insurance.................................................AI-17
SECTION 3.11 Tax Matters...............................................AI-17
SECTION 3.12 Employee Retirement Income Security Act of 1974...........AI-18
SECTION 3.13 Absence of Sensitive Payments.............................AI-20
SECTION 3.14 Inapplicability of Specified Statutes.....................AI-20
SECTION 3.15 Authorized and Outstanding Capital Stock..................AI-20
SECTION 3.16 Employment Arrangements...................................AI-21
SECTION 3.17 Material Agreements.......................................AI-21
SECTION 3.18 Ordinary Course of Business...............................AI-22
SECTION 3.19 Bank Accounts, Etc........................................AI-23
SECTION 3.20 Adverse Restrictions......................................AI-23
SECTION 3.21 Broker or Finder..........................................AI-23
SECTION 3.22 Personal Injury or Property Damage;
Warranty Claims; Etc....................................AI-24
SECTION 3.23 Environmental Matters.....................................AI-24
SECTION 3.24 Solvency..................................................AI-25
SECTION 3.25 Compliance with Regulations Relating to
Securities Credit.......................................AI-25
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<PAGE>
SECTION 3.26 Materiality...............................................AI-25
SECTION 3.27 Continuing Representation and Warranty....................AI-25
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF KEY..........................AI-25
SECTION 4.1 Organization and Business; Power and Authority;
Effect of Transaction.....................................AI-26
SECTION 4.2 Financial and Other Information............................AI-27
SECTION 4.3 Changes in Condition.......................................AI-28
SECTION 4.4 Liabilities................................................AI-28
SECTION 4.5 Title to Properties; Leases................................AI-28
SECTION 4.6 Compliance with Private Authorizations.....................AI-29
SECTION 4.7 Compliance with Governmental Authorizations
and Applicable Law........................................AI-30
SECTION 4.8 Intangible Assets..........................................AI-31
SECTION 4.9 Related Transactions.......................................AI-31
SECTION 4.10 Insurance. ..............................................AI-31
SECTION 4.11 Tax Matters...............................................AI-32
SECTION 4.12 Employee Retirement Income Security Act of 1974. ........AI-33
SECTION 4.13 Absence of Sensitive Payments.............................AI-34
SECTION 4.14 Inapplicability of Specified Statutes.....................AI-35
SECTION 4.15 Authorized and Outstanding Capital Stock..................AI-35
SECTION 4.16 Employment Arrangements. ................................AI-35
SECTION 4.17 Material Agreements.......................................AI-36
SECTION 4.18 Ordinary Course of Business...............................AI-36
SECTION 4.19 Adverse Restrictions......................................AI-37
SECTION 4.20 Broker or Finder..........................................AI-38
SECTION 4.21 Personal Injury or Property Damage;
Warranty Claims; Etc.....................................AI-38
SECTION 4.22 Environmental Matters.....................................AI-38
SECTION 4.23 Solvency..................................................AI-39
SECTION 4.24 Compliance with Regulations Relating
to Securities Credit....................................AI-39
SECTION 4.25 Materiality...............................................AI-39
SECTION 4.26 Continuing Representation and Warranty....................AI-39
ARTICLE 5 STOCKHOLDER MEETING COVENANTS..................................AI-40
SECTION 5.1 SEC Filings................................................AI-40
SECTION 5.2 Board Recommendation.......................................AI-41
SECTION 5.3 Meeting of Stockholders of the Company.....................AI-41
SECTION 5.4 Meeting of Stockholders of Key.............................AI-41
ARTICLE 6 ADDITIONAL COVENANTS...........................................AI-42
SECTION 6.1 Access to Information; Confidentiality.....................AI-42
SECTION 6.2 Agreement to Cooperate.....................................AI-43
SECTION 6.3 Public Announcements.......................................AI-43
SECTION 6.4 Directors' and Officers' Indemnification...................AI-44
SECTION 6.5 Notification of Certain Matters............................AI-44
SECTION 6.6 No Solicitation............................................AI-44
SECTION 6.7 Termination of Option Securities and
Convertible Securities....................................AI-45
SECTION 6.8 Arrangement of Debt Financing..............................AI-46
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<PAGE>
ARTICLE 7 CLOSING CONDITIONS.............................................AI-47
SECTION 7.1 Conditions to Obligations of Each Party to
Effect the Merger........................................AI-47
SECTION 7.2 Conditions to Obligations of Key...........................AI-47
SECTION 7.3 Conditions to Obligations of the Company...................AI-51
ARTICLE 8 TERMINATION, AMENDMENT AND WAIVER..............................AI-54
SECTION 8.1 Termination................................................AI-54
SECTION 8.2 Effect of Termination......................................AI-55
SECTION 8.3 Amendment..................................................AI-55
SECTION 8.4 Waiver.....................................................AI-55
SECTION 8.5 Fees, Expenses and Other Payments..........................AI-55
ARTICLE 9 GENERAL PROVISIONS.............................................AI-56
SECTION 9.1 Effectiveness of Representations, etc......................AI-56
SECTION 9.2 Notices....................................................AI-56
SECTION 9.3 Specific Performance; Other Rights and Remedies............AI-57
SECTION 9.4 Severability...............................................AI-57
SECTION 9.5 Counterparts...............................................AI-58
SECTION 9.6 Section Headings...........................................AI-58
SECTION 9.7 Governing Law..............................................AI-58
SECTION 9.8 Further Acts...............................................AI-58
SECTION 9.9 Entire Agreement...........................................AI-58
SECTION 9.10 Assignment................................................AI-58
SECTION 9.11 Parties in Interest.......................................AI-58
SECTION 9.12 Mutual Drafting...........................................AI-59
APPENDIX A Definitions
EXHIBITS
EXHIBIT A Form of New Key Warrants (First Preamble)
EXHIBIT B Amended and Restated Articles of Incorporation of Key
(Section 1.6)
EXHIBIT C By-Laws of Key (Section 1.7)
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<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of
November 18, 1995, is made by and between Key Energy Group, Inc., a Maryland
corporation ("Key"), and WellTech Inc., a Delaware corporation (the "Company"
and, together with Key, the "parties").
RECITALS
WHEREAS, upon the terms and subject to the conditions of this
Agreement, in accordance with the general corporation laws of the State of
Delaware (the "DGCL") and of the State of Maryland (the "MGCL"), the Company and
Key will carry out a business combination transaction pursuant to which the
Company will merge with and into Key (the "Merger") and the Company stockholders
will receive 4,929,962 shares (the "Key Shares") of Common Stock, par value $.10
per share, of Key (the "Key Stock") and five-year warrants substantially in the
form of Exhibit A attached hereto and made a part hereof to purchase at a
purchase price of $6.75 per share up to an aggregate of 750,000 shares of Key
Stock (the "New Key Warrants") and, upon the consummation of the Merger, Key
shall retire the Existing Key Shares and the Existing Key Warrants (each as
hereinafter defined); and
WHEREAS, the Board of Directors of each of the Company and Key (i) has
unanimously determined that the Merger is advisable and fair to, and in the best
interests of, it and its respective stockholders and has approved and adopted
this Agreement as a plan of reorganization within the provisions of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii)
has approved this Agreement, the Merger and the other transactions contemplated
hereby or thereby or by any Collateral Document executed or required to be
executed in connection herewith or therewith (collectively the "Transactions"),
and (iii) has recommended approval and adoption of this Agreement, the Merger
and the Transactions by its respective stockholders; and
WHEREAS, the Company and Key have simultaneously with the execution and
delivery of this Agreement executed and delivered an interim operations
agreement (as from time to time amended in accordance with its terms, the
"Interim Operations Agreement"); and
WHEREAS, Key has simultaneously with the execution and delivery of this
Agreement executed and delivered a registration rights agreement (as from time
to time amended in accordance with its terms, the "Registration Rights
Agreement"); and
WHEREAS, capitalized terms used in this Agreement without definition
shall have the meanings given to such terms in Appendix A attached hereto and
made a part hereof;
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual representations, warranties, covenants and agreements set forth herein,
the parties hereto, intending to be legally bound, do hereby covenant and agree
as follows:
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<PAGE>
ARTICLE 1
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the DGCL and the MGCL, at
the Effective Time the Company shall be merged with and into Key. As a result of
the Merger, the separate existence of the Company shall cease and Key shall
continue as the surviving corporation of the Merger (the "Surviving
Corporation").
SECTION 1.2 Action by Stockholders.
(a) The Company, acting through its Board of Directors, shall, in
accordance with Applicable Law and its Organic Documents: (i) as soon as
practicable, duly call, give notice of, convene and hold a special meeting of
stockholders for the purpose of adopting and approving this Agreement, the
Merger and the Transactions (the "Company Special Meeting"); (ii) include in any
proxy statement the conclusion and recommendation of its Board of Directors to
the effect that its Board of Directors, having determined that this Agreement,
the Merger and the Transactions are in the best interests of the Company and its
stockholders, has approved this Agreement, the Merger and the Transactions and
recommends that its stockholders vote in favor of the approval and adoption of
this Agreement, the Merger and the Transactions; and (iii) use its reasonable
business efforts to obtain the necessary approval and adoption of this
Agreement, the Merger and the Transactions by its stockholders.
(b) Key, acting through its Board of Directors, shall, in accordance
with Applicable Law and its Organic Documents: (i) as soon as practicable, duly
call, give notice of, convene and hold a special meeting of stockholders for the
purpose of adopting and approving this Agreement, the Merger and the
Transactions (the "Key Special Meeting"); (ii) include in any proxy statement
the conclusion and recommendation of its Board of Directors to the effect that
its Board of Directors, having determined that this Agreement, the Merger and
the Transactions are advisable and in the best interests of Key and its
stockholders, has approved this Agreement, the Merger and the Transactions and
recommends that its stockholders vote in favor of the approval and adoption of
this Agreement, the Merger and the Transactions; and (iii) use its reasonable
business efforts to obtain the necessary approval and adoption of this
Agreement, the Merger and the Transactions by its stockholders.
SECTION 1.3 Closing. Unless this Agreement shall have been terminated
pursuant to Section 8.1 and the Merger and the Transactions shall have been
abandoned, and subject to the satisfaction or, if permissible, waiver of the
conditions set forth in Article 7, the closing of the Merger (the "Closing")
will take place, on the Closing Date, at the offices of Sullivan & Worcester,
One Post Office Square, Boston, Massachusetts, unless another date, time or
place is agreed to in writing by the parties.
SECTION 1.4 Effective Time. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article 7
(but subject to Section 1.3), the parties hereto shall cause the Merger to be
consummated by filing a Certificate of Merger with the Secretary of State of the
State of Delaware and Articles of Merger with the Secretary of State of the
State of Maryland, and by making any related filings required under the DGCL and
the MGCL in connection with the Merger. The Merger shall become effective at
such time (but not prior to the Closing Date) as such documents are duly filed
with the Secretary of State of Delaware and the Secretary of State of the State
of Maryland, respectively, or at such later time as is specified in such
documents (the "Effective Time").
AI-6
<PAGE>
SECTION 1.5 Effect of the Merger. From and after the Effective Time,
the Surviving Corporation shall possess all the rights, privileges, powers and
franchises and be subject to all of the restrictions, disabilities and duties of
the Company and Key, and the Merger shall otherwise have the effects, provided
for under the DGCL and the MGCL.
SECTION 1.6 Articles of Incorporation. The Articles of Incorporation of
Key in effect at the Effective Time shall be the Articles of Incorporation of
the Surviving Corporation unless amended in accordance with Applicable Law,
except that such Articles of Incorporation shall be amended and restated to read
in their entirety substantially as set forth in Exhibit B attached hereto and
made a part hereof. The name of the Surviving Corporation shall be the name of
Key or such other name as Key may elect.
SECTION 1.7 Bylaws. The bylaws of Key in effect at the Effective Time
shall be the bylaws of the Surviving Corporation unless amended in accordance
with Applicable Law, except that such bylaws shall be amended and restated to
read in their entirety substantially as set forth in Exhibit C attached hereto
and made a part hereof.
SECTION 1.8 Directors and Officers. From and after the Effective Time,
until successors are duly elected or appointed and qualified (or earlier
resignation or removal) in accordance with Applicable Law (a) the directors of
Key at the Effective Time (after giving effect to the provisions of Section
7.3(f)) shall be the directors of the Surviving Corporation and (b) the officers
of Key at the Effective Time shall be the officers of the Surviving Corporation.
ARTICLE 2
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.1 Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of Key, the Company or the
holders of any of the following securities:
(a) Each share of Common Stock, par value $1.00 per share, of the
Company (the "Company Stock") issued and outstanding immediately prior to the
Effective Time (other than any shares of the Company Stock to be canceled
pursuant to Section 2.1(b) and any Dissenting Shares (as defined in Section
2.5)), shall be converted into the right to receive 13.9682 shares of Key Stock
and New Key Warrants to purchase 2.125 shares of Key Stock (the "Merger
Consideration"). At the Effective Time, all shares of Company Stock (the
"Company Shares") shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and certificates previously
evidencing any such Company Shares (each, a "Certificate") shall thereafter
represent the right to receive, upon the surrender of such Certificate in
accordance with the provisions of Section 2.2, the Merger Consideration
multiplied by the number of Company Shares represented by such Certificate, and
a holder of more than one Certificate shall have the right to receive the Merger
Consideration multiplied by the number of Company Shares represented by all such
Certificates (the "Exchange Merger Consideration"). The holders of such
Certificates previously evidencing Company Shares outstanding immediately prior
to the Effective Time shall cease to have any rights with respect to such
Company Shares except as otherwise provided herein or by Applicable Law.
(b) Each Company Share held in the treasury of the Company or by any of
its Subsidiaries and each Company Share owned by Key or any of its Subsidiaries
AI-7
<PAGE>
immediately prior to the Effective Time shall automatically be canceled and
extinguished without any conversion thereof and no payment shall be made with
respect thereto.
(c) Each share of Key Stock and all Convertible Securities and Option
Securities of Key issued and outstanding immediately prior to the Merger (other
than those owned directly or indirectly by the Company or by any of its
Subsidiaries) shall remain outstanding. Each share of Key Stock owned directly
or indirectly by the Company or by any of its Subsidiaries (including without
limitation the Existing Key Shares) shall become treasury shares of Key or, at
Key's sole and absolute discretion, be canceled and extinguished, and all
Convertible Securities and Option Securities of Key owned directly or indirectly
by the Company or by any of its Subsidiaries (including without limitation the
Existing Key Warrants) shall be canceled and extinguished, and in no event shall
any payment be made with respect to any such shares of Key Stock, Convertible
Securities or Option Securities.
(d) In lieu of issuing fractional shares, Key may convert a holder's
right to receive shares of Key Stock and New Key Warrants pursuant to Section
2.1(a) into a right to receive the highest whole number of shares of Key Stock
and of New Key Warrants constituting the Exchange Merger Consideration plus cash
equal to the fraction of a share of Key Stock to which the holder would
otherwise be entitled multiplied by the Key Share Price, and the Exchange Merger
Consideration to which a holder is entitled shall be deemed to be such number of
shares of Key Stock plus such number of New Key Warrants and such cash. For
purposes of carrying out the intent of this Section, Key may aggregate
Certificates so that fractional shares of Key Stock and fractional New Key
Warrants due in exchange for multiple Certificates may be combined to yield a
number of whole shares and whole New Key Warrants thereof plus a single
fraction.
SECTION 2.2 Exchange of Certificates.
(a) At least twenty-four (24) hours prior to the Effective Time, Key
shall deposit or cause to be deposited with a bank or trust company designated
by Key (the "Exchange Agent"), for the benefit of the holders of Company Shares
(other than Dissenting Shares), for exchange in accordance with this Article,
through the Exchange Agent, the Merger Consideration multiplied by the number of
Company Shares issued and outstanding immediately prior to the Effective Time
(other than Company Shares to be canceled pursuant to Section 2.1(b) and any
Dissenting Shares), plus cash in an amount sufficient to make payment for
fractional shares, in exchange for all of the outstanding Company Shares (the
"Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable instructions
from Key, deliver the Exchange Merger Consideration to be issued pursuant to
Section 2.1(a) out of the Exchange Fund to holders of Company Shares upon
transmittal of Certificates for exchange as provided therein and in Section
2.2(b). The Exchange Fund shall not be used for any other purpose. Any interest,
dividends or other income earned by the Exchange Fund shall be for the account
of Key.
(b) Immediately after the Effective Time, Key will instruct the
Exchange Agent to deliver (by instructions from each holder of record reasonably
satisfactory to Key and the Exchange Agent, and otherwise by mail to the most
recent address of such holder as shown on the Company's books and records) to
each holder of a Certificate or Certificates which immediately prior to the
Effective Time evidenced outstanding Company Shares (other than Company Shares
to be canceled pursuant to Section 2.1(b) and any Dissenting Shares), (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon proper delivery
of the Certificates to the Exchange Agent and shall be in such form and have
such other provisions as Key may reasonably specify) and (ii) instructions to
effect the surrender of the Certificates in exchange for the Exchange Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
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Agent or to such other agent or agents as may be appointed by Key together with
such letter of transmittal, duly executed, and such other customary documents as
may be required pursuant to such instructions (collectively, the "Transmittal
Documents"), the holder of such Certificate shall be entitled to receive in
exchange therefor the Exchange Merger Consideration which such holder has the
right to receive pursuant to Sections 2.1(a) and 2.1(d), and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of Company Shares which is not registered in the transfer records of the
Company, the Exchange Merger Consideration may be issued and paid in accordance
with this Article to a transferee if the Certificate evidencing such Company
Shares is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. The Exchange Merger Consideration will be
delivered by the Exchange Agent as promptly as practicable following surrender
of a Certificate and the related Transmittal Documents, and cash payments for
fractional shares may be made by check. No interest will be payable on the
Exchange Merger Consideration regardless of any delay in making payments. Until
surrendered as contemplated by this Section, each Certificate shall be deemed at
any time after the Effective Time to evidence only the right to receive, upon
such surrender, the Exchange Merger Consideration, without interest.
(c) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and subject to such other
reasonable conditions as Key may impose, the Surviving Corporation shall issue
in exchange for such lost, stolen or destroyed Certificate the Exchange Merger
Consideration deliverable in respect thereof as determined in accordance with
Sections 2.1(a) and 2.1(d). Key may, in its reasonable discretion and as a
condition precedent to authorizing the issuance of the Exchange Merger
Consideration, require the owner of such lost, stolen or destroyed Certificate
to provide a bond or other surety to Key and the Surviving Corporation in such
sum as Key may reasonably direct as indemnity against any claim that may be made
against Key or the Surviving Corporation (and their Affiliates) with respect to
the Certificate alleged to have been lost, stolen or destroyed.
(d) Any portion of the Exchange Fund which remains undistributed to the
holders of the Company Stock for thirty (30) days after the Effective Time shall
be delivered to Key upon demand by Key, and any holders of Certificates who have
not theretofore complied with this Article shall thereafter look only to Key for
the Exchange Merger Consideration to which they are entitled pursuant to this
Article.
(e) None of Key, the Company, the Surviving Corporation or the Exchange
Agent shall be liable to any holder of Company Shares for any shares of Key
Stock, any New Key Warrants or cash from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
(f) Each of Key, the Surviving Corporation and the Exchange Agent shall
be entitled to deduct and withhold from the Exchange Merger Consideration
otherwise payable pursuant to this Agreement to any holder of Company Shares
such amounts as Key, the Surviving Corporation or the Exchange Agent is required
to deduct and withhold with respect to the making of such payment under the
Code, or any provision of state, local or foreign tax law. To the extent that
amounts are so withheld by Key, the Surviving Corporation or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the Company Shares in respect of which such
deduction and withholding was made by Key, the Surviving Corporation or the
Exchange Agent.
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SECTION 2.3 Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
transfer of Company Shares thereafter on the records of the Company. On or after
the Effective Time, any Certificate presented to the Exchange Agent, Key or the
Surviving Corporation shall be converted into the Exchange Merger Consideration.
SECTION 2.4 Option Securities and Convertible Securities; Payment
Rights. At the Effective Time, (a) each outstanding Option Security and each
outstanding Convertible Security exercisable or convertible to purchase Company
Shares immediately prior to the Effective Time, shall be canceled and the holder
thereof shall be entitled to receive, and shall receive, upon payment of the
consideration required to exercise or convert, and termination of such holder's
rights to exercise or convert, as the case may be, all other Option Securities
or Convertible Securities issued to such holder, shares of Key Stock and New Key
Warrants in the respective amounts issuable with respect to the number of
Company Shares issuable pursuant to such Option Security or Convertible Security
so exercised or converted, as the case may be, as provided in Section 2.1(a),
plus cash in lieu of receipt of a fractional share in an amount determined as
provided in Section 2.1(d), and (b) each Option Security outstanding not then
exercisable or exercised and the conversion rights of each Convertible Security
outstanding not then convertible or converted shall be canceled.
SECTION 2.5 Dissenting Shares.
(a) Notwithstanding any other provision of this Agreement to the
contrary, Company Shares that are outstanding immediately prior to the Effective
Time and which are held by stockholders who shall have not voted in favor of the
Merger or consented thereto in writing and who shall be entitled to and shall
have demanded properly in writing appraisal rights for such Company Shares in
accordance with Section 262 of the DGCL and who shall not have withdrawn such
demand or otherwise have forfeited appraisal rights (collectively, the
"Dissenting Shares") shall not be converted into or represent the right to
receive the Exchange Merger Consideration. Such stockholders shall be entitled
to receive payment of the appraised value of such Company Shares held by them in
accordance with the provisions of the DGCL, except that all Dissenting Shares
held by stockholders who shall have failed to perfect or who effectively shall
have withdrawn, forfeited or lost their appraisal rights with respect to such
Company Shares under the DGCL shall thereupon be deemed to have been converted
into and to have become exchangeable for, as of the Effective Time, the right to
receive, without any interest thereon, the Exchange Merger Consideration, upon
surrender, in the manner provided in Section 2.2, of the Certificate or
Certificates that formerly evidenced such Company Shares.
(b) The Company shall give Key prompt notice of any demands for
appraisal rights received by it, withdrawals of such demands, and any other
instruments served pursuant to the DGCL and received by the Company and relating
thereto. The Company and Key shall jointly direct all negotiations and
proceedings with respect to demands for appraisal rights under the provisions of
the DGCL. The Company shall not, except with the prior written consent of Key,
make any payment with respect to any demands for appraisal rights, or offer to
settle, or settle, any such demands.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents, warrants and covenants to, and agrees
with, Key as follows:
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SECTION 3.1 Organization and Business; Power and Authority; Effect of
Transaction.
(a) The Company:
(i) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation as
set forth in Section 3.1(a) of the Company Disclosure Schedule,
(ii) has all requisite power and authority (corporate and
other) to own or hold under lease its properties and to conduct its
business as now conducted and as presently proposed to be conducted,
and has in full force and effect all Governmental Authorizations and
Private Authorizations and has made all Governmental Filings, to the
extent required for such ownership and lease of its property and
conduct of its business, and
(iii) has duly qualified and is authorized to do business and
is in good standing as a foreign corporation in each jurisdiction (a
true, accurate and complete list of which is set forth in Section
3.1(a) of the Company Disclosure Schedule) in which the character of
its property or the nature of its business or operations requires such
qualification or authorization.
(b) The Company has all requisite power and authority (corporate and
other) and has in full force and effect all Governmental Authorizations and
Private Authorizations in order to enable it to execute and deliver, and to
perform its obligations under, this Agreement and each Collateral Document
executed or required to be executed pursuant hereto or thereto or to consummate
the Merger and the Transactions; and the execution, delivery and performance of
this Agreement and each Collateral Document executed or required to be executed
pursuant hereto or thereto have been duly authorized by all requisite corporate
or other action, other than that of the Company's stockholders. This Agreement
has been duly executed and delivered by the Company and constitutes, and each
Collateral Document executed or required to be executed pursuant hereto or
thereto or to consummate the Merger and the Transactions when executed and
delivered by the Company will constitute, legal, valid and binding obligations
of the Company, enforceable in accordance with their respective terms. The
affirmative vote or action by written consent of a majority of the votes that
the holders of the outstanding shares of Company Stock are entitled to cast is
the only vote of the holders of any class or series of the capital stock of the
Company necessary to approve the Merger and the Transactions under Applicable
Law and the Company's Organic Documents. The provisions of Section 203 of the
DGCL will not apply to this Agreement, the Merger or the Transactions.
(c) Except as set forth in Section 3.1(c) of the Company Disclosure
Schedule, neither the execution and delivery of this Agreement or any Collateral
Document executed or required to be executed pursuant hereto or thereto, nor the
consummation of the Transactions, nor compliance with the terms, conditions and
provisions hereof or thereof by the Company:
(i) will conflict with, or result in a breach or violation of,
or constitute a default under, any Applicable Law on the part of the
Company or any Subsidiary, or will conflict with, or result in a breach
or violation of, or constitute a default under, or permit the
acceleration of any obligation or liability in, or but for any
requirement of giving of notice or passage of time or both would
constitute such a conflict with, breach or violation of, or default
under, or permit any such acceleration in, any Contractual Obligation
of the Company or any Subsidiary,
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(ii) will result in or permit the creation or imposition of
any Lien upon any property now owned or leased by the Company or any
Subsidiary, or
(iii) will require any Governmental Authorization or
Governmental Filing or Private Authorization, except for filing
requirements under Applicable Law in connection with the Merger and the
Transactions.
(d) The Company does not have any Subsidiaries other than those set
forth on Section 3.1(d) of the Company Disclosure Schedule, each of which is (i)
wholly-owned unless noted otherwise in Section 3.1(d) of the Company Disclosure
Schedule, (ii) a corporation which is duly organized, validly existing and in
good standing under the laws of the respective state of incorporation set forth
opposite its name on Section 3.1(d) of the Company Disclosure Schedule, and
(iii) duly qualified and in good standing as a foreign corporation in each other
jurisdiction (as shown on Section 3.1(d) of the Company Disclosure Schedule) in
which the character of its property or the nature of its business or operations
requires such qualification or authorization, with full power and authority
(corporate and other) to carry on the business in which it is engaged. Each
Subsidiary has in full force and effect all Governmental Authorizations and
Private Authorizations and has made all Governmental Filings, to the extent
required for such ownership and lease of its property and conduct of its
business. The Company owns all of the outstanding capital stock (as shown in
Section 3.1(d) of the Company Disclosure Schedule) of each Subsidiary, free and
clear of all Liens (except to the extent set forth in Section 3.1(d) of the
Company Disclosure Schedule), and all such stock has been duly authorized and
validly issued and is fully paid and nonassessable. There are no outstanding
Option Securities or Convertible Securities, or agreements or understandings
with respect to any of the foregoing, of any nature whatsoever relating to the
authorized and unissued or outstanding capital stock of any Subsidiary.
SECTION 3.2 Financial and Other Information.
(a) The Company has heretofore furnished to Key copies of the financial
statements of the Company and its Subsidiaries listed in Section 3.2(a) of the
Company Disclosure Schedule (the "Company Financial Statements"). The Company
Financial Statements, including in each case the notes thereto, have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby, except as otherwise noted therein or as set forth in
Section 3.2(a) of the Company Disclosure Schedule, are true, accurate and
complete, do not contain any untrue statement of a material fact or, except as
set forth in Schedule 3.2(a) of the Company Disclosure Schedule, omit to state a
material fact required by GAAP to be stated therein or necessary in order to
make the statements contained therein not misleading, and fairly present the
financial condition and results of operations of the Company and its
Subsidiaries, on the bases therein stated, as of the respective dates thereof,
and for the respective periods covered thereby subject, in the case of unaudited
financial statements, to normal year-end audit adjustments and accruals. The
Company will, within fifteen (15) business days of the date hereof supplement
Section 3.2(a) of the Company Disclosure Schedule so as to include a true,
accurate and complete description of the business, operations, financial
condition, properties, prospects and management of the Company and its
Subsidiaries of the nature and in the detail required by Regulation S-K with
respect to a registration statement filed under the Securities Act on Form S-4.
Such supplement will not contain any information (i) required to be set forth in
any Section of the Company Disclosure Schedule or (ii) which Adversely Affects
the Company and its Subsidiaries taken as a whole, or the ability of the Company
to perform any of the obligations set forth in this Agreement or any Collateral
Document executed or required to be executed pursuant hereto or thereto or to
consummate the Merger and the Transactions, except to the extent specifically
described in Section 3.3 of the Company Disclosure Schedule.
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(b) Neither the Company Disclosure Schedule (including without
limitation the information set forth or to be set forth in Schedule 3.2(a)
thereof), the Company Financial Statements or this Agreement nor any Collateral
Document, data, information or statement furnished or to be furnished by or on
behalf of the Company pursuant to this Agreement or any Collateral Document
executed or required to be executed by or on behalf of the Company pursuant
hereto or thereto or to consummate the Merger and the Transactions, contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact required to be stated herein or therein or necessary in
order to make the statements contained herein or therein not misleading and all
such Collateral Documents, data, information or statements are and will be true,
accurate and complete.
(c) The Company does not own any capital stock or equity or proprietary
interest in any other Entity or enterprise, however organized and however such
interest may be denominated or evidenced, except as set forth in Section 3.1(d)
or 3.2(c) of the Company Disclosure Schedule. None of the Entities, if any, so
set forth in Section 3.2(c) of the Company Disclosure Schedule is a Subsidiary
of the Company except as so set forth. The Company owns all of the outstanding
capital stock or equity or proprietary interests (as shown on Section 3.2(c) of
the Company Disclosure Schedule) of each such Entity or other enterprise, free
and clear of all Liens (except to the extent set forth in Section 3.2(c) of the
Company Disclosure Schedule), and all such stock or equity or proprietary
interests has been duly authorized and validly issued and is fully paid and
nonassessable. There are no outstanding Option Securities or Convertible
Securities, or agreements or understandings with respect to any of the
foregoing, of any nature whatsoever, except as described in Section 3.2(c) of
the Company Disclosure Schedule.
SECTION 3.3 Changes in Condition. Since the date of the most recent
financial statements forming part of the Company Financial Statements, except to
the extent specifically described in Section 3.3 of the Company Disclosure
Schedule, there has been no Adverse Change in the Company and its Subsidiaries
taken as a whole. There is no Event known to the Company which Adversely
Affects, or in the future might (so far as the Company can now reasonably
foresee) Adversely Affect, the Company and its Subsidiaries taken as a whole, or
the ability of the Company to perform any of the obligations set forth in this
Agreement or any Collateral Document executed or required to be executed
pursuant hereto or thereto or to consummate the Merger and the Transactions,
except to the extent specifically described in Section 3.3 of the Company
Disclosure Schedule.
SECTION 3.4 Liabilities. At the date of the most recent balance sheet
forming part of the Company Financial Statements, neither the Company nor any
Subsidiary had any obligations or liabilities, past, present or deferred,
accrued or unaccrued, fixed, absolute, contingent or other, except as disclosed
in such balance sheet, or the notes thereto, and since such date neither the
Company nor any Subsidiary has incurred any such obligations or liabilities,
other than obligations and liabilities incurred in the ordinary course of
business consistent with past practice of the Company and its Subsidiaries,
which do not, in the aggregate, Adversely Affect the Company and its
Subsidiaries taken as a whole except to the extent set forth in Section 3.4 of
the Company Disclosure Schedule. Neither the Company nor any Subsidiary has
Guaranteed or is otherwise primarily or secondarily liable in respect of any
obligation or liability of any other Person, except for endorsements of
negotiable instruments for deposit in the ordinary course of business or as
disclosed in the most recent balance sheet, or the notes thereto, forming part
of the Company Financial Statements or in Section 3.4 of the Company Disclosure
Schedule.
SECTION 3.5 Title to Properties; Leases.
(a) Each of the Company and each of its Subsidiaries has good legal,
indefeasible, insurable and marketable title (in fee simple if owned) to all
real property, if any, reflected as an asset on the most recent balance sheet
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forming part of the Company Financial Statements, or owned by the Company or any
of its Subsidiaries for use in its business if not so reflected, and good
indefeasible and merchantable title to all other assets, tangible and
intangible, reflected on such balance sheet, or owned by the Company or any of
its Subsidiaries for use in its business if not so reflected, or purported to
have been acquired by the Company or any of its Subsidiaries since such date,
except inventory sold, or property, plant and other equipment used up or
retired, since such date, in each case in the ordinary course of business
consistent with past practice of the Company and its Subsidiaries, free and
clear of all Liens, except (i) Liens reflected in the Company Financial
Statements, (ii) Liens for current taxes not yet due and payable, (iii) Liens
set forth on Section 3.5(a) of the Company Disclosure Schedule, and (iv) such
imperfections of title, easements, encumbrances and mortgages or other Liens, if
any, as are not, individually or in the aggregate, substantial in character,
amount or extent and do not materially detract from the value, or interfere with
the present use, of the property subject thereto or affected thereby, or
otherwise materially impair business operations. Except for financing statements
evidencing Liens referred to in the preceding sentence (a true, accurate and
complete list and description of which is set forth in Section 3.5(a) of the
Company Disclosure Schedule), no financing statements under the Uniform
Commercial Code and no other filing which names the Company or any of its
Subsidiaries as debtor or which covers or purports to cover any of the property
of the Company or any of its Subsidiaries is on file in any state or other
jurisdiction, and neither the Company nor any Subsidiary has signed or agreed to
sign any such financing statement or filing or any agreement authorizing any
secured party thereunder to file any such financing statement or filing. Except
as otherwise set forth in Schedule 3.5(a) of the Company Disclosure Schedule,
each Lease or other occupancy or other agreement under which the Company or any
of its Subsidiaries holds real or personal property has been duly authorized,
executed and delivered by the Company or one of its Subsidiaries and, to the
Company's knowledge, information and belief, each of the other parties thereto,
and is a legal, valid and binding obligation of each of them, enforceable in
accordance with its terms. Each of the Company and its Subsidiaries has a valid
leasehold interest in and enjoys peaceful and undisturbed possession under all
Leases pursuant to which it holds any real property or tangible personal
property, none of which contains any unusual or burdensome provision, except as
described in Section 3.5(a) of the Company Disclosure Schedule. All of such
Leases are valid and subsisting and in full force and effect; and neither the
Company nor any of its Subsidiaries nor, to the Company's knowledge, information
and belief, any other party thereto, is in default in the performance,
observance or fulfillment of any obligation, covenant or condition contained in
any such Lease.
(b) Section 3.5(b) of the Company Disclosure Schedule contains a true,
accurate and complete description of all real estate owned or leased by the
Company or any of its Subsidiaries and all Leases and an identification of all
material items of fixed assets and machinery and equipment. None of the fixed
assets and machinery and equipment is subject to contracts of sale, and none is
held by the Company or any of its Subsidiaries as lessee or as conditional sales
vendee under any Lease or conditional sales contract and none is subject to any
title retention agreement, except as set forth in Section 3.5(b) of the Company
Disclosure Schedule. The real property (other than land), fixtures, fixed assets
and all other material items of personal property, including machinery and
equipment, are in a state of reasonable repair and maintenance and are in
serviceable operating condition.
(c) Except as set forth in Section 3.5(c) of the Company Disclosure
Schedule, to the Company's knowledge, information and belief, all real property
owned or leased by the Company or any of its Subsidiaries conforms to and
complies with all applicable title covenants, conditions, restrictions and
reservations and all applicable zoning, wetlands, land use and other Applicable
Laws.
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SECTION 3.6 Compliance with Private Authorizations. Section 3.6 of the
Company Disclosure Schedule sets forth a true, accurate and complete list and
description of each Private Authorization which individually is material to the
Company and its Subsidiaries taken as a whole, all of which are in full force
and effect. Each of the Company and each Subsidiary has obtained all Private
Authorizations which are necessary for the ownership by the Company or each
Subsidiary of its properties and the conduct of its business as now conducted or
as presently proposed to be conducted or which, if not obtained and maintained,
could, singly or in the aggregate, Adversely Affect the Company and its
Subsidiaries taken as a whole. Neither the Company nor any Subsidiary is in
breach or violation of, or is in default in the performance, observance or
fulfillment of, any Private Authorization, and no Event exists or has occurred,
which constitutes, or but for any requirement of giving of notice or passage of
time or both would constitute, such a breach, violation or default, under any
Contractual Obligation or Private Authorization, except for such defaults,
breaches or violations, as do not and will not have in the aggregate any Adverse
Effect on the Company and its Subsidiaries taken as a whole or the ability of
the Company to perform any of the obligations set forth in this Agreement or any
Collateral Document executed or required to be executed pursuant hereto or
thereto or to consummate the Merger and the Transactions. No Private
Authorization is the subject of any pending or, to the Company's knowledge,
information or belief, threatened attack, revocation or termination.
SECTION 3.7 Compliance with Governmental Authorizations and Applicable
Law.
(a) Section 3.7(a) of the Company Disclosure Schedule contains a
description of:
(i) all Legal Actions which are pending or in which the
Company or any of its Subsidiaries or any of its business, operations
or properties, or any of its officers or directors in connection
therewith, is, or, to the Company's knowledge, information and belief,
at any time during the past three (3) years has been, engaged, or which
involves, or, to the Company's knowledge, information and belief, at
any time during such period involved, the business, operations or
properties of the Company or any of its Subsidiaries or, to the
Company's knowledge, information and belief, which is threatened or
contemplated against, or in any other manner relating Adversely to, the
Company or any of its Subsidiaries or any of their business, operations
or properties, or any of their officers or directors in connection
therewith; and
(ii) each Governmental Authorization which relates to the
business, operations, properties, prospects, condition, financial or
other, or results of operations of the Company or any of its
Subsidiaries, all of which are in full force and effect.
(b) Each of the Company and each of its Subsidiaries has obtained all
Governmental Authorizations which are necessary for the ownership or uses of its
properties and the conduct of its business as now conducted or as presently
proposed to be conducted and which, if not obtained and maintained, could singly
or in the aggregate, have any Adverse Effect on the Company and its Subsidiaries
taken as a whole. No Governmental Authorization is the subject of any pending
or, to the Company's knowledge, information and belief, threatened attack,
revocation or termination. Neither the Company nor any Subsidiary nor any
officer or director (in connection with the business, operations and properties
of the Company or any Subsidiary) is in or is charged with or, to the Company's
knowledge, information and belief, at any time during the past three (3) years
has been in or has been charged with, or is threatened or under investigation
with respect to, breach or violation of, or default in the performance,
observance or fulfillment of, any Governmental Authorization or any Applicable
Law, and no Event exists or has occurred, which constitutes, or but for any
requirement of giving of notice or passage of time or both would constitute,
such a breach, violation or default, under
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(x) any Governmental Authorization or any Applicable Law,
except for such breaches, violations or defaults as do not and will not
have in the aggregate any Adverse Effect on the Company and its
Subsidiaries taken as a whole or the ability of the Company to perform
any of the obligations set forth in this Agreement or any Collateral
Document executed or required to be executed pursuant hereto or thereto
or to consummate the Merger and the Transactions, or
(y) any requirement of any insurance carrier, applicable to
its business, operations or properties,
except as otherwise specifically described in Section 3.7(b) of the Company
Disclosure Schedule.
(c) With respect to matters, if any, of a nature referred to in Section
3.7(a) or 3.7(b) of the Company Disclosure Schedule, except as otherwise
specifically described in Schedule 3.7(c) of the Company Disclosure Schedule,
all such information and matters set forth in the Company Disclosure Schedule,
if adversely determined against the Company or any Subsidiary, will not, in the
aggregate, Adversely Affect the Company and its Subsidiaries taken as a whole,
or the ability of the Company to perform its obligations under this Agreement or
any Collateral Documents executed or required to be executed pursuant hereto or
thereto or to consummate the Merger and the Transactions.
SECTION 3.8 Intangible Assets.
(a) Each of the Company and each Subsidiary owns or possesses or
otherwise has the right to use all Governmental Authorizations and other
Intangible Assets necessary for the present and planned future conduct of its
business, without any conflict with the rights of others. The present and
planned future conduct of business by the Company and each Subsidiary is not
dependent upon any one or more, or all, of such Governmental Authorizations and
other Intangible Assets or rights with respect to any of the foregoing, except
as set forth on Section 3.8(a) of the Company Disclosure Schedule.
(b) Section 3.8(b) of the Company Disclosure Schedule sets forth a
true, accurate and complete description of all of such Governmental
Authorizations and other Intangible Assets or rights with respect thereto,
including without limitation the nature of the Company's and each Subsidiary's
interest in each and the extent to which the same have been duly registered in
the offices as indicated therein.
SECTION 3.9 Related Transactions. Section 3.9 of the Company Disclosure
Schedule sets forth a true, accurate and complete description of any Contractual
Obligation or transaction between the Company or any of its Subsidiaries and any
of its officers, directors, employees, stockholders, or any Affiliate of any
thereof (other than reasonable compensation for services as officers, directors
and employees), now existing or which, to the Company's knowledge, information
and belief, at any time during the past three (3) years, existed or occurred,
including without limitation any providing for the furnishing of services to or
by, providing for rental of property, real, personal or mixed, to or from, or
providing for the lending or borrowing of money to or from or otherwise
requiring payments to or from, any officer, director, stockholder or employee,
or any Affiliate of any thereof. All such Contractual Obligations and
transactions are and, to the Company's knowledge, information and belief, were
on terms and conditions no less favorable to the Company or any of its
Subsidiaries than would be customary for such between Persons who are not
Affiliates or upon terms and conditions on which similar Contractual Obligations
and transactions with Persons who are not Affiliates could fairly and reasonably
be expected to be entered into, except as otherwise specifically described in
Section 3.9 of the Company Disclosure Schedule.
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SECTION 3.10 Insurance.
(a) Section 3.10(a) of the Company Disclosure Schedule includes the
insurers' names, policy numbers, expiration dates, amounts of coverage, the
annual premiums, Best policy holder's and financial size ratings of the
insurers, exclusions, deductibles and self-insured retention and describes in
reasonable detail any retrospective rating plan, fronting arrangement or any
other self-insurance or risk assumption agreed to by the Company or any
Subsidiary or imposed upon the Company or any Subsidiary by any such insurers,
as well as any self-insurance program that is in effect.
(b) Neither the Company nor any Subsidiary is in breach or violation of
or in default under any such policy, and all premiums due thereon have been
paid, and each such policy will continue to be in force and effect up to and
including the Closing Date. The insurance policies so listed and identified are
sufficient in nature, scope and amounts to insure adequately (and, in any event,
in amounts sufficient to prevent the Company or any Subsidiary from becoming a
coinsurer within the terms of such policies) the Company's or any Subsidiary's
business, operations and properties.
SECTION 3.11 Tax Matters.
(a) Each of the Company and each of its Subsidiaries has in accordance
with all Applicable Laws filed all Tax Returns which are required to be filed,
except with respect to failures to file which in the aggregate would not have an
Adverse Effect on the Company and its Subsidiaries taken as a whole, and has
paid, or made adequate provision for the payment of, all Taxes which have or may
become due and payable pursuant to said Returns and all other governmental
charges and assessments received to date other than those Taxes being contested
in good faith for which adequate provision has been made on the most recent
balance sheet forming part of the Company Financial Statements. The Tax Returns
of the Company and each Subsidiary have been prepared in accordance with all
Applicable Laws and generally accepted principles applicable to taxation
consistently applied. All Taxes which the Company and each Subsidiary are
required by law to withhold and collect have been duly withheld and collected,
and have been paid over, in a timely manner, to the proper Authorities to the
extent due and payable. Neither the Company nor any Subsidiary has executed any
waiver to extend, or otherwise taken or failed to take any action that would
have the effect of extending, the applicable statute of limitations in respect
of any Tax liabilities of the Company or any Subsidiary for the fiscal years
prior to and including the most recent fiscal year. Adequate provision has been
made on the most recent balance sheet forming part of the Company Financial
Statements for all Taxes of any kind, including interest and penalties in
respect thereof, whether disputed or not, and whether past, current or deferred,
accrued or unaccrued, fixed, contingent, absolute or other, and to the
knowledge, information and belief of the Company there are no transactions or
matters or any basis which might or could result in additional Taxes of any
material nature to the Company and its Subsidiaries taken as a whole for which
an adequate reserve has not been provided on such balance sheet. Without
limiting the generality of the foregoing, the Company will not incur any tax
liability as a consequence of the conversion of its interest in Dawson WellTech,
L.C. or the distribution of the proceeds of such conversion to its stockholders.
Neither the Company nor any Subsidiary is a "consenting corporation" within the
meaning of Section 341(f) of the Code. Each of the Company and each Subsidiary
has at all times been taxable as a Subchapter C corporation under the Code,
except as otherwise set forth in Section 3.11(a) of the Company Disclosure
Schedule. Neither the Company nor any Subsidiary has ever been a member of any
consolidated group (other than with the Company and its Subsidiaries) for Tax
purposes.
(b) Each of the Company and each Subsidiary has paid all Taxes which
have become due pursuant to its Returns and has paid all installments of
estimated Taxes due and payable.
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(c) From the end of its most recent fiscal year to the date hereof
neither the Company nor any Subsidiary has made any payment on account of any
Taxes except regular payments required in the ordinary course of business with
respect to current operations or property presently owned.
(d) The information shown on the Federal Income Tax Returns of the
Company and its Subsidiaries (true, accurate and complete copies of which have
been furnished by the Company to Key) is true, accurate and complete and fairly
and accurately reflects the information purported to be shown. Federal and State
Income Tax Returns of the Company and its Subsidiaries have not been examined by
the IRS or applicable state Authority, and neither the Company nor any
Subsidiary has been notified of any proposed examination, except as shown in
Section 3.11(d) of the Company Disclosure Schedule.
(e) Neither the Company or any Subsidiary is a party to any tax sharing
agreement or arrangement except as set forth in Section 3.11(e) of the Company
Disclosure Schedule.
(f) Neither the Company nor any Subsidiary is, or within five (5) years
of the date hereof has been, a "United States real property holding corporation"
as defined in Section 897 of the Code.
SECTION 3.12 Employee Retirement Income Security Act of 1974.
(a) Neither the Company nor any Subsidiary (which for purposes of this
Section shall include any ERISA Affiliate) has been or is making at any time
since its organization any contribution to any Plans or has sponsored any Plan
or Benefit Arrangement except as set forth in Section 3.12(a) of the Company
Disclosure Schedule. As to all Plans and Benefit Arrangements listed in Section
3.12(a) of the Company Disclosure Schedule:
(i) all Plans and Benefit Arrangements comply and have been
administered in form and in operation with all Applicable Laws, and
neither the Company nor any Subsidiary has received any notice from any
Authority questioning or challenging such compliance;
(ii) all Plans maintained or previously maintained by the
Company or any Subsidiary that are or were intended to comply with
Sections 401 and 501 of the Code comply and complied in form and in
operation with all applicable requirements of such sections, and no
event has occurred which will or could give rise to disqualification of
any such Plan under such sections or to a tax under Section 511 of the
Code;
(iii) none of the assets of any Plan are invested in employer
securities or employer real property;
(iv) there have been no "prohibited transactions" (as
described in Section 406 of ERISA or Section 4975 of the Code) with
respect to any Plan and neither the Company nor any Subsidiary has
otherwise engaged in any prohibited transaction;
(v) there have been no acts or omissions by the Company or any
Subsidiary which have given rise to or may give rise to any material
fines, penalties, taxes or related charges under Sections 502(c),
502(i) or 4071 or ERISA or Chapter 43 of the Code for which the Company
or any Subsidiary may be liable;
(vi) there are no Claims (other than routine claims for
benefits) pending or threatened involving such Plans or the assets of
such Plans, and, to the Company's knowledge, information
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and belief, no facts exist which could give rise to any such Claims
(other than routine claims for benefits);
(vii) no such Plan is subject to Title IV of ERISA, or, if
subject, there have been no "reportable events" (as described in
Section 4043 of ERISA), and no steps have been taken to terminate any
such Plan;
(viii) all group health Plans of the Company or any Subsidiary
have been operated in compliance with the group health plan
continuation coverage requirements of COBRA;
(ix) actuarially adequate accruals for all obligations under
the Plans are reflected in the most recent balance sheet forming part
of the Company Financial Statements and such obligations include a pro
rata amount of the contributions which would otherwise have been made
in accordance with past practices for the Plan years which include the
Closing Date;
(x) neither the Company nor any Subsidiary nor any of its
respective directors, officers, employees or any other fiduciary has
committed any breach of fiduciary responsibility imposed by ERISA or
any similar Applicable Law that would subject the Company or any
Subsidiary or any of its respective directors, officers or employees to
liability under ERISA or any similar Applicable Law;
(xi) no Plan which is subject to Part 3 of Subtitle B of Title
I of ERISA or Section 412 of the Code had an accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the
Code), whether or not waived, as of the last day of the most recent
fiscal year of such Plan to which Part 3 of Subtitle B of Title I of
ERISA or Section 412 of the Code applied, nor would have had an
accumulated funding deficiency on such date if such year were the first
year of such Plan to which Part 3 of Subtitle B of Title I of ERISA or
Section 412 of the Code applied;
(xii) no material liability to the PBGC has been or is
expected by the Company to be incurred by the Company or any Subsidiary
with respect to any Plan, and there has been no event or condition
which presents a material risk of termination of any Plan by the PBGC;
(xiii) neither the Company nor any Subsidiary is or ever has
been a party to any Multiemployer Plan or made contributions to any
such Plan;
(xiv) except as set forth in Section 3.12(a)(xiv) of the
Company Disclosure Schedule (which entry, if applicable, shall indicate
the present value of accumulated plan liabilities calculated in a
manner consistent with FAS 106 and actual annual expense for such
benefits for each of the last two (2) years) and pursuant to the
provisions of COBRA, neither the Company nor any Subsidiary maintains
any Plan that provides benefits described in Section 3(1) of ERISA to
any former employees or retirees of the Company or any Subsidiary; and
(xv) the Company has made available to Key a copy of the two
most recently filed Federal Form 5500 series and accountant's opinion,
if applicable, for each Plan (and the two most recent actuarial
valuation reports for each Plan, if any, that is subject to Title IV of
ERISA), and all information provided by the Company to any actuary in
connection with the preparation of any such actuarial valuation report
was true, accurate and complete in all material respects.
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(b) The execution, delivery and performance of this Agreement and the
Collateral Documents executed or required to be executed pursuant hereto and
thereto will not involve any prohibited transaction within the meaning of ERISA
or Section 4975 of the Code.
SECTION 3.13 Absence of Sensitive Payments. Neither the Company or any
Subsidiary nor, to the Company's knowledge, information and belief, any of its
or any of their officers, directors, employees, agents or other representatives,
has (a) made any contributions, payments or gifts to or for the private use of
any governmental official, employee or agent where either the payment or the
purpose of such contribution, payment or gift is illegal under the laws of the
United States or the jurisdiction in which made, (b) established or maintained
any unrecorded fund or asset for any purpose or made any false or artificial
entries on its books, or (c) made any payments to any person with the intention
or understanding that any part of such payment was to be used for any purpose
other than that described in the documents supporting the payment.
SECTION 3.14 Inapplicability of Specified Statutes. Neither the Company
nor any Subsidiary is a "holding company", or a "subsidiary company" or an
"affiliate" of a "holding company", as such terms are defined in the Public
Utility Holding Company Act of 1935, as amended, or an "investment company" or a
company "controlled" by or acting on behalf of an "investment company", as
defined in the Investment Company Act of 1940, as amended, or a "carrier" or a
person which is in control of a "carrier", as defined in section 11301 of Title
49, U.S.C.
SECTION 3.15 Authorized and Outstanding Capital Stock.
(a) The authorized and outstanding capital stock of the Company is as
set forth in Section 3.15(a) of the Company Disclosure Schedule, including that
there are an aggregate of 352,941 shares of Company Stock outstanding. All of
such outstanding capital stock has been duly authorized and validly issued, is
fully paid and nonassessable and is not subject to any preemptive or similar
rights. Except as set forth in Section 3.15(a) of the Company Disclosure
Schedule, (i) there is neither outstanding nor has the Company or any Subsidiary
agreed to grant or issue any shares of its capital stock or any Option Security
or Convertible Security, and (ii) neither the Company nor any Subsidiary is a
party to or is bound by any agreement, put or commitment pursuant to which it is
obligated to purchase, redeem or otherwise acquire any shares of capital stock
or any Option Security or Convertible Security. Between the date hereof and the
Closing, the Company will not, and will not permit any Subsidiary to, issue,
sell or purchase or agree to issue, sell or purchase any capital stock or any
Option Security or Convertible Security of the Company or any Subsidiary, except
as set forth in Section 3.15(a) of the Company Disclosure Schedule. As of the
Effective Time, the rights of the holders of all Option Securities and
Convertible Securities issued by the Company to exercise or convert such
Securities shall have been terminated pursuant to the terms thereof.
(b) All of the outstanding capital stock of the Company is owned by the
stockholders as set forth in Section 3.15(b) of the Company Disclosure Schedule,
to the Company's knowledge, information and belief, free and clear of all Liens.
To the Company's knowledge, information and belief, no Person, and no group of
Persons acting in concert, owns as much as five percent (5%) of the Company's
outstanding Common Stock, and the Company is not controlled by any other Person,
except as set forth in Section 3.15(b) of the Company Disclosure Schedule.
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SECTION 3.16 Employment Arrangements.
(a) Neither the Company nor any Subsidiary has any obligation or
liability, contingent or other, under any Employment Arrangement, other than
those listed or described in Section 3.16(a) of the Company Disclosure Schedule.
Except as described in Section 3.16(a) of the Company Disclosure Schedule, (i)
none of the employees of the Company or any Subsidiary is now, or, to the
Company's knowledge, information and belief, during the past five (5) years has
been, represented by any labor union or other employee collective bargaining
organization, or are now, or, to the Company's knowledge, information and belief
during the past five (5) years have been, parties to any labor or other
collective bargaining agreement, (ii) there are no pending grievances, disputes
or controversies with any union or any other employee or collective bargaining
organization of such employees, or threats of strikes, work stoppages or
slowdowns or any pending demands for collective bargaining by any union or other
such organization, and (iii) neither the Company or any Subsidiaries nor any of
their employees is now, or, to the Company's knowledge, information and belief,
during the past five (5) years has been, subject to or involved in or, to the
Company's knowledge, information and belief, threatened with, any union
elections, petitions therefore or other organizational or recruiting activities.
The Company and each Subsidiary have performed all obligations required to be
performed under all Employment Arrangements and are not in breach or violation
of or in default or arrears under any of the terms, provisions or conditions
thereof. Section 3.16(a) of the Company Disclosure Schedule sets forth the basis
of funding, and the current status of, any past service liability with respect
to each Employment Arrangement to which the same is applicable.
(b) Except as set forth on Schedule 3.16(b), no employee shall accrue
or receive additional benefits, service or accelerated rights to payments of
benefits under any Employment Arrangement, including the right to receive any
parachute payment, as defined in Section 280G of the Code, or become entitled to
severance, termination allowance or similar payments as a result, directly or
indirectly, of the transactions contemplated by this Agreement.
(c) The Company considers its and each of its Subsidiaries'
relationships with employees to be good.
SECTION 3.17 Material Agreements.
(a) Listed on Section 3.17(a) of the Company Disclosure Schedule are
all Material Agreements relating to the ownership or operation of the business
and property of the Company or any of its Subsidiaries presently held or used by
the Company or any such Subsidiary or to which the Company or any such
Subsidiary is a party or to which it or any of its property is subject or bound.
True, accurate and complete copies of each of the Material Agreements have been
furnished by the Company to Key (or true, accurate and complete descriptions
thereof have been set forth in Section 3.17(a) of the Company Disclosure
Schedule, if any such Material Agreements are oral). All of the Material
Agreements are valid, binding and legally enforceable obligations of the parties
thereto, and the Company or one of its Subsidiaries is validly and lawfully
operating its business and owning its property under each of the Material
Agreements. The Company and each Subsidiary have duly complied with all of the
terms and conditions of each Material Agreement and have not done or performed,
or failed to do or perform (and there is no pending or, to the knowledge,
information and belief of the Company, threatened Claim that the Company or any
Subsidiary has not so complied, done and performed or fail to do and perform)
any act which would invalidate or provide grounds for the other party thereto to
terminate (with or without notice, passage of time or both) such Material
Agreement or impair the rights or benefits, or increase the costs, of the
Company or any Subsidiary, under any of the Material Agreements.
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(b) Each Material Agreement, if any, set forth in Section 3.17(a) of
the Company Disclosure Schedule calling for the delivery of goods or merchandise
or the performance of services can be satisfied or performed by the Company or
one of its Subsidiaries at margins providing an operating profit, except as set
forth in Section 3.17(b) of the Company Disclosure Schedule.
SECTION 3.18 Ordinary Course of Business. Each of the Company and each
of its Subsidiaries, from the end of its most recent fiscal year to the date
hereof, and until the Closing Date, except (i) as may be described on Section
3.18 of the Company Disclosure Schedule, (ii) as may be required expressly by
the terms of this Agreement, (iii) as are reflected in the Company Financial
Statements, or (iv) as may be consented to by Key, which consent shall not be
unreasonably withheld, conditioned or delayed:
(a) has operated, and will continue to operate, its business
in the normal, usual and customary manner in the ordinary and regular
course of business, consistent with prior practice;
(b) has not sold or otherwise disposed of or contracted to
sell or otherwise dispose of, and will not sell or otherwise dispose of
or contract to sell or otherwise dispose of, any of its properties or
assets, other than in the ordinary course of business, or any of the
Existing Key Shares or Existing Key Warrants;
(c) except in each case in the ordinary course of business,
(i) has not incurred and will not incur any
obligations or liabilities (fixed, contingent or other);
(ii) has not entered and will not enter into any
commitments; and
(iii) has not canceled and will not cancel any debts
or claims;
(d) has not made or committed to make, and will not make or
commit to make, any additions to its property or any purchases of
machinery or equipment, except for normal maintenance and replacements;
(e) has not discharged or satisfied and will not discharge or
satisfy any Lien, and has not paid and will not pay any obligation or
liability (absolute or contingent) other than current liabilities or
obligations under contracts then existing or thereafter entered into in
the ordinary course of business and commitments under Leases existing
on that date or incurred since that date in the ordinary course of
business;
(f) has not created or permitted to be created, and will not
create or permit to be created, any Lien on any of its tangible
property;
(g) has not transferred or created or permitted to be
created, and will not transfer or create or permit to be created, any
Lien on any Intangible Assets;
(h) has not increased and will not increase the compensation
payable or to become payable to any of its directors, officers,
employees, advisers, consultants, salesmen or agents or otherwise
alter, modify or change the terms of their employment or engagement;
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(i) has not suffered and will not suffer any material damage,
destruction or loss (whether or not covered by insurance) or any
acquisition or taking of property by any Authority;
(j) has not waived and will not waive any rights of material
value without fair and adequate consideration;
(k) has not experienced any work stoppage;
(l) has not entered into, amended or terminated, and will not
enter into, amend or terminate, any Lease, Governmental Authorization,
Private Authorization, Material Agreement or Employment Arrangement or
any Contractual Obligation or transaction with any Affiliate;
(m) has not amended or terminated and will not amend or
terminate, and has kept and will keep in full force and effect
including without limitation renewing to the extent the same would
otherwise expire or terminate, all insurance policies and coverage;
(n) has not, and will not have, declared, made or paid, or
agreed to declare, make or pay, any Distribution; and
(o) has not entered into and will not enter into any other
transaction or series of related transactions which individually or in
the aggregate is material to the Company and its Subsidiaries taken as
a whole, except in the ordinary course of business.
SECTION 3.19 Bank Accounts, Etc. Section 3.19 of the Company Disclosure
Schedule contains a true, accurate and complete list as of the date hereof of
all banks, trust companies, savings and loan associations and brokerage firms in
which the Company or any Subsidiary has an account or a safe deposit box and the
names of all Persons authorized to draw thereon, to have access thereto, or to
authorize transactions therein, the names of all Persons, if any, holding powers
of attorney from the Company or any Subsidiary and a summary statement as to the
terms thereof. The Company agrees that prior to the Closing Date it will not
make or permit to be made any change affecting any bank, trust company, savings
and loan association, brokerage firm or safe deposit box or in the names of the
Persons authorized to draw thereon, to have access thereto or to authorize
transactions therein or in such powers of attorney, or open any additional
accounts or boxes or grant any additional powers of attorney, without in each
case obtaining the prior written consent of Key.
SECTION 3.20 Adverse Restrictions. Neither the Company nor any
Subsidiary is a party to or subject to, nor is any of its property subject to,
any Applicable Law, Governmental Authorization, Contractual Obligation,
Employment Arrangement, Material Agreement or Private Authorization, or any
other obligation or restriction of any kind or character, which now or, as far
as the Company can now reasonably foresee, at any time in the future could,
individually or in the aggregate, be unduly burdensome or which could,
individually or in the aggregate, have any Adverse Effect on the Company and its
Subsidiaries taken as a whole, except as set forth in Section 3.20 of the
Company Disclosure Schedule.
SECTION 3.21 Broker or Finder. No Person assisted in or brought about
the negotiation of this Agreement, the Merger or the subject matter of the
Transactions in the capacity of broker, agent or finder or in any similar
capacity on behalf of the Company or to the knowledge, information and belief of
the Company or any stockholder of the Company.
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SECTION 3.22 Personal Injury or Property Damage; Warranty Claims; Etc.
Except as set forth in Section 3.22 of the Company Disclosure Schedule, neither
the Company nor any Subsidiary or any Person acting for or on its behalf,
including without limitation any insurance carrier, has paid, to the knowledge,
information and belief of the Company, at any time during the past three (3)
years, and there is not now pending or, to the knowledge, information and belief
of the Company, threatened or existing any basis for any Claim relating to, any
damages to any third party for injuries to Persons or damage to property, or for
breach of warranty, which if determined adversely to the Company or any
Subsidiary, individually or in the aggregate (taking into account unasserted
Claims of a similar nature), could have any Adverse Effect on the Company and
its Subsidiaries taken as a whole.
SECTION 3.23 Environmental Matters.
(a) Except as set forth in Section 3.23(a) of the Company Disclosure
Schedule, the Company and each Subsidiary:
(i) to the knowledge, information and belief of the Company,
has not been notified that it is potentially liable under, has not
received any request for information or other correspondence concerning
its potential liability with respect to any site or facility under, and
is not a "potentially responsible party" under, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, the Resource Conservation Recovery Act, as amended, or any
similar state law;
(ii) has not entered into or received any consent decree,
compliance order or administrative order issued pursuant to
Environmental Laws;
(iii) is not a party in interest or in default under any
judgment, order, writ, injunction or decree of any final order issued
pursuant to Environmental Laws;
(iv) is, to the knowledge, information and belief of the
Company, in substantial compliance in all material respects with all
Environmental Laws, has, to Company's knowledge, information and
belief, obtained all Environmental Permits, and is not the subject of
or, to the Company's knowledge, information and belief, threatened with
any Legal Action involving a demand for damages or other potential
liability including any Lien with respect to material violations or
material breaches of any Environmental Law.
(v) the Company has no knowledge of any past or present Event
related to the Company or any Subsidiary or its or any of their
business, operations or property which Event, individually or in the
aggregate, may interfere with or prevent continued material compliance
with all Environmental Laws, or which, individually or in the
aggregate, will form the basis of any material Claim for the release or
threatened release into the environment, of any Hazardous Material.
(b) Except as set forth in Section 3.23(b) of the Company Disclosure
Schedule:
(i) no unauthorized disposal, release, burial or placement of
Hazardous Materials which to Company's knowledge, information and
belief and due to the activities of the Company could form the basis
for a material Claim has occurred:
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(A) on any property or facility owned or leased by
the Company or any Subsidiary during the period that such
facilities and properties were owned or leased by it or,
(B) to the knowledge, information and belief of the
Company, at any other time or at any other facility or site to
which Hazardous Materials from the Company or any Subsidiary
may have been taken.
(ii) to the knowledge, information and belief of the Company,
neither the Company nor any Subsidiary has any above-ground or
underground fuel storage tanks on property owned or leased by it.
SECTION 3.24 Solvency. As of the execution and delivery of this
Agreement, and after giving effect to the consummation of the Merger and the
Transactions, the Company and the Company and its Subsidiaries taken as a whole
are and, as of the Closing Date, will be solvent. The Company will not incur any
tax liability as a consequence of the Merger to the extent, if any, that the tax
basis of its assets may be less than its liabilities.
SECTION 3.25 Compliance with Regulations Relating to Securities Credit.
None of the borrowings, if any, of the Company were incurred or used for the
purpose of purchasing or carrying any security which at the date of its
acquisition was, or any security which now is, margin stock or other margin
security within the meaning of Regulation T of the Margin Rules or a "security
that is publicly held," within the meaning of the Margin Rules, and neither the
Company nor any Subsidiary owns any margin stock or other margin security, or a
"security that is publicly held", and neither the Company nor any Subsidiary has
any present intention of acquiring any margin stock or other margin security, or
any "security that is publicly held".
SECTION 3.26 Materiality. The representations and warranties set forth
in this Article would in the aggregate be true and correct even without the
materiality exceptions or qualifications contained therein or set forth in the
Company Disclosure Schedule, except for such exceptions and qualifications
including without limitation those set forth in the Company Disclosure Schedule
which, in the aggregate for all such representations and warranties, are not and
could not reasonably be expected to be Adverse to the Company and its
Subsidiaries taken as a whole.
SECTION 3.27 Continuing Representation and Warranty. Except for those
representations and warranties which speak as of a specific date, all of the
representations and warranties of the Company set forth in this Article shall be
true and correct on the Closing Date with the same force and effect as though
made on and as of that date and those, if any, which speak as of a specific date
shall be true and correct on the Closing Date.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF KEY
Key represents, warrants and covenants to, and agrees with, the Company
as follows:
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SECTION 4.1 Organization and Business; Power and Authority; Effect of
Transaction.
(a) Key
(i) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation as
set forth in Section 4.1(a) of the Key Disclosure Schedule,
(ii) has all requisite power and authority (corporate and
other) to own or hold under lease its properties and to conduct its
business as now conducted and as presently proposed to be conducted,
and has in full force and effect all Governmental Authorizations and
Private Authorizations and has made all Governmental Filings, to the
extent required for such ownership and lease of its property and
conduct of its business, and
(iii) has duly qualified and is authorized to do business and
is in good standing as a foreign corporation in each jurisdiction (a
true, accurate and complete list of which is set forth in Section
4.1(a) of the Key Disclosure Schedule) in which the character of its
property or the nature of its business or operations requires such
qualification or authorization.
(b) Key has all requisite power and authority (corporate and other) and
has in full force and effect all Governmental Authorizations and Private
Authorizations in order to enable it to execute and deliver, and to perform its
obligations under, this Agreement and each Collateral Document executed or
required to be executed pursuant hereto or thereto or to consummate the Merger
and the Transactions; and the execution, delivery and performance of this
Agreement and each Collateral Document executed or required to be executed
pursuant hereto or thereto have been duly authorized by all requisite corporate
or other action, other than that of Key's stockholders. This Agreement has been
duly executed and delivered by Key and constitutes, and each Collateral Document
executed or required to be executed pursuant hereto or thereto or to consummate
the Merger and the Transactions when executed and delivered by Key will
constitute, legal, valid and binding obligations of Key, enforceable in
accordance with their respective terms. The affirmative vote or action by
written consent of two-thirds (2/3rds) of the votes that the holders of the
outstanding shares of Key Stock are entitled to cast is the only vote of the
holders of any class or series of the capital stock of Key necessary to approve
the Merger and the Transactions under Applicable Law and Key's Organic
Documents. The provisions of Section 3-602 of the MGCL will not apply to this
Agreement, the Merger or the Transactions.
(c) Except as set forth in Section 4.1(c) of the Key Disclosure
Schedule, neither the execution and delivery of this Agreement or any Collateral
Document executed or required to be executed pursuant hereto or thereto, nor the
consummation of the Transactions, nor compliance with the terms, conditions and
provisions hereof or thereof by Key or any Subsidiary:
(i) will conflict with, or result in a breach or violation of,
or constitute a default under, any Applicable Law on the part of Key or
any Subsidiary or will conflict with, or result in a breach or
violation of, or constitute a default under, or permit the acceleration
of any obligation or liability in, or but for any requirement of giving
of notice or passage of time or both would constitute such a conflict
with, breach or violation of, or default under, or permit any such
acceleration in, any Contractual Obligation of Key or any Subsidiary,
(ii) will result in or permit the creation or imposition of any Lien
upon any property now owned or leased by Key or any Subsidiary, or
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(iii) will require any Governmental Authorization or
Governmental Filing or Private Authorization, except for filing
requirements under Applicable Law in connection with the Merger and the
Transactions and as the Securities Act and the Exchange Act and
applicable state securities laws may apply to compliance by Key with
the provisions of this Agreement and the Registration Rights Agreement
relating to stockholder approval and registration rights, respectively.
(d) Key does not have any Subsidiaries other than those set forth on
Section 4.1(d) of the Key Disclosure Schedule, each of which is (i) wholly-owned
unless noted otherwise in Section 4.1(d) of the Key Disclosure Schedule, (ii) a
corporation which is duly organized, validly existing and in good standing under
the laws of the respective state of incorporation set forth opposite its name on
Section 4.1(d) of the Key Disclosure Schedule, and (iii) duly qualified and in
good standing as a foreign corporation in each other jurisdiction (as shown on
Section 4.1(d) of the Key Disclosure Schedule) in which the character of its
property or the nature of its business or operations requires such qualification
or authorization, with full power and authority (corporate and other) to carry
on the business in which it is engaged. Each Subsidiary has in full force and
effect all Governmental Authorizations and Private Authorizations and has made
all Governmental Filings, to the extent required for such ownership and lease of
its property and conduct of its business. Key owns all of the outstanding
capital stock (as shown on Section 4.1(d) of the Key Disclosure Schedule) of
each Subsidiary, free and clear of all Liens (except to the extent set forth in
Section 4.1(d) of the Key Disclosure Schedule), and all such stock has been duly
authorized and validly issued and is fully paid and nonassessable. There are no
outstanding Option Securities or Convertible Securities, or agreements or
understandings with respect to any of the foregoing, of any nature whatsoever
relating to the authorized and unissued or outstanding capital stock of any
Subsidiary.
SECTION 4.2 Financial and Other Information.
(a) Key has heretofore furnished to the Company copies of the financial
statements of Key and its Subsidiaries listed in Section 4.2(a) of the Key
Disclosure Schedule (the "Key Financial Statements"). The Key Financial
Statements, including in each case the notes thereto, have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, except as otherwise noted therein or as set forth in Section
4.2(a) of the Key Disclosure Schedule, are true, accurate and complete, do not
contain any untrue statement of a material fact or omit to state a material fact
required by GAAP to be stated therein or necessary in order to make the
statements contained therein not misleading, and fairly present the financial
condition and results of operations of Key and its Subsidiaries, on the bases
therein stated, as of the respective dates thereof, and for the respective
periods covered thereby subject, in the case of unaudited financial statements
to normal year-end audit adjustments and accruals. Section 4.2(a) of the Key
Disclosure Schedule contains a true, accurate and complete description of the
business, operations, financial condition, properties, prospects and management
of Key and its Subsidiaries of the nature and in the detail required by
Regulation S-K with respect to a registration statement filed under the
Securities Act on Form S-4.
(b) Neither the Key Disclosure Schedule (including without limitation
the information set forth in Schedule 4.2(a) thereof), the Key Financial
Statements or this Agreement nor any Collateral Document, data, information or
statement furnished or to be furnished by or on behalf of Key pursuant to this
Agreement or any Collateral Document executed or required to be executed by or
on behalf of Key pursuant hereto or thereto or to consummate the Merger and the
Transactions, contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact required to be stated herein or
therein or necessary in order to make the statements contained herein or therein
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not misleading and all such Collateral Documents, data, information or
statements are and will be true, accurate and complete.
(c) Key does not own any capital stock or equity or proprietary
interest in any other Entity or enterprise, however organized and however such
interest may be denominated or evidenced, except as set forth in Section 4.1(d)
or 4.2(c) of the Key Disclosure Schedule. None of the Entities, if any, so set
forth in Section 4.2(c) of the Key Disclosure Schedule is a Subsidiary of Key
except as so set forth. Key owns all of the outstanding capital stock or equity
or proprietary interests (as shown on Section 4.2(c) of the Key Disclosure
Schedule) of each such Entity or other enterprise, free and clear of all Liens
(except to the extent set forth in Section 4.2(c) of the Key Disclosure
Schedule), and all such stock or equity or proprietary interests has been duly
authorized and validly issued and is fully paid and nonassessable. There are no
outstanding Option Securities or Convertible Securities, or agreements or
understandings with respect to any of the foregoing, of any nature whatsoever,
except as described in Section 4.2(c) of the Key Disclosure Schedule.
SECTION 4.3 Changes in Condition. Since the date of the most recent
financial statements forming part of the Key Financial Statements, except to the
extent specifically described in Section 4.3 of the Key Disclosure Schedule,
there has been no Adverse Change in Key and its Subsidiaries taken as a whole.
There is no Event known to Key which Adversely Affects, or in the future might
(so far as Key can now reasonably foresee) Adversely Affect, Key or Key and its
Subsidiaries taken as a whole, or the ability of Key to perform any of the
obligations set forth in this Agreement or any Collateral Document executed or
required to be executed pursuant hereto or thereto or to consummate the Merger
and the Transactions, except to the extent specifically described in Section 4.3
of the Key Disclosure Schedule.
SECTION 4.4 Liabilities. At the date of the most recent balance sheet
forming part of the Key Financial Statements, neither Key nor any Subsidiary had
any obligations or liabilities, past, present or deferred, accrued or unaccrued,
fixed, absolute, contingent or other, except as disclosed in such balance sheet,
or the notes thereto, and since such date neither Key nor any Subsidiary has
incurred any such obligations or liabilities, other than obligations and
liabilities incurred in the ordinary course of business consistent with past
practice of Key and its Subsidiaries, which do not, in the aggregate, Adversely
Affect Key and its Subsidiaries taken as a whole except to the extent set forth
in Section 4.4 of the Key Disclosure Schedule. Neither Key nor any Subsidiary
has Guaranteed or is otherwise primarily or secondarily liable in respect of any
obligation or liability of any other Person, except for endorsements of
negotiable instruments for deposit in the ordinary course of business or as
disclosed in the most recent balance sheet, or the notes thereto, forming part
of the Key Financial Statements or in Section 4.4 of the Key Disclosure
Schedule.
SECTION 4.5 Title to Properties; Leases.
(a) Each of Key and each of its Subsidiaries has good legal,
indefeasible, insurable and marketable title (in fee simple if owned) to all
real property, if any, reflected as an asset on the most recent balance sheet
forming part of the Key Financial Statements, or owned by Key or any of its
Subsidiaries for use in its business if not so reflected, and good indefeasible
and merchantable title to all other assets, tangible and intangible, reflected
on such balance sheet, or owned by Key or any of its Subsidiaries for use in its
business if not so reflected, or purported to have been acquired by Key or any
of its Subsidiaries since such date, except inventory sold, or property, plant
and other equipment used up or retired, since such date, in each case in the
ordinary course of business consistent with past practice of Key and its
Subsidiaries, free and clear of all Liens, except (i) Liens reflected in the Key
Financial Statements, (ii) Liens for current taxes not yet due and payable, (ii)
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Liens set forth on Section 4.5(a) of the Key Disclosure Schedule, and (iv) such
imperfections of title, easements, encumbrances and mortgages or other Liens, if
any, as are not, individually or in the aggregate, substantial in character,
amount or extent and do not materially detract from the value, or interfere with
the present use, of the property subject thereto or affected thereby, or
otherwise materially impair business operations. Except for financing statements
evidencing Liens referred to in the preceding sentence (a true, accurate and
complete list and description of which is set forth in Section 4.5(a) of the Key
Disclosure Schedule), no financing statements under the Uniform Commercial Code
and no other filing which names Key or any of its Subsidiaries as debtor or
which covers or purports to cover any of the property of Key or any of its
Subsidiaries is on file in any state or other jurisdiction, and neither Key nor
any Subsidiary has signed or agreed to sign any such financing statement or
filing or any agreement authorizing any secured party thereunder to file any
such financing statement or filing. Except as set forth in Schedule 4.5(a) of
the Key Disclosure Schedule, each Lease or other occupancy or other agreement
under which Key or any of its Subsidiaries holds real or personal property has
been duly authorized, executed and delivered by Key or one of its Subsidiaries
and, to Key's knowledge, information and belief, each of the other parties
thereto, and is a legal, valid and binding obligation of each of them,
enforceable in accordance with its terms. Each of Key and its Subsidiaries has a
valid leasehold interest in and enjoys peaceful and undisturbed possession under
all Leases pursuant to which it holds any real property or tangible personal
property, none of which contains any unusual or burdensome provision except as
described in Section 4.5(a) of the Key Disclosure Schedule. All of such Leases
are valid and subsisting and in full force and effect; and neither Key nor any
of its Subsidiaries nor, to Key's knowledge, information and belief, any other
party thereto, is in default in the performance, observance or fulfillment of
any obligation, covenant or condition contained in any such Lease.
(b) Section 4.5(b) of the Key Disclosure Schedule contains a true,
accurate and complete description of all real estate owned or leased by Key or
any of its Subsidiaries and all Leases and an identification of all material
items of fixed assets and machinery and equipment. None of the fixed assets and
machinery and equipment is subject to contracts of sale, and none is held by Key
or any of its Subsidiaries as lessee or as conditional sales vendee under any
Lease or conditional sales contract and none is subject to any title retention
agreement, except as set forth in Section 4.5(b) of the Key Disclosure Schedule.
The real property (other than land), fixtures, fixed assets and all other
material items of personal property, including machinery and equipment, are in a
state of reasonable repair and maintenance and are in serviceable operating
condition.
(c) Except as set forth in Section 4.5(c) of the Key Disclosure
Schedule, to Key's knowledge, information and belief, all real property owned or
leased by Key or any of its Subsidiaries conforms to and complies with all
applicable title covenants, conditions, restrictions and reservations and all
applicable zoning, wetlands, land use and other Applicable Laws.
SECTION 4.6 Compliance with Private Authorizations. Section 4.6 of the
Key Disclosure Schedule sets forth a true, accurate and complete list and
description of each Private Authorization which individually is material to Key
and its Subsidiaries taken as a whole, all of which are in full force and
effect. Each of Key and each Subsidiary has obtained all Private Authorizations
which are necessary for the ownership by Key or each Subsidiary of its
properties and the conduct of its business as now conducted or as presently
proposed to be conducted or which, if not obtained and maintained, could, singly
or in the aggregate, Adversely Affect Key or Key and its Subsidiaries taken as a
whole. Neither Key nor any Subsidiary is in breach or violation of, or is in
default in the performance, observance or fulfillment of, any Private
Authorization, and no Event exists or has occurred, which constitutes, or but
for any requirement of giving of notice or passage of time or both would
constitute, such a breach, violation or default, under any Contractual
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Obligation or Private Authorization, except for such defaults, breaches or
violations, as do not and will not have in the aggregate any Adverse Effect on
Key and its Subsidiaries taken as a whole or the ability of Key to perform any
of the obligations set forth in this Agreement or any Collateral Document
executed or required to be executed pursuant hereto or thereto or to consummate
the Merger and the Transactions. No Private Authorization is the subject of any
pending or, to Key's knowledge, information or belief, threatened attack,
revocation or termination.
SECTION 4.7 Compliance with Governmental Authorizations and Applicable Law.
(a) Section 4.7(a) of the Key Disclosure Schedule contains a description
of:
(i) all Legal Actions which are pending or in which Key or any
of its Subsidiaries or any of its business, operations or properties,
or any of its officers or directors in connection therewith, is, or, to
Key's knowledge, information and belief, at any time during the past
three (3) years has been, engaged, or which involves, or, to Key's
knowledge, information and belief, at any time during such period
involved, the business, operations or properties of Key or any of its
Subsidiaries or, to Key's knowledge, information and belief, which is
threatened or contemplated against, or in any other manner relating
Adversely to, Key or any of its Subsidiaries or any of their business,
operations or properties, or any of their officers or directors in
connection therewith; and
(ii) each Governmental Authorization which relates to the
business, operations, properties, prospects, condition, financial or
other, or results of operations of Key or any of its Subsidiaries, all
of which are in full force and effect.
(b) Each of Key and each of its Subsidiaries has obtained all
Governmental Authorizations which are necessary for the ownership or uses of its
properties and the conduct of its business as now conducted or as presently
proposed to be conducted and which, if not obtained and maintained, could singly
or in the aggregate, have any Adverse Effect on Key and its Subsidiaries taken
as a whole. No Governmental Authorization is the subject of any pending or, to
Key's knowledge, information and belief, threatened attack, revocation or
termination. Neither Key nor any Subsidiary nor any officer or director (in
connection with the business, operations and properties of Key or any
Subsidiary) is in or is charged with or, to Key's knowledge, information and
belief, at any time during the past three (3) years has been in or has been
charged with, or is threatened or under investigation with respect to, breach or
violation of, or default in the performance, observance or fulfillment of, any
Governmental Authorization or any Applicable Law, and no Event exists or has
occurred, which constitutes, or but for any requirement of giving of notice or
passage of time or both would constitute, such a breach, violation or default,
under
(x) any Governmental Authorization or any Applicable Law,
except for such breaches, violations or defaults as do not and will not
have in the aggregate any Adverse Effect on Key and its Subsidiaries
taken as a whole or the ability of Key to perform any of the
obligations set forth in this Agreement or any Collateral Document
executed or required to be executed pursuant hereto or thereto or to
consummate the Merger and the Transactions, or
(y) any requirement of any insurance carrier, applicable to its
business, operations or properties,
except as otherwise specifically described in Section 4.7(b) of the Key
Disclosure Schedule.
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(c) With respect to matters, if any, of a nature referred to in Section
4.7(a) or 4.7(b) of the Key Disclosure Schedule, except as otherwise
specifically described in Section 4.7(c) of the Key Disclosure Schedule, all
such information and matters set forth in the Key Disclosure Schedule, if
adversely determined against Key or any Subsidiary, will not, in the aggregate,
Adversely Affect Key and its Subsidiaries taken as a whole, or the ability of
Key to perform its obligations under this Agreement or any Collateral Documents
executed or required to be executed pursuant hereto or thereto or to consummate
the Merger and the Transactions.
SECTION 4.8 Intangible Assets.
(a) Each of Key and each Subsidiary owns or possesses or otherwise has
the right to use all Governmental Authorizations and other Intangible Assets
necessary for the present and planned future conduct of its business, without
any conflict with the rights of others. The present and planned future conduct
of business by Key and each Subsidiary is not dependent upon any one or more, or
all, of such Governmental Authorizations and other Intangible Assets or rights
with respect to any of the foregoing, except as set forth on Section 4.8(a) of
the Key Disclosure Schedule.
(b) Section 4.8(b) of the Key Disclosure Schedule sets forth a true,
accurate and complete description of all of such Governmental Authorizations and
other Intangible Assets or rights with respect thereto, including without
limitation the nature of Key's and each Subsidiary's interest in each and the
extent to which the same have been duly registered in the offices as indicated
therein.
SECTION 4.9 Related Transactions. Section 4.9 of the Key Disclosure
Schedule sets forth a true, accurate and complete description of any Contractual
Obligation or transaction between Key or any of its Subsidiaries and any of its
officers, directors, employees, stockholders, or any Affiliate of any thereof
(other than reasonable compensation for services as officers, directors and
employees), now existing or which, to Key's knowledge, information and belief,
at any time during the past three (3) years, existed or occurred, including
without limitation any providing for the furnishing of services to or by,
providing for rental of property, real, personal or mixed, to or from, or
providing for the lending or borrowing of money to or from or otherwise
requiring payments to or from, any officer, director, stockholder or employee,
or any Affiliate of any thereof. All such Contractual Obligations and
transactions are and, to Key's knowledge, information and belief, were on terms
and conditions no less favorable to Key or any of its Subsidiaries than would be
customary for such between Persons who are not Affiliates or upon terms and
conditions on which similar Contractual Obligations and transactions with
Persons who are not Affiliates could fairly and reasonably be expected to be
entered into, except as otherwise specifically described in Schedule 4.9 of the
Key Disclosure Schedule.
SECTION 4.10 Insurance.
(a) Section 4.10(a) of the Key Disclosure Schedule includes the
insurers' names, policy numbers, expiration dates, amounts of coverage, the
annual premiums, Best policy holder's and financial size ratings of the
insurers, exclusions, deductibles and self-insured retention and describes in
reasonable detail any retrospective rating plan, fronting arrangement or any
other self-insurance or risk assumption agreed to by Key or any Subsidiary or
imposed upon Key or any Subsidiary by any such insurers, as well as any
self-insurance program that is in effect.
(b) Neither Key nor any Subsidiary is in breach or violation of or in
default under any such policy, and all premiums due thereon have been paid, and
each such policy will continue to be in force and effect up to and including the
Closing Date. The insurance policies so listed and identified are
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sufficient in nature, scope and amounts to insure adequately (and, in any event,
in amounts sufficient to prevent Key or any Subsidiary from becoming a coinsurer
within the terms of such policies) Key's or any Subsidiary's business,
operations and properties.
SECTION 4.11 Tax Matters.
(a) Each of Key and each of its Subsidiaries has in accordance with all
Applicable Laws filed all Tax Returns which are required to be filed, except
with respect to failures to file which in the aggregate would not have an
Adverse Effect on Key and its Subsidiaries taken as a whole, and has paid, or
made adequate provision for the payment of, all Taxes which have or may become
due and payable pursuant to said Returns and all other governmental charges and
assessments received to date other than those Taxes being contested in good
faith for which adequate provision has been made on the most recent balance
sheet forming part of the Key Financial Statements. The Tax Returns of Key and
each Subsidiary have been prepared in accordance with all Applicable Laws and
generally accepted principles applicable to taxation consistently applied. All
Taxes which Key and each Subsidiary are required by law to withhold and collect
have been duly withheld and collected, and have been paid over, in a timely
manner, to the proper Authorities to the extent due and payable. Neither Key nor
any Subsidiary has executed any waiver to extend, or otherwise taken or failed
to take any action that would have the effect of extending, the applicable
statute of limitations in respect of any Tax liabilities of Key or any
Subsidiary for the fiscal years prior to and including the most recent fiscal
year. Adequate provision has been made on the most recent balance sheet forming
part of the Key Financial Statements for all Taxes of any kind, including
interest and penalties in respect thereof, whether disputed or not, and whether
past, current or deferred, accrued or unaccrued, fixed, contingent, absolute or
other, and to the knowledge, information and belief of Key there are no
transactions or matters or any basis which might or could result in additional
Taxes of any material nature to Key and its Subsidiaries taken as a whole for
which an adequate reserve has not been provided on such balance sheet. Neither
Key nor any Subsidiary is a "consenting corporation" within the meaning of
Section 341(f) of the Code. Each of Key and each Subsidiary has at all times
been taxable as a Subchapter C corporation under the Code, except as otherwise
set forth in Section 4.11(a) of the Key Disclosure Schedule. Neither Key nor any
Subsidiary has ever been a member of any consolidated group (other than with Key
and its Subsidiaries) for Tax purposes during the past five (5) years.
(b) Each of Key and each Subsidiary has paid all Taxes which have
become due pursuant to its Returns and has paid all installments of estimated
Taxes due and payable.
(c) From the end of its most recent fiscal year to the date hereof
neither Key nor any Subsidiary has made any payment on account of any Taxes
except regular payments required in the ordinary course of business with respect
to current operations or property presently owned.
(d) The information shown on the Federal Income Tax Returns of Key and
its Subsidiaries (true, accurate and complete copies of which have been
furnished by Key to Key) is true, accurate and complete and fairly and
accurately reflects the information purported to be shown. Federal and State
Income Tax Returns of Key and its Subsidiaries have not been examined by the IRS
or any applicable state Authority, and neither Key nor any Subsidiary has been
notified of any proposed examination, except as shown in Section 4.11(d) of the
Key Disclosure Schedule.
(e) Neither Key or any Subsidiary is a party to any tax sharing
agreement or arrangement except as set forth in Section 4.11(e) of the Key
Disclosure Schedule.
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(f) Neither Key nor any Subsidiary is, or within five (5) years of the
date hereof has been, a "United States real property holding corporation" as
defined in Section 897 of the Code.
SECTION 4.12 Employee Retirement Income Security Act of 1974.
(a) Neither Key nor any Subsidiary (which for purposes of this Section
shall include any ERISA Affiliate) has been or is making at any time since its
organization any contribution to any Plans or has sponsored any Plan or Benefit
Arrangement except as set forth in Section 4.12(a) of the Key Disclosure
Schedule. As to all Plans and Benefit Arrangements listed in Section 4.12(a) of
the Key Disclosure Schedule:
(i) all Plans and Benefit Arrangements comply and have been
administered in form and in operation with all Applicable Laws, and
neither Key nor any Subsidiary has received any notice from any
Authority questioning or challenging such compliance;
(ii) all Plans maintained or previously maintained by Key or
any Subsidiary that are or were intended to comply with Sections 401
and 501 of the Code comply and complied in form and in operation with
all applicable requirements of such sections, and no event has occurred
which will or could give rise to disqualification of any such Plan
under such sections or to a tax under Section 511 of the Code;
(iii) none of the assets of any Plan are invested in employer
securities or employer real property;
(iv) there have been no "prohibited transactions" (as
described in Section 406 of ERISA or Section 4975 of the Code) with
respect to any Plan and neither Key nor any Subsidiary has otherwise
engaged in any prohibited transaction;
(v) there have been no acts or omissions by Key or any
Subsidiary which have given rise to or may give rise to any material
fines, penalties, taxes or related charges under Sections 502(c),
502(i) or 4071 or ERISA or Chapter 43 of the Code for which Key or any
Subsidiary may be liable;
(vi) there are no Claims (other than routine claims for
benefits) pending or threatened involving such Plans or the assets of
such Plans, and, to Key's knowledge, information and belief, no facts
exist which could give rise to any such Claims (other than routine
claims for benefits);
(vii) no such Plan is subject to Title IV of ERISA, or, if
subject, there have been no "reportable events" (as described in
Section 4043 of ERISA), and no steps have been taken to terminate any
such Plan;
(viii) all group health Plans of Key or any Subsidiary have
been operated in compliance with the group health plan continuation
coverage requirements of COBRA;
(ix) actuarially adequate accruals for all obligations under
the Plans are reflected in the most recent balance sheet forming part
of the Key Financial Statements and such obligations include a pro rata
amount of the contributions which would otherwise have been made in
accordance with past practices for the Plan years which include the
Closing Date;
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(x) neither Key nor any Subsidiary nor any of its respective
directors, officers, employees or any other fiduciary has committed any
breach of fiduciary responsibility imposed by ERISA or any similar
Applicable Law that would subject Key or any Subsidiary or any of its
respective directors, officers or employees to liability under ERISA or
any similar Applicable Law;
(xi) no Plan which is subject to Part 3 of Subtitle B of Title
I of ERISA or Section 412 of the Code had an accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the
Code), whether or not waived, as of the last day of the most recent
fiscal year of such Plan to which Part 3 of Subtitle B of Title I of
ERISA or Section 412 of the Code applied, nor would have had an
accumulated funding deficiency on such date if such year were the first
year of such Plan to which Part 3 of Subtitle B of Title I of ERISA or
Section 412 of the Code applied;
(xii) no material liability to the PBGC has been or is
expected by Key to be incurred by Key or any Subsidiary with respect to
any Plan, and there has been no event or condition which presents a
material risk of termination of any Plan by the PBGC;
(xiii) neither Key nor any Subsidiary is or ever has been a party
to any Multiemployer Plan or made contributions to any such Plan;
(xiv) except as set forth in Section 4.12(a)(xiv) of the Key
Disclosure Schedule (which entry, if applicable, shall indicate the
present value of accumulated plan liabilities calculated in a manner
consistent with FAS 106 and actual annual expense for such benefits for
each of the last two (2) years) and pursuant to the provisions of
COBRA, neither Key nor any Subsidiary maintains any Plan that provides
benefits described in Section 3(1) of ERISA to any former employees or
retirees of Key or any Subsidiary; and
(xv) Key has made available to Key a copy of the two most
recently filed Federal Form 5500 series and accountant's opinion, if
applicable, for each Plan (and the two most recent actuarial valuation
reports for each Plan, if any, that is subject to Title IV of ERISA),
and all information provided by Key to any actuary in connection with
the preparation of any such actuarial valuation report was true,
accurate and complete in all material respects.
(b) The execution, delivery and performance of this Agreement and the
Collateral Documents executed or required to be executed pursuant hereto and
thereto will not involve any prohibited transaction within the meaning of ERISA
or Section 4975 of the Code.
SECTION 4.13 Absence of Sensitive Payments. Neither Key or any
Subsidiary nor, to Key's knowledge, information and belief, any of its or any of
their officers, directors, employees, agents or other representatives has (a)
made any contributions, payments or gifts to or for the private use of any
governmental official, employee or agent where either the payment or the purpose
of such contribution, payment or gift is illegal under the laws of the United
States or the jurisdiction in which made, (b) established or maintained any
unrecorded fund or asset for any purpose or made any false or artificial entries
on its books, or (c) made any payments to any person with the intention or
understanding that any part of such payment was to be used for any purpose other
than that described in the documents supporting the payment.
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SECTION 4.14 Inapplicability of Specified Statutes. Neither Key nor any
Subsidiary is a "holding company", or a "subsidiary company" or an "affiliate"
of a "holding company", as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended, or an "investment company" or a company
"controlled" by or acting on behalf of an "investment company", as defined in
the Investment Company Act of 1940, as amended, or a "carrier" or a person which
is in control of a "carrier", as defined in section 11301 of Title 49, U.S.C.
SECTION 4.15 Authorized and Outstanding Capital Stock.
(a) The authorized and outstanding capital stock of Key are as set
forth in Section 4.15(a) of the Key Disclosure Schedule. All of such outstanding
capital stock has been duly authorized and validly issued, is fully paid and
nonassessable and is not subject to any preemptive or similar rights. Except as
set forth in Section 4.15(a) of the Key Disclosure Schedule, (i) there is
neither outstanding nor has Key or any Subsidiary agreed to grant or issue any
shares of its capital stock or any Option Security or Convertible Security, and
(ii) neither Key nor any Subsidiary is a party to or is bound by any agreement,
put or commitment pursuant to which it is obligated to purchase, redeem or
otherwise acquire any shares of capital stock or any Option Security or
Convertible Security. Between the date hereof and the Closing, Key will not, and
will not permit any Subsidiary to, issue, sell or purchase or agree to issue,
sell or purchase any capital stock or any Option Security or Convertible
Security of the Company or any Subsidiary, except as set forth in Section
4.15(a) of the Key Disclosure Schedule.
(b) To Key's knowledge, information and belief, no Person, and no group
of Persons acting in concert, owns as much as five percent (5%) of Key's
outstanding Common Stock except as set forth in Section 4.15(b) of the Key
Disclosure Schedule.
SECTION 4.16 Employment Arrangements.
(a) Neither Key nor any Subsidiary has any obligation or liability,
contingent or other, under any Employment Arrangement, other than those listed
or described in Section 4.16(a) of the Key Disclosure Schedule. Except as
described in Section 4.16(a) of the Key Disclosure Schedule, (i) none of the
employees of Key or any Subsidiary is now, or, to Key's knowledge, information
and belief, during the past five (5) years has been, represented by any labor
union or other employee collective bargaining organization, or are now, or, to
Key's knowledge, information and belief, during the past five (5) years have
been, parties to any labor or other collective bargaining agreement, (ii) there
are no pending grievances, disputes or controversies with any union or any other
employee or collective bargaining organization of such employees, or threats of
strikes, work stoppages or slowdowns or any pending demands for collective
bargaining by any union or other such organization, and (iii) neither Key or any
Subsidiaries nor any of their employees is now or, to Key's knowledge,
information and belief, during the past five (5) years has been subject to or
involved in or, to Key's knowledge, information and belief, threatened with, any
union elections, petitions therefore or other organizational or recruiting
activities. Key and each Subsidiary have performed all obligations required to
be performed under all Employment Arrangements and are not in breach or
violation of or in default or arrears under any of the terms, provisions or
conditions thereof. Section 4.16(a) of the Key Disclosure Schedule sets forth
the basis of funding, and the current status of, any past service liability with
respect to each Employment Arrangement to which the same is applicable.
(b) Except as set forth on Schedule 4.16(b), no employee shall accrue
or receive additional benefits, service or accelerated rights to payments of
benefits under any Employment Arrangement, including the right to receive any
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parachute payment, as defined in Section 280G of the Code, or become entitled to
severance, termination allowance or similar payments as a result, directly or
indirectly, of the transactions contemplated by this Agreement.
(c) Key considers its and each of its Subsidiaries' relationships with
employees to be good.
SECTION 4.17 Material Agreements.
(a) Listed on Section 4.17(a) of the Key Disclosure Schedule are all
Material Agreements relating to the ownership or operation of the business and
property of Key or any of its Subsidiaries presently held or used by Key or any
Subsidiary or to which Key or any such Subsidiary is a party or to which it or
any of its property is subject or bound. True, accurate and complete copies of
each of the Material Agreements have been furnished by Key to the Company (or
true, accurate and complete descriptions thereof have been set forth in Section
4.17(a) of the Key Disclosure Schedule, if any such Material Agreements are
oral). All of the Material Agreements are valid, binding and legally enforceable
obligations of the parties thereto, and Key or one of its Subsidiaries is
validly and lawfully operating its business and owning its property under each
of the Material Agreements. Key and each Subsidiary have duly complied with all
of the terms and conditions of each Material Agreement and have not done or
performed, or failed to do or perform (and there is no pending or, to the
knowledge, information and belief of Key, threatened Claim that Key or any
Subsidiary has not so complied, done and performed or fail to do and perform)
any act which would invalidate or provide grounds for the other party thereto to
terminate (with or without notice, passage of time or both) such Material
Agreement or impair the rights or benefits, or increase the costs, of Key or any
Subsidiary, under any of the Material Agreements.
(b) Each Material Agreement, if any, set forth in Section 4.17(a) of
the Key Disclosure Schedule calling for the delivery of goods or merchandise or
the performance of services can be satisfied or performed by Key or one of its
Subsidiaries at margins providing an operating profit, except as set forth in
Section 4.17(b) of the Key Disclosure Schedule. No Material Agreement calls for
the delivery of goods or merchandise in which Key or any Subsidiary has an
interest.
SECTION 4.18 Ordinary Course of Business. Each of Key and each of its
Subsidiaries, from the end of its most recent fiscal year to the date hereof,
and until the Closing Date, except (i) as may be described on Section 4.18 of
the Key Disclosure Schedule, (ii) as may be required expressly by the terms of
this Agreement, (iii) as are reflected in Key Financial Statements, or (iv) as
may be consented to by the Company, which consent shall not be unreasonably
withheld, conditioned or delayed:
(a) has operated, and will continue to operate, its business
in the normal, usual and customary manner in the ordinary and regular
course of business, consistent with prior practice;
(b) has not sold or otherwise disposed of or contracted to
sell or otherwise dispose of, and will not sell or otherwise dispose of
or contract to sell or otherwise dispose of, any of its properties or
assets, other than in the ordinary course of business;
(c) except in each case in the ordinary course of business,
(i) has not incurred and will not incur any
obligations or liabilities (fixed, contingent or other);
(ii) has not entered and will not enter into any
commitments; and
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(iii) has not canceled and will not cancel any
debts or claims;
(d) has not made or committed to make, and will not make or
commit to make, any additions to its property or any purchases of
machinery or equipment, except for normal maintenance and replacements;
(e) has not discharged or satisfied and will not discharge or
satisfy any Lien, and has not paid and will not pay any obligation or
liability (absolute or contingent) other than current liabilities or
obligations under contracts then existing or thereafter entered into in
the ordinary course of business and commitments under Leases existing
on that date or incurred since that date in the ordinary course of
business;
(f) has not created or permitted to be created, and will not
create or permit to be created, any Lien on any of its tangible
property;
(g) has not transferred or created or permitted to be
created, and will not transfer or create or permit to be created,
any Lien on any Intangible Assets;
(h) has not increased and will not increase the compensation
payable or to become payable to any of its directors, officers,
employees, advisers, consultants, salesmen or agents or otherwise
alter, modify or change the terms of their employment or engagement;
(i) has not suffered and will not suffer any material damage,
destruction or loss (whether or not covered by insurance) or any
acquisition or taking of property by any Authority;
(j) has not waived and will not waive any rights of material
value without fair and adequate consideration;
(k) has not experienced any work stoppage;
(l) has not entered into, amended or terminated, and will not
enter into, amend or terminate, any Lease, Governmental Authorization,
Private Authorization, Material Agreement or Employment Arrangement or
any Contractual Obligation or transaction with any Affiliate;
(m) has not amended or terminated and will not amend or
terminate, and has kept and will keep in full force and effect
including without limitation renewing to the extent the same would
otherwise expire or terminate, all insurance policies and coverage;
(n) has not, and will not have, declared, made or paid, or
agreed to declare, make or pay, any Distribution; and
(o) has not entered into and will not enter into any other
transaction or series of related transactions which individually or in
the aggregate is material to Key and its Subsidiaries taken as a whole,
except in the ordinary course of business.
SECTION 4.19 Adverse Restrictions. Neither Key nor any Subsidiary is a
party to or subject to, nor is any of its property subject to, any Applicable
Law, Governmental Authorization, Contractual Obligation, Employment Arrangement,
Material Agreement or Private Authorization, or any other obligation or
restriction of any kind or character, which now or, as far as Key can now
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reasonably foresee, at any time in the future could, individually or in the
aggregate, be unduly burdensome or which could, individually or in the
aggregate, have any Adverse Effect on Key or Key and its Subsidiaries taken as a
whole, except as set forth in Section 4.19 of the Key Disclosure Schedule.
SECTION 4.20 Broker or Finder. No Person assisted in or brought about
the negotiation of this Agreement, the Merger or the subject matter of the
Transactions in the capacity of broker, agent or finder or in any similar
capacity on behalf of Key, except as set forth in Section 4.20 of the Key
Disclosure Schedule.
SECTION 4.21 Personal Injury or Property Damage; Warranty Claims; Etc.
Except as set forth in Section 4.21 of the Key Disclosure Schedule, neither Key
nor any Subsidiary or any Person acting for or on its behalf, including without
limitation any insurance carrier, has paid, to the knowledge, information and
belief of Key, at any time during the past three (3) years, and there is not now
pending or, to the knowledge, information and belief of Key, threatened or
existing any basis for any Claim relating to, any damages to any third party for
injuries to Persons or damage to property, or for breach of warranty, which if
determined adversely to Key or any Subsidiary, individually or in the aggregate
(taking into account unasserted Claims of a similar nature), could have any
Adverse Effect on Key and its Subsidiaries taken as a whole.
SECTION 4.22 Environmental Matters.
(a) Except as set forth in Section 4.22(a) of the Key Disclosure
Schedule, Key and each Subsidiary:
(i) to the knowledge, information and belief of Key, has not
been notified that it is potentially liable under, has not received any
request for information or other correspondence concerning its
potential liability with respect to any site or facility under, and is
not a "potentially responsible party" under, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, the Resource Conservation Recovery Act, as amended, or any
similar state law;
(ii) has not entered into or received any consent decree,
compliance order or administrative order issued pursuant to
Environmental Laws;
(iii) is not a party in interest or in default under any
judgment, order, writ, injunction or decree of any final order issued
pursuant to Environmental Laws;
(iv) is, to the knowledge, information and belief of Key, in
substantial compliance in all material respects with all Environmental
laws, has, to Key's knowledge, information and belief, obtained all
Environmental Permits, and is not the subject of or, to Key's
knowledge, information and belief, threatened with any Legal Action
involving a demand for damages or other potential liability including
any Lien with respect to material violations or material breaches of
any Environmental Law.
(v) Key has no knowledge of any past or present Event related
to Key or any Subsidiary or its or any of their business, operations or
property which Event, individually or in the aggregate, may interfere
with or prevent continued material compliance with all Environmental
Laws, or which, individually or in the aggregate, will form the basis
of any material Claim for the release of threatened release into the
environment, of any Hazardous Material.
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(b) Except as set forth in Section 4.22(b) of the Key Disclosure
Schedule:
(i) no unauthorized disposal, release, burial or placement of
Hazardous Materials which to Key's knowledge, information and belief
and due to the activities of Key could form the basis for a material
Claim has occurred:
(A) on any property or facility owned or leased by
Key or any Subsidiary during the period that such facilities
and properties were owned or leased by it or,
(B) to the knowledge, information and belief of Key,
at any other time or at any other facility or site to which
Hazardous Materials from Key or any Subsidiary may have been
taken.
(ii) to the knowledge, information and belief of Key, neither
Key nor any Subsidiary has any above-ground or underground fuel storage
tanks on property owned or leased by it.
SECTION 4.23 Solvency. As of the execution and delivery of this
Agreement, and after giving effect to the consummation of the Merger and the
Transactions, Key and Key and its Subsidiaries taken as a whole are and, as of
the Closing Date, will be solvent.
SECTION 4.24 Compliance with Regulations Relating to Securities Credit.
None of the borrowings, if any, of Key were incurred or used for the purpose of
purchasing or carrying any security which at the date of its acquisition was, or
any security which now is, margin stock or other margin security within the
meaning of Regulation T of the Margin Rules or a "security that is publicly
held," within the meaning of the Margin Rules, and neither Key nor any
Subsidiary owns any margin stock or other margin security, or a "security that
is publicly held", and neither Key nor any Subsidiary has any present intention
of acquiring any margin stock or other margin security, or any "security that is
publicly held".
SECTION 4.25 Materiality. The representations and warranties set forth
in this Article would in the aggregate be true and correct even without the
materiality exceptions or qualifications contained therein or set forth in the
Key Disclosure Schedule, except for such exceptions and qualifications including
without limitation those set forth in the Key Disclosure Schedule which, in the
aggregate for all such representations and warranties, are not and could not
reasonably be expected to be Adverse to Key or Key and its Subsidiaries taken as
a whole.
SECTION 4.26 Continuing Representation and Warranty. Except for those
representations and warranties which speak as of a specific date, all of the
representations and warranties of Key set forth in this Article shall be true
and correct on the Closing Date with the same force and effect as though made on
and as of that date and those, if any, which speak as of a specific date shall
be true and correct on the Closing Date.
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ARTICLE 5
STOCKHOLDER MEETING COVENANTS
SECTION 5.1 SEC Filings.
(a) As promptly as practicable after the date hereof, Key (with all
necessary assistance and cooperation of the Company) will prepare and file with
the SEC a registration statement on Form S-4 (the "Registration Statement") in
connection with the registration under the Securities Act of the Exchange Merger
Consideration to be issued pursuant to the Merger, which Registration Statement
shall contain a joint proxy statement to be mailed by the Company and Key to
their respective stockholders in connection with the vote of such stockholders
with respect to the Merger (the "Joint Proxy Statement/Prospectus").
(b) Key and the Company will thereafter use their reasonable business
efforts to respond to any comments of the SEC with respect to the Registration
Statement and to have the Registration Statement declared effective as promptly
as practicable, and also will take any other action required to be taken under
federal or state securities laws (including, without limitation, the delivery to
Key and the Company, as appropriate, of a letter from each other party's
independent auditors in form and substance reasonably satisfactory to Key and
the Company, as the case may be, and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement).
(c) As promptly as practicable after the date hereof, Key and the
Company shall prepare and file any other filings required to be filed by each
under the Securities Act, the Exchange Act or any other federal or state laws
relating to the Transactions (collectively "Other Filings") and will use their
reasonable business efforts to respond to any comments of the SEC or any other
appropriate government official with respect thereto.
(d) As promptly as practicable after the effectiveness of the
Registration Statement, Key (with all necessary assistance and cooperation of
the Company) will prepare and file with the SEC a registration statement (the
"Shelf Registration Statement") in connection with the registration for resale
under the Securities Act of (i) the Exchange Merger Consideration to be issued
pursuant to the Merger to the stockholders of the Company who are parties to the
Registration Rights Agreement, and (ii) shares of Key Stock held on the
Effective Date by affiliates of the majority stockholder of the Company, which
Shelf Registration Statement shall be supplemented and amended, from time to
time, in accordance with the provisions of the Registration Rights Agreement.
(e) Key and the Company shall cooperate with each other and provide to
each other all information necessary in order to prepare the Registration
Statement, the Joint Proxy Statement/Prospectus, the Shelf Registration
Statement and the Other Filings (collectively "SEC Filings") and shall provide
promptly to the other party any information that such party may obtain that
could necessitate amending any such document.
(f) Key and the Company will notify each other promptly of the receipt
of any comments from the SEC or its staff or any other appropriate government
official and of any requests by the SEC or its staff or any other appropriate
government official for amendments or supplements to any of the SEC Filings or
for additional information and will supply the other party with copies of all
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correspondence between Key or any of its representatives, and the Company or any
of its representatives, as the case may be, on the one hand, and the SEC or its
staff or any other appropriate government official, on the other hand, with
respect thereto. If at any time prior to the Effective Time, any event shall
occur that should be set forth in an amendment of, or a supplement to, any of
the SEC Filings, Key and the Company agree promptly to prepare and file such
amendment or supplement and to distribute such amendment or supplement as
required by Applicable Law, including, in the case of an amendment or supplement
to the Joint Proxy Statement/Prospectus, mailing such supplement or amendment to
the Company's stockholders and Key's stockholders, as the case may be.
(g) The information provided and to be provided by Key and the Company
for use in SEC Filings shall at all times prior to the Effective Time be true
and correct in all material respects and shall not omit to state any material
fact required to be stated therein or necessary in order to make such
information not false or misleading, and Key and the Company each agree to
correct any such information provided by it for use in the SEC Filings that
shall have become false or misleading in any material respect. Each SEC Filing,
when filed with the SEC or any other appropriate government official, shall
comply as to form in all material respects with all Applicable Law.
SECTION 5.2 Board Recommendation. The Joint Proxy Statement/Prospectus
shall include the recommendation of the Company's Board of Directors to the
Company's stockholders to vote in favor of the Merger and the Joint Proxy
Statement/Prospectus shall include the recommendation of Key's Board of
Directors to Key's stockholders to vote in favor of the Merger; provided,
however, that the Company's Board of Directors or Key's Board of Directors may
each modify or withdraw such Board of Directors' recommendation if it
determines, with the written advice of outside counsel, to do so in the exercise
of its fiduciary duties.
SECTION 5.3 Meeting of Stockholders of the Company. The Company shall
take all action necessary, in accordance with Applicable Law and its Organic
Documents, to duly call, give notice of, convene and hold a meeting of its
stockholders as promptly as practicable to consider and vote upon the adoption
and approval of this Agreement, the Merger and the Transactions. The only
stockholder vote required for the adoption and approval of the Merger and
Transactions by the Company is the vote required under Section 3.1(b) hereof.
Subject to the fiduciary duty of the Company's Board of Directors under
Applicable Law, as advised in writing by outside counsel, the Company shall use
its reasonable business efforts to solicit from stockholders proxies in favor of
adoption and approval of the Merger and the Transactions and to take all other
action necessary to secure the vote of stockholders required by Applicable Law
and the Company's Organic Documents to effect the Merger and the Transactions.
SECTION 5.4 Meeting of Stockholders of Key. Key shall take all action
necessary, in accordance with Applicable Law and Key's Organic Documents, to
duly call, give notice of, convene and hold a meeting of its stockholders as
promptly as practicable to consider and vote upon the adoption of this
Agreement, the Merger and the Transactions. The only stockholder vote required
for the adoption and approval of the Merger and the Transactions by Key is the
vote required under Section 4.1(b) hereof. Subject to the fiduciary duty of the
Key Board of Directors under Applicable Law, as advised in writing by outside
counsel, Key shall use its reasonable business efforts to solicit from
stockholders proxies in favor of adoption and approval of the Merger and the
Transactions and to take all other action necessary to secure the vote of
stockholders required by Applicable Law and Key's Organic Documents to effect
the Merger and the Transactions. At any such meeting, the Company shall vote, or
cause to be voted, all shares of Key Stock then owned by the Company or any
Subsidiary of the Company or subject to proxies held by the Company or any
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Subsidiary in favor of the adoption and approval of the Merger and the
Transactions unless the Company's Board of Directors determines that voting in
favor of the approval of the Merger and the Transactions would violate its
fiduciary duties to the Company's stockholders.
ARTICLE 6
ADDITIONAL COVENANTS
SECTION 6.1 Access to Information; Confidentiality.
(a) Each of the parties shall afford to the other and its accountants,
counsel, financial advisors and other representatives (the "Representatives")
full access during normal business hours throughout the period prior to the
Effective Time to all of its (and its Subsidiaries') properties, books,
contracts, commitments and records (including without limitation Tax Returns)
and, during such period, shall furnish promptly upon request (i) a copy of each
report, schedule and other document filed or received by any of them pursuant to
the requirements of any Applicable Law (including without limitation federal or
state securities laws) or filed by any of them with any Authority in connection
with the Transactions or which may have a material effect on their respective
businesses, operations, properties, prospects, personnel, condition, (financial
or other), or results of operations, (ii) to the extent not provided for
pursuant to the preceding clause, (A) all financial records, ledgers, workpapers
and other sources of financial information possessed or controlled by such party
or its accountants deemed by the other party or its Representatives necessary or
useful for the purpose of performing an audit of such party and its Subsidiaries
and certifying financial statements and financial information, and (B) all other
information relating to such party and its Subsidiaries that the other party or
its Representatives requires, in either case for inclusion in or in support of
the Registration Statement or the Shelf Registration Statement, and (iii) such
other information concerning any of the foregoing as either party shall
reasonably request. All non-public information furnished by either party to any
other party pursuant to the provisions of this Agreement, including without
limitation this Section, will be kept confidential and shall not, without the
prior written consent of the party disclosing such information, be disclosed by
in any manner whatsoever, in whole or in part, and shall not be used for any
purposes, other than in connection with the Merger and the Transactions. In no
event shall either party or any of its Representatives use such information to
the detriment of the party disclosing such information. Each party agrees to
reveal such information only to those of its Representatives who need to know
such the information for the purpose of evaluating the Merger and the
Transactions, who are informed of the confidential nature of such information
and who shall undertake in writing (a copy of which, if requested, will be
furnished to the disclosing party) to act in accordance with the terms and
conditions of this Agreement.
(b) Subject to the terms and conditions of Section 6.1(a), Key and the
Company may disclose such information as may be necessary in connection with
seeking all Governmental and Private Authorizations or that is required by
Applicable Law to be disclosed. In the event that this Agreement is terminated
in accordance with its terms, Key and the Company shall each promptly redeliver
all non-public written material provided pursuant to this Section or any other
provision of this Agreement or otherwise in connection with the Merger and the
Transactions and shall not retain any copies, extracts or other reproductions in
whole or in part of such written material other than one copy thereof which
shall be delivered to independent counsel for such party.
(c) No investigation pursuant to this Section 6.1 or otherwise shall
affect any representation or warranty in this Agreement of either party or any
condition to the obligations of the parties hereto.
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SECTION 6.2 Agreement to Cooperate.
(a) Each of the parties hereto shall use reasonable business efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under Applicable Law to consummate the
Merger and make effective the Transactions, including using its reasonable
business efforts (i) to prepare and file with the applicable Authorities as
promptly as practicable after the execution of this Agreement all requisite
applications and amendments thereto, together with related information, data and
exhibits, necessary to request issuance of orders approving the Merger and the
Transactions by all such applicable Authorities, each of which must be obtained
or become final in order to satisfy the condition applicable to it set forth in
Section 7.1(c) hereof; (ii) to obtain all necessary or appropriate waivers,
consents and approvals, (iii) to effect all necessary registrations, filings and
submissions (including without limitation filings under the Securities Act, the
Exchange Act and any other submissions requested by the SEC), (iv) to lift any
injunction or other legal bar to the Merger and the Transactions (and, in such
case, to proceed with the Merger and the Transactions as expeditiously as
possible), subject, however, to the requisite votes of the stockholders of the
parties, and (v) to comply with all of the terms and provisions of this
Agreement and each of the Collateral Documents to which it is or may become a
party.
(b) Each of the parties hereto agrees to take such actions as may be
necessary to obtain any Governmental Authorizations legally required for the
consummation of the Merger and the Transactions, including the making of any
Governmental Filings, publications and requests for extensions and waivers.
(c) The Company will use its reasonable business efforts on or prior to
the Closing Date (i) to obtain the satisfaction of the conditions specified in
Sections 7.1 and 7.2 hereof; (ii) if requested by Key, to obtain the consents
(to the extent required) to the continued existence of all long-term debt of
each of the Company and each of its Subsidiaries; and (iii) to cause those key
employees of the Company and its Subsidiaries designated by Key to execute and
deliver non-competition agreements substantially conforming in form and
substance to the non-competition agreements currently maintained by Key with its
key employees. Key will use its reasonable business efforts on or prior to the
Closing Date to obtain the satisfaction of the conditions applicable to it
specified in Sections 7.1 and 7.3 hereof.
(d) The parties shall cooperate with one another in the preparation,
execution and filing of all Returns, questionnaires, applications, or other
documents regarding any real property transfer or gains, sales, use, transfer,
value added, stock transfer and stamp Taxes, any transfer, recording,
registration and other fees, and any similar Taxes which become payable in
connection with the Transactions that are required or permitted to be filed on
or before the Effective Time.
SECTION 6.3 Public Announcements. Until the Closing, or in the event of
termination of this Agreement, each party shall consult with the other before
issuing any press release or otherwise making any public statements with respect
to this Agreement, the Merger or any Transaction and shall not issue any such
press release or make any such public statement without the prior consent of the
other and the written advice of legal counsel that such press release or such
public statement will not affect the registration of Key Stock and the New Key
Warrants under the Securities Act or the timing of the effectiveness thereof.
Notwithstanding the foregoing, the Company acknowledges and agrees that Key may,
without the prior consent of the Company, issue such press release or make such
public statement as may be required by Applicable Law or any listing agreement
or arrangement to which Key is a party with a national securities exchange or
the National Association of Securities Dealers, Inc. Automated Quotation System,
in which case, to the extent practicable, Key will consult with, and exercise in
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good faith, all reasonable business efforts to mutually agree with the Company
regarding the nature, extent and form of such press release or public statement,
and, in any event, with prior notice to the Company.
SECTION 6.4 Directors' and Officers' Indemnification.
(a) From and after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless the present officers and directors of the
Company against all Claims or amounts that are paid in settlement of, with the
approval of the Surviving Corporation, or otherwise in connection with any Claim
based in whole or in part on the fact that such Person is or was a director or
officer of the Company and arising out of actions or omissions occurring at or
prior to the Effective Time (including, without limitation, the Merger and the
Transactions), in each case to the fullest extent permitted under the MGCL (and
shall pay any expenses in advance of the final disposition of any such action or
proceeding to each such Person to the fullest extent permitted under the MGCL,
upon receipt from the Person to whom expenses are advanced of an undertaking to
repay such advances to the extent required under the MGCL). The Surviving
Corporation shall observe and comply with the Company's obligations pursuant to
the indemnification agreements, if any, listed in Section 6.4(a) of the Company
Disclosure Schedule.
(b) This Section is intended to be for the benefit of, and shall be
enforceable by, the present officers and directors of the Company, their heirs
and personal representatives and shall be binding on the Surviving Corporation
and its respective successors and assigns.
SECTION 6.5 Notification of Certain Matters. The Company shall give
prompt notice to Key, and Key shall give prompt notice to the Company, of (a)
the occurrence or non-occurrence of any Event the occurrence or non-occurrence
of which would be likely to cause (i) any representation or warranty of the
Company or Key, as the case may be, contained in this Agreement to be untrue or
inaccurate, or (ii) any covenant, condition or agreement contained in this
Agreement not to be complied with or satisfied, or (iii) any change to be made
in such party's Disclosure Schedule, and (b) any failure of the Company or Key,
as the case may be, to comply with or satisfy, or be able to comply with or
satisfy, any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant to
this Section shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
SECTION 6.6 No Solicitation.
(a) The Company shall not, nor shall it permit any Subsidiary, or any
of the Company's or any Subsidiary's Representatives (including, without
limitation, any investment banker, attorney or accountant retained by it) to,
initiate, solicit or facilitate, directly or indirectly, any inquiries or the
making of any proposal with respect to any Other Transaction, engage in any
discussions or negotiations concerning, or provide to any other person any
information or data relating to, it or any Subsidiary for the purposes of, or
otherwise cooperate in any way with or assist or participate in, or facilitate
any inquiries or the making of any proposal which constitutes, or may reasonably
be expected to lead to, a proposal to seek or effect any Other Transaction, or
agree to or endorse any Other Transaction; provided, however, that nothing
contained in this Section shall prohibit the Company or its Board of Directors
from making any disclosure to its stockholders that, in the reasonable judgment
of its Board of Directors in accordance with, and based upon the written advice
of, outside counsel, is required under Applicable Law. The Company shall
promptly advise Key of, and communicate the material terms of, any proposal
relating to any Other Transaction it may receive, or any inquiries it receives
which may reasonably be expected to lead to such a proposal, and the identity of
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the Person making it. The Company shall further advise Key of the status and
changes in the material terms of any such proposal or inquiry (or any amendment
to any of them). During the term of this Agreement, the Company shall not enter
into any agreement, oral or written, and whether or not legally binding, with
any Person that provides for, or in any way facilitates, any Other Transaction,
or affects any other obligation of the Company under this Agreement.
(b) Key shall not, nor shall it permit any Subsidiary, or any of Key's
or any Subsidiary's Representatives (including, without limitation, any
investment banker, attorney or accountant retained by it) to, initiate, solicit
or facilitate, directly or indirectly, any inquiries or the making of any
proposal with respect to any Other Transaction, engage in any discussions or
negotiations concerning, or provide to any other person any information or data
relating to, it or any Subsidiary for the purposes of, or otherwise cooperate in
any way with or assist or participate in, or facilitate any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to lead
to, a proposal to seek or effect any Other Transaction, or agree to or endorse
any Other Transaction; provided, however, that nothing contained in this Section
shall prohibit Key or its Board of Directors from making any disclosure to its
stockholders that, in the reasonable judgment of its Board of Directors in
accordance with, and based upon the written advice of, outside counsel, is
required under Applicable Law. Key shall promptly advise the Company of, and
communicate the material terms of, any proposal relating to any Other
Transaction it may receive, or any inquiries it receives which may reasonably be
expected to lead to such a proposal, and the identity of the Person making it.
Key shall further advise the Company of the status and changes in the material
terms of any such proposal or inquiry (or any amendment to any of them). During
the term of this Agreement, Key shall not enter into any agreement, oral or
written, and whether or not legally binding, with any Person that provides for,
or in any way facilitates, any Other Transaction, or affects any other
obligation of Key under this Agreement.
(c) "Other Transaction" means a transaction or series of related
transactions (other than the Merger and the Transactions) resulting in (a) any
change of control of the Company or Key, (b) any merger or consolidation of the
Company or Key, or any of either of their Subsidiaries, regardless of whether
the Company or Key (or any such Subsidiary) is the surviving corporation, (c)
any tender offer or exchange offer for, or any acquisitions of, any securities
of the Company or Key, (d) any sale or other disposition of assets of the
Company or Key or any Subsidiary of either of them not otherwise permitted under
Section 3.18 or 4.18 hereof, or (e) so long as this Agreement remains in effect,
any issue or sale, or any agreement to issue or sell, any capital stock,
Convertible Securities or Option Securities by the Company or Key not otherwise
permitted under Section 4.15 hereof.
SECTION 6.7 Termination of Option Securities and Convertible
Securities. The Company will take all action necessary to terminate all
outstanding Option Securities and the conversion rights of all Convertible
Securities issued by the Company as of the Effective Time and to provide timely
notice to all holders of Option Securities and Convertible Securities notifying
them of such termination. Without the prior written consent of Key, except as
set forth in Section 3.15(a) of the Company Disclosure Schedule, (a) such
termination will not cause an acceleration of the exercise, conversion or
vesting schedule of any Option Security or of any Convertible Security, and (b)
the Company will not otherwise accelerate, or cause an acceleration of, the
exercise, conversion or vesting schedule of any Option Security or Convertible
Security. Prior to the Closing, the Company shall issue Certificates to all
holders of properly exercised Option Securities and properly converted
Convertible Securities; such Certificates shall accurately represent the number
of Company Shares to which such holder is entitled by virtue of such exercise or
conversion and the Company shall amend Section 3.15(b) of the Company Disclosure
Schedule accordingly.
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SECTION 6.8 Arrangement of Debt Financing. The Company and Key will
cooperate with one another and use their respective reasonable business efforts
to negotiate, execute and consummate the transaction contemplated by a
definitive secured credit facility meeting the requirements of the provisions of
this Section 6.8 (the "New Debt Facility"). Without limiting the generality of
the foregoing, the parties agree that the definitive agreements, instruments and
other documents relating to the New Debt Facility (collectively, the "New Debt
Facility Documents") will provide, among other things, as follows:
(a) The New Credit Facility Documents will be based
substantially on the terms and conditions of one of the following
commitment letters (true, accurate and complete copies of which have
heretofore been delivered to the Company) with respect to the New Debt
Facility:
(i) The letter, dated October 24, 1995, from The CIT
Group/Credit Finance, Inc. to Key Energy Group, Inc.; and
(ii) The letter, dated November 3, 1995, from Norwest
Bank Texas to Key Energy Group, Inc.
Key shall have the sole power and authority, in its sole and absolute
discretion, to determine which of the financial institutions issuing
such two letters to pursue with respect to negotiating the New Credit
Facility;
(b) Subject to the other provisions of this Section 6.8, all
of the material terms and conditions of the New Credit Facility
Documents shall be reasonably satisfactory to the parties;
(c) The New Credit Facility Documents may not be amended,
modified or changed in any manner Adverse to either of the parties or
terminated by the Company or Key without the express written consent of
the Company and Key;
(d) All existing long-term indebtedness of the Company and its
Subsidiaries and, to the extent it shall, in its sole and absolute
discretion, determine, of Key and its Subsidiaries shall be repaid
simultaneously with the initial borrowings to be incurred pursuant to
the New Debt Facility;
(e) Subject to the provisions of subparagraph (d) immediately
preceding, Key shall have the sole power and authority (i) to make all
decisions with respect to the New Credit Facility and the incurrence of
indebtedness thereunder, including, without limitation, to determine,
from time to time, the amount of indebtedness to be incurred and the
use of the proceeds thereof, and (ii) to execute all documents in
connection with the incurrence of such indebtedness; provided, however,
that Key shall cause such borrowings to be made as are sufficient, from
time to time, to enable the Company to satisfy its obligations in the
ordinary course of business; and
(f) The parties agree to execute and deliver an amendment to
this Agreement to the extent reasonably requested by the banks or other
financial institutions providing the New Credit Facility.
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ARTICLE 7
CLOSING CONDITIONS
SECTION 7.1 Conditions to Obligations of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by Applicable Law:
(a) This Agreement, the Merger and the Transactions shall have
been approved and adopted in accordance with the DGCL and the MGCL by
the affirmative vote or, to the extent permitted by Law, by written
consent, of the stockholders holding at least the minimum number of
shares of the Company Stock and Key Stock then issued and outstanding
as are required by Applicable Law and the Company's Organic Documents
and Key's Organic Documents, as the case may be, for such approval and
adoption;
(b) As of the Closing Date, no Legal Action shall be pending
before or threatened by any Authority seeking to restrain, prohibit,
make illegal or delay materially, or seeking material damages or to
impose any Adverse conditions in connection with, the consummation of
the Merger and the Transactions, or which is likely to have an Adverse
Effect on Key and its Subsidiaries taken as a whole assuming
consummation of the Merger;
(c) Other than the filing of merger documents in accordance
with the DGCL and the MGCL, all authorizations, consents, waivers,
orders or approvals required to be obtained, and all filings,
submissions, registrations, notices or declarations required to be made
by Key and the Company prior to the consummation of the Merger and the
Transactions shall have been obtained from, and made with, all required
Authorities, except for such authorizations, consents, waivers, orders,
approvals, filings, registrations, notices or declarations the failure
to obtain or make would not, assuming consummation of the Merger, have
an Adverse Effect on Key and its Subsidiaries taken as a whole;
(d) Key and one or more banks or other financial institutions
shall have entered into the New Credit Facility substantially on the
terms and conditions described in Section 6.8, all Collateral Documents
required in connection therewith shall have been executed and
delivered, and the closings with respect thereto shall have been
authorized by Key and such banks or other financial institutions
subject to the consummation of the Merger;
(e) The Registration Statement shall have become effective
under the Securities Act and no stop order suspending its effectiveness
or any part thereof shall have been issued and remain in effect and no
proceedings for that purpose shall be pending or contemplated under the
Securities Act; and
(f) The shares of Key Stock constituting a part of the
Exchange Merger Consideration and the shares of Key Stock issuable upon
exercise of the New Key Warrants shall have been approved for listing
on the American Stock Exchange, subject to official notice of issuance.
SECTION 7.2 Conditions to Obligations of Key. The obligation of Key to
effect the Merger shall be subject to the satisfaction at or prior to the
Effective Time of the following conditions, any or all of which may be waived,
in whole or in part, to the extent permitted by Applicable Law:
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(a) All agreements, certificates, opinions and other documents
shall be reasonably satisfactory in form, scope and substance to Key
and its counsel, and Key and its counsel shall have received all
information and copies of all documents, including records of corporate
proceedings, which they may reasonably request in connection therewith,
such documents where appropriate to be certified by proper corporate
officers;
(b) The Company shall have furnished Key and, at Key's
request, any bank or other financial institution providing credit to
the Company or any Subsidiary, with favorable opinions, dated the
Closing Date of Porter & Hedges, counsel for the Company or, when
appropriate, local counsel of the Company, that shall address the
following:
(i) Due organization, valid existence, foreign
qualification and good standing of the Company and each
Subsidiary;
(ii) Requisite corporate power and authority to own,
lease and operate its properties and to carry on its business
as it is now being conducted;
(iii) In respect of the Company and each Subsidiary,
the number of shares of capital stock or other voting
securities authorized, issued, reserved for issuance or
outstanding as of the date hereof and the Effective Time and
number of Option Securities and amount of Convertible
Securities outstanding as of such dates;
(iv) Due authorization, valid issuance, full payment
and nonassessability of outstanding shares of capital stock of
the Company and each Subsidiary and, upon issuance on the
terms and conditions specified in the Option Securities and
Convertible Securities pursuant to which they are issuable,
all shares of such capital stock subject to issuance;
(v) To the knowledge of counsel, (A) there are no
Contractual Obligations to repurchase, redeem or otherwise
acquire any shares of Company Stock or any stock of any
Subsidiary, or any Option Securities and Convertible
Securities, (B) the Merger and the Transactions will not cause
an acceleration of the exercise or vesting schedule of any
Option Securities and Convertible Securities, and (C) all
outstanding shares of stock of each Subsidiary are owned by
the Company or by another Subsidiary, free and clear of any
Lien except as set forth in Schedule 3.1(d) of the Company
Disclosure Schedule;
(vi) Corporate power and authority of the Company to
execute and deliver this Agreement and all Collateral
Documents executed or required to be executed pursuant hereto
or thereto or to consummate the Merger and the Transactions,
to perform its obligations thereunder and to consummate the
Merger and the Transactions;
(vii) Due and valid authorization by the Company by
all necessary corporate action of its execution, delivery and
performance of this Agreement and the Collateral Documents
executed or required to be executed pursuant hereto or thereto
or to consummate the Merger and the Transactions and the
consummation by it of the Merger and the Transactions;
(viii) Due and valid execution and delivery by, and
enforceability against, the Company of this Agreement and the
Collateral Documents executed or required to be
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executed pursuant hereto or thereto or to consummate the
Merger and the Transactions, except as such enforceability may
be subject to bankruptcy, moratorium, insolvency,
reorganization, arrangement and other similar laws relating to
or affecting the rights of creditors and to the effect of
general principles of equity;
(ix) The execution and delivery of this Agreement and
the Collateral Documents executed or required to be executed
pursuant hereto or thereto or to consummate the Merger and the
Transactions by the Company do not, and the performance of
this Agreement and such Collateral Documents by it will not,
(A) conflict with or violate the Organic Documents of the
Company or any Subsidiary, (B) conflict with or violate any
Applicable Law, or (C) to counsel's knowledge, constitute a
default under, result in the loss of a material benefit under,
or give to others any right of termination, amendment,
acceleration, increased payments or cancellation of, or result
in the creation of a Lien on any property or asset of the
Company or any Subsidiary pursuant to, any Material Agreement
to which the Company or any Subsidiary is a party or by which
the Company or any Subsidiary or any property or asset of the
Company or any Subsidiary is bound or affected;
(x) No consents from or filings with any Authority
(other than filings of a Certificate of Merger and Articles of
Merger) are required by the Company for its execution,
delivery and performance of this Agreement and the Collateral
Documents executed or required to be executed pursuant hereto
or thereto or to consummate the Merger and the Transactions
and its consummation of the Merger and the Transactions;
(xi) Effectiveness of the Merger upon making of
required filings with Secretaries of State of Delaware and
Maryland;
(xii) To the knowledge of counsel, absence of pending
or threatened material Legal Action;
(xiii) The information provided by the Company for
use in the Registration Statement and the Shelf Registration
Statement; and
(xiv) Nonapplicability of Section 203 of the DGCL;
and such other matters incident to the Merger and the Transactions as
Key or its counsel may request or which may be requested by any such
bank or financial institution or their respective counsel;
(c) Key shall have received a favorable opinion, dated the
Closing Date of Sullivan & Worcester, its tax counsel, to the effect
that this Agreement constitutes a plan of reorganization within the
provisions of Section 368(a)(1)(A) of the Code and as to the
consequences thereof to Key and its stockholders and the Company. In
order to enable such firm to render such opinion, the stockholders of
the Company, by approving this Agreement, agree to execute and deliver
to Key and such counsel agreements, in form, scope and substance,
reasonably satisfactory to Key and such counsel, with respect to their
intentions as to disposition, to assure the continuity of ownership
requirements of Section 368(a)(1)(A) of the Code and the related
regulations promulgated thereunder;
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(d) The representations, warranties, covenants and agreements
of the Company contained in this Agreement or otherwise made in writing
by it or on its behalf pursuant hereto or otherwise made in connection
with the Transactions shall be true and correct in all material
respects at and as of the Closing Date with the same force and effect
as though made on and as of such (including without limitation giving
effect to any later obtained knowledge, information or belief of the
Company or Key) date except those which speak as of a certain date
which shall continue to be true and correct as of such date on the
Closing Date; each and all of the agreements and conditions to be
performed or satisfied by the Company hereunder at or prior to the
Closing Date shall have been duly performed or satisfied in all
material respects; and the Company shall have furnished Key with such
certificates and other documents evidencing the truth of such
representations, warranties, covenants and agreements and the
performance of such agreements or conditions as Key or its counsel
shall have reasonably requested;
(e) Key shall have received from the Company's independent
accountants, a certificate or letter, dated the Closing Date, to the
effect that, on the basis of a limited review in accordance with the
standards for such reviews promulgated by the American Institute of
Certified Public Accountants as outlined in Statement of Standards of
Accounting and Review Services No. 1, they have no reason to believe
that the unaudited Company Financial Statements set forth in the
Registration Statement were not prepared in accordance with GAAP and
practices consistent with those followed in the preparation of the
audited Company Financial Statements so set forth, or that any material
modifications of such unaudited Company Financial Statements are
required for a fair presentation of the financial position or results
of operations or changes in financial position of the Company or that
during the period from the last day covered by the most recent Company
Financial Statements set forth in the Registration Statement to a date
not more than five (5) days prior to the Closing Date, there has been
any Adverse Change in the financial position or results of the
operations of the Company and its Subsidiaries taken as a whole which
is not described in the Registration Statement.
(f) All actions taken by the stockholders of the Company to
approve and adopt this Agreement, the Merger and the Transactions shall
comply in all respects with and shall be legal, valid, binding,
enforceable and effective under the Law of the State of Delaware, the
Company's Organic Documents and all Material Agreements to which it or
any of its Subsidiaries is a party or by which it or any of them or any
of its or any of their property or assets is bound;
(g) As of the Closing Date, except as set forth in the Company
Disclosure Schedule, there shall not have occurred and be continuing
any Adverse Change affecting the Company and its Subsidiaries taken as
a whole from those reflected in the most recent Company Financial
Statements;
(h) Each of the officers and directors of the Company and each
of its Subsidiaries and each trustee under each Plan of the Company or
any of its Subsidiaries shall have submitted his or her unqualified
written resignation, dated as of the Closing Date, from all such
positions held with the Company and each of its Subsidiaries and as a
trustee for each such Plan;
(i) All Contractual Obligations set forth in Section 3.9 of
the Company Disclosure Schedule shall have been terminated and
satisfied and discharged in full, except as otherwise set forth in
Section 7.2(i) of the Key Disclosure Schedule;
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(j) All Existing Key Warrants and Existing Key Shares shall
have been delivered to Key, without the payment of any amount by it,
marked canceled and discharged in full; and
(k) The Interim Operations Agreement shall have remained in
full force and effect at all times up to the Effective Time and the
Company shall not be in breach or default, in any respect which would
be Adverse to the Company.
SECTION 7.3 Conditions to Obligations of the Company. The obligation of
the Company and the stockholders of the Company to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by Applicable Law:
(a) All agreements, certificates, opinions and other documents
shall be reasonably satisfactory in form, scope and substance to the
Company and its counsel, and the Company and its counsel shall have
received all information and copies of all documents, including records
of corporate proceedings, which they may reasonably request in
connection therewith, such documents where appropriate to be certified
by proper corporate officers;
(b) Key shall have furnished the Company and its stockholders
with favorable opinions, dated the Closing Date of Sullivan &
Worcester, A Registered Limited Liability Partnership, counsel for Key,
or, where appropriate, of local counsel for Key, that shall address the
following:
(i) Due organization, valid existence, foreign
qualifications and good standing of Key and each Subsidiary;
(ii) Requisite corporate power and authority to own,
lease and operate its properties and to carry on its business
as it is now being conducted;
(iii) In respect of Key, the number of shares of
capital stock or other voting securities authorized, issued,
reserved for issuance or outstanding as of the date of such
opinion and number of Option Securities and amount of
Convertible Securities outstanding as of such date;
(iv) Due authorization, valid issuance, full payment
and nonassessability of outstanding shares of capital stock of
Key, upon issuance on the terms and conditions specified in
the Option Securities and Convertible Securities pursuant to
which they are issuable, all shares of such capital stock
subject to issuance, and the shares of Key Stock and the New
Key Warrants constituting a part of the Exchange Merger
Consideration and the shares of Key Stock issuable upon
exercise of such New Key Warrants;
(v) To the knowledge of counsel, (A) there are no
Contractual Obligations to repurchase, redeem or otherwise
acquire any shares of Key Stock or any stock of any
Subsidiary, or any Option Securities and Convertible
Securities issued by Key or any Key Subsidiary, (B) the Merger
and the Transactions will not cause an acceleration of the
exercise or vesting schedule of any such Option Securities and
Convertible Securities, and (C) all outstanding shares of
stock of each Subsidiary are owned by Key or by another
Subsidiary, free and clear of any Lien, except, in each case,
as set forth in Schedule 4.1(d) of the Key Disclosure
Schedule;
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(vi) Corporate power and authority of Key to execute
and deliver this Agreement and the Collateral Documents
executed or required to be executed pursuant hereto or thereto
or to consummate the Merger and the Transactions, to perform
its obligations thereunder and to consummate the Merger and
the Transactions;
(vii) Due and valid authorization by Key by all
necessary corporate action of its execution, delivery and
performance of this Agreement and the Collateral Documents
executed or required to be executed pursuant hereto or thereto
or to consummate the Merger and the Transactions and the
consummation by it of the Merger and the Transactions;
(viii) Due and valid execution and delivery by, and
enforceability against, Key of this Agreement and the
Collateral Documents executed or required to be executed
pursuant hereto or thereto or to consummate the Merger and the
Transactions, except (A) as such enforceability may be subject
to bankruptcy, moratorium, insolvency, reorganization,
arrangement and other similar laws relating to or affecting
the rights of creditors and to the effect of general
principles of equity and (B) that no opinion need be expressed
as to the enforceability of indemnification provisions
included in the Registration Rights Agreement;
(ix) The execution and delivery of this Agreement and
the Collateral Documents executed or required to be executed
pursuant hereto or thereto or to consummate the Merger and the
Transactions by Key do not, and the performance of this
Agreement and such Collateral Documents by it will not, (A)
conflict with or violate the Organic Documents of Key or any
Subsidiary, (B) conflict with or violate any Applicable Law,
or (C) to counsel's knowledge, constitute a default under,
result in the loss of a material benefit under, or give to
others any right of termination, amendment, acceleration,
increased payments or cancellation of, or result in the
creation of a Lien on any property or asset of Key or any
Subsidiary pursuant to, any Material Agreement to which Key or
any Subsidiary is a party or by which Key or any Subsidiary or
any property or asset of Key or any Subsidiary is bound or
affected;
(x) No consents from or filings with any Governmental
Authority (other than filings of a Certificate of Merger and
Articles of Merger) are required by Key for the execution,
delivery and performance of this Agreement and the Collateral
Documents executed or required to be executed pursuant hereto
or thereto or to consummate the Merger and the Transactions
and the consummation of the Merger and the Transactions,
except as contemplated by the Registration Rights Agreement;
(xi) Effectiveness of the Merger upon making of
required filings with Secretaries of State of Delaware and
Maryland;
(xii) To the knowledge of counsel, absence of pending
or threatened material Legal Action;
(xiii) The information provided by Key for use in the
Registration Statement and the Shelf Registration Statement;
and
(xiv) Nonapplicability of Section 3-602 of the MGCL;
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and such other matters incident to the Merger and the Transactions as
the Company or its counsel may reasonably request;
(c) The representations, warranties, covenants and agreements
of Key contained in this Agreement or otherwise made in writing by it
or on its behalf pursuant hereto or otherwise made in connection with
the Transactions shall be true and correct in all material respects at
and as of the Closing Date with the same force and effect as though
made on and as of such date except those which speak as of a certain
date which shall continue to be true and correct as of such date
(including without limitation giving effect to any later obtained
knowledge, information or belief of Key or the Company) on the Closing
Date; each and all of the agreements and conditions to be performed or
satisfied by Key hereunder at or prior to the Closing Date shall have
been duly performed or satisfied in all material respects; and Key
shall have furnished the Company with such certificates and other
documents evidencing the truth of such representations, warranties,
covenants and agreements and the performance of such agreements or
conditions as the Company or its counsel shall have reasonably
requested;
(d) The Company shall have received from Key's independent
accountants, a certificate or letter, dated the Closing Date, to the
effect that, on the basis of a limited review in accordance with the
standards for such reviews promulgated by the American Institute of
Certified Public Accountants as outlined in Statement of Standards of
Accounting and Review Services No. 1, they have no reason to believe
that the unaudited Key Financial Statements set forth in the
Registration Statement were not prepared in accordance with GAAP and
practices consistent with those followed in the preparation of the
audited Key Financial Statements so set forth, or that any material
modifications of such unaudited Key Financial Statements are required
for a fair presentation of the financial position or results of
operations or changes in financial position of Key or that during the
period from the last day covered by the most recent Key Financial
Statements set forth in the Registration Statement to a date not more
than five (5) days prior to the Closing Date, there has been any
Adverse Change in the financial position or results of the operations
of Key and its Subsidiaries taken as a whole which is not described in
the Registration Statement;
(e) Two (2) additional nominees of the Company shall, if
proposed, have been elected as members of the Board of Directors of Key
to hold office until the next annual meeting of stockholders of Key and
until their respective successors shall have been elected and
qualified, or the earlier resignation or removal of such nominees, as a
consequence of which the Board of Directors of Key shall consist of
three (3) nominees of the Company and five (5) other directors;
(f) All actions taken by the stockholders of Key to approve
and adopt this Agreement, the Merger and the Transactions shall comply
in all respects with and shall be legal, valid, binding, enforceable
and effective under the Law of the State of Maryland, Key's Organic
Documents and all Material Agreements to which it or any of its
Subsidiaries is a party or by which it or any of them or any of its or
any of their property or assets is bound;
(g) As of the Closing Date, except as set forth in the Key
Disclosure Schedule, there shall not have occurred and be continuing
any Adverse Change affecting Key and its Subsidiaries taken as a whole
from those reflected in the most recent Key Financial Statements; and
(h) The Shelf Registration Statement shall have become
effective under the Securities Act and no stop order suspending its
effectiveness or any part thereof shall have been issued and
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remain in effect and no proceedings for that purpose shall be pending
or contemplated under the Securities Act.
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this Agreement,
the Merger and the Transactions by the stockholders of the parties:
(a) by mutual consent of the Company and Key;
(b) by either Key or the Company:
(i) if any permanent injunction, decree or judgment
by any Authority preventing the consummation of the Merger
shall have become final and nonappealable; or
(ii) if the Merger and the Transactions have not been
consummated prior to the Termination Date; or
(c) by the Company:
(i) in the event (A) the Company is not in breach of this
Agreement and none of its material representations or warranties shall
have become and continue to be untrue in any material respect, and (B)
Key is in breach of this Agreement or any of its representations or
warranties shall have become and continue to be untrue in any respect
which could, in the aggregate, have an Adverse Effect on Key, unless,
in either case, such breach or untruth is capable of being cured by and
will not prevent or delay consummation of the Merger by or beyond the
Termination Date; or
(ii) if (A) the Board of Directors of Key shall (I) withdraw,
modify or change its recommendation so that it is not in favor of this
Agreement, the Merger or the Transactions, or shall have resolved to do
any of the foregoing, or (II) have recommended or resolved to recommend
to its stockholders any Other Transaction, or (B) Key shall have
entered into or agreed to enter into any Other Transaction; or
(d) by Key:
(i) in the event (A) Key is not in breach of this Agreement
and none of its material representations or warranties shall have
become and continue to be untrue in any material respect, and (B) the
Company is in breach of this Agreement or any of its representations or
warranties shall have become and continue to be untrue in any respect
which could, in the aggregate, have an Adverse Effect on the Company,
unless, in either case, such breach or untruth is capable of being
cured by and will not prevent or delay consummation of the Merger by or
beyond the Termination Date; or
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(ii) if (A) the Board of Directors of the Company shall (I)
withdraw, modify or change its recommendation so that it is not in
favor of this Agreement, the Merger or the Transactions, or shall have
resolved to do any of the foregoing, or (II) have recommended or
resolved to recommend to its stockholders any Other Transaction, or (B)
the Company shall have entered into or agreed to enter into any Other
Transaction.
The term "Termination Date" shall mean February 29, 1996 or such other
date as the parties may, from time to time, mutually agree; provided, however,
that notwithstanding the foregoing, either Key or the Company may, in its sole
discretion, elect to extend such date, from time to time, to not later than May
31, 1996 in the event that (a) in its reasonable business judgment not all of
the conditions of the obligations of the parties to consummate the Merger and
the Transactions set forth in Article 7 are likely to be satisfied by the then
current Termination Date and (b) either (i) it is not in breach of this
Agreement and none of its representations and warranties has become untrue in
any respect which could, in the aggregate, have an Adverse Effect on it, or (ii)
if such a breach or untruth exists, such breach or untruth is capable of being
cured by and will not prevent or delay consummation of the Merger by or beyond
the date to which it proposes to extend the Termination Date.
The right of either party to terminate this Agreement pursuant to this
Section shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of either party, any Person controlling any
such party or any of their respective Representatives whether prior to or after
the execution of this Agreement.
SECTION 8.2 Effect of Termination. Except as provided in Sections
2.2(a), 2.2(d), 6.1(b) and 8.5, in the event of the termination of this
Agreement pursuant to Section 8.1, this Agreement shall forthwith become void,
there shall be no liability on the part of either party, or any of their
respective officers or directors, to the other and all rights and obligations of
either party shall cease; provided, however, that such termination shall not
relieve either party from liability for any intentional misrepresentation or
intentional breach of any of its warranties, covenants or agreements set forth
in this Agreement.
SECTION 8.3 Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time; provided, however, that, after approval
of this Agreement and the Merger by the stockholders of a particular party, no
amendment, which under Applicable Law may not be made without the approval of
such stockholders, may be made without such approval. This Agreement may not be
amended except by an instrument in writing signed by the parties hereto.
SECTION 8.4 Waiver. At any time prior to the Effective Time, except to
the extent not permitted by Applicable Law, Key or the Company may (a) extend
the time for the performance of any of the obligations or other acts of the
other, subject, however, to the provisions of Section 8.1, (b) waive any
inaccuracies in the representations and warranties of the other contained herein
or in any document delivered pursuant hereto, and (c) waive compliance by the
other with any of the agreements, covenants or conditions contained herein. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
SECTION 8.5 Fees, Expenses and Other Payments. (a) All costs and
expenses, incurred in connection with this Agreement, the Merger and the
Transactions, and compliance with Applicable Law and Contractual Obligations as
a consequence hereof and thereof, including, without limitation, fees and
disbursements of counsel, financial advisors and accountants, incurred by the
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parties hereto shall be borne solely and entirely by the party which has
incurred such costs and expenses (with respect to such party, its "Expenses").
Anything herein to the contrary notwithstanding, Key agrees that the Company may
pay the costs and expenses of its stockholders up to an aggregate amount of
$150,000. Key agrees to take all action necessary to cause the Surviving
Corporation to pay promptly any of the foregoing reasonable Expenses incurred,
but not paid, by the Company prior to the Effective Time.
(b) The Company agrees that if this Agreement shall be terminated by
Key pursuant to the provisions of Section 8.1(d)(iii) hereof, and Key agrees
that if this Agreement is terminated by the Company pursuant to the provisions
of Section 8.1(c)(iii) hereof, and if, prior to such termination or within nine
(9) months thereafter, the Company or Key consummates any Other Transaction (the
first party to consummate any Other Transaction being herein referred to as the
"Indemnitor" and the other party being herein referred to as the "Indemnitee"),
then the Indemnitor will pay to the Indemnitee an amount equal to $500,000,
which amount is in recognition of, among other things, the out-of-pocket
Expenses of the Indemnitee related to this Agreement, the reliance of the
Indemnitee on the Indemnitor's fulfillment of its obligations hereunder, the
costs in delayed opportunity to the Indemnitee and the benefit to the
Indemnitor. Anything in this Section 8.5(b) to the contrary notwithstanding, the
Indemnitee shall, after the Indemnitor has consummated any Other Transaction, be
released from all further obligations under this Section, including without
limitation the right, without being required to make any payment to the
Indemnitor, to consummate any Other Transaction.
ARTICLE 9
GENERAL PROVISIONS
SECTION 9.1 Effectiveness of Representations, etc. Except as set forth
in Section 8.2 hereof, the representations, warranties, covenants and agreements
of each party shall remain operative and in full force and effect to the extent
hereinafter set forth, regardless of any investigation made by or on behalf of
either party, any Person controlling such party or any of its Representatives
whether prior to or after the execution of this Agreement. Notwithstanding the
foregoing, the representations and warranties of the parties shall terminate as
of the Closing and shall expire and cease to be of any further force or effect
upon the Closing.
SECTION 9.2 Notices. All notices and other communications which by any
provision of this Agreement are required or permitted to be given shall be given
in writing and shall be (a) mailed by first-class or express mail, or by
recognized courier service, postage prepaid, (b) sent by telex, telegram,
telecopy or other form of rapid transmission, confirmed by mailing (by first
class or express mail, or by recognized courier service, postage prepaid)
written confirmation at substantially the same time as such rapid transmission,
or (c) personally delivered to the receiving party (which if other than an
individual shall be an officer or other responsible party of the receiving
party). All such notices and communications shall be mailed, sent or delivered
as follows:
(a) If to Key:
257 Livingston Avenue
New Brunswick, New Jersey 08901
Attention: Francis D. John, Chief Executive Officer
Telecopier No.: (908) 247-5148
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with a copy to:
Sullivan & Worcester
A Registered Limited Liability Partnership
One Post Office Square
Boston, Massachusetts 02109
Attention: Lena G. Goldberg, Esq.
Telecopier No.: (617) 338-2880
(b) If to the Company:
3535 Briarpark, Suite 200
Houston, Texas 77042
Attention: W. Clarke Gormley, Vice President-Legal
Telecopier No.: (713) 977-7331
with a copy to:
Porter & Hedges
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Attention: T. William Porter, Esq.
Telecopier No.: (713) 228-1331
and
Goodwin, Procter & Hoar
Exchange Place
Boston, Massachusetts 02109
Attention: Robert P. Whalen, Jr., Esq.
Telecopier No.: (617) 523-1231
or to such other person(s), telex or facsimile number(s) or address(es) as the
party to receive any such communication or notice may have designated by written
notice to the other party.
SECTION 9.3 Specific Performance; Other Rights and Remedies. Each party
recognizes and agrees that the other party's remedy at law for any breach of the
provisions of this Agreement would be inadequate and agrees that for breach of
such provisions, such party shall, in addition to such other remedies as may be
available to it at law or in equity or as provided in this Agreement, be
entitled to injunctive relief and to enforce its rights by an action for
specific performance to the extent permitted by Applicable Law. Each party
hereby waives any requirement for security or the posting of any bond or other
surety in connection with any temporary or permanent award of injunctive,
mandatory or other equitable relief. Nothing herein contained shall be construed
as prohibiting either party from pursuing any other remedies available to it for
such breach or threatened breach, including without limitation the recovery of
damages.
SECTION 9.4 Severability. If any term or provision of this Agreement
shall be held or deemed to be, or shall in fact be, invalid, inoperative,
illegal or unenforceable as applied to any particular case in any jurisdiction
or jurisdictions, or in all jurisdictions or in all cases, because of the
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conflicting of any provision with any constitution or statute or rule of public
policy or for any other reason, such circumstance shall not have the effect of
rendering the provision or provisions in question invalid, inoperative, illegal
or unenforceable in any other jurisdiction or in any other case or circumstance
or of rendering any other provision or provisions herein contained invalid,
inoperative, illegal or unenforceable to the extent that such other provisions
are not themselves actually in conflict with such constitution, statute or rule
of public policy, but this Agreement shall be reformed and construed in any such
jurisdiction or case as if such invalid, inoperative, illegal or unenforceable
provision had never been contained herein and such provision reformed so that it
would be valid, operative and enforceable to the maximum extent permitted in
such jurisdiction or in such case. Notwithstanding the foregoing, in the event
of any such determination the effect of which is to Affect Adversely either
party, the parties shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible to the
fullest extent permitted by Applicable Law in an acceptable manner to the end
that the Transactions are fulfilled and consummated to the maximum extent
possible.
SECTION 9.5 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, binding upon all of the
parties. In pleading or proving any provision of this Agreement, it shall not be
necessary to produce more than one of such counterparts.
SECTION 9.6 Section Headings. The headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
SECTION 9.7 Governing Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by, and construed in
accordance with, the applicable laws of the United States of America and the
laws of The Commonwealth of Massachusetts applicable to contracts made and
performed in such State and, in any event, without giving effect to any choice
or conflict of laws provision or rule that would cause the application of
domestic substantive laws of any other jurisdiction, except to the extent that
the DGCL or the MGCL apply to the Merger.
SECTION 9.8 Further Acts. Each party agrees that at any time, and from
time to time, before and after the consummation of the transactions contemplated
by this Agreement, it will do all such things and execute and deliver all such
Collateral Documents and other assurances, as any other party or its counsel
reasonably deems necessary or desirable in order to carry out the terms and
conditions of this Agreement and the transactions contemplated hereby or to
facilitate the enjoyment of any of the rights created hereby or to be created
hereunder.
SECTION 9.9 Entire Agreement. This Agreement (together with the Company
Disclosure Schedule, the Key Disclosure Schedule and the other Collateral
Documents delivered in connection herewith), constitutes the entire agreement of
the parties and supersede all prior agreements and undertakings, both written
and oral, between the parties, with respect to the subject matter hereof,
including without limitation that certain letter of intent, dated August 29,
1995, between the parties.
SECTION 9.10 Assignment. This Agreement shall not be assigned by
operation of law or otherwise and any purported assignment shall be null and
void.
SECTION 9.11 Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party, and nothing in this Agreement,
express or implied (other than the provisions of Section 6.4, which provisions
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are intended to benefit and may be enforced by the beneficiaries thereof), is
intended to or shall confer upon any person any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
SECTION 9.12 Mutual Drafting. This Agreement is the result of the joint
efforts of Key and the Company, and each provision hereof has been subject to
the mutual consultation, negotiation and agreement of the parties and there
shall be no construction against either party based on any presumption of that
party's involvement in the drafting thereof.
IN WITNESS WHEREOF, Key and the Company have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
Key Energy Group, Inc.
By: /s/ Francis D. John
Name: Francis D. John
Title: President and Chief Executive Officer
WellTech, Inc.
By: /s/ W. Clarke Gormley
Name: W. Clarke Gormley
Title: Vice President - Legal
Schedules to the Merger Agreement have been omitted from this filing,
but will be provided upon request.
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APPENDIX A
DEFINITIONS
As used in this Agreement, unless the context otherwise requires, the
following terms (or any variant in the form thereof) have the following
respective meanings. Terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa, and the reference to any gender
shall be deemed to include all genders. Unless otherwise defined or the context
otherwise clearly requires, terms for which meanings are provided herein shall
have such meanings when used in the Company Disclosure Schedule, the Key
Disclosure Schedule and each Collateral Document executed or required to be
executed pursuant hereto or thereto or otherwise delivered, from time to time,
pursuant hereto or thereto. References to "hereof", "herein" or similar terms
are intended to refer to the Agreement as a whole and not a particular section,
and references to "this Section" are intended to refer to the entire section and
not a particular subsection thereof.
Adverse, Adversely, when used alone or in conjunction with other terms
(including without limitation "Affect," "Change" and "Effect") shall mean any
Event which is reasonably likely, in the reasonable business judgment of Key or
the Company, as the case may be, be expected to (a) adversely affect the
validity or enforceability of this Agreement or the likelihood of consummation
of the Merger, or (b) adversely affect the business, operations, management,
properties or prospects, or the condition, financial or other, or results of
operation of the Company and its Subsidiaries taken as a whole or Key and its
Subsidiaries taken as a whole, as the case may be, or (c) impair the Company's
or Key's, as the case may be, ability to fulfill its obligations under the terms
of this Agreement, or (d) adversely affect the aggregate rights and remedies of
Key or the Company, as the case may be, under this Agreement, in all cases,
unless otherwise specifically set forth, in a material manner or to a material
degree. Notwithstanding the foregoing, for purposes of determining whether one
or more conditions, including without limitation those set forth in Sections
7.1(b), 7.1(c), 7.2(e), 7.2(g) and 7.3(g), shall have been satisfied, the term
"Adverse" when used alone or in conjunction with other terms (including without
limitation "Affect," "Change" and "Effect") shall mean any Event which when
considered with all other Changes would reasonably be expected to result in a
"loss" having the effect of so fundamentally adversely affecting the business or
financial prospects of the Company or Key, as the case may be, that the benefits
reasonably expected to be obtained by such party as a result of the Merger would
be jeopardized in a material manner or to a material degree with relative
certainty; provided, however, that in no event shall either (a) a change in the
oil and gas industry generally or in the particular geographic areas in which
the Company or Key are engaged in business or (b) in the trading price of the
Key Stock on the American Stock Exchange between the date hereof and the
Effective Date, in and of itself, constitute an Adverse Change, Affect or
Effect. The term "loss" shall mean any and all direct or indirect payments,
obligations, assessments, losses, loss of income, liabilities, fines, penalties,
costs and expenses paid or incurred or more likely than not to be paid or
incurred, or diminutions in value of any kind or character (whether or not known
or unknown, conditional or unconditional, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise)
that are more likely than not to occur, including without limitation penalties,
interest on any amount payable to a third party as a result of the foregoing and
any legal or other expenses reasonably incurred or more likely than not to be
reasonably incurred in connection with investigating or defending any Legal
Actions or other Claims that, if adversely determined, would likely result in
losses, and all amounts paid in settlement of Legal Actions or other Claims;
provided, however, that losses shall be net of (i) any insurance proceeds
entitled to be received from a nonaffiliated insurance company on account of
such losses (after taking into account any costs incurred in obtaining such
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proceeds and any increase in insurance premiums as a result of a claim with
respect to such proceeds) and (ii) the reasonably determined present value of
any tax benefits reasonably likely to be recognized as a consequence of such
losses.
Affiliate, Affiliated shall mean, with respect to any Person, (a) any
other Person at the time directly or indirectly controlling, controlled by or
under direct or indirect common control with such Person, (b) any other Person
of which such Person at the time owns, or has the right to acquire, directly or
indirectly, twenty percent (20%) or more of any class of the capital stock or
beneficial interest, (c) any other Person which at the time owns, or has the
right to acquire, directly or indirectly, twenty percent (20%) or more of any
class of the capital stock or beneficial interest of such Person, (d) any
executive officer or director of such Person, (e) with respect to any
partnership, joint venture or similar Entity, any general partner thereof, and
(f) when used with respect to an individual, shall include any member of such
individual's immediate family or a family trust.
Agreement shall mean this Agreement as originally in effect, including
unless the context otherwise specifically requires, this Appendix A, all
schedules, including the Company Disclosure Schedule, and the Key Disclosure
Schedule, and all exhibits hereto, and as any of the same may from time to time
be supplemented, amended, modified or restated in the manner herein or therein
provided.
Applicable Law shall mean any Law of any Authority, whether domestic or
foreign, including without limitation all federal and state securities and
Environmental Laws, to which a Person is subject or by which it or any of its
business or operations is subject or any of its property or assets is bound.
Authority shall mean any governmental or quasi-governmental authority,
whether administrative, executive, judicial, legislative or other, or any
combination thereof, including without limitation any federal, state,
territorial, county, municipal or other government or governmental or
quasi-governmental agency, arbitrator, authority, board, body, branch, bureau,
central bank or comparable agency or Entity, commission, corporation, court,
department, instrumentality, master, mediator, panel, referee, system or other
political unit or subdivision or other Entity of any of the foregoing, whether
domestic or foreign.
Benefit Arrangement shall mean any material benefit arrangement that is
not a Plan, including (a) any employment or consulting agreement (b) any
arrangement providing for insurance coverage or workers' compensation benefits,
(c) any incentive bonus or deferred bonus arrangement, (d) any arrangement
providing termination allowance, severance or similar benefits, (e) any equity
compensation plan, (f) any deferred compensation plan, and (g) any compensation
policy and practice.
Certificate shall have the meaning given to it in Section 2.1(a).
Claims shall mean any and all debts, liabilities, obligations, losses,
damages, deficiencies, assessments and penalties, together with all Legal
Actions, pending or threatened, claims and judgments of whatever kind and nature
relating thereto, and all fees, costs, expenses and disbursements (including
without limitation reasonable attorneys' and other legal fees, costs and
expenses) relating to any of the foregoing.
Closing shall have the meaning given to it in Section 1.3.
Closing Date shall mean the date on which the transactions contemplated
by this Agreement are consummated and the Merger becomes effective.
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COBRA shall mean the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended, as set forth in Section 4980B of the Code and Part 6 of Title
I of ERISA.
Code shall have the meaning given to it in the Second Recital.
Collateral Document shall mean any agreement, certificate, contract,
instrument, notice, opinion or other document executed or required to be
executed pursuant to the provisions of this Agreement or any of the Collateral
Documents, including without limitation the Interim Operations Agreement, the
New Debt Facility Documents, the New Key Warrants and the Registration Rights
Agreement.
Company shall have the meaning given to it in the Preamble.
Company Disclosure Schedule shall mean the Company Disclosure Schedule
dated as of the date of this Agreement delivered by the Company to Key.
Company Financial Statements shall have the meaning given to it in
Section 3.2.
the Company's knowledge (including the term "to the knowledge,
information and belief of the Company") means the knowledge of any Company
director or executive officer, and that such director or executive officer,
after reasonable inquiry of appropriate Company personnel and reasonable review
of appropriate company records, shall have reason to believe and shall believe
that the subject representation or warranty is true and accurate as stated.
Company Shares shall have the meaning given to it in Section 2.1(a).
Company Special Meeting shall have the meaning given to it in Section
1.2(a).
Company Stock shall have the meaning given to it in Section 2.1(a).
Contract, Contractual Obligation shall mean any term, condition,
provision, representation, warranty, agreement, covenant, undertaking,
commitment, indemnity or other obligation set forth in the Organic Documents of
the obligee or which is outstanding or existing under any Instrument (including
without limitation any Instrument relating to or evidencing any Indebtedness) to
which the obligee is a party or by which it or any of its business is subject or
property or assets is bound.
control (including the terms "controlled," "controlled by" and "under
common control with") means the possession, directly or indirectly or as trustee
or executor, of the power to direct or cause the direction of the management or
policies of a Person, or the disposition of such Person's assets or properties,
whether through the ownership of stock, equity or other ownership, by contract,
arrangement or understanding, or as trustee or executor, by contract or credit
arrangement or otherwise;
Convertible Securities shall mean any evidences of indebtedness, shares
of capital stock (other than common stock) or other securities directly or
indirectly convertible into or exchangeable for shares of common stock, whether
or not the right to convert or exchange thereunder is immediately exercisable or
is conditioned upon the passage of time, the occurrence or non-occurrence or
existence or non-existence of some other Event, or both.
DGCL shall have the meaning given to it in the First Recital.
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Dissenting Shares shall have the meaning given to it in Section 2.5(a).
Distribution shall mean, with respect to any Person, (a) the
declaration or payment of any dividend (except dividends payable in common stock
of such Person) on or in respect of any shares of any class of capital stock of
such Person or any shares of capital stock of any Subsidiary owned by a Person
other than the Company or a Subsidiary, (b) the purchase, redemption or other
retirement of any shares of any class of capital stock of such Person or any
shares of capital stock of any Subsidiary of such Person owned by a Person other
than such Person or a Subsidiary of such Person, and (c) any other distribution
on or in respect of any shares of any class of capital stock of such Person or
any shares of capital stock of any Subsidiary of such Person owned by a Person
other than such Person or a Subsidiary of such Person.
Effective Time shall have the meaning given to it in Section 1.4.
Employment Arrangement shall mean, with respect to any Person, any
employment, consulting, retainer, severance or similar contract, agreement,
plan, arrangement or policy (exclusive of any which is terminable within thirty
(30) days without liability, penalty or payment of any kind by such Person or
any Affiliate), or providing for severance, termination payments, insurance
coverage (including any self-insured arrangements), workers compensation,
disability benefits, life, health, medical, dental or hospitalization benefits,
supplemental unemployment benefits, vacation or sick leave benefits, pension or
retirement benefits or for deferred compensation, profit-sharing, bonuses, stock
options, stock purchase or appreciation rights or other forms of incentive
compensation or post-retirement insurance, compensation or post-retirement
insurance, compensation or benefits, or any collective bargaining or other labor
agreement, whether or not any of the foregoing is subject to the provisions of
ERISA.
Encumber shall mean to suffer, accept, agree to or permit the
imposition of an Lien.
Entity shall mean any corporation, firm, unincorporated organization,
association, partnership, limited liability company, trust (inter vivos or
testamentary), estate of a deceased, insane or incompetent individual, business
trust, joint stock company, joint venture or other organization, entity or
business, whether acting in an individual, fiduciary or other capacity, or any
Authority.
Environmental Law shall mean any Law relating to or otherwise imposing
liability or standards of conduct concerning pollution or protection of the
environment or occupational health and safety, including without limitation Laws
relating to emissions, discharges, releases or threatened releases of Hazardous
Materials or other chemicals, noises, orders or industrial pollutants,
substances, materials or wastes into the environment (including, without
limitation, ambient air, surface water, ground water, mining or reclamation or
mined land, land surface or subsurface strata) or otherwise relating to the
manufacture, processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants, chemicals
or industrial, toxic or hazardous substances, materials or wastes. Environmental
Laws shall include without limitation the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. Section 6901 et seq.), the Hazardous
Material Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Federal
Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act
(42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C.
Section 2601 et seq.), the Occupational Safety and Health Act (29 U.S.C. Section
651 et seq.), the Federal Insecticide Fungicide and Rodenticide Act (7 U.S.C.
Section 136 et seq.), and the Surface Mining Control and Reclamation Act of 1977
(30 U.S.C. Section 1201 et seq.), and any analogous federal, state, local or
foreign, Laws, and the rules and regulations promulgated thereunder all as from
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time to time in effect, and any reference to any statutory or regulatory
provision shall be deemed to be a reference to any successor statutory or
regulatory provision.
Environmental Permit shall mean any Governmental Authorization required
by or pursuant to any Environmental Law.
ERISA shall mean the Employee Retirement Income Security Act of 1974,
and the rules and regulations thereunder, all as from time to time in effect, or
any successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
ERISA Affiliate shall mean any Person that is treated as a single
employer with the Company under Sections 414(b), (c), (m) or (o) of the Code or
Section 4001(b)(1) of ERISA.
Event shall mean the existence or occurrence of any act, action,
activity, circumstance, condition, event, fact, failure to act, omission,
incident or practice, or any set or combination of any of the foregoing.
Exchange Act shall mean the Securities Exchange Act of 1934, and the
rules and regulations of the SEC thereunder, all as from time to time in effect,
or any successor law, rules or regulations, and any reference to any statutory
or regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
Exchange Agent shall have the meaning given to it in Section 2.2(a).
Exchange Fund shall have the meaning given to it in Section 2.2(a).
Exchange Merger Consideration shall have the meaning given to it in
Section 2.1(a).
Existing Key Shares shall mean an aggregate of 1,429,962 of the
1,635,000 shares of Key Stock issued to the Company by Key pursuant to the
agreement dated as of December 10, 1993.
Existing Key Warrants shall mean the warrants to purchase an aggregate
of 250,000 shares of Key Stock at $5.00 per share issued by Key pursuant to the
agreement dated as of December 10, 1993.
Expenses shall have the meaning set forth in Section 8.5.
Final Determination (a) shall mean with respect to federal Taxes, a
"determination" as defined in Section 1313(a) of the Code or execution of an IRS
Form 870AD and, with respect to Taxes other than federal Taxes, any final
determination of liability in respect of a Tax which, under Applicable Law, is
not subject to further appeal, review or modification through proceedings or
otherwise, including without limitation the expiration of a statute of
limitations or a period for the filing of claims for refunds, amended returns or
appeals from adverse determinations; and (b) shall include the payment of Tax by
or whichever is responsible for payment of such Tax under Applicable Law, with
respect to any item disallowed or adjusted by a Taxing Authority, provided that
the other party is notified of such payment and the party that is responsible
for such Tax under this Agreement determines that no action should be taken to
recoup such payment from such Taxing Authority.
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GAAP shall mean generally accepted accounting principles as in effect
from time to time in the United States of America.
Governmental Authorizations shall mean all approvals, concessions,
consents, franchises, licenses, permits, plans, registrations and other
authorizations of all Authorities.
Governmental Filings shall mean all filings, including franchise and
similar Tax filings, and the payment of all fees, assessments, interest and
penalties associated with such filings, with all Authorities.
Guaranty or Guaranteed shall mean any agreement, undertaking or
arrangement by which the Company guarantees, endorses or otherwise becomes or is
liable, directly or indirectly, contingently or otherwise, upon any Indebtedness
of any other Person including without limitation the payment of amounts drawn
down by beneficiaries of letters of credit (other than by endorsements of
negotiable instruments for deposit or collection in the ordinary course of
business). The amount of the obligor's obligation under any Guaranty shall be
deemed to be the outstanding amount (or maximum permitted amount, if larger) of
the Indebtedness directly or indirectly guaranteed thereby (subject to any
limitation set forth therein).
Hazardous Materials shall mean and include any substance (in whatever
state of matter): (a) that is defined as a "hazardous waste", "hazardous
material" or "hazardous substance", under any Environmental Law; (b) that is
radioactive and is regulated under any Environmental Law; (c) that contains or
consists of gasoline, diesel fuel or other petroleum hydrocarbons in any
unconfined manner; or (d) that contains or consists of PCBs, asbestos, or urea
formaldehyde foam insulation.
Indebtedness shall mean, with respect to any Person, (a) all items,
except items of capital stock or of surplus or of general contingency or
deferred tax reserves or any minority interest in any Subsidiary of such Person
to the extent such interest is treated as a liability with indeterminate term on
the consolidated balance sheet of such Person, which in accordance with GAAP
would be included in determining total liabilities as shown on the liability
side of a balance sheet of such Person, (b) all obligations secured by any Lien
to which any property or asset owned or held by such Person is subject, whether
or not the obligation secured thereby shall have been assumed, and (iii) to the
extent not otherwise included, all Contractual Obligations of such Person
constituting capitalized leases and all obligations of such Person with respect
to Leases constituting part of a sale and leaseback arrangement.
Instrument shall mean, with respect to any Person, any agreement, bond,
certificate, commitment, contract, debenture, indenture, lease, letter of
credit, memorandum, mortgage, note, notice, permit, plan, purchase or sales
order, document or other writing (whether by formal agreement, letter or
otherwise), or any oral arrangement, understanding or commitment, under which
any debt, liability or other obligation is evidenced, assumed or undertaken, or
any Lien (or right or interest therein) is granted, perfected or exists.
Intangible Assets shall mean all assets and property lacking physical
properties the evidence of ownership of which must customarily be maintained by
independent registration, documentation, certification, recordation or other
means, and shall include, without limitation, concessions, copyrights,
franchises, license, patents, permits, service marks, trademarks, trade names,
and applications with respect to any of the foregoing, technology and know-how.
Interim Operations Agreement shall have the meaning given to it in the
Third Recital.
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Joint Proxy Statement/Prospectus shall have the meaning given to it in
Section 5.1(a).
Key shall have the meaning given to it in the Preamble.
Key Disclosure Schedule shall mean the Key Disclosure Schedule dated as
of the date of this Agreement delivered by Key to the Company.
Key Financial Statements shall have the meaning given to it in Section
4.2.
Key's knowledge (including the term "to the knowledge, information and
belief of Key") means the knowledge of any Key director or executive officer,
and that such director or executive officer, after reasonable inquiry of
appropriate Key personnel and reasonable review of appropriate company records,
shall have reason to believe and shall believe that the subject representation
or warranty is true and accurate as stated.
Key Share Price shall mean the closing price per share for Key Stock on
the American Stock Exchange on the Closing Date or, if no shares shall have
traded on such date, the mean between the closing bid and asking price on such
date.
Key Shares shall have the meaning given to it in the First Recital.
Key Special Meeting shall have the meaning given to it in Section
1.2(b).
Key Stock shall have the meaning given to it in the First Recital.
Law shall mean any (a) administrative, judicial, legislative or other
action, code, consent decree, constitution, decree, directive, enactment,
finding, guideline, law, injunction, interpretation, judgment, order, ordinance,
policy statement, proclamation, promulgation, regulation, requirement, rule,
rule of law, rule of public policy, settlement agreement, statute, or writ or
any Authority, domestic or foreign; (b) the common law, or other legal or
quasi-legal precedent; or (c) arbitrator's, mediator's or referee's award,
decision, finding or recommendation; including, in each such case or instance,
any interpretation, directive, guideline or request, whether or not having the
force of law including, in all cases, without limitation any particular section,
part or provision thereof.
Lease shall mean any lease of property, whether real, personal or
mixed, and all amendments thereto.
Legal Action shall mean, with respect to any Person, any litigation or
legal or other actions, arbitrations, counterclaims, investigations,
proceedings, requests for material information by or pursuant to the order of
any Authority or suits, at law or in arbitration, equity or admiralty, whether
or not purported to be brought on behalf of such Person affecting such Person or
any of such Person's business, property or assets.
Lien shall mean any of the following: mortgage; lien (statutory or
other); preference, priority or other security agreement, arrangement or
interest; hypothecation, pledge or other deposit arrangement; assignment;
charge; levy; executory seizure; attachment; garnishment; encumbrance (including
any easement, exception, variance, reservation or limitation, right of way,
zoning restriction, building or use restriction, and the like); conditional
sale, title retention or other similar agreement, arrangement, device or
restriction; preemptive or similar right; any financing lease involving
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substantially the same economic effect as any of the foregoing; the filing of
any financing statement under the Uniform Commercial Code or comparable law of
any jurisdiction; restriction on sale, transfer, assignment, disposition or
other alienation; or any option, equity, claim or right of or obligation to, any
other Person, of whatever kind and character.
Margin Rules shall mean Regulations G, T, U or X of the Board of
Governors of the Federal Reserve System, 12 C.F.R., parts 207, 220, 221 and 224,
as now in effect.
material or materiality for the purposes of this Agreement, shall,
unless specifically stated to the contrary, be determined without regard to the
fact that various provisions of this Agreement set forth specific dollar
amounts.
Material Agreement or Material Commitment shall mean, with respect to
any Person, any Contractual Obligation which (a) was not entered into in the
ordinary course of business, (b) was entered into in the ordinary course of
business which (i) involved the purchase, sale or lease of goods or materials,
or purchase of services, aggregating more than Fifty Thousand Dollars ($50,000)
during any of the last three fiscal years, (ii) extends for more than three (3)
months, or (iii) is not terminable on thirty (30) days or less notice without
penalty or other payment, (c) involves Indebtedness for Money Borrowed, (d) is
or otherwise constitutes a written agency, dealer, license, distributorship,
sales representative or similar written agreement, or (e) accounted for more
than three percent (3%) of revenues in any of the last three fiscal years or is
likely to account for more than three percent (3%) of revenues during the
current fiscal year.
MGCL shall have the meaning given to it in the First Recital.
Merger shall have the meaning given to it in the First Recital.
Merger Consideration shall have the meaning given to it in Section
2.1(a).
Multiemployer Plan shall mean a Plan which is a "multiemployer plan"
within the meaning of Section 4001(a)3 of ERISA.
New Debt Facility shall have the meaning given to it in Section 6.8.
New Debt Facility Documents shall have the meaning given to it in
Section 6.8.
New Key Warrants shall have the meaning given to it in the First
Recital.
Option Securities shall mean all rights, options and warrants, and
calls or commitments evidencing the right, to subscribe for, purchase or
otherwise acquire shares of capital stock or Convertible Securities, whether or
not the right to subscribe for, purchase or otherwise acquire is immediately
exercisable or is conditioned upon the passage of time, the occurrence or
non-occurrence or the existence or non-existence of some other Event.
Organic Document shall mean, with respect to a Person which is a
corporation, its charter, its by-laws and all stockholder agreements, voting
trusts and similar arrangements applicable to any of its capital stock and, with
respect to a Person which is a partnership, its agreement and certificate of
partnership, any agreements among partners, and any management and similar
agreements between the partnership and any general partners (or any Affiliate
thereof).
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Other Filings shall have the meaning given to it in Section 5.1(c).
Other Transaction shall have the meaning given to it in Section 6.6(c).
parties shall have the meaning given to it in the Preamble.
PBGC shall mean the Pension Benefit Guaranty Corporation and any Entity
succeeding to any or all of its functions under ERISA.
Person shall mean any natural individual or any Entity.
Plan shall mean, with respect to the Company and at a particular time,
any employee benefit plan which is covered by ERISA and in respect of which the
Company or an ERISA Affiliate is (or, if such plan were terminated at such time,
would under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
Private Authorizations shall mean all approvals, concessions, consents,
franchises, licenses, permits, and other authorizations of all Persons (other
than Authorities) including without limitation those with respect to copyrights,
computer software programs, patents, service marks, trademarks, trade names,
technology and know-how.
Registration Rights Agreement shall have the meaning given to it in the
Fourth Recital.
Registration Statement shall have the meaning given to it in Section
5.1(a).
Representatives shall have the meaning given to it in Section 6.1(a).
SEC shall mean the United States Securities and Exchange Commission, or
any successor Authority.
SEC Filings shall have the meaning given to it in Section 5.1(e).
Securities Act shall mean the Securities Act of 1933, and the rules and
regulations of the SEC thereunder, all as from time to time in effect, or any
successor law, rules or regulations, and any reference to any statutory or
regulatory provision shall be deemed to be a reference to any successor
statutory or regulatory provision.
Shelf Registration Statement shall mean the registration statement
(including the prospectus or preliminary prospectus included therein), and all
amendments thereof (including post-effective amendments), filed under the
Securities Act pursuant to the provisions of Section 5.1(d).
Subsidiary shall mean, with respect to a Person, any Entity a majority
of the capital stock ordinarily entitled to vote for the election of directors
of which, or if no such voting stock is outstanding, a majority of the equity
interests of which, is owned directly or indirectly, legally or beneficially, by
such Person or any other Person controlled by such Person.
Surviving Corporation shall have the meaning given to it in Section 1.1
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Tax (and "Taxable", which shall mean subject to Tax), shall mean, with
respect to the Company, (a) all taxes (domestic or foreign), including without
limitation any income (net, gross or other including recapture of any tax items
such as investment tax credits), alternative or add-on minimum tax, gross
income, gross receipts, gains, sales, use, leasing, lease, user, ad valorem,
transfer, recording, franchise, profits, property (real or personal, tangible or
intangible), fuel, license, withholding on amounts paid to or by the Company or
any of its Subsidiaries, payroll, employment, unemployment, social security,
excise, severance, stamp, occupation, premium, environmental or windfall profit
tax, custom, duty or other tax, governmental fee or other like assessment or
charge of any kind whatsoever, together with any interest, levies, assessments,
charges, penalties, addition to tax or additional amount imposed by any Taxing
Authority, (b) any joint or several liability of the Company or any of its
Subsidiaries with any other Person for the payment of any amounts of the type
described in (a) and (c) any liability of the Company or any of its Subsidiaries
for the payment of any amounts of the type described in (a) as a result of any
express or implied obligation to indemnify any other Person.
Tax Claim shall mean any Claim which relates to Taxes, including
without limitation the representations and warranties set forth in Sections 3.11
and 4.11.
Tax Return or Returns shall mean all returns, consolidated or otherwise
(including without limitation information returns), required to be filed with
any Authority with respect to Taxes.
Taxing Authority shall mean any Authority responsible for the
imposition of any Tax.
Termination Date shall have the meaning given to it in Section 8.1.
Transactions shall have the meaning given to it in the Second Recital.
Transmittal Documents shall have the meaning given to it in Section
2.2(b).
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Exhibit A to Annex I
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO
THE DISTRIBUTION HEREOF OR OF THE COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON
EXERCISE HEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE RULES
AND REGULATIONS THEREUNDER. NEITHER THIS WARRANT NOR THE COMMON STOCK OR OTHER
SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933 OR UPON RECEIPT BY THE COMPANY OF AN OPINION SATISFACTORY AS TO FORM, SCOPE
AND SUBSTANCE OF COUNSEL ACCEPTABLE TO THE COMPANY AS TO AN EXEMPTION THEREFROM.
Common Stock Purchase Warrant
[Number of Shares] [Date]
KEY ENERGY GROUP, INC., a Maryland corporation (the "Company"), for
value received, hereby certifies that , or registered assigns, is entitled to
purchase, except to the extent hereinafter referred to, from the Company duly
authorized, validly issued, fully paid and nonassessable shares (the "Warrant
Shares") of Common Stock, par value $.10 per share (the "Common Stock"), of the
Company at the purchase price per share of $6.75 (the "Exercise Price"), at any
time or from time to time prior to 5:00 P.M., Boston, Massachusetts time, on ,
2001 (the "Expiration Date"), all subject to the terms and conditions set forth
below in this Warrant.
This Warrant (this "Warrant" and, together with any such warrants
issued in substitution therefor or issued pursuant to the Asset Purchase
Agreement, the "Warrants") referred to in the Agreement and Plan of Merger dated
as of November , 1995 (as from time to time in effect, the "Asset Purchase
Agreement") between the Company and WellTech, Inc.
SECTION 1. Registration. The Company shall number and register this
Warrant (and any other warrants issued in substitution herefor) in a register as
they are issued. The Company may deem and treat the registered holders of the
Warrants as the absolute owners thereof (notwithstanding any notation of
ownership or other writing thereon made by anyone) for all purposes and shall
not be affected by any notice to the contrary. Notwithstanding the foregoing, a
Warrant, if properly assigned, may be exercised by a new holder without a new
Warrant first having been issued.
SECTION 2. Registration of Transfer and Exchanges. The Company shall
from time to time register the transfer of the Warrants in a Warrant register to
be maintained by the Company upon surrender thereof accompanied by a written
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instrument or instruments of transfer in form reasonably satisfactory to the
Company, duly executed by the registered holder or holders thereof or by the
duly appointed legal representative thereof or by a duly authorized attorney and
upon receipt of any applicable transfer taxes or evidence satisfactory to the
Company that no such tax is due. Upon any such registration of transfer, a new
Warrant shall be issued to the transferee(s) and the surrendered Warrant shall
be canceled and disposed of by the Company.
If such a transfer is not made pursuant to an effective Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
the Warrant holder will, if requested by the Company, deliver to the Company an
opinion of counsel, which counsel and opinion shall be satisfactory in form,
scope and substance to the Company, that the Warrants may be sold publicly
without registration under the Securities Act, as well as:
(a) an investment covenant satisfactory to the Company
signed by the proposed transferee;
(b) an agreement by such transferee to the impression of the
restrictive investment legend set forth at the beginning of this
Warrant; and
(c) an agreement by such transferee to be bound by the
provisions of this Warrant.
This Warrant may be exchanged at the option of the holder(s) hereof,
when surrendered to the Company at its office designated for such purpose (the
address of which is set forth in Section 8) for another Warrant or other
Warrants of like tenor and representing in the aggregate a like number of
Warrants, including, without limitation, upon an adjustment in the number of
Warrant Shares purchasable upon exercise of this Warrant. Warrants surrendered
for exchange shall be canceled and disposed of by the Company.
SECTION 3. Warrants: Exercise of Warrants. Subject to the terms of this
Warrant, the holder of this Warrants shall have the right, which may be
exercised at any time prior to the Expiration Date, to receive from the Company
the number of fully paid and nonassessable Warrant Shares which the holder may
at the time be entitled to receive on such exercise and payment of the Exercise
Price then in effect for such Warrant Shares. No adjustments as to dividends
will be made upon exercise of the Warrants.
This Warrant may be exercised upon surrender hereof to the Company at
its office designated for such purpose (the address of which is set forth in
Section 8) with the form of election to purchase attached hereto duly filled in
and signed, upon payment to the Company of the Exercise Price per Warrant Share,
for the number of Warrant Shares in respect of which this Warrant is then
exercised. Payment of the aggregate Exercise Price shall be made (a) in cash or
by certified or bank cashier's check payable to the order of the Company, or (b)
by delivery to the Company of that number of shares of Common Stock having a
Fair Market Value (as hereinafter defined) equal to the then applicable Exercise
Price multiplied by the number of Warrant Shares then being purchased. In the
alternative, this Warrant may be exercised on a net basis, such that, without
the exchange of any funds, the holder of this Warrant receives that number of
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Warrant Shares subscribed to less that number of shares of Common Stock having
an aggregate Fair Market Value at the time of exercise equal to the aggregate
Exercise Price that would otherwise have been paid by such holder for the number
of Warrant Shares subscribed to. As used herein the term "Fair Market Value", on
a per share basis, means the Closing Price of the Common Stock on the Date of
Exercise. As used herein, the term "Date of Exercise" with respect to any
Warrant means the date on which such Warrant is exercised as provided herein.
For purposes of this Warrant, the "Closing Price" for any date shall mean the
last sale price reported in the Wall Street Journal or other trade publication
regular way or, in case no such reported sale takes place on such date, the
average of the last reported bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is admitted
to trading on any national securities exchange or if such national securities
exchange is not the principal market for the Common Stock, the last sale price
as reported by the National Association of Securities Dealers, Inc. Automated
National Market System ("NASDAQ") or its successor, if any, or if the Common
Stock is not so reported, the average of the reported bid and asked prices in
the over-the-counter market, as furnished by the National Quotation Bureau,
Inc., or if such firm is not then engaged in the business of reporting such
prices, as furnished by any similar firm then engaged in such business and
selected by the Company or, if there is no such firm, as furnished by any NASD
member selected by the Company or, if the Common Stock is not quoted in the
over-the-counter market, the fair value thereof determined in good faith by the
Company's Board of Directors as of a date which is within fifteen (15) days of
the date as of which the determination is to be made.
Subject to the provisions of Section 4, upon such surrender of this
Warrant and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch (and in any event within three (3)
business days) to or upon the written order of the holder, and in the name of
this Warrant holder or its nominee, a certificate or certificates for the number
of full Warrant Shares issuable upon such exercise together with such other
property (including cash) and securities as may be then deliverable upon such
exercise. Such certificate or certificates shall be deemed to have been issued
and the person so named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of this Warrant
and payment of the Exercise Price.
This Warrant shall be exercisable, at the election of the holder
hereof, either in full or from time to time in part, and, in the event that this
Warrant is exercised in respect of fewer than all of the Warrant Shares issuable
on such exercise at any time prior to the Expiration Date, a new Warrant
evidencing the remaining Warrant or Warrants will be issued and delivered
pursuant to the provisions of this Section and of Section 4.
The Company shall not be required to issue fractional Warrant Shares on
the exercise of Warrants. If more than one Warrant shall be presented for
exercise in full at the same time by the same holder, the number of full Warrant
Shares which shall be issuable upon the exercise thereof shall be computed on
the basis of the aggregate number of Warrant Shares purchasable on exercise of
the Warrants so presented. If any fraction of a Warrant Share would, except for
the provisions of this Section, be issuable on the exercise of any Warrants (or
specified portion thereof), the Company shall pay an amount in cash equal to
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the Exercise Price on the day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction.
All Warrants surrendered upon exercise shall be canceled and disposed
of by the Company. The Company shall keep copies of this Warrant and any notices
received hereunder available for inspection by the normal business hours at its
office.
SECTION 4. Payment of Taxes. The Company will pay all stamp taxes in
connection with the issuance, sale, delivery or transfer of the Warrants, as
well as all such taxes attributable to the initial issuance of Warrant Shares
upon the exercise of this Warrant and payment of the Exercise Price.
SECTION 5. Mutilated or Missing Warrants. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, upon delivery of an indemnity
agreement or security satisfactory to the Company in form, scope, substance and
amount, the Company shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrants or in lieu of and substitution for the
Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing
an equivalent number of Warrants .
SECTION 6. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free from preemptive or similar rights, out of the
aggregate of its authorized but unissued capital stock or its authorized and
issued capital stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of each class of capital stock constituting a part of
the Warrant Shares which may then be deliverable upon the exercise of all
outstanding Warrants. The Company shall cause all Warrant Shares of each class
of Common Stock or other securities reserved for issuance upon exercise of the
Warrants to be listed (or to be listed subject to notice of issuance) on each
securities exchange on which such shares of Common Stock or any such other
securities are listed.
The Company or, if appointed, the transfer agent for shares of each
class of Common Stock (the "Transfer Agent") and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of the
Warrants will be irrevocably authorized and directed at all times to reserve
such number of authorized shares as shall be required for such purpose. The
Company will keep a copy of this Warrant on file with the Transfer Agent and
with every subsequent transfer agent for any shares of the Company capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will furnish such Transfer Agent a copy of all notices of
adjustments, and certificates related thereto, transmitted to each holder
pursuant to Section 7.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly issued, fully paid, nonassessable, free of preemptive or
similar rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
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SECTION 7. Adjustments, Notices and Other Events.
(a) Adjustment of Exercise Price. Subject to the provisions
of this Section 7, the Exercise Price in effect from time to time
shall be subject to adjustment, as follows:
(i) In case the Company shall (x) declare a dividend
or make a distribution on the outstanding shares of its Common
Stock in shares of its Common Stock, (y) subdivide or
reclassify the outstanding shares of its Common Stock into a
greater number of shares, or (z) combine or reclassify the
outstanding shares of its Common Stock into a smaller number
of shares, the Exercise Price in effect immediately after the
record date for such dividend or distribution or the effective
date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior
thereto by a fraction, of which (A) the numerator shall be the
number of shares of Common Stock outstanding immediately
before such dividend, distribution, subdivision, combination
or reclassification, and of which (B) the denominator shall be
the number of shares of Common Stock outstanding immediately
after such dividend, distribution, subdivision, combination or
reclassification. Any shares of Common Stock of the Company
issuable in payment of a dividend shall be deemed to have been
issued immediately prior to the record date for such dividend
for purposes of calculating the number of outstanding shares
of Common Stock of the Company under Section 7(a)(ii) and
7(a)(iii) hereof. Such adjustment shall be made successively
whether any event specified above shall occur.
(ii) In case the Company shall fix a record date for
the issuance of rights, options, warrants or convertible or
exchangeable securities to all holders of its Common Stock
entitling them (for a period expiring within forty-five (45)
days after such record date) to subscribe for or purchase
shares of its Common Stock at a price per share less than the
Current Market Price (as such term is defined in Section
7(a)(iv) hereof) of a share of Common Stock of the Company on
such record date, the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the price
determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which (A) the
numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares of
Common Stock which the aggregate offering price of the total
number of shares of Common Stock so offered would purchase at
the Current Market Price per share, and of which (B) the
denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional
shares of Common Stock offered for subscription or purchase.
Such adjustment shall be made successively whenever such a
record date is fixed. To the extent that any such rights,
options, warrants or convertible or exchangeable securities
are not so issued or expire unexercised, the Exercise Price
then in effect shall be readjusted to the Exercise Price which
would then be in effect if such unissued or unexercised
rights, options, warrants or convertible or exchangeable
securities had not been issuable.
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(iii) In case the Company shall fix a record date for
the making of a distribution to all holders of shares of its
Common Stock (A) of shares of any class other than its Common
Stock or (B) of evidences of its indebtedness or (C) of assets
(excluding cash dividends or distributions (other than
extraordinary cash dividends or distributions), and dividends
or distributions referred to in Subsection 7(a)(i) hereof) or
(D) of rights, options, warrants or convertible or
exchangeable securities (excluding those rights, options,
warrants or convertible or exchangeable securities referred to
in Section 7(a)(ii) hereof), then in each such case the
Exercise Price in effect immediately thereafter shall be
determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which (x) the
numerator shall be the total number of shares of Common Stock
outstanding on such record date multiplied by the Current
Market Price (as such term is defined in Section 7(a)(iv)
hereof) per share on such record date, less the aggregate fair
market value as determined in good faith by the Board of
Directors of the Company of said shares or evidences of
indebtedness or assets or rights, options, warrants or
convertible or exchangeable securities so distributed, and of
which (y) the denominator shall be the total number of shares
of Common Stock outstanding on such record date multiplied by
such Current Market Price per share. Such adjustment shall be
made successively whenever such a record date is fixed. In the
event that such distribution is not so made, the Exercise
Price then in effect shall be readjusted to the Exercise Price
which would then be in effect if such record date had not been
fixed.
(iv) For the purpose of any computation under Section
7(a)(ii) or 7(a)(iii) hereof, the "Current Market Price" per
share at any date (the "Computation Date") shall be deemed to
be the average of the daily Closing Prices of the Common Stock
for twenty (20) consecutive Trading Days ending the Trading
Day immediately preceding the Computation Date; provided,
however, that if there shall have occurred prior to the
Computation Date any event described in Subsection 7(a)(i),
7(a)(ii) or 7(a)(iii) which shall have become effective with
respect to market transactions at any time (the "Market-Effect
Date") on or within such 20-day period, the Closing Price for
each Trading Day preceding the Market-Effect Date shall be
adjusted, for purposes of calculating such average, by
multiplying such Closing Price by a fraction, of which (A) the
numerator shall be the Exercise Price as in effect immediately
prior to the Computation Date and of which (B) the denominator
shall be the Exercise Price as in effect immediately prior to
the Market-Effect Date, it being understood that the purpose
of this proviso is to ensure that the effect of such event on
the market price of the Common Stock shall, as nearly as
possible, be eliminated in order that the distortion in the
calculation of the Current Market Price may be minimized.
(b) No Adjustments to Exercise Price. No adjustment in the
Exercise Price in accordance with the provisions of Section 7(a)(i),
7(a)(ii) or 7(a)(iii) hereof need be made unless such adjustment would
amount to a change of at least 1% in such Exercise Price; provided,
however, that the amount by which any adjustment is not made by reason
of the provisions of this Section 7(b) shall be carried forward and
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taken into account at the time of any subsequent adjustment in the
Exercise Price.
(c) Adjustment of Number of Shares. Upon each adjustment of
the Exercise Price pursuant to Section 7(a)(i), 7(a)(ii) or 7(a)(iii)
hereof, each Warrant shall thereupon evidence the right to purchase
that number of Warrant Shares (calculated to the nearest hundredth of a
share) obtained by multiplying the number of Warrant Shares purchasable
immediately prior to such adjustment and dividing the product so
obtained by the Exercise Price in effect immediately after such
adjustment.
(d) Reorganizations. In case of any capital reorganization,
other than in the cases referred to in Section 7(a) hereof, or the
consolidation or merger of the Company with or into another corporation
(other than a merger or consolidation in which the Company is the
continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock or the
conversion of such outstanding shares of Common Stock into shares of
other stock or other securities or property), or the sale or conveyance
of the property of the Company as an entirety or substantially as an
entirety (collectively such actions being hereinafter referred to as
"Reorganizations"), there shall thereafter be deliverable upon exercise
of any Warrant (in lieu of the number of Warrant Shares theretofore
deliverable) the number of shares of stock or other securities or
property to which a holder of the number of Warrant Shares which would
otherwise have been deliverable upon the exercise of such Warrant would
have been entitled upon such Reorganization if such Warrant had been
exercised in full immediately prior to such Reorganization. In case of
any Reorganization, appropriate adjustment, as determined in good faith
by the Board of Directors of the Company, shall be made in the
application of the provisions herein set forth with respect to the
rights and interests of the holder of this Warrant so that the
provisions set forth herein shall thereafter be applicable, as nearly
as possible, in relation to any shares or other property thereafter
deliverable upon exercise of the Warrants. Any such adjustments shall
be made by and set forth in a supplemental agreement prepared by the
Company or any successor thereto, between the Company, or any successor
thereto, and shall for all purposes hereof conclusively be deemed to be
an appropriate adjustment. The Company shall not effect any such
Reorganization, unless upon or prior to the consummation thereof the
successor corporation, or if the Company shall be the surviving
corporation in any such Reorganization and is not the issuer of the
shares of stock or other securities or property to be delivered to
holders of shares of the Common Stock outstanding at the effective time
thereof, then such issuer, shall assume by written instrument the
obligation to deliver to the holder of any Warrants such shares of
stock, securities, cash or other property as such holder shall be
entitled to purchase in accordance with the foregoing provisions.
(e) Verification of Computation. The Company shall select a
firm of independent accountants, which selection (i) may be its regular
firm of independent accountants and (ii) may be changed from time to
time, to verify each computation and/or adjustment made in accordance
with this Section 7. The certificate, report or other written statement
of any such firm shall be conclusive evidence of the correctness of any
computation made under this Section 7. Promptly upon its receipt of
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such certificate, report or statement from such firm of independent
accountants, the Company shall deliver a copy thereof to the holder
of this Warrant.
(f) Notice of Certain Actions. In the event the Company shall:
(i) declare any dividend payable in stock to the
holders of its Common Stock or make any other distribution in
property other than cash to the holders of its Common Stock;
or
(ii) offer to the holders of its Common Stock rights
to subscribe for or purchase any shares of any class of stock
or any other rights or options; or
(iii) effect any reclassification of its Common Stock
(other than a reclassification involving merely the
subdivision or combination of outstanding shares of Common
Stock) or any capital reorganization or any consolidation or
merger (other than a merger in which no distribution of
securities or other property is made to holders of Common
Stock), or any sale, transfer or other disposition of its
property, assets and business substantially as an entirety, or
the liquidation, dissolution or winding up of the Company;
then in each such case, the Company shall cause notice of such proposed
action to be mailed to the holder of this Warrant as hereinafter set
forth in this Section 7(f). Such notice shall specify the date on which
the books of the Company shall close, or a record be taken, for
determining the holders of Common Stock entitled to receive such stock
dividend or other distribution or such rights or options, or the date
on which such reclassification, reorganization, consolidation, merger,
sale, transfer, other disposition, liquidation, dissolution, winding up
or exchange shall take place or commence, as the case may be, and the
date as of which it is expected that holders of record of Common Stock
shall be entitled to receive securities or other property deliverable
upon such action, if any such date has been fixed. Such notice shall be
mailed in the case of any action covered by paragraph (i) or (ii) of
this Section 7(f), at least ten (10) days prior to the record date for
determining holders of the Common Stock for purposes of receiving such
payment or offer, and, in the case of any action covered by paragraph
(iii), at least ten (10) days prior to the earlier of the date upon
which such action is to take place or any record date to determine
holders of Common Stock entitled to receive such securities or other
property.
(g) Certificate of Adjustments. Whenever any adjustment is to
be made pursuant to this Section 7, the Company shall prepare a
Certificate executed by the Chief Financial Officer of the Company,
setting forth such adjustment to be mailed to the holder of this
Warrant at least fifteen (15) days prior thereto, such notice to
include in reasonable detail (i) the events precipitating the
adjustment, (ii) the computation of any adjustments, and (iii) the
Exercise Price and the number of shares or the securities or other
property purchasable upon exercise of each Warrant after giving effect
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to such adjustment. Such Certificate shall be accompanied by the
accountant's verification required by Section 7(e) hereof.
SECTION 8. Notices. Any notice or demand authorized by the Warrants to
be given or made by the registered holder of any Warrant to or on the Company
shall be sufficiently given or made when received at the office of the Company
expressly designated by the Company at its office for purposes of the Warrants
(until Warrant holders are otherwise notified in accordance with this Section by
the Company), as follows:
Key Energy Group, Inc.
257 Livingston Avenue
New Brunswick, NJ 08901
Attention: Francis D. John, President
Any notice pursuant to the Warrants to be given by the Company to the
registered holder(s) of any Warrant shall be sufficiently given when received by
such holder at the address appearing on the Warrant register of the Company
(until the Company is otherwise notified in accordance with this Section by such
holder).
SECTION 9. Cash Distributions and Dividends. If the Company pays a
dividend or makes a distribution to the holders of its Common Stock of any
securities (other than Common Stock) or property (including cash and securities
of other companies) of the Company, or any rights, options or warrants to
purchase securities (other than Common Stock) or property (including securities
of other companies) of the Company, then, simultaneously with the payment of
such dividend or the making of such distribution, and as a condition precedent
to its right to do so, the Company will pay or distribute to the holders of the
Warrants an amount of property (including without limitation cash) and/or
securities (including without limitation securities of other companies) of the
Company as would have been received by such holders had they exercised (whether
or not the Warrants were then exercisable) all of the Warrants immediately prior
to the record date (or other applicable date) used for determining stockholders
of the Company entitled to receive such dividend or distribution.
SECTION 10. No Rights or Liabilities as Stockholder; Information.
Nothing contained in this Warrant shall be construed as conferring upon the
holder hereof the right to vote or to consent as stockholders in respect of the
meetings of stockholders or the election of members of the Board of Directors of
the Company or any other matter, or any rights whatsoever as stockholders of the
Company or as imposing any obligation on such holder to purchase any securities
or as imposing any liabilities on such holder as a stockholder sf the Company,
whether such obligation or liabilities are asserted by the Company or by
creditors of the Company. Notwithstanding the foregoing, the Company will
furnish to each holder of any Warrants, promptly upon their becoming available,
copies of all financial statements, reports, notices and proxy statements sent
or made available generally by the Company to its stockholders or otherwise
filed pursuant to the provisions of the Securities Act or the Securities
Exchange Act of 1934, as amended. The Company shall give to each Warrant holder
written notice of any determination to register any of its Common Stock at the
same
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time that it gives notice to any holder of securities of the Company entitled to
rights to register securities under the Securities Act.
SECTION 11. Amendment and Modification; Waiver. This Warrant may not be
amended or modified except by a written instrument signed by the Company and the
registered holder of this Warrant at the time such amendment or modification is
sought. Any waiver of any term or condition of this Warrant in any one instance
shall not operate as or be deemed to be or construed as a further or continuing
waiver of such term or condition, nor shall any failure at any time or times to
enforce or require performance of any provision hereof operate as a waiver of or
affect in any manner any party's right at a later time to enforce or require
performance of such provision or any other provision hereof.
SECTION 12. Severability. If any provision of this Warrant shall be
held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable
as applied to any particular case in any jurisdiction or jurisdictions, or in
all jurisdictions or in all cases, because of the conflict of any provision with
any constitution or statute or rule of public policy, or for any other reason,
such circumstance shall not have the effect of rendering the provision or
provisions in question invalid, inoperative or unenforceable in any other
jurisdiction or in any other case or circumstance or if rendering any other
provision or provisions herein contained invalid, inoperative or unenforceable
to the extent that such other provisions are not themselves actually in conflict
with such constitution, statute or rule of public policy, but this Warrant shall
be reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision were formed so that it would be valid, operative and enforceable to
the maximum extent permitted in such jurisdiction or in such case.
SECTION 13. Successors. All the covenants and provisions of this
Warrant by or for the benefit of the Company or the Warrant holder shall bind
and inure to the benefit of their respective successors and assigns.
SECTION 14. Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles or conflicts of laws.
SECTION 15. Headings. The headings contained in this Warrant are
inserted for convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by the signature of its duly authorized officer and the corporate seal hereunto
affixed.
KEY ENERGY GROUP, INC.
By:
[Seal] Francis D. John, President
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FORM OF ELECTION TO PURCHASE
(To Be Executed Upon Exercise of Warrant)
The undersigned holder hereby represents that he, she or it is the
registered holder of this Warrant, and hereby irrevocably elects to exercise the
right, represented by this Warrant, to receive shares of Common Stock, $.10 par
value, of KEY ENERGY GROUP, INC., and herewith tenders payment for such shares,
to the order of KEY ENERGY GROUP, INC., the amount of $_____________ in
accordance with the terms hereof. The undersigned requests that a certificate
for such shares be registered in the name of the undersigned or nominee
hereinafter set forth, and further that such certificate be delivered to the
undersigned at the address hereinafter set forth or to such other person or
entity as is hereinafter set forth. If said number of shares is less than all of
the shares of Common Stock purchasable hereunder, the undersigned requests that
a new Warrant representing the remaining balance of such shares be registered in
the name of the undersigned or nominee hereinafter set forth, and further that
such certificate be delivered to the undersigned at the address hereinafter set
forth or to such other person or entity as is hereinafter set forth.
Certificate to be registered as follows:
Certificate to be delivered as follows:
Date:_________________________
__________________________
(Signature must conform in
all respects to the name of
the holder as specified on
the face of the Warrant,
unless Form of Assignment
has been executed)
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FORM OF ASSIGNMENT
[To be executed upon Transfer of Warrant]
For value received, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto the right represented by such
Warrant to purchase ________ shares of Common Stock of KEY ENERGY GROUP, INC.
(the "Company") to which such Warrant relates, and appoints its Attorney to make
such transfer on the books of the Company maintained for such purpose, with full
power of substitution in the premises.
------------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
Warrant)
------------------------------------------
(Street Address)
------------------------------------------
(City), (State) (Zip Code)
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Exhibit B to Annex I
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
KEY ENERGY GROUP, INC.
Key Energy Group, Inc., a Maryland corporation (the "Corporation"),
certifies to the Maryland Department of Assessments and Taxation as follows:
(1) The Corporation desires to amend and restate its Articles of
Incorporation as are currently in effect in accordance with Section 2-609 of the
Maryland General Corporation Law.
(2) These Articles of Amendment and Restatement restate, integrate and
amend provisions of Articles of Incorporation of the Corporation, as heretofore
amended.
(3) The Board of Directors of the Corporation, at a meeting held on
November __, 1995, unanimously adopted a resolution that these Articles of
Amendment and Restatement shall be submitted for shareholder approval as being
advisable and in the best interests of the Corporation.
(4) The Articles of Amendment and Restatement were duly adopted by
shareholders in accordance with Section 2-604 of the Maryland General
Corporation Law.
(5) The address of the principal office of the Corporation is 257
Livingston Avenue, New Brunswick, New Jersey 08901.
(6) The name and the address of the resident agent of the Corporation
within the State of Maryland is The Prentice-Hall Corporation System, Maryland,
11 East Chase Street, Baltimore, Maryland 21202.
The Articles of Incorporation are hereby amended and restated to read
in their entirety as follows:
FIRST: The original Articles of Incorporation of the Corporation were
filed with the State Department of Assessments and Taxation of the State of
Maryland on April 22, 1977, and the Corporation is duly incorporated under
Maryland General Corporation Law.
SECOND: The name of the corporation is:
Key Energy Group, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Maryland General
Corporation Law.
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FOURTH: The present address of the principal office of the Corporation
within the State of Maryland is c/o The Prentice-Hall Corporation System,
Maryland, 11 East Chase Street, Baltimore, Maryland 21202.
FIFTH: (a) The total number of shares of stock of all classes which the
Corporation has authority to issue is Twenty Five Million (25,000,000) shares of
capital stock amounting in aggregate par value to $2,500,000. All of such shares
are initially classified as "Common Stock"(par value $.10 per share). The Board
of Directors may classify and reclassify any unissued shares of capital stock by
setting or changing in any one or more respects the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock,
provided, however, that, notwithstanding anything to the contrary in these
Articles, no such classification or reclassification shall create a class of
stock which shall (i) have more than one vote per share, (ii) be issued in
connection with any so-called "shareholder rights plan", "poison pill" or other
anti-takeover measure, or (iii) be issued for consideration which is less than
fair consideration as determined in good faith by the Corporation's Board of
Directors.
(b) The following is a description of the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the Common
Stock of the Corporation:
(1) Each share of Common Stock shall have one vote, and,
except as otherwise provided in respect of any class of stock hereafter
classified or reclassified, the exclusive voting power for all purposes
shall be vested in the holders of the Common Stock.
(2) Subject to the provisions of law and any preferences of
any class of stock hereafter classified or reclassified, dividends,
including dividends payable in shares of another class of the
Corporation's stock, may be paid on the Common Stock of the Corporation
at such time and in such amounts as the Board of Directors may deem
advisable.
(3) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, the holders of
the Common Stock shall be entitled to share ratably in the net assets
of the Corporation remaining after payment or provision for payment of
the debts and other liabilities of the Corporation and the amount to
which the holders of any class of stock hereafter classified or
reclassified having a preference on distributions in the liquidation,
dissolution or winding up of the Corporation shall be entitled,
together with the holders of any other class of stock hereafter
classified or reclassified having a preference on distributions in the
liquidation, dissolution or winding up of the Corporation.
(c) Subject to the foregoing, the power of the Board of Directors to
classify and reclassify any of the shares of capital stock shall include,
without limitation, subject to the provisions of these Articles of Amendment and
Restatement, as from time to time amended (the "Charter"), authority to classify
or reclassify any unissued shares of such stock into a class or classes of
preferred stock, preference stock, special stock or other stock, and to divide
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and classify shares of any class into one or more series of such class, by
determining, fixing, or altering one or more of the following:
(1) The distinctive designation of such class or series and
the number of shares to constitute such class or series; provided,
however, that, unless otherwise prohibited by the terms of such or any
other class or series, the number of shares of any class or series may
be decreased by the Board of Directors in connection with any
classification or reclassification of unissued shares and the number of
shares of such class or series may be increased by the Board of
Directors in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into shares of
Common Stock or any other class or series shall become part of the
authorized capital stock and be subject to classification and
reclassification as provided in this sub-paragraph.
(2) Whether or not and, if so, the rates, amounts and times at
which, and the conditions under which, dividends shall be payable on
shares of such class or series, whether any such dividends shall rank
senior or junior to or on a parity with the dividends payable on any
other class or series of stock, and the status of any such dividends as
cumulative, cumulative to a limited extent or non-cumulative and as
participating or non-participating.
(3) Whether or not shares of such class or series shall have
voting rights, in addition to any voting rights provided by law and, if
so, the terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or
exchange rate in such events or at such times as the Board of Directors
shall determine.
(5) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall
be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; and whether or not there shall be any sinking fund or
purchase account in respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of the assets of, the Corporation, which
rights may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at
different dates, and whether such rights shall rank senior or junior to
or on a parity with such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable,
while shares of such class or series are outstanding, upon the payment
of dividends or making of distributions on, or the acquisition of, or
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the use of moneys for purchase or redemption of, any stock of the
Corporation, or upon any other action of the Corporation, including
action under this sub- paragraph, and, if so, the terms and conditions
thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with the Maryland General Corporation
Law or any other statutory or decisional law of the State of Maryland,
now or hereafter in force ("Maryland Law") and the Charter.
(d) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
capital stock or of any other charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(2) on a parity with another class or series either as
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(3) junior to another class or series either as to dividends
or upon liquidation, if the rights of the holders of such class or
series shall be subject or subordinate to the rights of the holders of
such other class or series in respect of the receipt of dividends or
the amounts distributable upon liquidation, dissolution or winding up,
as the case may be.
(e) Anything in this Article FIFTH to the contrary notwithstanding, in
no event shall any shares of capital stock entitle the holder thereof, and the
Board of Directors shall have no power or authority to authorize the issue of
any shares of capital stock entitling the holder thereof, to more than (1) vote
per share.
SIXTH: The number of directors of the Corporation shall be five, which
number may be increased or decreased pursuant to the By-Laws of the Corporation,
but shall never be less than the minimum number permitted by Maryland Law. The
names of the directors who will serve until the next annual meeting and until
their successors are elected and qualify are as follows:
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Francis D. John
Van D. Greenfield
William Manly
Morton Wolkowitz
D. Kirk Edwards
SEVENTH: (a) The following provisions are hereby adopted for the
purpose of defining, limiting and regulating the powers of the Corporation and
of the directors and stockholders.
(1) The Board of Directors is hereby empowered to authorize
the issuance from time to time of shares of the Corporation's stock of
any class, whether now or hereafter authorized, or securities
convertible into or exchangeable for, or evidencing the right to
purchase or otherwise acquire, shares of the Corporation's stock of any
class or classes, whether now or hereafter authorized, for such
consideration as may be deemed advisable by the Board of Directors and
without any action by the stockholders.
(2) No holder of any stock or any other securities of the
Corporation, whether now or hereafter authorized, shall have any
preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix; and any stock or other securities which the Board
of Directors may determine to offer for subscription may, as the Board
of Directors in its sole discretion shall determine, be offered to the
holders of any class, series or type of stock or other securities at
the time outstanding to the exclusion of the holders of any or all
other classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall,
consistent with Maryland Law, have power in its sole discretion to
determine from time to time in accordance with sound accounting
practice or other reasonable valuation methods what constitutes annual
or other net profits, earnings, surplus or net assets in excess of
capital; to fix and vary from time to time the amount to be reserved as
working capital, or determine that retained earnings or surplus shall
remain in the hands of the Corporation; to set apart out of any funds
of the Corporation such reserve or reserves in such amount or amounts
and for such proper purpose or purposes as it shall determine and to
abolish any such reserve or any part thereof; to distribute and pay
distributions or dividends in stock, cash or other securities or
property, out of surplus or any other funds or amounts legally
available therefor, at such times and to the stockholders of record on
such dates as it may, from time to time, determine; and to determine
whether and to what extent and at what times and places and under and
subject to what conditions and regulations the books, accounts and
documents of the Corporation, or any of them, shall be open to the
inspection of stockholders, except as otherwise provided by law or by
the By-Laws, and, except as so provided, no stockholder shall have any
right to inspect any book, account or document of the Corporation
unless authorized so to do by resolution of the Board of Director.
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(4) Notwithstanding any provision of Maryland Law requiring
the authorization of any action by a greater proportion than a majority
of the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action shall
be valid and effective if authorized by the affirmative vote of the
holders of a majority of the total number of shares of all classes
outstanding and entitled to vote thereon, except as provided in the
Charter.
(5) The Corporation shall indemnify (A) its directors and
officers, whether serving the Corporation or at its request any other
entity, to the full extent required or permitted by the Maryland Law,
including the advance of expenses under the procedures and to the full
extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the
Corporation's By-Laws and be permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other rights to which
those seeking indemnification may be entitled. The Board of Directors
may take such action as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve and amend from
time to time such by-laws, resolutions or contracts implementing such
provisions or such further indemnification arrangements as may be
permitted by Maryland Law.
(6) No director or officer of this Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director or an officer,
except to the extent that exculpation from liability is not permitted
under Maryland Law as in effect when such breach occurred. No amendment
of the Charter or repeal of any of its provisions shall limit or
eliminate the limitations on liability provided to directors and
officers hereunder with respect to acts or omissions occurring prior to
such amendment or repeal.
(7) The power to adopt, alter and repeal the By-Laws of the
Corporation shall be vested in the Board of Directors of the
Corporation, subject to the rights of stockholders to adopt, alter and
repeal the By-Laws of the Corporation.
(8) The Corporation reserves the right from time to time to
make any amendments to the Charter which may now or hereafter be
authorized by Maryland Law, including any amendments changing the terms
or contract rights, as expressly set forth in any of the Corporation's
outstanding stock by classification, reclassification or otherwise.
(b) The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter, or construed as or deemed by inference or
otherwise in any manner to exclude or limit any powers conferred upon the Board
of Directors under Maryland Law.
EIGHTH: The duration of the Corporation shall be perpetual.
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IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment and Restatement to be signed in its name and on its behalf by its
President and witnessed by its Secretary on __________, 1995.
- ------------------------------- ------------------------------------
Diane Mack, Secretary Francis D. John, President
THE UNDERSIGNED, President of Key Energy Group, Inc., who executed on
behalf of the Corporation Articles of Amendment and Restatement, hereby
acknowledges in the name and on behalf of said Corporation that the foregoing
Articles of Amendment and Restatement are to be the corporate act of said
Corporation and hereby certifies that the matters and facts set forth herein
with respect to authorization and approval thereof are true in all material
respects under the penalties of perjury.
-------------------------------------
Francis D. John, President
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Exhibit C to Annex I
BY-LAWS
OF
KEY ENERGY GROUP, INC.
a Maryland corporation
ARTICLE I.
STOCKHOLDERS
SECTION 1.01. Annual Meeting. The Corporation shall hold an annual
meeting of its stockholders to elect directors and transact any other business
within its powers, either on the first Thursday of November in each year if not
a legal holiday, or on such other day as shall be determined by the Board of
Directors. Except as the Articles of Incorporation of the Corporation, as from
time to time amended (the "Charter"), or the Maryland General Corporation Law or
any other law, statutory or decisional, of the State of Maryland now or
hereafter in force (collectively, "Maryland Law") provide otherwise, any
business may be considered at an annual meeting without the purpose of the
meeting having been specified in the notice. Failure to hold an annual meeting
shall not invalidate the Corporation's existence or affect any otherwise valid
corporate acts.
SECTION 1.02. Special Meeting. At any time in the interval between
annual meetings, a special meeting of the stockholders may be called by the
Chairman of the Board or the President or by a majority of the Board of
Directors by vote at a meeting or in writing (addressed to the Secretary of the
Corporation) with or without a meeting. Special meetings of the stockholders
shall be called by the Secretary on the written request of stockholders entitled
to cast at least twenty-five percent (25%) percent of all the votes entitled to
be cast at the meeting. A request for a special meeting shall state the purpose
of the meeting and the matters proposed to be acted on at it. The Secretary
shall inform the stockholders who make the request of the reasonably estimated
costs of preparing and mailing notice of the meeting and, on payment of these
costs to the Corporation, notify each stockholder entitled to notice of the
meeting. Unless requested by stockholders entitled to cast a majority of all the
votes entitled to be cast at the meeting, the special meeting need not be called
to consider any matter which is substantially the same as a matter voted on at
any special meeting of stockholders held in the preceding twelve months.
SECTION 1.03. Place of Meetings. Meetings of the stockholders shall be
held at such place in the United States as is set from time to time by the Board
of Directors or, in the case of a meeting called by the stockholders, as set by
such stockholders.
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SECTION 1.04. Notice of Meetings; Waiver of Notice. Except as otherwise
required by Maryland Law or the Charter, not less than ten nor more than ninety
days before each stockholders' meeting, the Secretary shall give written notice
of the meeting to each stockholder entitled to vote at the meeting and each
other stockholder entitled to notice of the meeting. The notice shall state the
time and place of the meeting and, if the meeting is a special meeting or notice
of the purpose is required by Maryland Law, the purpose of the meeting. Notice
is given to a stockholder when it is personally delivered to him, her or it,
left at his, her or its residence or usual place of business, or mailed to him,
her or it at his, her or its address as it appears on the records of the
Corporation. Notwithstanding the foregoing provisions, each person who is
entitled to notice waives notice if he, she or it, before or after the meeting,
signs a waiver of the notice which is filed with the records of the stockholders
meetings or is present at the meeting in person or by proxy.
SECTION 1.05. Quorum; Voting. Unless Maryland Law, the Charter or the
By-Laws provide otherwise, at a meeting of stockholders the presence in person
or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at the meeting constitutes a quorum, and a majority of all
votes cast at a meeting at which a quorum is present is sufficient to approve
any matter which properly comes before the meeting, except that a plurality of
all the votes cast at a meeting at which a quorum is present is sufficient to
elect a director.
SECTION 1.06. Adjournments. Whether or not a quorum is present, except
as otherwise provided by Maryland Law or the Charter, a meeting of stockholders
convened on the date for which it was called may be adjourned from time to time
without further notice by a majority vote of the stockholders present in person
or by proxy to a date not more than one hundred twenty days after the original
record date. Any business which might have been transacted at the meeting as
originally notified may be deferred and transacted at any such adjourned meeting
at which a quorum shall be present.
SECTION 1.07. General Right to Vote; Proxies. Unless the Charter
provides for a greater or lesser number of votes per share or limits or denies
voting rights to one or more classes or series, or except as otherwise provided
by Maryland Law, each outstanding share of stock, regardless of class or series,
is entitled to one vote on each matter submitted to a vote at a meeting of
stockholders. In all elections for directors, each share of stock entitled to
vote with respect thereto may be voted for as many individuals as there are
directors to be elected. A stockholder may vote the stock the stockholder owns
of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
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means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a stockholder
at any time without condition or qualification unless the proxy states that it
is irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The interest with
which a proxy may be coupled includes an interest in the stock to be voted under
the proxy or another general interest in the Corporation or its assets or
liabilities.
SECTION 1.08. List of Stockholders. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote at such
meeting, showing the number and class or series of shares held by each and
certified by the transfer agent for such class or by the Secretary, shall be
furnished by the Secretary.
SECTION 1.09. Conduct of Business and Voting. At all meetings of
stockholders, unless the voting is conducted by inspectors, the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies, the acceptance or rejection of votes and
procedures for the conduct of business not otherwise specified by these By-Laws,
the Charter or Maryland Law, shall be decided or determined by the chairman of
the meeting. If demanded by stockholders, present in person or by proxy,
entitled to cast ten percent (10%) in number of votes entitled to be cast, or if
ordered by the chairman, the vote upon any election or question shall be taken
by ballot and, upon like demand or order, the voting shall be conducted by two
inspectors, in which event the proxies and ballots shall be received, and all
questions touching the qualification of voters and the validity of proxies and
the acceptance or rejection of votes shall be decided, by such inspectors.
Unless so demanded or ordered, no vote need be by ballot and voting need not be
conducted by inspectors. The stockholders at any meeting may choose an inspector
or inspectors to act at such meeting, and in default of such election the
chairman of the meeting may appoint an inspector or inspectors. No candidate for
election as a director at a meeting shall serve as an inspector thereat.
SECTION 1.10. Informal Action by Stockholders. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if there is filed with the records of stockholders meetings a written
consent which sets forth the action and is signed and dated by stockholders
holding the minimum number of shares required to execute a written consent in
accordance with the provisions of Maryland Law and entitled to vote on the
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matter and, to the extent required by Maryland Law, a written waiver of any
right to dissent signed by each stockholder entitled to notice of the meeting
but not entitled to vote at it.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. Function of Directors. The business and affairs of the
Corporation shall be managed under the direction of its Board of Directors. All
powers of the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by Maryland
Law or by the Charter or By-Laws.
SECTION 2.02. Number of Directors. The Corporation shall have at least
three directors; provided, however, that, if there is no stock outstanding, the
number of Directors may be less than three but not less than one, and, if there
is stock outstanding and so long as there are less than three stockholders, the
number of directors may be less than three but not less than the number of
stockholders. The Corporation shall have the number of directors provided in the
Charter until changed as herein provided. The number of directors may be set
from time to time by action of the stockholders or of a majority of the entire
Board of Directors, but may not exceed 25 nor be less than the minimum number
permitted herein, but the action may not affect the tenure of office of any
director.
SECTION 2.03. Election and Tenure of Directors. At each annual meeting,
the stockholders shall elect directors to hold office until the next annual
meeting and until their successors are elected and qualify.
SECTION 2.04. Removal of Director. Unless Maryland Law or the Charter
provides otherwise, (a) the stockholders may remove any director, with or
without cause, by the affirmative vote of a majority of all the votes entitled
to be cast for the election of directors, and (b) the Board of Directors may
remove any director with cause by the affirmative vote of a majority of the
remaining directors then in office.
SECTION 2.05. Vacancy on Board. The stockholders may elect a successor
to fill a vacancy on the Board of Directors which results from the removal of a
director. A director elected by the stockholders to fill a vacancy which results
from the removal of a director shall serve for the balance of the term of the
removed director. A majority of the remaining directors, whether or not
sufficient to constitute a quorum, may fill a vacancy on the Board of Directors
which results from any cause (including a removal if the stockholders have not
filled the vacancy) except an increase in the number of directors, and a
majority of the entire Board of Directors may fill a vacancy which results from
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an increase in the number of directors. A director elected by the Board of
Directors to fill a vacancy shall serve until the next annual meeting of
stockholders and until his or her successor is elected and qualifies.
SECTION 2.06. Regular Meetings. After each meeting of stockholders at
which directors shall have been elected, the Board of Directors shall meet as
soon as practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board, the Chairman of the Board or the President, with notice in
accordance with Section 2.08, the Board of Directors shall meet immediately
following the close of, and at the place of, such stockholders' meeting. Any
other regular meeting of the Board of Directors shall be held on such date and
at any place as may be designated from time to time by the Board of Directors.
SECTION 2.07. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or the
President or by a majority of the Board of Directors by vote at a meeting, or in
writing with or without a meeting. A special meeting of the Board of Directors
shall be held on such date and at any place as may be designated from time to
time by the Board of Directors. In the absence of designation such meeting shall
be held at such place as may be designated in the call.
SECTION 2.08. Notice of Meeting. No notice shall be required for
regular meetings for which the time and place have been fixed. Except as
provided in Section 2.07, the Secretary shall give notice to each director of
each special meeting of the Board of Directors. The notice shall state the time
and place of the meeting. Notice is given to a director when it is delivered
personally to him or her, left at his or her residence or usual place of
business, or sent by telegram, cablegram, datagram, facsimile transmission or
other means of electronic transmission or telephone, at least 24 hours before
the time of the meeting or, in the alternative, by mail to his or her address as
it shall appear on the records of the Corporation, at least 72 hours before the
time of the meeting. Unless Maryland Law, the Charter, these By-Laws or a
resolution of the Board of Directors provides otherwise, the notice need not
state the business to be transacted at or the purposes of any regular or special
meeting of the Board of Directors. No notice of any meeting of the Board of
Directors need be given to any director who attends except where a director
attends a meeting for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened, or to any
director who, in writing executed and filed with the records of the meeting
either before or after the holding thereof, waives such notice. Any meeting of
the Board of Directors, regular or special, may adjourn from time to time to
reconvene at the same or some other place, and no notice need be given of any
such adjourned meeting other than by announcement.
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SECTION 2.09 Action by Directors. Unless Maryland Law, the Charter or
these By-Laws require a greater proportion, the action of a majority of the
directors present at a meeting at which a quorum is present is an action of the
Board of Directors. A majority of the entire Board of Directors shall constitute
a quorum for the transaction of business except when a vacancy or vacancies
prevent such majority, whereupon a majority of the directors then in office
shall constitute a quorum, provided that such majority shall constitute at least
one-third of the entire Board of Directors and, in no event, less than two
directors, unless only one director is required to be in office at the time. In
the absence of a quorum, the directors present by majority vote and without
notice other than by announcement may adjourn the meeting from time to time
until a quorum shall attend. At any such adjourned meeting at which a quorum
shall be present, any business may be transacted which might have been
transacted at the meeting as originally notified. Any action required or
permitted to be taken at a meeting of the Board of Directors may be taken
without a meeting, if an unanimous written consent which sets forth the action
is signed and dated by each member of the Board and filed with the minutes of
proceedings of the Board.
SECTION 2.10. Meeting by Conference Telephone. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 2.11. Compensation. By resolution of the Board of Directors a
fixed sum and expenses, if any, for attendance at each regular or special
meeting of the Board of Directors or of committees thereof, and other
compensation for the services as such or on committees of the Board of
Directors, may be paid to directors. Directors who are full-time employees of
the Corporation need not be paid for attendance at meetings of the Board or
committees thereof for which fees are paid to other directors. A director who
serves the Corporation in any other capacity also may receive compensation for
such other services, pursuant to a resolution of the directors.
ARTICLE III.
COMMITTEES
SECTION 3.01. Committees. The Board of Directors may appoint from among
its members an Executive Committee and other committees composed of two or more
directors and delegate to these committees any of the powers of the Board of
Directors, except, unless otherwise specifically permitted by Maryland Law, the
power to declare dividends or other distributions on stock, elect directors,
issue stock other than as provided in the next sentence, recommend to the
stockholders any action which requires stockholder approval, amend these
By-Laws, or approve any merger or share exchange which does not require
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stockholder approval. If the Board of Directors has given general authorization
for the issuance of stock, a committee of the Board, in accordance with a
general formula or method specified by the Board by resolution or by adoption of
a stock option or other plan, may fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors.
SECTION 3.02. Committee Procedure. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority of
those present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint a director to act in the place of an
absent member. Any action required or permitted to be taken at a meeting of a
committee may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed and dated by each member of the committee and
filed with the minutes of the committee. The members of a committee may conduct
any meeting thereof by conference telephone in accordance with the provisions of
Section 2.10.
SECTION 3.03. Emergency. In the event of a state of disaster of
sufficient severity to prevent the conduct and management of the affairs and
business of the Corporation by its directors and officers as contemplated by the
Charter and these By-Laws, any two or more available members of the then
incumbent Executive Committee shall constitute a quorum of that Committee for
the full conduct and management of the affairs and business of the Corporation
in accordance with the provisions of Section 3.01. In the event of the
unavailability, at such time, of a minimum of two members of the then incumbent
Executive Committee, the available directors shall elect an Executive Committee
consisting of any two members of the Board of Directors, whether or not they be
officers of the Corporation, which two members shall constitute the Executive
Committee for the full conduct and management of the affairs of the Corporation
in accordance with the foregoing provisions of this Section. This Section shall
be subject to implementation by resolution of the Board of Directors passed from
time to time for that purpose, and any provisions of these By-Laws (other than
this Section) and any resolutions which are contrary to the provisions of this
Section or to the provisions of any such implementary resolutions shall be
suspended until it shall be determined by any interim Executive Committee acting
under this Section that it shall be to the advantage of the corporation to
resume the conduct and management of its affairs and business under all the
other provisions of these By-Laws.
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ARTICLE IV.
OFFICERS
SECTION 4.01. Executive and Other Officers. The Corporation shall have
a President, a Secretary, and a Treasurer. It may also have a Chairman of the
Board. The Board of Directors shall designate who shall serve as chief executive
officer, who shall have general supervision of the business and affairs of the
Corporation, and may designate a chief operating officer, who shall have
supervision of the operations of the Corporation, subject to the rights and
authority of the chief executive officer. In the absence of any designation by
the Board of Directors, the Chairman of the Board, if there be one, shall serve
as chief executive officer and the President shall serve as chief operating
officer. In the absence of the Chairman of the Board, or if there be none, the
President shall be the chief executive officer. The same person may hold both
offices. The Corporation may also have one or more Vice-Presidents, assistant
officers, and subordinate officers as may be established from time to time by
the Board of Directors. A person may hold more than one office in the
Corporation except that no person may serve concurrently as both President and
Vice- President of the Corporation. The Chairman of the Board, if there be one,
and the President, if designated as the chief executive officer, shall each be a
director; the other officers may be directors.
SECTION 4.02. Chairman of the Board. The Chairman of the Board, if one
be elected, shall preside at all meetings of the Board of Directors and of the
stockholders at which he or she shall be present. Unless otherwise specified by
the Board of Directors, he or she shall be the chief executive officer of the
Corporation and shall perform the duties customarily performed by chief
executive officers and may execute, in the name of the Corporation, all
authorized deeds, mortgages, bonds, contracts or other instruments, except in
cases in which the signing and execution thereof shall have been expressly
delegated to some other officer or agent of the Corporation. In general, he or
she may perform any duties of a chairman of the board and, if so designated, a
chief executive officer and shall perform such other duties and have such other
powers as are from time to time assigned to him or her by the Board of
Directors.
SECTION 4.03. President. Unless otherwise specified by resolution of
the Board of Directors, the President, in the absence of the Chairman of the
Board, shall preside at all meetings of the Board of Directors and of the
stockholders at which he or she shall be present. Unless otherwise specified by
the Board of Directors, the President shall be the chief operating officer of
the Corporation and perform the duties customarily performed by chief operating
officers, and may execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall have been expressly delegated to some other
officer or agent of the Corporation. In general, he or she shall perform such
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other duties customarily performed by a president of a corporation and shall
perform such other duties and have such other powers as are from time to time
assigned to him or her by the Board of Directors or the chief executive officer
of the Corporation.
SECTION 4.04. Vice Presidents. The Vice-President or Vice- Presidents,
at the request of the chief executive officer or the President, or in the
President's absence or during his or her inability to act, shall perform the
duties and exercise the functions of the President, and when so acting shall
have the powers of the President. If there be more than one Vice-President, the
Board of Directors may determine which one or more of the Vice- Presidents shall
perform any of such duties or exercise any of such functions, or if such
determination is not made by the Board of Directors, the chief executive
officer, or if he or she shall fail to do so, the President may make such
determination; otherwise any of the Vice-Presidents may perform any of such
duties or exercise any of such functions. Each Vice-President shall perform such
other duties and have such other powers, and have such additional descriptive
designations in their titles (if any), as are from time to time assigned to them
by the Board of Directors, the chief executive officer, or the President.
SECTION 4.05. Secretary. The Secretary shall keep the minutes of the
meetings of the stockholders, of the Board of Directors and of any committees,
in books provided for the purpose; he or she shall see that all notices are duly
given in accordance with the provisions of the By-Laws or as required by
Maryland Law; he or she shall be custodian of the records of the Corporation; he
or she may witness any document on behalf of the Corporation, the execution of
which is duly authorized, see that the corporate seal is affixed where such
document is required or desired to be under its seal, and, when so affixed, may
attest the same. In general, he or she shall perform such other duties
customarily performed by a secretary of a corporation, and shall perform such
other duties and have such other powers as are from time to time assigned to him
or her by the Board of Directors, the chief executive officer, or the President.
SECTION 4.06. Treasurer. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation, and shall deposit, or cause to be deposited, in the name of the
Corporation, all moneys or other valuable effects in such banks, trust companies
or other depositories as shall, from time to time, be selected by the Board of
Directors; he or she shall render to the chief executive officer, the President
and the Board of Directors, whenever requested, an account of the financial
condition of the Corporation. In general, he or she shall perform such other
duties customarily performed by a treasurer of a corporation, and shall perform
such other duties and have such other powers as are from time to time assigned
to him or her by the Board of Directors, the chief executive officer, or the
President. Unless otherwise specified by the Board of Directors, the Treasurer
shall be the chief financial officer and, in the absence of the election of a
Controller, the chief accounting officer of the Corporation.
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SECTION 4.07. Assistant and Subordinate Officers. The assistant and
subordinate officers of the Corporation are all officers below the office of
Vice-President, Secretary, or Treasurer. The assistant or subordinate officers
shall have such duties as are from time to time assigned to them by the Board of
Directors, the chief executive officer, or the President or in the case of
Assistant Treasurer and Assistant Secretary by the Treasurer and the Secretary,
respectively.
SECTION 4.08. Election, Tenure and Removal of Officers. The Board of
Directors shall elect the officers of the Corporation. The Board of Directors
may from time to time authorize any committee or officer to appoint assistant
and subordinate officers. Election or appointment of an officer, employee or
agent shall not of itself create contract rights. All officers shall be
appointed to hold their offices, respectively, during the pleasure of the Board.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may remove an officer at any time.
The removal of an officer does not prejudice any of his or her contract rights.
The Board of Directors (or, as to any assistant or subordinate officer, any
committee or officer authorized by the Board) may fill a vacancy which occurs in
any office for the unexpired portion of the term.
SECTION 4.09 Compensation. The Board of Directors shall have power to
fix the salaries and other compensation and remuneration, of whatever kind, of
all officers of the Corporation. No officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a director of the
Corporation. The Board of Directors may authorize any committee or officer, upon
whom the power of appointing assistant and subordinate officers may have been
conferred, to fix the salaries, compensation and remuneration of such assistant
and subordinate officers.
ARTICLE V.
DIVISIONAL TITLES
SECTION 5.01. Conferring Divisional Titles. The Board of Directors may
from time to time confer upon any employee of a division of the Corporation the
title of President, Vice President or Treasurer of such division or any other
title or titles deemed appropriate, or may authorize the Chairman of the Board
or the President to do so. Any such titles so conferred may be discontinued and
withdrawn at any time by the Board of Directors, or by the Chairman of the Board
or the President if so authorized by the Board of Directors. Any employee of a
division designated by such divisional title shall have the powers and duties
with respect to such division as shall be prescribed by the Board of Directors,
or, to the extent authorized by the Board of Directors, the Chairman of the
Board or the President.
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SECTION 5.02. Effect of Divisional Titles. The conferring of divisional
titles shall not create an office of the Corporation under Article IV unless
specifically designated as such by the Board of Directors, but any person who is
an officer of the Corporation may also have a divisional title.
ARTICLE VI.
STOCK
SECTION 6.01. Certificates for Stock. Each stockholder is entitled to
certificates which represent and certify the shares of stock he, she or it holds
in the Corporation. Each stock certificate shall include on its face the name of
the Corporation, the name of the stockholder or other person to whom it is
issued, and the class of stock and number of shares it represents. It shall be
in such form, not inconsistent with Maryland Law or the Charter, as shall be
approved by the Board of Directors or any officer or officers designated for
such purpose by the Board of Directors. Each stock certificate shall be signed
by the Chairman of the Board, the President or a Vice-President, and
countersigned by the Secretary, an Assistant Secretary, the Treasurer or an
Assistant Treasurer. Each certificate may be sealed with the actual corporate
seal or facsimile of it or in any other form and the signatures may be either
manual or facsimile signatures. A certificate is valid and may be issued whether
or not an officer who signed it or whose facsimile is affixed thereto is still
an officer when it is issued. No certificate shall be issued for any shares of
stock until such shares are fully paid, except as otherwise authorized by
provisions of Section 2-210 of the Maryland General Corporation Law.
SECTION 6.02. Transfers. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates of stock and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined. Upon compliance with provisions restricting the
transferability of shares of stock, if any, transfers of shares of stock of the
Corporation shall be made only on the stock transfer books of the Corporation by
the record holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the Corporation or with a
transfer agent or a registrar, if any, and on surrender of the certificate or
certificates for such shares of stock properly endorsed and the payment of all
taxes due thereon, if any.
SECTION 6.03. Record Dates or Closing of Transfer Books. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the
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day the record date is fixed nor, subject to Section 1.06 of these By-Laws, more
than ninety days before the date on which the action requiring the determination
will be taken; the transfer books may not be closed for a period longer than
twenty days; and, in the case of a meeting of stockholders, the record date or
the closing of the transfer books shall be at least ten days before the date of
the meeting. If a record date is not set, and, if the stock transfer books are
not closed, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be the later of (i) the close of
business on the day on which notice of the meeting is mailed or (ii) the
thirtieth day before the meeting. Except as otherwise required by Maryland Law
or the Charter, the record date for determining stockholders entitled to receive
payment of a dividend or an allotment of any rights shall be the close of
business on the day on which the resolution of the Board of Directors declaring
the dividend or allotment of rights is adopted, but any such payment or
allotment shall not be made more than sixty days after the date on which the
resolution is adopted.
SECTION 6.04. Stock Ledger. The Corporation shall maintain a stock
ledger which contains the name and address of each stockholder and the number of
shares of stock of each class which the stockholder holds. The stock ledger may
be in written form or in any other form which can be converted within a
reasonable time into written form for visual inspection. The original or a
duplicate of the stock ledger shall be kept at the offices of a transfer agent
for the particular class or series of stock, or, if none, at the principal
office in the State of Maryland or the principal executive offices of the
Corporation.
SECTION 6.05. Certification of Beneficial Owners. The Board of
Directors may adopt by resolution a procedure by which a stockholder of the
Corporation may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may certify, the purpose for which the certification
may be made, the form of certification and the information to be contained in
it, if the certification is with respect to a record date or closing of the
stock transfer books, the time after the record dates or closing of the stock
transfer books within which the certification must be received by the
Corporation, and any other provisions with respect to the procedure which the
Board considers necessary or desirable. On receipt of a certification which
complies with the procedure adopted by the Board of Directors in accordance with
this Section, the person specified in the certification is, for the purpose set
forth in the certification, the holder of record of the specified stock in place
of the stockholder who makes the certification.
SECTION 6.06. Lost Stock Certificates. The Board of Directors may
determine the conditions for issuing a new stock certificate in place of one
which is alleged to have been lost, stolen or destroyed, or the Board of
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Directors may delegate such power to any officer or officers of the Corporation.
In their discretion, the Board of Directors or such officer or officers may
require the owner of the certificate to give bond, with sufficient surety, to
indemnify the Corporation against any loss or claim arising as a result of the
issuance of a new certificate or refuse to issue such new certificate save upon
the order of some court having jurisdiction.
SECTION 6.07. Fractional Shares Interests. The Corporation may, but
shall not be obliged to, issue fractional shares of stock, eliminate a
fractional interest by rounding off to a full share of stock, arrange for the
disposition of a fractional interest by the person entitled to it, pay cash for
the fair value of a fractional share of stock determined as of the time when the
person entitled to receive it is determined, or issue scrip or other evidence of
ownership which shall entitle its holder to exchange such scrip or other
evidence of ownership aggregating a full share for a certificate which
represents the shares, but such scrip or other evidence of ownership shall not,
unless otherwise provided, entitle the holder to exercise any voting right, or
to receive dividends thereon or to participate in any of the assets of the
corporation in the event of liquidation. The Board of Directors may impose any
reasonable condition on the issuance of scrip or other evidence of ownership may
cause such scrip or evidence of ownership to be issued subject to the condition
that it shall become void if not exchanged for a certificate representing a full
share of stock before a specified date or subject to the condition that the
shares for which such scrip or evidence of ownership is exchangeable may be sold
by the Corporation and the proceeds thereof distributed to the holders of such
scrip or evidence of ownership, or subject to a provision for forfeiture of such
proceeds to the Corporation if not claimed within a period of not less than
three years from the date the scrip or other evidence of ownership was
originally issued.
ARTICLE VII.
FINANCE
SECTION 7.01. Checks, Drafts, Etc. All checks, drafts and orders for
the payment of money, notes and other evidences of indebtedness, issued in the
name of the Corporation, shall, unless otherwise provided by resolution of the
Board of Directors, be signed by the chief executive officer, the President, a
Vice- President or an Assistant Vice-President and countersigned by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary.
SECTION 7.02. Annual Statement of Affairs. The chief executive officer
or chief financial officer shall prepare, or cause to be prepared, annually a
full and correct statement of the financial affairs of the Corporation, to
include a balance sheet and statements of operations and cash flow for the
preceding fiscal year. The statement of affairs shall be submitted at the annual
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meeting of the stockholders and, within twenty days after the meeting, placed on
file at the Corporation's principal office.
SECTION 7.03. Fiscal Year. The fiscal year of the Corporation shall be
the twelve calendar months period ending June 30 in each year, unless otherwise
provided by the Board of Directors.
SECTION 7.04. Dividends. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property or in shares of the capital stock of the Corporation, unless such
dividend is contrary to Maryland Law or to a restriction contained in the
Charter.
SECTION 7.05. Pursuant to Section 3-702(b) of the Maryland General
Corporation Law, the acquisition of shares of the Corporation's Common Stock,
$.10 par value per share, (a) by WellTech, Inc. or the then shareholders of
WellTech, Inc. in connection with the sale by WellTech, Inc. to the Corporation
of certain assets used in WellTech's West Texas operations, (b) the acquisition
by the current shareholders or associates of current shareholders of WellTech,
Inc. in connection with the merger between the Corporation and WellTech, Inc.,
or (c) in connection with any other transaction between the Corporation and any
party who becomes a shareholder or an associate of a shareholder as a result of
transactions described in (a) or (b), is and shall be exempt from Subtitle 7 of
the Maryland General Corporation Law; and to the extent, if any, that Section
3-602 of Subtitle 6 of the Maryland General Corporation Law would otherwise
apply, it shall not apply to any business combination between the Corporation
and WellTech, Inc. or the majority shareholder or associates of the majority
shareholder of WellTech, Inc.
ARTICLE VIII.
INDEMNIFICATION
SECTION 8.01. Procedure. Any indemnification, or payment of expenses in
advance of the final disposition of any proceeding, shall be made promptly, and
in any event within sixty days, upon the written request of the director or
officer entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within
sixty days. The Indemnified Party's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be reimbursed by the Corporation. It
shall be a defense to any action for advance for expenses that (a) a
determination has been made that the facts then known to those making the
determination would preclude indemnification or (b) the Corporation has not
received both (i) an undertaking as required by Maryland Law to repay such
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advances in the event it shall ultimately be determined that the standard of
conduct has not been met and (ii) a written affirmation by the Indemnified Party
of such Indemnified Party's good faith belief that the standard of conduct
necessary for indemnification by the Corporation has been met.
SECTION 8.02. Exclusivity, Etc. The indemnification and advance of
expenses provided by the Charter and these By-Laws shall not be deemed exclusive
of any other rights to which a person seeking indemnification or advance of
expenses may be entitled under Maryland Law, or any agreement, vote of
stockholders or disinterested directors or other provision that is consistent
with Maryland Law, both as to action in his or her official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, shall continue in respect of all events occurring
while a person was so acting after such person has ceased to be so acting, and
shall inure to the benefit of the estate, heirs, executors and administrators of
such person. All rights to indemnification and advance of expenses under the
Charter and these By-Laws shall be deemed to be a contract between the
Corporation and each director or officer of the Corporation who serves or served
in such capacity at any time while this By-Law is in effect. Nothing herein
shall prevent the amendment of this By-Law, provided that no such amendment
shall diminish any rights to indemnification or advance of expense of such
director or officer or the obligations of the Corporation arising hereunder with
respect to events occurring, or claims made, while this By-Law or any provision
hereof is in force.
SECTION 8.03. Severability; Definitions. The validity or
unenforceability of any provision of this Article VIII shall not affect the
validity or enforceability of any other provision hereof. The phrase "this
By-Law" in this Article VIII means this Article VIII in its entirety.
ARTICLE IX.
MISCELLANEOUS
SECTION 9.01. Books and Records. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of a Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of these By-Laws
shall be kept at the principal office of the Corporation.
SECTION 9.02. Corporate Seal. The Board of Directors shall provide a
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the Secretary. The Board of Directors may authorize one or more duplicate
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seals and provide for the custody thereof. If the Corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any Maryland Law, rule or regulation relating to a corporate seal to place
the word "Seal" adjacent to the signature of the person authorized to sign the
document on behalf of the Corporation.
SECTION 9.03. Bonds. The Board of Directors may require any officer,
agent or employee of the Corporation to give a bond to the Corporation,
conditioned upon the faithful discharge of his or her duties, with one or more
sureties and in such amount as may be satisfactory to the Board of Directors.
SECTION 9.04. Voting Stock in Other Corporations. Stock of other
corporations or associations, registered in the name of the Corporation, may be
voted by the chief executive officer, the President, a Vice-President, the
Treasurer or a proxy appointed by any of them. The Board of Directors, however,
may by resolution appoint some other person or persons to vote such shares, in
which case such person or persons shall be entitled to vote such shares upon the
production of a certified copy of such resolution.
SECTION 9.05. Mail. Any notice or other document which is required by
these By-Laws to be mailed shall be deposited in the United Sates mails, postage
prepaid.
SECTION 9.06. Execution of Documents. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by Maryland Law to be executed,
acknowledged, or verified by more than one officer.
SECTION 9.07. Amendments. Subject to the provisions of Section 2.02,
(a) any and all provisions of these By-Laws may be altered or repealed and new
by-laws may be adopted at any annual meeting of the stockholders, or at any
special meeting called for the purpose, and (b) the Board of Directors shall
have the power, at any regular or special meeting thereof, to make and adopt new
by-laws, or to amend, alter or repeal any of these By-Laws.
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AMENDMENT NO. 1
to
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 to AGREEMENT AND PLAN OF MERGER dated November 18,
1995 (the "Agreement") by and between Key Energy Group, Inc., a Maryland
corporation ("Key") and WellTech, Inc., a Delaware corporation ("WellTech") is
made and entered into as of this 18th day of January, 1996.
WITNESSETH:
WHEREAS, capitalized terms used herein without definition shall have
the meanings ascribed to them in the Agreement; and
WHEREAS, the parties have determined that it is necessary and advisable
and in their mutual best interests to amend certain provisions of the Agreement.
NOW THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Section 4.15(a) of the Agreement is hereby amended to delete the
period and add the following at the end of the final sentence thereof:
and except for the issuance of warrants to purchase up to
75,000 shares of the common stock, $.10 par value per share,
of Key at $5.00 per share to the lender providing the New
Credit Facility.
2. Section 6.8 of the Agreement is hereby amended as follows:
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(a) In lines 4, 5 and 6 of the first paragraph of Section 6.8, the word
"Debt" shall be deleted and replaced with the word "Credit"; and
(b) In line 3 of subsection (d) of Section 6.8, the word "Debt" shall
be deleted and replaced with the word "Credit".
3. Section 7.2(e) of the Agreement is hereby deleted in its entirety.
4. Section 7.3(d) of the Agreement is hereby deleted in its entirety.
5. Section 7.3(e) of the Agreement is hereby amended as follows:
(a) In line 1 of subsection 7.3(e), the word "additional" shall be
deleted.
(b) In line 5 of subsection 7.3(e), the words "three (3)" shall be
deleted and replaced with the words "two (2)" and the words "five (5)" shall be
deleted and replaced with the words "four (4)". 6. Section 9.2(a) of the
Agreement is hereby amended to delete the name "Lena G. Goldberg, Esq." and
replace it with the name "Norman A. Bikales, Esq." 7. Appendix A to the
Agreement is hereby amended to delete the words "New Debt Facility" and "New
Debt Facility Documents" appearing on page 8 of Appendix A and replace them with
the words "New Credit Facility" and "New Credit Facility Documents",
respectively. 8. Except as specifically amended hereby, the Agreement is hereby
ratified and affirmed in its entirety.
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IN WITNESS WHEREOF, Key and the Company have caused this Amendment No.
1 to Agreement and Plan of Merger to be executed as of the date first written
above by their respective officers thereunto duly authorized.
KEY ENERGY GROUP, INC.
By: /s/ Francis D. John
Name: Francis D. John
Title: President and
Chief Executive Officer
WELLTECH, INC.
By:/s/ W. Clarke Gormley
Name: W. Clarke Gormley
Title: Vice President - Legal
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AMENDMENT NO. 2
to
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 2 to AGREEMENT AND PLAN OF MERGER dated November 18,
1995 (the "Agreement") by and between Key Energy Group, Inc. a Maryland
corporation ("Key"), and WellTech, Inc., a Delaware corporation ("WellTech"), is
made and entered into as of this 29th day of February, 1996.
WITNESSETH:
WHEREAS, capitalized terms used herein without definition shall have
the meanings ascribed to them in the Agreement; and
WHEREAS, the parties have determined that it is necessary and advisable
and in their mutual best interests to amend certain provisions of the Agreement.
NOW THEREFORE, in consideration of the premises, the mutual covenants
and agreements herein contained and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. The first sentence of the third paragraph of Section 8.1(d) of the
Agreement is hereby amended as follows:
Delete "February 29, 1996" and insert "March 29, 1996" in place
thereof.
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2. Except as specifically amended hereby, the Agreement is hereby
ratified and affirmed in its entirety.
IN WITNESS WHEREOF, Key and WellTech have caused this Amendment No. 2
to Agreement and Plan of Merger to be executed as of the date first written
above by their respective officers thereunto duly authorized.
KEY ENERGY GROUP, INC.
By: /s/ Francis D. John
Name: Francis D. John
Title: President and Chief Executive
Officer
WELLTECH, INC.
By: /s/ W. Clarke Gormley
Name: W. Clarke Gormley
Title: Vice President - Legal
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Annex II
SIMMONS & COMPANY
INTERNATIONAL
---------------------------------------------------
December 29, 1995
Board of Directors
Key Energy Group, Inc.
257 Livingston Avenue
New Brunswick, New Jersey 08901
Members of the Board:
You have requested the opinion of Simmons & Company International ("Simmons") as
investment bankers as to the fairness, from a financial point of view, to the
holders of common stock of Key Energy Group, Inc. ("Key" or "the Company") of
the consideration to be paid by Key in the proposed merger of WellTech, Inc.
("WellTech") with and into Key, pursuant to the Agreement and Plan of Merger
("the Agreement"), executed by Key and WellTech ("the Proposed Merger").
As more specifically set forth in the Agreement, in the Proposed Merger shares
of common stock of WellTech ("WellTech Common Stock") will be converted into an
aggregate of 4,929,962 shares of common stock, par value of $0.10 per share, of
Key ("Key Common Stock") and 750,000 warrants to purchase an aggregate of
750,000 shares of Key Common Stock at $6.75 per share ("New Key Warrants"). As
part of the Proposed Merger, 1,429,962 of the 1,635,000 shares of Key Common
Stock owned by WellTech prior to the transaction, and the warrants to purchase
an aggregate of 250,000 shares of Key Common Stock at $5.00 per share held by
WellTech prior to the transaction, will be canceled.
Simmons, as a specialized, energy-related investment banking firm, is engaged
in, among other things, the valuation of businesses and their securities in
connection with mergers and acquisitions, the management and underwriting of
sales of equity and debt to the public and private placements of equity and
debt. In addition, in the ordinary course of business, Simmons may actively
trade the securities of Key for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
In connection with rendering its opinion, Simmons has reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) the financial
statements and other information concerning the Company, including the Annual
Reports on Form 10-K of the Company for each
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<PAGE>
SIMMONS & COMPANY
INTERNATIONAL
Key Energy Group, Inc.
December 29, 1995
Page 2
of the years in the three-year period ended June 30, 1995 and the Quarterly
Report on Form 10-Q of the Company for the quarter ended September 30, 1995;
(iii) certain near-term forecasts and other internal information, primarily
financial in nature, concerning the business and operations of the Company
furnished by the Company for purposes of Simmons' analysis; (iv) certain
publicly available information concerning the trading of, and the trading market
for, Key Common Stock; (v) certain information concerning WellTech, including
the audited financial statements for each of the years in the three-year period
ended December 31, 1994 and certain unaudited financial statements, prepared by
WellTech, for interim periods during the year ended December 31, 1994 and the
ten months ended October 31, 1995; (vi) certain near-term forecasts and other
internal information, primarily financial in nature, concerning the business and
operations of WellTech furnished by WellTech for purposes of Simmons' analysis;
(vii) certain publicly available information with respect to certain other
companies that Simmons believes to be comparable to the Company or WellTech and
the trading markets for certain of such other companies' securities; (viii)
certain publicly available information concerning the estimate of the future
operating performance of the Company and the comparable companies prepared by
industry experts unaffiliated with either the Company or WellTech; and (ix)
certain publicly available information concerning the nature and terms of
certain other transactions considered relevant to the inquiry. Simmons has also
met with certain officers and employees of the Company and WellTech to discuss
the foregoing, as well as other matters believed relevant to the inquiry.
In arriving at its opinion, Simmons has assumed and relied upon the accuracy and
completeness of all of the financial and other information provided or publicly
available, including, without limitation, information with respect to the amount
and timing of cost savings pursuant to the Proposed Merger provided by the
Company and WellTech, and has not attempted independently to verify any of such
information. Simmons has not conducted a physical inspection of any of the
assets, properties or facilities of the Company or WellTech, nor has Simmons
made or obtained any independent evaluations or appraisals of any such assets,
properties or facilities.
In conducting its analysis and arriving at its opinion expressed herein, Simmons
has considered such financial and other factors as it deemed appropriate under
the circumstances including, among others, the following: (i) the historical and
current financial position and results of the Company and WellTech; (ii) the
business prospects of the Company and WellTech; (iii) estimates of pro forma
combination benefits pursuant to the Proposed Merger prepared by the Company and
WellTech; (iv) the historical and current market for Key Common Stock and for
the equity securities of certain other companies believed to be comparable to
the Company or WellTech; (v) the respective contributions in terms of various
financial measures of the Company and WellTech to the combined company, and the
relative ownership of Key after the
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<PAGE>
SIMMONS & COMPANY
INTERNATIONAL
Key Energy Group, Inc.
December 29, 1995
Page 3
proposed transaction by the current holders of Key Common Stock and WellTech
Common Stock; (vi) the pro forma effect of the transaction on Key's
capitalization ratios, earnings per share and cash flow per share; and (vii) the
nature and terms of certain other acquisition transactions that Simmons believes
to be relevant. Simmons has also taken into account its assessment of general
economic, market and financial conditions and its experience in connection with
similar transactions and securities' valuation generally. Simmons' opinion
necessarily is based upon conditions as they exist and can be evaluated on, and
on the information made available at, the date hereof. Simmons does not express
any opinion as to the price or range of prices at which the shares of Key Common
Stock will trade subsequent to the consummation of the Proposed Merger.
Simmons is acting as financial advisor to the Company in the transaction and
will receive a customary fee for its services.
Based upon and subject to the foregoing, Simmons is of the opinion, as
investment bankers, that the consideration to be paid by the Company in the
proposed transaction is fair, from a financial point of view, to holders of Key
Common Stock.
Sincerely,
SIMMONS & COMPANY INTERNATIONAL
Ben A. Guill
Managing Director
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<PAGE>
Annex III
DELAWARE GENERAL CORPORATION LAW
SECTION 262 --- APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the marking of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in 1 subsections (f) or (g) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement merger or consolidation pursuant to ss.ss.251, 252, 254,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger of consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on any
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
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<PAGE>
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts described in
the foreign subparagraphs a., b. and c. of this paragraph.
(3) In the event of all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss.253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights sunder this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
or incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
this shares shall deliver to the corporation, before the taking of the vote on
the merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to ss.228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
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<PAGE>
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving of resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger of
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsection (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statements shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisals under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
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appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolation, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining such fair value, the
Court shall taken into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors including the rate
of interest which the surviving or resulting corporation would have had to pay
to borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertified stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may e enforced, whether such surviving or
resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceedings including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger of consolidation); provided,
however, that if no petition for an appraisal shall be field within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
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an appraisal and an acceptance of the merger of consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objection stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (last amended by Ch.
79. L. '95, eff. 7-1-95.)
AIII-5
<PAGE>
KEY ENERGY GROUP, INC.
PROXY FOR SPECIAL MEETING IN LIEU OF THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 26, 1996
The undersigned, revoking all prior proxies, hereby constitutes and
appoints Francis D. John, Danny R. Evatt and Van D. Greenfield, and each of
them, as the true and lawful attorneys and proxies for the undersigned, with
full power of substitution, to vote all shares of Common Stock, par value $.10
per share (the "Common Stock"), of Key Energy Group, Inc. (the "Company") that
the undersigned is entitled to vote at the Special Meeting in Lieu of Annual
Meeting of Stockholders the Company to be held at the Hyatt Regency, Two Albany
Street, New Brunswick, New Jersey on March 26, 1996 at 11:00 a.m., local time,
or at any adjournment thereof, upon such business as may properly come before
the meeting or any adjournment including, without limiting such general
authorization, the following proposals described in the accompanying Joint Proxy
Statement-Prospectus:
1. FOR o AGAINST o ABSTAIN o Approval of the Agreement and Plan of Merger,
pursuant to which Welltech, Inc. will merge
with and into the Company (the "Merger").
2. FOR o AGAINST o ABSTAIN o Approval of an amendment to the Company's
Articles of Incorporation to amend and
restate said Articles in their entirety,
including an increase in the total number of
authorized shares of the Common Stock from
10,000,000 to 25,000,000 and a provision
permitting the Board to classify and
reclassify unissued shares of capital stock
of the Company.
3. FOR o AGAINST o ABSTAIN o If the Merger is consummated, to increase
the size of the Board to six persons and
elect Francis D. John, Van D. Greenfield,
William Manly, Morton Wolkowitz, W. Phillip
Marcum and Kevin P. Collins as the Company's
Directors, each to serve as a Director for a
term expiring at the 1996 Annual Meeting of
Stockholders of the Company or when their
successors are duly elected and qualified.
If the Merger is not consummated,
to elect Francis D. John, Van D. Greenfield,
William Manly, Morton Wolkowitz and D. Kirk
Edwards as the Company's Directors, each to
serve as a Director for a term expiring at
the 1996 Annual Meeting of Stockholders of
the Company or when their successors are
duly elected and qualified.
To withhold authority to elect any Director nominee, write that
person's name in the space provided below:
(continued, and to be signed on reverse side)
(continued from other side)
<PAGE>
4. FOR o AGAINST o ABSTAIN o Approval of the Key 1995 Stock Option Plan
covering an aggregate of 1,150,000 shares of
Common Stock.
5. FOR o AGAINST o ABSTAIN o Approval of the Key 1995 Outside Directors
Stock Option Plan covering an
aggregate of 300,000 shares of
Common Stock.
UNLESS OTHERWISE SPECIFIED ON THE REVERSE SIDE, THIS PROXY WILL BE
VOTED FOR THE DIRECTORS SPECIFIED ABOVE IN PROPOSAL 3 AND FOR PROPOSALS 1, 2, 4
and 5. THE PERSONS WHO HAVE BEEN NAMED PROXIES HAVE AUTHORITY, WHICH THEY INTEND
TO EXERCISE, TO VOTE IN FAVOR OF THE PROPOSALS REFERRED TO AND ANY OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
This Proxy should be dated,
signed by the shareholder
exactly as printed at the left
and returned promptly in the
enclosed envelope. Persons
signing in a fiduciary
capacity should so indicate.
Dated: , 1996
(Signature)
(Signature)
<PAGE>
PART II: Information Not Required In The Prospectus
Item 20. Indemnification of Directors and Officers
Section 2-418 of MGCL provides that a corporation may indemnify any
director made a party to any proceeding against judgments, penalties, fines,
settlements and reasonable expenses, unless it is established that (i) the act
or omission of the director was material to the matter giving rise to the
proceeding, and was committed in bad faith or was a result of deliberate
dishonesty, (ii) director actually received an improper personal benefit or
(iii) in a criminal proceeding,the director had reasonable cause to believe the
act or omission was unlawful. A director may not be indemnified in any
proceeding charging improper personal benefit, if director was adjudged to be
liable and, in a derivative action, there shall not be indemnification if the
director has been adjudged liable to the corporation. A director or officer of a
corporation who has been successful in the defense of any proceeding shall be
indemnified against reasonable costs incurred in such defense. Indemnification
may not be made unless authorized pursuant to a determination that the director
has met the requisite standard of conduct.
Article Seventh of the Key Charter provides that Key shall , to the
fullest extent permitted by Maryland Law, indemnify any and all persons whom it
shall have the power to indemnify under such law from and against any and all of
the expenses, liabilities or other matters referred to in or covered by Maryland
Law, and the indemnification provided for therein shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under any By-Law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office and shall continue as to a corporate representative who has
agreed to be a director, officer, employer or agent and shall inure to the
benefit of the heirs and personal representatives of such corporate
representative. Furthermore, a director or officer of Key shall not be liable to
Key or its stockholders for monetary damages for breach of fiduciary duty as a
director or an officer, except to the extent that exculpation from liability is
not permitted under Maryland Law as in effect when such breach occurred. No
amendment or repeal of this provision shall apply to or have any effect on the
liability or alleged liability of any director or officer of Key for or with
respect to any acts or omissions of such director or officer occurring prior to
such amendment or repeal.
Item 21. Exhibits and Financial Statement Schedules.
Exhibit No Item Exhibit
- ---------- ---- -------
2.1 Agreement and Plan of Merger Filed herewith as
between Key and WellTech, Annex I to the Proxy
dated as of November 18, 1995, Statement -Prospectus
as amended
3.1 Amended and Restated Articles Filed herewith as
of Incorporation of Key Exhibit B to Annex I
to the Proxy
Statement-Prospectus
II-1
<PAGE>
Exhibit No Item Exhibit
- ---------- ---- -------
3.2 Amended and Restated By-Laws Filed herewith as
of Key Exhibit C to Annex I
to the Proxy
Statement-Prospectus
4.1 Common Stock Purchase Warrant Filed herewith as
to Purchase Key Common Stock Exhibit A to Annex I
issued in connection with to the Proxy
Merger Statement-Prospectus
4.2 Common Stock Purchase Warrant Filed herewith as
to Purchase 75,000 shares of Exhibit 4.2
Key Common Stock issued to CIT
Group/Credit Finance
4.3 Form of Registration Rights Previously filed with
Agreement between Key and the original
Certain Holders of Key Common Registration Statement
Stock
4.4 Registration Rights Agreement, Incorporated by
dated as of August 5, 1994, Reference to Exhibit
between Key and WellTech 10(a) of Key's Report
on Form 8-K dated
August 17, 1994
4.5 Registration Rights Agreement, Incorporated by
dated as of March 30, 1995, Reference to Exhibit
between Key, Clint Hurt & 10(d) of the Key's
Associates, Inc. and Mr. Clint Report on Form 10-K
Hurt dated June 30, 1995
4.6 Registration Rights Agreement Filed herewith as
dated as of January 19, 1996 Exhibit 4.6
between Key and CIT
5.1 Opinion of Sullivan & Filed herewith as
Worcester LLP Exhibit 5.1
5.2 Opinion of Piper & Marbury Filed herewith as
L.L.P. Exhibit 5.2
II-2
<PAGE>
Exhibit No Item Exhibit
- ---------- ---- -------
8 Opinion of Sullivan & Filed herewith as
Worcester LLP Exhibit 8
as to tax matters
10.1 Loan Agreement between Odessa Incorporated by
Exploration, Key and Norwest Reference to Exhibit
Bank Texas, dated as of March 10(g) of the Key's
30, 1995 Report on Form 10-K
dated June 30, 1995
10.2 Loan Agreement between Clint Incorporated by
Hurt Drilling, Key and Norwest Reference to Exhibit
Bank Texas, dated as of March 10(g) of Key's Report
30, 1995 on Form 10-K dated
June 30, 1995
10.3 Second Amended and Restated Filed herewith as
Loan Agreement and Security Exhibit 10.3
Agreement between Key, Yale E.
Key, Clint Hurt and CIT
Group/Credit Finance
10.4 Cross-Guaranty and Cross- Filed herewith as
Collateralization Agreement Exhibit 10.4
between Key, Yale E. Key,
Clint Hurt, WellTech and CIT
10.5 Asset Purchase Agreement, Incorporated by
dated as of March 30, 1995, Reference to Exhibit
between Key, Clint Hurt & 10(e) of Key's Report
Associates, Inc. and Mr. Clint on Form 10-K dated
Hurt June 30, 1995.
10.6 Employment Agreement between Incorporated by
Francis D. John and Key, dated Reference to Exhibit
as of July 1, 1995, as amended 10.1 of Key's Report
on Form 10-KSB/A dated
October 31, 1995
10.7 Employment Agreement between Incorporated by
Danny R. Evatt and Key, dated Reference to Exhibit
as of July 1, 1995 10.3 of Key's Report
on Form 10-KSB/A dated
October 31, 1995
II-3
<PAGE>
Exhibit No Item Exhibit
- ---------- ---- -------
10.8 Employment Agreement between Incorporated by
C. Ron Laidley and Key, dated Reference to Exhibit
as of July 1, 1995 10.2 of Key's Report
on Form 10-KSB/A dated
October 31, 1995
10.9 Key 1995 Stock Option Plan Previously filed with
the original
Registration Statement
10.10 Key Outside Directors Stock Previously filed with
Option Plan the original
Registration Statement
10.11 Interim Operations Agreement Previously filed with
between Key and WellTech, the original
dated as of November 18, 1995, Registration Statement
as amended
11 Statement re computation of Previously filed with
per share earnings the original
Registration Statement
21 Subsidiaries of Key Previously filed with
the original
Registration Statement
23.1 Consent of Sullivan & Contained in Exhibits
Worcester LLP 5.1 and 8
23.2 Consent of Piper & Marbury, Contained in
L.L.P. Exhibit 5.2
23.3 Consent of KPMG Peat Marwick Filed herewith as
LLP Exhibit 23.3
23.4 Consent of Arthur Andersen LLP Filed herewith as
Exhibit 23.4
23.5 Consent of Coopers & Lybrand, L.L.P. Filed herewith as
Exhibit 23.5
23.6 Consent of W. Phillip Marcum Filed herewith as
Exhibit 23.6
23.7 Consent of Kevin P. Collins Filed herewith as
Exhibit 23.7
23.8 Consent of Victor J. Sirgo, Filed herewith as
P.E. Exhibit 23.8
25 Power of Attorney Filed as Page II-5
of the original
Registration Statement
Item 22. Undertakings.
(a) The undersigned Registrant hereby undertakes;
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act;
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the formation set forth in the
registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities offered therein, and the offering of
such securities being registered which remain unsold at the termination
of the offering.
(b) (1) The undersigned Registrant hereby undertakes as follows: that
prior to any public offering of the securities registered hereunder
through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be underwriter
within the meaning of Rule 143(c), the issuer undertakes that such
information called for by the applicable registration form with respect
to reofferings by persons who may be deemed underwriters, in addition
to the information called for by other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the Securities
Act and is used in connection with an offering of securities subject to
Rule 415, will be filed as apart of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 15 of this
registration statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the Securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and Key
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Key Energy Group, Inc. has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
Brunswick, State of New Jersey, on this 1st day of March, 1996.
KEY ENERGY GROUP, INC.
By: /S/ Francis D. John
Name: Francis D. John
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 relating to Common Stock and Warrants to
Purchase Common Stock has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/S/ Francis D. John President, Chief Executive March 1, 1996
Francis D. John Officer, Chief Financial
Officer and Director
/S/William Manly* Director March 1, 1996
William Manly
/S/ Morton Wolkowitz* Director March 1, 1996
Morton Wolkowitz
/S/Van D. Greenfield* Director March 1, 1996
Van D. Greenfield
/S/D. Kirk Edwards* Director March 1, 1996
D. Kirk Edwards
/S/Danny R. Evatt* Chief Accounting Officer March 1, 1996
Danny R. Evatt and Treasurer
* By: /S/Francis D. John
Francis D. John
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit No Item Exhibit
- ---------- ---- -------
2.1 Agreement and Plan of Merger Filed herewith as
between Key and WellTech, Annex I to the Proxy
dated as of November 18, 1995, Statement -Prospectus
as amended
3.1 Amended and Restated Articles Filed herewith as
of Incorporation of Key Exhibit B to Annex I
to the Proxy
Statement-Prospectus
3.2 Amended and Restated By-Laws Filed herewith as
of Key Exhibit C to Annex I
to the Proxy
Statement-Prospectus
4.1 Common Stock Purchase Warrant Filed herewith as
to Purchase Key Common Stock Exhibit A to Annex I
issued in connection with to the Proxy
Merger Statement-Prospectus
4.2 Common Stock Purchase Warrant Filed herewith as
to Purchase 75,000 shares of Exhibit 4.2
Key Common Stock issued to CIT
Group/Credit Finance
4.3 Form of Registration Rights Previously filed with
Agreement between Key and the original
Certain Holders of Key Common Registration Statement
Stock
4.4 Registration Rights Agreement, Incorporated by
dated as of August 5, 1994, Reference to Exhibit
between Key and WellTech 10(a) of Key's Report
on Form 8-K dated
August 17, 1994
4.5 Registration Rights Agreement, Incorporated by
dated as of March 30, 1995, Reference to Exhibit
between Key, Clint Hurt & 10(d) of the Key's
Associates, Inc. and Mr. Clint Report on Form 10-K
Hurt dated June 30, 1995
4.6 Registration Rights Agreement Filed herewith as
dated as of January 19, 1996 Exhibit 4.6
between Key and CIT
5.1 Opinion of Sullivan & Filed herewith as
Worcester LLP Exhibit 5.1
5.2 Opinion of Piper & Marbury Filed herewith as
L.L.P. Exhibit 5.2
-1-
<PAGE>
Exhibit No Item Exhibit
- ---------- ---- -------
8 Opinion of Sullivan & Filed herewith as
Worcester LLP Exhibit 8
as to tax matters
10.1 Loan Agreement between Odessa Incorporated by
Exploration, Key and Norwest Reference to Exhibit
Bank Texas, dated as of March 10(g) of the Key's
30, 1995 Report on Form 10-K
dated June 30, 1995
10.2 Loan Agreement between Clint Incorporated by
Hurt Drilling, Key and Norwest Reference to Exhibit
Bank Texas, dated as of March 10(g) of Key's Report
30, 1995 on Form 10-K dated
June 30, 1995
10.3 Second Amended and Restated Filed herewith as
Loan Agreement and Security Exhibit 10.3
Agreement between Key, Yale E.
Key, Clint Hurt and CIT
Group/Credit Finance
10.4 Cross-Guaranty and Cross- Filed herewith as
Collateralization Agreement Exhibit 10.4
between Key, Yale E. Key,
Clint Hurt, WellTech and CIT
10.5 Asset Purchase Agreement, Incorporated by
dated as of March 30, 1995, Reference to Exhibit
between Key, Clint Hurt & 10(e) of Key's Report
Associates, Inc. and Mr. Clint on Form 10-K dated
Hurt June 30, 1995.
10.6 Employment Agreement between Incorporated by
Francis D. John and Key, dated Reference to Exhibit
as of July 1, 1995, as amended 10.1 of Key's Report
on Form 10-KSB/A dated
October 31, 1995
10.7 Employment Agreement between Incorporated by
Danny R. Evatt and Key, dated Reference to Exhibit
as of July 1, 1995 10.3 of Key's Report
on Form 10-KSB/A dated
October 31, 1995
-2-
<PAGE>
Exhibit No Item Exhibit
- ---------- ---- -------
10.8 Employment Agreement between Incorporated by
C. Ron Laidley and Key, dated Reference to Exhibit
as of July 1, 1995 10.2 of Key's Report
on Form 10-KSB/A dated
October 31, 1995
10.9 Key 1995 Stock Option Plan Previously filed with
the original
Registration Statement
10.10 Key Outside Directors Stock Previously filed with
Option Plan the original
Registration Statement
10.11 Interim Operations Agreement Previously filed with
between Key and WellTech, the original
dated as of November 18, 1995, Registration Statement
as amended
11 Statement re computation of Previously filed with
per share earnings the original
Registration Statement
21 Subsidiaries of Key Previously filed with
the original
Registration Statement
23.1 Consent of Sullivan & Contained in Exhibits
Worcester LLP 5.1 and 8
23.2 Consent of Piper & Marbury, Contained in
L.L.P. Exhibit 5.2
23.3 Consent of KPMG Peat Marwick Filed herewith as
LLP Exhibit 23.3
23.4 Consent of Arthur Andersen LLP Filed herewith as
Exhibit 23.4
23.5 Consent of Coopers & Lybrand, L.L.P. Filed herewith as
Exhibit 23.5
23.6 Consent of W. Phillip Marcum Filed herewith as
Exhibit 23.6
23.7 Consent of Kevin P. Collins Filed herewith as
Exhibit 23.7
23.8 Consent of Victor J. Sirgo, Filed herewith as
P.E. Exhibit 23.8
25 Power of Attorney Filed as Page II-5
of the original
Registration Statement
-3-
Exhibit 4.2
THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO
THE DISTRIBUTION HEREOF OR OF THE COMMON STOCK OR OTHER SECURITIES ISSUABLE UPON
EXERCISE HEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE RULES
AND REGULATIONS THEREUNDER. NEITHER THIS WARRANT NOR THE COMMON STOCK OR OTHER
SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933 OR UPON RECEIPT BY THE COMPANY OF AN OPINION SATISFACTORY AS TO FORM, SCOPE
AND SUBSTANCE OF COUNSEL ACCEPTABLE TO THE COMPANY AS TO AN EXEMPTION THEREFROM.
Common Stock Purchase Warrant
[Number of Shares] [Date]
KEY ENERGY GROUP, INC., a Maryland corporation (the "Company"), for
value received, hereby certifies that , or registered assigns, is entitled to
purchase, except to the extent hereinafter referred to, from the Company duly
authorized, validly issued, fully paid and nonassessable shares (the "Warrant
Shares") of Common Stock, par value $.10 per share (the "Common Stock"), of the
Company at the purchase price per share of $6.75 (the "Exercise Price"), at any
time or from time to time prior to 5:00 P.M., Boston, Massachusetts time, on ,
2001 (the "Expiration Date"), all subject to the terms and conditions set forth
below in this Warrant.
This Warrant (this "Warrant" and, together with any such warrants
issued in substitution therefor or issued pursuant to the Agreement and Plan of
Merger dated as of November 18, 1995 between the Company and WellTech, Inc., the
"Warrants").
SECTION 1. Registration. The Company shall number and register this
Warrant (and any other warrants issued in substitution herefor) in a register as
they are issued. The Company may deem and treat the registered holders of the
Warrants as the absolute owners thereof (notwithstanding any notation of
ownership or other writing thereon made by anyone) for all purposes and shall
not be affected by any notice to the contrary. Notwithstanding the foregoing, a
Warrant, if properly assigned, may be exercised by a new holder without a new
Warrant first having been issued.
SECTION 2. Registration of Transfer and Exchanges. The Company shall
from time to time register the transfer of the Warrants in a Warrant register to
be maintained by the Company upon surrender thereof accompanied by a written
<PAGE>
instrument or instruments of transfer in form reasonably satisfactory to the
Company, duly executed by the registered holder or holders thereof or by the
duly appointed legal representative thereof or by a duly authorized attorney and
upon receipt of any applicable transfer taxes or evidence satisfactory to the
Company that no such tax is due. Upon any such registration of transfer, a new
Warrant shall be issued to the transferee(s) and the surrendered Warrant shall
be canceled and disposed of by the Company.
If such a transfer is not made pursuant to an effective Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
the Warrant holder will, if requested by the Company, deliver to the Company an
opinion of counsel, which counsel and opinion shall be satisfactory in form,
scope and substance to the Company, that the Warrants may be sold publicly
without registration under the Securities Act, as well as:
(a) an investment covenant satisfactory to the Company signed by the
proposed transferee;
(b) an agreement by such transferee to the impression of the
restrictive investment legend set forth at the beginning of this Warrant; and
(c) an agreement by such transferee to be bound by the provisions of
this Warrant.
This Warrant may be exchanged at the option of the holder(s) hereof,
when surrendered to the Company at its office designated for such purpose (the
address of which is set forth in Section 8) for another Warrant or other
Warrants of like tenor and representing in the aggregate a like number of
Warrants, including, without limitation, upon an adjustment in the number of
Warrant Shares purchasable upon exercise of this Warrant. Warrants surrendered
for exchange shall be canceled and disposed of by the Company.
SECTION 3. Warrants: Exercise of Warrants. Subject to the terms of this
Warrant, the holder of this Warrants shall have the right, which may be
exercised at any time prior to the Expiration Date, to receive from the Company
the number of fully paid and nonassessable Warrant Shares which the holder may
at the time be entitled to receive on such exercise and payment of the Exercise
Price then in effect for such Warrant Shares. No adjustments as to dividends
will be made upon exercise of the Warrants.
This Warrant may be exercised upon surrender hereof to the Company at
its office designated for such purpose (the address of which is set forth in
Section 8) with the form of election to purchase attached hereto duly filled in
and signed, upon payment to the Company of the Exercise Price per Warrant Share,
for the number of Warrant Shares in respect of which this Warrant is then
exercised. Payment of the aggregate Exercise Price shall be made (a) in cash or
by certified or bank cashier's check payable to the order of the Company, or (b)
by delivery to the Company of that number of shares of Common Stock having a
Fair Market Value (as hereinafter defined) equal to the then applicable Exercise
Price multiplied by the number of Warrant Shares then being purchased. In the
alternative, this Warrant may be exercised on a net basis, such that, without
the exchange of any funds, the holder of this Warrant receives that number of
-2-
<PAGE>
Warrant Shares subscribed to less that number of shares of Common Stock having
an aggregate Fair Market Value at the time of exercise equal to the aggregate
Exercise Price that would otherwise have been paid by such holder for the number
of Warrant Shares subscribed to. As used herein the term "Fair Market Value", on
a per share basis, means the Closing Price of the Common Stock on the Date of
Exercise. As used herein, the term "Date of Exercise" with respect to any
Warrant means the date on which such Warrant is exercised as provided herein.
For purposes of this Warrant, the "Closing Price" for any date shall mean the
last sale price reported in the Wall Street Journal or other trade publication
regular way or, in case no such reported sale takes place on such date, the
average of the last reported bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading if that is the principal market for the Common Stock, or,
if not listed or admitted to trading, on any national securities exchange or if
such national securities exchange is not the principal market for the Common
Stock, the last sale price as reported by the National Association of Securities
Dealers, Inc. Automated National Market System ("NASDAQ") or its successor, if
any, or, if the Common Stock is not so reported, the average of the reported bid
and asked prices in the over-the-counter market, as furnished by the National
Quotation Bureau, Inc., or if such firm is not then engaged in the business of
reporting such prices, as furnished by any similar firm then engaged in such
business and selected by the Company or, if there is no such firm, as furnished
by any NASD member selected by the Company or, if the Common Stock is not quoted
in the over-the-counter market, the fair value thereof determined in good faith
by the Company's Board of Directors as of a date which is within fifteen (15)
days of the date as of which the determination is to be made.
Subject to the provisions of Section 4, upon such surrender of this
Warrant and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch (and in any event within three (3)
business days) to or upon the written order of the holder, and in the name of
this Warrant holder or its nominee, a certificate or certificates for the number
of full Warrant Shares issuable upon such exercise together with such other
property (including cash) and securities as may be then deliverable upon such
exercise. Such certificate or certificates shall be deemed to have been issued
and the person so named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of this Warrant
and payment of the Exercise Price.
This Warrant shall be exercisable, at the election of the holder
hereof, either in full or from time to time in part, and, in the event that this
Warrant is exercised in respect of fewer than all of the Warrant Shares issuable
on such exercise at any time prior to the Expiration Date, a new Warrant
evidencing the remaining Warrant or Warrants will be issued and delivered
pursuant to the provisions of this Section and of Section 4.
The Company shall not be required to issue fractional Warrant Shares on
the exercise of Warrants. If more than one Warrant shall be presented for
exercise in full at the same time by the same holder, the number of full Warrant
Shares which shall be issuable upon the exercise thereof shall be computed on
the basis of the aggregate number of Warrant Shares purchasable on exercise of
the Warrants so presented. If any fraction of a Warrant Share would, except for
the provisions of this Section, be issuable on the exercise of any Warrants (or
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<PAGE>
specified portion thereof), the Company shall pay an amount in cash equal to the
Exercise Price on the day immediately preceding the date the Warrant is
presented for exercise, multiplied by such fraction.
All Warrants surrendered upon exercise shall be canceled and disposed
of by the Company. The Company shall keep copies of this Warrant and any notices
received hereunder available for inspection by the normal business hours at its
office.
SECTION 4. Payment of Taxes. The Company will pay all stamp taxes in
connection with the issuance, sale, delivery or transfer of the Warrants, as
well as all such taxes attributable to the initial issuance of Warrant Shares
upon the exercise of this Warrant and payment of the Exercise Price.
SECTION 5. Mutilated or Missing Warrants. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, upon delivery of an indemnity
agreement or security satisfactory to the Company in form, scope, substance and
amount, the Company shall issue, in exchange and substitution for and upon
cancellation of the mutilated Warrants or in lieu of and substitution for the
Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing
an equivalent number of Warrants .
SECTION 6. Reservation of Warrant Shares. The Company will at all times
reserve and keep available, free from preemptive or similar rights, out of the
aggregate of its authorized but unissued capital stock or its authorized and
issued capital stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of each class of capital stock constituting a part of
the Warrant Shares which may then be deliverable upon the exercise of all
outstanding Warrants. The Company shall cause all Warrant Shares of each class
of Common Stock or other securities reserved for issuance upon exercise of the
Warrants to be listed (or to be listed subject to notice of issuance) on each
securities exchange on which such shares of Common Stock or any such other
securities are listed.
The Company or, if appointed, the transfer agent for shares of each
class of Common Stock (the "Transfer Agent") and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of the
Warrants will be irrevocably authorized and directed at all times to reserve
such number of authorized shares as shall be required for such purpose. The
Company will keep a copy of this Warrant on file with the Transfer Agent and
with every subsequent transfer agent for any shares of the Company capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will furnish such Transfer Agent a copy of all notices of
adjustments, and certificates related thereto, transmitted to each holder
pursuant to Section 7.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly issued, fully paid, nonassessable, free of preemptive or
similar rights and free from all taxes, liens, charges and security interests
with respect to the issue thereof.
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SECTION 7. Adjustments, Notices and Other Events.
(a) Adjustment of Exercise Price. Subject to the
provisions of this Section 7, the Exercise Price in effect
from time to time shall be subject to adjustment, as follows:
(i) In case the Company shall (x) declare a dividend
or make a distribution on the outstanding shares of its Common
Stock in shares of its Common Stock, (y) subdivide or
reclassify the outstanding shares of its Common Stock into a
greater number of shares, or (z) combine or reclassify the
outstanding shares of its Common Stock into a smaller number
of shares, the Exercise Price in effect immediately after the
record date for such dividend or distribution or the effective
date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined
by multiplying the Exercise Price in effect immediately prior
thereto by a fraction, of which (A) the numerator shall be the
number of shares of Common Stock outstanding immediately
before such dividend, distribution, subdivision, combination
or reclassification, and of which (B) the denominator shall be
the number of shares of Common Stock outstanding immediately
after such dividend, distribution, subdivision, combination or
reclassification. Any shares of Common Stock of the Company
issuable in payment of a dividend shall be deemed to have been
issued immediately prior to the record date for such dividend
for purposes of calculating the number of outstanding shares
of Common Stock of the Company under Section 7(a)(ii) and
7(a)(iii) hereof. Such adjustment shall be made successively
whether any event specified above shall occur.
(ii) In case the Company shall fix a record date for
the issuance of rights, options, warrants or convertible or
exchangeable securities to all holders of its Common Stock
entitling them (for a period expiring within forty-five (45)
days after such record date) to subscribe for or purchase
shares of its Common Stock at a price per share less than the
Current Market Price (as such term is defined in Section
7(a)(iv) hereof) of a share of Common Stock of the Company on
such record date, the Exercise Price shall be adjusted
immediately thereafter so that it shall equal the price
determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which (A) the
numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares of
Common Stock which the aggregate offering price of the total
number of shares of Common Stock so offered would purchase at
the Current Market Price per share, and of which (B) the
denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional
shares of Common Stock offered for subscription or purchase.
Such adjustment shall be made successively whenever such a
record date is fixed. To the extent that any such rights,
options, warrants or convertible or exchangeable securities
are not so issued or expire unexercised, the Exercise Price
then in effect shall be readjusted to the Exercise Price which
would then be in effect if such unissued or unexercised
rights, options, warrants or convertible or exchangeable
securities had not been issuable.
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(iii) In case the Company shall fix a record date for
the making of a distribution to all holders of shares of its
Common Stock (A) of shares of any class other than its Common
Stock or (B) of evidences of its indebtedness or (C) of assets
(excluding cash dividends or distributions (other than
extraordinary cash dividends or distributions), and dividends
or distributions referred to in Subsection 7(a)(i) hereof) or
(D) of rights, options, warrants or convertible or
exchangeable securities (excluding those rights, options,
warrants or convertible or exchangeable securities referred to
in Section 7(a)(ii) hereof), then in each such case the
Exercise Price in effect immediately thereafter shall be
determined by multiplying the Exercise Price in effect
immediately prior thereto by a fraction, of which (x) the
numerator shall be the total number of shares of Common Stock
outstanding on such record date multiplied by the Current
Market Price (as such term is defined in Section 7(a)(iv)
hereof) per share on such record date, less the aggregate fair
market value as determined in good faith by the Board of
Directors of the Company of said shares or evidences of
indebtedness or assets or rights, options, warrants or
convertible or exchangeable securities so distributed, and of
which (y) the denominator shall be the total number of shares
of Common Stock outstanding on such record date multiplied by
such Current Market Price per share. Such adjustment shall be
made successively whenever such a record date is fixed. In the
event that such distribution is not so made, the Exercise
Price then in effect shall be readjusted to the Exercise Price
which would then be in effect if such record date had not been
fixed.
(iv) For the purpose of any computation under Section
7(a)(ii) or 7(a)(iii) hereof, the "Current Market Price" per
share at any date (the "Computation Date") shall be deemed to
be the average of the daily Closing Prices of the Common Stock
for twenty (20) consecutive Trading Days ending the Trading
Day immediately preceding the Computation Date; provided,
however, that if there shall have occurred prior to the
Computation Date any event described in Subsection 7(a)(i),
7(a)(ii) or 7(a)(iii) which shall have become effective with
respect to market transactions at any time (the "Market-Effect
Date") on or within such 20-day period, the Closing Price for
each Trading Day preceding the Market-Effect Date shall be
adjusted, for purposes of calculating such average, by
multiplying such Closing Price by a fraction, of which (A) the
numerator shall be the Exercise Price as in effect immediately
prior to the Computation Date and of which (B) the denominator
shall be the Exercise Price as in effect immediately prior to
the Market-Effect Date, it being understood that the purpose
of this proviso is to ensure that the effect of such event on
the market price of the Common Stock shall, as nearly as
possible, be eliminated in order that the distortion in the
calculation of the Current Market Price may be minimized.
(b) No Adjustments to Exercise Price. No adjustment in the
Exercise Price in accordance with the provisions of Section 7(a)(i),
7(a)(ii) or 7(a)(iii) hereof need be made unless such adjustment would
amount to a change of at least 1% in such Exercise Price; provided,
however, that the amount by which any adjustment is not made by reason
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<PAGE>
of the provisions of this Section 7(b) shall be carried forward and
taken into account at the time of any subsequent adjustment in the
Exercise Price.
(c) Adjustment of Number of Shares. Upon each adjustment of
the Exercise Price pursuant to Section 7(a)(i), 7(a)(ii) or 7(a)(iii)
hereof, each Warrant shall thereupon evidence the right to purchase
that number of Warrant Shares (calculated to the nearest hundredth of a
share) obtained by multiplying the number of Warrant Shares purchasable
immediately prior to such adjustment and dividing the product so
obtained by the Exercise Price in effect immediately after such
adjustment.
(d) Reorganizations. In case of any capital reorganization,
other than in the cases referred to in Section 7(a) hereof, or the
consolidation or merger of the Company with or into another corporation
(other than a merger or consolidation in which the Company is the
continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock or the
conversion of such outstanding shares of Common Stock into shares of
other stock or other securities or property), or the sale or conveyance
of the property of the Company as an entirety or substantially as an
entirety (collectively such actions being hereinafter referred to as
"Reorganizations"), there shall thereafter be deliverable upon exercise
of any Warrant (in lieu of the number of Warrant Shares theretofore
deliverable) the number of shares of stock or other securities or
property to which a holder of the number of Warrant Shares which would
otherwise have been deliverable upon the exercise of such Warrant would
have been entitled upon such Reorganization if such Warrant had been
exercised in full immediately prior to such Reorganization. In case of
any Reorganization, appropriate adjustment, as determined in good faith
by the Board of Directors of the Company, shall be made in the
application of the provisions herein set forth with respect to the
rights and interests of the holder of this Warrant so that the
provisions set forth herein shall thereafter be applicable, as nearly
as possible, in relation to any shares or other property thereafter
deliverable upon exercise of the Warrants. Any such adjustments shall
be made by and set forth in a supplemental agreement prepared by the
Company or any successor thereto, between the Company, or any successor
thereto, and shall for all purposes hereof conclusively be deemed to be
an appropriate adjustment. The Company shall not effect any such
Reorganization, unless upon or prior to the consummation thereof the
successor corporation, or if the Company shall be the surviving
corporation in any such Reorganization and is not the issuer of the
shares of stock or other securities or property to be delivered to
holders of shares of the Common Stock outstanding at the effective time
thereof, then such issuer, shall assume by written instrument the
obligation to deliver to the holder of any Warrants such shares of
stock, securities, cash or other property as such holder shall be
entitled to purchase in accordance with the foregoing provisions.
(e) Verification of Computation. The Company shall select a
firm of independent accountants, which selection (i) may be its regular
firm of independent accountants and (ii) may be changed from time to
time, to verify each computation and/or adjustment made in accordance
with this Section 7. The certificate, report or other written statement
of any such firm shall be conclusive evidence of the correctness of any
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computation made under this Section 7. Promptly upon its receipt of
such certificate, report or statement from such firm of independent
accountants, the Company shall deliver a copy thereof to the holder of
this Warrant.
(f) Notice of Certain Actions. In the event the Company shall:
(i) declare any dividend payable in stock to the
holders of its Common Stock or make any other distribution in
property other than cash to the holders of its Common Stock;
or
(ii) offer to the holders of its Common Stock rights
to subscribe for or purchase any shares of any class of stock
or any other rights or options; or
(iii) effect any reclassification of its Common Stock
(other than a reclassification involving merely the
subdivision or combination of outstanding shares of Common
Stock) or any capital reorganization or any consolidation or
merger (other than a merger in which no distribution of
securities or other property is made to holders of Common
Stock), or any sale, transfer or other disposition of its
property, assets and business substantially as an entirety, or
the liquidation, dissolution or winding up of the Company;
then in each such case, the Company shall cause notice of such proposed
action to be mailed to the holder of this Warrant as hereinafter set
forth in this Section 7(f). Such notice shall specify the date on which
the books of the Company shall close, or a record be taken, for
determining the holders of Common Stock entitled to receive such stock
dividend or other distribution or such rights or options, or the date
on which such reclassification, reorganization, consolidation, merger,
sale, transfer, other disposition, liquidation, dissolution, winding up
or exchange shall take place or commence, as the case may be, and the
date as of which it is expected that holders of record of Common Stock
shall be entitled to receive securities or other property deliverable
upon such action, if any such date has been fixed. Such notice shall be
mailed in the case of any action covered by paragraph (i) or (ii) of
this Section 7(f), at least ten (10) days prior to the record date for
determining holders of the Common Stock for purposes of receiving such
payment or offer, and, in the case of any action covered by paragraph
(iii), at least ten (10) days prior to the earlier of the date upon
which such action is to take place or any record date to determine
holders of Common Stock entitled to receive such securities or other
property.
(g) Certificate of Adjustments. Whenever any adjustment is to
be made pursuant to this Section 7, the Company shall prepare a
Certificate executed by the Chief Financial Officer of the Company,
setting forth such adjustment to be mailed to the holder of this
Warrant at least fifteen (15) days prior thereto, such notice to
include in reasonable detail (i) the events precipitating the
adjustment, (ii) the computation of any adjustments, and (iii) the
Exercise Price and the number of shares or the securities or other
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property purchasable upon exercise of each Warrant after giving effect
to such adjustment. Such Certificate shall be accompanied by the
accountant's verification required by Section 7(e) hereof.
SECTION 8. Notices. Any notice or demand authorized by the Warrants to
be given or made by the registered holder of any Warrant to or on the Company
shall be sufficiently given or made when received at the office of the Company
expressly designated by the Company at its office for purposes of the Warrants
(until Warrant holders are otherwise notified in accordance with this Section by
the Company), as follows:
Key Energy Group, Inc.
257 Livingston Avenue
New Brunswick, NJ 08901
Attention: Francis D. John, President
Any notice pursuant to the Warrants to be given by the Company to the
registered holder(s) of any Warrant shall be sufficiently given when received by
such holder at the address appearing on the Warrant register of the Company
(until the Company is otherwise notified in accordance with this Section by such
holder).
SECTION 9. Cash Distributions and Dividends. If the Company pays a
dividend or makes a distribution to the holders of its Common Stock of any
securities (other than Common Stock) or property (including cash and securities
of other companies) of the Company, or any rights, options or warrants to
purchase securities (other than Common Stock) or property (including securities
of other companies) of the Company, then, simultaneously with the payment of
such dividend or the making of such distribution, and as a condition precedent
to its right to do so, the Company will pay or distribute to the holders of the
Warrants an amount of property (including without limitation cash) and/or
securities (including without limitation securities of other companies) of the
Company as would have been received by such holders had they exercised (whether
or not the Warrants were then exercisable) all of the Warrants immediately prior
to the record date (or other applicable date) used for determining stockholders
of the Company entitled to receive such dividend or distribution.
SECTION 10. No Rights or Liabilities as Stockholder; Information.
Nothing contained in this Warrant shall be construed as conferring upon the
holder hereof the right to vote or to consent as stockholders in respect of the
meetings of stockholders or the election of members of the Board of Directors of
the Company or any other matter, or any rights whatsoever as stockholders of the
Company or as imposing any obligation on such holder to purchase any securities
or as imposing any liabilities on such holder as a stockholder sf the Company,
whether such obligation or liabilities are asserted by the Company or by
creditors of the Company. Notwithstanding the foregoing, the Company will
furnish to each holder of any Warrants, promptly upon their becoming available,
copies of all financial statements, reports, notices and proxy statements sent
or made available generally by the Company to its stockholders or otherwise
filed pursuant to the provisions of the Securities Act or the Securities
Exchange Act of 1934, as amended. The Company shall give to each Warrant holder
written notice of any determination to register any of its Common Stock at the
same time that it gives notice to any holder of securities of the Company
entitled to rights to register securities under the Securities Act.
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SECTION 11. Amendment and Modification; Waiver. This Warrant may not be
amended or modified except by a written instrument signed by the Company and the
registered holder of this Warrant at the time such amendment or modification is
sought. Any waiver of any term or condition of this Warrant in any one instance
shall not operate as or be deemed to be or construed as a further or continuing
waiver of such term or condition, nor shall any failure at any time or times to
enforce or require performance of any provision hereof operate as a waiver of or
affect in any manner any party's right at a later time to enforce or require
performance of such provision or any other provision hereof.
SECTION 12. Severability. If any provision of this Warrant shall be
held or deemed to be, or shall in fact be, invalid, inoperative or unenforceable
as applied to any particular case in any jurisdiction or jurisdictions, or in
all jurisdictions or in all cases, because of the conflict of any provision with
any constitution or statute or rule of public policy, or for any other reason,
such circumstance shall not have the effect of rendering the provision or
provisions in question invalid, inoperative or unenforceable in any other
jurisdiction or in any other case or circumstance or if rendering any other
provision or provisions herein contained invalid, inoperative or unenforceable
to the extent that such other provisions are not themselves actually in conflict
with such constitution, statute or rule of public policy, but this Warrant shall
be reformed and construed in any such jurisdiction or case as if such invalid,
inoperative or unenforceable provision had never been contained herein and such
provision were formed so that it would be valid, operative and enforceable to
the maximum extent permitted in such jurisdiction or in such case.
SECTION 13. Successors. All the covenants and provisions of this
Warrant by or for the benefit of the Company or the Warrant holder shall bind
and inure to the benefit of their respective successors and assigns.
SECTION 14. Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles or conflicts of laws.
SECTION 15. Headings. The headings contained in this Warrant are
inserted for convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by the signature of its duly authorized officer and the corporate seal hereunto
affixed.
KEY ENERGY GROUP, INC.
By: /s/ Francis D. John
[Seal] Francis D. John, President
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FORM OF ELECTION TO PURCHASE
(To Be Executed Upon Exercise of Warrant)
The undersigned holder hereby represents that he, she or it is the
registered holder of this Warrant, and hereby irrevocably elects to exercise the
right, represented by this Warrant, to receive
shares of Common Stock, $.10 par value, of KEY ENERGY GROUP, INC., and
herewith tenders payment for such shares, to the order of KEY ENERGY GROUP,
INC., the amount of $
in accordance with the terms hereof. The undersigned requests that a
certificate for such shares be registered in the name of the undersigned or
nominee hereinafter set forth, and further that such certificate be delivered to
the undersigned at the address hereinafter set forth or to such other person or
entity as is hereinafter set forth. If said number of shares is less than all of
the shares of Common Stock purchasable hereunder, the undersigned requests that
a new Warrant representing the remaining balance of such shares be registered in
the name of the undersigned or nominee hereinafter set forth, and further that
such certificate be delivered to the undersigned at the address hereinafter set
forth or to such other person or entity as is hereinafter set forth.
Certificate to be registered as follows:
Certificate to be delivered as follows:
Date:_________________________
______________________________________
(Signature must conform in
all respects to the name of
the holder as specified on
the face of the Warrant,
unless Form of Assignment
has been executed)
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FORM OF ASSIGNMENT
[To be executed upon Transfer of Warrant]
For value received, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto the right represented by such
Warrant to purchase ________ shares of Common Stock of KEY ENERGY GROUP, INC.
(the "Company") to which such Warrant relates, and appoints its Attorney to make
such transfer on the books of the Company maintained for such purpose, with full
power of substitution in the premises.
------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
Warrant)
-------------------------------------
(Street Address)
------------------------------------
(City), (State) (Zip Code)
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Exhibit 4.6
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement") dated as of January 19,
1996, by and between Key Energy Group, Inc., a Maryland corporation (the
"Company"), and the Holder (as hereinafter defined) executing the signature page
hereto.
This Agreement is contemplated by that certain Secured Amended and
Restated Loan and Security Agreement dated as of January 19, 1996 (the
"Agreement") by and between the Company and The CIT Group/Credit Finance, Inc.
("CIT").
The parties hereby agree as follows:
Section 1. Definitions.
As used in this Agreement, the following terms shall have the following
meanings:
"Advice" has the meaning set forth in Section 5.
"Affiliate" means, with respect to any specified Person, any other
Person who, directly or indirectly, controls, is controlled by, or is under
common control with such specified Person.
"Business Day" means any day other than a day on which banks are
authorized or required to be closed in the State of New York.
"Closing Date" means the closing date as defined in that certain
Agreement and Plan of Merger, dated as of November 18, 1995, by and between the
Company and WellTech, Inc. (the "Merger Agreement").
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.10 per share, of the
Company.
"Company" has the meaning set forth in the preamble and shall include
the Company's successors by merger, acquisition, reorganization or otherwise.
"Controlling Persons" has the meaning set forth in Section 8(a).
"Demand Registration" has the meaning set forth in Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute, and the rules and regulations of
the Commission promulgated thereunder.
"Holder" means the holder of record of Registrable Securities.
<PAGE>
"Inspectors" has the meaning set forth in Section 4(m).
"Lock-up Request" has the meaning set forth in Section 10.
"NASD" has the meaning set forth in Section 4(q).
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"Piggy-Back Registration" has the meaning set forth in Section 3(a).
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement,
including a prospectus supplement with respect to the terms of the offering of
any portion of the Registrable Securities covered by a Shelf Registration
Statement, and by all other amendments and supplements to the prospectus,
including post-effective amendments, and in each case including all material
incorporated by reference or deemed to be incorporated by reference in such
prospectus.
"Records" has the meaning set forth in Section 4(m).
"Registrable Securities" means, collectively, the Common Stock to be
issued upon exercise of the Warrant (as hereafter defined) until such time as
(i) a Registration Statement covering such Registrable Securities has been
declared effective and such Registrable Securities have been disposed of
pursuant to such effective Registration Statement, (ii) such Registrable
Securities are transferred to any Person other than a Holder pursuant to Rule
144 (or any similar provision then in force, but not Rule 144A) under the
Securities Act, including a sale pursuant to the provisions of Rule 144(k), or
(iii) such Registrable Securities shall cease to be outstanding.
"Registration Expenses" has the meaning set forth in Section 7.
"Registration Statement" means any registration statement of the
Company that covers any of the Registrable Securities pursuant to the provisions
of this Agreement (including any Shelf Registration Statement), and all
amendments and supplements to any such registration statement, including
post-effective amendments, in each case including the Prospectus, all exhibits,
and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
"Rule 144A" has the meaning set forth in Section 9(b).
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"Securities Act" means the Securities Act of 1933, as amended from time
to time, or any successor statute, and the rules and regulations of the
Commission promulgated thereunder.
"Shelf Registration" has the meaning set forth in Section 2(a).
"Shelf Registration Statement" has the meaning set forth in Section
2(a).
"Suspension Notice" has the meaning set forth in Section 5.
"Target Effective Period" has the meaning set forth in Section 2(a).
"Warrant" mean the warrant to purchase up to 75,000 shares of Common
Stock held by CIT.
Section 2. Shelf Registration.
(a) Filing: Effectiveness. (i) If, as of the Closing Date, a shelf
registration statement (the "Shelf Registration Statement") on the appropriate
form for an offering to be made on a continuous basis pursuant to Rule 415 under
the Securities Act (or such successor rule or similar provision then in effect)
covering all of the Registrable Securities (a "Shelf Registration") is not
effective or the effectiveness thereof has been suspended, or (ii) if the
Closing Date has not occurred by June 30, 1995 and the Holder requests the
Company to do so then the Company shall use its reasonable business efforts to
cause such Shelf Registration Statement to be effective as soon as practicable.
Once the Shelf Registration Statement is effective, the Company shall use its
reasonable business efforts to keep such Shelf Registration Statement
continuously effective for a period (the "Target Effective Period") ending with
the earlier of (x) the sale of all Registrable Securities and (y) 24 months
following the Closing Date or, if later, the date on which such Shelf
Registration Statement is declared effective. The Company further agrees, if
necessary, to supplement or amend the Shelf Registration Statement, as required
by the registration form used by the Company for such Shelf Registration
Statement or by the instructions applicable to such registration form or by the
Securities Act or as reasonably requested (which request shall result in the
filing of a supplement or amendment) by a Holder of Registrable Securities to
which such Shelf Registration Statement relates (but only to the extent that
such request by such Holder relates to information with respect to such Holder),
and the Company agrees to furnish the Holder, Holders' counsel and any managing
underwriter copies of any such supplement or amendment prior to its being used
and/or filed with the Commission. The Holder shall be permitted to withdraw all
or any part of the Registrable Securities from a Shelf Registration Statement
(i) at any time prior to the effective date of such Shelf Registration Statement
and (ii) in the event that on or after the effective date of such Shelf
Registration Statement the Holder receives a Lock-up Request and such
withdrawing Holder elects to exercise its rights to a Piggy-Back Registration
pursuant to Section 3 hereof. The Company further agrees that if during the
Target Effective Period, the Holder has not sold all Registrable Securities,
then upon demand made by the Holder at any time within three years after the
expiration of the Target Effective Period, the Company shall promptly file a
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<PAGE>
registration statement on the appropriate form for an offering to be made by the
Holder of all of the Registrable Securities then held by Holder (the "Demand
Registration") and shall use reasonable business efforts to have such
registration statement declared effective provided, however, that: (i) the
Demand Registration need not be a Shelf Registration; (ii) the Holder shall be
entitled to only one Demand Registration during said three year period; and
(iii) the Holder's right to such Demand Registration shall terminate upon the
first to occur of (y) expiration of such three year period of (z) sale of such
Registrable Securities by the Holder.
(b) Effective Registration. A registration will not be deemed to have
been effected as a Shelf Registration or a Demand Registration unless the Shelf
Registration Statement or Registration Statement filed upon demand, as the case
may be, with respect thereto has been declared effective by the Commission and
the Company has complied in all material respects with its obligations under
this Agreement with respect thereto. If a Shelf Registration or Demand
Registration is deemed not to have been effected, then the Company shall
continue to be obligated to effect a Shelf Registration or a Demand
Registration, as the case may be, pursuant to this Section 2.
Section 3. Piggy-Back Registration.
(a) Request for Registration. Each time the Company proposes to file a
registration statement under the Securities Act with respect to an offering by
the Company for its own account or for the account of any of its security
holders of any class of equity security (other than (i) a registration statement
on Form S-4 or S-8 (or any substitute form that is adopted by the Commission) or
(ii) a registration statement filed in connection with an exchange offer or
offering of securities solely to the Company's existing security holders), and
the form of registration statement to be used permits the registration of
Registrable Securities, then the Company shall give written notice of such
proposed filing to the Holders of Registrable Securities as soon as practicable
(but in no event less than 20 days before the anticipated effective date), and
such notice shall offer such Holders the opportunity to register such
Registrable Securities as each such Holder may request (which request shall
specify the Registrable Securities intended to be disposed of by such Holder and
the intended method of distribution thereof) within 10 days after the date such
notice is received by such Holder from the Company (a "Piggy-Back
Registration"). The Company shall cause the managing underwriter or underwriters
of a proposed underwritten offering to permit the Registrable Securities
requested to be included in a Piggy-Back Registration to be included on the same
terms and conditions as any similar securities of the Company or any other
security holder included therein and to permit the sale or other disposition of
such Registrable Securities in accordance with the intended method of
distribution thereof. Any Holder shall have the right to withdraw its request
for inclusion of its Registrable Securities in any registration statement
pursuant to this Section 3 by giving written notice to the Company of such
withdrawal no later than five days prior to the anticipated effective date. The
Company may withdraw a Piggy-Back Registration at any time prior to the time it
becomes effective, provided that the Company shall give prompt notice of such
withdrawal to the Holders of Registrable Securities requested to be included in
such Piggy-Back Registration.
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(b) Reduction of Offering. If the managing underwriter or underwriters
of an underwritten offering with respect to which Piggy-Back Registration has
been requested as provided in Section 3(a) shall have informed the Company, in
writing, that in the opinion of such underwriter or underwriters the total
number of shares which the Company, Holders of Registrable Securities and any
other Persons participating in such registration intend to include in such
offering is such as to materially and adversely affect the success of such
offering (including without limitation any material decrease in the proposed
public offering price), then the number of shares to be offered for the account
of all Persons (other than the Company) participating in such registration shall
be reduced or limited (to zero if necessary) pro rata in proportion to the
respective number of shares requested to be registered by such Persons to the
extent necessary to reduce the total number of shares requested to be included
in such offering to the number of shares, if any, recommended by such managing
underwriter or underwriters.
No registration effected under this Section 3, and no failure to effect
a registration under this Section 3 shall relieve the Company of its obligation
to effect a Shelf Registration or a Demand Registration pursuant to Section 2.
No failure to effect a registration under this Section 3 and to complete the
sale of Registrable Securities in connection therewith shall relieve the Company
of any other obligation under this Agreement, including without limitation, the
Company' s obligations under Sections 7 and 8.
Section 4. Registration Procedures.
In connection with the obligations of the Company to effect or cause
the registration of any Registrable Securities pursuant to the terms and
conditions of this Agreement, the Company shall use its reasonable business
efforts to effect the registration and sale of such Registrable Securities in
accordance with the intended method of distribution thereof as quickly as
practicable, and in connection therewith:
(a) The Company shall prepare and file with the Commission a
Registration Statement on the appropriate form under the Securities
Act, which form shall comply as to form in all materials respects with
the requirements of the applicable form and include all financial
statements required by the Commission to be filed therewith, and use
its reasonable business efforts to cause such Registration Statement to
become effective and remain effective in accordance with the provisions
of this Agreement.
(b) The Company shall promptly prepare and file with the
Commission such amendments and post-effective amendments to each
Registration Statement as may be necessary to keep such Registration
Statement effective for as long as such registration is required to
remain effective pursuant to the terms hereof; shall cause the
Prospectus to be supplemented by any required Prospectus supplement,
and, as so supplemented, to be filed pursuant to Rule 424 under the
Securities Act; and shall comply with the provisions of the Securities
Act applicable to it with respect to the disposition of all Registrable
Securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the
Holders set forth in such Registration Statement or supplement to the
Prospectus;
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(c) The Company shall promptly furnish to any Holder and the
underwriters, if any, without charge, such number of conformed copies
of each Registration Statement and any post-effective amendment thereto
and such number of copies of the Prospectus (including each preliminary
Prospectus) and any amendments or supplements thereto, any documents
incorporated by reference therein and such other documents as such
Holder or underwriter may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities being
sold by such Holder.
(d) The Company shall, on or prior to the date on which a
Registration Statement is declared effective, (i) use its reasonable
business efforts to register or qualify the Registrable Securities
covered by such Registration Statement under such other securities or
"blue sky" laws of such states of the United States as any Holder or
underwriter requests; (ii) do any and all other acts and things which
may be necessary or advisable to enable such Holder to consummate the
disposition of such Registrable Securities owned by such Holder; (iii)
use its reasonable business efforts to keep each such registration or
qualification (or exemption therefrom) effective during the period
which the Registration Statement is required to be kept effective in
accordance with the provisions of this Agreement; and (iv) do any and
all other acts or things reasonably necessary or advisable to enable
the disposition in such jurisdictions of such Registrable Securities;
provided, however, that the Company shall not be required (x) to
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 4(d), (y) to file
any general consent to service of process, or (z) to subject itself to
taxation in any jurisdiction where it would not otherwise be subject to
taxation.
(e) The Company shall cause the Registrable Securities covered
by a Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary by
virtue of the business and operations of the Company to enable the
Holders to consummate the disposition of such Registrable Securities.
(f) The Company shall promptly notify each Holder, Holders'
counsel and any underwriter in writing, (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed and,
with respect to a Registration Statement or any post-effective
amendment, when the same has become effective, (ii) of any request by
the Commission or any state securities authority for amendments and
supplements to a Registration Statement and Prospectus or for
additional information after the Registration Statement has become
effective, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of a Registration Statement or the
initiation or threatening of any proceedings for that purpose, (iv) of
the issuance by any state securities commission or other regulatory
authority of any order suspending the qualification or exemption from
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qualification of any of the Registrable Securities under state
securities or "blue sky" laws or the initiation of any proceedings for
that purpose, (v) if, between the effective date of a Registration
Statement and the closing of any sale of Registrable Securities covered
thereby, the representations and warranties of the Company contained in
any underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to the offering cease to be true and
correct in all material respects, and (vi) of the happening of any
event which makes any statement made in a Registration Statement or
related Prospectus untrue or which requires the making of any changes
in such Registration Statement or Prospectus so that they will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. Immediately following expiration of any
Suspension Period, the Company shall prepare and file with the
Commission and furnish a supplement or amendment to such Prospectus so
that, as thereafter deliverable to the purchasers of such Registrable
Securities, such Prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(g) The Company shall make generally available to the Holders
an earnings statement satisfying the provisions of Section 11(a) of the
Securities Act no later than 45 days (90 days in the event it relates
to a fiscal year) after the end of the 12-month period beginning with
the first day of the Company's first fiscal quarter commencing after
the effective date of a Registration Statement, which earnings
statement shall cover said 12-month period, and which requirement will
be deemed to be satisfied if the Company timely files complete and
accurate information on forms 10-Q, 10-K and 8-K under the Exchange Act
and otherwise complies with Rule 158 under the Securities Act.
(h) The Company shall promptly use its reasonable business
efforts to prevent the issuance of any order suspending the
effectiveness of a Registration Statement, and if one is issued use its
reasonable business efforts to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement at the
earliest possible moment.
(i) The Company shall, if requested by the managing
underwriter or underwriters, if any, Holders' counsel, or any Holder
promptly incorporate in a Prospectus supplement or post-effective
amendment such information as such managing underwriter or underwriters
reasonably requests, or Holders' counsel reasonably requests, to be
included therein, including, without limitation, with respect to the
Registrable Securities being sold by such Holder to such underwriter or
underwriters, the purchase price being paid therefor by such
underwriter or underwriters and with respect to any other terms of an
underwritten offering of the Registrable Securities to be sold in such
offering, and promptly make all required filings of such Prospectus
supplement or post-effective amendment.
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(j) The Company shall, as promptly as practicable after filing
with the Commission any document which is incorporated by reference
into a Registration Statement (in the form in which it was
incorporated), deliver a copy of each such document to each of the
Holders and to Holders' counsel.
(k) The Company shall cooperate with the Holders and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates (which shall not bear any
restrictive legends unless required under applicable law) representing
securities sold under a Registration Statement, and enable such
securities to be in such denominations and registered in such names as
the managing underwriter or underwriters, if any, or such Holders may
reasonably request and keep available and make available to the
Company's transfer agent prior to the effectiveness of such
Registration Statement a supply of such certificates.
(l) The Company shall enter into such customary agreements
(including, if applicable, an underwriting agreement in customary form)
and take such other actions as the Holders or the underwriters retained
by the Holders participating in an underwritten public offering, if
any, may reasonably request in order to expedite or facilitate the
disposition of Registrable Securities.
(m) The Company shall promptly make available to each Holder,
any underwriter participating in any disposition pursuant to a
Registration Statement, and any attorney, accountant or other agent or
representative retained by any such Holder or underwriter
(collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause
the Company's officers, directors and employees to supply all
information reasonably requested by any such Inspector in connection
with such Registration Statement; provided that, unless the disclosure
of such Records is necessary to avoid or correct a misstatement or
omission in such Registration Statement or the release of such Records
is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, the Company shall not be required to provide
any information under this paragraph (1) if the Company believes, after
consultation with counsel for the Company and counsel for the Holders,
that to do so would cause the Company to forfeit an attorney-client
privilege that was applicable to such information or (2) if either (i)
the Company has requested and been granted from the Commission
confidential treatment of such information contained in any filing with
the Commission or documents provided supplementally or otherwise or
(ii) the Company reasonably determines in good faith that such Records
are confidential and so notifies the Inspectors in writing unless prior
to furnishing any such information with respect to (i) or (ii) such
Holder of Registrable Securities requesting such information agrees to
enter into a confidentiality agreement in customary form and subject to
customary exceptions; and provided, further that each Holder of
Registrable Securities agrees that it will, upon learning that
disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company at its
expense, to undertake appropriate action and to prevent disclosure
of the Records deemed confidential.
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(n) In the case of any underwritten public offering, the
Company shall furnish to each Holder and to each underwriter a signed
counterpart, addressed to such Holder or underwriter, of (i) an opinion
or opinions of counsel to the Company, and (ii) a comfort letter or
comfort letters from the Company's independent public accountants, each
in customary form and covering such matters of the type customarily
covered by opinions or comfort letters, as the case may be, as the
managing underwriter therefor reasonably requests.
(o) The Company shall cause the shares of Common Stock
included in a Registration Statement to be listed on the American Stock
Exchange or such other securities exchange on which similar securities
issued by the Company are then listed.
(p) The Company shall provide a CUSIP number for all
Registrable Securities covered by a Registration Statement not later
than the effective date of such Registration Statement.
(q) The Company shall cooperate with each Holder and each
underwriter participating in the disposition of Registrable Securities
and their respective counsel in connection with any filings required to
be made with the National Association of Securities Dealers, Inc.
("NASD").
(r) The Company shall, during the period when the Prospectus
is required to be delivered under the Securities Act, promptly file all
documents required to be filed with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act.
(s) The Company shall appoint a transfer agent and registrar
for all the shares of Common Stock covered by a Registration Statement
not later than the effective date of such Registration Statement.
(t) In connection with an underwritten offering, the Company
will participate, to the extent reasonably requested by the managing
underwriter for the offering or the Holders, in customary efforts to
sell the securities under the offering, including without limitation,
participating in "road shows."
Section 5. Suspension Period.
In the case of a Shelf Registration Statement, each Holder, upon
receipt of any notice (a "Suspension Notice") from the Company of the happening
of any event of the kind described in Section 4(f)(vi) or of any event which, in
the Company's reasonable business judgment, could become such an event, shall
forthwith discontinue disposition of the Registrable Securities pursuant to the
Shelf Registration Statement covering such Registrable Securities until such
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Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(f) or until it is advised in writing (the "Advice") by
the Company that the use of the Prospectus may be resumed, and has received
copies of any additional or supplemental filings which are incorporated by
reference in the Prospectus, and, if so directed by the Company, such Holder
will, or will request the managing underwriter or underwriters, if any, to,
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event that the Company shall give any Suspension Notice, (i) the
Company shall use its reasonable business efforts and take such actions as are
reasonably necessary to render the Advice and end the suspension period as
promptly as practicable and (ii) the time periods for which a Shelf Registration
Statement is required to be kept effective pursuant to Section 2 hereof shall be
extended by the number of days during the suspension period.
Section 6. Holder Information.
If any Registration Statement refers to any Holder by name or otherwise
as the holder of any securities of the Company, then such Holder shall have the
right, to the extent permitted by law, to require (i) the insertion therein of
language, in form and substance reasonably satisfactory to such Holder, to the
effect that the holding by such Holder of such securities is not to be construed
as a recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such Holder
will assist in meeting any future financial requirements of the Company, or (ii)
in the event that such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar Federal or state "blue sky"
statute and the rules and regulations thereunder then in force, the deletion of
the reference to such Holder.
Section 7. Registration Expenses.
Any and all expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all Commission and
securities exchange, NASDAQ or NASD registration and filing fees, all fees and
expenses incurred in connection with compliance with state securities or "blue
sky" laws (including reasonable fees and disbursements of counsel for any
underwriters in connection with "blue sky" qualifications of the Registrable
Securities), printing expenses, messenger and delivery expenses, internal
expenses (including, without limitation, all salaries and expenses of the
Company's officers and employees performing legal or accounting duties), all
expenses for word processing, printing and distributing any Registration
Statement, any Prospectus, any amendments or supplements thereto, any
underwriting agreements, securities sales agreements and other documents
relating to the performance of and compliance with this Agreement, the fees and
expenses incurred in connection with the listing of the Registrable Securities,
the fees and disbursements of counsel for the Company and of the independent
certified public accountants of the Company (including the expenses of any
comfort letters or costs associated with the delivery by independent certified
public accountants of a comfort letter or comfort letter requested pursuant to
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Section 4(n)) Securities Act liability insurance (if the Company elects to
obtain such insurance), and the reasonable fees and expenses of any special
experts or other Persons retained by the Company in connection with any
registration, (all such expenses being herein called "Registration Expenses"),
will be borne by the Company whether or not the Registration Statement to which
such expenses relate becomes effective provided, however, that Registration
Expenses shall not include (i) underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Registrable
Securities or (ii) any fees or expenses of any counsel, accountants or other
persons retained or employed by the Holders.
Section 8. Indemnification and Contribution.
(a) Indemnification bv the Company. The Company agrees to indemnify and
hold harmless, to the full extent permitted by law, each Holder, its partners,
officers, directors, trustees, stockholders, employees, agents and investment
advisers, and each Person who controls such Holder within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under
common control with, or is controlled by, such Holder, together with the
partners, officers, directors, trustees, stockholders, employees and agents of
such controlling Person (collectively, the "Controlling Persons"), from and
against all losses, claims, damages, liabilities and expenses (including without
limitation any legal or other fees and expenses reasonably incurred by any
Holder or any such Controlling Person in connection with defending or
investigating any action or claim in respect thereof) (collectively, the
"Damages") to which such Holder, its partners, officers, directors, trustees,
stockholders, employees, agents and investment advisers, and any such
Controlling Person may become subject under the Securities Act or otherwise,
insofar as such Damages (or proceedings in respect thereof) arise out of or are
based upon any untrue or alleged untrue statement of material fact contained in
any Registration Statement (or any amendment thereto) pursuant to which
Registrable Securities were registered under the Securities Act, including all
documents incorporated therein by reference, or caused by any omission or
alleged omission to state therein a material fact necessary to make the
statements therein in light of the circumstances under which they were made not
misleading, or caused by any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact necessary
to make the statements therein in light of the circumstances under which they
were made not misleading, except insofar as such Damages arise out of or are
based upon any such untrue statement or omission based upon information relating
to such Holder furnished in writing to the Company by such Holder expressly for
use therein. In connection with an underwritten offering, the Company will
indemnify the underwriters thereof, their officers and directors and each Person
who controls such underwriters (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act) to the same extent as provided
above with respect to the indemnification of the Holders of Registrable
Securities except with respect to information provided by the underwriter
specifically for inclusion therein.
(b) Indemnification bv the Holders. Each Holder agrees to indemnify and
hold harmless the Company, its directors, officers and each Person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
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Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Holder, but only with reference to
information relating to such Holder furnished to the Company in writing by such
selling Holder expressly for use in any Registration Statement (or any amendment
thereto) or any Prospectus (or any amendment or supplement thereto); provided,
however, that such selling Holder shall not be obligated to provide such
indemnity to the extent that such Damages result from the failure of the Company
to promptly amend or take action to correct or supplement any such Registration
Statement or Prospectus on the basis of corrected or supplemental information
provided in writing by such selling Holder to the Company expressly for such
purpose. In no event shall the liability of any Holder of Registrable Securities
hereunder be greater in amount than the amount of the proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Indemnification Procedures. In case any proceeding (including any
governmental investigation) shall be instituted involving any Person in respect
of which indemnity may be sought pursuant to either paragraph (a) or (b) above,
such Person (the "indemnified party") shall promptly notify the Person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceedings and shall pay the fees and
disbursements of such counsel relating to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel, or (ii) the
indemnifying party fails promptly to assume the defense of such proceeding or
fails to employ counsel reasonably satisfactory to such indemnified party or
parties, or (iii) (A) the named parties to any such proceeding (including any
impleaded parties) include both such indemnified party or parties and any
indemnifying party or an Affiliate of such indemnified party or parties or of
any indemnifying party, (B) there may be one or more defenses available to such
indemnified party or parties or such Affiliate of such indemnified party or
parties that are different from or additional to those available to any
indemnifying party or such Affiliate of any indemnifying party and (C) such
indemnified party or parties shall have been advised by such counsel that there
may exist a conflict of interest between or among such indemnified party or
parties or such Affiliate of such indemnified party or parties and any
indemnifying party or such Affiliate of any indemnifying party, in which case,
if such indemnified party or parties notifies the indemnifying party or parties
in writing that it elects to employ separate counsel of its choice at the
expense of the indemnifying parties, the indemnifying parties shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the indemnifying parties, it being understood, however, that unless there exists
a conflict among indemnified parties, the indemnifying parties shall not, in
connection with any one such proceeding or separate but substantially similar or
related proceedings in the same jurisdiction, arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (together with appropriate local counsel) at any
time for such indemnified party or parties. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its
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written consent but, if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party or parties from and against any loss or liability by reason of
such settlement or judgment. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which such indemnified party is a party,
and indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such proceeding.
(d) Contribution. To the extent that the indemnification provided for
in paragraph (a) or (b) of this Section 8 is unavailable to an indemnified party
or insufficient in respect of any Damages, then each indemnifying party under
such paragraph, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by such indemnified party as a result
of such Damages in such proportion as is appropriate to reflect the relative
fault of the Company on the one hand and the Holders on the other hand in
connection with the statements or omissions that resulted in such Damages, as
well as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Holders on the other hand shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the Holders
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
Notwithstanding the provisions of this Section 8(d), no Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities of such Holder were offered to the
public (less any underwriting discounts and commissions) exceeds the amount of
any damages which such Holder has otherwise been required to pay by reason of
such untrue statement or omission. Each Holder's obligation to contribute
pursuant to this Section 8(d) is several in the proportion that the proceeds of
the offering received by such Holder bears to the total proceeds of the offering
received by all the Holders and not joint.
If indemnification is available under paragraph (a) or (b) of this
Section 8, the indemnifying parties shall indemnify each indemnified party to
the full extent provided in such paragraphs without regard to the relative fault
of said indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 8(d).
The Company and each Holder agrees that it would not be just or
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to herein. The amount paid or payable
by an indemnified party as a result of the Damages referred to in this Section 8
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred (and not otherwise reimbursed) by
such indemnified party in connection with investigating or defending any such
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action or claim. No person guilty of fraudulent misrepresentation (within the
meaning of Section ll(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 8 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
Section 9. Rule 144 and Rule 144A.
(a) Rule 144. The Company covenants that it will file any reports
required to be filed by it under the Securities Act and the Exchange Act (or, if
the Company is not required to file such reports, it will, upon the request of
any Holder, make publicly available other information so long as necessary to
permit sales under Rule 144 under the Securities Act), and it will take such
further action as any Holder may reasonably request, all to the extent required
from time to time to enable such Holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rules may be amended
from time to time, or (b) any similar rule or regulation hereafter adopted by
the Commission. Upon the request of any Holder, the Company will deliver to such
Holder a written statement as to whether it has complied with such requirements.
(b) Rule 144A. Upon the request of any Holder, the Company shall
deliver to such holder within 10 days following receipt by the Company of such
request, the information required by Section (d)(4) of Rule 144A under the
Securities Act, as such rule may be amended from time to time or any similar
rule or regulation hereafter adopted by the Commission ("Rule 144A"), and will
take such further action as any Holder may reasonably request, all to the extent
required from time to time to enable such Holder to sell Registrable Securities
without registration under the Securities Act within the limitations or the
exemptions provided by Rule 144A. All information shall be "reasonably current"
as defined in Rule 144A.
Section 10. Restrictions on Sale by the Company and Others.
In the event of an underwritten public offering for the account of the
Company with respect to which the Holders have the right to exercise their
rights to Piggy-Back Registration pursuant to Section 3 hereof, upon the written
request (the "Lock-up Request") of the managing underwriter (or underwriters) of
such offering, which request shall be made at least 20 days prior to the
anticipated effective date of the Registration Statement for such offering, each
Holder agrees not to effect any public sale or distribution of any securities
similar to those being registered in such offering (other than pursuant to such
offering), including without limitation, through sales of Registrable Securities
pursuant to the Shelf Registration Statement, during the 10 days prior to, and
during the 90-day period beginning on, the effective date of the Registration
Statement relating to such offering.
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Section 11. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of the Holder (or if
there is more than one Holder, of the Holders of a majority in interest) of the
Registrable Securities then outstanding.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by telecopier, registered or certified
mail (return receipt requested), postage prepaid or courier to the parties at
their respective addresses set forth on the signature pages hereof (or at such
other address for any party as shall be specified by like notice, provided that
notices of a change of address shall be effective only upon receipt thereof).
All such notices and communications shall be deemed to have been received: at
the time delivered by hand, if personally delivered; five business days after
being deposited in the mail, postage prepaid, if mailed; when receipt is
acknowledged, if telecopied; and on the next business day if timely delivered to
a courier guaranteeing overnight delivery.
(c) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders. If any transferee of any Holder shall acquire
Registrable Securities in any manner, whether by operation of law or otherwise,
such Registrable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities such person
shall be conclusively deemed to have agreed to be bound by and to perform all of
the terms and provisions of this Agreement and such person shall be entitled to
receive the benefits hereof.
(d) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(e) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of law.
(g) Severabilitv. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the Holders
shall be enforceable to the fullest extent permitted by law.
-15-
<PAGE>
(h) Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and is intended to be the complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
(i) Attornevs' Fees. In any action or proceeding brought to enforce any
provision of this Agreement or where any provision hereof is validly asserted as
a defense, the successful party shall, to the extent permitted by applicable
law, be entitled to recover reasonable attorneys' fees and expenses in addition
to any other available remedy.
(j) Further Assurances. Each party shall cooperate and take such action
as may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
(k) Remedies. In the event of a breach or a threatened breach by any
party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific performance
of its rights under this Agreement or to injunctive relief, in addition to being
entitled to exercise all rights provided in this Agreement and granted by law.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being agreed by the parties that the remedy at law, including
monetary damages, is inadequate and that any objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed by their respective officers hereunto duly
authorized, as of the day and year first above written.
KEY ENERGY GROUP, INC.
By: /s/ Francis D. John
Name: Francis D. John
Title: Chief Executive Officer
Address: 257 Livingston Avenue
New Brunswick, New Jersey 08901
Telecopier: (908) 247-5148
-16-
Exhibit 5.1
March 1, 1996
Key Energy Group, Inc.
255 Livingston Avenue
New Brunswick, NJ 08901
Re: Registration Statement on Form S-4
5,679,962 shares of Common Stock, par value $.10 per share
Dear Sir or Madam:
In accordance with the Securities Act of 1933, as amended, Key Energy
Group, Inc., a Maryland corporation ("Key"), will register 4,929,962 shares of
Common Stock (the "Acquisition Shares"), par value $.10 per share (the "Common
Stock"), five-year warrants ("Warrants") to purchase an aggregate of 750,000
shares of Common Stock at an exercise price of $6.75 per share and the 750,000
shares of Common Stock issuable upon the exercise of the Warrants (collectively,
with the Acquisition Shares, the "Shares" ) by filing a registration statement
on Form S-4 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission"). This opinion is furnished to you to be filed as
Exhibit 5.1 to the Registration Statement. The Shares will be issued as
consideration under the Agreement and Plan of Merger, dated November 18, 1995,
as amended, providing for the merger of WellTech, Inc. with and into Key.
We have acted as counsel to Key in connection with the preparation of
the Registration Statement, and we have examined originals or copies, certified
or otherwise identified to our satisfaction, of the Registration Statement, the
Articles of Incorporation of Key, as amended to date, as well as a proposed
amendment to such Articles of Incorporation, corporate records, certificates and
statements of officers and accountants of Key and of public officials, and such
other documents as we have considered necessary in order to furnish the opinion
hereinafter set forth.
We express no opinion herein as to the laws of any jurisdiction other
than The Commonwealth of Massachusetts. Insofar as this opinion involves matters
of Maryland law, we have relied solely upon the opinion of Piper & Marbury
L.L.P., a copy of which is filed with the Registration Statement as Exhibit 5.2.
In rendering this opinion, we have assumed that Key's charter amendment
to, inter alia, increase the total number of authorized shares of Common Stock
from 10,000,000 to 25,000,000 has been approved by the stockholders of Key and
that Articles of Amendment and Restatement reflecting the same have been filed
with the State of Maryland.
<PAGE>
Key Energy Group, Inc.
March 1, 1996
Page 2
Based on and subject to the foregoing, we are of the opinion that the
Shares and the Warrants have been duly and validly authorized by Key and, when
issued, said Shares and the Warrants will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm made therein under the
caption "Legal Matters." In giving such consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act or the Rules and Regulations of the Commission promulgated
thereunder.
Very truly yours,
/s/ SULLIVAN & WORCESTER LLP
SULLIVAN & WORCESTER LLP
Exhibit 5.2
PIPER & MARBURY
L.L.P.
Charles Center South
36 South Charles Street
Baltimore, Maryland 21201-3018
410-539-2530
Fax: 410-539-0489
February 29, 1996
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Re: Key Energy Group, Inc.
Ladies and Gentlemen:
We have acted as special Maryland counsel for Key Energy Group, Inc., a
Maryland corporation (the "Company"), in connection with the Company's
registration statement on Form S-4 (the "Registration Statement") of 4,929,962
shares (the "Acquisition Shares") of common stock, $.10 par value ("Common
Stock"), warrants (the "Warrants") to purchase 750,000 shares of Common Stock to
be granted in connection with the merger of WellTech, Inc., a Delaware
corporation, with and into the Company (the "Merger") and the 750,000 shares of
Common Stock to be issued upon the exercise of the Warrants (the "Warrant
Shares").
We have examined the Charter and By-Laws of the Company, the Agreement
and Plan of Merger dated as of November 18, 1995, as amended (the "Merger
Agreement"), by and between the Company and WellTech, Inc., the form of warrants
to be issued to WellTech, Inc. shareholders, certain minutes of proceedings of
the Board of Directors of the Company and a good standing certificate dated
February 23, 1996 from the State Department of Assessments and Taxation of
Maryland, and originals or copies, certified or otherwise identified to our
satisfaction, of such other documents, corporate records, certificates of public
officials and officers of the Company and other instruments, and have conducted
such other investigations of fact and law, as we have deemed necessary or
advisable for the purposes of rendering this opinion.
In rendering this opinion we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to use as certified
or photostatic copies and the authenticity of the originals for such copies. We
have assumed that any filings required under the laws of the State of Delaware
have been made.
The Company plans to amend its Charter to increase the number of
authorized shares of Common Stock to 25,000,000 shares. For purposes of this
opinion, we have assumed that such charter amendment has been duly adopted and
filed with the Maryland State Department of Assessments and Taxation.
<PAGE>
Sullivan & Worcester
February 29, 1996
Page 2
Based upon the subject to the foregoing, we are of the opinion that:
1. The Acquisition Shares have been duly and validly authorized for
issuance by the Board of Directors of the Company by resolutions adopted on
November 18, 1995, and the Acquisition Shares, when issued as authorized in
accordance with the terms of the Merger Agreement and upon acceptance for filing
of Articles of Merger by the Maryland State Department of Assessments and
Taxation, will be fully paid and nonassessable by the Company, with no personal
liability attached to the ownership thereof.
2. The Warrant Shares have been duly and validly authorized for
issuance by the Board of Directors of the Company by resolutions adopted on
November 18, 1995, and the Warrant Shares, when issued upon the exercise of the
Warrants granted in accordance with the terms of the Merger Agreement and
delivered against payment therefor, will be fully paid and nonassessable by the
Company, with no personal liability attached to the ownership thereof.
3. The Warrants have been duly and validly authorized for issuance by
the Board of Directors of the Company by resolutions adopted November 18, 1995
and the Warrants, when issued and delivered in accordance with the terms of the
Merger Agreement, will be fully paid and nonassessable by the Company, with no
personal liability attached to the ownership thereof.
The opinions expressed in this letter are solely for your use in
connection with the Registration Statement. This opinion may not be relied on by
any other person or by you in any other connection without our prior written
approval. The opinions expressed in this letter are limited to the matters set
forth in this letter, and no other opinions should be inferred beyond the
matters expressly stated.
All of the opinions set forth herein are rendered as of the date
hereof, and we assume no obligation to update such opinions or advise you of
changes in our opinions to reflect facts or circumstances which may hereafter
come to our attention or changes in the law which may hereafter occur.
The opinions expressed above are limited to the law of the State of
Maryland. We hereby consent to the filing of this opinion as Exhibit 5.2 to the
Registration Statement and to the reference to our firm in the Registration
Statement. In giving our consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Act or the
Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/Piper & Marbury L.L.P.
PIPER & MARBURY L.L.P
Exhibit 8
March 1, 1996
Key Energy Group, Inc.
257 Livingston Avenue
New Brunswick, NJ 08901
ATTN: Francis D. John, Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the transaction referred to below. This opinion is delivered in
connection with the Agreement and Plan of Merger dated as of November 18, 1995,
as amended, by and between Key Energy Group, Inc., a Maryland corporation
("Key"), and WellTech, Inc., a Delaware corporation ("WellTech"). The Agreement
and Plan of Merger, and all other agreements expressly contemplated thereby, are
collectively referred to herein as the "Merger Agreement". "Code" shall mean the
Internal Revenue Code of 1986, as amended. Capitalized terms used herein shall
have the same meaning they have in the Merger Agreement, except as otherwise
defined herein.
Facts. Pursuant to the Merger Agreement, WellTech will be merged with
and into Key, and the WellTech shareholders will in exchange receive common
stock of Key and warrants to purchase common stock of Key. Prior to the Merger,
WellTech will distribute stock of Dawson Well Servicing, Inc. to the WellTech
stockholders.
Assumptions. In rendering our opinions, we have with your permission
assumed the accuracy of the following assumptions, and we have assumed that the
Merger will be consummated pursuant to the terms of and in accordance with the
Merger Agreement.
A. The fair market value of the Key common stock and other
consideration received by a WellTech stockholder in the Merger will be
approximately equal to the fair market value of the WellTech shares surrendered
by him in exchange therefor.
B. There is no present plan or intention by the stockholders of
WellTech who own, directly or indirectly, a one percent (1%) or greater interest
(by value) in WellTech (the "WellTech Securityholders"), and to the best
knowledge of the management of WellTech, there is no present plan or intention
on the part of the remaining stockholders of WellTech, to sell,
<PAGE>
Key Energy Group, Inc.
March 1, 1996
Page 2
exchange or otherwise dispose of a number of shares of Key common stock received
in the Merger that would reduce the WellTech stockholders' ownership of Key
stock to a number of shares having a value, as of the date of the Merger, of
less than fifty percent (50%) of the value of all of the formerly outstanding
stock of WellTech as of the same date. For purposes of this assumption, shares
of WellTech stock surrendered by dissenters or exchanged for cash in lieu of
fractional shares of Key common stock will be treated as outstanding WellTech
stock on the date of the Merger, and the value of WellTech stock shall include
the expenses of WellTech stockholders in connection with the Merger that are
paid by WellTech, the value of the Dawson Well Servicing, Inc. stock distributed
to WellTech stockholders prior to the Merger, and the value of the New Key
Warrants received by the WellTech stockholders in the Merger. Moreover, shares
of WellTech stock and shares of Key stock held by WellTech's stockholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the Merger have
been considered in making this assumption.
C. At the time of the Merger, Key has no plan or intention to redeem or
otherwise reacquire any of the Key stock to be issued in the Merger.
D. At the time of the Merger, Key has no plan or intention to sell or
otherwise dispose of any of the assets of WellTech acquired in the Merger,
except for dispositions made in the ordinary course of business or transfers
described in Section 368(a)(2)(C) of the Code.
E. Following the Merger, Key will continue the historic business of
WellTech or use a significant portion of WellTech's business assets in a
business.
F. Key, WellTech, and the stockholders of WellTech will pay their
respective expenses, if any, incurred in connection with the Merger, provided
however that WellTech may pay certain expenses of its stockholders as expressly
provided for in the Merger Agreement.
G. There is no intercorporate indebtedness existing between Key and
WellTech that was issued, acquired, or will be settled at a discount.
H. No two parties to the Merger are "investment companies" as defined
in Sections 368(a)(2)(F)(iii) and (iv) of the Code.
I. Both the fair market value of WellTech's assets being transferred to
Key in the Merger (exclusive of Key stock and the Existing Key Warrants) and
such transferred assets' aggregate adjusted bases will exceed the sum of
WellTech's liabilities being assumed by Key, plus the amount of liabilities, if
any, to which such transferred assets are subject.
<PAGE>
Key Energy Group, Inc.
March 1, 1996
Page 3
J. Neither WellTech nor Key is under the jurisdiction of a court in a
Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
K. No consideration for the Merger has been or will be provided by Key
or any Key Subsidiary to WellTech or to the stockholders of WellTech other than
as expressly provided for in the Merger Agreement.
L. The payment of cash in lieu of fractional shares of Key common stock
is solely for the purpose of avoiding the expense and inconvenience to Key of
issuing fractional shares and does not represent separately bargained for
consideration. The total cash consideration that will be paid in the Merger to
WellTech's stockholders instead of issuing fractional shares of Key common stock
will not exceed one percent (1%) of the total consideration that will be issued
in the Merger to WellTech's stockholders in exchange for their shares of
WellTech stock. The fractional share interests of each holder of WellTech stock
will be aggregated, and no holder of WellTech stock will receive cash in an
amount equal to or greater than the value of one full share of Key common stock.
M. The liabilities of WellTech assumed by Key and the liabilities to
which the transferred assets of WellTech are subject were incurred by WellTech
in the ordinary course of its business.
Opinions. Based on the foregoing facts and assumptions and assuming the
accuracy thereof, we are of the opinion that for federal income tax purposes:
1. The merger of WellTech with and into Key pursuant to the Merger
Agreement will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code.
2. WellTech and Key will each be a "party to a reorganization" within
the meaning of Section 368(b) of the Code.
3. No gain or loss will be recognized by Key upon the receipt of
WellTech's assets in the Merger. Code Section 1032(a).
4. No gain or loss will be recognized by WellTech upon the transfer of
its assets to Key in the Merger. Code Sections 357 and 361.
5. No gain or loss will be recognized by a Key stockholder as a result
of the Merger, and such stockholder's tax basis and holding period in his Key
stock will be the same following the Merger as they were preceding.
<PAGE>
Key Energy Group, Inc.
March 1, 1996
Page 4
No opinion is expressed concerning the consequences to any party of any
matter other than those specifically addressed above. In particular, we express
no opinion with respect to the state or local tax treatment of the Merger. We
also express no opinion with respect to the tax consequences of WellTech's
distribution of Dawson Well Servicing, Inc. stock to the WellTech stockholders.
Miscellaneous. The foregoing opinions are based on the Code as in
effect on the date hereof and administrative and judicial interpretations of it.
No assurance can be given that the Code will not change or that such
interpretations will not be revised or amended adversely, possibly with
retroactive effect.
This opinion is not intended to satisfy the opinion required by Section
7.2(c) of the Merger Agreement, which opinion will be delivered at the Closing
and be based upon executed representations made by Key, WellTech, and the
WellTech stockholders.
This opinion is intended solely for the benefit and use of Key, and is
not to be used, released, quoted, or relied upon by anyone else for any purpose
(other than as required by law) without our prior written consent. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm made therein under the caption "Legal
Matters". In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act or the Rules and Regulations of the Commission promulgated
thereunder.
Very truly yours,
/s/ Sullivan & Worcester LLP
Sullivan & Worcester LLP
<PAGE>
Exhibit 10.3
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Agreement is between the undersigned Borrowers, YALE E. KEY, INC.
("Yale"), KEY ENERGY DRILLING, INC. D/B/A CLINT HURT DRILLING ("Hurt") and KEY
ENERGY GROUP, INC. ("Key") and the undersigned Lender, THE CIT GROUP/CREDIT
FINANCE, INC., concerning loans and other credit accommodations to be made by
Lender to Borrowers.
SECTION 1. PARTIES; BACKGROUND
1.1 The "Borrowers" are the persons, firms, corporations or other
entities, identified as the Borrowers in Section 10.6(c) and their successors
and assigns. All references to "Borrower" shall mean each of them individually,
and all references to "Borrowers" shall mean each of them, jointly, severally
and collectively, and the successors and assigns of each.
1.2 The "Lender" is The CIT Group/Credit Finance, Inc. and its
successors and assigns.
1.3 (i) Yale (the "Original Borrower"), Eskey, Inc. (the "Original
Guarantor"), and Fidelcor Business Credit Corporation ("Fidelcor") entered into
a loan transaction (the "Original Loan Transaction") on December 29, 1988, and,
in connection therewith, Yale executed a Promissory Note in favor of Fidelcor
(the "Original Note"), and Yale delivered to Fidelcor a Security Agreement (the
"Security Agreement") and certain related agreements and documents. As part of
the Original Loan Transaction, Eskey, Inc. executed a Corporate Continuing
Guaranty (the "Original Guaranty") in favor of Fidelcor, guaranteeing
unconditionally Yale's obligations to Fidelcor. The Original Note, the Security
Agreement, the Original Guaranty, and all documents related thereto are referred
to herein as the "1988 Agreements".
(ii) On June 29, 1990, Yale and Fidelcor entered into an Amended and
Restated Loan and Security Agreement (the Security Agreement as amended by the
Amended and Restated Loan and Security Agreement, being referred to herein as
the "Original Loan Agreement"); Yale executed a Restated Promissory Note which
amended and restated the Original Note; and Eskey, Inc. reaffirmed its
obligations under the Original Guaranty by executing the Reaffirmation and
Amendment of Guaranty and Subordination Agreement; all of the foregoing being
referred to as the "Amendment Agreements". On July 25, 1990, Skeeter Well
Service, Inc. ("Skeeter") executed a Guaranty in favor of Lender and entered
into a Security Agreement with Lender (the "Skeeter Agreements"). The Amendment
Agreements and the Skeeter Agreements, along with all documents executed in
connection therewith, are referred to as the "1990 Agreements".
<PAGE>
(iii) On February 4, 1991, Fidelcor sold and assigned to CIT the
Original Loan Transaction, including all of its right, title, and interest in
and to the 1988 Agreements and the 1990 Agreements.
(iv) On or about December 8, 1992, pursuant to a plan of
reorganization, Key Energy Group, Inc., a newly formed wholly-owned subsidiary
of National Environmental Group, Inc. ("NEGI"), and ESKEY, Inc., a wholly-owned
subsidiary of NEGI, merged with NEGI. NEGI was the surviving corporation and its
name was changed to Key Energy Group, Inc.
(v) In March 1991, Yale, a wholly-owned subsidiary of Key, merged with
Skeeter Well Service, Inc. and Yale was the surviving corporation. In July 1993,
OEI Acquisition Corp., a wholly-owned subsidiary of Key, merged with Odessa
Exploration Incorporated. OEI Acquisition Corp. was the surviving corporation
and its name was changed to "Odessa Exploration Incorporated" ("Odessa"). In
March 1995, Key Energy Drilling, Inc., a wholly-owned subsidiary of Key,
acquired the assets of Clint Hurt & Associates, Inc. and the right to use the
name "Clint Hurt Drilling."
(vi) On May 19, 1994, Yale executed a Second Amended and Restated
Promissory Note (the "Second Amended Note") in favor of CIT in the principal
amount of $4,326,666.69. On December 27, 1994, Yale executed a Promissory Note
(Term Note) (the "Term Note") in favor of CIT in the principal amount of
$2,500,000.00. The Second Amended Note and the Term Note are referred to as the
"1994 Notes".
(vii) The 1988 Agreements, the 1990 Agreements, and the 1994 Notes are
referred to herein as the "Original Loan Documents". Yale and Key are from
time-to-time referred to as the "Original Obligors".
(viii) On November 18, 1995, Key and WellTech entered into an
"Agreement and Plan of Merger" (the "Merger Agreement") evidencing their intent
to merge WellTech with and into Key in accordance with the general corporation
laws of the states of Delaware and Maryland (the "Merger"). It is anticipated
that the Merger will not be concluded and become effective until March 31, 1996.
In the interim, Key and WellTech have entered into an "Interim Operations
Agreement" dated November 18, 1995 whereby Key has assumed responsibility for
operating and managing the affairs of WellTech.
1.4 Any accounting term used in this Agreement shall have, unless
otherwise specifically provided herein, the meaning customarily given in
accordance with generally accepted accounting principles ("GAAP"), and all
financial computations hereunder shall be computed, unless otherwise
specifically provided herein, in accordance with GAAP as consistently applied
and using the same method for inventory valuation as used in the preparation of
a Borrower's financial statements.
1.5 Capitalized terms not otherwise defined herein shall, unless the
context indicates otherwise, have the meanings provided for by the Uniform
Commercial Code to the extent the same are used or defined therein. Wherever
appropriate in the context, terms used herein in the singular also include the
plural, and vice versa, and each masculine, feminine, or neuter pronoun shall
also include the other genders.
2
<PAGE>
1.6 The terms "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
section, paragraph or subdivision. The section titles, and list of exhibits
appear as a matter of convenience only and shall not affect the interpretation
of this Agreement. All references to statutes and related regulations shall
include any amendments of same and any successor statutes and regulations. All
references to any instruments or agreements, shall include any and all
modifications or amendments thereto and any and all extensions or renewals
thereof.
SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS
2.1 Revolving Loans. Lender shall, subject to the terms and conditions
contained herein, make revolving loans to each of the Borrowers ("Revolving
Loans") in amounts requested by such Borrower from time to time, but not in
excess of such Borrower's Net Availability existing immediately prior to the
making of the requested loan and provided the requested loan would not cause the
outstanding Obligations of all Borrowers in the aggregate to exceed the Maximum
Credit; provided further, however, that Lender shall be under no obligation to
make Revolving Loans to any Borrower following the filing of an involuntary
petition, action or proceeding against any Borrower or guarantor (and for so
long thereafter as such involuntary petition, action, or proceeding remains
undismissed or unstayed, and subject to the terms and provisions of Section
7.1(h)) seeking reorganization, arrangement or readjustment of such Borrower's
or guarantor's debts or for any other relief under the bankruptcy laws of the
United States now or hereafter in effect.
(a) The " Maximum Credit" is set forth in Section 10.1(a) hereof.
(b) "Accounts Availability" equals the product obtained by multiplying
the outstanding amounts of a Borrower's separate Eligible Accounts, net of
taxes, discounts, allowances, and credits given or claimed by the Eligible
Accounts Percentage set forth in Section 10.1(b), and deducting therefrom any
Reserves.
(c) The "Net Availability" shall be calculated at any time as an amount
equal to the Maximum Credit minus the aggregate amount of all then-outstanding
Obligations by the Borrowers to Lender.
(d) "Yale's Net Availability" shall be calculated as the lesser of
(i) the Maximum Credit, less the Obligations; and
(ii) Yale's Accounts Availability, less Yale's Revolving Loans.
(e) "Hurt's Net Availability" shall be calculated as the lesser of:
3
<PAGE>
(i) the Maximum Credit, less the Obligations; or
(ii) $2,000,000, less the sum of Hurt's Term Loan, Hurt's Capital
Expenditures Loan, and Hurt's Revolving Loans; and
(iii) Hurt's Accounts Availability, less Hurt's Revolving Loans.
(f) "Key's Net Availability" shall be calculated as the lesser of:
(i) the Maximum Credit, less the Obligations; and
(ii) Key's Accounts Availability, less Key's Revolving Loans.
(g) "Eligible Accounts" are accounts created by a Borrower in the
ordinary course of its business which are and remain acceptable to Lender for
lending purposes. General criteria for Eligible Accounts are set forth below but
may be revised from time to time, by Lender, in its sole judgment, on fifteen
(15) days prior written notice to the Borrowers. Lender shall, in general, deem
accounts to be Eligible Accounts if: (1) such accounts arise from bona fide
completed transactions and have not remained unpaid for more than the number of
days after the invoice date set forth in Section 10.1(c); (2) the amounts of the
accounts reported to Lender are absolutely owing to a Borrower and do not arise
from sales on consignment, guaranteed sale or other terms under which payment by
the account debtors may be conditional or contingent; (3) the account debtor's
chief executive office or principal place of business is located in the United
States; (4) such accounts do not arise from progress billings or retainages or
bill and hold sales; (5) there are no contra relationships, setoffs,
counterclaims or disputes existing with respect thereto (but that portion of the
account for which no contras, setoffs, counterclaims or disputes are applicable
may be deemed an Eligible Account) and there are no other facts existing or
threatened which would impair or delay the collectibility of all or any portion
thereof; (6) the goods giving rise thereto were not at the time of the sale
subject to any liens except those permitted in this Agreement; (7) such accounts
are not accounts with respect to which the account debtor or any officer or
employee thereof is an officer, employee or agent of or is affiliated with any
Borrower, directly or indirectly, whether by virtue of family membership,
ownership, control, management or otherwise; (8) such accounts are not accounts
with respect to which the account debtor is the United States or any State or
political subdivision thereof or any department, agency or instrumentality of
the United States, any State or political subdivision, unless there has been
compliance with the Assignment of Claims Act or any similar State or local law,
if applicable; (9) the Borrowers have delivered to Lender or Lender's
representative such original documents as Lender may have reasonably requested
pursuant to Section 5.8 hereof in connection with such accounts and Lender shall
have received a verification of such account, reasonably satisfactory to it, if
sent to the account debtor or any other obligor or any bailee pursuant to
Section 5.4 hereof; (10) there are no facts existing or threatened which are
reasonably likely to result in any adverse change in the account debtor's
financial condition; (11) such accounts owed by a single account debtor or its
affiliates do not represent more than twenty percent (20%) of all otherwise
Eligible Accounts of all Borrowers, provided, however, that with respect to the
Eligible Accounts of Parker & Parsley, Inc., such accounts may not represent
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more than thirty-two percent (32%) of all otherwise Eligible Accounts of all
Borrowers (accounts excluded from Eligible Accounts solely by reason of this
subsection (11) shall nevertheless be considered Eligible Accounts to the extent
of the amount of such accounts which does not exceed twenty percent (20%) or in
the case of Parker & Parsley, Inc. thirty-two percent (32%), of all otherwise
Eligible Accounts); (12) such accounts are not owed by an account debtor who is
or whose affiliates are "past due" (i.e. where more than 90 days have elapsed
since the invoice date of such accounts) upon other accounts owed to Borrowers
comprising more than fifty percent (50%) of the accounts of such account debtor
or its affiliates owed to such Borrower; (13) such accounts are owed by account
debtors whose total indebtedness to a Borrower does not exceed the amount of any
customer credit limits as established, and changed, from time to time by Lender
upon notice to such Borrower (accounts excluded from Eligible Accounts solely by
reason of this subsection (13) shall nevertheless be considered Eligible
Accounts to the extent the amount of such accounts does not exceed such customer
credit limit); (14) with respect to which the account debtor is located in the
states of New Jersey, Minnesota, West Virginia, or any other state requiring the
filing of a Business Activity Report or similar document in order to bring suit
or otherwise enforce its remedies against such account debtor in the courts or
through any judicial process of such state, unless such Borrower has qualified
to do business in such states, or has filed a Notice of Business Activities
Report or similar document with such states, as appropriate, for the then
current year; and (15) such accounts are owed by account debtors deemed
creditworthy at all times by Lender.
(h) Lender shall have a continuing right to deduct reserves in
determining Accounts Availability and each individual Borrower's Net
Availability ("Reserves"), and to increase and decrease such Reserves from time
to time, if and to the extent that, in Lender's sole judgement, such Reserves
are necessary to protect Lender against any state of facts which does, or would,
with notice or passage of time or both, constitute an Event of Default or have a
material adverse effect on any Collateral. Lender may, at its option, implement
Reserves by designating as ineligible a sufficient amount of accounts which
would otherwise be Eligible Accounts so as to reduce Net Availability and/or
each individual Borrower's Accounts Availability by the amount of the intended
Reserve.
(i) Subject to the terms and conditions hereof, including but not
limited to the existence of sufficient Net Availability and Accounts
Availability, each Borrower agrees to borrow amounts from time to time such that
the aggregate outstanding Revolving Loans and Term Loans to both Borrowers shall
at all times equal or exceed the principal amount set forth in Section 10.1(d)
as the Minimum Borrowing. Each Borrower covenants, represents and warrants to
Lender that they will jointly and severally maintain Net Availability at all
times in amounts sufficient to permit Borrowers to comply with the Minimum
Borrowing requirement. In the event Borrowers do not borrow sufficient amounts
to continuously meet or exceed the Minimum Borrowing requirement, or in the
event Borrowers fail to maintain Net Availability at all times at amounts
sufficient to permit Borrowers to comply with the Minimum Borrowing requirement,
then, in either of such events, Borrowers shall be deemed to have borrowed from
Lender jointly such additional sums from time to time as may be necessary in
order for Borrowers to continuously meet the Minimum Borrowing requirement. Such
sums shall be added to the principal amount of the outstanding Revolving Loans
for the sole purpose of computing interest due under this Agreement.
Notwithstanding the provisions of the immediately preceding sentence, Lender
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shall have no obligation to disburse to Borrowers, or any of them, any amount
deemed to have been borrowed for purposes of meeting the Minimum Borrowing
requirement unless Borrowers actually requested such disbursement from Lender
and unless the Net Availability is sufficient to support such disbursement.
2.2 Term Loan.
(a) The amount of any term loans being made by Lender to any Borrower
on the date hereof is set forth in Section 10.2(a) (the "Initial Term Loans").
Such Initial Term Loans shall be evidenced by a promissory note delivered by
each Borrower receiving an Initial Term Loan to Lender and shall be repaid,
together with interest and other amounts, in accordance with this Agreement and
such promissory notes.
(b) The amount of any additional term loans which may be available to
any Borrower at Lender's discretion after the date hereof is set forth in
Section 10.2(b) ("Additional Term Loans" and together with the Initial Term
Loans, the "Term Loans"). Such Additional Term Loans shall be evidenced by
promissory notes delivered by such Borrower to Lender, in form and substance
reasonably acceptable to Lender, and shall be repaid together with interest and
other amounts in accordance with this Agreement and such promissory notes. All
promissory notes evidencing such Additional Term Loans, together with the
promissory notes evidencing the Initial Term Loans, shall be referred to as the
"Promissory Notes."
(c) All appraisals conducted in connection with the Term Loans shall be
conducted at Borrowers' expense by an independent appraiser reasonably
acceptable to Lender. In addition, with respect to the Additional Term Loans,
(i) Lender shall have received such appraisal at least thirty (30) days prior to
the date of the requested advance for such Additional Term Loan, (ii) Lender
shall have received from Borrower evidence reasonably satisfactory to Lender
that the machinery and equipment has been purchased by Borrower and delivered to
such Borrower at one of its locations set forth in Section 10.6(e) and that such
machinery and equipment is in place and operational and (iii) Lender shall have
received invoices and such other documentation as reasonably requested by
Lender.
2.3 Accommodations.
(a) Lender may, in its sole discretion, issue or cause to be issued,
from time to time at any Borrower's request and on terms and conditions and for
purposes satisfactory to Lender, credit accommodations consisting of letters of
credit, bankers' acceptances, merchandise purchase guaranties or other
guaranties or indemnities for such Borrower's account ("Accommodations"). Each
such Borrower shall execute and perform additional agreements relating to the
Accommodations in form and substance reasonably acceptable to Lender and the
issuer of any Accommodations, all of which shall supplement the rights and
remedies granted herein. Any payments made by Lender or any affiliate of Lender
in connection with the Accommodations shall constitute additional Revolving
Loans to such Borrower.
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(b) In addition to the fees and costs of any issuer in connection with
issuing or administering Accommodations, the Borrower requesting the
Accommodation shall pay monthly to Lender, on the first day of each month, a
charge on such Borrower's open Accommodations at the rate per annum set forth in
Section 10.3(a) (the "Accommodation Charges").
(c) No Accommodation will be issued (i) unless the full amount of the
Accommodation requested, plus fees and costs for issuance (unless paid by
Borrower), is less than the Net Availability existing immediately prior to the
issuance of the requested Accommodation, or (ii) if the requested Accommodation
would cause the outstanding Obligations to exceed the Maximum Credit, or (iii)
if the requested Accommodation would cause the open amount of Accommodations
issued to all Borrowers to exceed, at any time, the Accommodation sublimit set
forth in Section 10.3(b), or (iv) if the expiry date of the requested
Accommodation extends beyond the initial term (or any renewal terms if
applicable) of this Agreement.
(d) All indebtedness, liabilities and obligations of any sort
whatsoever, however arising, whether present or future, fixed or contingent,
secured or unsecured, due or to become due, paid or incurred, arising or
incurred in connection with any Accommodation shall be included in the term
"Obligations," as defined herein, and shall include, without limitation, (i) all
amounts due or which may become due under any Accommodation; (ii) all amounts
charged or chargeable to any Borrower or to Lender by any bank, other financial
institution or correspondent bank which opens, issues, or is involved with such
Accommodations; (iii) Lender's Accommodation Charges and all fees, costs and
other charges of any issuer of any Accommodation; and (iv) all duties, freight,
taxes, costs, insurance and all such other charges and expenses which may
pertain directly or indirectly to any Obligations or Accommodations or to the
goods or documents relating thereto.
(e) Each Borrower unconditionally agrees to indemnify and hold Lender
harmless from any and all loss, claim or liability (including reasonable
attorneys' fees) arising from any transactions or occurrences relating to any
Accommodation established or opened for such Borrower's account, the Collateral
relating thereto and any drafts or acceptances thereunder, including any such
loss or claim due to any action taken by an issuer of any Accommodation. Each
Borrower further agrees to indemnify and hold Lender harmless for any errors or
omissions other than gross negligence, bad faith, or willful misconduct in
connection with the Accommodations, whether caused by Lender, by the issuer of
any Accommodation or otherwise. Each Borrower's unconditional obligation to
indemnify and hold Lender harmless under this provision shall not be modified or
diminished for any reason or in any manner whatsoever, except for Lender's gross
negligence, bad faith, or willful misconduct. Each Borrower agrees that any
charges made to Lender by any issuer of any Accommodation shall be conclusive on
such Borrower and may be charged to such Borrower's account.
(f) Lender shall not be responsible for (i) the conformity of any goods
to the documents presented; (ii) the validity or genuineness of any documents;
or (iii) delay, default, or fraud by any Borrower or shipper and/or anyone else
in connection with the Accommodations or any underlying transaction.
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(g) Each Borrower agrees that any action taken by Lender, if taken in
good faith, or any action taken by an issuer of any Accommodation, under or in
connection with any Accommodation, shall be binding on such Borrower and shall
not create any resulting liability to Lender. In furtherance thereof, Lender
shall have the full right and authority to clear and resolve any questions of
non-compliance of documents; to give any instructions as to acceptance or
rejection of any documents or goods; to execute for each Borrower's account any
and all applications for steamship or airway guarantees, indemnities or delivery
orders; to grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts, acceptances, or documents; and to agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of the terms or conditions of any of the applications or Accommodations. All of
the foregoing actions may be taken in Lender's sole name, and the issuer thereof
shall be entitled to comply with and honor any and all such documents or
instruments executed by or received solely from Lender, all without any notice
to or any consent from any Borrower. None of the foregoing actions described in
this subsection (g) may be taken by any Borrower without Lender's express
written consent.
2.4 Certain Amounts Due on Demand. Lender may, in its sole discretion,
make or permit Revolving Loans, Accommodations, or other Obligations in excess
of the Maximum Credit, Accounts Availability or Net Availability or applicable
formulas or sublimits. All or any portion of such excess(es) shall become
immediately due and payable upon Lender's demand.
SECTION 3. INTEREST AND FEES
3.1 (a) Interest on the Revolving Loans shall be payable by the
Borrowers on the first day of each month, calculated upon the closing daily
balances in the loan account of the Borrowers for each day during the
immediately preceding month, at the per annum rate (the "Annual Rate") set forth
as the Interest Rate in Section 10.4(a). The Annual Rate shall increase or
decrease by an amount equal to each increase or decrease, respectively, in the
Prime Rate (as herein defined), effective as of the date of each such change, On
and after any Event of Default or termination or non-renewal hereof, interest on
all unpaid matured obligations shall accrue at a rate equal to two percent (2%)
per annum in excess of the Annual Rate otherwise payable until such time as all
Obligations are indefeasibly paid in full (notwithstanding entry of any judgment
against any Borrower or the exercise of any other right or remedy by Lender),
and all such interest shall be payable on demand. Notwithstanding the foregoing
provisions of this Section 3.1(a) regarding the rates of interest applicable to
Revolving Loans and any rate of interest applicable to any Term Loan:
(i) If at any time the amount of interest computed on the
basis of either the Annual Rate or the rate provided by any Promissory
Note pursuant to Section 2.2 of this Agreement (the "Note Rate") would
exceed the amount of interest computed upon the basis of the maximum
rate of interest (the "Maximum Legal Rate") permitted by applicable
state or federal law in effect from time to time hereafter, after
taking into account, to the extent required by applicable law, any and
all fees, payments, charges and calculations provided for in this
Agreement or in any other agreement between Borrowers or any individual
Borrower and Lender, the interest payable under this Agreement shall
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be computed on the basis of the Maximum Legal Rate, but any subsequent
reduction in the Annual Rate or the Note Rate (if applicable) shall not
reduce such interest thereafter payable hereunder below the amount
computed on the basis of the Maximum Legal Rate until the aggregate
amount equals the total amount of interest which would have accrued if
such interest had been at all times computed solely on the basis of the
Annual Rate and the Note Rate (if applicable).
(ii) No agreements, conditions, provisions or stipulations
contained in this Agreement or any other instrument, document or
agreement between Borrowers, or any of them, and the Lender, or default
of any Borrower, or the exercise by the Lender of the right to
accelerate the maturity of the payment of the principal and interest or
to exercise any option whatsoever contained in this Agreement or any
other agreement among Borrowers, or any of them, and the Lender, or the
arising of any contingency whatsoever, shall entitle the Lender to
collect, in any event, interest exceeding the Maximum Legal Rate and in
no event shall any Borrower be obligated to pay interest exceeding such
Maximum Legal Rate and all agreements, conditions or stipulations, if
any, which may in any event or contingency whatsoever operate to bind,
obligate or compel any Borrower to pay a rate of interest exceeding the
Maximum Legal Rate, shall be without binding force or effect, at law or
in equity, to the extent only of the excess of interest over such
Maximum Legal Rate. In the event that any interest is charged in excess
of the Maximum Legal Rate ("Excess"), each Borrower acknowledges and
stipulates that any such charge shall be the result of an accidental
and bona fide error, and such Excess shall be, first, applied to reduce
the principal amount of indebtedness then unpaid hereunder; second,
applied to reduce such Borrower's other Obligations hereunder; and
third, returned to such Borrower, it being the intention of the parties
hereto not to enter at any time into a usurious or otherwise illegal
relationship. Each Borrower recognizes that, with fluctuations in the
Annual Rate, the Note Rate, and the Maximum Legal Rate, such an
unintentional result could inadvertently occur. By the execution of
this Agreement, each Borrower covenants that (x) the credit or return
of any Excess shall constitute the acceptance by each Borrower of such
Excess, and (y) no Borrower shall seek or pursue any other remedy,
legal or equitable, against Lender, based in whole or in part upon the
charging or receiving of any interest in excess of the maximum
authorized by applicable law. For the purpose of determining whether or
not any Excess has been contracted for, charged, or received by Lender,
all interest at any time contracted for, charged or received by the
Lender in connection with this Agreement shall be amortized, prorated,
allocated and spread in equal parts during the entire term of this
Agreement.
(iii) The provisions of Section 3.1(a)(ii) shall be deemed to
be incorporated into every document or communication relating to the
Obligations which sets forth or prescribes any account, right or claim
or alleged account, right or claim of the Lender with respect to each
Borrower (or any other obligor in respect of the Obligations), whether
or not any provision of Section 3.1 is referred to therein. All such
documents and communications and all figures set forth therein shall,
for the sole purpose of computing the extent of the liabilities and
obligations of each Borrower (or any other obligor) asserted by the
Lender thereunder, be automatically recomputed by such Borrower or
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obligor, and by any court considering the same, to give effect to the
adjustments or credits required by Section 3.1(a)(ii).
(iv) If the applicable state or federal law is amended in the
future to allow a greater rate of interest to be charged under this
Agreement or any other loan documents than is presently allowed by
applicable state or federal law, then the limitation of interest
hereunder shall be increased to the maximum rate of interest allowed by
applicable state or federal law as amended, which increase shall be
effective hereunder on the effective date of such amendment, and all
interest charges owing to the Lender by reason thereof shall be payable
upon demand.
(b) The "Prime Rate" is the per annum rate of interest publicly
announced by Chemical Bank of New York, or the applicable rate of its successors
or assigns, from time to time as its prime rate (the prime rate is not intended
to be the lowest rate of interest charged by Chemical Bank of New York, or its
successors or assigns, to its borrowers).
3.2 The Borrowers collectively shall pay Lender on the date hereof a
Closing Commitment Fee in the amount set forth in Section 10.4(b), which fee is
fully earned as of the date hereof.
3.3 The Borrowers collectively shall pay Lender monthly, on the first
day of each month, in arrears, an Unused Line Fee for each month during the
initial and each renewal Term at the rate per annum set forth in Section
10.4(c), calculated upon the amount, if any, by which the Maximum Credit exceeds
the average outstanding daily principal balance during the preceding month of
all Revolving Loans, Accommodations and any Term Loan and Capex Term Loan.
3.4 At Lender's option, all principal, interest (other than unmatured
accrued interest), fees, costs, expenses and other charges provided for in this
Agreement, or in any other agreement now or hereafter existing between Lender
and any Borrower, may be charged to any loan account of such Borrower maintained
by Lender. Interest, fees for Accommodations, the Unused Line Fee and any other
amounts payable by the Borrowers, or any of them, to Lender based on a per annum
rate shall be calculated on the basis of actual days elapsed over a 360-day
year.
3.5 If as a result of any regulatory change directly or indirectly
affecting Lender or any of Lender's affiliated companies there shall be imposed,
modified or deemed applicable any tax excluding any tax on or measured by
income, gross receipts, charges, or rates of Lender, reserve, special deposit,
minimum capital, capital ratio, or similar requirement against or with respect
to or measured by reference to loans made or to be made hereunder or
participations therein, or to Accommodations, and the result shall be to
increase the cost to Lender or to any of Lender's affiliated companies of making
or maintaining any loan or Accommodation hereunder or to any other party
maintaining any participation therein, or reduce any amount receivable in
respect of any such loan (which increase in cost, or reduction in amount
receivable, shall be the result of Lender's or Lender's affiliated companies'
reasonable allocation among all affected customers of the aggregate of such
increases or reductions resulting from such event), then, within ten (10) days
after receipt by the Borrowers of a certificate from Lender containing the
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information described in this Section 3.5, each Borrower agrees, jointly and
severally, from time to time to pay Lender such additional amounts as shall be
sufficient to compensate Lender or any of Lender's affiliated companies for such
increased costs or reductions in amounts which Lender determines in its sole
discretion are material. Notwithstanding the foregoing, all such amounts shall
be subject to the provisions of Section 3.1. The certificate requesting
compensation under this Section 3.5 shall identify the regulatory change which
has occurred, the requirements which have been imposed, modified or deemed
applicable, the amount of such additional cost or reduction in the amount
receivable and the way in which such amount has been calculated.
SECTION 4. GRANT OF SECURITY INTEREST
4.1 To secure the payment and performance in full of all Obligations,
each Borrower hereby grants to Lender a continuing security interest in and lien
upon, and a right of setoff against, and each Borrower hereby assigns and
pledges to Lender, all of the Collateral, including any Collateral not deemed
eligible for lending purposes.
4.2 "Obligations" shall mean any and all Revolving Loans, Term Loans,
Accommodations and all other indebtedness, liabilities and obligations of every
kind, nature and description owing by any Borrower to Lender and/or its
affiliates, including principal, interest, charges, fees and expenses, however
evidenced, whether as principal, surety, endorser, guarantor or otherwise,
whether arising under this Agreement or otherwise, whether now existing or
hereafter arising, whether arising before, during or after the initial or any
renewal Term or after the commencement of any case with respect to any Borrower
under the United States Bankruptcy Code or any similar statute, whether direct
or indirect, absolute or contingent, joint or several, due or not due, primary
or secondary, liquidated or unliquidated, secured or unsecured, original,
renewed or extended and whether arising directly or howsoever acquired by Lender
including from any other entity outright, conditionally or as collateral
security, by assignment, merger with any other entity, participations or
interests of Lender in the obligations of such Borrower to others, assumption,
operation of law, subrogation or otherwise and shall also include all amounts
chargeable to the Borrowers under this Agreement or in connection with any of
the foregoing.
4.3 "Collateral" shall mean all of the following property of each
Borrower:
All now owned and hereafter acquired right, title and interest of each
Borrower in, to and in respect of all: accounts, interests in goods represented
by accounts, returned, reclaimed or repossessed goods with respect thereto and
rights as an unpaid vendor; contract rights; chattel paper; general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims, and existing and future leasehold interests in
equipment, real estate and fixtures); documents; instruments; letters of credit,
bankers' acceptances or guaranties; cash monies, deposits, securities, bank
accounts, deposit accounts, investment property, credits and other property now
or hereafter held in any capacity by Lender, its affiliates, or any entity
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which, at any time, participates in Lender's financing of such Borrower, or at
any other depository or other institution; agreements or property securing or
relating to any of the items referred to above;
All now owned and hereafter acquired right, title and interest of each
Borrower in, to and in respect of goods, including, but not limited to:
All inventory, wherever located, whether now owned or hereafter
acquired, of whatever kind, nature or description, including all raw materials,
work-in-process, finished goods, and materials to be used or consumed in each
Borrower's business; and all names or marks affixed to or to be affixed thereto
for purposes of selling same by the seller, manufacturer, lessor or licensor
thereof;
All equipment and fixtures, wherever located, whether now owned or
hereafter acquired, including, without limitation, all machinery, equipment,
motor vehicles, furniture and fixtures, and any and all additions,
substitutions, replacements (including spare parts), and accessions thereof and
thereto;
All consumer goods, farm products, crops, timber, minerals or the like
(including oil and gas), wherever located, whether now owned or hereafter
acquired, of whatever kind, nature or description;
All now owned and hereafter acquired right, title and interests of each
Borrower in, to and in respect of any real or other personal property in or upon
which Lender has or may hereafter have a security interest, lien or right of
setoff;
All present and future books and records relating to any of the above
including, without limitation, all computer programs, printed output and
computer readable data in the possession or control of any Borrower, any
computer service bureau or other third party;
All products and proceeds of the foregoing in whatever form and
wherever located, including, without limitation, all insurance proceeds and all
claims against third parties for loss mr destruction of or damage to any of the
foregoing.
4.4 To the extent not completed by the date hereof, each Borrower
covenants to deliver to the Lender, as soon as possible after the date hereof,
each of the following with respect to each parcel of real property owned by such
Borrower and each parcel of real property leased by such Borrower and deemed by
the Lender to be material, all in form and substance reasonably satisfactory to
the Lender: (a) a deed of trust and/or mortgage; (b) a survey certified to the
Lender (unless such requirement is waived in writing by Lender); (c) a mortgagee
policy of title insurance in an amount acceptable to the Lender; (d) an
environmental audit addressed to the Lender; and (e) such other due diligence
items as the Lender may reasonably request.
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SECTION 5. COLLECTION AND ADMINISTRATION
5.1 Borrowers are authorized to collect the accounts and any other
proceeds of Collateral, on behalf of and in trust for Lender, at the Borrowers'
expense, but such authority shall automatically terminate upon an Event of
Default. Lender may modify or terminate such authority at any time whether or
not an Event of Default has occurred and directly collect the accounts and other
monetary obligations included in the Collateral. Each Borrower shall, at such
Borrower's expense and in the manner requested by Lender from time to time,
direct that remittances and all other proceeds of accounts and other Collateral
shall be (a) sent to a post office box designated by and/or in the name of
Lender or in the name of such Borrower, but as to which access is limited to
Lender and/or (b) deposited into a bank account maintained in the name of Lender
and/or a blocked bank account under arrangements with the depository bank under
which all funds deposited to such blocked bank account are required to be
transferred solely to Lender. Regardless whether such account is maintained in
the name of the Borrowers, or any of them, or the Lender, the Borrowers shall
bear the risk of loss of all funds in such account. In connection therewith,
each Borrower shall execute such post office box and/or blocked bank account
agreements as Lender shall specify.
5.2 All Obligations shall be payable at Lender's office set forth below
or at Lender's bank designated in Section 10.6(b) or at such other bank or place
as Lender may expressly designate from time to time for purposes of this
Section. Lender shall apply all proceeds of accounts or other Collateral
received by Lender and all other payments in respect of the Obligations to the
Revolving Loans whether or not then due or to any other Obligations then due, in
whatever order or manner Lender shall determine. Lender shall have the
continuing and exclusive right to apply and reverse and reapply any and all such
proceeds and payments to any portion of the Obligations. For purposes of
determining Accounts Availability and Net Avail ability, remittances and other
payments with respect to the Collateral and Obligations will be treated as
credited to the loan account of the Borrowers maintained by Lender and
Collateral balances to which they relate, upon the date of Lender's receipt of
advice from Lender's bank that such remittances or other payments have been
credited to Lender's account or in the case of remittances or other payments
received, directly in kind by Lender, upon the date of Lender's deposit thereof
at Lender's bank, subject to final payment and collection. In computing interest
charges, the loan account of the Borrowers maintained by Lender will be credited
with remittances and other payments two (2) Business Days after Lender's receipt
of advice of deposit of remittances and other payments in Lender's account at
Lender's bank designated in Section 10.6(b) or at such other financial
institution as Lender may designate. "Business Day" shall mean any day other
than a Saturday or Sunday or any other day on which Lender or banks in Chicago,
Illinois or New York, New York are authorized to close.
5.3 Lender shall render to Borrowers monthly a loan account statement.
Each statement shall be considered correct and binding upon each Borrower as an
account stated, except to the extent that Lender receives, within ninety (90)
days after the mailing of such statement, written notice from any Borrower of
any specific exceptions by such Borrower to that statement.
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5.4 Lender may, at any time, whether or not an Event of Default has
occurred, without notice to or assent of any Borrower, (a) notify any account
debtor that the accounts and other Collateral which includes a monetary
obligation have been assigned to Lender by any such Borrower and that payment
thereof is to be made to the order of and directly to Lender, (b) send, or cause
to be sent by its designee, requests (which may identify the sender by a
pseudonym) for verification of accounts and other Collateral directly to any
account debtor or any other obligor or any bailee with respect thereto, and (c)
demand, collect or enforce payment of any accounts or such other Collateral, but
without any duty to do so, and Lender shall not be liable for any, failure to
collect or enforce payment thereof. At Lender's request, all invoices and
statements sent to any account debtor, other obligor or bailee, shall state that
the accounts and such other Collateral have been assigned to Lender and are
payable directly and only to Lender.
5.5 Each Borrower hereby appoints Lender and any designee of Lender as
such Borrower's attorney-in-fact and authorizes Lender or such designee, at such
Borrower's sole expense, to exercise at any times in Lender's or such designee's
discretion all or any of the following powers, which powers of attorney, being
coupled with an interest, shall be irrevocable until all Obligations have been
paid in full: (a) receive, take, endorse, assign, deliver, accept and deposit,
in the name of Lender or such Borrower, any and all cash, checks, commercial
paper, drafts, remittances and other instruments and documents relating to the
Collateral or the proceeds thereof, (b) transmit to account debtors, other
obligors or any bailees notice of the interest of Lender in the Collateral or
request from account debtors or such other obligors or bailees at any time, in
the name of such Borrower or Lender or any designee of Lender, information
concerning the Collateral and any amounts owing with respect thereto, (c) notify
account debtors or other obligors to make payment directly to Lender, or notify
bailees as to the disposition of Collateral, (d) after an Event of Default has
occurred and has not been waived or cured to Lender's satisfaction, take or
bring, in the name of Lender or such Borrower, all steps, actions, suits or
proceedings deemed by Lender necessary or desirable to effect collection of or
other realization upon the accounts and other Collateral, (e) after an Event of
Default has occurred and has not been waived or cured to Lender's satisfaction,
change the address for delivery of mail to such Borrower and to receive and open
mail addressed to any such Borrower, (f) after an Event of Default has occurred
and has not been waived or cured to Lender's satisfaction, extend the time of
payment of, compromise or settle for cash, credit, return of merchandise, and
upon any terms or conditions, any and all accounts or other Collateral which
includes a monetary obligation and discharge or release the account debtor or
other obligor, without affecting any of the Obligations, and (g) execute in the
name of such Borrower and file against such Borrower in favor of Lender
financing statements or amendments with respect to the Collateral.
5.6 Each Borrower hereby releases and exculpates Lender, its officers,
employees and designees, from any liability arising from any acts under this
Agreement or in furtherance thereof, whether as attorney-in-fact or otherwise,
whether of omission or commission, and whether based upon any error of judgment
or mistake of law or fact, except for willful misconduct, gross negligence, or
bad faith. In no event will Lender have any liability to any Borrower for lost
profits or other special or consequential damages.
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5.7 After written notice by Lender to the Borrowers and automatically,
without notice, after an Event of Default which has not been waived or cured to
Lender's satisfaction, no Borrower shall, without the prior written consent of
Lender in each instance, (a) grant any extension of time of payment of any of
the accounts or any other Collateral which includes a monetary obligation, (b)
compromise or settle any of the accounts or any such other Collateral for less
than the full amount thereof, (c) release in whole or in part any account debtor
or other person liable for the payment of any of the accounts or any such other
Collateral, or (d) grant any credits, discounts, allowances, deductions, return
authorizations or the like with respect to any of the accounts or any such other
Collateral.
5.8 At such times as Lender may reasonably request and in the manner
specified by Lender, each Borrower shall deliver to Lender or Lender's
representative true and correct copies of original invoices, agreements, proofs
of rendition of services and delivery of goods and other documents evidencing or
relating to the transactions which gave rise to accounts or other Collateral,
together with customer statements, schedules describing the accounts or other
Collateral and/or statements of account and confirmatory assignments to Lender
of the accounts or other Collateral, in form and substance reasonably
satisfactory to Lender and duly executed by such Borrower. After an Event of
Default has occurred, each Borrower shall deliver to Lender the originals of the
foregoing documents upon Lender's request therefor. Without limiting the
provisions of Section 5.7, a Borrower's granting of credits, discounts,
allowances, deductions, return authorizations or the like will be promptly
reported to Lender in writing. In no event shall any such schedule or
confirmatory assignment (or the absence thereof or omission of any of the
accounts or other Collateral therefrom) limit or in any way be construed as a
waiver, limitation or modification of the security interests or rights of Lender
or the warranties, representations and covenants of any Borrower under this
Agreement. Any documents, schedules, invoices or other paper delivered to Lender
by the Borrowers may be destroyed or otherwise disposed of by Lender six (6)
months after receipt by Lender, unless such Borrower requests their return in
writing in advance, and makes prior arrangements for their return, at such
Borrower's expense.
5.9 From time to time as requested by Lender, at the sole expense of
the Borrowers, Lender or its designee shall have access, prior to an Event of
Default during reasonable business hours and on or after an Event of Default at
any time, to all of the premises where Collateral is located for the purposes of
inspecting the Collateral and all Borrowers' books and records, and each
Borrower shall permit Lender or its designee to make such copies of such books
and records or extracts therefrom as Lender may reasonably request. Without
expense to Lender, Lender may use such of any Borrower's personnel, equipment,
including computer equipment, programs, printed output and computer readable
media, supplies and premises for the collection of accounts and realization on
other Collateral as Lender, in its sole discretion, deems appropriate. Each
Borrower hereby irrevocably authorizes all accountants and third parties to
disclose and deliver to Lender at such Borrower's expense all financial
information, books and records, work papers, management reports and other
information in their possession regarding such Borrower.
5.10 If after receipt of any payment of, or proceeds applied to the
payment of, all or any part of the Obligations, the Lender is for any reason
required to surrender such payment or proceeds because such payment or proceeds
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is invalidated, declared fraudulent, set aside, determined to be void or
voidable as a preference, or a diversion of trust funds, or for any other
reason, then: the Obligations or any part thereof intended to be satisfied shall
be revived and continue and this Agreement shall continue in full force as if
such payment or proceeds had not been received by the Lender, and each Borrower
shall be jointly and severally liable to pay to the Lender, and hereby does
indemnify the Lender and hold the Lender harmless, for the amount of such
payment or proceeds surrendered. The provisions of this Section 5.10 shall be
and remain effective notwithstanding any contrary action which may have been
taken by the Lender in reliance upon such payment or proceeds, and any such
contrary action so taken shall be without prejudice to the Lender's rights under
this Agreement and shall be deemed to have been conditioned upon such payment or
proceeds having become final and irrevocable. The provisions of this Section
5.10 shall survive the termination of this Agreement.
SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Each Borrower hereby represents, warrants and covenants to Lender the
following, the truth and accuracy of which, and compliance with which, shall be
continuing conditions of the making of loans or other credit accommodations by
Lender to any Borrower:
6.1 Each Borrower shall keep and maintain its books and records in
accordance with generally accepted accounting principles, consistently applied.
The Borrowers shall on a consolidated basis, at each Borrower's expense, on or
before the fifteenth (15th) day of each month, deliver to Lender true and
complete monthly agings of its accounts receivable and, on or before the
twentieth (20th) day of each month, deliver to Lender true and complete agings
of its accounts and notes payable, monthly inventory reports and monthly
internally prepared interim financial statements including consolidating
financial statements of the Borrowers and any of the Borrowers' subsidiaries,
all in such form, and together with such other information with respect to the
business of each Borrower or any guarantor, as Lender may reasonably request.
Annually, the Borrowers shall deliver consolidated audited financial statements
of Key accompanied by the report and opinion thereon of independent certified
public accountants reasonably acceptable to Lender and consolidating financial
statements of Borrowers and any of Borrowers' subsidiaries, as soon as
available, but in no event later than ninety (90) days after the end of the
Borrowers' fiscal year. Additionally, promptly upon the filing thereof, Borrower
shall deliver to Lender true and complete copies of any 10-Q Report, 10-K Report
and any other report or document filed by Borrowers, or any of them, with the
Securities and Exchange Commission, or any other governmental agency.
6.2 Each Borrower may from time to time render invoices to account
debtors under its trade names set forth in Section 10.6(f) after Lender has
received prior written notice from such Borrower of the use of such trade names
and as to which, such Borrower agrees that: (a) each trade name does not refer
to another corporation or other legal entity, (b) all accounts and proceeds
thereof (including any returned merchandise) invoiced under any such trade names
are owned exclusively by such Borrower and are subject to the security interest
of Lender and the other terms of this Agreement, and (c) all schedules of
accounts and confirmatory assignments including any sales made or services
rendered using the trade name shall show such Borrower's name as assignor and
Lender is authorized to receive, endorse and deposit to any loan account of
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such Borrower maintained by Lender all checks or other remittances made payable
to any trade name of such Borrower representing payment with respect to such
sales or services.
6.3 Each Borrower shall promptly notify Lender in writing of any loss,
damage, investigation, action, suit, proceeding or claim relating to a material
portion of the Collateral or which may result in any material adverse change in
such Borrower's business, assets, liabilities or condition, financial or
otherwise.
6.4 Each Borrower's books and records concerning accounts and its chief
executive office are and shall be maintained only at the address set forth in
Section 10.6(d). Each Borrower's only other places of business and the only
other locations of Collateral, if any, are and shall be the addresses set forth
in Section 10.6(e) hereof, except any Borrower may change such locations in the
ordinary course of business or open a new place of business after thirty (30)
days prior written notice to Lender. Prior to any change in location or opening
of any new place of business, each Borrower shall execute and deliver or cause
to be executed and delivered to Lender such financing statements, financing
documents, mortgages, and security and other agreements as Lender may reasonably
require, including, without limitation, those described in Section 6.14. Without
otherwise limiting the effect of the foregoing, Borrower may change the location
of its well servicing rigs and drilling rigs without prior approval of Lender;
provided, however, such well servicing rigs and drilling rigs may not be removed
from the state where they are located as of the date hereof, and Borrowers shall
within five (5) days of Lender's request, provide Lender with a listing of the
current locations of all well servicing rigs and drilling rigs.
6.5 Each Borrower has and at all times will continue to have good and
marketable title to all of the Collateral, free and clear of all liens, security
interests, claims or encumbrances of any kind except those, if any, set forth on
Schedule A hereto.
6.6 No Borrower shall directly or indirectly: (a) sell, lease,
transfer, assign, abandon or otherwise dispose of any part of the Collateral or
any material portion of its other assets (other than sales of inventory to
buyers in the ordinary course of business) or (b) consolidate with or merge with
or into any other entity, or permit any other entity to consolidate with or
merge with or into such Borrower except pursuant to the Merger or (c) form or
acquire any interest in any firm, corporation or other entity.
6.7 Each Borrower shall at all times maintain, with financially sound
and reputable insurers, casualty insurance with respect to the Collateral and
other assets. All such insurance policies shall be in such form, substance,
amounts and coverage as may be reasonably satisfactory to Lender and shall
provide for thirty (30) days prior written notice to Lender of cancellation or
reduction of coverage. Each Borrower hereby irrevocably appoints Lender and any
designee of Lender as, attorney-in-fact for such Borrower to obtain at such
Borrower's expense, any such insurance should such Borrower fail to do so and,
after an Event of Default that is continuing, to adjust or settle any claim or
other matter under or arising pursuant to such insurance or to amend or cancel
such insurance. Each Borrower shall deliver to Lender evidence of such insurance
and a lender's loss payable endorsement satisfactory to Lender as to all
existing and future insurance policies with respect to the Collateral. Each
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Borrower shall deliver to Lender, in kind, all instruments representing proceeds
of insurance received by such Borrower. Prior to an Event of Default, Lender may
permit Borrowers to apply any insurance proceeds received at any time to the
cost of repairs to or replacement of any portion of the Collateral and/or, at
Lender's option, payment of or as security for any of the Obligations, whether
or not due; provided, however, that if Lender elects to apply the insurance
proceeds to the then outstanding Obligations, Lender will apply the proceeds (i)
first to reduce the Capital Expenditures Loans, (ii) second, to reduce other
Term Loans, and (iii) third, to reduce the Revolving Loans. After the occurrence
of an Event of Default which has not been cured to Lender's satisfaction, Lender
may permit Borrowers to apply any insurance proceeds received at any time to the
cost of repairs to or replacement of any portion of the Collateral and/or, at
Lender's option, to payment of or as security for any of the Obligations,
whether or not due, in any order or manner as Lender determines.
6.8 Each Borrower is and at all times will continue to be in compliance
with the requirements of all material laws, rules, regulations and orders of any
governmental authority relating to its business (including laws, rules,
regulations and orders relating to taxes, payment and withholding of payroll
taxes, employer and employee contributions and similar items, securities,
employee retirement and welfare benefits, employee health and safety, or
environmental matters) and all material agreements or other instruments, binding
on such Borrower or its property. All of each Borrower's inventory shall be
produced in accordance with the requirements of the Federal Fair Labor Standards
Act of 1938, as amended and all rules, regulations and orders related thereto.
Each Borrower shall pay and discharge all taxes, assessments and governmental
charges against such Borrower or any Collateral prior to the date on which
penalties are imposed or liens attach with respect thereto, unless the, same are
being contested in good faith and, at Lender's option, Reserves are established
for the amount contested and penalties which may accrue thereon.
6.9 With respect to each account deemed an Eligible Account, except as
reported in writing to Lender, (a) Borrower has no knowledge that any of the
criteria for eligibility are not or are no longer satisfied, (b) each is valid
and legally enforceable and represents an undisputed bona fide indebtedness
incurred by the account debtor for the sum reported to Lender, (c) each arises
from an absolute and unconditional sale of goods, without any right of return or
consignment, or from a completed rendition of services, (d) each is not, at the
time such account arises, subject to any defense, offset, dispute, contra
relationship, counterclaim, or any given or claimed credit, allowance or
discount except as disclosed to Lender in writing and approved by Lender in
writing, and (e) all statements made and all unpaid balances and other
information appearing in the invoices, agreements, proofs of rendition of
services and delivery of goods and other documentation relating to the accounts,
and all confirmatory assignments, schedules, statements of account and books and
records with respect thereto, are in all material respects true and correct and
what they purport to be.
6.10 With respect to each Borrower's equipment, each such Borrower
shall maintain equipment having an aggregate value of at least 85% of the then
current appraised forced liquidation value of all of such Borrower's equipment
in good order and repair, and in running and marketable condition, ordinary wear
and tear excepted.
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6.11 Borrowers shall at all times on a consolidated basis maintain cash
flow coverage, tangible net worth, and liabilities to tangible net worth as set
forth in Section 10.5 and no Borrower shall, directly or indirectly, expend or
commit to expend, for fixed or capital assets (including capital lease
obligations) an amount in excess of the capital expenditure limit set forth in
Section 10.5 in any fiscal year of Borrowers. In addition, after the date of
this Agreement no Borrower will enter into any operating or capital lease as
lessee or sublessee if, after giving effect thereto, the aggregate amount of
additional operating or capital lease rentals payable by all Borrowers in any
fiscal year with respect to all such leases entered into in such fiscal year
would exceed $1,500,000.
6.12 Except as set forth on Schedule 6.12 hereto and as otherwise
provided herein, no Borrower will, directly or indirectly: (a) lend or advance
money or property to, guarantee or assume indebtedness of, or invest (by capital
contribution or otherwise) in any person, firm, corporation or other entity; or
(b) declare, pay or make any cash dividend, redemption or other distribution on
account of any shares of any class of stock of such Borrower now or hereafter
outstanding; or (c) make any payment of the principal amount of or interest on
any indebtedness owing to any officer, director, shareholder, or affiliate of
such Borrower; or (d) make any loans or advances to any officer, director,
employee, shareholder or affiliate of such Borrower (including, but not limited
to, any other Borrower) provided, however, that, with respect to advances to
officers and employees, Borrowers may make such advances in the ordinary course
of business as long as all such advances at any time outstanding do not exceed
$25,000 in the aggregate; or (e) enter into any sale or lease or other
transaction with any officer, director, employee, shareholder or affiliate of
such Borrower on terms that are less favorable to such Borrower than those which
might be obtained at the time from persons who are not an officer, director,
employee, shareholder or affiliate of such Borrower. Notwithstanding the
foregoing, each Borrower (each, an "Intercompany Lender") may make loans to any
other Borrower (each, an "Intercompany Borrower") provided however that (i) all
such loans to any Intercompany Borrower shall be evidenced by the Intercompany
Note and Security Agreement executed by such Intercompany Borrower (the "Chattel
Paper") and (ii) Lender retains a properly perfected security interest in the
Chattel Paper at the time of such intercompany loan.
6.13 Each Borrower shall pay, on Lender's demand, all costs, expenses,
filing fees and taxes payable in connection with the preparation, execution,
delivery, recording, administration, collection, liquidation, enforcement and
defense of the Obligations, Lender's rights in the Collateral, this Agreement
and all other existing and future agreements or documents contemplated herein or
related hereto, including any amendments, waivers, supplements or consents which
may hereafter be made or entered into in respect hereof, or in any way involving
claims or defense asserted by Lender or claims or defense against Lender
asserted by such Borrower, any guarantor or any third party directly or
indirectly arising out of or related to the relationship between such Borrower
and Lender or any guarantor and Lender, including, but not limited to the
following, whether incurred before, during or after the initial or any renewal
Term or after the commencement of any case with respect to any such Borrower or
any guarantor under the United States Bankruptcy Code or any similar statute:
(a) all costs and expenses of filing or recording (including Uniform Commercial
Code financing statement filing taxes and fees, documentary taxes, intangibles
taxes and mortgage recording taxes and fees, if applicable); (b) all title
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insurance and other insurance premiums, appraisal fees, fees incurred in
connection with any environmental report, audit or survey and search fees; (c)
all fees relating to the wire transfer of loan proceeds and other funds and fees
for returned checks; (d) all reasonable expenses and costs heretofore and from
time to time hereafter incurred by Lender during the course of periodic field
examinations of the Collateral and the Borrowers' operations, plus a per diem
charge at the rate of $650 per person, per day for Lender's examiners in the
field and office; and (e) the reasonable costs, fees and disbursements of
in-house and outside counsel to Lender.
6.14 At the request of Lender, at any time and from time to time at
such Borrower's sole expense, each Borrower shall execute and deliver or cause
to be executed and delivered to Lender such agreements, documents and
instruments, including waivers, consents and subordination agreements from
mortgagees or other holders of security interests or liens, landlords or
bailees, and do or cause to be done such further acts as Lender, in its
discretion, deems necessary or desirable to create, preserve, perfect or
validate any security interest of Lender or the priority thereof in the
Collateral and otherwise to effectuate the provisions and purposes of this
Agreement. Each Borrower hereby authorizes Lender to file financing statements
or amendments against such Borrower in favor of Lender with respect to the
Collateral, without such Borrower's signature and to file as financing
statements any carbon, photographic or other reproductions of this Agreement or
any financing statements signed by such Borrower.
6.15 Each Borrower authorizes Lender, at Lender's option, as
attorney-in-fact for such Borrower, to commence, appear in and prosecute, in
Lender's or such Borrower's name and with the participation of such Borrower,
any action or proceeding relating to any condemnation or other taking of any
Collateral comprised of real property and to settle or compromise any claim in
connection with any such condemnation or other taking. Any award for the taking
of, or damage to, all or any part of the Collateral, or any interest therein,
upon the lawful exercise of power of eminent domain shall be payable to Lender
who, after deducting its expenses, including reasonable attorneys' fees, may
apply the sums so received to the portion of the Obligations hereby secured last
falling due or in such other manner as Lender may desire. Each Borrower agrees
to execute such further assignments of any compensations, awards, damages,
claims, rights of action and proceeds as Lender reasonably may require.
6.16 Each Borrower assumes all responsibility and liability arising
from or relating to the use, sale, or other disposition of the Collateral.
Neither the Lender nor any of its officers, directors, employees, and agents
shall be liable or responsible in any way for the safekeeping of any of the
Collateral, or for any act or failure to act with respect to the Collateral, or
for any loss or damage thereto, or for any diminution in the value thereof, or
for any act of default by any warehouseman, carrier, forwarding agency or, other
person whomsoever, all of which shall be at the Borrowers' sole risk. The
Obligations shall not be affected by any failure of the Lender to take any steps
to perfect its security interest in or to collect or realize upon the
Collateral, nor shall loss of or damage to the Collateral release any Borrower
from any of the Obligations. The Lender may (but shall not be required to), to
the extent set forth in this Agreement or applicable law, without notice to or
consent from any Borrower, sue upon or otherwise collect, extend the time for
payment of, modify or amend the terms of, compromise or settle for cash or
credit, grant other indulgences, extensions, renewals, compositions, or
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releases, and take or omit to take any other action with respect to the
Collateral, any security therefor, any agreement relating thereto, any insurance
applicable thereto, or any person liable directly or indirectly in connection
with any of the foregoing, without discharging or otherwise affecting the
liability of the Borrower for the Obligations.
6.17 Each Borrower shall notify Lender in writing of the following
matters at the following times:
(a) Immediately after becoming aware of the existence of
any Event of Default.
(b) Immediately after becoming aware that the holder of any
capital stock of such Borrower has given notice or taken any action
with respect to a claimed default.
(c) Immediately after becoming aware of any material adverse
change in the Collateral or in any Borrower's property, business,
operations, or condition (financial or otherwise).
(d) Immediately after becoming aware of any pending or
threatened action, proceeding, or counterclaim by any individual, sole
proprietorship, partnership, joint venture, trust, unincorporated
organization, association, corporation, Public Authority, or any other
entity, or any pending or threatened investigation by a Public
Authority, which may materially and adversely affect the Collateral,
the repayment of the Obligations, the Lender's rights under the Loan
Documents, or the Collateral or in any Borrower's property, business,
operations, or condition (financial or otherwise).
(e) Immediately after becoming aware of any pending or
threatened strike, work stoppage, material unfair labor practice claim,
or other material labor dispute affecting any Borrower or any of its
subsidiaries.
(f) Immediately after becoming aware of any violation of any
law, statute, regulation, or ordinance of a Public Authority applicable
to any Borrower, which may materially and adversely affect the
Collateral, the repayment of the Obligations, the Lender's rights under
this Agreement, or the Collateral or any Borrower's property, business,
operations, or condition (financial or otherwise).
(g) Immediately after becoming aware of any violation or any
investigation of a violation by any Borrower of environmental laws
which would materially and adversely affect the Collateral, any
Borrower's property, business, operation or condition (financial or
otherwise).
(h) Thirty (30) days prior to any Borrower changing its name.
Each notice given under this Section 6.17 shall describe the subject matter
thereof in reasonable detail and shall set forth the action that such Borrower
has taken or proposes to take with respect thereto. As used herein, the term
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"Public Authority" shall mean the government of any country or sovereign state,
or of any state, province, municipality, or other political subdivision thereof,
or any department, agency, public corporation or other instrumentality of any of
the foregoing.
6.18 (a) Except with respect to the matters described in Schedule B
hereto, neither Borrower nor any subsidiary of any Borrower, except in
compliance in all material respects with all laws, ordinances, regulations,
administrative orders, notices and decrees of any governmental authority
pertaining to Borrower or such subsidiary, (i) may own, occupy, or operate a
site or vessel on which any hazardous material or oil is stored, transported or
disposed of; or (ii) may directly or indirectly transport, or arrange for the
transport, of any hazardous material or oil; or (iii) will cause, or have legal
responsibility for, any release, or threat of release, of any hazardous material
or oil on or from the real property identified in Section 10.6 (the "Premises"),
or any other site or vessel presently owned, occupied, or operated either by any
Borrower or any subsidiary or any person for whose conduct any Borrower or any
subsidiary is responsible. Except with respect to the matters described in
Schedule B, neither Borrower nor any subsidiary of any Borrower may cause, or
have legal responsibility for, any release, or threat of release, of any
hazardous material or oil on or from the Premises, or any other site or vessel
presently owned, occupied, or operated by any Borrower, any subsidiary or any
person for whose conduct any Borrower or any subsidiary is responsible, where
any such release or threat of release can reasonably be expected to result in a
material liability of any Borrower or any subsidiary or a lien on the Premises
or other property of any Borrower or any subsidiary.
(b) Except with respect to the matters described in Schedule B hereto,
no Borrower nor any Borrower's subsidiary has, except in compliance in all
material respects with all laws, ordinances, regulations, administrative orders,
notices and decrees of any governmental authority pertaining thereto, (i) owned,
occupied or operated a site or vessel on which any hazardous materials or oil
were stored, transported or disposed of by any Borrower or such subsidiary; (ii)
directly or indirectly transported, or arranged for the transport, of any
hazardous material or oil; or (iii) caused, or become legally responsible for,
any material release or threat of release, of any hazardous material or oil on
or from the Premises or any other site or vessel owned, occupied or operated
either by any Borrower, any subsidiary of any Borrower or any person for whose
conduct any Borrower or any subsidiary of any Borrower is responsible. Except
with respect to the matters described in Schedule B, no Borrower nor its
subsidiaries has caused, or become legally responsible for, any release or
threat of release of any hazardous material or oil on or from the Premises or
any other site or vessel owned, occupied or operated either by any Borrower, any
subsidiary of any Borrower or any person for whose conduct any Borrower or any
subsidiary of any Borrower is responsible, where any such release or threat of
release can reasonably be expected to result in a material liability to any
Borrower or any subsidiary of any Borrower or a lien on the Premises or other
property of any Borrower or any subsidiary of any Borrower.
(c) Except with respect to the matters described in Schedule B, no
Borrower nor any subsidiary of any Borrower has received notification from any
federal, state, foreign or other governmental authority of: any potential, known
or threat of release of any hazardous material or oil on or from the Premises or
any other site or vessel at any time owned, occupied or operated either by any
Borrower, any subsidiary of any Borrower or any person for whose conduct any
Borrower or any subsidiary of any Borrower is responsible or whose liability may
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result in a lien on the Premises or any other property of any Borrower or any
subsidiary of any Borrower; or of the incurrence of any expense or loss by such
governmental authority or by any other person, in connection with the
assessment, containment, or removal of any release, or threat of release, of any
hazardous material or oil from the Premises or any such site or vessel.
(d) Each Borrower shall, and shall cause the other Borrowers and each
subsidiary of any Borrower to:
(i) comply with all material laws, ordinances, regulations,
administrative orders, notices and decrees of any governmental
authority pertaining to the storage, transport, release and disposal of
hazardous material or oil;
(ii) except in compliance with all applicable laws,
ordinances, regulations, administrative orders, notices and decrees of
any governmental authority refrain from disposing of hazardous material
or oil on the Premises or on any other site or vessel owned, occupied
or operated either by any Borrower, any subsidiary of any Borrower, or
by any person for whose conduct any Borrower or any subsidiary of any
Borrower is responsible;
(iii) engage in such activity as is reasonable and prudent
under the circumstances (w) to determine whether and to what extent
hazardous materials or oil is present on the Premises or on any other
site or vessel at any time owned, occupied or operated either by any
Borrower, any subsidiary of any Borrower, or by any person for whose
conduct any Borrower or any subsidiary of any Borrower is responsible
or whose liability may result in a lien on the Premises or other
property of any Borrower or any subsidiary of any Borrower, (x) to
determine whether and to what extent containment or removal of such
hazardous material or oil as may then be present is necessary or
appropriate in light of applicable law or potential harms or damages
which may result therefrom, (y) to carry out any activities necessary
or appropriate under clauses (w) and (x), and (y) to qualify for
insurance programs or safe harbors which may be available under
applicable law, ordinances and regulations;
(iv) provide Lender with written notice: (x) upon any
Borrower's obtaining knowledge or any material release, or threat of
release, or any hazardous material or oil at or from the Premises, or
any other site or vessel at any time owned, occupied, or operated by
any Borrower, or any subsidiary of any Borrower, or by any person for
whose conduct any Borrower, or any subsidiary of any Borrower, is
responsible, where such release or threat of release is required to be
reported to any governmental authority by any Borrower or any
subsidiary of any Borrower or any other such person, or may result in a
lien on the Premises or other property of any Borrower or any
subsidiary of any Borrower; (y) upon any Borrower's or any Borrower's
subsidiary's receipt of any notice to such effect from any federal,
state, foreign or other governmental authority; and (z) upon any
Borrower's or any Borrower's subsidiary's obtaining knowledge of any
incurrence of any expense or loss by any such governmental authority in
connection with the assessment, containment, or removal of any
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hazardous material or oil for which expense or loss any Borrower or
any subsidiary may be liable in any material amount or for which
expense a lien may be imposed on the Premises or any other property
of any Borrower or any subsidiary of any Borrower; and
(v) jointly and severally indemnify, defend and hold Lender
harmless from any claim brought or threatened against Lender by any
Borrower, or any subsidiary of any Borrower, any guarantor or endorser
of the Obligations, or any governmental agency or authority or any
other person (as well as from attorneys' and environmental expert's
reasonable fees and expenses in connection therewith) on account of the
presence of hazardous material or oil on the Premises, or any other
site or vessel at any time owned, occupied or operated by any Borrower
or any subsidiary of any Borrower or any person for whose conduct any
Borrower or any subsidiary of any Borrower may be responsible, or whose
liability may result in a lien on the Premises or other property of any
Borrower or any subsidiary of any Borrower, the past, present or future
release or threat of release of hazardous materials or oil on or from
the Premises, or any other site or vessel at any time owned, occupied
or operated by any Borrower, or any subsidiary of any Borrower, or by
any person for whose conduct any Borrower or any subsidiary of any
Borrower may be responsible or whose liability may result in a lien on
the Premises or other property of any Borrower or any subsidiary of any
Borrower, or the failure by any Borrower to comply with the terms and
provisions of this Section 6.18 (each of which may be defended,
compromised, settled, or pursued by Lender with counsel of Lender's
selection, but at the expense of the Borrowers, on a joint and several
basis, and, in the case of compromise or settlement prior to an Event
of Default, with the consent of any Borrower, which consent shall bind
all Borrowers). The within indemnification shall survive payment of the
Obligations and/or any termination, release, or discharge executed by
Lender in favor of any Borrower or any subsidiary of any Borrower or
other person.
(e) As used in this Section 6.18, the term "oil" shall mean oil and/or
any other petroleum product or by-product.
6.19 At Lender's option, and at each Borrower's expense, Lender may
order appraisals of the forced liquidation value of Borrower's machinery and
equipment, provided, however, that the timing and manner of all such appraisals
shall be commercially reasonable in all respects. If the principal balance of
the Term Loans outstanding to any Borrower, as of the date of the appraisal,
exceeds eighty-two percent (82%) of the appraised forced liquidation value of
such Borrower's machinery and equipment, such Borrower shall make additional
principal payments with respect to the Term Loan in an amount equal to 1/12 of
the amount by which the outstanding principal balance of such Borrower's Term
Loans exceeds eighty-two percent (82%) of the appraised forced liquidation value
of such Borrower's machinery and equipment as of the date of the appraisal, such
payments to be paid concurrently with the monthly Term Loan installments due
under the Term Loans, until the entire excess amount has been fully amortized.
6.20 No Borrower shall directly or indirectly enter into or permit to
exist, any transaction with Odessa as obligor to such Borrower, direct or
contingent, by reason of any loan, advance, lease, sale or other financing
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transaction, investment or otherwise; provided, however, that Hurt may provide
services from time to time to Odessa as long as the aggregate of all such
accounts outstanding at any time does not exceed $300,000.00.
6.21 Immediately after the Merger becomes effective, Borrowers will
enter into the certain Third Amended and Restated Loan and Security Agreement
containing terms and conditions substantially the same as those set forth in
this Agreement, except that the financial covenants and monetary amounts will,
among other things, also account for WellTech, which by virtue of the Merger,
will have become a party hereto.
6.22 So long as any Obligation of WellTech to Lender under the WellTech
Loan and Security Agreement is outstanding or unpaid, Key shall operate and
manage the affairs of WellTech under and pursuant to the Interim Operations
Agreement and the Interim Operations Agreement shall not be terminated,
modified, amended or superseded without the prior written consent of Lender.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES
7.1 All Obligations shall be immediately due and payable, without
notice or demand, and any provisions of this Agreement as to future loans and
credit accommodations by Lender shall terminate automatically, upon the
termination or non-renewal of this Agreement or, at Lender's option, upon or at
any time after the occurrence or existence of any one or more of the following
"Events of Default":
(a) Any Borrower fails to pay when due any of the Obligations or fails
to perform any of the terms of this Agreement or any other existing or future
financing, security or other agreement between such Borrower and Lender or any
affiliate of Lender;
(b) Any representation, warranty or statement of fact made by any
Borrower to Lender in this Agreement or any other agreement, schedule,
confirmatory assignment or otherwise, or to any affiliate of Lender, shall prove
inaccurate or misleading in any material respect;
(c) Any guarantor revokes, terminates or fails to perform any of the
terms of any guaranty, endorsement or other agreement of such party in favor of
Lender or any affiliate of Lender;
(d) Any judgment or judgments aggregating in excess of $50,000 or any
injunction or attachment (except statutory liens or attachments for amounts not
yet due and payable) is obtained against any Borrower or any guarantor which
remains unstayed for a period of ten (10) days or is enforced;
(e) Any Borrower or any guarantor or a general partner of a guarantor
or a Borrower (which is a partnership), being a natural person, dies, or any
Borrower or any guarantor which is a partnership or corporation, is dissolved,
or any Borrower or any guarantor which is a corporation fails to maintain its
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corporate existence in good standing, or Borrower or any guarantor suspends its
usual business or engages in a different line of business from the line of
business it is engaged in as of the date of this Agreement;
(f) Any change in the chief executive officer or president of Key
without Lender's prior written consent;
(g) Any Borrower or any guarantor of any of the Obligations becomes
insolvent, makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a general meeting of its creditors or
principal creditors;
(h) Any petition or application for any relief under the bankruptcy
laws of the United States now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed by any Borrower or any guarantor or, if filed against any
Borrower or any guarantor of any of the Obligations, is not dismissed within
sixty (60) days;
(i) The indictment or threatened indictment of any Borrower or any
guarantor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against any Borrower or any guarantor, pursuant
to which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of such Borrower or such guarantor;
(j) Any event of default under any financing, security or other
agreement, document or instrument at any time executed and/or delivered to, with
or in favor of Lender or any of its affiliates by any affiliate of any Borrower;
(k) Any event of default under the Loan and Security Agreement dated of
even date herewith entered into between Lender and WellTech (the "WellTech Loan
and Security Agreement");
(l) Lender in good faith believes that either (i) the prospect of
payment or performance of the Obligations is impaired or (ii) the Collateral is
not sufficient to secure fully the Obligations;
(m) Any default by any Borrower under any material agreement or
instrument, in favor of any individual or entity other than Lender and such
default continues for thirty (30) days after such breach first occurs; provided,
however, that such grace period shall not apply, and an Event of Default shall
exist, promptly upon such breach, if such breach may not, in Lender's reasonable
determination, be cured by Borrower during such thirty (30) day grace period;
(n) The Merger is not consummated by April 30, 1996, and Lender has
requested that WellTech obtain alternative financing and WellTech has not found
alternative financing within 90 days after Lender's request; or
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(o) Key fails to operate and manage the affairs of WellTech under and
pursuant to the Interim Operations agreement when any Obligation of WellTech to
Lender under the WellTech Loan and Security Agreement is outstanding or unpaid.
7.2 Upon the occurrence of an Event of Default which has not been
waived by Lender or cured to Lender's satisfaction and at any time thereafter,
Lender shall have all rights and remedies provided in this Agreement, any other
agreements between any Borrower and Lender, the Uniform Commercial Code or other
applicable law, all of which rights and remedies may be exercised without notice
to any Borrower, all such notices being hereby waived, except such notice as is
expressly provided for hereunder or is not waivable under applicable law. All
rights and remedies of Lender are cumulative and not exclusive and are
enforceable, in Lender's discretion, alternatively, successively, or
concurrently on any one or more occasions and in any order Lender may determine.
Without limiting the foregoing, Lender may (a) accelerate the payment of all
Obligations and demand immediate payment thereof to Lender, (b) to the extent
permitted by law, with or without judicial process or the aid or assistance of
others, enter upon any premises on or in which any of the Collateral may be
located and take possession of the Collateral or complete processing,
manufacturing and repair of all or any portion, of the Collateral, (c) require
any Borrower, at such Borrower's expense, to assemble and make available to
Lender any part or all of the Collateral at any place and time designated by
Lender, (d) collect, foreclose, receive, appropriate, set off and realize upon
any and all Collateral, (e) extend the time of payment of, compromise or settle
for cash, credit, return of merchandise, and upon any terms or conditions, any
and all accounts or other Collateral which includes a monetary obligation and
discharge or release the account debtor or other obligor, without affecting any
of the Obligations, (f) sell, lease, transfer, assign, deliver or otherwise
dispose of any and all Collateral (including, without limitation, entering into
contracts with respect thereto, by public or private sales at any exchange,
broker's board, any office of Lender or elsewhere) at such prices or terms as
Lender may deem reasonable, for cash, upon credit or for future delivery, with
the Lender having the right to purchase the whole or any part of the Collateral
at any such public sale, all of the foregoing being free from any right or
equity of redemption of any Borrower which right or equity of redemption is
hereby expressly waived and released by each Borrower. If any of the Collateral
is sold or leased by Lender upon credit terms or for future delivery, the
Obligations shall not be reduced as a result thereof until payment therefor is
finally collected by Lender. If notice of disposition of Collateral is required
by law, ten (10) business days prior notice by Lender to the Borrowers
designating the time and place of any public sale or the time after which any
private sale or other intended disposition of Collateral is to be made, shall be
deemed to be reasonable notice thereof and each Borrower waives any other
notice. In the event Lender institutes an action to recover any Collateral or
seeks recovery of any Collateral by way of prejudgment remedy, each Borrower
waives to the extent permitted by law the posting of any bond which might
otherwise be required.
7.3 Lender may apply the cash proceeds of Collateral actually received
by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of any of the Obligations, in whole or in part (including
reasonable attorneys' fees and legal expenses incurred by Lender with respect
thereto or otherwise chargeable to the Borrowers) and in such order as Lender
may elect, whether or not then due. Each Borrower shall remain liable to Lender
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for the payment of any deficiency together with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including reasonable attorneys' fees and legal expenses.
7.4 Lender may, at its option, cure any default by any Borrower under
any agreement with a third party or pay or bond on appeal any judgment entered
against any Borrower, discharge taxes, liens, security interests or other
encumbrances at any time levied on or existing with respect to the Collateral
and pay any amount, incur any expense or perform any act which, in Lender's sole
judgment, is necessary or appropriate to preserve, protect, insure, maintain or
realize upon the Collateral. Lender may charge the Borrowers' loan account for
any amounts so expended, such amounts to be repayable by the Borrowers on
demand. Lender shall be under no obligation to effect such cure, payment,
bonding or discharge, and shall not by doing so, be deemed to have assumed any
obligation or liability of any Borrower.
SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS
8.1 WAIVER OF JURY TRIAL. LENDER AND EACH BORROWER ACKNOWLEDGE AND
AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE
RELATIONSHIP ESTABLISHED HEREBY WOULD BE BASED UPON DIFFICULT AND COMPLEX
ISSUES, AND THEREFORE, THE PARTIES AGREE THAT ANY LAWSUIT GROWING OUT OF ANY
SUCH CONTROVERSY WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE
SITTING WITHOUT JURY. TRIAL BY A JUDGE SITTING WITHOUT A JURY WILL FURTHER
RESULT IN THE AVOIDANCE OF DELAYS, A STREAMLINING OF THE PROCEEDINGS INVOLVED
AND, AS A RESULT, WILL MINIMIZE THE EXPENSE OF ANY SUCH LAWSUIT FOR THE BENEFIT
OF EACH BORROWER AND LENDER. EACH BORROWER HEREBY WAIVES TRIAL BY JURY, RIGHTS
OF SET OFF, AND THE RIGHT TO IMPOSE COUNTERCLAIMS (EXCEPT BY COMPULSORY
COUNTERCLAIMS) IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION
WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE
OBLIGATIONS OR THE COLLATERAL, OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT
HERETO OR THERETO, OR ANY OTHER CLAIM OR DISPUTE HOWSOEVER ARISING, BETWEEN THE
BORROWERS, OR ANY OF THEM, AND THE LENDER. EACH BORROWER HEREBY CONFIRMS THAT
THE FOREGOING WAIVERS ARE INFORMED AND FREELY MADE.
8.2 Each Borrower hereby irrevocably submits and consents to the
nonexclusive jurisdiction of the State and Federal Courts located in the State
in which the office of Lender designated in Section 10.6(a) is located and any
other State where any Collateral is located with respect to any action or
proceeding arising out of this Agreement, the Collateral or any matter arising
therefrom or relating thereto. In any such action or proceeding, each Borrower
waives personal service of the summons and complaint or other process and papers
therein and agrees that the service thereof may be made by mail directed to such
Borrower at its chief executive office set forth herein or other address thereof
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of which Lender has received notice as provided herein, service to be deemed
complete five (5) days after mailing by certified or registered mail, or as
permitted under the rules of either of said Courts. Any such action or
proceeding commenced by any Borrower against Lender will be litigated only in a
Federal Court located in the district, or a State Court in the State and County,
in which the office of Lender designated in Section 10.6(a) is located and each
Borrower waives any objection based on forum non conveniens and any objection to
venue in connection therewith.
8.3 Lender shall not, by any act, delay, omission or otherwise be
deemed to have expressly or impliedly waived any of its rights or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. A waiver by Lender of any right or remedy on any one occasion shall not
be construed as a bar to or waiver of any such right or remedy which Lender
would otherwise have on any future occasion, whether similar in kind or
otherwise.
8.4 Unless otherwise expressly provided herein, each Borrower waives,
to the extent permitted by applicable law, diligence, presentment, protest and
notice of demand or dishonor and protest as to any instrument, notice of intent
to accelerate and notice of acceleration, notice of default, notice of protest,
demand, dishonor or nonpayment, as well as any and all other notices to which it
might otherwise be entitled. No notice to or demand on any Borrower which the
Lender may elect to give shall entitle such Borrower to any further notice or
demand in the same, similar or other circumstances.
8.5 The provisions of Chapter 15 of the Texas Credit Code (Vernon's
Texas Civil Statutes) Article 5069-15 are specifically declared by Lender and
the Borrowers not to be applicable to this Agreement or the transactions
contemplated hereby.
SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS
9.1 Term. This Agreement shall only become effective upon: (a) the
execution and delivery of this Agreement by each Borrower and Lender and (b) the
execution and delivery by WellTech, Inc. and Lender of the WellTech Loan and
Security Agreement and shall continue in full force and effect until either
December 31, 1998, or January 5, 1999, at Lender's option, and shall be deemed
automatically renewed for successive terms of two (2) years thereafter unless
terminated as of the end of the initial or any renewal term (each a "Term") by
the Lender or any Borrower giving the other parties hereto written notice at
least sixty (60) days prior to the end of the then-current Term.
9.2 Any of the Borrowers may also terminate this Agreement by giving
Lender at least thirty (30) days prior written notice at any time upon payment
in full of all of the Obligations as provided herein, including the early
termination fee provided below. Lender shall also have the right to terminate
this Agreement at any time upon or after the occurrence of an Event of Default.
If Lender terminates this Agreement upon or after the occurrence of an Event of
Default, or if any of the Borrowers shall terminate this Agreement as permitted
herein effective prior to the end of the then-current Term, in addition to all
other Obligations, the Borrowers collectively shall pay to Lender, upon the
effective date of termination, in view of the impracticality and extreme
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difficulty of ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Lender's lost profits, an early termination
fee equal to:
(a) fifty percent (50%) of the average monthly interest and
fees payable by the Borrowers to Lender with respect to the Revolving
Loans for the immediately preceding six (6) months or from the date of
this Agreement, whichever is the shorter period, multiplied by
(b) either (i) the number of months (or any part thereof)
remaining in the then-current Term, if the Borrowers' written notice of
termination is received by Lender or termination by Lender is effective
more than sixty (60) days prior to the end of the then-current Term or
(ii) the number of months (or any part thereof) remaining in the
then-current Term plus twenty-four (24) if the Borrowers' written
notice of termination is received by Lender or termination by Lender is
effective within sixty (60) days prior to the end of the then-current
Term.
For purposes of calculating the early termination fee, in no event will the
average monthly interest be less than the interest which would have been payable
if the Revolving Loans had equaled the Minimum Borrowing set forth in Section
10.1(d) on each day during the calculation period.
9.3 Borrowers may prepay, in whole or in part, the Term Loans prior to
the end of the then current Term. If such prepayment is made with funds other
than funds obtained from a public offering or private placement of equity or
debt by Borrowers, the Borrowers collectively shall pay to Lender, upon the
effective date of termination, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Lender's lost profits, an early termination
fee equal to:
(a) fifty percent (50%) of the average monthly interest and
fees payable by the Borrowers to Lender with respect to the Term Loans
for the immediately preceding six (6) months or from the date of this
Agreement, whichever is the shorter period, multiplied by
(b) either (i) the number of months (or any part thereof)
remaining in the then-current Term, if the Borrowers' written notice of
termination is received by Lender or termination by Lender is effective
more than sixty (60) days prior to the end of the then-current Term or
(ii) the number of months (or any part thereof) remaining in the
then-current Term plus twenty-four (24) if the Borrowers' written
notice of termination is received by Lender or termination by Lender is
effective within sixty (60) days prior to the end of the then-current
Term.
If such payment is made with funds obtained from a public offering or
private placement of equity or debt by Borrowers, Borrowers shall collectively
pay to Lender an early termination fee of $50,000.00.
9.4 Upon termination of this Agreement by the Borrowers, as permitted
herein, in addition to payment of all Obligations which are not contingent, each
Borrower shall deposit such amount of cash collateral as Lender reasonably
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determines is necessary to secure Lender from loss, cost, damage or expense,
including reasonable attorneys' fees, in connection with any open Accommodations
or remittance items or other payments provisionally credited to the Obligations
and/or to which Lender has not yet received final and indefeasible payment.
9.5 Except as otherwise provided, all notices, requests and demands
hereunder shall be (a) made to Lender at its address set forth in Section
10.6(a) and to each Borrower at its chief executive office set forth in Section
10.6(d), or to such other address as either party may designate by written
notice to the other in accordance with this provision, and (b) deemed to have
been given or made: if by hand, immediately upon delivery; if by telex, telegram
or telecopy (fax), immediately upon receipt; if by overnight delivery service,
upon receipt; and if by certified mail, peturn receipt requested five (5) days
after mailing.
9.6 If any provision of this Agreement is held to be invalid or
unenforceable, such provision shall not affect this Agreement as a whole, but
this Agreement shall be construed as though it did not contain the particular
provision held to be invalid or unenforceable.
9.7 Neither this Agreement nor any provision hereof shall be amended,
modified or discharged orally or by course of conduct, but only by a written
agreement signed by an authorized officer of Lender and Borrowers. This
Agreement shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors and assigns, except that any obligation
of Lender under this Agreement shall not be assignable nor inure to the
successors and assigns of Borrowers.
9.8 No termination of this Agreement shall relieve or discharge any
Borrower of its Obligations, grants of Collateral, duties and covenants
hereunder or otherwise including, without limitation, the continuation and
survival in full force and effect of all security interests and liens of Lender
in and upon all then-existing and thereafter-arising or acquired Collateral and
all warranties and waivers of Borrowers, until such time as all Obligations to
Lender have been indefeasibly paid and satisfied in full.
9.9 The enumeration herein of the Lender's rights and remedies is not
intended to be exclusive, and such rights and remedies are in addition to and
not by way of limitation of any other rights or remedies that the Lender may
have under the Uniform Commercial Code or other applicable law. The Lender shall
have the right, in its sole discretion, to determine which rights and remedies
are to be exercised and in which order. The exercise of one right or remedy
shall not preclude the exercise of any others, all of which shall be cumulative.
The Lender may, without limitation, proceed directly against the Borrowers, or
any of them, to collect the Obligations without any prior recourse to the
Collateral.
9.10 Whenever an Event of Default exists, the Lender is hereby
authorized at any time and from time to time, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by the Lender or any affiliate of
such Lender to or for the credit or the account of any Borrower against any and
all of the Obligations, whether or not then due and payable.
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9.11 Lender may grant the right to participate in Loans and to enter
into participation agreements with one or more participating lenders; and, in
the event that Lender does grant such right to participate in Loans, Lender may
do so with such participating lenders, and on such terms and conditions, as
shall be acceptable to Lender. If a participating lender shall at any time with
the Borrowers' knowledge participate with the Lender in the Loans, each Borrower
hereby grants to such participating lender, and the Lender and such
participating lender shall have and are hereby given, a continuing lien on and
security interest in any money, securities and other property of such Borrower
in the custody or possession of the participating lender, including, the right
of set-off, to the extent of such participating lender's participation in the
Obligations, and such participating lender shall be deemed to have the same
right of set-off to the extent of such participating lender's participation in
the Obligations under this Agreement, as it would have if it were a direct
lender.
9.12 All terms used herein which are defined in the Uniform Commercial
Code shall have the meanings given therein unless otherwise defined in this
Agreement and all references to the singular or plural herein shall also mean
the plural or singular, respectively.
9.13 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE IN WHICH THE OFFICE OF LENDER SET FORTH IN SECTION
10.6(a) BELOW IS LOCATED.
9.14 THIS AGREEMENT (AND THE PROMISSORY NOTES REFERRED TO IN SECTION
2.2), ARE INTENDED BY THE BORROWERS AND THE LENDER TO BE THE FINAL, COMPLETE,
AND EXCLUSIVE EXPRESSION OF THE AGREEMENT BETWEEN THEM. THIS AGREEMENT
SUPERSEDES ANY AND ALL PRIOR ORAL OR WRITTEN AGREEMENTS RELATING TO THE SUBJECT
MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS,
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. NO MODIFICATION, RESCISSION,
WAIVER, RELEASE, OR AMENDMENT OF ANY PROVISION OF THIS AGREEMENT SHALL BE MADE,
EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE BORROWERS AND A DULY AUTHORIZED
OFFICER OF LENDER.
9.15 This Agreement may be executed in any number of counterparts, and
by the Lender and the Borrowers in separate counterparts, each of which shall be
an original, but all of which shall together constitute on and the same
agpeement.
9.16 The captions contained in this Agreement are for convenience only,
are without substantive meaning and should not be construed to modify, enlarge,
or restrict any provision.
9.17 This Agreement amends and restates in its entirety the Original
Loan Agreement. The execution of this Agreement, the Promissory Note and the
other loan documents executed in connection herewith does not extinguish the
indebtedness outstanding in connection therewith nor does it constitute a
novation with respect to indebtedness outstanding in connection with the
Original Loan Agreement or the indebtedness evidenced by the Original Loan
Documents. The Borrowers and Lender ratify and confirm each of the Original Loan
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Documents including each of the security documents executed pursuant to the
Original Loan Agreement, and agree that such Original Loan Documents as amended
and modified hereby continue to be legal, valid, binding and enforceable in
accordance with their respective terms. Without limiting the generality of the
foregoing and notwithstanding any loan document to the contrary, each Borrower
and Lender agree and acknowledge that: (i) the term "Loan Agreement" as used in
each loan document means this Agreement; (ii) the term "Indebtedness,"
"Obligations" or "Secured Obligations" as used in any loan document means the
Obligations; and (iii) the term "Lender" as used in the Loan Documents means the
Lender as defined herein.
9.18 Releases. As a material inducement to Lender to enter into this
Agreement, Yale and Key each hereby represents and warrants that there are no
claims or offsets against, or defenses or counterclaims to, the terms and
provisions of and the other obligations created or evidenced by the Original
Loan Documents. Each of the Original Obligors hereby releases, acquits, and
forever discharges Lender, and its current parent, subsidiaries and affiliated
organizations, and the current offices, employees, attorneys and agents of each
of the foregoing (all of whom are herein jointly and severally referred to as
the "Released Parties") from any and all liability, damages, losses,
obligations, costs, expenses, suits, claims, demands, causes of action for
damages or any other relief, whether or not now known or suspected, of any kind,
nature or character, at law or in equity, that any of them now has or may have
ever had against any of the Released Parties, including, but not limited to,
those relating to (a) usury or penalties or damages therefor, (b) allegations
that a partnership existed between Borrower and the Released Parties, (c)
allegations of unconscionable acts, deceptive trade practices, lack of good
faith or fair dealing, lack of commercial reasonableness or special
relationships, such as fiduciary, trust or confidential relationships, (d)
allegations of dominion, control, alter ego, instrumentality, fraud,
misrepresentation, duress, coercion, undue influence, interference or
negligence, (e) allegations of tortious interference with present or present or
prospective business relationships or of antitrust or (f) slander, libel or
damage to reputation (hereinafter being collectively referred to as the
"Claims"), all of which Claims are hereby waived.
SECTION 10. ADDITIONAL DEFINITIONS AND TERMS
10.1 (a) Maximum Credit: $17,500,000
(b) Eligible Accounts Percentage: Eighty-Five Percent
(85%) so long as the dilution percentage of such
accounts does not exceed Four Percent (4%) whereupon
the Eligible Accounts Percentage shall be reduced to
an amount deemed reasonable by Lender.
(c) Maximum days after Invoice Date for Eligible
Accounts: 90 days; provided, however, that Lender may
make advances up to $250,000.00 in the aggregate at
any given time against Eligible Accounts which are
between 91 days and 120 days past invoice date.
(d) Minimum Borrowing: $8,600,000; provided, however,
that if the Term Loans are repaid in full from either
Borrower's operating income or the proceeds of a
stock offering of Key, then the Minimum Borrowing
will be $5,500,000.
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<PAGE>
(e) Sublimits:
(i) For Yale, $17,500,000 less all Obligations
of Hurt and Key;
(ii) For Hurt, the lesser of $2,000,000 or
$17,500,000 less all Obligations of Yale and
Key; and
(iii) For Key, $17,500,000 less all Obligations of
Hurt and Yale.
10.2 The lesser of eighty-two percent (82%) of the forced
liquidation value of the Borrower's equipment or
(a) Term Loan:
(i) For Yale, $10,004,082; and
(ii) For Hurt, $1,230,000.
(b) Additional Term Loans (ss.2.2(b)): In addition, Lender
will provide Borrowers with a line of credit in the
aggregate amount of up to the amount set forth below
("Capital Expenditures Line") for the equipment
purchased by Borrowers after November 6, 1995, which is
acceptable to Lender for lending purposes ("Acceptable
Capital Expenditures"). Advances, if any, by Lender
against Borrowers' Acceptable Capital Expenditures
("Capital Expenditures Loans") shall be limited to
seventy percent (70%) of the forced liquidation value
of such Capital Expenditures, as set forth in an
appraisal delivered to Lender in accordance with
Section 2.2(c), and such advances will be evidenced by
a Promissory Note and be amortized over 84 months. Any
advances made under the Capital Expenditures Line will
be made at the sole discretion of Lender.
(i) For Yale, up to $2,500,000 less all
outstanding Advances under the
Capital Expenditures Line; and
(ii) For Hurt, up to the lesser of
$2,000,000 or $2,500,000 less all
outstanding Advances under the
Capital Expenditures Line.
34
<PAGE>
10.3 Accommodations:
(a) Lender's Charge for
Accommodations: N/A
(b) Sublimit for Accommodations: N/A
10.4 Fees:
(a) Interest Rate: Prime Rate plus 1.25% per annum
(b) Closing Fees:
(i) Yale: $25,000
(ii) Hurt: $25,000
(c) Unused Line Fee Rate: N/A
10.5 Financial Covenants: Unless indicated otherwise, all amounts below
shall be determined in accordance with generally accepted accounting principles,
in effect on the date hereof, consistently applied:
(a) "Consolidated Debt Service (Fixed Charge) Coverage
Ratio" means the ratio of (a) the sum of net income
plus (i) depreciation and amortization expenses plus
(ii) increases in deferred taxes less (iii) decreases
in deferred taxes resulting from tax payments
actually made; divided by (b) the sum of payments on
long term indebtedness plus (i) capital lease
payments plus (ii) any unfunded capital expenditures;
(c) determined on a consolidated basis.
Testing of the following ratio will begin on the
earlier to occur of March 31, 1996 or the Merger.
Borrowers, WellTech and BPI will maintain a
Consolidated Debt Service (Fixed Charge) Coverage
Ratio of not less than 1.30 to 1.00, such ratio to be
tested at the end of each calendar quarter (i.e. as
of March 31, June 30, September 30 and December 31)
based on the prior 12-month period.
(b) "Consolidated Tangible Net Worth" means the amount by
which the sum of (a) Shareholders Equity plus
Subordinated Debt (non-current balance) exceeds (b)
Intangible Assets, determined on a consolidated basis
for all Borrowers. For this purpose: "Shareholders
Equity" means shareholders equity determined
according to GAAP; and "Intangible Assets" means (i)
assets which are treated as intangible pursuant to
GAAP; (ii) obligations owing by any persons that are
officers, directors, shareholders, employees,
35
<PAGE>
subsidiaries or affiliates, or any entity in which
any such person owns any interest; and (iii) any
asset which is intangible or lacks intrinsic and
marketable value or collectibility, including without
limitation goodwill, noncompetition agreements,
patents, copyrights, trademarks, franchises or
organization or research and development costs,
prepaid expenses or investments in
subsidiaries/affiliates; and (iv) any other assets
determined to be intangible by Lender in its
reasonable credit judgment.
Testing of the following ratio will begin on the
earlier to occur of March 31, 1996 or the Merger.
Borrowers, WellTech and BPI will maintain a
Consolidated Tangible Net Worth of not less than
$30,000,000, such ratio to be tested as of the end of
each calendar quarter (i.e. as of March 31, June 30,
September 30 and December 31).
(c) Total Liabilities (as defined by GAAP) to
Consolidated Tangible Net Worth:
Testing of the following ratio will begin on the
earlier to occur of March 31, 1996 or the Merger.
Borrowers, WellTech and BPI will not allow the ratio
of Total Liabilities to Consolidated Tangible Net
Worth to be greater than 2.25 to 1.00, such ratio to
be tested as of the end of any calendar quarter (i.e.
as of March 31, June 30, September 30 and December
31).
(d) Maximum Annual Capital Expenditures: Borrowers will
not allow their Capital Expenditures to exceed
$7,000,000 during any Fiscal Year.
10.6 (a) Lender's Office: 10 South LaSalle Street
Chicago, Illinois 60603
(b) Lender's Bank: Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
(c) Borrowers: Yale E. Key, Inc.
Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling
Key Energy Group, Inc.
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<PAGE>
(d) Borrowers' Chief Executive Offices:
1. Yale:
1503 East Taylor
Midland, Texas 79702
2. Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling:
1503 East Taylor
Midland, Texas 79702
3. Key Energy:
257 Livingstone Avenue
New Brunswick, New Jersey 08901
(e) Attached hereto as Schedule 10.6(e) is a correct and
complete listing of all of Borrowers' other Offices
and Locations of Collateral identifying each location
by street address, listing the name and address of
each owner of each location and if different from the
owner, the name and address of each lessor of each
location.
(f) Borrowers' Trade Names for Invoicing:
1. Yale: Bonner Hoffman Oil Well Service
Sketter Macken Oil Well Service
Key Fishing & Rental Tools
Key Tank Rentals
Key Mud
2. Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling: None
3. Key Energy: None
37
<PAGE>
IN WITNESS WHEREOF, Borrowers and Lender have duly executed this
Agreement this day of January, 1996.
LENDER: BORROWERS:
THE CIT GROUP/CREDIT YALE E. KEY, INC.
FINANCE, INC.
By: /s/ Morris Horstmann By: /s/ Francis D. John
Name: Mr.Morris Horstmann Name: Francis D. John
Title: Vice President Title: Executive Vice President
KEY ENERGY DRILLING, INC.
D/B/A CLINT HURT DRILLING
By: /s/ Francis D. John
Name: Francis D. John
Title: Executive Vice President
KEY ENERGY GROUP, INC.
By: /s/ Francis D. John
Name: Francis D. John
Title: President
38
<PAGE>
SCHEDULE A
Permitted Liens
<PAGE>
SCHEDULE B
<PAGE>
SCHEDULE 6.12
1. Key has guaranteed the obligations of Odessa to Norwest Bank Texas,
Midland.
2. Key will pay the bonuses due to Francis D. John under Mr. John's
Employment Agreement with Key.
<PAGE>
SCHEDULE 10.6(e)
Exhibit 10.4
CROSS-COLLATERALIZATION AND CROSS-GUARANTY AGREEMENT
This CROSS-COLLATERALIZATION AND CROSS-GUARANTY AGREEMENT (this
"Agreement"), dated as of January 19, 1996, is among The CIT Group/Credit
Finance, Inc. ("Lender"), Yale E. Key, Inc. ("Yale"), Key Energy Drilling, Inc.
d/b/a Clint Hurt Drilling ("Hurt"), Key Energy Group, Inc. ("Key"), WellTech,
Inc. ("WellTech"), and Bronson Production, Inc. ("BPI") (Yale, Hurt, Key,
WellTech and BPI are referred to each individually as a "Borrower" and
collectively as the "Borrowers").
A. Yale, Hurt and Key entered into that certain Second Amended and
Restated Loan and Security Agreement with Lender dated as of January 18, 1996
(the "Yale Loan Agreement").
B. WellTech and BPI entered into that certain Loan and Security
Agreement with Lender dated as of January 18, 1996 (the "WellTech Loan
Agreement"; the Original Loan Agreement, as defined in the Yale Loan Agreement
and the WellTech Loan Agreement, together with the Yale Loan Agreement and the
WellTech Loan Agreement as they may hereafter be modified or amended are
referred to collectively as the "Loan Agreements").
C. In accordance with the terms of the Loan Agreements, Lender has
agreed to make loans and other financial accommodations for the benefit of
Borrowers.
D. Key and Lender entered into that certain Stock Pledge Agreement
dated as of January 18, 1996 (the "Key Stock Pledge Agreement"), under which Key
pledged certain stock (the "Key Stock") described therein as security for the
obligations of the Borrowers under the Loan Agreements.
E. WellTech and Lender entered into that certain Stock Pledge Agreement
dated as of January 18, 1996 (the "WellTech Stock Pledge Agreement"), under
which WellTech pledged certain stock (the "WellTech Stock") described therein as
security for the obligations of the Borrowers under the Loan Agreement.
F. Yale, Hurt and WellTech have each agreed to execute certain deeds of
trust or mortgages (the "Mortgages") pledging as additional collateral certain
parcels of real estate located in various states (the "Real Estate").
G. Lender has conditioned its obligations under the Loan Agreements and
the other documents and instruments executed in connection therewith on the
execution of this Agreement by each of the Borrowers.
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth in this Agreement, and for good and valuable consideration,
the receipt of which is hereby acknowledged, each Borrower and Lender hereby
agree as follows:
<PAGE>
Due to the close business and financial relationships between each and
all Borrowers, in consideration of the benefits which will accrue to each
Borrower, and as an inducement for and in consideration of Lender at any time
providing or extending loans, advances and other financial accommodations to all
Borrowers pursuant to the Loan Agreements, each Borrower hereby, irrevocably and
unconditionally, (a) guarantees and agrees to be liable for the prompt
indefeasible and full payment and performance of all revolving loans, term
loans, letters of credit, bankers' acceptances, merchandise purchase guaranties
or other guaranties or indemnities for each other Borrower's account and all
other obligations, liabilities and indebtedness of every kind, nature or
description owing by all other Borrowers to Lender and/or its affiliates,
including principal, interest, charges, fees and expenses, however evidenced,
whether as principal, surety, endorser, guarantor or otherwise, arising under
any of the Loan Agreements, whether now existing or hereafter arising, whether
arising during or after the initial or any renewal term of the Loan Agreements
or after the commencement of any case with respect to any Borrower under the
United States Bankruptcy Code or any similar statute, whether direct or
indirect, absolute or contingent, joint or several, due or not due, primary or
secondary, liquidated or unliquidated, secured or unsecured, original, renewed
or extended, and whether arising directly or howsoever acquired by Lender
including from any other entity outright, conditionally or as collateral
security, by assignment, merger with any other entity, participations or
interests of Lender in the obligations of any Borrower to others, by assumption,
operation of law, subrogation or otherwise, and (b) agrees to pay to Lender on
demand the amount of all expenses (including, without limitation, attorneys'
fees and legal expenses) incurred by Lender in connection with the preparation,
execution, delivery, recording, administration, collection, liquidation,
enforcement and defense of each Borrower's obligations, liabilities and
indebtedness as aforesaid to Lender, Lender's rights in any collateral or under
this Agreement and all other Loan Agreements, or in any way involving claims by
or against Lender directly or indirectly arising out of or related to the
relationship between any Borrower and Lender, whether such expenses are incurred
before, during or after the initial or any renewal term of the Loan Agreements
or after the commencement of any case with respect to any Borrower under the
United States Bankruptcy Code or any similar statute (all of which being
collectively referred to herein as the "Guaranteed Obligations").
Notice of acceptance of this Agreement, the making of loans, advances
and extensions of credit or other financial accommodations to, and the incurring
of any expenses by or in respect of, each Borrower, and presentment, demand,
protest, notice of protest, notice of nonpayment or default, notice of intent to
accelerate and notice of acceleration, and all other notices to which each
Borrower is or may be entitled are hereby waived. Each Borrower also waives
notice of, and hereby consents to, (i) any amendment, modification, supplement,
renewal, restatement or extensions of time of payment of or increase or decrease
in the amount of any of the Guaranteed Obligations or to the Loan Agreements and
any collateral, and the guarantee made herein shall apply to the Guaranteed
Obligations as so amended, modified, supplemented, renewed, restated or
extended, increased or decreased, (ii) the taking, exchange, surrender and
releasing of collateral or guarantees now or at any time held by or available to
Lender for the obligations of any Borrower or any other party at any time liable
for or in respect of the Guaranteed Obligations (individually, an "Obligor" and
collectively, the "Obligors"), (iii) the exercise of, or refraining from the
exercise of any rights against any Borrower, or any other Obligor or any
collateral, and (iv) the settlement, compromise or release of, or the waiver of
2
<PAGE>
any default with respect to, any Guaranteed Obligations. Each Borrower agrees
that the amount of the Guaranteed Obligations shall not be diminished and the
liability of such Borrower hereunder shall not be otherwise impaired or affected
by any of the foregoing.
No invalidity, irregularity or unenforceability of all or any part of
the Guaranteed Obligations shall affect, impair or be a defense to this
Agreement, nor shall any other circumstance which might otherwise constitute a
defense available to, or legal or equitable discharge of any Borrower in respect
of any of the Guaranteed Obligations affect, impair or be a defense to the
obligations under this Agreement. Without limitation of the foregoing, the
liability of each Borrower hereunder shall not be discharged or impaired in any
respect by reason of any failure by Lender to perfect or continue perfection of
any lien or security interest in any collateral for the Guaranteed Obligations
or any delay by Lender in perfecting any such lien or security interest. As to
interest, fees and expenses, whether arising before or after the commencement of
any case with respect to Borrower under the United States Bankruptcy Code or any
similar statute, each Borrower shall be liable therefor, even if any other
Borrower's liability for such amounts does not, or ceases to, exist by operation
of law.
Payment of all amounts now or hereafter owed to any Borrower by any
other Borrower or any other Obligor is hereby subordinated in right of payment
to the indefeasible payment in full to Lender of the Guaranteed Obligations and
is hereby assigned to Lender as security therefor. Until such time as the
Guaranteed Obligations have been indefeasibly paid to Lender in full in cash or
by cashiers' or bank check or wire transfer, each Borrower hereby irrevocably
and unconditionally waives and relinquishes all surety defenses including, but
not limited to, all statutory, contractual, common law, equitable and all other
claims against each other Borrower, any collateral for the Guaranteed
Obligations or other assets of any Borrower or any other Obligor, for
subrogation, reimbursement, exoneration, contribution, indemnification, setoff
or other recourse in respect of sums paid or payable to Lender by any Borrower
hereunder, and each Borrower hereby further irrevocably and unconditionally
waives and relinquishes any and all other benefits which such Borrower might
otherwise directly or indirectly receive or be entitled to receive by reason of
any amounts paid by or collected or due from any other Borrower or any other
Obligor upon the Guaranteed Obligations or realized from their property.
EACH BORROWER HEREBY PLEDGES, ASSIGNS, AND GRANTS TO LENDER A SECURITY
INTEREST IN THE COLLATERAL DESCRIBED IN THE LOAN AGREEMENT TO WHICH IT IS A
PARTY TO SECURE ALL OF THE GUARANTEED OBLIGATIONS. IN ADDITION, THE STOCK AND
THE REAL ESTATE, AS WELL AS ANY OTHER PROPERTY, REAL OR PERSONAL, AT ANY TIME
NOW OR HEREAFTER PLEDGED TO LENDER BY ANY BORROWER SHALL SERVE AS COLLATERAL TO
SECURE THE GUARANTEED OBLIGATIONS.
In the event proceedings shall be instituted by or against any Borrower
or any other Obligor in bankruptcy or insolvency, or for reorganization,
arrangement, receivership, or the like, or if any Borrower or any other Obligor
calls a meeting of creditors or makes any assignment for the benefit of
creditors, or upon the occurrence of any event which constitutes a default or
event of default under the Loan Agreements, the liability of such Borrower for
3
<PAGE>
the entire Guaranteed Obligations shall, at the option of Lender, mature, even
if the liability of any other Borrower or any other Obligor therefor does not.
Each Borrower shall continue to be liable hereunder until one of
Lender's officers actually receives a written termination notice by certified
mail; but the giving of such notice shall not relieve such Borrower from
liability for any Guaranteed Obligations incurred before termination or for
post-termination collection expenses and interest pertaining to any Guaranteed
Obligations arising before termination.
Each Borrower agrees that this Agreement shall remain in full force and
effect or be reinstated, as the case may be, if at any time payment of any of
the Guaranteed Obligations is rescinded or otherwise restored by Lender to any
Borrower or to any other person who made such payment, or to the creditors or
creditors' representative of such Borrower or such other person.
Lender's books and records showing the account between Lender and each
Borrower shall be admissible in evidence in any action or proceeding as prima
facie proof of the items therein set forth, and any written statements rendered
by Lender to any Borrower, to the extent to which no written objection is made
within sixty (60) days after the date thereof, shall be considered correct and
be binding on Borrowers as an account stated for purposes of this Agreement.
No delay on Lender's part in exercising any rights hereunder or failure
to exercise the same shall constitute a waiver of such rights. No notice to, or
demand on, any Borrower shall be deemed to be a waiver of the obligation of such
Borrower to take further action without notice or demand as provided herein. No
waiver of any of Lender's rights hereunder, and no modification or amendment of
this Agreement, shall be deemed to be made by Lender unless the same shall be in
writing, duly signed on Lender's behalf, and each such waiver, if any, shall
apply only with respect to the specific instance involved and shall in no way
impair Lender's rights or the obligations of any Borrower to Lender in any other
respect at any other time.
This Agreement is binding upon each Borrower, its successors and
assigns and shall benefit Lender and its successors, endorsers, transferees and
assigns. All references to Borrower and Lender herein shall include their
respective successors and assigns. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE
OFFICE OF LENDER SET FORTH ABOVE IS LOCATED.
EACH BORROWER AND LENDER WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING INSTITUTED BY EITHER OR ANY OF THEM AGAINST THE OTHER WHICH
PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY ALLEGED TORTIOUS CONDUCT
BY ANY BORROWER OR LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISING OUT
OF OR RELATED TO THE RELATIONSHIP BETWEEN BORROWERS AND LENDER. IN NO EVENT WILL
LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
4
<PAGE>
Each Borrower waives all rights to interpose any claims, deductions,
setoffs or counterclaims of any kind, nature or description in any action or
proceeding instituted by Lender with respect to this Agreement or any matter
arising herefrom or relating hereto, except compulsory counterclaims.
EACH BORROWER HEREBY IRREVOCABLY SUBMITS AND CONSENTS TO THE
NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE
IN WHICH THE OFFICE OF LENDER DESIGNATED ABOVE IS LOCATED WITH RESPECT TO ANY
ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY MATTER ARISING
HEREFROM OR RELATING HERETO. ANY SUCH ACTION OR PROCEEDING COMMENCED BY ANY
BORROWER AGAINST LENDER WILL BE LITIGATED ONLY IN A FEDERAL COURT LOCATED IN THE
DISTRICT, OR A STATE COURT IN THE STATE AND COUNTY, IN WHICH THE OFFICE OF
LENDER SET FORTH ABOVE IS LOCATED AND EACH BORROWER WAIVES ANY OBJECTION BASED
ON FORUM NON CONVENIENS AND ANY OBJECTION TO VENUE IN CONNECTION THEREWITH.
In any such action or proceeding, each Borrower waives personal service
of the summons and complaint or other process and papers therein and agrees that
any process or notice of motion or other application to any of said Courts or a
judge thereof, or any notice in connection with any proceedings hereunder may be
served (i) inside or outside such State by registered or certified mail, return
receipt requested, addressed to such Borrower at the address set forth below or
which such Borrower has previously advised Lender in writing and as indicated in
the records of Lender, and service or notice so served shall be deemed complete
five (5) days after the same shall have been posted or (ii) in such other manner
as may be permissible under the rules of said Courts.
If the Merger (as defined in the WellTech Loan Agreement) has not
occurred on or prior to April 30, 1996 and WellTech and BPI indefeasibly pay to
Lender all obligations due to Lender under the WellTech Loan Agreement, in cash,
by cashier's or bank check or wire transfer, then upon Lender's receipt of such
indefeasible payment, this Agreement shall terminate with respect to WellTech's
and BPI's obligations to collateralize and guaranty borrowings and obligations
of the other Borrowers and with respect to the other Borrowers' obligations to
collateralize and guaranty borrowings and obligations of WellTech and BPI, and
WellTech and BPI shall no longer be included in the definition of "Borrowers" or
be a "Borrower" hereunder.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
This Agreement may be executed in any number of counterparts, and by
the Lender and the Borrowers in separate counterparts, each of which shall be an
original, but all of which shall together constitute one and the same agreement.
5
<PAGE>
IN WITNESS WHEREOF, each party hereto has executed and delivered this
Agreement on the day and year first above written.
"BORROWERS":
KEY ENERGY GROUP, INC.
By: /s/ Francis D. John
Name: Francis D. John
Title: President
YALE E. KEY, INC.
By: /s/ Francis D. John
Name: Francis D. John
Title: Executive Vice President
KEY ENERGY DRILLING, INC. D/B/A CLINT HURT
DRILLING
By: /s/ Francis D. John
Name: Francis D. John
Title: Executive Vice President
WELLTECH, INC.
By: /s/ W. Clarke Gormley
Name: W. Clarke Gormley
Title: Vice President
6
<PAGE>
BRONSON PRODUCTION, INC.
By: /s/ W. Clarke Gormley
Name: W. Clarke Gormley
Title: Vice President
"LENDER":
THE CIT GROUP/CREDIT FINANCE, INC.
By: /s/ Morris Horstmann
Name: Morris Horstmann
Title: Vice President
7
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Key Energy Group, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Independent Accountants" and "Experts" in the proxy
statement - prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Midland, Texas
March 1, 1996
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated August 31, 1995 (except with respect to the matters discussed in Note 12,
as to which the date is January 19, 1996), on the WellTech, Inc. consolidated
financial statements as of December 31, 1994 and 1993 and for the three years in
the period ended December 31, 1994 included in Key Energy Group, Inc.'s
Amendment No. 1 to Form S-4 registration statement (Registration No. 333-369)
and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1996
Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
(Registration No. 333-369) of our report dated September 7, 1993 on our audits
of the consolidated statements of operations, stockholders' equity (deficit) and
cash flows of Key Energy Group, Inc. and Subsidiaries for the seven months ended
June 30 and the five months ended November 30, 1992 and to the reference to our
firm under the heading "Experts" in the proxy statement-prospectus.
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P.
Dallas, Texas
March 1, 1996
Exhibit 23.6
CONSENT
I, W. Phillip Marcum, do hereby consent to serve, if elected, as a
Director of Key Energy Group, Inc. ("Key") and to being named as a nominee to
the Board of Directors of Key in the Proxy Statement - Prospectus on Form S-4
filed by Key.
/s/ W. Phillip Marcum
W. Phillip Marcum
March 1, 1996
Exhibit 23.7
CONSENT
I, Kevin P. Collins, do hereby consent to serve, if elected, as a
Director of Key Energy Group, Inc. ("Key") and to being named as a nominee to
the Board of Directors of Key in the Proxy Statement - Prospectus on Form S-4
filed by Key.
/s/ Kevin P. Collilns
Kevin P. Collins
March 1, 1996
Exhibit 23.8
CONSENT
I, Victor J. Sirgo, P.E., hereby consent to the reference to my name
under the heading "Business and Properties of Key" in the Proxy Statement -
Prospectus of Key Energy Group, Inc.
/s/ Victor J. Sirgo, P.E.
Victor J. Sirgo, P.E.
Midland,Texas
January 17, 1996
