<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 8-K/A
AMENDMENT NO. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): June 25, 1997
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 1-8038 04-2648081
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
Two Tower Center, Tenth Floor
East Brunswick, New Jersey 08816
(Address of Principal Executive Offices)
908/247-4822
(Registrant's telephone number, including area code)
(Not Applicable)
(Former name or former address, if changed since last report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On June 25, 1997, Yale E. Key, Inc., a wholly owned subsidiary of the
Key Energy Group, Inc. (the "Company"), acquired all of the issued and
outstanding capital stock of Well-Co Oil Service, Inc., a closely held Nevada
corporation. The assets owned by Well-Co Oil Service, Inc. consist of equipment
and vehicles utilized in working-over and servicing oil and gas wells in West
Texas and Eastern New Mexico. The consideration given by the Company for the
issued and outstanding capital stock of Well-Co Oil Service, Inc. consists of
cash in the amount of $17,575,816.46 and 240,000 shares of Company's common
stock which had a trading value as of June 25, 1997 of $16.875 per share. The
amount of such consideration was determined by negotiations between the Company
and the owners of all of the issued and outstanding capital stock of Well-Co Oil
Service, Inc. No material relationship exists between the sellers and the
Company or any of its affiliates, any director or officer of the Company or any
associate of any such officer or director. The Company intends for the assets of
Well-Co Oil Service, Inc. to continue to be used in working-over and servicing
oil and gas wells.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired.
The following financial statements of Well-Co Oil Service, Inc. are
filed herewith: Report of Independent Accountants dated August
8, 1997, Balance Sheet dated June 25, 1997, Statement of
Income for period from July 1, 1996 through June 25, 1997,
Statement of Cash Flows for period from July 1, 1996 through
June 25, 1997, Statement of Stockholder's Equity for period
from July 1, 1996 through June 25, 1997, and Notes to
Financial Statements
(b) Pro Forma Financial Information.
The following pro forma financial statements are filed herewith:
Key Energy Group, Inc. and Subsidiaries Unaudited Pro Forma
Combined Financial Statements
Key Energy Group, Inc. and Subsidiaries Unaudited Pro Forma
Combined Balance Sheet as of March 31, 1997
Key Energy Group, Inc. and Subsidiaries Unaudited Pro Forma
Combined Statement of Operations for Twelve Months
Ended June 30, 1996
Key Energy Group, Inc. and Subsidiaries Unaudited Pro Forma
Combined Statement of Operations for Nine Months
Ended March 31, 1997
Notes to Unaudited Combined Financial Statements dated June
30, 1996 and March 31, 1997
(c) Exhibits.
The following exhibits, from which schedules have been omitted and will
be furnished to the Commission upon its request, are filed with this
report on Form 8-K/A.
2
<PAGE> 3
2.1 Stock Purchase Agreement Among Key Energy Group, Inc. and
Mark Duane Massingill and Claudia Lynn Massingill, dated as
of June 25, 1997.*
23.1 Consent of Robinson Burdette Martin & Cowan, L.L.P., dated as
of September 8, 1997.
23.2 Consent of Robinson Burdette Martin & Cowan, L.L.P., dated as
of September 8, 1997.
* previously filed.
3
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 9, 1997 KEY ENERGY GROUP, INC.
By: /s/ FRANCIS D. JOHN
--------------------------------
Francis D. John, President
4
<PAGE> 5
WELL-CO OIL SERVICE, INC.
FINANCIAL STATEMENTS WITH
REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE PERIOD FROM JULY 1, 1996 THROUGH JUNE 25, 1997
| Robinson
| Burdette
| Martin
| &Cowan,L.L.P.
certified public accountants
<PAGE> 6
WELL-CO OIL SERVICE, INC.
FINANCIAL STATEMENTS
June 25, 1997
TABLE OF CONTENTS
Page
----
Report of Independent Accountants 1
Financial Statements:
Balance Sheet 2
Statement of Income 3
Statement of Cash Flows 4
Statement of Stockholder's Equity 5
Notes to Financial Statements 6
<PAGE> 7
| Robinson | certified public accountants
| Burdette |
| Martin |
| &Cowan,L.L.P. |
REPORT OF INDEPENDENT ACCOUNTANTS
Stockholder
Well-Co Oil Service, Inc.
We have audited the accompanying balance sheet of Well-Co Oil Service, Inc. as
of June 25, 1997, and the related statements of income, stockholder's equity and
cash flows for the period from July 1, 1996 through June 25, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Well-Co Oil Service, Inc. as of
June 25, 1997, and the results of its operations and its cash flows for the
period from July 1, 1996 through June 25, 1997 in conformity with generally
accepted accounting principles.
Robinson Burdette Martin & Cowan, L. L. P.
Lubbock, Texas
August 8, 1997
-1-
<PAGE> 8
WELL-CO OIL SERVICE, INC.
BALANCE SHEET
June 25, 1997
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,101,284
Short term investments 163,491
Accounts receivable:
Trade billed 2,948,211
Trade unbilled 405,360
Employees 33,106
Amounts due from former stockholders 43,328
Inventories 136,333
Prepaid expenses and other current assets 57,282
Deferred income taxes 174,111
------------------
Total current assets 5,062,506
Property and equipment, net 3,626,341
Other assets 309,553
------------------
Total assets $ 8,998,400
==================
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 388,634
Other accrued liabilities 1,265,786
Current portion of long-term debt 133,124
Current portion of capitalized lease obligations 361,651
------------------
Total current liabilities 2,149,195
Long-term debt, less current portion 253,987
Capitalized lease obligations, less current portion 212,134
Deferred income taxes 346,701
------------------
2,962,017
------------------
Commitments and contingencies (Notes 4, 8, and 11) --
Stockholder's equity:
Common stock, no par value; 10,000 shares authorized,
10,000 shares issued and outstanding 38,392
Additional paid-in capital 2,144,036
Retained earnings 3,853,955
------------------
Total stockholder's equity 6,036,383
------------------
Total liabilities and stockholder's equity $ 8,998,400
==================
The accompanying notes are an integral part of these
financial statements.
-2-
<PAGE> 9
WELL-CO OIL SERVICE, INC.
STATEMENT OF INCOME
Period from July 1, 1996 through June 25, 1997
Revenues:
Oilfield services $23,006,573
Other, net 101,655
Interest 104,039
-----------
23,212,267
-----------
Costs and expenses:
Oilfield services 17,936,720
Depreciation and amortization 1,197,369
General and administrative 1,521,705
Interest 341,723
-----------
20,997,517
-----------
Income before income taxes 2,214,750
Income tax expense 888,698
-----------
Net income $ 1,326,052
===========
Earnings per common share (primary and fully diluted) $ 132.61
===========
Weighted average number of common shares outstanding 10,000
===========
The accompanying notes are an integral part of these
financial statements.
-3-
<PAGE> 10
WELL-CO OIL SERVICE, INC.
STATEMENT OF CASH FLOWS
Period from July 1, 1996 through June 25, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 1,326,052
Adjustments to reconcile income from operations to net cash provided by operations:
Gains on short-term investments (28,536)
Depreciation and amortization 1,197,369
Deferred income taxes 199,690
Change in current assets and liabilities:
Increase in accounts receivable (884,317)
Increase in prepaid expenses and other current assets (233,417)
Decrease in accounts payable (546,200)
Decrease in accrued liabilities (7,532)
-----------
Net cash provided by operating activities 1,023,109
-----------
Cash flows from investing activities:
Proceeds from sale of short-term investments 3,471,495
Purchase of short-term investments (2,009,123)
Advances to former stockholders (644,528)
Repayments of amounts advanced to former stockholders 743,526
Purchases of property and equipment (1,112,663)
Other 52,468
-----------
Net cash provided by investing activities 501,175
-----------
Cash flows from financing activities:
Capital lease payments (305,500)
Principal payments on long-term debt (108,632)
Principal payments on notes payable to former stockholders and affiliates (1,463,456)
Proceeds from notes payable to former stockholders and affiliates 485,000
-----------
Net cash used in financing activities (1,392,588)
-----------
Net increase in cash and cash equivalents 131,696
Cash, beginning of period 969,588
-----------
Cash, end of period $ 1,101,284
===========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 359,634
Income taxes 900,440
Non-cash investing and financing activities:
Assets acquired through financing by notes payable 400,000
Assets acquired through financing by capital lease 405,473
Notes payable contributed back to the Company in the form of capital contributions 2,144,036
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-4-
<PAGE> 11
WELL-CO OIL SERVICE, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
Period from July 1, 1996 through June 25, 1997
<TABLE>
<CAPTION>
Common stock
--------------------------------------
Number of Additional
shares Amount paid-in Retained
outstanding at par capital earnings Total
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1996 10,000 $ 38,392 $ -- $ 2,527,903 $ 2,566,295
Capital contributions -- -- 2,144,036 -- 2,144,036
Net income -- -- -- 1,326,052 1,326,052
---------------- ---------------- ---------------- ---------------- ----------------
Balance at June 25, 1997 10,000 $ 38,392 $ 2,144,036 $ 3,853,955 $ 6,036,383
================ ================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
-5-
<PAGE> 12
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company - Prior to December 28, 1993, Well-Co Oil Service, Inc.
("Old Well-Co") and Lyn-Mar Properties, Inc. ("Lyn-Mar") were separate
corporations under common control as one family controlled the stock
ownership and management of both companies. On December 28, 1993, Lyn-
Mar was merged into Old Well-Co in a tax-free merger and on December
30, 1993, Old Well-Co was merged into a newly created Nevada
corporation with the same name, Well-Co Oil Service, Inc. (the
"Company"). The merger of Old Well-Co into the Company was effected by
exchanging 5,000 shares of the Company's no par value common stock for
the outstanding shares of Old Well-Co in a tax-free exchange.
The Company operates 83 well service and workover rigs with corporate
headquarters in Brownfield, Texas and other offices and yard facilities
in Levelland, Lamesa, Denver City, and Andrews, Texas. Although the
range and extent of services provided varies, as part of its well
service business, the Company generally provides a full range of
maintenance and workover rig services. These services include the
completion of newly drilled wells, the recompletion of existing wells
and the plugging and abandonment of wells at the end of their useful
lives. Other services include fishing tools and services, hydro-static
tubing testing, reverse circulation and related services, roustabout
services, and electric wireline services.
On June 25, 1997, Key Energy Group, Inc. ("Key"), through its wholly
owned subsidiary Yale E. Key, Inc., acquired all of the issued and
outstanding common stock of the Company. Key operates in Texas,
Oklahoma, Michigan, the Appalachian Basin and Argentina. A significant
part of Key's operations are similar to that of the Company's.
Basis of presentation - The preparation of these financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents - For purposes of reporting cash flows, cash
and cash equivalents include cash on hand and highly-liquid investments
with original maturities of three months or less.
Revenues and receivables - The various oilfield services offered by the
Company are provided on an hourly basis at predetermined fees per hour
including the rental of equipment for use by others. Revenue is
recognized daily as services are provided or equipment is rented
regardless of when billed to the customer.
Inventories - Inventories, which consist primarily of oilwell service
parts and supplies, are held for use in the operations of the Company
and are valued at the lower of cost (first-in first-out method) or
market.
(Continued)
-6-
<PAGE> 13
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Property and equipment - The Company provides for depreciation and
amortization of property and equipment, which includes the amortization
of assets recorded under capital leases, using the straight-line method
over the following estimated useful lives of the assets:
Description Years
- ------------------------------------------------------ -------------
Oilfield service equipment 3-7
Motor vehicles 3
Furniture and equipment 5
Buildings and improvements 15-35
Upon disposition or retirement of property and equipment, the cost and
related accumulated depreciation and amortization are removed from the
accounts and the gain or loss thereon, if any, is included in the
results of operations.
Environmental - The Company 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 the Company 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.
Income taxes - 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. 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. A valuation allowance for deferred tax
assets is recognized when it is "more likely than not" that the benefit
of deferred tax assets will not be realized.
Earnings per share - Earnings per share of common stock is calculated
by dividing net income by the weighted average number of common shares
for the period.
(Continued)
-7-
<PAGE> 14
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 25, 1997:
Oilfield service equipment $10,952,668
Motor vehicles 4,889,731
Furniture and equipment 195,156
Buildings and land 762,443
-----------
16,799,998
Accumulated depreciation and amortization 13,173,657
-----------
$ 3,626,341
===========
3 OTHER ASSETS
Other assets consisted of the following as of June 25, 1997:
Deposit on worker's compensation insurance policy (a) $ 300,000
Other 9,553
-----------
$ 309,553
===========
(a) Restricted as to use
4. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are
pending against the Company. Management does not believe that the
disposition of any of these items will result in a material adverse
impact to the financial position of the Company. As of June 25, 1997,
the Company had no reserve for potential suits or claims.
The Company has been informed by the Texas Natural Resource
Conservation Commission that it may be a potentially responsible party
regarding clean up of a site no longer owned by the Company. In the
opinion of management, the ultimate outcome will not result in a
material adverse effect on the financial position of the Company at
June 25, 1997.
(Continued)
-8-
<PAGE> 15
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. COMMITMENTS AND CONTINGENCIES (Continued)
The Company's operations are subject to inherent risks, including
blowouts, fire and explosions which could result in personal injury or
death, suspended drilling operations, damage to, or destruction of
equipment, damage to producing formations and pollution or other
environmental hazards. As a protection against these hazards, the
Company maintains general liability insurance coverage of $1,000,000
per occurrence with $2,000,000 of aggregate and excess liability and
umbrella coverage up to $5,000,000 per occurrence with a $5,000,000
aggregate. The Company believes it is adequately insured for public
liability and property damage to others with respect to its operations.
However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive
fire damage or damage to the environment. The Company also carries
insurance to cover physical damage to, or loss of, its equipment;
however, it does not carry insurance against loss of earnings resulting
from such damage or loss.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of June 25, 1997:
Note payable to an unaffiliated corporation dated December 30, 1996 in the
original amount of $400,000. The note bears interest at 8% and is payable in 36
monthly installments of $12,535 including interest beginning April 30, 1997. The
note is collateralized by various vehicles, well service rigs, trailers and
equipment that has a net book value of $855,460 as of
June 25, 1997. $ 370,199
Other notes payable 16,912
------------------
387,111
Less current maturities (133,124)
------------------
$ 253,987
==================
Scheduled maturities of long-term debt subsequent to June 25, 1997, are
as follows:
Year ended June 30,
1998 $ 133,124
1999 144,846
2000 109,141
------------------
$ 387,111
==================
(Continued)
-9-
<PAGE> 16
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following as of June 25,
1997:
Accrued payroll and taxes $ 376,877
Workers compensation claims liabilities 479,552
Other 409,357
----------
Total $1,265,786
==========
7. INCOME TAXES
The provision for income taxes for the period from July 1, 1996 through
June 25, 1997 consists of the following:
Federal:
Current $599,074
Deferred 183,648
--------
782,722
--------
State:
Current 89,934
Deferred 16,042
--------
105,976
--------
$888,698
========
The effective income tax rate varies from the Federal statutory rate as
follows:
Statutory tax rate 34.0%
State income taxes (franchise tax) 4.8
Meals and entertainment disallowance 4.0
Other (4.0)
----
38.8%
====
There are $44,571 and $61,776 of accrued Federal and state income
taxes, respectively, in other accrued liabilities at June 25, 1997.
(Continued)
-10-
<PAGE> 17
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
7. INCOME TAXES (Continued)
The tax effect of significant temporary differences representing
deferred tax assets and liabilities and changes therein are as follows:
<TABLE>
<CAPTION>
July 1, 1996 Net change June 25, 1997
------------------ ---------------- -------------------
<S> <C> <C> <C>
Deferred tax assets:
Workers compensation claims
liabilities $ 206,522 $ (29,232) $ 177,290
Accrued vacation liabilities 37,097 (9,852) 27,245
Allowance for doubtful accounts 26,353 (26,353) --
Self insured health care claims
liabilities 5,837 11,725 17,562
Amounts due affiliates 35,394 (35,394) --
Short term investments 22,794 (22,794) --
------------------ ---------------- -------------------
Deferred tax assets 333,997 (111,900) 222,097
------------------ ---------------- -------------------
Deferred tax liabilities:
Property and equipment (146,035) (85,235) (231,270)
Inventories (47,322) (664) (47,986)
Workers compensation premium
deposit (110,910) -- (110,910)
Capital leases (2,630) (1,891) (4,521)
------------------ ---------------- -------------------
Deferred tax liabilities (306,897) (87,790) (394,687)
------------------ ---------------- -------------------
Net deferred tax assets
(liabilities) $ 27,100 $ (199,690) $ (172,590)
================== ================ ===================
</TABLE>
8. LEASING ARRANGEMENTS
Among other leases, the Company leases certain automotive equipment
under non-cancelable leases which expire at various dates through 2000.
The term of the leases generally runs from 36 to 60 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.
Capitalized assets included in property and equipment as of June 25,
1997 are as follows:
Motor vehicles $ 1,029,028
Accumulated amortization 439,895
------------------
$ 589,133
==================
(Continued)
-11-
<PAGE> 18
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. LEASING ARRANGEMENTS (Continued)
As of June 25, 1997, the future minimum lease payments under
non-cancelable operating leases together with the present value of the
net minimum lease payments are as follows:
Lease
Year ended June 30, payments
- ---------------------------------------------------- ------------------
1998 $ 387,714
1999 193,836
2000 25,716
------------------
Total minimum lease payments 607,266
Less amounts representing interest 33,481
------------------
Present value of minimum lease obligations 573,785
Less current portion 361,651
------------------
Long-term capital lease obligations $ 212,134
==================
9. EMPLOYEE BENEFIT PLANS
The Company maintains a profit sharing plan for its employees. The Plan
is a defined contribution plan covering all full-time employees of the
Company who have one year of service and are age twenty-one or older.
Contributions are made to the Plan as determined by the Company's Board
of Directors. The Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974. During the period from July 1,
1996 through June 25, 1997, the Company made contributions to the Plan
totaling $25,000.
10. TRANSACTIONS WITH RELATED PARTIES
During the period, the Company rented certain equipment from a
partnership ("LMB Farms") comprised of former stockholders of the
Company. During the period from July 1, 1996 through June 25, 1997, the
Company incurred $182,981 in rental expense for the equipment.
As part of the final definitive agreement of sale of the Company on
June 25, 1997, on June 9, 1997 certain real property with recorded cost
of $189,011 was transferred to a company owned by former stockholders
and employees. This property had no remaining book value as it had
been, prior to July 1, 1996, fully impaired due to possible
environmental issues surrounding the property. Accordingly, there was
no gain or loss recognized as a result of this transaction. The
property is the location for the Company's Levelland facility.
The Company allows employees to receive advances on payroll. At June
25, 1997, the amount due from employees relative to these advances was
approximately $33,000.
(Continued)
-12-
<PAGE> 19
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. TRANSACTIONS WITH RELATED PARTIES (Continued)
During the period from July 1, 1996 to June 25, 1997, the Company
provided the use of well servicing rigs to a company owned by former
stockholders and officers without charge. Management has estimated the
labor and other costs associated with those services to be
approximately $32,000.
During the period from July 1, 1996 to June 25, 1997, the Company
purchased certain well servicing equipment from a company owned by
former stockholders and officers of the Company at a cost of $100,000.
On June 24, 1997, certain amounts owed by the Company to former
stockholders and officers of the Company was contributed to the Company
by the Company's then current stockholders in the form of a capital
contribution. The amount of the contribution was approximately
$2,144,000.
During the period from July 1, 1996 to June 25, 1997, the Company
borrowed $485,000 from former stockholders and officers. During that
same period, amounts in the approximate total of $1,463,500 plus
interest of approximately $357,000 were paid by the Company to this
same group. At June 25, 1997, the Company had paid all amounts owed to
these individuals in full.
During the period from July 1, 1996 to June 25, 1997, the Company had
interest bearing and non-interest bearing advances to certain former
stockholders. The average amount due from those stockholders during the
period was approximately $438,000. The balance at June 25, 1997 was
approximately $43,000.
11. CONCENTRATIONS OF CREDIT RISK
The Company has a concentration of customers in the oil and gas
industry. Substantially all of the Company's customers are major
integrated oil companies, major independent producers of oil and gas
and smaller independent producers. This may affect the Company's
overall exposure to credit risk either positively or negatively, in as
much 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 the Company may generally secure
a receivable at any time by filing a mechanic's and materialmans' lien
on the well serviced.
Two customers each accounted for approximately 19% and 18% of the
Company's total revenues for the period from July 1, 1996 through June
25, 1997. Although the loss of these customers is not anticipated, such
a loss would have a severe near term effect on the Company's business.
(Continued)
-13-
<PAGE> 20
WELL-CO OIL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. CONCENTRATIONS OF CREDIT RISK (Continued)
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of demand deposits and
certificates of deposits. Management believes that its funds are
deposited with high quality financial institutions. The Company has
$1,101,284 in demand deposits in a single institution and a certificate
of deposit of $163,491 in another financial institution. Both are
limited to $100,000 each in FDIC deposit insurance coverage.
-14-
<PAGE> 21
KEY ENERGY GROUP, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited Pro Forma Combined Financial Statements of Key Energy
Group, Inc. ("Key" or "The Company") have been prepared to give effect to the
acquisition of the assets of Well-Co Oil Service, Inc. ("Well-Co") in June 1997.
The Unaudited pro Forma Combined Financial Statements of The Company are not
necessarily indicative of the financial results for the periods presented had
the acquisition of Well-Co taken place on July 1, 1995. In addition, future
results may vary significantly from the results reflected on the accompanying
Unaudited Pro Forma Combined Financial Statements because of, among other
factors, changes in products and service prices, future oil and gas production
declines and future acquisitions. This information should be read in conjunction
with the consolidated financial statements of Key (and related notes) and the
financial statements of Well-Co.
<PAGE> 22
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
as of March 31, 1997
(in thousands)
<TABLE>
<CAPTION>
The Pro Forma Pro Forma
Company Well-Co Entries Combined
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash $11,528 $1,101 $12,629
Short term investments -- 163 163
Restricted cash 3,568 -- 3,568
Accounts receivable, net 32,073 3,431 (90) (a) 35,414
Inventories 2,004 136 2,140
Prepaid expenses and other 2,220 232 (174) (a) 2,278
current assets
----------------- -------------- ----------------
Total Current Assets 51,393 5,063 56,192
----------------- -------------- ----------------
Property and Equipment:
Oilfield service equipment 118,287 10,953 13,709 (b) 142,549
Oil and gas well drilling equipment 5,945 -- 5,945
Motor vehicles 1,510 4,890 (3,752) (b) 2,648
Oil and gas properties and related 20,525 -- 20,525
equipment, successful efforts
method
Furniture and equipment 974 195 (180) (b) 989
Buildings and land 7,558 761 (300) (b) 8,019
----------------- -------------- ----------------
154,799 16,799 160,675
Accumulated depreciation & depletion (16,120) (13,174) 13,174 (b) (16,120)
----------------- -------------- ----------------
Net Property and Equipment 138,679 3,625 180,675
Other Assets 14,471 310 (10) (a) 14,771
----------------- -------------- ----------------
Total Assets $204,543 $8,998 $235,518
================= ============== ================
</TABLE>
2
<PAGE> 23
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
as of March 31, 1997
(in thousands)
<TABLE>
<CAPTION>
The Pro Forma Pro Forma
Company Well-Co Entries Combined
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $13,802 $389 $14,191
Other accrued liabilities 12,480 1,266 225 (b) 13,971
Accrued interest 1,292 -- 1,292
Accrued income taxes 118 -- 118
Deferred tax liability 310 -- 310
Current portion of long-term debt 1,430 495 1,925
----------------- -------------- ---------------- ----------------
Total Current Liabilities 29,432 2,150 31,807
----------------- -------------- ---------------- ----------------
Long-term debt 91,102 466 17,576 (c) 109,144
Deferred income taxes 15,117 346 6,162 (b) 21,625
Non-current accrued expenses 4,832 -- 4,832
Minority interest 1,249 -- 1,249
Commitments and contingencies -- -- --
----------------- -------------- ---------------- ----------------
Total Stockholders' Equity:
Common stock 1,173 38 (14) (b) 1,197
Additional paid-in capital 47,856 2,144 1,882 (b) 51,882
Retained earnings 13,782 3,854 (3,854) (b) 13,782
----------------- -------------- ---------------- ----------------
Total Stockholders' Equity 62,811 6,036 66,861
----------------- -------------- ---------------- ----------------
Total Liabilities and Stockholders'
Equity $204,543 $8,998 $235,518
================= ============== ================ ================
</TABLE>
See accompanying notes to unaudited pro form combined financial statements.
3
<PAGE> 24
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Twelve Months Ended June 30, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
The Pro Forma Pro Forma
Company Well-Co Entries Combined
<S> <C> <C> <C> <C>
REVENUES:
Oilfield service $55,933 $19,631 $75,564
Oil and gas 4,175 -- 4,175
Oil and gas welling drilling 6,188 -- 6,188
Other, net 182 (495) 440 (d) 127
----------------- -------------- ----------------
66,478 19,136 86,054
----------------- -------------- ----------------
COSTS AND EXPENSES
Oilfield services 40,737 15,771 (1,267) (d) 55,241
Oil and gas 1,350 -- 1,350
Oil and gas well drilling 5,030 -- 5,030
Depreciation, depletion and 4,701 794 1,483 (e) 6,978
amortization
General and administrative 6,608 1,148 (200) (d) 7,556
Interest 2,477 385 1,327 (f) 4,189
----------------- -------------- ----------------
60,903 18,098 80,344
----------------- -------------- ----------------
Income before income taxes and 5,575 1,038 5,710
minority interest
Income tax expenses 1,888 386 (340) (g) 1,934
Minority interest in net income 101 -- 101
----------------- -------------- ----------------
NET INCOME $3,586 $652 $3,675
----------------- -------------- ----------------
EARNINGS PER SHARE:
Income before income taxes and $0.70 $0.70
minority interest
Net income (loss) $0.45 $0.45
WEIGHTED AVERAGE SHARES 7,941 240 8,181
OUTSTANDING:
</TABLE>
See accompanying notes to unaudited pro form combined financial statements.
4
<PAGE> 25
Key Energy Group, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended March 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
The Pro Forma Pro Forma
Company Well-Co Entries Combined
<S> <C> <C> <C> <C>
REVENUES:
Oilfield service $97,327 $17,255 $114,582
Oil and gas 5,863 -- 5,863
Oil and gas well drilling 7,097 -- 7,097
Other, net 422 154 576
----------------- -------------- ----------------
110,709 17,409 128,118
----------------- -------------- ----------------
COSTS AND EXPENSES
Oilfield services 69,268 13,453 (950) (d) 81,771
Oil and gas 2,185 -- 2,185
Oil and gas well drilling 5,905 -- 5,905
Depreciation, depletion and 7,687 898 1,112 (e) 9,697
amortization
General and administrative 12,176 1,142 (150) (d) 13,168
Interest 4,507 257 995 (f) 5,759
----------------- -------------- ----------------
101,728 15,750 118,485
----------------- -------------- ----------------
Income before income taxes and 8,981 1,659 9,633
minority interest
Income tax expense 3,020 667 (448) (g) 3,239
Minority interest in net income (1) -- (1)
----------------- -------------- ----------------
NET INCOME $5,962 $992 $6,395
================= ============== ================
EARNINGS PER SHARE:
Income before income taxes and $0.76 $0.80
minority interest
Net income $0.51 $0.53
================= ============== ================
WEIGHTED AVERAGE SHARES 11,737 240 11,977
OUTSTANDING:
================= ============== ================
</TABLE>
See accompanying notes to unaudited pro form combined financial statements.
5
<PAGE> 26
Key Energy Group, Inc.
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
JUNE 30, 1996 AND MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma combined financial information of
Key Energy Group, Inc. ("Key" or "The Company") is presented to reflect the
acquisition of Well-Co Oil Service, Inc. ("Well-Co") in June 1997. The unaudited
pro forma combined balance sheet is presented as if the acquisition of Well-Co
occurred at the balance sheet date. The unaudited pro forma combined statements
of operations are presented as if the acquisition had occurred on July 1, 1995.
The Company - Represents the consolidated balance sheet of Key Energy
Group, Inc. as of March 31, 1997 and the consolidated statements of Key Energy
Group, Inc. for the year ended June 30, 1996 and the nine months ended March 31,
1997.
Well-Co Oil Service, Inc. - Represents the balance sheet of Well-Co Oil
Service, Inc. as of June 25, 1997, the statement of operations of Well-Co Oil
Service, Inc. for the year ended June 30, 1996 (which was derived by certain
calculations involving the statements of operations of Well-Co Oil Service, Inc.
for the years ended December 31, 1996 and December 31, 1995) and the statement
of operations of Well-Co Oil Service, Inc. for the nine months ended March 31,
1997 (which was derived by certain calculations involving the statement of
operations of Well-Co Oil Service, Inc. for the period from July 1, 1996 through
June 25, 1997.
2. PRO FORMA ENTRIES
(a) To adjust the bad debt reserve, other current assets and other
assets for items either not included in the acquisition or to increase reserves.
(b) To record the acquisition of Well-Co using the purchase method
of accounting. The allocation of the purchase price to the acquired assets
and liabilities of Well-Co is preliminary, and therefore, subject to change.
(c) To adjust the debt of the Company as a result of the cash
consideration portion of the purchase price of Well-Co.
(d) To record the estimated savings in operating costs and general and
administrative expenses due to the acquisition. The estimated savings is solely
a result of changed circumstances brought about by the consummation of the
acquisition, principally the elimination of duplicate
6
<PAGE> 27
administrative positions, duplicate office locations and lower property and
casualty insurance costs.
(e) To adjust depreciation, depletion and amortization for the
Well-Co assets.
(f) To adjust interest expense for the increased debt due to the
acquisition of Well-Co.
(g) To adjust income tax expense for each tax jurisdiction.
3. INCOME TAXES
Key Energy Group, Inc. 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 differences between the book and tax basis of the assets
liabilities of the acquisition. In accordance with Statement 109, the Company
prepares separate tax calculations for each tax jurisdiction in which Key is
subject to income taxes.
4. INCOME FROM OPERATIONS PER SHARE
Income 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 per share is not presented since the effect would
be anti-dilutive. Pro Forma income per share has been calculated taking into
account the issuance of shares of the Company's Common Stock in the acquisition
as if such shares were issued on July 1, 1995.
7
<PAGE> 28
EXHIBIT INDEX
2.1 Stock Purchase Agreement Among Key Energy Group, Inc. and
Mark Duane Massingill and Claudia Lynn Massingill, dated as
of June 25, 1997.*
23.1 Consent of Robinson Burdette Martin & Cowan, L.L.P., dated as
of September 8, 1997.
23.2 Consent of Robinson Burdette Martin & Cowan, L.L.P., dated as
of September 8, 1997.
* previously filed.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this current report of Key Energy
Group, Inc. on Form 8-K/A (Amendment No. 2) of our report dated August 8, 1997,
on our audit of the financial statements of Well-Co Oil Service, Inc.
Robinson Burdette Martin & Cowan, L.L.P.
Lubbock, Texas
September 8, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Key Energy Group, Inc. on Form S-3 (file numbers 333-01777,
333-24497 and 333-24499) of our report dated August 8, 1997, on our audit of
the financial statements of Well-Co Oil Service, Inc. as of June 25, 1997 and
for the period from July 1, 1996 to June 25, 1997, which report is included in
this current report on Form 8-K/A (Amendment No. 2).
Robinson Burdette Martin & Cowan, L.L.P.
Lubbock, Texas
September 8, 1997
