SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 3)
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For fiscal year ended June 30, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file no. 1-8038
KEY ENERGY GROUP, INC.
(Name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
255 Livingston Ave., New Brunswick, NJ 08901
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (908) 247-4822
Securities registered pursuant to Section 12(b)of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.10 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Shares held by nonaffiliates of the
Registrant as of August 1, 1995 was approximately $34,999,644.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No ___
Common Shares outstanding at August 1, 1995: 6,913,510
DOCUMENTS INCORPORATED BY REFERENCE: None.
<PAGE>
Key Energy Group, Inc. and Subsidiaries
INDEX
Page Number
PART II
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis or Plan of Operations. 4
Item 8. Financial Statements and Supplementary Data. 10
Signatures 38
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<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected consolidated financial data
of Key for the five years ended June 30, 1995. 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 Year Fiscal Year Seven Months Five Months Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
June 30, 1995 June 30, 1994 June 30, 1993 Nov. 30, 1992 June 30, 1992 June 30,1991
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 44,689 $ 34,621 $ 14,256 $ 10,433 $ 21,535 $ 24,223
Income from continuing operations
before reorganization items, income
taxes and extraordinary item 3,328 2,295 1,124 400 83 1,716
Income from continuing operations
before extraordinary item 2,178 1,345 711 2,118 557 1,011
Income (loss) before extraordinary item 2,178 1,345 711 2,118 (345) (5,216)
Net income (loss) 2,178 1,345 711 4,986 (345) (5,186)
Income (loss) applicable to common
shareholders 2,178 1,345 711 4,986 (596) (5,571)
Income (loss) per common share(1):
Primary:
Income from continuing operations
before reorganization items, income
taxes and extraordinary item $ 0.50 $ 0.44 $ 0.21 $ 0.02 $ 0.02 $ 0.05
Income from continuing operations
before extraordinary item $ 0.33 $ 0.26 $ 0.21 $ 0.12 $ 0.02 $ 0.05
Income (loss) before extraordinary item 0.33 0.26 0.14 0.12 (0.04) (0.44)
Net income (loss) 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 $ 0.50 $ 0.43 $ 0.21 $ 0.00 $ 0.01 $ 0.02
Income from continuing operations
before extraordinary item $ 0.33 $ 0.25 $ 0.21 $ 0.01 $ 0.01 $ 0.02
Income (loss) before extraordinary item 0.33 0.25 0.14 0.01 (0.02) (0.14)
Net income (loss) 0.33 0.25 0.14 0.03 (0.02) (0.14)
Average common shares outstanding:
Primary 6,647 5,274 5,124 17,942 14,717 12,684
Assuming full dilution 6,647 5,288 5,138 176,508 38,339 40,720
Common shares outstanding at period end 6,914 5,274 5,124 17,942 17,942 14,717
Market price per common share at period
end $ 5.06 $ 4.67 3.67 * $ 0.06 $ 0.19
Cash dividends paid on common shares $ - $ - $ - $ - $ - $ -
<CAPTION>
(continued)
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<PAGE>
Fiscal Year Fiscal Year Seven Months Five Months Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
June 30, 1995 June 30, 1994 June 30, 1993 Nov. 30, 1992 June 30, 1992 June 30,1991
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Property and equipment, net $ 31,942 $ 17,159 $ 9,688 * $ 7,417 $ 7,079
Total assets $ 45,243 $ 28,095 $ 15,906 * $ 12,239 $ 11,829
Long-term debt $ 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) $ 20,111 $ 9,263 $ 7,280 * $ (4,938) $ (4,287)
Book value per common share 2.91 $ 1.76 $ 1.42 * $ (0.26) $ (0.27)
<FN>
* - 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.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The following discussion provides information to assist in the
understanding of 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.
Results of Operations
Fiscal Year Ended June 30, 1995 Compared to Fiscal Year Ended June 30, 1994
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.
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<PAGE>
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.
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.
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<PAGE>
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.
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 preventers and
oil well frac tanks.
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<PAGE>
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.
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.)
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<PAGE>
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 June 30, 1995, the Company had $1,275,000 in cash and restricted
cash (the Company also had $267,000 in restricted marketable securities) as
compared to $1,173,000 in cash and restricted cash at June 30, 1994.
Key has projected $2.5 million for oil field service capital
expenditures for fiscal 1996 as compared to $2.8 million for fiscal 1995.
Capital expenditures are expected to be primarily capitalized improvement costs
to existing equipment and machinery. Capital expenditures are expected to
decrease from fiscal 1995 levels due to less capital improvements for the
acquired WellTech West Texas operations. Financing of capital expenditures is
expected to come from the operating cash flows of Key. Capital expenditures were
$4,395,000 in fiscal 1994.
OEI is forecasting outlays of approximately $4 million in oil and gas
property acquisitions and $6 million in development costs for fiscal 1996 as
compared to $3.7 million during fiscal 1995. Financing is expected to come from
borrowings.
-8-
<PAGE>
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.
Debt
In January 1995, Key received $2.5 million in term note proceeds from
CIT 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 two and one half percent 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, OEI refinanced its debt (approximately $2.8 million
at March 31, 1995) with Norwest Bank Texas, Midland, N.A. ("Norwest"). The
refinanced debt consist of a $7.5 million reducing revolver with a current
borrowing base of $5.3 million. 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 OEI and is guaranteed by the
Company. In addition, the revolver has cross-default provisions and
cross-collaterization provisions with Clint Hurt.
As a result of the purchase of the Clint Hurt drilling equipment, Key
Energy Drilling, Inc. d/b/a Clint Hurt Drilling signed a note with Norwest for
the principal sum of one million dollars. The note requires principal payments
of approximately $28,000 per month plus interest with the first payment due May
5th, 1995 and monthly thereafter for 36 months. The note has an interest rate of
Norwest prime rate (9.0% at June 30, 1995), plus 3/4 of one percent. The note
matures in April of 1998. The note is secured by all of the equipment of Clint
Hurt and is guaranteed by the Company. In addition, Clint Hurt obtained a
working capital Line of Credit with Norwest in the amount of $200,000. The line
of credit requires two interest only payments due May 5, 1995 and June 5, 1995,
respectively and ten $20,000 monthly principal and interest payments thereafter.
The line of credit has an interest rate of Norwest prime rate (9.0% at June 30,
1995), plus 3/4 of one percent. The line of credit is secured by all of the
equipment of Clint Hurt and is guaranteed by the Company.
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.
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<PAGE>
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Independent Auditors' Report...........................................11
Report of Independent Accountants......................................12
Consolidated Balance Sheets, June 30, 1995 and 1994....................13
Consolidated Statements of Operations, Years Ended
June 30, 1995 and 1994, Seven Months Ended June 30, 1993
and Five Months Ended November 30, 1992..............................14
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..............................15
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................16
Notes to Consolidated Financial Statements, June 30, 1995,
1994 and 1993........................................................17
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<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)
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<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
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<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.
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<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.
-14-
<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.
-15-
<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.
-16-
<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.
-17-
<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.
-18-
<PAGE>
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).
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
-19-
<PAGE>
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
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
-20-
<PAGE>
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.
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.
-21-
<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.
-22-
<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 - Nations Bank, 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.
-23-
<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.
-24-
<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.
-25-
<PAGE>
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
====== ======
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.
-26-
<PAGE>
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 $ -
====== ====== ====== =========
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)
======== =========
-27-
<PAGE>
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.
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:
-28-
<PAGE>
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.
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
-29-
<PAGE>
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.
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
=================================================================
-30-
<PAGE>
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>
<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>
-31-
<PAGE>
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.
15. INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)
<TABLE>
<CAPTION>
CAPITALIZED COSTS: June 30, 1995 June 30, 1994
<S> <C> <C>
------------- -------------
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
========== ==========
<FN>
* - Computed at the statutory rate of 34%.
** - Excludes corporate overhead and financing costs.
</FN>
</TABLE>
-32-
<PAGE>
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.
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.
-33-
<PAGE>
<TABLE>
<CAPTION>
Oil and Gas Producing Activities:
Oil and Natural
Condensate Gas
(Bbls) (Mcf)
<S> <C> <C>
Total Proved Reserves:
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.
-34-
<PAGE>
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1994
(in thousands)
<S> <C> <C>
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
============================
</TABLE>
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
=========
-35-
<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:
<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>
Interest paid $1,422 $759 $276 $215
Taxes paid 53 10 - -
</TABLE>
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>
-36-
<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.
-37-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 3 to its
Annual Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
KEY ENERGY GROUP, INC.
(Registrant)
By:/s/ Francis D. John
Francis D. John
President, Chief Executive and Chief
Dated: March 22, 1996 Financial Officer and Director
-38-
