UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8038
KEY ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, Twentieth Floor, East Brunswick, NJ 08816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 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 New York Stock Exchange
7% Convertible Subordinated Debentures Due 2003 None
5% Convertible Subordinated Notes Due 2004 None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark 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. [ ]
The aggregate market value of the Common Shares held by nonaffiliates of the
Registrant as of September 11, 1998 was approximately $154,884,755.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
Common Shares outstanding at September 11, 1998: 18,284,048
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement with
respect to the Annual Meeting of Shareholders are incorporated by reference in
Part III of this report.
<PAGE>
Key Energy Group, Inc. and Subsidiaries
INDEX
PART I.
Item 1. Business. 3
Item 2. Properties. 8
Item 3. Legal Proceedings. 9
Item 4. Submission of Matters to a Vote of
Security Holders. 9
PART II.
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters. 10
Item 6. Selected Financial Data. 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operation. 12
Item 8. Financial Statements and Supplementary Data. 19
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure. 51
PART III.
Item 10. Directors and Executive Officers of
the Registrant. 51
Item 11. Executive Compensation. 51
Item 12. Security Ownership of Certain Beneficial
Owners and Management. 51
Item 13. Certain Relationships and Related
Transactions. 51
PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 52
<PAGE>
Key Energy Group, Inc. and Subsidiaries
PART I.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business", "Item 3. Legal
Proceedings", "Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the actual results, performance, or achievements of Key Energy
Group, Inc. (the "Company" or "Key") to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the volatility of oil and gas prices, the availability of capital resources,
operating hazards and uninsured risks, competition, and the ability of the
Company to implement its business strategy.ITEM 1. BUSINESS.
The Company
Key Energy Group, Inc. (the "Company" or "Key") is the largest provider of
onshore oil and gas well services in the United States and second largest in
Argentina. As of June 30, 1998, the Company operated a fleet of 803 well service
rigs, 733 oilfield trucks, and 70 drilling rigs (including 16 well service rigs,
28 oilfield trucks, and six drilling rigs in Argentina). As of June 30, 1998,
Key's well service and oilfield truck fleets were the largest fleets,
respectively, onshore the continental United States and the Company operated in
all major onshore oil and gas producing regions of the continental United
States, other than California and in Argentina. Including the consummation of
the subsequent acquisitions of Dawson Production Services, Inc. ("Dawson") and
the other well servicing companies referred to in "Subsequent Events" below, the
Company also operates in California and in the inland waters of the Gulf of
Mexico. Including completion of the subsequent acquisitions, the Company
operates a fleet of approximately 1,423 well service rigs, 1,121 oilfield
trucks, and 71 drilling rigs (including 20 well service rigs, 28 oilfield trucks
and six drilling rigs in Argentina). After the subsequent acquisitions, the
Company is the world's largest provider of well service rigs.
The Company generally provides a full range of maintenance and workover services
to major and independent oil and gas companies in all of its operating regions.
In addition to maintenance and workover services, Key also provides services
which include the completion of newly drilled wells, the recompletion of
existing wells (including horizontal recompletions) and the plugging and
abandonment of wells at the end of their useful lives. Other services include
oil field fluid transportation, storage and disposal services, frac tank
rentals, fishing and rental tools, wireline services, air drilling, hot oiling
and following the Dawson acquisition, production testing services. In addition,
the Company is engaged in contract drilling in several oil and gas producing
regions of the continental United States and Argentina, and owns and produces
oil and natural gas in the Permian Basin and Texas Panhandle.
As of June 30, 1998, the Company conducted operations through eight directly or
indirectly wholly-owned subsidiaries; Yale E. Key, Inc. ("Yale E. Key");
WellTech Eastern, Inc. ("WellTech Eastern"); WellTech Mid-Continent, Inc.
("WellTech Mid-Continent"); Odessa Exploration Incorporated ("Odessa
Exploration"); Brooks Well Servicing, Inc. ("Brooks""); Key Four Corners, Inc.
("Key Four Corners"); Key Rocky Mountain, Inc. ("Key Rocky Mountain") and Key
Energy Drilling, Inc. ("Key Energy Drilling"). In addition, Key operates in
Argentina through its wholly-owned subsidiary, Servicios WellTech, S.A.
("Servicios"). Yale E. Key, WellTech Eastern, WellTech Mid-Continent, Brooks,
Key Four Corners, Key Rocky Mountain and Servicios provide oil and gas well
services. In addition, WellTech Eastern, Key Four Corners, Servicios and Key
Energy Drilling provide contract oil and gas well drilling services. Odessa
Exploration is engaged in the production of oil and natural gas.
Subsequent Events
On September 15, 1998, Midland Acquisition Corporation ("Midland"), a New Jersey
corporation and a wholly-owned subsidiary of the Company, completed its cash
tender offer (the "Tender Offer") for all outstanding shares of common stock,
par value $0.01 per share (the "Dawson Shares"), including the associated common
stock purchase rights, of Dawson at a price of $17.50 per Dawson Share. The
Tender Offer expired at 8:30 a.m., New York City Time, on Tuesday, September 15,
1998. Midland accepted for payment 10,021,601 Dawson Shares for a total purchase
price of approximately $175.4 million. The acceptance of tendered Dawson Shares,
together with Dawson Shares previously owned by Midland and the Company prior to
the commencement of the Tender Offer resulted in Midland and the Company
acquiring approximately 97.0% of the outstanding Dawson Shares. The purchase
price for Dawson Shares pursuant to the Tender Offer and the merger agreement
was determined pursuant to arms-length negotiations between the parties and was
based on a variety of factors, including, without limitation, the anticipated
earnings and cash flows of Dawson.
<PAGE>
The Tender Offer was made pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of August 11, 1998, by and among, Midland, the
Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger
Agreement, Midland was merged with and into Dawson (the "First Merger") under
the laws of the States of New Jersey and Texas and all Dawson Shares not owned
by Midland were cancelled and retired and converted into the right to receive
$17.50 in cash per Dawson Share. On September 21, 1998, Dawson was merged with
and into the Company (the "Second Merger") pursuant to the laws of the States of
Maryland and Texas.
The total consideration paid for the Dawson Shares pursuant to the Tender Offer
and the First Merger was approximately $181.7 million. The Company's source of
funds to pay such amount, certain outstanding debt of Dawson and the Company and
related fees and expenses was (i) a bridge loan agreement in the amount of
$150,000,000, dated as of September 14, 1998, among the Company, Lehman Brothers
Inc., as Arranger, and Lehman Commercial Paper Inc., as Administrative Agent,
and the other lenders party thereto (the "Bridge Loan Agreement") and (ii) a
$550,000,000 Second Amended and Restated Credit Agreement, dated as of June 6,
1997, as amended and restated through September 14, 1998, among the Company, PNC
Bank, National Association, as Administrative Agent, Norwest Bank Texas, N.A.,
as Collateral Agent, PNC Capital Markets, Inc., as Arranger and the other
lenders named from time to time parties thereto (the "Second Amended and
Restated Credit Agreement"). In connection with the Bridge Loan Agreement, the
Company entered into Registration Rights Agreements (the "Registration Rights
Agreements") with Lehman Brothers Inc. and Lehman Commercial Paper Inc. pursuant
to which the Company agreed to file with the Securities and Exchange Commission
(the "Commission") within a certain time period a registration statement with
respect to (i) an offer to exchange borrowings under the Bridge Loan Agreement
for a new issue of debt securities of the Company, and (ii) the resale of
warrants (and the shares of common stock of the Company to be issued upon the
exercise of such warrant) to purchase shares of common stock of the Company
issued to Lehman Brothers Inc. in connection with the Bridge Loan Agreement.
Loans outstanding after one year pursuant to the Bridge Loan Agreement will
convert into term loans which may be exchanged by the holders thereof for
exchange notes issued pursuant to an Indenture dated as of September 14, 1998
(the "Indenture"), between the Company and The Bank of New York, trustee.
At the time the Second Merger was consummated, the Company, its subsidiaries and
U.S. Trust Company of Texas, N.A., trustee ("U.S. Trust"), entered into a
Supplemental Indenture dated September 21, 1998 (the "Supplemental Indenture"),
pursuant to which the Company assumed the obligations of Dawson under the
indenture dated February 20, 1997 (the "Dawson Indenture") between Dawson and
U.S. Trust, most of the Company's subsidiaries guarantied those obligations and
the notes issued pursuant to the Dawson Indenture were equally and ratably
secured with the obligations under the Second Amended and Restated Credit
Agreement. Under the terms of the Dawson Indenture, the Company is required to
commence a cash tender offer to purchase at 101% of the aggregate principal
amount of the outstanding notes (which the outstanding amount is $140 million)
by mid-October 1998, the source of funds for which will be borrowings under the
Second Amended and Restated Credit Agreement.
Dawson operates approximately 527 well service rigs, 200 oilfield trucks, and 21
production testing units in South Texas and the Gulf Coast, East Texas and
Louisiana, the Permian Basin of West Texas and New Mexico, the Anadarko Basin of
Texas and Oklahoma, California, and in the inland waters of the Gulf of Mexico.
In addition, subsequent to June 30, 1998, the Company completed the acquisition
of five well servicing companies which collectively operate 93 well service rigs
(including four in Argentina), one drilling rig, and 188 oilfield trucks.
Growth Strategy
The domestic well service rig and production service industry has historically
been highly fragmented, characterized by a large number of smaller companies
which have competed effectively on a local basis in terms of pricing and the
quality of services offered. In recent years, many major and independent oil and
gas companies have placed increasing emphasis upon not only pricing, but also on
safety records and quality management systems of, and the breadth of services
<PAGE>
offered by, their vendors, including well servicing contractors. This market
environment, which requires significant expenditures by smaller companies to
meet these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As a result,
the industry has seen high levels of consolidation among the competing
contractors.
Over the past two and one-half years, Key has been the leading consolidator of
this industry, completing in excess of fifty acquisitions. This consolidation
has led to reduced fragmentation in the market and has led to more predictable
demand for well services for the Company and its competitors. Key's management
structure is decentralized, which allows for rapid integration of acquisitions
and the retention of strong local identities of many of the acquired businesses.
The Company, as a result, has developed a growth strategy to: (i),subject to
restrictions under its existing credit facilities, identify, negotiate and
consummate additional acquisitions of complementary well servicing operations,
including rigs, trucking and other ancillary services; (ii) fully-integrate
acquisitions into the Company's decentralized organizational structure and
thereby attempt to maximize operating margins; (iii) expand business lines and
services offered by the Company in existing areas of operations; and (iv) extend
the geographic scope and operating environments for the Company's operations.
Oil Field Services
The Company provides a full range of well service rig services, oil field liquid
services and other production services necessary to maintain and workover
producing oil and gas wells through its subsidiaries, Yale E. Key, WellTech
Eastern, WellTech Mid-Continent, Brooks, Key Four Corners, Key Rocky Mountain,
and Servicios. These services also include the completion of newly drilled
wells, the recompletion of existing wells (including horizontal recompletions)
and the plugging and abandonment of wells at the end of their useful lives.
Other services include oil field fluid transportation, storage and disposal
services, frac tank rentals, fishing and rental tools, wireline services, air
drilling, hot oiling, and following the Dawson acquisition, production testing
services. The Company has more than 1,000 customers which are either major oil
and gas companies or independent producers seeking to optimize performance of
oil and gas wells. As of June 30, 1998, of the Company's 803 well service rigs,
299 operate in the Permian Basin of West Texas and New Mexico, 187 in the
Mid-Continent Region, 80 in the ArkLaTex Region, 84 in Michigan and the
Northeast, 29 in the Four Corners Region, 108 in the Rocky Mountain Region and
16 in Argentina.
Well Service Rig Services. The Company utilizes its fleet to perform four major
categories of service to oil and gas operators including:
Maintenance Services. Maintenance services are required on producing oil and gas
wells to ensure efficient and continuous operation. These services consist of
routine mechanical repairs necessary to maintain production from the well, such
as repairing parted sucker rods or defective down-hole pumps in an oil well, or
replacing defective tubing in an oil or gas well. The Company provides the well
service rigs, equipment and crews for these maintenance services. Many of these
well service rigs also have pumps and tanks (a workover package) that can be
used for circulating fluids into and out of the well. Maintenance jobs are often
performed on a series of wells in proximity to each other and typically take
less than 48 hours per well.
Maintenance services are generally required throughout the life of a well. The
need for these services does not directly depend on the level of drilling
activity and is generally independent of short-term fluctuations in oil and gas
prices. Accordingly, maintenance services are generally the most stable type of
well service activity. The general level of maintenance, however, is affected by
changes in the total number of producing oil and gas wells in the Company's
geographic service areas.
Workover Services. In addition to periodic maintenance, producing oil and gas
wells occasionally require major repairs or modifications, called "workovers."
Workover services include extensions of existing wells to drain new formations
either through deepening well bores or through drilling of horizontal laterals.
<PAGE>
In less extensive workovers, the Company's rigs are used to seal off depleted
zones in existing well bores and access previously bypassed productive zones.
The Company's workover rigs are also used to convert producing wells to
injection wells for enhanced recovery operations. Workover services include
major subsurface repairs such as casing repair or replacement, recovery of
tubing and removal of foreign objects in the well bore. These extensive workover
operations are normally performed by a well service rig with a workover package,
which may include rotary drilling equipment, mud pumps, mud tanks and blowout
preventers depending upon the particular type of workover operation. Most of the
Company's well service rigs are designed for and can be equipped to perform
complex workover operations. A workover may last from a few days to several
weeks.
The demand for workover services is more sensitive to expectations relating to
and changes in oil and gas prices than the demand for maintenance services, but
not as sensitive as the demand for completion services. When oil and gas prices
are low, there is little incentive to perform workovers on wells to increase
production and well operators tend to defer such expenditures. As oil and gas
prices increase, the level of workover activity tends to increase as operators
seek to increase production by enhancing the efficiency of their wells.
Completion Services. Completion services prepare a newly drilled well for
production. The completion process may involve selectively perforating the well
casing to access producing zones, stimulating and testing these zones and
installing downhole equipment. The Company provides a well service and workover
package rig to assist in this completion process. Newly drilled wells are
frequently completed by a well service rig so that an operator can minimize the
use of a higher cost drilling rig. The completion process typically requires a
few days to several weeks, depending on the nature and type of the completion,
and generally requires additional auxiliary equipment which the Company provides
for an additional fee.
The demand for well completion services is directly related to drilling activity
levels, which are highly sensitive to expectations relating to and changes in
oil and gas prices. During periods of weak drilling demand, drilling contractors
frequently price well completion work competitively compared to a well service
rig so that the drilling rig stays on the job. Thus, excess drilling capacity
will serve to reduce the amount of completion work available to the well
servicing industry.
Plugging and Abandonment Services. Well service rigs and workover equipment are
also used in the plugging and abandonment of oil and gas wells no longer capable
of producing in economic quantities. The demand for oil and gas does not
significantly affect the demand for well plugging services.
Liquid Services. The Company provides vacuum truck services, frac tank rentals
and salt water disposal services which together provide an integrated mix of
liquid services to well site customers.
Production Testing Services. Dawson owns 21 gas production testing units that
are used to provide services to oil and gas wells located onshore and in inland
waters. Dawson performs production testing services for oil and gas producers
primarily along the Texas Gulf Coast.
Dawson's equipment includes several trailer-mounted manifolds, separators,
heater treaters, sand separators, light generators and slickline wireline units.
Manifolds are used to reduce the flowing pressure of the well stream to a rate
that will easily flow through the production testing equipment. After the
appropriate well stream rate is achieved, a separator is used to divide the well
stream into its respective components -- oil, gas and water. For gas wells, a
heater is used to prevent the gas from freezing during flowbacks. Slickline
wireline equipment generally is used to lower measurement equipment into a well
for several days to retrieve data to determine the characteristics of the
reservoir.
Dawson uses its production testing units to perform deliverability tests
required upon the initial completion of a well and periodically during the
productive life of a gas well to determine the maximum production allowable
under certain rules of the Texas Railroad Commission, the state oil and gas
regulatory agency. In addition, these units are used to clean and test
<PAGE>
stimulated wells and to measure the pressure, volume and quality of gas and
liquids produced by the well. These units also are used to determine the most
efficient production flow rate, to run pressure build-up tests that measure the
rate of increase of shut-in gas pressure to determine reservoir characteristics
and to determine whether a producing formation has been damaged.
Other Production Services. The Company provides production services, which
include hot oiler unit services, pipeline installation and testing services,
slickline wire-line services and fishing and rental tool services.
Contract Drilling Services The Company, primarily through Key Energy Drilling,
owns and operates 71 drilling rigs and provides contract drilling services for
major and independent oil companies in most onshore oil and gas producing areas
of the continental United States. The Company entered the land drilling business
in March 1995 with the acquisition of four drilling rigs from an independent
third party and, as the result of subsequent acquisitions, acquired 67
additional land drilling rigs (six of which operate in Argentina). The rigs are
generally capable of drilling up to 10,000 feet.
Production The Company is engaged in the production of oil and natural gas in
the Permian Basin area of West Texas through Odessa Exploration. Odessa
Exploration acquires and manages interests in producing oil and gas properties
for its own account and for drilling partnerships it sponsors. Odessa
Exploration acquires producing oil and gas wells and related properties from
major and independent producers and, subsequently, either reworks the acquired
wells to increase production or forms drilling ventures for additional
development wells. Odessa Exploration operates oil and gas wells on behalf of
over 250 working interest owners as well as for its own account.
Foreign Operations The Company provides oil field services in Argentina through
Servicios. As of June 30, 1998, Servicios owned and operated 16 well servicing
rigs and six drilling rigs in Argentina.
COMPETITION AND OTHER EXTERNAL FACTORS
Despite a significant amount of consolidation having occurred, the domestic well
service rig and production service industry remains somewhat fragmented and
includes a small number of companies that are capable of competing effectively
in all or part of the Company's well servicing markets. Nonetheless, the Company
believes that it is competitive in terms of pricing, performance, equipment,
safety, availability of equipment to meet customer needs and availability of
experienced, skilled personnel in those regions in which it operates.
In the well servicing market, an important competitive factor in establishing
and maintaining long-term customer relationships is having an experienced,
skilled and well trained work force. In recent years, many of the Company's
larger customers have placed emphasis not only on pricing, but also on safety
records and quality management systems of contractors. The Company believes that
such factors will be of increased importance in the future. The Company has
directed substantial resources toward employee safety and training programs, as
well as its employee review process. While the Company's efforts in these areas
are not unique, many competitors, particularly small contractors, have not
undertaken similar training programs for their employees. Management believes
that the Company's safety record and reputation for quality equipment and
service are among the best in the industry.
The Company acquires oil and gas properties from independent and major oil
companies and competes with other independent and integrated oil companies for
the acquisition of these properties. The Company also competes with other local
oil and gas drilling contractors, as well as national oil and gas drilling
companies. As with oil field services, the need for drilling oil and gas wells
fluctuates, in part, based on the price of, and demand for, oil and natural gas.
The Company serves over 1,000 customers in most oil and gas producing regions of
the continental United States and Argentina. The Company had no single customer
in fiscal 1998 that provided 10% or more of consolidated revenues.
<PAGE>
The need for oilfield services fluctuates, in part, in relation to the demand
for oil and natural gas. As demand for those commodities increases, service and
maintenance requirements increase as oil and natural gas producers attempt to
maximize the producing efficiency of their wells in a higher priced environment.
EMPLOYEES
As of June 30, 1998, the Company employed 5,601 persons (4,982 in well service
operations, 12 in oil and gas production, 587 in contract drilling operations
and 20 in corporate). The Company's employees are not represented by a labor
union or collective bargaining agent. The Company has experienced no work
stoppages associated with labor disputes or grievances and considers its
relations with its employees to be satisfactory.
REGULATIONS
The oilfield service operations and the oil and gas production and drilling
activities of the Company are subject to various local, state and federal laws
and regulations intended to protect the environment. The Company's operations
routinely involve the handling of waste materials, some of which are classified
as hazardous substances. Consequently, the regulations applicable to the
Company's operations include those with respect to containment, disposal and
controlling the discharge of any hazardous oil field waste and other
non-hazardous waste material into the environment, requiring removal and cleanup
under certain circumstances, or otherwise relating to the protection of the
environment. Laws and regulations protecting the environment have become more
stringent in recent years, and may in certain circumstances impose "strict
liability," rendering a party liable for environmental damage without regard to
negligence or fault on the part of such party. Such laws and regulations may
expose the Company to liability for the conduct of, or conditions caused by,
others, or for acts of the Company which were in compliance with all applicable
laws at the times such acts were performed. Management of the Company believes
that it is in substantial compliance with all material federal, state and local
regulations as they relate to the environment. Although the Company has incurred
certain costs in complying with environmental laws and regulations, such amounts
have not been material to the Company's financial results during the three past
fiscal years.
Management believes that the Company is in substantial compliance with all known
material local, state and federal safety guidelines and regulations. In order to
comply with such safety guidelines and regulations and increase employee
awareness of on-the-job safety, the Company employs seven safety officers. The
Company also has a safety training and education center that is used by it for
continued safety training and awareness.
ITEM 2. PROPERTIES.
The Company's corporate offices are located in East Brunswick, New Jersey and
Midland, Texas where the Company leases office space from an independent third
party.
Oil Field Services
The following table sets forth the type, number and location of the major
equipment owned and operated by the Company's oil field service subsidiaries as
of June 30, 1998:
(table located on next page)
<PAGE>
Well Service/ Drilling Oilfield
Company Workover Rigs Rigs Trucks
- -------------------------------------------------------------------------------
Domestic:
Yale E. Key (Permian Basin of
West Texas and New Mexico) 299 - 215
WellTech Mid-Continent
(Mid-Continent Region) 187 - 91
Brooks (ArkLaTex Region) 80 2 105
WellTech Eastern (Michigan
and Northeast) 84 5 214
Key Rocky Mountain (Rocky
Mountains) 108 - -
Key Four Corners (Four Corners
Area) 29 17 80
Key Energy Drilling (West Texas
and New Mexico) - 40 -
International:
Servicios (Argentina) 16 6 28
--- --- ---
TOTALS 803 70 733
=== === ===
Yale E. Key owns ten and leases six office and yard locations. WellTech
Mid-Continent owns sixteen and leases seventeen office and yard locations.
WellTech Eastern owns two and leases fourteen office and yard locations. Brooks
owns three and leases 11 office and yard locations. Key Rocky Mountain owns four
and leases eight office and yard locations. Key Four Corners owns three and
leases two office and yard locations. Key Energy Drilling owns three and leases
one office and yard location. In Argentina, Servicios leases two office and yard
locations.
All operating facilities are metal one story office and/or shop buildings. All
buildings are occupied and considered to be in satisfactory condition.
Production
Odessa Exploration's major proved producing properties are located primarily in
the Permian Basin area of West Texas. Odessa Exploration leases office space in
Odessa, Texas.
As of June 30, 1998, the Company owned interests in 452 gross (332 proved
developed) oil properties and 60 gross (45 proved developed) gas properties.
During the fiscal year ended June 30, 1998, the Company produced 223,009 barrels
of oil at an average price of $16.25 per barrel and 1,396 MMcf of natural gas at
an average sales price of $2.44 per Mcf. Average production (lifting) costs were
$6.54 per barrel of oil equivalent (one barrel of oil equals six thousand cubic
feet of natural gas). The Company's reserves had a pre-tax SEC 10 value of
approximately $47.8 million as of June 30, 1998. The Company holds proved oil
and gas reserves of approximately 93.5 billion cubic feet of natural gas
equivalent (15.6 million barrels of oil equivalent) primarily in the Permian
Basin and Panhandle of West Texas.
ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS.
See Item 8, Note 4 to the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is currently traded on the New York Stock Exchange,
under the symbol "KEG". Prior to April 1998, the Company's common stock was
traded on the American Stock Exchange. As of June 30, 1998, there were 1,143
holders of record of 18,267,813 shares of common stock outstanding.
The following table sets forth, for the periods indicated, the high and low
closing prices of the Company's common stock on the New York Stock Exchange for
the third and fourth quarters of fiscal 1998 and the American Stock Exchange for
the remaining quarters, as derived from published sources.
High Low
Fiscal Year Ending 1998:
First Quarter $ 34 1/2 $18 1/8
Second Quarter 37 3/4 17 1/4
Third Quarter 20 7/8 14
Fourth Quarter 19 1/2 13
Fiscal Year Ending 1997:
First Quarter $ 8 3/4 $ 7 1/2
Second Quarter 12 1/4 8 3/8
Third Quarter 14 7/8 11 3/8
Fourth Quarter 17 13/16 12 7/8
There were no dividends paid on the Company's common stock during the fiscal
years ended June 30, 1998, 1997 or 1996. The Company does not intend, for the
foreseeable future, to pay dividends on its common stock. In addition, the
Company is contractually restricted from paying dividends under the terms of its
existing credit facilities.
Recent Sales of Unregistered Securities:
The Company effected the following unregistered sales of its securities during
the twelve months ended June 30, 1998 that were not previously included in the
Company's Quarterly Reports filed for such period. Each of the following
issuances by the Company of the securities sold in the transactions referred to
below were not registered under the Securities Act of 1933, as amended, pursuant
to the exemption provided under Section 4 (2) thereof for transactions not
involving a public offering:
Effective March 19, 1998, the Company issued to various employees, pursuant to
the Key Energy Group, Inc. 1997 Incentive Plan, options to purchase shares of
the Company's common stock.
Effective January 8, 1998, the Company issued a warrant to purchase 265,000
shares of Common Stock at an exercise price of $18.00 per share, subject to
certain adjustments, as partial consideration in connection with the purchase by
Key Rocky Mountain, a wholly-owned subsidiary of the Company, of substantially
all the capital stock of J.W. Gibson Well Service Company.
<PAGE>
Item 6.
Selected Financial Data.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Fiscal Fiscal Fiscal Fiscal Fiscal
Year Year Year(1) Year Year
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30,
(in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Revenues $420,046 $162,425 $65,857 $44,689 $34,621
Operating costs:
Direct costs 288,951 111,250 46,962 32,793 26,585
Depreciation, depletion and amortization 31,001 11,076 4,701 2,738 1,371
General and administrative 39,813 17,545 6,142 4,352 3,540
Interest 21,476 7,879 2,477 1,478 830
Income before income taxes, minority interest
and extraordinary items 38,805 14,675 5,575 3,328 2,295
Net income 24,175 9,098 3,586 2,178 1,345
Income per common share:
Basic $1.41 $0.81 $0.46 $0.33 $0.26
Diluted $1.23 $0.66 $0.45 $0.33 $0.25
Average common shares outstanding:
Basic 17,153 11,216 7,789 6,647 5,274
Dilution 24,024 17,632 7,941 6,647 5,288
Common shares outstanding at period end 18,267 12,298 10,414 6,914 5,274
Market price per common share at period end $13.12 $17.81 $8.19 $5.06 $4.67
Cash dividends paid on common shares $ - $ - $ - $ - $ -
BALANCE SHEET DATA:
Cash $25,265 $41,704 $4,211 $1,275 $1,173
Current assets 127,557 93,333 27,481 11,290 9,167
Property and equipment 547,537 227,255 96,127 36,336 18,935
Property and equipment, net 499,152 208,186 87,207 31,942 17,159
Total assets 698,640 320,095 121,722 45,243 28,095
Current liabilities 48,029 33,142 24,339 9,228 8,383
Long-term obligations, including current 399,779 174,167 46,825 15,949 11,501
Stockholders' equity 154,928 73,179 41,624 20,111 9,263
OTHER DATA:
EBITDA (2) 91,282 33,630 12,753 7,544 4,496
Net cash (used in) provided by:
Operating activities 34,349 2,156 7,121 3,258 1,842
Investing activities (299,763) (82,062) (13,551) (7,154) (5,608)
Financing activities 248,975 117,399 9,366 3,998 4,316
Working capital 79,528 60,191 3,142 2,062 784
Book value per common share (3) $8.48 $5.95 $4.00 $2.91 $1.76
Ratio of earnings to fixed charges (4) 2.61 2.52 2.62 2.57 2.65
</TABLE>
(1) Financial data for the year ended June 30, 1996 includes the allocated
purchase price of WellTech Eastern and the results of their operations,
beginning March 26, 1996.
(2) Net income before interest expense, income taxes, depreciation, depletion
and amortization. EBITDA is presented because of its wide acceptance as a
financial indicator of a company's ability to service or incur debt. EBITDA
should not be considered as an alternative to operating net income, as defined
by generally accepted accounting principals, as indicators of the Company's
financial performance or to cash flow as a measure of liquidity.
(3) Book value per common share is stockholders' equity at period end divided by
the number of outstanding common shares at period end.
(4) For purposes of computing the ratios of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes and fixed
charges. Fixed charges consist of interest expenses, amortization of debt
issuance expenses and the portion of rental and lease obligations representative
of the interest factor.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Special Note: Certain statements set forth below under this caption consitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" for additional factors relating to
such statements.
The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this report.
Overview
Historically, fluctuations in well servicing activity have had a strong
correlation with fluctuations in oil and gas prices. During fiscal 1998, oil
prices have decreased from an average of approximately $21 per barrel for West
Texas Intermediate crude oil in July of 1997 to an average of approximately $12
per barrel in June of 1998. As a result, the Company experienced a decrease in
demand for drilling and services. Even though the Company experienced a
successful fiscal year ended June 30, 1998, in terms of earnings and earnings
per share compared to previous years, continued low oil prices may continue to
negatively affect the Company's operating performance. The Company seeks to
minimize the effects of such low oil prices and fluctuations of pricing on its
operations and financial condition through reduction of operating and capital
costs, diversification of services, entry into new markets and customer
alliances.
FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997
Results of Operations
Operating Income
The Company
Revenues for the year ended June 30, 1998 increased $257,621,000, or 159%, from
$162,425,000 in fiscal 1997 to $420,046,000 in fiscal 1998, while net income for
fiscal 1998 increased $15,077,000, or 166% , from $9,098,000 in fiscal 1997 to
$24,175,000 in fiscal 1998. The increase was primarily due to well service and
oil and gas well drilling acquisitions throughout the year and increased well
service and oil and gas drilling revenues from existing equipment through the
third quarter of fiscal 1998.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1998 increased
$230,460,000, or 160%, from $144,385,000 for the year ended June 30, 1997 to
$374,845,000 for the year ended June 30, 1998. The increase is primarily
attributable to acquisitions throughout the year and higher equipment use
through the third quarter of fiscal 1998 resulting from an increase in demand
for oilfield services.
Oil and Natural Gas Well Drilling
Revenues from oil and gas well drilling activities increased $25,139,000, or
253%, from $9,956,000 during the year ended June 30, 1997 to $35,095,000 for the
year ended June 30, 1998. The increase was primarily the result of acquisitions.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $55,000, or 1%, from $6,975,000
during the year ended June 30, 1997 to $7,030,000 for the current year. The
increase was primarily the result of increased production in the current year
which was partially offset with a decrease in the average price of oil and
natural gas for fiscal 1998 as compared to fiscal 1997.
Operating Expenses
Oilfield Services Oilfield service expenses for the year ended June 30, 1998
increased $159,129,000, or 159%, from $100,366,000 for the year ended June 30,
1997 to $259,495,000 for the year ended June 30, 1998. The increase was due
primarily to acquisitions made throughout the fiscal year and the increased
demand for oilfield services through the third quarter of fiscal 1998.
<PAGE>
Oil and Natural Gas Well Drilling
Expenses related to oil and gas well drilling activities increased $18,318,000,
or 225%, from $8,155,000 for the year ended June 30, 1997 to $26,473,000 for the
year ended June 30, 1998. The increase was primarily the result of acquisitions
throughout fiscal 1998.
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $253,000, or 9%, from
$2,729,000 for the year ended June 30, 1997 to $2,983,000 for the year ended
June 30, 1998. The increase was primarily the result of an increase in the total
number of producing oil and gas wells from fiscal 1997 to 1998.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $19,925,000, or 180%,
from $11,076,000 for fiscal 1997 to $31,001,000 for fiscal 1998. The increase is
primarily due to oilfield service depreciation expense, which is the result of
the acquisitions completed throughout fiscal 1998 and 1997.
General and Administrative Expenses
General and administrative expenses increased $22,268,000, or 127%, from
$17,545,000 for the year ended June 30, 1997 to $39,813,000 for the year ended
June 30, 1998. The increase was primarily attributable to oilfield service and
oil and gas well drilling acquisitions throughout the fiscal year.
Interest Expense
Interest expense increased $13,597,000, or 173%, from $7,879,000 for fiscal 1997
to $21,476,000 in fiscal 1998. The increase was primarily the result of debt
incurred in connection with acquisitions completed throughout fiscal 1998 and
1997.
Income Taxes
Income tax expense increased $9,057,000, or 163%, from $5,573,000 in income tax
expense for fiscal 1997 to $14,630,000 for fiscal 1998. The increase in income
taxes is primarily due to the increase in operating income. However, the Company
does not expect to be required to remit the total amount of the $14,630,000 in
total federal income taxes for fiscal year 1998 because of the availability of
net operating loss carryforwards and accelerated depreciation.
Cash Flow
Net cash provided by operating activities increased $32,193,000, or 1,493%, from
$2,156,000 during fiscal 1997 to $34,349,000 for fiscal 1998. The increase is
attributable primarily to the increase in net income in fiscal 1998 compared to
fiscal 1997 and decreases in accounts payable and accrued expenses and increases
in depreciation.
Net cash used in investing activities increased $217,701,000, or 265%, from
$82,062,000 for fiscal 1997 to $299,763,000 for fiscal 1998. The increase is
primarily the result of increased capital expenditures for well service
operations and well service and oil and gas well drilling acquisitions.
Net cash provided by financing activities increased $131,576,000 or 112% from
$117,399,000 for fiscal 1997 to $248,975,000 for fiscal 1998. The increase is
primarily the result of proceeds from long-term commercial paper and borrowings
under the Company's existing line-of-credit during the current fiscal year.
FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996
Operating Income
The Company
Revenues for the year ended June 30, 1997 increased $96,568,000, or 147%, from
$65,857,000 in fiscal 1996 to $162,425,000 in fiscal 1997, while net income for
<PAGE>
fiscal 1997 increased $5,512,000, or 154% , from $3,586,000 in fiscal 1996 to
$9,098,000 in fiscal 1997. The increase was primarily due to well service
acquisitions throughout the year, increased oil and gas revenues from Odessa
Exploration, and increased oil and gas drilling revenues.
Oilfield Services
Oilfield service revenues for the year ended June 30, 1997 increased
$88,452,000, or 158%, from $55,933,000 for the year ended June 30, 1996 to
$144,385,000 for the year ended June 30, 1997. The increase is primarily
attributable to acquisitions throughout the year and higher equipment use
resulting from an increase in demand for oilfield services.
Oil and Natural Gas Exploration and Production
Revenues from oil and gas activities increased $3,421,000, or 96%, from
$3,554,000 during the year ended June 30, 1996 to $6,975,000 for the current
year. The increase was primarily the result of increased production of oil and
natural gas from several wells that were drilled and began production during
fiscal 1997, higher oil and natural gas prices for fiscal 1997, and the April
1996 purchase of $6.9 million of oil and gas properties from an unrelated third
party.
Oil and Natural Gas Well Drilling
Revenues from oil and gas well drilling activities increased $3,768,000, or 61%,
from $6,188,000 during the year ended June 30, 1996 to $9,956,000 for the year
ended June 30, 1997. The increase was primarily the result of increased well
drilling activity and an increase in the Company's pricing structure.
Operating Expenses
Oilfield Services
Oilfield service expenses for the year ended June 30, 1997 increased
$59,629,000, or 146%, from $40,737,000 for the year ended June 30, 1996 to
$100,366,000 for the year ended June 30, 1997. The increase was due primarily to
acquisitions made throughout the fiscal year and the increased demand for
oilfield services. In addition, the Company has continued to expand its
services, offering fishing tools, blow-out preventers and oilwell frac tanks.
Oil and Natural Gas Exploration and Production
Expenses related to oil and gas activities increased $1,534,000, or 128%, from
$1,195,000 for the year ended June 30, 1996 to $2,729,000 for the year ended
June 30, 1997. The increase was primarily the result of costs associated with
several oil and natural gas wells that were drilled and began producing during
fiscal 1997 and the April 1996 purchase of $6.9 million in oil and gas
properties.
Oil and Natural Gas Well Drilling
Expenses related to oil and gas well drilling activities increased $3,125,000,
or 62%, from $5,030,000 for the year ended June 30, 1996 to $8,155,000 for the
year ended June 30, 1997. The increase was primarily the result of increased
revenues.
Depreciation and Depletion Expense
Depreciation, depletion and amortization expense increased $6,375,000, or 136%,
from $4,701,000 for fiscal 1996 to $11,076,000 for fiscal 1997. The increase is
primarily due to oilfield service depreciation expense, which is the result of
increased oilfield service capital expenditures for the current period versus
the prior period and the acquisitions completed throughout fiscal 1997. In
addition, depletion expense increased for the period due to the increase in the
production of oil and natural gas..
General and Administrative Expenses
General and administrative expenses increased $11,403,000, or 186%, from
$6,142,000 for the year ended June 30, 1996 to $17,545,000 for the year ended
June 30, 1997. The increase was primarily attributable to oilfield service
acquisitions throughout the fiscal year.
<PAGE>
Interest Expense
Interest expense increased $5,402,000, or 218%, from $2,477,000 for fiscal 1996
to $7,879,000 in fiscal 1997. The increase was primarily the result of debt
incurred in connection with acquisitions completed throughout fiscal 1997.
Income Taxes
Income tax expense increased $3,685,000, or 195%, from $1,888,000 in income tax
expense for fiscal 1996 to $5,573,000 for fiscal 1997. The increase in income
taxes is primarily due to the increase in operating income. However, the Company
does not expect to be required to remit a significant amount of the $5,573,000
in total federal income taxes for fiscal year 1997 because of the availability
of net operating loss carryforwards, accelerated depreciation and drilling tax
credits.
Cash Flow
Net cash provided by operating activities decreased $4,965,000, or 70%, from
$7,121,000 during fiscal 1996 to $2,156,000 for fiscal 1997. The decrease is
attributable primarily to increases in accounts receivable, decreases in
accounts payable and accrued expenses, but was partially off set by increases in
depreciation and net income.
Net cash used in investing activities increased $68,511,000, or 506%, from
$13,551,000 for fiscal 1996 to $82,062,000 for fiscal 1997. The increase is
primarily the result of increased capital expenditures for well service
operations and well service acquisitions.
Net cash provided by financing activities was $117,399,000 for fiscal 1997 as
compared to $9,366,000 for fiscal 1996, which represents an increase of
$108,033,000, or 1,153%. The increase, which is partially offset by repayments
of long-term debt, is primarily the result of proceeds from the existing
Debentures and commercial paper during the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $16.4 million for the year
ended June 30, 1998 from $41.7 million as of June 30, 1997 to $25.3 million as
of June 30, 1998.
The Company has projected, without consideration of acquisitions subsequent to
June 30, 1998, $51 million for oilfield service capital expenditures for fiscal
1999 as compared to $44.3 million and $15 million in fiscal 1998 and 1997,
respectively. Odessa Exploration has projected outlays of approximately $6
million in development costs for fiscal 1999, as compared to $7.8 million and
$8.2 million in fiscal 1998 and 1997, respectively. The Company's oil and gas
well drilling operations have forecast approximately $5 million for capital
expenditures for fiscal 1999, primarily for improvements to existing equipment
and machinery, as compared to $5.4 million for fiscal 1998 and $1.5 million in
fiscal 1997. The Company expects to finance these capital expenditures and
development costs using cash flows from operations and available credit. The
Company believes that its cash flows and, to the extent required, borrowings
under the Second Amended and Restated Credit Agreement, will be sufficient to
fund such expenditures.
Debt
On June 6, 1997, the Company entered into an agreement (the "Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a
syndication of other lenders pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on LIBOR and
the level of the Company's indebtedness. The Initial Credit Agreement contained
certain restrictive covenants and required the Company to maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).
<PAGE>
Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as
administrative agent and lender, pursuant to which PNC agreed to make revolving
credit loans of up to a maximum loan commitment of $200 million. The maximum
commitment decreases to $175 million on November 6, 2000 and to $125 million on
November 6, 2001. The loan commitment terminates on November 6, 2002. Borrowings
under the credit facility may be either (i) Eurodollar Loans with interest
currently payable quarterly at LIBOR plus 1.25% subject to adjustment based on
certain financial ratios, (ii) Base Rate Loans with interest payable quarterly
at the greater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2%,
or (iii) a combination thereof, at the Company's option. The Amended PNC Credit
Agreement contains certain restrictive covenants and requires the Company to
maintain certain financial ratios. A change of control of the Company, as
defined in the Amended PNC Credit Agreement, is an event of default. Borrowings
under the Amended PNC Credit Agreement are secured by substantially all of the
assets of the Company and its domestic subsidiaries.
Effective December 3, 1997, PNC completed the syndication of the Amended PNC
Credit Agreement. In connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to the
Amended and Restated Credit Agreement (the "Amendment to Amended PNC Credit
Agreement") providing for, among other things, an increase in the maximum
commitment to $250 million from $200 million.
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of the Notes. The placements were made as private offerings pursuant
to Rule 144A under the Securities Act of 1933. The Notes are subordinate to the
Company's senior indebtedness, which, as defined in the indenture under which
the Notes were issued, includes the borrowings under the Amended PNC Credit
Agreement, as amended. The Notes are convertible, at the holder's option, into
shares of Common Stock at a conversion price of $38.50 per share, subject to
certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures are subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Amended PNC Credit Agreement, as amended.
The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert prior
to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock
(at the Company's option), generally equal to 50% of the interest otherwise
payable from the date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in control of the Company,
as defined in the indenture under which the Debentures were issued, each holder
of Debentures will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Debentures within 60 days
of such event at a price equal to 100% of the principal amount thereof, together
with accrued and unpaid interest thereon.
As of June 30, 1998, $47,400,000 in principal amount of the Debentures had been
converted into 4,861,538 shares of common stock at the option of the holders. An
additional 165,423 shares of common stock were issued representing 50%
<PAGE>
of the interest otherwise payable from the date of conversion through July 1,
1999, and an additional 35,408 shares of common stock were issued as an
inducement to convert. The additional 165,423 shares of common stock,
representing 50% of the interest otherwise payable from the date of conversion
through July 1, 1999, are included in equity. The fair value of the additional
35,408 shares of common stock issued as inducement to convert was $710,186 and
is recorded as interest expense in the consolidated statement of operations. In
addition, the proportional amount of unamortized debt issuance costs associated
with the converted Debentures was charged to additional paid-in capital at the
time of conversion.
Impact of SFAS 121
As of July 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("FAS 121"). Consequently, the
Company reviews its long-lived assets to be held and used, including oil and gas
properties accounted for under the successful efforts method of accounting,
whenever events or circumstances indicate that the carrying value of those
assets may not be recoverable. Long-lived assets to be disposed of are to be
accounted for at the lower of carrying amount or fair value less cost to sell
when management has committed to a plan to dispose of the assets. All companies,
including successful efforts oil and gas companies, are required to adopt FAS
121 for fiscal years beginning after December 15, 1995. In order to determine
whether an impairment had occurred, the Company estimated the expected future
cash flows of its income producing equipment and oil and gas properties and
compared such future cash flows to the carrying amount of the asset to determine
if the carrying amount was recoverable. Based on this process, no writedown in
the carrying amount of the Company's property was necessary at June 30, 1998.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Specifially, SFAS 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
in the first quarter of its fiscal year ended June 30, 1999.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that company's report information about
operating segments in annual financial statements and requires that those
company's report selected information about operating segments in interim
financial reports issued to shareholders. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 need not be applied to interim financial
statements in the initial year of its application. However, comparative
information for interim periods in the initial year of application is to be
reported in the financial statements for interim periods in the second year of
application. The Company will adopt SFAS 131 for the fiscal year ended June 30,
1999.
Impact of Inflation on Operations
Management is of the opinion that inflation has not had a significant impact on
the Company's business.
<PAGE>
Year 2000 Issue
As a result of the acquisitions completed by the Company over the past
twenty-four months, the Company utilizes several management information systems
in connection with its business operations and financial reporting process. The
Company made an assessment of its Year 2000 issues, and determined that many of
these management information systems would be adversely impacted by the arrival
of the Year 2000.
Accordingly, for operational efficiency, and to prevent any adverse impacts that
may result from the arrival of the Year 2000, the Company is currently
implementing a new integrated management information system along with updated
hardware that will replace most of the systems currently utilized. The
implementation of the new management information system, which is Year 2000
compliant, began in July of 1998 and is scheduled to be completed by June of
1999, assuming no unforeseen circumstances which are beyond the Company's
control. Year 2000 issues as they relate to suppliers and customers remain to be
evaluated by the Company. However, based on current available information, the
Company does not anticipate that the costs associated with any necessary
modifications will be material to the Company's operations or financial
condition.
The cost of the new management information system, (a large part of which
management expects will be capitalized) is not expected to have a material
impact on the Company's business, operations or results thereof, financial
condition, liquidity or capital resources.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Presented herein are the consolidated financial statements of Key Energy Group,
Inc. and Subsidiaries as of June 30, 1998 and 1997 and the years ended June 30,
1998, 1997 and 1996.
Also, included is the report of KPMG Peat Marwick LLP, independent certified
public accountants, on such consolidated financial statements as of June 30,
1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996.
INDEX TO FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets 20
Consolidated Statements of Operations 21
Consolidated Statements of Cash Flows 22
Consolidated Statements of Stockholders' Equity 23
Notes to Consolidated Financial Statements 24
Independent Auditors' Report 50
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, June 30,
(Thousands, except share and per share data) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $25,265 $41,704
Accounts receivable, net of allowance for
doubtful accounts ( $2,843 - 1998, $1,552 - 1997) 82,406 45,230
Inventories 13,315 5,171
Deferred tax asset 1,203 -
Prepaid income taxes 537 -
Prepaid expenses and other current assets 4,831 1,228
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 127,557 93,333
- --------------------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 400,731 176,326
Oil and gas well drilling equipment 61,629 6,319
Motor vehicles 19,748 10,569
Oil and gas properties and other related equipment, successful efforts method 42,638 23,622
Furniture and equipment 5,333 1,661
Buildings and land 17,458 8,758
- --------------------------------------------------------------------------------------------------------------------------------
547,537 227,255
Accumulated depreciation & depletion (48,385) (19,069)
- --------------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 499,152 208,186
- --------------------------------------------------------------------------------------------------------------------------------
Goodwill, net of amortization ($2,264 - 1998; $822 - 1997) 44,936 9,256
Other Assets 26,995 9,320
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $698,640 $320,095
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $20,124 $15,339
Other accrued liabilities 22,239 12,507
Accrued interest 3,818 2,102
Accrued income taxes - 1,664
Deferred tax liability - 126
Current portion of long-term debt 1,848 1,404
- --------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 48,029 33,142
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 397,931 172,763
Non-current accrued expenses 4,812 4,017
Deferred tax liability 92,940 35,738
Minority interest - 1,256
Stockholders' equity:
Common stock, $.10 par value; 100,000,000 shares authorized,
18,684,479 and 12,297,752 shares issued, respectively
at June 30, 1998 and 1997, respectively 1,868 1,230
Additional paid-in capital 119,303 55,031
Treasury stock, at cost; 416,666 shares at June 30, 1998 and
none at June 30, 1997 (9,682) -
Unrealized gain on available-for-sale securities 2,346 -
Retained earnings 41,093 16,918
- --------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 154,928 73,179
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $698,640 $320,095
================================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
(Thousands, except per share data) June 30, 1998 June 30, 1997 June 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Oilfield services $374,845 $144,385 $55,933
Oil and gas well drilling 35,095 9,956 6,188
Oil and gas 7,030 6,975 3,554
Other, net 3,076 1,109 182
- --------------------------------------------------------------------------------------------------------------------------------
420,046 162,425 65,857
- --------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 259,495 100,366 40,737
Oil and gas well drilling 26,473 8,155 5,030
Oil and gas 2,983 2,729 1,195
Depreciation, depletion and amortization 31,001 11,076 4,701
General and administrative 39,813 17,545 6,142
Interest 21,476 7,879 2,477
- --------------------------------------------------------------------------------------------------------------------------------
381,241 147,750 60,282
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 38,805 14,675 5,575
Income tax expense 14,630 5,573 1,888
Minority interest in net income - 4 101
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME $24,175 $9,098 $3,586
================================================================================================================================
EARNINGS PER SHARE :
Basic $1.41 $0.81 $0.46
Diluted $1.23 $0.66 $0.45
================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 17,153 11,216 7,789
Diluted 24,024 17,632 7,941
================================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of
Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
(Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $24,175 $9,098 $3,586
Adjustments to reconcile income from operations to
net cash provided by operations:
Depreciation, depletion and amortization 31,001 11,076 4,701
Amortization of deferred debt costs 2,006 - -
Deferred income taxes 7,287 4,180 1,618
Minority interest in net income - 4 101
Gain on sale of assets (189) (235) (186)
Other non-cash items 1,313 - 6
Change in assets and liabilities net of effects
from the acquisitions:
(Increase) in accounts receivable (3,173) (14,904) (2,180)
(Increase) decrease in other current assets (4,051) (2,811) 765
Decrease in accounts payable, accrued interest and accrued expenses (17,444) (5,565) (1,293)
Other assets and liabilities (6,576) 1,313 3
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 34,349 2,156 7,121
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Well service operations (44,284) (15,084) (5,188)
Capital expenditures - Oil and gas operations (7,849) (8,188) (1,879)
Capital expenditures - Oil and gas well drilling operations (5,385) (1,483) (598)
Capital expenditures - Other (1,748) - -
Proceeds from sale of fixed assets 1,279 3,159 574
Cash received in acquisitions 2,903 2,342 1,168
Acquisitions - Well service operations (172,536) (62,808) -
Acquisitions - Oil and gas well drilling (49,440) - -
Acquisitions - Oil and gas operations (9,298) - (7,895)
Purchase of Marketable equity securities (9,979) - -
Acquisitions - minority interest (3,426) - -
Redemption of restricted marketable securities - - 267
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (299,763) (82,062) (13,551)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (6,087) (1,772) (2,601)
Repayment of long-term debt (231,337) (47,815) -
Borrowings under line-of-credit 280,770 120,000 1,100
Proceeds from stock options exercised 1,042 141 -
Proceeds from warrants exercised 4,223 1,362 -
Purchase of treasury stock (9,682) - -
Proceeds from convertible subordinated debentures - 52,000 -
Proceeds from long-term commercial paper debt 216,000 - -
Proceeds paid for debt issuance costs (9,270) (7,389) -
Proceeds from other long-term debt 3,316 872 10,867
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 248,975 117,399 9,366
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (16,439) 37,493 2,936
Cash at beginning of period 41,704 4,211 1,275
- -----------------------------------------------------------------------------------------------------------------------
Cash at end of period $25,265 $41,704 $4,211
=======================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Key Energy Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock Unrealized
-------------------- Gain on
Number of Additional Available
Shares Amount Paid-in Treasury Retained for Sale
(thousands) Outstanding at par Capital Stock Earnings Securities Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 6,914 $691 $15,186 $ - $4,234 $ - $20,111
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for WellTech
Merger 3,500 350 17,577 - - - 17,927
Net income - - - - 3,586 - 3,586
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 10,414 $1,041 $32,763 - $7,820 - $41,624
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for Brownlee
Well Service stock 61 6 665 - - - 671
Issuance of common stock for Woodward
Well Service stock 75 8 555 - - - 563
Issuance of common stock for Brooks
Well Service stock 918 92 11,033 - - - 11,125
Issuance of common stock for Enerair
Oilwell Service assets 4 - 48 - - - 48
Issuance of common stock for Cobra
Well Service stock 175 18 2,368 - - - 2,386
Issuance of common stock for Tri-State
Well Service assets 84 8 992 - - - 1,000
Issuance of common stock for Kal-Con
Well Service assets and stock 78 8 1,103 - - - 1,111
Issuance of common stock for Well-Co
Well Service stock 240 24 4,026 - - - 4,050
Exercise of warrants 221 22 1,340 - - - 1,362
Exercise of options 28 3 138 - - - 141
Net income - - - - 9,098 - 9,098
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 12,298 $1,230 $55,031 - $16,918 - $73,179
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of common stock for Big A
Well Service assets 125 12 4,066 - - - 4,078
Issuance of common stock for Critchfield
Well Service assets and stock 240 24 5,736 - - - 5,760
Issuance of common stock for Sitton
Drilling stock 100 10 2,159 - - - 2,169
Issuance of common stock for Gibson
Well Service assets 100 10 1,846 - - - 1,856
Exercise of warrants 609 61 4,162 - - - 4,223
Exercise of options 209 21 1,021 - - - 1,042
Conversion of 7% Notes 5,062 506 45,282 - - - 45,788
Purchase of treasury stock - 416,666 shares (417) - - (9,682) - - (9,682)
Mark to market of available for sale
securities - - - - - 2,346 2,346
Other (59) (6) (6)
Net income - - - - 24,175 - 24,175
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 18,267 $1,868 $119,303 $(9,682) $41,093 $2,346 $154,928
===========================================================================================================================
See the accompanying notes which are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
Key Energy Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1997 and 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Key Energy Group, Inc. herein after referred to as the "Company" or "Key", was
organized in April 1977, and commenced operations in July 1978. Results of
operations for the twelve months ended June 30, 1998, 1997 and 1996 include the
Company's oilfield service operations conducted by its wholly-owned subsidiary,
Yale E. Key, Inc., ("Yale E. Key"), the Company's oil and gas exploration and
production wholly-owned subsidiary, Odessa Exploration Incorporated ("Odessa
Exploration"), and the Company's oil and gas well drilling operations conducted
by the Company's wholly-owned subsidiary, Key Energy Drilling, Inc. ("Key Energy
Drilling"). Also included in the results of operations for the fiscal year ended
June 30, 1998 and 1997 and approximately three months for the fiscal year ended
June 30, 1996 are those operating results from the Company's wholly-owned
subsidiary, WellTech Eastern, Inc. ("WellTech Eastern") which currently holds
the assets acquired in the merger with WellTech, Inc. ("WellTech"), on March 26,
1996 (see Note 2). In addition, as a result of the Welltech acquisition, the
Company acquired 63% ownership in Servicios WellTech, S.A. ("Servicios"), an
Argentina corporation. In July 1997, the Company acquired the remaining 37%
ownership in Servicios. Servicios conducts oilfield services operations in
Argentina and was consolidated with a minority interest prior to July 1997. In
addition, results of operations for a portion of the fiscal year ended June 30,
1998 are those operating results from the Company's wholly-owned subsidiaries,
Key Rocky Mountain, Inc. ("Key Rocky Mountain") and Key Four Corners, Inc. ("Key
Four Corners"), both of which were formed as the result of several acquisitions
during the fiscal year ended June 30, 1998. (see Note 2)
Basis of Presentation
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated. The accounting policies
presented below have been followed in preparing the accompanying consolidated
financial statements.
Estimates and Uncertainties
Preparation of the accompanying consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures 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.
Inventories
Inventories, which consist primarily of well service parts and supplies and
those parts and supplies held for sale at the Company's various retail supply
stores, are valued at the lower of average cost or market.
Property and Equipment
The Company provides for depreciation and amortization of well service and
related equipment using the straight-line method, with an overall average
salvage value of approximately 10%, over the following estimated useful lives of
the assets:
(table follows on next page)
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Description Years
----------------------------------------
Oilfield service equipment 3 - 20
Motor vehicles 3 - 7
Furniture and equipment 3 - 10
Buildings and improvements 10 - 40
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.
Odessa Exploration 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. Upon disposition, 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.
As of July 1, 1997 the Company changed their method of calculating depreciation
on its oil and gas well drilling rigs from the straight-line method to the
units-of-production method. The new method takes into consideration the number
of days the rigs are actually in service each month and depreciation is recorded
for at least 15 days each month for each rig that is available for service. The
Company believes the new method will more appropriately reflect its financial
results by better matching of revenues with expenses and to better reflect how
the assets are to be used over time. The effect of this change on net income for
1998, 1997 and 1996 was not material.
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.
Other Assets and Goodwill
Other assets consist primarily of goodwill, capitalized debt issuance costs,
investment in common stock (accounted for using the cost-method) and security
and escrow deposits from Key's workers' compensation retrospective insurance
program, in addition to an interest, (approximately 13%), in an insurance
company (the insurance company is affiliated with Key's workers' compensation
carrier).
Marketable equity securities are deemed by management to be available for sale
and are classified in the consolidated balance sheet at fair value of
approximately $12,307,000 as other long-term assets with net unrealized gains of
approximately $2,346,000 reported within stockholders' equity.
At June 30, 1998, 1997 and 1996, the Company classified as goodwill the cost in
excess of fair value of the net tangible assets acquired in purchase
transactions. Goodwill of $37,122,000 was added in 1998. Goodwill is being
amortized on a straight-line basis over ten to twenty-five years. Management
continually evaluates whether events or circumstances have occurred that
indicate the remaining useful life of goodwill may warrant revision or the
remaining balance of goodwill may not be recoverable. Goodwill amortization
expense totaled $1,442,000 for fiscal 1998 and $622,000 for fiscal 1997 and
$100,000 for fiscal 1996. Debt issuance costs are amortized over the term of the
applicable debt and such amortization is classified as interest expense.
Amortization of debt issuance costs totaled $2,006,000 and $344,000 for the
fiscal years ended 1998 and 1997, respectively.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Earnings per Share
The Company accounts for earnings per share upon Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128,
basic earnings per common share are determined by dividing net earnings
applicable to common stock by the weighted average number of common shares
actually outstanding during the year. Diluted earnings per common share is based
on the increased number of shares that would be outstanding assuming conversion
of dilutive outstanding convertible securities using the "as if converted"
method.
Year Ended
(thousands, except per share data)
------------------------------------
6/30/98 6/30/97 6/30/96
------------------------------------
Basic EPS Computation:
Numerator-
Net Income $ 24,175 $ 9,098 $ 3,586
Denominator-
Weighted Average Common
Shares Outstanding 17,153 11,216 7,789
-----------------------------------
Basic EPS $ 1.41 $ 0.81 $ 0.46
===================================
Diluted EPS Computation:
Numerator-
Net Income $ 24,175 $ 9,098 $ 3,586
Effect of dilutive
securities, tax effected:
Convertible Securities 5,331 2,578 -
------------------------------------
$ 29,506 $ 11,676 $ 3,586
------------------------------------
Denominator-
Weighted Average Common
Shares Outstanding: 17,153 11,216 7,789
Warrants 141 340 -
Stock options 1,266 743 152
7% Convertible Debentures 1,191 5,333 -
5% Convertible Debentures 4,273 - -
------------------------------------
24,024 17,632 7,941
------------------------------------
Diluted EPS $ 1.23 $ 0.66 $ 0.45
===================================
Income Taxes
The Company accounts for income taxes based upon Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
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
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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.
The Company and its eligible subsidiaries file a consolidated U. S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U. S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of temporary cash investments to
financial institutions with high credit standing and by policy limits the amount
of credit exposure to any one financial institution. The Company's customer base
consists primarily of multi-national, foreign national and independent oil and
natural gas producers. See Note 12 for additional information regarding
customers which accounted for more than 10% of consolidated revenues. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral on its trade receivables. Such credit risk is considered
by management to be limited due to the large number of customers comprising the
Company's customer base. The Company maintains reserves for potential credit
losses, and such losses have been within management's expectations.
Impact of SFAS 121
On July 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of ("FAS 121"). This Statement requires
that long-lived assets, goodwill and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of this
Statement did not have an impact on the Company's consolidated financial
position, results of operations, or liquidity.
Stock-based Compensation
The Company accounts for employee stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Accordingly, the company
has only adopted the disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). See
Note 8 for the pro forma disclosures of compensation expense determined under
the fair-value provisions of SFAS 123.
Cash and Cash Equivalents
For cash flow purposes, the Company considers all unrestricted highly liquid
investments with less than a three month maturity when purchased as cash
equivalents.
Reclassifications
Certain reclassifications have been made to the fiscal 1997 and 1996
consolidated financial statements to conform to the fiscal 1998 presentation.
Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future:
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting
Comprehensive Income, is effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Specifially, SFAS 130 requires that an enterprise (i) classify items of other
comprehensive income by their nature in a financial statement and (ii) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will adopt SFAS 130
in the first quarter of its fiscal year ended June 30, 1999.
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, is effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that company's report information about
operating segments in annual financial statements and requires that those
company's report selected information about operating segments in interim
financial reports issued to shareholders. This statement also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS 131 need not be applied to interim financial
statements in the initial year of its application. However, comparative
information for interim periods in the initial year of application is to be
reported in the financial statements for interim periods in the second year of
application. The Company will adopt SFAS 131 for the fiscal year ended June 30,
1999.
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 the Company's operations,
management is of the opinion that inflation has not had a significant impact on
its business.
2. BUSINESS AND PROPERTY ACQUISITIONS
The following acquisitions have been completed during fiscal 1998 are included
in the Company's results of operations for the twelve months ended June 30,
1998. Each of the acquisitions were accounted for using the purchase method of
accounting. Unless otherwise noted, the purchase prices specified below are
based on cash paid and/or the fair value of the Company's common stock, par
value $0.10 (the "Common Stock").
Transportes Dimopulos S.R.L.
On June 5, 1998, the Company completed the acquisition of Transportes Dimopulos
S.R.L. ("Transportes") which operates in Argentina. Transportes was acquired for
approximately $2.2 million in cash and future obligations and included
approximately 28 oilfield service trucks and trailers, all located in Argentina.
The operating results of Transportes are included in the Company's results of
operations effective June 5, 1998.
Watson Truck & Supply, Inc.
On May 19, 1998, the Company completed the acquisition of certain assets of
Watson Truck & Supply, Inc. ("Watson") for approximately $2.6 million in cash.
The asset purchased included a repair and refurbishment facility and a supply
store in Mills, Wyoming. The operating results of Watson are included in the
Company's results of operations effective June 1, 1998.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Lakota Drilling Company
On May 22, 1998, the Company completed the acquisition of the assets of Lakota
Drilling Company ("Lakota") for approximately $12 million in cash. Lakota
operates seven drilling rigs in the Permian Basin region of West Texas. The
operating results of Lakota are included in the Company's results of operations
effective June 1, 1998.
Odessa Exploration Properties
On June 14, 1998, Odessa Exploration completed the purchase of approximately
$8.7 million of oil and gas producing and undeveloped properties from a group of
sellers unrelated to the Company.
JPF Well Service, Inc. and JPF Lease Service, Inc.
On April 20, 1998, the Company completed the acquisition of the assets of JPF
Well Service, Inc. and JPF Lease Service, Inc. (collectively, "JPF") for
approximately $6.2 million in cash. JPF operates nine well service rigs and
oilfield construction equipment in Southeast Texas. The operating results of JPF
are included in the Company's results of operations effective April 20, 1998.
Edwards Transport, Inc.
On March 27, 1998, the Company completed the acquisition of the assets of
Edwards Transport, Inc. ("Edwards") for approximately $3.0 million in cash.
Edwards operates fifteen vacuum and pump trucks in West Texas. The operating
results of Edwards are included in the Company's results of operations effective
April 1, 1998.
Lundy Vacuum Service, Inc.
On March 3, 1998, the Company completed the acquisition of the assets of Lundy
Vacuum Service, Inc. ("Lundy") for approximately $1.4 million in cash. Lundy
operates eight vacuum trucks, other oilfield fluid hauling trucks and an
oilfield construction site buisiness in East Texas. The operating results of
Lundy are included in the Company's results of operations effective March 3,
1998.
Lauffer Well Service, Inc.
On March 2, 1998, the Company completed the acquisition of the assets of Lauffer
Well Service, Inc. ("Lauffer") for approximately $400,000 in cash. Lauffer
operates four well service rigs in Kentucky. The operating results of Lauffer
are included in the Company's results of operations effective March 2, 1998.
Updike Brothers, Inc.
On February 6, 1998, the Company completed the acquisition of Updike Brothers,
Inc. ("Updike") for approximately $10.6 million in cash. Updike operates 25 well
service rigs in Wyoming. The operating results of Updike are included in the
Company's results of operations effective February 6, 1998.
Four Corners Drilling Company
On February 4, 1998, the Company completed the acquisition of the assets of Four
Corners Drilling Company ("Four Corners") for approximately $10.0 million in
cash. Four Corners owns 12 drilling rigs in the four corners region of the
Southwestern United States. The operating results of Four Corners are included
in the Company's results of operations effective February 4, 1998.
Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co.
On January 30, 1998, the Company completed the acquisition of Kingley
Enterprises, Inc. d/b/a Legacy Drilling Co. ("Legacy") for approximately $2.6
million in cash. Legacy operates four drilling rigs in the Permian Basin region
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
of West Texas. The operating results of Legacy are included in the Company's
results of operations effective February 1, 1998.
Circle M Vacuum Services, Inc.
On January 30, 1998, the Company completed the acquisition of the assets of
Circle M Vacuum Services, Inc. ("Circle M") for approximately $800,000 in cash.
Circle M operates four vacuum trucks, trailers and a salt water disposal well in
Southeast Texas. The operating results of Circle M are included in the Company's
results of operations effective February 1, 1998.
Hot Oil Plus, Inc.
On January 29, 1998, the Company completed the acquisition of the assets of Hot
Oil Plus, Inc. ("Hot Oil Plus") for approximately $2.2 million in cash. Hot Oil
Plus operates eight hot oil trucks, a pump truck and a steam heater in Southeast
Texas. The operating results of Hot Oil Plus are included in the Company's
results of operations effective February 1, 1998.
J.W. Gibson Well Service Company
On January 8, 1998, the Company completed the acquisition of J.W. Gibson Well
Service Company ("Gibson") for approximately $25.8 million, consisting of $23.9
million in cash, 100,000 shares of Common Stock and warrants to acquire 265,000
shares of Common Stock at an exercise price of $18.00 per share, subject to
certain adjustments.
Gibson operates 74 well service rigs and related equipment in eight states. From
August 1, 1997 through the closing of the acquisition, the Company managed the
operations of Gibson pursuant to an interim operating agreement. Under the
operating agreement, the Company received a management fee equal to the
operating income from Gibson's operations less $25,000 per month and received a
one-time management fee of $300,000. The total management fee earned from August
1, 1997 through September 30, 1998 of $361,000 is classified as other revenue in
the consolidated statement of operations. The operating results of Gibson are
included in the Company's consolidated results of operations effective January
8, 1998. The payment of the management fee was not contingent upon closing of
this transaction.
Sitton Drilling Co.
On January 1, 1998, the Company completed the acquisition of Sitton Drilling Co.
("Sitton") for approximately $15.0 million, including $12.9 million in cash and
100,000 shares of Common Stock. Sitton operates five drilling rigs in the
Permian Basin region of West Texas. The operating results of Sitton are included
in the Company's results of operations effective January 1, 1998.
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc.
On December 2, 1997, the Company completed the acquisition of the assets of
Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc. (collectively
the "Critchfield Assets") for approximately $8.4 million, consisting of $2.7
million in cash and 240,000 shares of Common Stock. The Critchfield Assets
consist of five land drilling rigs, five well service rigs and other related
equipment in Michigan. The operating results of Critchfield Assets are included
in the Company's results of operations effective December 2, 1997.
Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation
On November 24, 1997, the Company completed the acquisition of Win-Tex Drilling
Co., Inc. and Win-Tex Trucking Corporation ("Win-Tex") for approximately $6.5
million in cash. Win-Tex operates six land drilling rigs, trucks, trailers and
related equipment in West Texas. The operating results of Win-Tex are included
in the Company's results of operations effective December 1, 1997.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Jeter Service Co.
On November 18, 1997, the Company completed the acquisition of Jeter Service Co.
("Jeter") for approximately $6.7 million in cash. Jeter operates 15 well service
rigs, an oilfield supply store and an oilfield location construction/maintenance
business with 15 trucks and other related equipment in Oklahoma. The operating
results of Jeter are included in the Company's results of operations effective
December 1, 1997.
GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy Well
Service, Inc.
On October 3, 1997, the Company acquired certain assets of GSI Trucking Company,
Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. ("GSI,
Kahlden and McCurdy") for approximately $1.8 million in cash. GSI, Kahlden and
McCurdy operate 12 fluid and 5 equipment hauling trucks in Southeast Texas. The
operating results of GSI, Kahlden and McCurdy are included in the Company's
results of operations effective October 3, 1997.
Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc.
On October 1, 1997, the Company completed the acquisition of substantially all
of the assets of Big A Well Service Co., Sunco Trucking Co. and Justis Supply
Co., Inc. (collectively "Big A/Sunco") for approximately $31.1 million,
consisting of $27 million in cash and 125,000 shares of Common Stock. Big
A/Sunco operates 25 well service rigs, four drilling rigs, 75 oilfield trucks,
related equipment and a machine shop/supply store in the Four Corners region of
the Southwestern United States. The operating results of Big A/Sunco are
included in the Company's results of operations effective October 1, 1997.
Frontier Well Service, Inc.
On September 30, 1997, the Company completed the acquisition of Frontier Well
Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier
operates 12 well service rigs and related equipment in Wyoming. The operating
results of Frontier are included in the Company's results of operations
effective October 1, 1997.
Dunbar Well Service, Inc.
On September 29, 1997, the Company completed the acquisition of Dunbar Well
Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar
operates 38 well service rigs and related equipment in Wyoming. The operating
results of Dunbar are included in the Company's results of operations effective
October 1, 1997.
BRW Drilling, Inc.
On September 25, 1997, the Company completed the acquisition of BRW Drilling,
Inc. ("BRW") for approximately $14.6 million in cash. BRW operates seven
drilling rigs and related equipment in the Permian Basin region of West Texas
and Eastern New Mexico. The operating results of BRW are included in the
Company's results of operations effective October 1, 1997.
Landmark Fishing & Rental, Inc.
On September 16, 1997, the Company completed the acquisition of Landmark Fishing
& Rental, Inc. ("Landmark") for approximately $3.8 million in cash. Landmark
operates a rental tool business in Western Oklahoma and the Texas Panhandle. The
operating results of Landmark are included in the Company's results of
operations effective September 16, 1997.
Waco Oil & Gas Co., Inc.
On September 1, 1997, the Company completed the acquisition of certain assets of
Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0 million in cash. The
Waco assets included 12 well service rigs, three drilling rigs, 33 oilfield
trucks operated in West Virginia. Following the consummation of the acquisition,
the three drilling rigs acquired from Waco were sold to an independent third
party for $2.3 million in cash. No gain or loss was recognized in the sale of
these rigs. The operating results of Waco are included in the Company's results
of operations effective September 23, 1997.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc.
On September 1, 1997, the Company completed the acquisition of Ram Oil Well
Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5 million
in cash. Ram/Rowland operates 17 well service rigs, 93 oilfield trucks, 290 frac
tanks, three disposal and brine wells, and dirt construction equipment in the
Permian Basin region of West Texas and Southeastern New Mexico. The operating
results of Ram/Rowland are included in the Company's results of operations
effective September 1, 1997.
Mosley Well Service, Inc.
On August 22, 1997, the Company completed the acquisition of Mosley Well
Service, Inc., ("Mosley"), which operates 36 well service rigs and related
equipment in East Texas, Northern Louisiana and Arkansas, for approximately
$17.2 million in cash. The operating results of Mosley are included in the
Company's results of operations effective August 22, 1997.
Kenting Holdings (Argentina) S.A.
On July 30, 1997, the Company completed the acquisition of Kenting Holdings
(Argentina) S.A. ("Kenting") for approximately $10.1 million in cash. Kenting is
the sole shareholder of Kenting Drilling (Argentina) S.A. which operates six
well service rigs, three drilling rigs and related equipment in Argentina. The
operating results of Kenting are included in the Company's results of operations
effective August 1, 1997.
Patrick Well Service, Inc.
On July 17, 1997, the Company completed the acquisition of Patrick Well Service,
Inc. ("Patrick") for approximately $7.0 million in cash. Patrick operates 29
well service rigs and related equipment in Southwest Kansas, Oklahoma and
Southeast Colorado. The operating results of Patrick are included in the
Company's results of operations effective August 1, 1997.
Servicios WellTech S.A.
On July 1, 1997, the Company purchased the remaining 37% minority interest in
Servicios WellTech S.A. ("Servicios") from two unrelated parties for
approximately $3.4 million in cash. As a result of the purchase, the Company now
owns 100% of Servicios. The operating results of the remaining minority interest
in Servicios are included in the Company's results of operations effective July
1, 1997.
Acquisition Completed Prior to June 30, 1997
Well-Co Oil Service. Inc.
On June 26, 1997, the Company completed its acquisition of Well-Co Oil Service,
Inc. ("Well-Co") which operates 79 well service rigs and related equipment in
west Texas. Well-Co was acquired for $17.5 million in cash and 240,000 shares of
the Company's common stock. The results of operations of Well-Co are included in
the Company's results of operations effective June 26, 1997.
Phoenix Well Service, Inc.
On June 10, 1997, the Company completed its acquisition of Phoenix Well Service,
Inc. ("Phoenix") which operates 11 well service rigs and related equipment in
west Texas. Phoenix was acquired for $2.3 million in cash. The results of
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
operations of Phoenix are included in the Company's results of operations
effective June 26, 1997.
Southwest Oilfield Services, Inc.
On June 10, 1997, the Company completed its acquisition of Southwest Oilfield
Services, Inc. ("Southwest") which operates 3 well service rigs and related
equipment in western Oklahoma. Southwest was acquired for $455,000 in cash. The
results of operations of Southwest are included in the Company's results of
operations effective June 10, 1997.
Wireline and Excavation Assets
On May 1, 1997, the Company completed an acquisition of ten wireline units and
related equipment for approximately $600,000 in cash. On May 5, 1997, the
Company completed its acquisition of several dump trucks and related excavation
equipment for $410,000 in cash. The results of operations of these assets are
included in the Company's results of operations effective May 1, 1997.
Shreve's Well Service
On April 18, 1997, the Company completed its acquisition of the assets of
Shreve's Well Service, Inc. ("Shreve's") which operated in West Virginia.
Shreve's assets were acquired for $550,000 in cash and included five well
service rigs and related equipment. The results of operations of Shreve's are
included in the Company's results of operations effective May 1, 1997.
Argentine Drilling Rigs
On April 16, 1997, the Company acquired three drilling rigs and related
equipment in Argentina from Drillers, Inc. for $1.5 million in cash. The
drilling rigs will be operated by WellTech Servicios, the Company's Argentine
subsidiary.
Diamond Well Service
On April 3, 1997, the Company completed the acquisition of the assets of Diamond
Well Service, Inc. ("Diamond") for $675,000 in cash. The Diamond assets included
four oilwell service rigs and related equipment in Oklahoma. The results of
operations of Diamond are included in the Company's results of operations
effective April 1, 1997.
Kalkaska Construction Service, Inc. ,Kalkaska Oilfield Service, Inc. and Elder
Well Service, Inc.
On March 31, 1997, the Company completed the acquisition of the assets of
Kalkaska Construction Service, Inc., Kalkaska Oilfield Service, Inc. ("KalCon")
and Elder Well Service, Inc. ("Elder"), both based in Michigan. The KalCon
assets included 40 vacuum (fluid transport) trucks, 40 trucks used in oilfield
equipment hauling, seven saltwater disposal wells and other oilfield related
equipment, and were acquired for approximately $8.5 million in cash and 77,998
shares of the Company's common stock. The Elder assets included six well service
rigs and related equipment and were acquired for $609,000 in cash. The operating
results of KalCon and Elder are included in the Company's results of operations
effective April 1, 1997.
T.S.T. Paraffin Service Co., Inc.
On March 27, 1997, the Company completed the acquisition of T.S.T. Paraffin
Service Co., Inc. ("TST") for $8.7 million in cash. TST operates approximately
61 trucks, 22 hot oil units and other related equipment in west Texas. The
operating results of TST are included in the Company's results of operations
effective April 1, 1997.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Tri-State Wellhead & Valve, Inc.
The Company completed its acquisition of the assets of Tri-State Wellhead &
Valve, Inc. ("Tri-State") on March 17, 1997 for $550,000 in cash and 83,770
shares of the Company's common stock. The Tri-State assets consisted of a
wellhead equipment rental business and five well service rigs. The operating
results from these assets are included in the Company's results of operations
effective April 1, 1997.
Cobra Industries, Inc.
Effective as of January 13, 1997, the Company completed the purchase of Cobra
Industries, Inc. ("Cobra") for $5 million in cash and 175,000 shares of the
Company's common stock. Cobra operates 26 well service rigs in southeastern New
Mexico. The operating results from Cobra are included in the Company's results
of operations effective February 1, 1997.
Talon Trucking Co.
Effective as of January 7, 1997, the Company completed the acquisition of the
assets of Talon Trucking Co. ("Talon") for $2.7 million in cash. Talon operated
three well service rigs, 21 trucks and related fluid transportation and disposal
assets in Oklahoma. The operating results from these assets are included in the
Company's results of operations effective January 7, 1997.
B&L Hotshot, Inc.
Effective as of December 13, 1996, the Company completed the acquisition of B&L
Hotshot, Inc. and affiliated entities ("B&L") for $4.9 million in cash. B&L
provides trucking and related services for oil and natural gas wells in
Michigan. The operating results from B&L are included in the Company's results
of operations effective January 1, 1997.
Brooks Well Servicing, Inc.
Effective as of December 1, 1996, the Company completed the acquisition of
Brooks Well Servicing, Inc. ("Brooks") for 917,500 shares of the Company's
common stock. Brooks was a wholly-owned subsidiary of Hunt Oil Company and
operated 32 well service rigs and ancillary equipment in east Texas. The
operating results from Brooks are included in the Company's results of
operations effective December 1, 1996.
Hitwell Surveys, Inc.
Effective as of December 2, 1996, the Company completed the purchase of Hitwell
Surveys, Inc. ("Hitwell") for approximately $1.3 million in cash. Hitwell
operates eight well logging and perforating trucks in the Appalachian Basin and
Michigan. The operating results from Hitwell are included in the Company's
results of operations effective December 1, 1996.
Energy Air Drilling Services Co.
Effective as of November 1, 1996, the Company completed the acquisition of
certain assets of Energy Air Drilling Services Co. ("Energy Air") for $500,000
in cash and 4,386 shares of the Company's common stock. Energy Air operated four
air drilling packages in west Texas.
Brownlee Well Service Inc.
Effective as of October 24, 1996, the Company completed the purchase of Brownlee
Well Service, Inc. ("Brownlee") and Integrity Fishing and Rental Tools Inc.,
("Integrity"). Consideration for the acquisition was $6.5 million in cash and
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
61,069 shares of the Company's common stock. Brownlee and Integrity operate 16
well service rigs with ancillary equipment and a variety of oilfield fishing
tools in west Texas. The operating results from Brownlee are included in the
Company's results of operations effective November 1, 1996.
Woodward Well Service, Inc
Effective as of October 1, 1996, the Company completed the acquisition of
Woodward Well Service, Inc. ("Woodward") for 75,000 shares of the Company's
common stock and approximately $100,000 in cash, most of which is payable over a
four-year period. Woodward operated five well service units in Oklahoma. The
operating results from Woodward are included in the Company's results of
operations effective October 1, 1996.
Acquisitions Completed Prior to June 30, 1996
Odessa Exploration Properties
In April of 1996, Odessa Exploration purchased approximately $6.9 million in
cash of oil and gas producing properties from an unrelated company using
proceeds from bank borrowings, which indebtedness was subsequently repaid.
WellTech, Inc.
On March 26, 1996, the Company completed the merger of WellTech, Inc.
("WellTech") into the Company. The net consideration for the merger was
3,500,000 shares of the Company's common stock and warrants to purchase 500,000
additional shares of Common Stock at an exercise price of $6.75 per share.
WellTech conducted oil and gas well servicing operations in the Mid-Continent
and Northeast areas of the United States and in Argentina.
Pro Forma Results of Operations - (unaudited)
The following unaudited pro forma results of operations have been prepared as
though Well-Co, Cobra and T.S.T., Ram/Rowland, Coleman, Dunbar, Gibson, Updike
and Lakota had been acquired on July 1, 1996. Proforma amounts are not
necessarily indicative of the results that may be reported in the future.
Year Ended
----------------------------------------
(Thousands, except per share data) June 30, 1998 June 30, 1997
-----------------------------------------------------------------------------
Revenues $ 459,764 $316,656
Net income 26,075 13,342
Basic earnings per share $ 1.52 $ 1.19
3. OTHER ASSETS
Other assets consist of the following:
June 30,
(Thousands) 1998 1997
---------------------------------------------------------------------------
Investment in securities $12,325 $ -
Workers compensation security deposits 1,418 1,817
Debt issuance costs (net of amortization;
1998 - $2,350, 1997 - $344) 11,869 7,045
Other 1,383 458
---------------------------------------------------------------------------
$26,995 $9,320
===========================================================================
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 consolidated
financial position of the Company.
During 1995 and subsequent fiscal years, the Company entered into employment
agreements with certain of its officers. These employment agreements generally
run for two fiscal years, but can be automatically be extended on a yearly basis
unless terminated by the Company or the applicable officer. In addition to
providing a base salary for each officer, the employment agreements provide for
severance payments for each officer varying from 12 to 24 months of the officers
base salary. The current annual base salaries for the officers covered under
such employment agreements total approximately $1,189,000.
5. LONG-TERM DEBT
The components of long-term debt are as follows:
June 30,
(Thousands) 1998 1997
-----------------------------------------------------------------
PNC Credit Facility (i) $172,000 $120,000
5% Subordinated Debentures (ii) 216,000 -
7% Subordinated Debentures (iii) 4,600 52,000
Other notes payable (iv) 7,179 2,167
-----------------------------------------------------------------
399,779 174,167
Less current portion 1,848 1,404
-----------------------------------------------------------------
Long-term debt $397,931 $172,763
=================================================================
(i) PNC Credit Facility
On June 6, 1997, the Company entered into an agreement (the "Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a
syndication of other lenders pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on LIBOR and
the level of the Company's indebtedness. The Initial Credit Agreement contained
certain restrictive covenants and required the Company to maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).
Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as
administrative agent and lender, pursuant to which PNC agreed to make revolving
credit loans of up to a maximum loan commitment of $200 million. The maximum
commitment decreases to $175 million on November 6, 2000 and to $125 million on
November 6, 2001. The loan commitment terminates on November 6, 2002. Borrowings
under the credit facility may be either (i) Eurodollar Loans with interest
currently payable quarterly at LIBOR plus 1.25% subject to adjustment based on
certain financial ratios, (ii) Base Rate Loans with interest payable quarterly
at the greater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2%,
or (iii) a combination thereof, at the Company's option. The Amended PNC Credit
Agreement contains certain restrictive covenants and requires the Company to
maintain certain financial ratios. A change of control of the Company, as
defined in the Amended PNC Credit Agreement, is an event of default. Borrowings
under the Amended PNC Credit Agreement are secured by substantially all of the
assets of the Company and its domestic subsidiaries.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective December 3, 1997, PNC completed the syndication of the Amended PNC
Credit Agreement. In connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to the
Amended PNC Credit Agreement providing for, among other things, an increase in
the maximum commitment to $250 million from $200 million.
In connection with the acquisition of Dawson, the total consideration paid for
the Dawson Shares pursuant to the Tender Offer and the First Merger was
approximately $181.7 million. The Company's source of funds to pay such amount,
certain outstanding debt of Dawson and the Company and related fees and expenses
was (i) a bridge loan agreement in the amount of $150,000,000, dated as of
September 14, 1998, among the Company, Lehman Brothers Inc., as Arranger, and
Lehman Commercial Paper Inc., as Administrative Agent, and the other lenders
party thereto (the "Bridge Loan Agreement") and (ii) a $550,000,000 Second
Amended and Restated Credit Agreement, dated as of June 6, 1997, as amended and
restated through September 14, 1998, among the Company, PNC Bank, National
Association, as Administrative Agent, Norwest Bank Texas, N.A., as Collateral
Agent, PNC Capital Markets, Inc., as Arranger and the other lenders named from
time to time parties thereto (the "Second Amended and Restated Credit
Agreement"). In connection with the Bridge Loan Agreement, the Company entered
into Registration Rights Agreements (the "Registration Rights Agreements") with
Lehman Brothers Inc. and Lehman Commercial Paper Inc. pursuant to which the
Company agreed to file with the Securities and Exchange Commission (the
"Commission") within a certain time period a registration statement with respect
to (i) an offer to exchange borrowings under the Bridge Loan Agreement for a new
issue of debt securities of the Company, and (ii) the resale of warrants (and
the shares of common stock of the Company to be issued upon the exercise of such
warrant) to purchase shares of common stock of the Company issued to Lehman
Brothers Inc. in connection with the Bridge Loan Agreement. Loans outstanding
after one year pursuant to the Bridge Loan Agreement will convert into term
loans which may be exchanged by the holders thereof for exchange notes issued
pursuant to an Indenture dated as of September 14, 1998 (the "Indenture"),
between the Company and The Bank of New York, trustee.
In addition, the Company, its subsidiaries and U.S. Trust Company of Texas,
N.A., trustee ("U.S. Trust"), entered into a Supplemental Indenture dated
September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company
assumed the obligations of Dawson under the Indenture dated February 20, 1997
(the "Dawson Indenture") between Dawson and U.S. Trust, most of the Company's
subsidiaries guarantied those obligations and the notes issued pursuant to the
Dawson Indenture were equally and ratably secured with the obligations under the
Second Amended and Restated Credit Agreement. Under the terms of the Dawson
Indenture, the Company is required to commence a cash tender offer to purchase
at 101% of the aggregate principal amount of the outstanding notes (which the
outstanding amount is $140 million) by mid-October 1998, the source of funds for
which will be borrowings under the Second Amended and Restated Credit Agreement.
Additionally, the Company has outstanding letters of credit of $2,612,000 as of
fiscal 1998 and 1997, related to its workers compensation insurance. Also, the
Company is contractually restricted from paying dividends under the terms of the
Bridge Loan Agreement and the First Amendment to the Amended PNC Credit
Agreement.
(ii) 5% Convertible Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of Notes. The placements were made as private offerings pursuant to
Rule 144A and Regulation S under the Securities Act. The Notes are subordinate
to the Company's senior indebtedness, which, as defined in the indenture under
which the Notes were issued, includes the borrowings under the Amended PNC
Credit Agreement, as amended. The Notes are convertible, at the holder's option,
into shares of Common Stock at a conversion price of $38.50 per share, subject
to certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holder's option, to require the Company to repurchase all or any part of the
holder's Notes, within 60 days of such event, at a price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest thereon.
Proceeds from the placement of the Notes were used to repay balances under the
Company's credit facilities (see above). At June 30, 1998, $216,000,000
principal amount of the Notes was outstanding. Interest on the Notes is payable
on March 15 and September 15. Interest of approximately $5.1 million was paid on
March 15, 1998.
(iii) 7% Convertible Subordinated Debentures
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures are subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Amended PNC Credit Agreement, as amended.
The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert prior
to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock
(at the Company's option), generally equal to 50% of the interest otherwise
payable from the date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in control of the Company,
as defined in the indenture under which the Debentures were issued, each holder
of Debentures will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Debentures within 60 days
of such event at a price equal to 100% of the principal amount thereof, together
with accrued and unpaid interest thereon.
As of June 30, 1998, $47,400,000 in principal amount of the Debentures had been
converted into 4,861,538 shares of common stock at the option of the holders. An
additional 165,423 shares of common stock were issued representing 50% of the
interest otherwise payable from the date of conversion through July 1, 1999 and
an additional 35,408 shares of common stock were issued as an inducement to
convert. The additional 165,423 shares of common stock, representing 50% of the
interest otherwise payable from the date of conversion through July 1, 1999, are
included in equity. The fair value of the additional 35,408 shares of common
stock issued as inducement to convert was $710,186 and is recorded as interest
expense in the consolidated statement of operations. In addition, the
proportional amount of unamortized debt issuance costs associated with the
converted Debentures was charged to additional paid-in capital at the time of
conversion.
At June 30, 1998, $4,600,000 principal amount of the Debentures remained
outstanding. Interest on the Debentures is payable on January 1 and July 1 of
each year.
(iv) Other Notes Payable
At June 30, 1998, other notes payable consist primarily of capital leases for
automotive equipment and equipment leases with varying interest rates and
principal and interest payments.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, 1998:
(in thousands)
Fiscal year Principal
Ended Amount
----------------------------------------------
1999 $ 1,848
2000 2,194
2001 1,417
2002 991
2003 177,329
Thereafter 216,000
----------------------------------------------
$ 399,779
==============================================
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, other current assets and other current liabilities
approximates fair value because of the short maturity of these instruments.
Marketable equity securities with a total cost of approximately $9,961,000 are
deemed by management to be available for sale and are classified in the
consolidated balance sheet at fair value of approximately $12,307,000 as other
long-term assets with net unrealized gains of approximately $2,346,000 reported
within stockholders equity.
The fair value of the Company's borrowing under its PNC Credit Facility
approximates the carrying amount as of June 30, 1998 and 1997, based on the
borrowing rates currently estimated to be available to the Company for loans
with similar terms.
The 7% subordinated convertible debentures have a carrying value of $4.6 million
and $52 million and a fair value of approximately $6.7 million and $98.9 million
at June 30, 1998 and 1997, respectively. In addition, the 5% Notes have a
carrying value of $216 million and a fair value of approximately $164.1 million
at June 30, 1998. The fair value of these debentures was estimated using quoted
market prices.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
June 30,
(Thousands) 1998 1997
----------------------------------------------------------------------
Accrued payroll and taxes $10,852 $ 6,674
Unvouchered accounts payable 3,428 -
Group medical insurance 695 891
Workers compensation 794 1,683
State sales, use and other taxes 1,030 247
Gas imbalance - deferred income - 155
Oil and Gas revenue distribution 201 145
Acquisition and reorganization accrual 2,066 838
401(k) monies payable 405 -
Other 2,768 1,874
----------------------------------------------------------------------
Total $22,239 $ 12,507
======================================================================
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. STOCKHOLDERS' EQUITY
On January 13, 1998 the Company's shareholders approved the Key Energy Group,
Inc. 1997 Incentive Plan (the "1997 Incentive Plan"). The 1997 Incentive Plan is
an amendment and restatement of the plans formerly known as the "Key Energy
Group, Inc. 1995 Stock Option Plan" (the "1995 Option Plan") and the "Key Energy
Group, Inc. 1995 Outside Directors Stock Option Plan" (the "1995 Directors
Plan") (collectively, the "Prior Plans"). All outstanding options previously
granted under the Prior Plans and outstanding as of November 17, 1997 (the date
on which the Company's Board of Directors adopted the plan)were assumed and
continued, without modification, under the 1997 Incentive Plan.
Under the 1997 Incentive Plan, the Company may grant the following awards to key
employees, Directors who are not employees ("Outside Directors") and consultants
of the Company, its controlled subsidiaries, and its parent corporation, if any:
(i) incentive stock options ("ISOs") as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), (ii) "nonstatutory" stock options
("NSOs"), (iii) stock appreciation rights ("SARs"), (iv) shares of the
restricted stock, (v) performance shares and performance units, (vi) other
stock-based awards and (vii) supplemental tax bonuses (collectively, ("Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options".
The Company may grant Incentive Awards covering an aggregate of the greater of
(i) 3,000,000 shares of the Company's Common Stock and (ii) 10% of the shares of
Common Stock issued and outstanding on the last day of each calendar quarter,
provided, however, that a decrease in the number of issued and outstanding
shares of Common Stock from the previous calendar quarter shall not result in a
decrease in Common Stock available for issuance under the 1997 Incentive Plan.
Up to 3,000,000 shares of Common Stock shall be available for Incentive Stock
Options.
Any shares of Common Stock that are issued and are forfeited or are subject to
Incentive Awards under the 1997 Incentive Plan that expire or terminate for any
reason will remain available for issuance with respect to the granting of
Incentive Awards during the term of the 1997 Incentive Plan, except as may
otherwise be provided by applicable law. Shares of Common Stock issued under the
1997 Incentive Plan may be either newly issued or treasury shares, including
shares of Common Stock that the Company receives in connection with the exercise
of an Incentive Awards. The number and kind of securities that may be issued
under the 1997 Incentive Plan and pursuant to then outstanding Incentive Awards
are subject to adjustments to prevent enlargement or dilution of rights
resulting from stock dividends, stock splits, recapitalizations, reorganization
or similar transactions.
The maximum number of shares of Common Stock subject to Incentive Awards that
may be granted or that may vest, as applicable, to any one Covered Employee
(defined below) during any calendar year shall be 500,000 shares, subject to
adjustment under the provisions of the 1997 Incentive Plan.
The maximum aggregate cash payout subject to Incentive Awards (including SARs,
performance units and performance shares payable in cash, or other stock-based
awards payable in cash) that may be granted to any one Covered Employee during
any calendar year is $2,500,000. For purposes of the 1997 Incentive Plan,
"Covered Employees" means a named executive officer who is one of the group
covered employees as defined in Section 162(m) of the Code and the regulation
promulgated thereunder (ie., generally the chief executive officer and the other
four most highly compensated executives for a given year.)
The 1997 Incentive Plan is administrated by the Compensation Committee appointed
by the Board of Directors (the "Committee") consisting of not less than two
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
directors each of whom is (i) an "outside director" under Section 162(m) of the
Code and (ii) a "non-employee director" under Rule 16b-3 of the Securities
Exchange Act of 1934 .
The following table summarizes the stock option activity related to the
Company's plans:
Price
Shares Per Share
-----------------------------------------------------------------
Outstanding, July 1, 1995 - -
Granted 1,075,000 $ 5.00
---------------------------------------------------------------
Outstanding, June 30, 1996 1,075,000
---------------------------------------------------------------
Granted 175,000 $ 7.50
Granted 175,000 $ 8.313
Granted 50,000 $ 8.375
Granted 25,000 $ 8.50
Granted 25,000 $11.125
Granted 535,000 $13.25
Granted 25,000 $14.50
Granted 50,000 $16.875
Canceled (27,000) $ 5.00
Exercised (28,000) $ 5.00
---------------------------------------------------------------
Outstanding, June 30, 1997 2,080,000
---------------------------------------------------------------
Granted 20,000 $18.125
Granted 250,000 $20.4375
Granted 15,000 $20.50
Granted 116,000 $15.00
Granted 15,000 $16.00
Exercised (209,000) $ 5.00
---------------------------------------------------------------
Outstanding, June 30, 1998 2,287,000
===============================================================
The Company applies APB 25 and related Interpretations in accounting for its
stock option awards. Accordingly, no compensation expense has been recognized
for its stock option awards. If compensation expense for the stock option awards
had been determined consistent with SFAS 123, the Company's net income and net
income per share, for the years ended June 30, 1998 and 1997 would have been
adjusted to the following pro forma amounts:
(unaudited)
Year Ended June 30,
1998 1997
--------------------------------------------------------
Net income (in thousands) $22,452 $8,680
Basic net income per share $ 1.31 $ 0.71
Diluted net income per share $ 1.14 $ 0.61
The pro forma net income and pro forma net income per share amounts noted above
are not likely to be representative of the pro forma amounts to be reported in
future years. Pro forma adjustments in future years will include compensation
expense associated with the options granted in fiscal year 1998 and 1997 plus
compensation expense associated with any options awarded in future years. As a
result, such pro forma compensation expense is likely to be higher than the
levels reflected for 1998 and 1997 if any options are awarded in future years.
Under SFAS 123, the fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grant in 1998 and 1997:
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1998 1997
---------------------------------------------------------------
Risk-free interest rate 5.79% 6.59%
Expected life 5 years 5 years
Expected volatility 136% 28%
Expected dividend yield 0% 0%
The total fair value of options granted at June 30, 1998 and 1997 is $14,098,000
and $6,541,000, respectively.
9. INCOME TAXES
Components of income tax expense are as follows:
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
------------------------------------------------------------------------------
Federal and State:
Current $ 7,343 $ 1,664 $ 270
Deferred 7,287 3,836 1,618
------------------------------------------------------------------------------
$14,630 $ 5,500 $ 1,888
==============================================================================
Income tax expense differs from amounts computed by applying the statutory
federal rate as follows:
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
-----------------------------------------------------------------------------
Income tax computed at
Statutory rate 35.0% 35.0% 34.0%
Amortization of goodwill
disallowance 1.1 1.5 -
Meals and entertainment
disallowance 0.7 0.8 1.7
State taxes 0.7 .2 -
Other 0.2 0.4 (1.8)
------------------------------------------------------------------------------
37.7% 37.9% 33.9%
==============================================================================
Deferred tax assets (liabilities) are comprised of the following :
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
-----------------------------------------------------------------------------
Net operating loss and
tax credit
carry-forwards $ 5,564 $ 4,628 $ 6,293
Property and equipment (99,664) (40,410) (10,942)
Other 2,363 (82) 95
------------------------------------------------------------------------------
Net deferred tax
liability $ 91,737 $ (35,864) $ (4,554)
==============================================================================
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 the Company
will more likely than not be sufficient to fully utilize available carryforwards
prior to their ultimate expiration.
The Company estimates that as of June 30, 1998, the Company will have available
approximately $3,290,000 of net operating loss carryforwards (which begin to
expire in 2001). The net operating loss carryforwards are subject to an annual
limitation of approximately $940,000, under Sections 382 and 383 of the Internal
Revenue Code.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
10. LEASING ARRANGEMENTS
Among other leases, the Company (primarily its subsidiaries) leases certain
automotive equipment under non-cancelable operating leases which expire at
various dates through 2002. The term of the operating leases generally run from
36 to 60 months with varying payment dates throughout each month. In addition,
in the case of Yale E. Key, each lease includes an option to purchase the
equipment and an excess mileage charge as defined in the leases.
As of June 30, 1998, the future minimum lease payments under non-cancelable
operating leases, in thousands, are as follows:
Lease
Fiscal Year Payments
Ending June 30, (thousands)
--------------------------------------------------
1999 $ 7,249
2000 6,022
2001 3,492
2002 1,641
2003 660
---------------------------------------------------
$19,064
===================================================
Operating lease expense was approximately $8,002,000, $5,299,000, and
$2,897,000, for the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
11. EMPLOYEE BENEFIT PLANS
Prior to January 1, 1998, the Company maintained two 401(k) plans (the "Old
Plans") for its employees such that employees of WellTech Eastern were eligible
for participation in one Plan (the "WellTech 401(k) Plan"), while all other
employees were eligible for participation in the other Plan (the "Key 401(k)
Plan"). At January 1, 1998, the Company merged the two Old Plans into one plan
(the "New Plan"). Both the Old Plans and the New Plan cover substantially all
employees of the Company.
After January 1, 1998, under the New Plan, the Company matches 100% of the
employees' contributions up to a maximum of $1,000 per participant per year.
Contributions to the New Plan after January 1, 1998 totaled $699,108. Prior to
January 1, 1998, under the Old Plans, the Company matched employees'
contributions up to 10% of the employees' contribution to the Key 401(k) Plan.
These contributions totaled approximately $36,000, $35,000 and $19,000 for the
six month period ended December 31, 1997 and the years ended June 30, 1997 and
1996, respectively. Additionally, the Company contributed $172,401 and $300,000
into the WellTech 401(k) Plan for the six month period ended December 31, 1997
and the year ended June 30, 1997, respectively . The Company matched employee
contributions up to 50% (to a maximum of $1,000 per employee) of the employees'
contributions to the WellTech 401(k) Plan.
12. MAJOR CUSTOMERS
Sales to customers representing 10% or more of consolidated revenues for the
years ended June 30, 1997, 1996 were as follows:
Fiscal Year Ended June 30,
1997 1996
------------------------------------------------
Customer A 13% 20%
Customer B 7% 11%
The Company did not have any one customer which represented 10% or more of
consolidated revenues for the fiscal year ended June 30, 1998.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13. TRANSACTIONS WITH RELATED PARTIES
WellTech Eastern paid $108,000 and $78,000 for the years ended June 30, 1998 and
1997, respectively, for office/yard rental expense in which an officer of the
Company and WellTech Eastern has an interest. In the opinion of the Board of
Directors of the Company, based on the Board's review of competitive bids, this
transaction was on terms at least as favorable to the Company as could have been
obtained from a third party.
Odessa Exploration paid $702,000 for the year ended June 30, 1998 for certain
oil and gas assets in a transaction involving a company, the president of which
is an outside director of the Company. At June 30, 1998, the Company owed
$300,000 to the same company.
14. 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
material-mans' lien on the well serviced.
15. BUSINESS SEGMENT INFORMATION
Information about the Company's operations by business segment is as follows:
Year Ended June 30,
(Thousands) 1998 1997 1996
---------------------------------------------------------------------------
Identifiable assets:
Oilfield services $513,583 $242,001 $94,962
Oil and gas well drilling services 84,579 8,365 5,583
Oil and gas 39,047 23,544 18,170
General corporate 61,431 46,185 3,007
---------------------------------------------------------------------------
$698,640 $320,095 $121,722
===========================================================================
Capital expenditures (excluding acquisitions):
Oilfield services $ 44,284 $ 15,084 $ 5,188
Oil and gas well drilling services 5,385 1,483 598
Oil and gas 7,849 8,188 1,879
---------------------------------------------------------------------------
$ 57,518 $ 24,755 $ 7,665
===========================================================================
Depreciation, depletion and amortization:
Oilfield services $ 26,060 $ 9,198 $ 3,862
Oil and gas well drilling services 2,450 436 221
Oil and gas 2,043 870 618
General corporate 448 572 -
---------------------------------------------------------------------------
$ 31,001 $ 11,076 $ 4,701
===========================================================================
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company's oilfield services subsidiaries operate a variety of oilfield
service equipment including workover rigs, hot oil units, transports and various
other oilfield servicing equipment. In addition, they perform a variety of other
oilfield services including fishing tools, frac tanks and blow-out preventers.
Oil and gas production is conducted by Odessa Exploration. Odessa Exploration
acquires and manages interests in producing oil and gas properties for its own
account and for its sponsored investors. Odessa Exploration is engaged in the
drilling and production of oil and natural gas in the United States. Odessa
Exploration acquires producing oil and gas properties from major and independent
producers. After acquisition, Odessa Exploration may either rework the acquired
wells to increase production and/or form drilling partnerships for additional
development wells.
Oil and gas well drilling services are conducted primarily by Key Energy
Drilling. Key Energy Drilling operates forty drilling rigs which drill for oil
and gas in the West Texas and New Mexico area.
16. SUBSEQUENT EVENTS.
Acquisitions Completed after June 30, 1998
The following acquisitions have been completed after June 30, 1998 and are not
included in the Company's results of operations for the twelve months ended June
30, 1998.
Colorado Well Service, Inc.
On July 15, 1998, the Company closed the acquisition of the assets of Colorado
Well Service, Inc. ("Colorado") for approximately $6.5 million in cash. Colorado
operates seventeen well service rigs and one drilling rig in Utah and Colorado.
TransTexas Assets
On August 19, 1998, the Company completed the acquisition of certain oilfield
service assets of TransTexas Gas Corporation ("TransTexas") for approximately
$20.5 million in cash and future obligations. The TransTexas assets are based in
Laredo, Texas and include nine well service rigs, approximately 80 oilfield
service trucks and 173 frac and other tanks.
Flint Asset Purchase
On September 16, 1998, the Company closed the acquisition of certain assets of
Flint Engineering & Construction Co., a subsidiary of Flint Industries, Inc.
("Flint") for approximately $11.9 million in cash. Flint operates 55 well
service rigs and 25 oilfield trucks in the Rocky Mountains, Four Corners Area,
MidContinent Region, Permian Basin and ArkLaTex Region.
Iceberg, S.A.
On September 24, 1998, the Company closed the acquisition of the assets of
Iceberg, S.A. ("Iceberg") for approximately $4.4 million in cash. Iceberg
operates four well service rigs in Comodoro Rivadavia, Argentina.
HSI Group
On September 24, 1998, the Company closed the acquisition of substantially all
of the operating assets of Hellums Services II, Inc., Superior Completion
Services, Inc., South Texas Disposal, Inc. and Elsik II, Inc. ("HSI Group") for
$47.9 million in cash. HSI Group operates, among other assets, approximately 80
oilfield trucks and eight well service rigs in South Texas.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Dawson Production Services Inc.
On September 15, 1998, Midland Acquisition Corporation ("Midland"), a New Jersey
corporation and a wholly-owned subsidiary of the Company, completed its cash
tender offer (the "Tender Offer") for all outstanding shares of common stock,
par value $0.01 per share (the "Dawson Shares"), including the associated common
stock purchase rights, of Dawson at a price of $17.50 per share. The Tender
Offer expired at 8:30 a.m., New York City Time, on Tuesday, September 15, 1998.
Midland accepted for payment 10,021,601 Dawson Shares for a total purchase price
of approximately $175.4 million. The acceptance of tendered Dawson Shares,
together with Dawson Shares previously owned by Midland and the Company prior to
the commencement of the Tender Offer resulted in Midland and the Company
acquiring approximately 97.0% of the outstanding Dawson Shares. The purchase
price for Dawson Shares pursuant to the Tender Offer and the merger agreement
was determined pursuant to arms-length negotiations between the parties and was
based on a variety of factors, including, without limitation, the anticipated
earnings and cash flows of Dawson.
The Tender Offer was made pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of August 11, 1998, by and among, Midland, the
Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger
Agreement, Midland was merged with and into Dawson (the "First Merger") under
the laws of the States of New Jersey and Texas and all Dawson Shares not owned
by Midland were cancelled and retired and converted into the right to receive
$17.50 in cash. On September 21, 1998, Dawson was merged with and into the
Company (the "Second Merger") pursuant to the laws of the States of Maryland and
Texas.
The total consideration paid for the Dawson Shares pursuant to the Tender Offer
and the First Merger was approximately $181.7 million.
Dawson operates approximately 527 well service rigs, 200 oilfield trucks, and 21
production testing units in South Texas and the Gulf Coast, East Texas and
Louisiana, the Permian Basin of West Texas and New Mexico, the Anadarko Basin of
Texas and Oklahoma, California, and in the inland waters of the Gulf of Mexico.
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
17. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended June 30, 1998, 1997 and
1996 are presented below:
Year Ended June 30,
(Thousands) 1998 1997 1996
--------------------------------------------------------------------
Interest paid $ 16,441 $ 5,850 $2,205
Taxes paid 9,024 - 391
Supplemental schedule detailing the purchase price of acquisitions including
non-cash consideration paid for the year ended June 30, 1996 is presented below:
(thousands)
--------------------------------------------------------------------
Fair value of Common Stock issued for
WellTech, Inc. $17,929
Assumption of Welltech, Inc.
Working capital deficit 1,734
Assumption of Welltech, Inc.
non-current liabilities and debt 27,570
Acquisition of WellTech, Inc.
property and equipment 47,455
Supplemental schedule detailing the purchase price of acquisitions including
non-cash consideration paid for the year ended June 30, 1997 is presented
below (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Acquisition Fair Value
of Issued Assumption of Assumption of of Property
Acquisition Common Stock Debt Liabilities and Equipment
- ----------------------------------------------------------------------------------------------------------
Brownlee Well Service Inc. $ 671 $ 1,948 $ 3,558 $ 11,234
Woodward Well Service, Inc. 563 80 771 1,351
Brooks Well Servicing, Inc. 11,125 - 6,291 16,935
Hitwell Surveys, Inc. - 176 1,425 2,655
B&L Hotshot, Inc. - - 175 4,575
Energy Air Drilling Services Co. 48 150 - 700
Talon Trucking Co. - - - 2,700
Cobra Industries, Inc. 2,386 625 3,867 10,171
T.S.T Paraffin Service Co., Inc. - 70 3,599 10,035
Tri-State Wellhead & Valve, Inc. 1,000 - - 1,339
Kalkaska Construction
Service, Inc. 1,111 - 1,187 10,711
Well-Co Oil Service, Inc. 4,050 599 11,337 28,463
Shreve's Well Service - - 50 600
Youngs Wireline - - 225 744
Phoenix Well Service - 410 1,761 3,897
Elder Well Service, Inc. - - 40 649
Diamond Well Service, Inc. - - - 675
Southwest Oilfield Services, Inc. - - - 455
Edco Well Service - - 50 460
</TABLE>
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Supplemental schedule detailing the purchase price of acquisitions including
non-cash consideration paid for the year ended June 30, 1998 is presented below
(in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fair Value Acquisition
of Issued Assumption of Assumption of of Property
Acquisition Common Stock Debt Liabilities and Equipment
- -------------------------------------------------------------------------------------------------------------
Watson Truck & Supply, Inc. $ - $ - $ 100 $ 1,370
Lakota Drilling Company - - 6 11,900
JPF Well Service, Inc.
and JPF Lease Service, Inc. - - 6 4,500
Edwards Transport, Inc. - - - 1,037
Lundy Vacuum Service, Inc. - - - 1,061
Lauffer Well Service, Inc. - - 50 350
Updike Brothers, Inc. - 1,197 7,748 10,595
Four Corners Drilling Company - - 150 9,600
Kingsley Enterprises, Inc. - 300 3,692 4,866
Circle M Vacuum Services, Inc. - - - 700
Hot Oil Plus, Inc. - 200 - 1,900
J.W. Gibson Well Service Company 1,856 - 4,532 22,214
Sitton Drilling Co. 2,169 - 4,071 10,642
Wellcorps,
L.L.C., White Rhino Drilling,
Inc. and S&R Cable, Inc. 5,760 - 500 6,439
Jeter Service Co. - 1,802 3,686 6,553
GSI Trucking Company, Inc., Kahlden
Production Services, Inc. and
McCurdy Well Service, Inc. - 51 - 1,181
Big A Well Service Co., Sunco
Trucking Co. and Justis
Supply Co., Inc 4,078 359 2,504 24,618
Frontier Well Service, Inc. - - 2,118 5,478
Dunbar Well Service, Inc. - - 6,273 15,206
BRW Drilling, Inc. - 1,919 6,194 14,140
Landmark Fishing & Rental, Inc. - 539 2,386 5,180
Waco Oil & Gas Co., Inc. - - 500 7,644
Ram Oil Well Service, Inc. and
Rowland Trucking Co., Inc. - - 7,669 19,918
Mosley Well Service, Inc. - 933 406 25,246
Kenting Holdings (Argentina) S.A. - - - -
Patrick Well Service, Inc. - 563 625 9,263
Win-Tex Drilling and Trucking - 295 3,942 7,392
</TABLE>
<PAGE>
Key Energy Group Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
18. Unaudited Supplementary Information - Quarterly Results of Operations
Summarized quarterly financial data for 1998 and 1997 are as follows:
(in thousands, except per First Second Third Fourth
share amounts Quarter Quarter Quarter Quarter
---------------------------------------------------------------------------
1998
Revenues $75,399 $109,595 $120,724 $114,328
Earnings from operations 22,780 33,960 37,281 37,074
Net earnings 4,111 7,345 7,082 5,637
Earnings per share .29 .40 .39 .31
Weighted average common shares
and equivalents outstanding 14,126 18,151 18,295 18,261
1997
Revenues $31,462 $36,197 $43,050 $52,921
Earnings from operations 2,396 3,022 3,563 5,621
Net earnings 1,554 2,043 2,365 3,136
Earnings per share .15 .19 .20 .26
Weighted average common shares
and equivalents outstanding 10,425 10,850 11,612 11,979
The fourth quarter of fiscal 1997 includes an adjustment of $2 million for
previously unrecorded inventory.
Amounts reported for the first quarter of 1998 differ from the amounts
previously reported on Form 10-Q, filed for the quarter ended September 30,
1997, due to non-cash adjustments recorded in the fourth quarter which are
associated with the 7% debentures converted in the first quarter of fiscal year
1998.
<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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended June 30, 1998. 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 consolidated financial position of Key
Energy Group, Inc. and Subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
September 1, 1998
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEMS 10 - 13.
Pursuant to Instruction G(3) to Form 10-K, the information required in Items
10-13 is incorporated by reference from the Company's definitive proxy
statement, which will be filed with the Commission pursuant to Regulation 14A
within 120 days of June 30, 1998.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits
The following documents are filed as part of this report:
(1) See Index to Financial Statements set forth in Item 8.
(2) Financial Statements Schedules: [None]
(3) Exhibits:
2.1 Agreement and Plan o f Merger dated as of November 18, 1995, between Key
and WellTech, as amended. (Incorporated by reference to the Company's
Registration Statement Form S-4, Registration No. 333-369).
2.2 Joint Plan of Reorganization, dated as of October 20, 1992, of the Company,
ESKEY Inc. and YFC International Finance N.V. and Order, dated December 4,
1992, of the United States Bankruptcy Court for the District of New Jersey,
approving the Joint Plan of Reorganization (Incorporated by reference to
Exhibits 2 (a) and 28 (a) of the Company's Current Report on Form 8-K dated
December 14, 1992, File No. 1-8038).
2.3 Agreement and Plan of Merger dated as of July 20, 1993, by and among the
Company, OEI Acquisition Corp. and Odessa Exploration Incorporated.
(Incorporated by reference to Exhibit 2(a) of the Company's Current Report
on Form 8-K dated September 2, 1993, File No. 1-8038).
2.4 Asset Purchase Agreement dated as of December 10, 1993 between the Company
and WellTech, Inc. (Incorporated by reference to Exhibit 2(a) of the
Company's Current Report on Form 8-K dated August 17, 1984, File No.
1-8038).
3.1 Amended and Restated Articles of Incorporation of the Company (Incorporated
by reference to the Company's Registration Statement on Form S-4,
Registration No. 333-369).
3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to
the Company's Registration Statement on Form S-4 dated March 8, 1996,
Registration No. 333-369).
3.3 Amendment to the Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 000-22665, and incorporated herein by
reference).
4.1 7% Convertible Subordinated Debenture of the Company due July 1, 2003.
(Incorporated by reference to Exhibit 4.1 of the Company's Annual Report on
Form 10-K dated June 30, 1996, File No. 1-8038).
4.2 Indenture for the 7% Convertible Subordinated Debenture of the Company due
July 1, 2003. (Incorporated by reference to Exhibit 4.2 of the Company's
Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038).
<PAGE>
4.3 Registration Rights Agreement among the Company, McMahan Securities Co.,
L.P. and Rausher Pierce Refsnes, Inc., dated as of July 3, 1996.
(Incorporated by reference to Exhibit 4.3 of the Company's Annual Report on
Form 10-K dated June 30, 1996, File No. 1-8038).
4.4 Registration Rights Agreement between the Company and D. Kirk Edwards,
dated as of July 20, 1993. (Incorporated by reference to Exhibit 10 ( c )
to the Company's Current Report on Form 8-K/A).
4.5 Registration Rights Agreement dated as of March 2, 1996 among the Company
and certain of its stockholders. (Incorporated by reference to the
Company's Registration Statement on Form S-4, Registration No. 353-369).
4.6 Registration Rights Agreement dated as of March 30, 1995 between the
Company, Clint Hurt and Associates, Inc. and Clint Hurt. (Incorporated by
reference to Exhibit 10 (d) of the Company's Annual Report on 10-KSB dated
June 30, 1995, File No. 1-8038).
4.7 Form of Common Stock Purchase Warrant to Purchase Key Common Stock issued
in connection with the WellTech Merger. (Incorporated by reference to the
Company's Registration Statement on Form S-4, Registration No. 353-369).
4.8 Indenture dated as of September 25, 1997, among Key Energy Group, Inc. and
American Stock Transfer and Trust Company. (Incorporated by reference to
Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 1-8038)
4.9 Registration Rights Agreement among Key Energy Group, Inc., Lehman Brothers
Inc., and McMahan Securities Co. L.P. dated as of September 25, 1997.
(Incorporated by reference to Exhibit 10(a) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)
10.1 Employment Agreement between the Company and D. Kirk Edwards, dated as of
July 1, 1996. (Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, File No.
1-8038)
10.2 Employment Agreement between WellTech Eastern, Inc. and Kenneth Hill, dated
as of March 29, 1996. (Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038).
10.3 Employment Agreement between the Company and Kenneth Huseman, dated as of
August 3, 1996. (Incorporated by reference to Exhibit 10.5 of the Company's
Annual Report on Form 10-K for the year ended June 30, 1997, File No.
1-8038)
10.4 Letter Agreement between Van Greenfield and the Company dated May 15, 1996.
(Incorporated by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K dated June 30, 1996, File No. 1-8038).
10.5 Amendment No. 2 to the Company's Employment Agreement between Francis D.
John and the Company, dated as of May 15, 1996. ( Incorporated by reference
to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
10.6 Letter Agreement between Morton Wolkowitz and the Company dated June 3,
1996. ( Incorporated by reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K dated June 30, 1996, File No. 1-8038).
<PAGE>
10.7 Asset Purchase Agreement between Hardy Oil & Gas USA, Inc. and Arch
Petroleum, Inc. dated as of April 1996. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
10.8 Asset Purchase Agreement between Arch Petroleum, Inc. and Odessa
Exploration, Inc. dated as of April 18, 1996. (Incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
10.9 General Conveyance by Arch Petroleum, Inc. to Odessa Exploration, Inc.
dated as of January 1, 1996. (Incorporated by reference to Exhibit 10.14 to
the Company's Annual Report on Form 10-K dated June 30, 1996, File No.
1-8038).
10.10Plan and Agreement of Merger among Key Energy Group, Inc., WellTech
Eastern, Inc. and Woodward Well Service, Inc. dated as of September 30,
1996. (Incorporated by reference to Exhibit 10(a) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.11Stock Purchase Agreement among Key Energy Group, Inc., Reo Brownlee, Elvin
Brownlee, Jr. And Elvin Brownlee III dated as of October 24, 1996.
(Incorporated by reference to Exhibit 10(b) to the Company's Quarterly
Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.12Asset Purchase Agreement among Yale E. Key, Inc., Key Energy Group, Inc.,
Energy Air Drilling Service Co. and Dale Rennels dated as of November 1,
1996. (Incorporated by reference to Exhibit 10( c ) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.13Stock Purchase Agreement among Key Energy Group, Inc., Ed Hitt, Helen
Hitt, Michael E. Thompson and Edward Monroe, Jr. Dated as of December 2,
1996. (Incorporated by reference to Exhibit 10(d) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.14Plan and Agreement of Merger among Key Energy Group, Inc., WellTech
Eastern, Inc., Hunt Oil Company and Brooks Well Servicing, Inc. dated as of
November 22, 1996. (Incorporated by reference to Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No.
1-8038).
10.15Asset Purchase Agreement among WellTech Eastern, Inc., B&L Hotshot, Inc.,
McDowell & Sons, Inc., 4 Star Trucking, Inc., R.B.R. Inc., Royce D. Thomas,
John F. McDowell and John R. McDowell dated as of December 13, 1996.
(Incorporated by reference to Exhibit 10(f) to the Company's Quarterly
Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.16Asset Purchase Agreement among WellTech Eastern, Inc., Talon Trucking
company and Lomak Petroleum, Inc. dated as of December 31, 1996.
(Incorporated by reference to Exhibit 10(g) to the Company's Quarterly
Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.17First Supplemental Indenture dated as of November 20, 1996 by and between
Key Energy Group, Inc. and American Stock Transfer & Trust Company, as
Trustee. (Incorporated by reference to Exhibit 10(i) to the Company's
Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038).
10.18Stock Purchase Agreement among Key Energy Group, Inc., Michael and Georgia
McDermett dated as of January 10, 1997. (Incorporated by reference to
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q dated March
31, 1997, File No. 1-8038).
<PAGE>
10.19Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group,
Inc. Tri State Wellhead & Valve, Inc. and John C. Bozeman dated as of March
14, 1997. (Incorporated by reference to Exhibit 10(b) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
10.20Stock Purchase Agreement among Yale E. Key, Inc., Keith and Leslie Neill
as of March 24, 1997. (Incorporated by reference to Exhibit 10( c ) to the
Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No.
1-8038).
10.21Asset Purchase Agreement among Key Energy Group, Inc., WellTech Eastern,
Inc., Elder Well Service, Inc., Martha Elder, Kenneth L. Ward, Nona Faye
Mugraur, Lela Gaye Biehl and Johnny Ray Johnson dated as of March 28, 1997.
(Incorporated by reference to Exhibit 10(d) to the Company's Quarterly
Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
10.22Asset Purchase Agreement #1 among WellTech Eastern, Inc., Key Energy
Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide,
LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31,
1997. (Incorporated by reference to Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
10.23Asset Purchase Agreement #2 among WellTech Eastern, Inc., Key Energy
Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide,
LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31,
1997. (Incorporated by reference to Exhibit 10(f) to the Company's
Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
10.24Stock Purchase Agreement among WellTech Eastern, Inc., Dennis Hogerheide
and LaWenda Hogerheide dated as of March 31, 1997. (Incorporated by
reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
10.25Asset Purchase Agreement among WellTech Eastern, Inc., Diamond Well
Service, Inc., John Scott and Dwayne Wardwell dated as of April 3, 1997.
(Incorporated by reference to Exhibit 10(h) to the Company's Quarterly
Report on Form 10-Q dated March 31, 1997, File No. 1-8038).
10.26Asset Sale Agreement among WellTech Eastern, Inc. and Drillers, Inc. dated
as of April 14, 1997. (Incorporated by reference to Exhibit 10(i) to the
Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No.
1-8038).
10.27Asset Purchase Agreement among WellTech Eastern, Inc., Shreve's Well
Service, Inc. and William A. Shreve dated April 18, 1997. (Incorporated by
reference to Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
10.28Asset Purchase Agreement among WellTech Eastern, Inc. and Petro Equipment,
Inc. and Donald E. Clark dated as of May 1, 1997. (Incorporated by
reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q
dated March 31, 1997, File No. 1-8038).
10.29Asset Purchase Agreement among WellTech Eastern, Inc., Southwest Oilfield
Services, Inc., David Wright and Roy Wofford dated May 29, 1997. .
(Incorporated by reference to Exhibit 10.33 to the Company's Annual Report
on Form 10-K dated June 30, 1997, File No. 1-8038).
<PAGE>
10.30Stock Purchase Agreement among Yale E. Key, Inc. and Raleigh K. Turn and
David Butts dated June 9, 1997. (Incorporated by reference to Exhibit 10.34
to the Company's Annual Report on Form 10-K dated June 30, 1997, File No.
1-8038).
10.31Stock Purchase Agreement among Key Energy Group, Inc. and Mark Duane
Massingill and Claudia Lynn Massingill dated as of June 25, 1997.
(Incorporated by reference to the Company's Current Report on Form 8-K
dated July 9, 1997, File No. 1-8038).
10.32Stock Purchase Agreement among WellTech Eastern, Inc. between Monty D.
Elmore dated as of July 17, 1997. (Incorporated by reference to the
Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038).
10.33Stock Purchase Agreement between WellTech Eastern, Inc. and Kenting Energy
Services, Inc. dated as of July 30, 1997. (Incorporated by reference to
Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year
ended June 30, 1997, File No. 1-8038)
10.34Stock Purchase Agreement between WellTech Eastern, Inc. and Robert E.
Mosley, Jr. et al dated as of August 22, 1997. (Incorporated by reference
to Exhibit 10.38 to the Company's Annual Report on Form 10-K dated June 30,
1997, File No. 1-8038).
10.35Credit Agreement dated as of June 6, 1997 among Key Energy Group, Inc.,
several banks and other financial institutions or entities from time to
time parties to the Agreement, PNC Bank, N.A., Norwest Bank of Texas, N.A.,
and Lehman Commercial Paper Inc. (Incorporated by reference to Exhibit
10.39 to the Company's Annual Report on Form 10-K dated June 30, 1997, File
No. 1-8038).
10.36Master Guarantee and Collateral Agreement made by Key Energy Group, Inc.
and certain of its Subsidiaries in favor of Norwest Bank of Texas, N.A.
dated as of June 6, 1997. (Incorporated by reference to Exhibit 10.33 to
the Company's Annual Report on Form 10-K dated June 30, 1997, File No.
1-8038).
10.37Stock Purchase Agreement by and among Nabors Acquisition Corp. IV, as
Seller, Key Rocky Mountain, Inc., as Buyer, and Key Energy Group, Inc.
dated as of July 31, 1997. ("Gibson Stock Purchase Agreement.")
(Incorporated by reference to Exhibit 10(c) of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, File No.
1-8038)
10.38Amendment One to the Gibson Stock Purchase Agreement dated as of October
10, 1997.(Incorporated by reference to Exhibit 10(d) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997,
File No. 1-8038)
<PAGE>
10.39Stock Purchase Agreement (Ram Oil Well Service, Inc.) by and among, Yale E.
Key, Inc. and Robert D. Calhoon dated as of September 1, 1997 (incorporated
by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K
dated September 1, 1997, File No. 1-8038).
10.40Stock Purchase Agreement (Rowland Trucking Co.) by and among, Yale E. Key,
Inc. and Robert D. Calhoon dated as of September 1, 1997 (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated
September 1, 1997,File No. 1-8038).
10.41Asset Purchase Agreement among WellTech Eastern, Inc., Waco Oil & Gas Co.,
Inc. and I.L. Morris dated as of September 1, 1997. (Incorporated by
reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, File No. 1-8038)
10.42Asset Purchase Agreement among Key Four Corners, Inc., Key Energy
Group,Inc., Coleman Oil & Gas Co., Big A Well Service Co., Sunco Trucking
Co., Justis Supply Co., Inc. and George E. Coleman dated as of September 2,
1997 (incorporated by reference to Exhibit 2.1 of the Company's Report on
Form 8-K dated October 1, 1997, File No. 1-8038).
10.43Stock Purchase Agreement between WellTech Eastern, Inc. and William
Gregory Wines dated as of September 16, 1997. (Incorporated by reference to
Exhibit 10(j) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 1-8038)
10.44Stock Purchase Agreement among, Key Energy Drilling, Inc. and S.K. Rogers,
Joe Dee Brooks, Lynn E. Waters and Donnie Roberts dated as of September 25,
1997. (Incorporated by reference to Exhibit 10(k) of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997,
File No. 1-8038)
10.45Stock Purchase Agreement among Key Rocky Mountain, Inc., Joseph R. Dunbar
and Janice N. Dunbar dated as of September 29, 1997. (Incorporated by
reference to Exhibit 10(m) of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997, File No. 1-8038)
10.46Stock Purchase Agreement among Key Rocky Mountain, Inc., Bruce L. Bummer,
Jack Hartnett, Diane Hartnett and Bruce Bummer 7/14/82 Family Trust dated
as of September 30, 1997. (Incorporated by reference to Exhibit 10(n) of
the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, File No. 1-8038)
10.47Amended and Restated Credit Agreement among Key Energy Group, Inc. and
several other financial institutions dated as of June 6, 1997 as amended
and restated through November 6, 1997. (Incorporated by reference to
Exhibit 10(s) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997, File No. 1-8038)
10.48First Amendment to the Amended and Restated Credit Agreement dated as of
June 6, 1997, as amended and restated through November 6, 1997 dated
December 3, 1997. (Incorporated by reference to Exhibit 10(t) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038)
10.49Asset Purchase Agreement among WellTech Eastern, Inc. and McCurdy Well
Service, Inc. effective as of October 3, 1997. (Incorporated by reference
to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997, File No. 1-8038)
<PAGE>
10.50Asset Purchase Agreement among WellTech Eastern, Inc. and GSI Trucking
Company, Inc. effective as of October 3, 1997. (Incorporated by reference
to Exhibit 10(e) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997, File No. 1-8038)
10.51Asset Purchase Agreement among WellTech Eastern, Inc. and Kahlden
Production Services, Inc. effective as of October 3, 1997. (Incorporated by
reference to Exhibit 10(f) of the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1997, File No. 1-8038)
10.52Stock Purchase Agreement between WellTech Eastern, Inc. and Donald Jeter,
effective as of November 11, 1997. (Incorporated by reference to Exhibit
10(g) of the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997, File No. 1-8038)
10.53Stock Purchase Agreement between Key Energy Drilling, Inc. and Robert C.
Jones and Dana Lunette Jones, effective as of November 24, 1997.
(Incorporated by reference to Exhibit 10(h) of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997, File No.
1-8038)
10.54Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group,
Inc. and White Rhino Drilling, Inc. and Jeff Critchfield, effective as of
December 2, 1997. (Incorporated by reference to Exhibit 10(i) of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, File No. 1-8038)
10.55Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group,
Inc., S&R Cable, Inc., Jeff Critchfield, Royce D. Thomas, Ronnie Shaw and
Donald Tinker, effective as of December 2, 1997. (Incorporated by reference
to Exhibit 10(j) of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 1-8038)
10.56Asset Purchase Agreement among WellTech Eastern, Inc., Wellcorps, L.L.C.
and Jeff Critchfield, Terra Energy, Ltd. And Brian Fries, effective as of
December 2, 1997. (Incorporated by reference to Exhibit 10(k) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038).
10.57Employment Agreement dated December 5, 1997 by and between Stephen E.
McGregor and the Company. (Incorporated by reference to Exhibit 10(e) of
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, File No. 1-8038)
10.58Stock Purchase Agreement between Key Energy Group, Inc., Key Energy
Drilling, Inc. and Ronald M. Sitton and Frank R. Sitton, effective as of
December 12, 1997. (Incorporated by reference to Exhibit 10(l) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038)
10.59Asset Purchase Agreement between Brooks Well Servicing, Inc. and Sam F.
McKee, Individually and d/b/a Circle M Vacuum Services, effective as of
January 30, 1998. (Incorporated by reference to Exhibit 10(m) of the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1997, File No. 1-8038)
10.60Stock Purchase Agreement between Key Energy Drilling, Inc. and Jack B.
Loveless, Jim Mayfield and J.W. Miller, effective as of January 30, 1998.
(Incorporated by reference to Exhibit 10(n) of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997, File No.
1-8038)
<PAGE>
10.61Asset Purchase Agreement between Key Four Corners, Inc. and Four Corners
Drilling, R.L. Andes and W.E. Lang, effective as of January 30, 1998.
(Incorporated by reference to Exhibit 10(o) of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997, File No.
1-8038)
10.62Asset Purchase Agreement among Key Rocky Mountain, Inc., Updike Brothers,
Inc. Employee Stock Ownership Retirement Plan and Trust, David W. Updike
Trust, Dorothy A. Updike Trust, Dorothy R. Updike Trust, Mary E. Updike,
Ralph O. Updike and Daniel Updike effective February 6, 1998. (Incorporated
by reference to Exhibit 10(p) of the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997, File No. 1-8038)
10.63Asset Purchase Agreement among Brooks Well Servicing, Inc., Hot Oil Plus,
Inc., Thomas N. Novosad, Jr. and Patricia Novosad effective January 29,
1998. (Incorporated by reference to Exhibit 10(q) of the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File
No. 1-8038)
10.64Asset Purchase Agreement among Brooks Well Servicing, Inc., Lundy Vacuum
Service, Inc. and Peyton E. Lundy effective March 3, 1998. (Incorporated by
reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, File No. 1-8038)
10.65Asset Purchase Agreement among Yale E. Key, Inc., Edwards Transport, Inc.
and Tom Nations effective March 26, 1998. (Incorporated by reference to
Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8038)
10.66Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF Well
Service Inc., effective April 20, 1998. (Incorporated by reference to
Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8038)
10.67Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF Lease
Service Inc., effective April 20, 1998. (Incorporated by reference to
Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8038)
* 10.68 Asset Purchase Agreement between Watson Oilfield Service & Supply,
Inc. and Watson Truck & Supply, Inc. dated May 19, 1998
* 10.69 Purchase and Sale Agreement among Burnett Corporation, B.O.
Cornelius, Ann C. Fatheree, James R. Corbin, Mary Jo Mitton, Birke B.
Marsh, H. Cobb, Birke B. Marsh, Trustee of the Corbin Trust, Jamie Kim
Corbin, Josh Alan Corbin, Jason J. Corbin, Wilbanks Exploration, Inc. and
Odessa Exploration, Inc. dated May 20, 1998.
* 10.70 Asset Purchase Agreement among Key Energy Drilling, Inc., Lakota
Drilling Company and Reed Gilmore, Priscilla Gilmore, M. Reed Gilmore, Jr.,
Valerie G. Griess, Joan G. Lindquist, James C. Gilmore, L. E. Grimes and
Larry V. Bohannon dated May 22, 1998.
10.71Key Energy Group, Inc. 1997 Incentive Plan (Incorporated by reference
to Exhibit B of the Company's definitive proxy statement dated
November 28, 1997.
* 23.1 Consent of KPMG Peat Marwick LLP
* 27(a) Statement - Financial Data Schedule. (Filed herewith as part of
the Condensed Consolidated Financial Statements).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended June 30,
1998.
*Filed herewith.
<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 report 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 Officer
Dated: September 28, 1998 and Director
By /s/ Stephen E. McGregor
Stephen E. McGregor
Dated: September 28, 1998 Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated
By /s/ Francis D. John
Francis D. John
President, Chief Executive and Chief
Dated: September 28, 1998 Financial Officer and Director
By /s/ Morton Wolkowitz
Morton Wolkowitz
Dated: September 28, 1998 Chairman of the Board and Director
By /s/ David J. Breazzano
David J. Breazzano
Dated: September 28, 1998 Director
By /s/ William Manly
William Manly
Dated: September 28, 1998 Director
By /s/ Kevin P. Collins
Kevin P. Collins
Dated: September 28, 1998 Director
By /s/ W. Phillip Marcum
W. Phillip Marcum
Dated: September 28, 1998 Director
By /s/ Danny R. Evatt
Danny R. Evatt
Dated: September 28, 1998 Chief Accounting Officer
ASSET PURCHASE AGREEMENT
BETWEEN
WATSON OILFIELD SERVICE & SUPPLY, INC.,
AND
WATSON TRUCK & SUPPLY, INC.
May 19, 1998
<PAGE>
Asset Purchase Agreement
This Asset Purchase Agreement (this Agreement) is entered into as of May
19, 1998 between Watson Oilfield Service & Supply, Inc., a Delaware
corporation ("Buyer"), and Watson Truck & Supply, Inc., a New Mexico
corporation ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is engaged in the business of the refurbishing and
repairing of oilfield service equipment, including well service rigs,
workover rigs, drilling rigs and components and parts thereof and selling
oilfield parts and equipment for customers in the Territories (as defined
in Section 3.1), including, but not limited to, Hopper parts under the
provisions of and subject to the Watson Hopper Distribution Agreement (as
hereinafter defined) with Watson Hopper, Inc., a New Mexico corporation
("Watson Hopper"), which is a wholly-owned subsidiary of Seller (the
"Business");
WHEREAS, in addition to the Business, Seller is also currently engaged in
the business of the refurbishing and repairing of well service rigs,
workover rigs, drilling rigs and refurbishing, repairing and fabricating
components and parts thereof and selling of oilfield parts and equipment
for customers outside the Territories, selling of new and used pulling
units, manufacturing of pulling units and parts (through its subsidiary,
Watson Hopper), selling and leasing of new and used vehicles (automobiles
and trucks), vehicle repair and maintenance services, and financing and
insurance activities related to such businesses (collectively, the
"Excluded Business"); and
WHEREAS, Seller desires to sell the assets of the Business, and Buyer
desires to purchase such assets.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements, and subject to the
terms and conditions herein contained, the parties hereto hereby agree as
follows:
Article I
Purchase and Sale of Assets
1.1 Purchase and Sale of the Assets. Subject to the terms and conditions
set forth in this Agreement, Seller hereby agrees to sell, convey,
transfer, assign and deliver to Buyer at the Closing (as defined in Section
5.1 hereof) all of the assets of the Seller existing on the Closing Date
(as defined in Section 5.1 hereof) relating to or used or useful in the
conduct of the Business other than the Excluded Assets (as defined in
Section 1.2 hereof), whether real, personal, tangible or intangible,
including, without limitation, the following assets owned by Seller (all
such assets being sold hereunder are referred to collectively herein as the
Assets):
(a) all of the inventory of Seller relating to, used or useful in the
conduct of the Business, including, without limitation, that which is more
fully described on Schedule 1.1(a) hereto (the Inventory);
(b) all tangible personal property owned by Seller relating to, used or
useful in the conduct of the Business (such as machinery, equipment,
leasehold improvements, furniture and fixtures, and vehicles), including,
without limitation, that which is more fully described on Schedule 1.1(b)
hereto (collectively, the "Tangible Personal Property");
(c) all of Seller's uncompleted repair services constituting work in
progress relating to, used or useful in the conduct of the Business
including, without limitation, that which is described on Schedule 1.1(c)
hereto (the "Work in Progress");
(d) those leases, subleases, contracts, subcontracts, contract rights, and
agreements described on Schedule 1.1(d) hereto (collectively, the
Contracts);
(e) all of the permits, authorizations, certificates, approvals,
registrations, variances, waivers, exemptions, rights-of-way, franchises,
ordinances, orders, licenses and other rights of every kind and character
(collectively, the Permits) relating to the conduct of the Business or
the ownership or operation of any of the Assets , including, but not
limited to, that which is more fully described on Schedule 1.1(e) hereto
(collectively, the Seller Permits) ;
(f) all of the Seller's intangible assets relating to, used or useful in
the operation of the Assets or the conduct of the Business (the
"Intangibles"), including without limitation, (i) Seller's rights to any
patents, patent applications, trademarks and service marks (including
registrations and applications therefor), trade names, and copyrights and
written know-how, trade secrets, licenses and sublicenses and all other
similar proprietary data and the goodwill associated therewith used or held
in connection with the Business (collectively, the "Intellectual
Property"), (ii) the Seller's telephone numbers relating to the Business,
and (iii) the sales and promotional literature, computer software, customer
and supplier lists and all other records of the Seller relating to the
Assets or the Business, excluding the corporate minute books, accounting
records, files, tax returns and other financial data on whatever media,
relating to the Seller or the Excluded Assets (the "Retained Records");
(g) subject to Section 3.6 hereof, the goodwill and going concern value of
the Business; and
(h) all other or additional privileges, rights, interests, properties and
assets of the Seller of every kind and description and wherever located
that are related to, used or useful in the Business or intended for use in
the Business in connection with, or that are necessary for the continued
conduct of, the Business (other than the Excluded Assets).
1.2 Excluded Assets. The Assets shall not include the following
(collectively, the "Excluded Assets"): (i) all of the Seller's accounts
receivable and all other rights of the Seller to payment for services
rendered by the Seller before Closing (except service rendered in
connection with the Work in Progress), it being understood that all of
Seller's customers relating to the Business shall be billed on the Closing
Date (as defined in Section 5.1 hereof) for services or materials provided
through that date and that Buyer will forward any payment on such accounts
received by it to Seller within five (5) business days of receipt; (ii) all
cash accounts of the Seller and all petty cash of the Seller kept on hand
for use in the Business; (iii) all other receivables and prepaid expenses,
including all right, title and interest of the Seller in and to any prepaid
expenses, bonds, deposits and other current assets relating to any of the
Assets or the Business; (iv) the Retained Records; (v) the cash
consideration paid or payable by Buyer to Seller pursuant to Section 1.3
hereof; (vi) the assets listed on Schedule 1.2 hereto; (vii) all rights of
Seller covered by the Watson Hopper Distribution Agreement; and (viii) all
assets whether real, personal, tangible, or intangible related to the
Excluded Business and which are not also related to the Business.
1.3 Consideration for Assets. As consideration for the sale of the Assets
to Buyer and for the other covenants and agreements of Seller contained
herein, Buyer agrees to pay to Seller, on the Closing Date, the amount of
One Million Three Hundred Twenty-Seven Thousand Thirty-Five Dollars and
Seventy-Four Cents ($1,327,035.74) by wire transfer of immediately
available funds to an account designated by Seller.
1.4 Liabilities. Effective on the Closing Date, Buyer shall assume those,
and only those, liabilities and obligations of the Seller to perform the
Contracts described on Schedule 1.1(d) hereto to the extent such Contracts
have not been performed and are not in default on the Closing Date (the
"Assumed Liabilities"). On and after the Closing Date, the Seller shall be
responsible for any and all liabilities and obligations of the Seller other
than the Assumed Liabilities, including, without limitation, (a) any
obligations arising from the Seller's employment of employees of the
Seller; (b) any liabilities arising from or relating to Seller's failure to
be duly qualified or licensed to do business and in good standing as a
foreign corporation authorized to do business in all jurisdictions in which
the character of the properties owned or the nature of the business
conducted by Seller would make such qualification or licensing necessary;
(c) any failure to pay any taxes owed by Seller which are applicable to the
period ending with the Closing Date (including, specifically, all taxes
applicable to any of the Assets); (d) any liabilities resulting from or
related to Seller's violation of Environmental Laws (as hereinafter
defined); (e) any liabilities arising out of any matters listed on Schedule
2.1.9 hereto; (f) all products liability claims, as well as other
liabilities involving products sold or services provided by the Seller
prior to the Closing Date, and (g) any other liabilities or obligations
arising out of Seller's ownership or operation of the Assets or conduct of
the Business prior to the Closing Date or Seller's ownership of the
Excluded Assets or conduct of the Excluded Business whether before or after
the Closing Date (collectively, the "Retained Liabilities").
Article I
Representations and Warranties
Article I.1 Representations and Warranties of Seller. Seller represents and
warrants to
Buyer as follows:
Article I.1.1. Organization and Good Standing. Seller is a corporation duly
organized, validly existing and in good standing under the laws of its
state of organization, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and operate
the properties currently owned and operated by it, and is duly qualified or
licensed to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted by it would
make such qualification or licensing necessary except where the failure to
make such qualification would not have a material adverse effect on Seller.
Article I.1.1. Agreements Authorized and their Effect on Other Obligations.
The execution and delivery of this Agreement have been authorized by all
necessary corporate, shareholder and other action on the part of Seller,
and this Agreement is the valid and binding obligation of Seller
enforceable (subject to normal equitable principals) against Seller in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, debtor relief or similar laws
affecting the rights of creditors generally. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, will not conflict with or result in a violation or
breach of any term or provision of, nor constitute a default under (i) the
charter or bylaws (or other organizational documents) of Seller, (ii) any
obligation, indenture, mortgage, deed of trust, lease, contract or other
agreement to which Seller is a party or by which Seller or its properties
are bound; or (iii) any provision of any law, rule, regulation, order,
permits, certificate, writ, judgment, injunction, decree, determination,
award or other decision of any court, arbitrator, or other governmental
authority to which Seller or any of its properties are subject.
2.1.3 Contracts. Schedule 1.1(d) hereto sets forth a complete list of all
contracts, including leases under which Seller is lessor or lessee, that
relate to the conduct of the Business or the ownership or operation of the
Assets and are to be performed in whole or in part after the Closing Date.
All of the Contracts are in full force and effect and constitute valid and
binding obligations of Seller. Seller is not, and to the knowledge of
Seller, no other party to any of the Contracts is, in default thereunder,
and to the knowledge of Seller, no event has occurred which (with or
without notice, lapse of time, or the happening of any other event) would
constitute a default thereunder. No Contract has been entered into on terms
which could reasonably be expected to have an adverse effect on the use of
the Assets by Buyer. Seller has not received any definitive information
which would cause Seller to conclude that any customer of Seller related to
the Business representing more than ten (10%) percent of Seller's total
revenue from the Business for the fiscal year of Seller ended April 30,
1998 will (or is likely to) cease doing business with Buyer (or its
successors) as a result of the consummation of the transactions
contemplated hereby. All of the Contracts are assignable (and are hereby
validly assigned) to Buyer without the consent of any other party thereto.
2.1.4 Title to and Condition of Assets. Seller has good, indefeasible and
marketable title to all of the Assets, free and clear of any Encumbrances
(defined below). Assets are being transferred as is, where is. Seller makes
no warranties as to general condition or fitness for a particular purpose
or otherwise regarding the condition of the Assets save and except as
provided in this Agreement. No notice of any violation of any law, statute,
ordinance, or regulation relating to any of the Assets has been received by
Seller or any director, officer, or shareholder of Seller, except such as
have been fully complied with. The term "Encumbrances" means all liens,
security interests, pledges, mortgages, deeds of trust, claims, rights of
first refusal, options, charges, restrictions or conditions to transfer or
assignment, liabilities, obligations, privileges, equities, easements,
rights of way, limitations, reservations, restrictions, and other
encumbrances of any kind or nature.
2.1.5 Licenses and Permits. Schedule 1.1(e) hereto sets forth a complete
list of all Permits necessary under law or otherwise for the conduct of the
Business and the ownership, operation, maintenance and use of the Assets in
the manner in which the Business is currently being conducted and in the
manner in which the Assets are now being operated, maintained and used .
Each of the Seller Permits and Seller's rights with respect thereto is
valid and subsisting, in full force and effect, and enforceable by Seller
subject to administrative powers of regulatory agencies having
jurisdiction. Seller is in compliance in all material respects with the
terms of each of the Seller Permits. None of the Seller Permits has been,
or to the knowledge of Seller are threatened to be, revoked, canceled,
suspended or modified. Upon consummation of the transactions contemplated
hereby, all of the Seller Permits shall be assignable (and are hereby
assigned) to Buyer without the consent of any regulatory agency or any
other third party. On and after the Closing Date, each of the Seller
Permits and Buyer's rights with respect thereto will be valid and
subsisting in full force and effect, and enforceable by Buyer subject only
to the administrative powers of regulatory agencies having jurisdiction
over the applicable Seller Permit.
2.1.6 Financial Information. Seller has delivered to Buyer copies of
certain financial information of Seller related to the Business, copies of
which are attached hereto as Schedule 2.1.6 (collectively, the "Seller
Financial Information"), and include a "Gross Margin Statement" as of March
31, 1998 (the "Statement Date"). The Seller Financial Information is true,
correct and complete in all material respects and presents fairly and fully
such financial information of the Business for the periods indicated
thereon. The inventories of Seller, which have thereafter been acquired by
Seller, consist of items of a quality and quantity salable in the normal
course of the applicable Business. The values at which such inventories are
carried are consistent with the normal inventory level and practices of
Seller with respect to the Business.
2.1.7 Absence of Certain Changes and Events. Since the Statement Date,
there has not been: (a) Financial Change. Any adverse change in the Assets
or the Business or prospects of the Business;
(a) Property Damage. Any damage, destruction, or loss to any of the Assets
(whether or not covered by insurance);
(a) Waiver. Any waiver or release of a material right of or claim held by
Seller related to the Assets or the Business;
(a) Change in Assets. Any acquisition, disposition, transfer, encumbrance,
mortgage, pledge or other encumbrance of any of the Assets other than in
the ordinary course of business;
(a) Labor Disputes. Any labor disputes between the Seller and the
Employees, as defined in Section 3.2 hereof; or
(a) Other Changes. Any other event or condition known to the Seller that
particularly pertains to and has or might have a material adverse effect on
the Assets, the operations of the Business or the prospects of the
Business.
2.1.8 Necessary Consents. Seller has obtained and delivered to Buyer all
consents to assignment or waivers thereof required to be obtained from any
governmental authority or from any other third party in order to validly
transfer the Assets hereunder, including, without limitation, any consents
required to assign the Contracts and the Seller Permits.
2.1.9 Environmental Matters. None of the current or past operations of the
Business, any of the Assets or the Land, as that term is defined in that
certain Real Estate Purchase Agreement (the "Real Estate Purchase
Agreement") between Charley R. Smith and Julee W. Smith, as Co-Trustees of
the Charley and Julee Smith Living Trust (the "Smith Trust") and Charley R.
Smith and Julee W. Smith, individually (the "Trustors"), dated May 19,
1998, is being or has been conducted or used in such a manner as to
constitute a violation of any Environmental Law (defined below). Except as
disclosed on Schedule 2.1.9 hereto Seller has not received any notice
(whether formal or informal, written or oral) from any entity, governmental
agency or individual regarding any existing, pending or threatened
investigation or inquiry related to violations of any Environmental Law or
regarding any claims for remedial obligations or contribution for removal
costs or damages under any Environmental Law. There are no writs,
injunction decrees, orders or judgments outstanding, or lawsuits, claims,
proceedings or investigations pending or, to the knowledge of Seller ,
threatened relating to the ownership, use, maintenance or operation of the
Assets, the conduct of the Business or the Land, nor, to the knowledge of
Seller, is there any basis for any of the foregoing. Buyer is not required
to obtain any permits, licenses or similar authorizations pursuant to any
Environmental Law in effect as of the Closing Date to operate and use any
of the Assets for their current or proposed purposes and uses. To the
knowledge of Seller, the Assets include all environmental and pollution
control equipment necessary for compliance with applicable Environmental
Law. No Hazardous Materials (defined below) have been or are currently
being used by Seller in the operation of the Assets, the Business or the
Land. No Hazardous Materials are or have ever been situated on or under the
Land, or incorporated into any of the Assets. There are no underground
storage tanks (as defined under Environmental Law) currently located under
the Land, and any underground storage tanks previously located on or under
the Land have been removed in compliance with all applicable Environmental
Law. There are no environmental conditions or circumstances, including the
presence or release of any Hazardous Materials, on any property presently
or previously owned or leased by Seller related to the Business or Assets,
including but not limited to, the Land, or on any property on which
Hazardous Materials generated by Seller's operations of the Business or the
use of the Assets were disposed of, which would result in an adverse change
in the Assets, the Business or business prospects of the Business. The term
Environmental Law means any and all laws, rules, orders, regulations,
statutes, ordinances, codes, decrees, and other legally enforceable
requirements (including, without limitation, common law) of the United
States, or any state, regional, city, local, municipal or other
governmental authority or quasi-governmental authority, regulating,
relating to, or imposing environmental standards of conduct concerning
protection of the environment or human health, or employee health and
safety as from time to time has been or is now in effect. The term
"Hazardous Materials" means (x) asbestos, polychlorinated biphenyls, urea
formaldehyde, lead based paint, radon gas, petroleum, oil, solid waste,
pollutants and contaminants, and (y) any chemicals, materials, wastes or
substances that are defined, regulated, determined or identified as toxic
or hazardous in any Environmental Law.
2.1.10 No ERISA Plans or Labor Issues. No employee benefit plan of Seller,
whether or not subject to any provisions of the Employee Retirement Income
Security Act of 1974, as amended, will by its terms or applicable law,
become binding upon or an obligation of Buyer. Seller has not engaged in
any unfair labor practices which could reasonably be expected to result in
an adverse effect on the Assets. Seller does not have any dispute with any
of the Employees or any of its former employees, and there are no labor
disputes or, to the knowledge of Seller, any disputes threatened by current
or former employees of Seller which would have an adverse effect on the
Assets or the Business.
2.1.11 Investigations; Litigation. No investigation or review by any
governmental entity with respect to Seller or any of the transactions
contemplated by this Agreement is pending or, to the knowledge of Seller,
threatened, nor has any governmental entity indicated to Seller an
intention to conduct the same. There is no suit, action, or legal,
administrative, arbitration, or other proceeding or governmental
investigation pending to which Seller is a party or might become a party or
any other unasserted claims against Seller which would have an adverse
effect on the Assets or the Business.
2.1.12 Absence of Certain Business Practices. Neither Seller, nor any
officer, employee or agent of Seller, nor any other person acting on behalf
of Seller, has, directly or indirectly, within the past five years, given
or agreed to give any gift or similar benefit to any customer, supplier,
government employee or other person who is or may be in a position to help
or hinder the profitable conduct of the Business or the profitable use of
the Assets (or to assist Seller in connection with any actual or proposed
transaction) which if not given in the past, might have had an adverse
effect on the profitable conduct of the Business or the profitable use of
the Assets, or if not continued in the future, might adversely affect the
profitable conduct of the Business or the profitable use of the Assets.
2.1.13 Solvency. Seller is not presently insolvent, nor will Seller be
rendered insolvent by the occurrence of the transactions contemplated by
this Agreement. The term "insolvent", with respect to Seller, means that
the sum of the present fair and saleable value of Seller's assets does not
and will not exceed its debts and other probable liabilities, and the term
"debts" includes any legal liability whether matured or unmatured,
liquidated or unliquidated, absolute fixed or contingent, disputed or
secured or unsecured.
2.1.14 Untrue Statements. This Agreement and all other agreements executed
by Seller and delivered to Buyer do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Seller has also
made available to Buyer true, complete and correct copies of all contracts,
documents concerning all litigation and administrative proceedings,
licenses, permits, insurance policies, lists of suppliers and customers,
and records relating principally to the Business and the Assets, and such
information covers all commitments and liabilities of Buyer relating
principally to the Business and the Assets.
2.1.15 Finder's Fee. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by Seller and its
counsel directly with Buyer and its counsel, without the intervention of
any other person in such manner as to give rise to any valid claim against
any of the parties hereto for a brokerage commission, finder's fee or any
similar payment.
2.1.16 Taxes. All federal, state and local taxes assessed or assessable
against the Assets for periods prior to January 1, 1998 have been paid by
Seller and the Assets will be conveyed to Buyer free and clear of any such
taxes or claims therefor. All taxes assessed against the Assets for the
period commencing January 1, 1998 will be prorated through the Closing Date
(based on 1997 assessed values) with the Seller paying to Buyer at Closing
an amount equal to the portion of such taxes applicable to the period
between January 1, 1998 and the Closing Date. Buyer agrees to pay all such
taxes on or before the due date of such taxes to the appropriate taxing
authority.
2.1.17 Bulk Sales. Seller has complied with all provisions of any
applicable, laws, rules or regulations relating to "Bulk Sales" (as that
term is interpreted in accordance with Uniform Commercial Code as enacted
in the jurisdiction in which the Assets are located and in which this
Agreement is to be enforced).
2.1.18 Intellectual Property. The Intangibles are all of the intangible
assets relating to, used or useful in the operation of the Assets or the
conduct of the Business. To the knowledge of Seller, the Intellectual
Property is owned or licensed by the Seller free and clear of any
Encumbrances; Seller has not granted to any other person any license to use
any of the Intellectual Property; and, to the knowledge of Seller, use of
the Intellectual Property will not, and the conduct of the Business did
not, infringe, misappropriate or conflict with the intellectual property
rights of others. The Seller has not received any notice of infringement,
misappropriations or conflict with the intellectual property rights of
others in connection with the use by Seller of the Intellectual Property.
Article I.1 Representations and Warranties of Buyer. Buyer represents and
warrants to Seller as follows:
Article I.1.1. Organization and Good Standing. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware, has full requisite corporate power and authority to
carry on its business as it is currently conducted, and to own and operate
the properties currently owned and operated by it, and is duly qualified or
licensed to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of
the properties owned or the nature of the business conducted by it would
make such qualification or licensing necessary.
Article I.1.1. Agreement Authorized and its Effect on Other Obligations.
The consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of Buyer,
and this Agreement is a valid and binding obligation of Buyer enforceable
(subject to normal equitable principles) in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, debtor relief or similar laws affecting the rights of
creditors generally. The execution, delivery and performance of this
Agreement by Buyer will not conflict with or result in a violation or
breach of any term or provision of, or constitute a default under (a) the
Certificate of Incorporation or Bylaws of Buyer or (b) any obligation,
indenture, mortgage, deed of trust, lease, contract or other agreement to
which Buyer or any of its property is bound.
Article I.1.1. Consents and Approvals. No consent, approval or
authorization of, or filing of a registration with, any governmental or
regulatory authority, or any other person or entity is required to be made
or obtained by Buyer in connection with the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby.
Article I.1.1. Finder's Fee. All negotiations relative to this Agreement
and the transactions contemplated hereby have been carried on by Buyer and
its counsel directly with the Seller and its counsel, without the
intervention by any other person as the result of any act of Buyer in such
a manner as to give rise to any valid claim against any of the parties
hereto for any brokerage commission, finder's fee or any similar payments.
Article I
Additional Agreements
3.1 Noncompetition. Except as otherwise consented to or approved in writing
by Buyer, Seller agrees that for a period of 60 months from the Closing
Date (the "Noncompetition Period"), Seller will not, directly or indirectly
acting alone or as a member of a partnership or as a consultant,
representative, advisor, lender (including gifts used for capitalization),
holder of, or investor in any security of any class of any corporation or
other business entity (i) own, lease, or operate a facility or sell service
parts manufactured by Watson Hopper in the states of Wyoming, Colorado,
Montana, North Dakota, Utah, Nebraska, and South Dakota, as well as the
area which is within a 25 mile radius from the city limits of Farmington,
New Mexico (collectively, the "Territories") which would be in competition
with any of the Business conducted by Buyer or any affiliate of Buyer; (ii)
request any customers or suppliers of Buyer or any affiliate of Buyer to
curtail or cancel any of their Business conducted with Buyer or any
affiliate of Buyer; (iii) disclose to any person, firm or corporation any
trade, technical or technological secrets of the Business other than any
such information which relates to the Excluded Business, or any other
business of Buyer or any affiliate of Buyer or any details of their
organization or business affairs not otherwise available in the public
domain; or (iv) induce or actively attempt to influence any Employee, as
hereinafter defined, or an Employee of Buyer or any affiliate of Buyer to
terminate his or her employment. It is specifically understood and agreed
by the parties hereto that in the event a customer or potential customer of
Buyer in the Territories desires to utilize the services of Seller from
facilities outside the Territories during the Noncompetition Period, such a
transaction will not be in violation of this Section 3.1. Seller agrees
that if either the length of time or geographical area set forth in this
Section 3.1 is deemed too restrictive in any court proceeding, such court
may reduce such restrictions to those which it deems reasonable under the
circumstances. Seller further agrees and acknowledges that the Buyer and
its affiliates do not have any adequate remedy at law for the breach or
threatened breach by Seller of this covenant, and agrees that the Buyer or
any affiliate of Buyer may, in addition to the other remedies which may be
available to it hereunder, file a suit in equity to enjoin Seller from such
breach or threatened breach. If any provisions of this Section 3.1 are held
to be invalid or against public policy, the remaining provisions shall not
be affected thereby. Seller acknowledges that the covenants set forth in
this Section 3.1 are being executed and delivered by Seller in
consideration of the covenants of Buyer contained in this Agreement, and
for other good and valuable consideration, receipt of which is hereby
acknowledged.
3.2 Hiring Employees. Schedule 3.2 hereto is a complete and accurate
listing of certain employees of Seller that devote their full time and
effort in the conduct of the Business (the "Employees"). Effective as of
the Closing Date, all of the Employees shall be offered employment by Buyer
subject to such Employees meeting Buyer's standard employment eligibility
requirements. Buyer shall have no liability or obligation with respect to
any employee benefits of any Employee except those benefits that accrue
pursuant to such Employees' employment with Buyer on or after the Closing
Date . Seller shall cooperate with Buyer in connection with any offer of
employment from Buyer to the Employees and use its best efforts to cause
the acceptance of any and all such offers. Seller acknowledges its
understanding that it is Buyer's intent that all Employees hired by Buyer
shall be at-will employees of Buyer. Buyer agrees that as to each Employee
hired by Buyer that such Employee shall be hired at each such Employee's
respective current salary with credit for prior service with Seller as it
relates to compensation and benefit plans of Buyer.
3. 3 Allocation of Purchase Price of Assets. The parties hereto agree to
allocate the purchase price paid by Buyer for the Assets hereunder as set
forth on Schedule 3.3 hereto, and shall report this transaction for federal
income tax purposes in accordance with the allocation so agreed upon. The
parties hereto for themselves and for their respective successors and
assigns covenant and agree that they will file coordinating Form 8594's in
accordance with Section 1060 of the Internal Revenue Code of 1986, as
amended, with their respective income tax returns for the taxable year that
includes the Closing Date .
3.4 Real Estate Purchase. Concurrent with the execution and delivery
hereof, the Smith Trust and Buyer shall have entered into the Real Estate
Purchase Agreement (and consummated the transactions contemplated thereby)
pursuant to which the Smith Trust will have conveyed to Buyer the real
property owned by the Smith Trust described on Schedule 3.4 hereto.
3.5 Further Assurances. From time to time, as and when requested by any
party hereto, any other party hereto shall execute and deliver, or cause to
be executed and delivered, such documents and instruments and shall take,
or cause to be taken, such further or other actions as may be reasonably
necessary to effect the transactions contemplated hereby.
3.6 Use of Name. Seller consents to the use of the name "Watson Oilfield
Service & Supply, Inc." (or a substantially similar name) in the
Territories. Seller agrees to execute any and all instruments, certificates
or other documents and take any and all action as may be necessary or
appropriate of Seller for Buyer to use such name in the Territories. Buyer
agrees that prior to a change in control of Buyer that Buyer shall obtain
the written consent of Seller to the continued use of the name "Watson Oil
Field Service & Supply, Inc." by Buyer, or change the name of Buyer to
delete the use of the name "Watson." For purposes of this Section 3.6, the
term "control" shall be ownership of voting rights of not less than 70% of
the voting rights related to all issued and outstanding securities of
Buyer. Additionally, Buyer agrees that it will not sell or transfer the
name "Watson Oilfield Service & Supply, Inc." (or a substantially similar
name containing the name "Watson") to a non-affiliate of Buyer without the
prior written consent of Seller."
3.7 Use of Watson Hopper Blueprints. Seller agrees to make available to
Buyer and allow Buyer to use the blueprints and other technical information
necessary for Buyer to conduct the Business for the term and any renewals
and extensions of the Watson Hopper Distribution Agreement.
3.8 Guaranty by Seller of Indemnification under Real Estate Purchase
Agreement. Seller agrees to and hereby unconditionally guarantees the
performance of any and all indemnifications and obligations of the Smith
Trust or the Trustors under the terms of the Real Estate Purchase Agreement
(the "Guaranty"). Seller waives notice of any amendments, changes or
modifications to the Real Estate Purchase Agreement or any agreements or
obligations of any of the parties to the Real Estate Purchase Agreement
which survive the Closing (as that term is defined in the Real Estate
Purchase Agreement and the use of the term "Closing" as defined in the Real
Estate Purchase Agreement shall be limited to use only in this Section
3.8). Seller further expressly waives notice of non-payment, protest, and
notice of protest with respect to the indebtedness and obligations covered
by the Guaranty. It shall not be necessary for Buyer, in order to enforce
payment by Seller under the Guaranty, to first institute suit or to pursue
or exhaust its remedies against either the Smith Trust or the Trustors.
Seller agrees that this Guaranty shall continue in full force and effect,
notwithstanding the termination of the Smith Trust or the death of either
of the Trustors or the release by agreement or by operation of law or the
extension of time to the Smith Trust or either of the Trustors as to any of
their obligations then existing. Seller acknowledges that the covenants set
forth in this Section 3.8 are being delivered by Seller in consideration of
the covenants of Buyer contained in this Agreement, and for other good and
valuable consideration, receipt of which is hereby acknowledged.
Article I
Indemnification Article I.1 Indemnification by Seller. In addition to any
other remedies available to Buyer under this Agreement, or at law or in
equity, Seller shall indemnify, defend and hold harmless Buyer and its
affiliates, officers, directors, employees, agents and stockholders,
against and with respect to any and all claims, costs, damages, losses,
expenses, obligations, liabilities, recoveries, suits, causes of action and
deficiencies, including interest, penalties and reasonable attorneys' fees
and expenses (collectively, the "Damages") that such indemnitee shall incur
or suffer (whether the Damages are suffered or incurred by a Buyer
Indemnified Party directly or as a result of a third party claim against
such Buyer Indemnified Party), which arise, result from or relate to (i)
any breach of, or failure by Seller to perform, its representations,
warranties, covenants or agreements in this Agreement or in any schedule,
certificate, exhibit or other instrument furnished or delivered to Buyer by
Seller under this Agreement or (ii) the Retained Liabilities, provided
however, that (x) Seller shall not be required to so indemnify, defend and
hold harmless Buyer against and with respect to any Damages incurred as a
result of a breach by Seller of its representations and warranties in this
Agreement, or in any schedule, certificate, exhibit or other instrument
furnished or delivered by Seller to Buyer under this Agreement for which
Buyer fails to provide written notice of a claim for such damages to Seller
on or before the expiration of the survival period. (As specified in
Section 6.1 hereof) of the specific representation or warranty alleged to
have been breached, and (y) Seller shall not be required to so indemnify,
defend and hold harmless Buyer unless and until the Damages equal or exceed
$25,000 in the aggregate (the "Indemnification Threshold"), at which time
Seller shall indemnify, defend and hold harmless Buyer for all Damages,
including but not limited to those Damages less than the Indemnification
Threshold.
Article I.1 Indemnification by Buyer. In addition to any other remedies
available to Seller under this Agreement, or at law or in equity, Buyer
shall indemnify, defend and hold harmless Seller against and with respect
to any and all Damages that such indemnitees shall incur or suffer, which
arise, result from or relate to (i) any breach of, or failure by Buyer to
perform, any of its representations, warranties, covenants or agreements in
this Agreement or in any schedule, certificate, exhibit or other instrument
furnished or delivered to Seller by or on behalf of Buyer under this
Agreement, (ii) the Assumed Liabilities, or (iii) except to the extent that
any Damages arise out of a breach by Seller of any of its respective
representations, warranties or covenants contained herein, the Buyer's
conduct of the Business after the Closing Date save and except for the
Retained Liabilities, provided however, that (x) Buyer shall not be
required to so indemnify, defend and hold harmless Seller against and with
respect to any Damages incurred as a result of a breach by Buyer of its
representations and warranties in this Agreement or in any schedule,
certificate, exhibit, or other instrument furnished or delivered by Buyer
to Seller under this Agreement for which Seller fails to provide written
notice of a claim for such Damages to Buyer on or before the expiration of
the survival period (as specified in Section 6.1 hereof), of the specific
representation or warranty alleged to have been breached, and (y) Buyer
shall not be required to so indemnify, defend and hold harmless Seller
unless and until the Damages equal or exceed $25,000 in the aggregate (the
"Indemnification Threshold"), at which time Buyer shall indemnify, defend
and hold harmless Seller for all Damages, including but not limited, to
those Damages less than the Indemnification Threshold.
Article I.1 Indemnification Procedure. If any party hereto discovers or
otherwise becomes aware of an indemnification claim arising under Section
4.1 or 4.2 of this Agreement, such indemnified party shall give written
notice to the indemnifying party, specifying such claim, and may thereafter
exercise any remedies available to such party under this Agreement;
provided, however, that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of any
obligations hereunder, to the extent the indemnifying party is not
materially prejudiced thereby. Further, promptly after receipt by an
indemnified party hereunder of written notice of the commencement of any
third party action or proceeding against such indemnified party with
respect to which a claim for indemnification may be made pursuant to this
Article 4, such indemnified party shall, if a claim in respect thereof is
to be made against any indemnifying party, give written notice to the
latter of the commencement of such third party action; provided, however,
that the failure of any indemnified party to give notice as provided herein
shall not relieve the indemnifying party of any obligations hereunder, to
the extent the indemnifying party is not materially prejudiced thereby. In
case any such third party action is brought against an indemnified party,
the indemnifying party shall be entitled to participate in and to assume
the defense thereof, jointly with any other indemnifying party similarly
notified, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after such notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently incurred by
the latter in connection with the defense thereof unless the indemnifying
party has failed to assume the defense of such third party claim and to
employ counsel reasonably satisfactory to such indemnified person. An
indemnifying party who elects not to assume the defense of a third party
claim shall not be liable for the fees and expenses of more than one
counsel in any single jurisdiction for all parties indemnified by such
indemnifying party with respect to such third party claim or with respect
to third party claims separate but similar or related in the same
jurisdiction arising out of the same general allegations. Notwithstanding
any of the foregoing to the contrary, the indemnified party will be
entitled to select its own counsel and assume the defense of any third
party action brought against it if the indemnifying party fails to select
counsel reasonably satisfactory to the indemnified party, the expenses of
such defense to be paid by the indemnifying party. No indemnifying party
shall consent to entry of any judgment or enter into any settlement with
respect to a third party claim without the consent of the indemnified
party, which consent shall not be unreasonably withheld, or unless such
judgment or settlement includes as an unconditional term thereof the giving
by the third party claimant or plaintiff to such indemnified party of a
release from all liability with respect to such third party claim. No
indemnified party shall consent to entry of any judgment or enter into any
settlement of any such third party action, the defense of which has been
assumed by an indemnifying party, without the consent of such indemnifying
party, which consent shall not be unreasonably withheld or delayed.
Article V
THE CLOSING 5.1 Time and Place. The consummation of the transactions
contemplated by this Agreement (the "Closing') shall take place on the date
hereof (the "Closing Date") at the offices of the Maddox Law Firm,
beginning at 9:00 a.m. on the Closing Date.
5.2 Deliveries. At the Closing, the following shall occur: (a) Seller shall
transfer good, marketable and valid title to the Assets to Buyer, free and
clear of any and all Encumbrances by execution and delivery of a Bill of
Sale and Assignment Agreement and such other documents as may be requested
by Buyer;
(b) The Maddox Law Firm, counsel to Seller, shall deliver its opinion of
counsel covering such matters as may be requested by Buyer; and
(c) Buyer shall pay to Seller in immediately available funds, the purchase
price specified in Section 1.2 hereof.
(d) The execution and delivery of a Distribution Agreement between Watson
Hopper and Buyer (the "Watson Hopper Distribution Agreement") acceptable to
Buyer.
(e) The execution and delivery of a Distribution Agreement between Cavins
Oil Well Tools, a division of Dawson Enterprises, a California corporation
and Buyer acceptable to Buyer.
(f) The execution and delivery of a Non-Competition Agreement between the
Buyer and Charley R. Smith, Julee W. Smith, and R. Finn Smith.
Article I I Miscellaneous
6.1 Survival of Representations, Warranties and Covenants. All
representations and warranties made by the parties hereto shall survive until
three (3) years after the Closing Date, notwithstanding any investigation made
on the part of the parties hereto; provided however, that the representations
and warranties made in Section 2.1.16 hereof shall survive until the expiration
of applicable statute of limitations associated with tax issues. All statements
contained in the certificate, schedule, exhibit or other instrument delivered
pursuant to this Agreement shall be deemed to have been representations and
warranties by the respective party or parties, as the case may be, and shall
also survive until three (3) years after the Closing Date despite any
investigation made by any party hereto or on its behalf. All covenants and
agreements contained herein shall survive as provided herein.
6.2 Entirety. This Agreement embodies the entire agreement among the
parties with respect to the subject matter hereof, and all prior agreements
between the parties with respect thereto are hereby superseded in their
entirety.
6.3 Counterparts. Any number of counterparts of this Agreement may be
executed and each such counterpart shall be deemed to be an original instrument,
but all such counterparts together shall constitute but one instrument.
6.4 Notices and Waivers. Any notice or waiver to be given to any party
hereto shall be in writing and shall be delivered by courier, sent by facsimile
transmission or first class registered or certified mail, postage prepaid,
return receipt requested:
If to Buyer
Addressed to: With a copy to:
Watson Oilfield Service & Supply, Inc. Cotton, Bledsoe, Tighe & Dawson
Two Tower Center, 20th Floor 500 W. Illinois, Suite 300
East Brunswick, New Jersey 08816 Midland, Texas 79701-4337
Attn: General Counsel Attn: Richard T. McMillan
Facsimile: (908) 247-5148 Facsimile: (915) 682-3672
If to Seller or any of the Shareholders
Addressed to: With a copy to:
Watson Truck & Supply, Inc. Maddox Law Firm
Attention: Chairman of the Board Attention: James M. Maddox
P. O. Box 10 P. O. Box 2508
Hobbs, New Mexico 88241 Hobbs, New Mexico 88241
Facsimile: (505) 397-2646
or or
Watson Truck & Supply, Inc. Maddox Law Firm
Attention: Chairman of the Board Attention: James M. Maddox
1501 N. Grimes 220 W. Broadway, Suite 200
Hobbs, New Mexico 88240 Hobbs, New Mexico 88240
Any communication so addressed and mailed by first-class registered or
certified mail, postage prepaid, with return receipt requested, shall be deemed
to be received on the third business day after so mailed, and if delivered by
courier or facsimile to such address, upon delivery during normal business hours
on any business day.
6.5 Captions. The captions contained in this Agreement are solely for
convenient reference and shall not be deemed to affect the meaning or
interpretation of any article, section, or paragraph hereof.
6.6 Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of and be enforceable by the successors and assigns of the
parties hereto.
6.7 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions shall remain in full force and effect and shall in no way be
affected, impaired or invalidated. It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such which may
be hereafter declared invalid, void or unenforceable.
6.8 Applicable Law. This Agreement shall be governed by and construed and
enforced in accordance with the applicable laws of the State of New Mexico.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective corporate names by their respective duly authorized
representatives, all as of the day and year first above written.
BUYER:
WATSON OILFIELD SERVICE & SUPPLY, INC.
By:
Name: William L. Hubbell
Title: President
SELLER:
WATSON TRUCK & SUPPLY, INC.
By:
Name: Charley R. Smith
Title: Chairman of the Board and President
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement Agreement dated as of the 5th day of May,1998,
execute by BURNETT CORPORATION, a Texas corporation; B.O. CORNELIUS; ANN C.
FATHEREE; JAMES R. CORBIN; MARY JO MITTON; BIRKE B. MARSH; H. COBB; BIRKE B.
MARSH, TRUSTEE OF THE CORBIN TRUST 1976; JAMIE KIM CORBIN; JOSH ALAN CORBIN; an
JASON J. plus WILBANKS EXPLORATION, INC. an JEFFREY G. SHRA ER (the Wilbanks
Group), (in ivi ually, an collectively, an ODESSA EXPLORATION, INCORPORATED ,
Delaware corporation, ('Buyer').
In consideration of the mutual promises containe herein, the benefits to be
erive byeach party h ereun er an other goo an valuable consi eration the receipt
an sufficiency ofwhich are hereby acknowle ge , Sellers an Buyer agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.01 - Purchase and Sale - Subject to the terms an con itions of this Agreement,
Sellers agree to sell an convey to Buyer ad Buyer agrees to purchase an pay for
the following describe assets (hereinafter referre to as the Properties:
(a) The interests escribe in Exhibit A hereto in an to the oil an gas
leases escribe in Exhibit hereto (the Leases ) insofar as they cover the lan
(the Lan s also escribe in Exhibit hereto, together with correspon ing un ivi e
interests in
(i) all rights, privileges, benefits, an powers conferre upon the hol er of
the Leases with respect to the use an occupation of the surface of the Lan s
that may be necessary, convenient, or inci ental to the possession an enjoyment
of the Leases,
(ii) all rights in respect of any poole or unitize acreage locate in whole
or in part within the Lan s by virtue of the Leases, inclu ing rights to pro
uction from the pool or unit allocate to any lease being a part thereof, regar
less of whether such pro uction is from the Lan s,
(iii) all rights, options, titles, an interests of Sellers granting Sellers
the right to obtain, or otherwise earn interests within the Lan s no matter how
earned,
(iv) all tenements, here itaments, an appurtenances belonging to any of the
foregoing, an
(v) any an all geological ata an reports, subject to all applicable
licensing an other agreements an all restrictions on transfer, inclu ing but not
limite to all well logs, core reports, seismic ata, interprete maps, contour
maps, isopach maps, etc.
(b) All permits, licenses, servitu es, rights-of-way, ivision or ers, gas
purchase an sale agreements, inclu ing without limitation gas contracts, cru e
oil purchase an sale agreements (wherein Sellers are selling parties), surface
leases, farmin agreements, farmout agreements, bottom-hole agreements, acreage
contribution agreements, operating agreements, unit agreements, processing
agreements, options, leases of equipment or facilities, an other contracts,
agreements, an rights that are owne by Sellers in whole or in part, an that are
appurtenant to the Properties or use or hel for use in connection with the
ownership or operation of the Properties or with the pro uction, treatment,
sale, or isposal of water, hy rocarbons an associate substances therefrom or
thereon; an
(c) All of the real, personal an mixe property use in the operation of the
Properties (whether locate on or off the Properties, but exclu ing all vehicles
use in the operation of the Properties) owne by Sellers in whole or in part or
cre ite to the joint account of Seller inclu ing, but not limite to (i) the
wells ( Wells ) escribe on Exhibit hereto, all wellhea equipment, fixtures
(inclu ing, but not limite to, fiel separators an liqui extractors), pipe,
casing, an tubing; (ii) all pro uction, gathering, treating, processing,
compression, ehy ration, salt water isposal, injection, gathering line an
pipeline equipment an facilities; (iii) all tanks, machines, equipment, tools,
ies, vessels an other facilities; an
( ) All of the files, recor s, ocuments, correspon ence an ata now in
the possession or control of Sellers that relate to the items escribe in
sub-paragraphs (a), (b), or (c) above, without 1imitation (the Recor s ).
1.02 Effective Time . The purchase and sale of the Properties shall be
effective as of 7:00 a.m. on May 1, 1998, local time at the location of the
Properties (herein calle the Effective Time ).
ARTICLE II
PURCHASE PRICE
2.01 - Purchase Price . The purchase price payable by Buyer for the
Properties shall be Nine Million One Hun re Forty-Three Thousan an No/100
ollars ($9,143,000.00) cash, in imme iately available fun s (the Purchase
Price ).
2.02 - A justments to Purchase Price . The Purchase Price shall be
subject to a justment as follows:
(a) The Purchase Price shall be a juste upwar as follows:
(i) The value of all merchantable, allowable oil in storage at the
Effective Time, above the pipeline connection;
(ii) The amount of all verifiable expen itures un er applicable
operating agreements or other similar arrangements or agreements pai by
Sellers in connection with the operation of the Property in accor ance with
this Agreement for work actually performe subsequent to the Effective Time;
(iii) Such increases as are ue to Upwar A justments ( efine below) as
provi e in Article V hereof;
(iv) Any other amount agree upon by Sellers an Buyer.
(b) The Purchase Price shall be a juste ownwar as follows:
(i) Procee s receive by Sellers from the sale of oil gas or other hy
rocarbons attributable to the Properties an which are pro uce after the
Effective Time;
(ii) An amount equal to all unpai a valorem, property, pro uction,
severance an similar taxes an assessments (but not inclu ing income taxes)
base upon or measure by the ownership of property or the pro uction of
hy rocarbons or the receipt of procee s therefrom accruing to the
Properties prior to the Effective Time (Taxes will be prorate base on 1997
taxes);
(iii) Any re uctions for efective Interests as provi e in Article V;
(iv) Any casualty losses; an
(v) Any other amount agree upon by Sellers an Buyer;
(c) The Purchase Price shall be a juste upwar or ownwar , as
necessary, as follows:
(i) to the extent Sellers '92 actual working interest an net revenue
interest in each of the wells iffers than that shown on Exhibit "A;" an
(ii) any material non-consent operations in properties which result in
an increase or ecrease in Sellers '92 interest in the property;
2.03 - Allocation of Purchase Price. Each party will use its own
allocation of the Purchase Price. In the event there is a efective Interest
or Environmental Con ition affecting a Property, the parties shall mutually
agree upon the value of such affecte Property.
ARTICLE III
Representations an Warranties
3.01 - Representations an Warranties of Sellers . Sellers severally,
but not jointly, represent an warrant to Buyer as follows.
(a) As to any corporate Seller, such Seller is a corporation uly
organize , vali ly existing an in goo stan ing un er the laws of its juris
iction of incorporation, is legally authorize to con uct business in each
juris iction where it con ucts business, an has all requisite corporate
power an authority to own an lease the properties an assets it currently
owns an leases an to carry on its business as such business is currently
con ucte .
(b) Sellers have all requisite power an authority to execute an eliver
this Agreement, to consummate the transactions contemplate hereby an to
perform all the terms an con itions hereof to be performe by them. The
execution an elivery of this Agreement by Sellers, the performance by
Sellers of all the terms an con itions hereof to be performe by them an the
consummation of the transactions contemplate hereby have been, or will be,
uly authorize an approve by the Boar of irectors of Sellers as to each
corporate Seller. This Agreement has been uly execute an elivere by Sellers
an constitutes the vali an bin ing obligation of Sellers, enforceable
against them in accor ance with its terms, except as such enforceability
may be limite by bankruptcy, insolvency or other laws relating to or
affecting the enforcement of cre itors rights generally an general
principles of equity (regar less of whether such enforceability is consi
ere in a procee ing in equity or at law).
(c) This Agreement an the execution an elivery hereof by Sellers o
not, an the fulfillment an compliance with the terms an con itions hereof
an the consummation of the transactions contemplate hereby will not:
(i) Conflict with, or require the consent of any person un er, any
of the
terms, con itions or provisions of the articles or certificate of
incorporation, as applicable, or bylaws of any corporate Seller;
(ii) Violate any provision of, require any filing, consent,
authorization or approval un er, any legal requirement applicable to
or bin ing upon Sellers;
(iii) Conflict with, result in a breach of, constitute a efault un er
(without regar to requirements of notice or the lapse of time or both),
accelerate or permit the acceleration of the performance require by, or
require any consent, authorization or approval un er, (A) any mortgage, in
enture, loan, cre it agreement or other agreement or instrument evi encing
in ebte ness for borrowe money to which any Seller is a party or to which
any Seller is boun or to which any of the Properties owne by Sellers is
subject, or (B) any lease, license, contract or other agreement or
instrument to which Sellers are a party or by which they are boun or to
which any of the Properties owne by them are subject; or
(iv) Result in the creation or imposition of any lien, charge or other
encumbrance upon the Properties.
(v) Sellers are not in efault un er, an no con ition exists that with
notice or lapse of time or both woul constitute a efault un er, (i) any
mortgage, in enture, loan, cre it agreement or other agreement or
instrument evi encing in ebte ness for borrowe money to which Sellers are a
party or by which Sellers are boun or to which any of the Properties are
subject, or any other agreement, contract, lease, license or other
instrument, (ii) any or er, ju gment or ecree of any court, commission,
boar , agency or other governmental bo y, or (iii) any law, statute, or
inance, ecree, or er, rule or regulation of any governmental authority.
(e) Except as provide for or disclose in Exhibit B attache hereto an
e a part hereof, since May 1, 1998, there has not been an will not be:
(i) Any material amage, estruction or loss to or of the Properties or
other assets, whether or not covere by insurance;
(ii) Any sale, lease or other isposition of the Properties or other
assets, except as permitte by the terms of this Agreement;
(iii) Any mortgage, ple ge or grant of a lien or security interest
against any of the Properties, other than in the or inary course of
business (except any such encumbrance that will be release at or before the
Closing); or
(iv) Any contract or commitment to o any of the foregoing.
(f) Exhibit C sets forth a list of the following contracts,
agreements, plans an commitments to which Sellers are parties or by which
Sellers or any of the Properties are boun .
Any contract, commitment or agreement that involves aggregate expen
itures by Sellers of more than $100,000.00 per year;
(ii) Any in enture, trust agreement, loan agreement or note un er
which Sellers have outstan ing in ebte ness, obligations or liabilities for
borrowe money;
(iii) Any lease, sublease, installment purchase or similar arrangement
for the use or occupancy of real property (other than the Sellers' Leases)
that involves aggregate expen itures by Sellers of more than $100,000.00
per year, together with a list of the location of such lease property, the
ate of termination of such arrangements, the name of the other party an the
annual rental payments require to be ma e for such arrangements;
(iv) Any guaranty, irect or in irect, by any affiliate of Sellers of
any contract, lease or agreement entere into by Sellers;
(v) Any agreement of surety, guarantee or in emnification by Sellers
outsi e of the or inary course of business;
(vi) All Gas Contracts ( efine below) an agreements for the sale of
gas affecting the Properties; an
(vii) All operating agreements.
(g) To the knowle ge of each of the Sellers, there are no material
efects in the personal property an fixtures to be conveye to Buyer pursuant
to the terms hereof which woul prevent the continue operation of the
Properties in accor ance with prior practice.
(h) To the knowle ge of each of the Sellers, all material royalties
(other than royalties hel in suspense), rentals an other payments ue un er
the Leases have been properly an timely pai , an all con itions necessary
to keep the Leases in force have been fully performe . No notices have been
receive by Sellers of any claim to the contrary an to the knowle ge of each
of the Sellers , all of the Leases are in full force an effect.
(i) Except as set forth on Exhibit A attached hereto an ma e a part
hereof, (i) Sellers are not obligate by virtue of any prepayment
arrangement un er any contract for the sale of hy rocarbons an containing a
take or pay or similar provision or pro uction payment or any other
arrangement to eliver hy rocarbons pro uce from the Properties at some
future time without then or thereafter receiving full payment therefor, an
(ii) Sellers have not pro uce a share of gas greater than their
ownership percentage an Sellers are un er no obligation to re uce their
share of pro uction un er any gas balancing agreement or similar contract
to allow un er-pro uce parties to come back into balance.
(j) All a valorem, property, pro uction, severance an similar taxes an
assessments base on or measure by the ownership of property or the pro
uction of hy rocarbons or the receipt of procee s therefrom on the
Properties have been properly pai an all such taxes an assessments which
become ue an payable prior to the Effective Time shall be properly pai by
Sellers.
(k) To the knowle ge of each of the Sellers, all material vali laws,
regulations an or ers of all governmental agencies having juris iction over
the Properties have been an shall continue to be complie with until the
Closing. To the knowle ge of each of the Sellers, all material necessary
permits from governmental agencies having juris iction in connection with
the Properties have been obaine an all require reports have been timely,
properly, an accurately ma e an will continue to be timely, properly an
accurately ma e through Closing. To the knowle ge of each of the Sellers
base on Texas Railroa Commission recor s, all plugge wells locate on the
Properties have been properly plugge an there are no aban one unplugge
wellbores locate on the Properties which goo oil fiel practice woul require
plugging.
(l) Sellers have incurre no liability, contingent or otherwise, for
brokers '92 or fin ers '92 fees relating to the transactions contemplate by
this Agreement for which Buyer shall have any responsibility whatsoever.
(m) To the knowle ge of each of the Sellers, none of the Properties is
subject to any top leases or reversionary interests, an there exists no
unrecor e ocument or agreement which may result in impairment or loss of
Sellers '92 ability to convey the Property.
(n) With respect to the Basic ocuments ( efine below), in all material
respects to the knowle ge of Sellers: (i) all of such Basic ocuments are in
full force an effect an are the vali an legally bin ing obligations of the
parties thereto, (ii) Sellers are not in breach or efault with respect to
any material obligations pursuant to any such Basic ocument or any
regulations incorporate therein or governing same; (iii) all material
payments (inclu ing, without limitation, royalties, elay rentals, shut-in
royalties, an joint interest or other billings un er unit or operating
agreements) ue thereun er have been ma e by Sellers or will be ma e by
Sellers prior to Closing; (iv) no other party to any Basic ocument (or any
successor in interest therein) is in breach or efault with respect to any
of its material obligations thereun er, an (v) neither Sellers nor any
other party to any Basic ocument has given or threatene to give notice of
any action to terminate, cancel, rescin or procure a ju icial reformation
of any Basic ocument or any provision thereof.
As use herein the term Basic ocuments shall mean all of the Sellers
'92 Leases, contracts for the sale an purchase of gas pro uce from the
Properties ( Gas Contracts ), farmout, ry hole, bottom-hole, acreage
contribution, purchase an acquisition agreements, area of mutual interest
agreements, salt water isposal agreements, servicing contracts, easement an
/or right-of-way agreements, unitization or pooling agreements an all other
material executory contracts an agreements relating to the Properties.
(o) (i) To the knowle ge of each of the Sellers, Sellers have not
cause or allowe the generation, treatment, storage, isposal or release of
hazar ous substances on the Properties except in accor ance with local,
state, an fe eral statutes, or inances, rules an regulations, (ii) Sellers
have complie with all laws, regulations an or ers of all governmental
agencies having juris iction over the Properties in connection with laws
regar ing protection of the environment, (iii) all material necessary
permits or exemptions have been obtaine from governmental agencies having
juris iction over the Properties in connection witth laws regar ing
protection of the environment, (iv) Sellers have not receive notice of any
procee ing, claim or lawsuit relating to the breach of any law regar ing
protection of the environment an (v) to the best of Sellers '92 knowle ge
no hazar ous substance has ever been ispose of on the Properties except in
accor ance with local, state, an fe eral statutes, or inances, rules an
regulations.
(q) Except as may be set forth in Exhibit attache hereto an ma e a
part hereof, on the ate hereof no suit, action or other procee ing is pen
ing before any court or governmental agency to which Sellers are a party an
which might result in impairment or loss of Sellers '92 title to any part
of the Properties or that might hin er or impe e operation of the
Properties an to the knowle ge of Sellers, no such suit, action or other
procee ing is threatene . Sellers shall promptly notify Buyer of any such
procee ing arising prior to the Closing -.
3.02 - Representations an Warranties of Buyer. Buyer represents an
warrants to the Sellers that:
(a) Buyer is a corporation uly organize , vali ly existing an in goo
stan ing un er the laws of its juris iction of incorporation.
(b) Buyer has all requisite corporate power an authority to execute an
eliver this Agreement, to consummate the transactions contemplate hereby an
to perform all the terms an con itions hereof to be performe by it. The
execution an elivery of this Agreement by Buyer, the performance by Buyer
of all the terms an con itions hereof to be performe by it an the
consummation of the transactions contemplate hereby have been uly authorize
an approve by the Boar of irectors of Buyer . This Agreement has been uly
execute an elivere by Buyer an constitutes the vali an bin ing obligation
of Buyer, enforceable against it in accor ance with its terms, except as
such enforceability may be limite by bankruptcy, insolvency or other laws
relating to or affecting the enforcement of cre itors '92 rights generally
an general principles of equity (regar less of whether such enforceability
is consi ere in a procee ing in equity or at law).
(c) This Agreement an the execution an elivery hereof by Buyer oes
not, an the fulfillment an compliance with the terms an con itions hereof
an the consummation of the transactions contemplate hereby will not:
Conflict with, or require the consent of any person un er, any of the
terms, con itions, or provisions of the certificate of incorporation or
bylaws of Buyer;
(ii) Violate any provision of, or require any filing, authorization or
approval un er, any legal requirement applicable to or bin ing upon Buyer;
(iii) Conflict with, result in a breach of, constitute a efault un er
(without regar to requirements of notice or the lapse of time or both)
accelerate or permit the acceleration of the performance require by; or
require any consent, authorization or approval un er, (i) any mortgage, in
enture, loan, cre it agreement or other agreement or instrument evi encing
in ebte ness for borrowe money to which Buyer is a party or by which Buyer
is boun or to which any of its properties is subject or (ii) any lease,
license, contract or other agreement or instrument to which Buyer is a
party or by which it is boun or to which any of its properties is subject;
or
(iv ) Result in the creation or imposition of any lien, charge or
other encumbrance upon the assets of Buyer.
( ) There is no action, suit, procee ing or governmental investigation
or inquiry pen ing, or to the knowle ge of Buyer, threatene against Buyer
or its subsi iaries or any of its properties that might elay, prevent or
hin er the consummation of the transactions contemplate hereby.
ARTICLE IV
COVENANTS
4.01 - Covenants of Sellers. Sellers agree with Buyer that:
(a) Prior to closing, Sellers will continue to make available to Buyer
for examination at Wilbanks Exploration, Inc. '92s ( Wilbanks ) offices in
enver, Colora o, title an other information relating to the Properties
insofar as the same are in Wilbanks '92 possession an will cooperate with
Buyer in Buyer '92s efforts to obtain, at Buyer's expense, such a itional
information relating to the Properties as Buyer may reasonably esire.
Sellers shall permit Buyer, at Buyer '92s expense, to inspect an photocopy
such information an recor s at any reasonable time but only to the extent,
in each case, that Sellers may o so without violating any obligation of
confi ence or contractual commitment to a thir party. Sellers shall not be
obligate to furnish any up ate abstracts, title opinions or a itional
information, but shall cooperate with Buyer in Buyer's efforts to obtain,
at Buyer '92s expense, such a itional title information as Buyer may
reasonably eem pru ent.
(b) After the Effective Time an prior to Closing, Sellers have cause
an will continue to cause the Properties to be pro uce , operate an
maintaine in a goo an workmanlike manner consistent with prior practices,
will not aban on any of the Properties, will maintain insurance now in
force with respect to the Properties, will pay or cause to be pai all costs
an expenses in connection therewith, will keep the Sellers '92 Leases in
full force an effect, an will perform an comply with all the covenants an
con itions containe in the Sellers '92 Leases an all agreements relating to
the Properties; provi e , however, in the absence of Buyer's written
consent, Sellers after the Effective Time an prior to the Closing shall not
con uct or authorize any operation on the Sellers '92 Leases requiring
Authority for Expen iture approval by working interest owners un er
applicable operating agreements, or an expen iture of $15,000.00 or more
for the entire 100% of any single project (except emergency operations
where Sellers shall give verbal notice of such emergency followe by written
confirmation within twenty-four (24) hours thereafter).
(c) Without the prior written consent of Buyer, Sellers shall not
enter into any new agreements or commitments with respect to the Properties
except as to the lawsuit isclose on Exhibit , will not mo ify, terminate or
settle any ispute arising out of any of the agreements relating to the
Properties, inclu ing, without limitation, the Basic ocuments, an will not
encumber, sell, transfer, assign, convey, farmout or otherwise ispose of
any of the Properties other than personal property which is replace by
equivalent property or consume in the operation of the Properties.
Sellers shall imme iately make requests of such thir parties in
compliance with applicable agreements, that any require consents be given
or waive an that any preferential rights be waive , provi e , however,
nothing containe in this Section 4.01 shall require Sellers to pay money or
un ertake any a itional legal obligation.
(e) Sellers will permit Buyer '92s authorize representatives to
consult with Sellers an their agents an employees uring reasonable business
hours an to con uct, at Buyer's sole risk an expense, on-site inspections,
tests an inventories of the Properties an inspect an examine all well logs
an geological an geophysical ata relating to such properties.
(f) Sellers will use their best efforts to obtain the satisfaction of
the con itions to Closing set forth in Section.6.01 hereof.
(g) Sellers shall not solicit from any thir party any proposals or
offers or enter into any negotiations relating to the isposition of any of
the Properties.
4.02 - Covenants of Buyer. Buyer covenants an agrees with Sellers as
follows:
(a) Buyer will use its best efforts to obtain the satisfaction of the
con itions to Closing set forth in Section 6.02 hereof.
(b) In the event that this Agreement is terminate or, if not terminate
, until the Closing, the confi entiality of any ata or information receive
by Buyer regar ing the business an assets of Sellers shall be maintaine by
Buyer an is representatives in accor ance with the agreements execute by
Buyer.
ARTICLE V
TITLE MATTERS, DEFECTIVE INTERESTS
ENVIRONMENTAL ISSUES
5.01 - Defensible Title
(a) As use herein, the term efensible Title shall mean, as to the
Properties an each of them, such title which
(i) is free an clear (except for Permitte Encumbrances) of mortgages,
liens, security interests, ple ges, charges, encumbrances, claims,
limitations, irregularities, bur ens, or efects, an (A) is otherwise only
subject to contractually bin ing arrangements which are conventional an
which are customarily experience in the oil an gas in ustry an (B) is not
subject to any matters which will result in a breach of any warranty ma e
by Sellers hereun er,
(ii) entitles Sellers to receive not less than the Net Revenue
Interests set forth in Exhibit hereto of all oil, gas an associate liqui an
gaseous hy rocarbons pro uce , save an markete from the Properties after e
ucting all royalty, overri ing royalty an other bur ens (an such interest
will not change in the future except as isclose on Exhibit A; an
(iii) obligates Sellers to bear costs an expenses relating to the
maintenance, evelopment, an operation of the Properties in an amount not
greater than the Working Interests set forth in Exhibit hereto an such
interest will not change in the future except as isclose on Exhibit A,
unless there is a correspon ing an proportionately equal increase in the
Net Revenue Interest.
(b) The term Permitte Encumbrances as use
herein shall mean:
(i) Lessors '92 royalties, overri ing royalties; an other bur ens,
reversionary interests an similar bur ens if the net cumulative effect of
such bur ens oes not operate to re uce the Net Revenue Interests of any of
the Properties to less than the Net Revenue Interest set forth in Exhibit
A;
(ii) Preferential rights to purchase an require thir party consents to
assignments an similar agreements with respect to which prior to Closing
(A) waivers or consent are obtaine from the appropriate parties, (B) the
appropriate time perio for asserting such rights has expire without an
exercise of such rights, an (C) with respect to consent, such consent is
not necessary to the vali ity of an assignment to Buyer an nee not be
obtaine prior to an assignment (the a equacy of such consent shall be
etermine by Buyer in its reasonable ju gment);
(iii) Liens for taxes or assessments not yet ue or not yet elinquent
or; if elinquent, that are being conteste in goo faith in the normal course
of business;
(iv) All rights to consent by, require notices to, filings with, or
other actions by governmental entities in connection with the sale or
conveyance of oil an gas leases or interests therein if the same are
customarily obtaine subsequent to such sale or conveyance;
(v) The terms an con itions of the Leases;
(vi) Rights of reassignment in the event of intentional release or
surren er of any of the Properties;
(vii) Easements, rights-of-way, servitu es, permits, surface leases an
other rights in respect of surface operations, pipelines, grazing, or the
like; an easements for streets, alleys, highways, pipelines, telephone
lines, power lines, railways an other easements, an rights-of-way, on, over
or in respect of any of the Properties;
(viii) Rights reserve to or veste in any municipality or governmental,
statutory or public authority to control or regulate any of the Properties
in any manner, an all applicable laws, rules an or ers of any governmental
authority;
(ix) Such Title efects ( efine below) or other efects as Buyer has
waive , an
(x) Liens release at Closing as shown on Exhibit
(c) The term Title efects as use herein means any encumbrances,
encroachments, irregularities, efects or objection to the Properties
(expressly exclu ing Permitte Encumbrances), that alone or in combination
ren er Sellers '92 title to the Properties less than efensible Title.
5.02 - efective Interests.
(a) " efective Interests shall mean:
(1) That portion of the Properties affecte by a Title efect.
(2) That portion of the Properties materially an a versely affecte by
Sellers '92 noncompliance with the material laws, rules, regulations, or
inances or or ers of any governmental agency or authority having juris
iction over any portion of the Properties.
(3) That portion of the Properties which on-site inspection reveals
requires removal of use equipment or property, clean-up of spills or umps,
plugging of aban one wells, repair of broken, efective or inoperable
equipment or of equipment which is incapable of performing its inten e
function, or other similar matters.
(4) That portion of the Properties with respect to which any
preferential right to purchase is exercise or for which consent is enie
unless Buyer elects to receive the consi eration receive from the exercise
of such preferential right to purchase.
(5) That portion of the Properties affecte by any suit, action or
other procee ing before any court or government agency that woul result in
substantial loss or impairment of Sellers '92 title to any material portion
of the Properties, or a material portion of the value thereof.
(6) That portion of the Properties estroye by fire or other casualty,
or with respect to which there is a taking or threatene taking in con
emnation or un er right of eminent omain.
(b) Buyer shall give S ellers notice of efective Interests not later
than fifteen (15) ays prior to the Closing ate. Such notice shall be in
writing an shall inclu e (i) a escription of the efective Interest, (ii)
the reason Buyer believes such Properties to be a efective Interest, an
(iii) the propose allocate value of the efective Interests. Buyer shall be
eeme to have waive all efective Interests of which Sellers have not been
given such notice; provi e , however, that such waiver shall not apply with
respect to any efective Interest if Buyer coul not reasonably have known of
it before the ate such notice is ue.
(c) Upon being notifie by Buyer pursuant in Section 5.02(b) of any
asserte efective Interest the Sellers shall give written counter-notice to
Buyer within ten (10) ays that they (i) inten to correct the asserte
efective Interest, or (ii) they o not inten to correct the efective
Interest, or (iii) they isagree that the asserte efective Interest exists.
If Sellers gives counter-notice of intent to correct such asserte efective
Interest, they shall have a perio of thirty (30) ays from the receipt of
the Buyer '92s notice (the Cure Perio ) to correct such asserte efective
Interest at their own expense, an the Closing ate shall be exten e until
the thir ay after the earliest to occur of the following: (A) the efective
Interest is correcte , (B) the Sellers notify Buyer they cannot correct the
efective Interests, an (C) the expiration of the Cure Perio . The failure
of Sellers to eliver written counter-notice shall be eeme to be an a
mission of the existence of such efective Interest an a waiver of Sellers
'92 right to correct such efective Interest (an an agreement that the
amount by which the agree allocate value of the efective Interest to which
the efective Interest relates is the amount state in Buyer '92s notice
pursuant to clause (iii) of Section 5.02(b)).
(i) efective Interests shall be exclu e from the Properties to be
purchase by Buyer hereun er, an the Purchase Price shall be re uce in accor
ance with Section 2.02 hereof by an amount equal to the agree allocate
value thereof unless (i) prior to expiration of the Cure Perio , the basis
for treating such Properties as efective Interests has been remove , (ii)
Buyer agrees to waive the relevant efective Interest an purchase the
efective Interest notwithstan ing the efect, or (iii) Buyer an Sellers
agree (or have been eeme to have agree ) to an amount by which the agree
allocate value of the efective Interests has been re uce an the Purchase
Price is re uce by such amount in accor ance with Section 2.02 hereof.
(e) In etermining which portions of the Properties are efective
Interests, it is the intent of the parties to inclu e, when possible, only
that portion of the Properties affecte by the efect. If the agree allocate
value of efective Interests cannot be etermine irectly from Exhibit B
because the efective Interests constitute a property inclu e within, but
not totally comprising, the Properties to which the agree allocate value
relates, Buyer an Sellers shall attempt, where feasible, to proportionately
re uce the agree allocate value.
5.03 - I entification of Upwar A justment. If prior to Closing,
Sellers notify Buyer that there is any inaccuracy in Exhibit "A" whereby
Sellers own more than represente thereon, Buyer an Sellers shall en eavor
to agree upon an amount by which the Purchase Price shall be increase to
reflect such increase value in accor ance with Section 2.02 (the Upwar A
justment ). If Buyer an Sellers fail to agree to the Upwar A justment,
Sellers may elect to have that portion of the Properties subject to such
increase in value exclu e from the Properties to be purchase by Buyer.
5.04- Environmental Information an Inspections . b Promptly upon the
execution of this Agreement, Sellers shall make available to the Buyer such
information that is in their possession or control, or to which it has
access, relating to the environmental con ition of the Properties, sai
information to inclu e, but not to be limite to, any an all information
pertaining to cru e oil an pro uce water that may have been spille or
ispose of on the Properties an the locations thereof; pits an pit
closures locate on the Properties; burial sites locate on the Properties;
lan farming sites; lan sprea ing sites; un ergroun injection sites; an soli
waste isposal sites. Buyer also shall have the right, at its sole risk an
expense, to con uct or have con ucte a Phase I Environmental Au it of such
of the Properties as it esignates. To enable Buyer to con uct the Phase I
Environmental Au it, Sellers will provi e Buyer (an its representatives)
with reasonable access to the Properties; to Sellers' books, recor s, an
files relating to the Properties; an to current employees of Sellers. In
con ucting the Phase I Environmental Au it, Buyer shall treat, an will
cause all of its representative, agents, consultants, contractors, or
subcontractors to treat, all information obtaine by Buyer pursuant to the
au it as strictly confi ential except to the extent such information
is otherwise available to the general public an will not isclose the
results without the prior written consent of Sellers, except to the extent
that such results are legally require to be isclose by Buyer in which case,
Buyer shall provi e Sellers with reasonable notice prior to making such
isclosure. Sellers shall have the right to have a representative present
uring any inspection of the Properties an uring any interviews of Sellers'
employees, con ucte as a part of the Phase I Environmental Au it. Buyer
shall coor inate these activities with Sellers so as to allow Sellers to
have a representative present if they so esire.
5.05 - Notice of Environmental Con ition .
Not later than fifteen (15) ays prior to Closing, Buyer shall
give Sellers written notice of any con ition (referre to herein as an
"Environmental Con ition") in the air, lan , soil, surface, subsurface
strata, surface water, groun water, or se iments in any one or more of
the Properties, which causes that Property or Properties to be subject
to reme iation un er, or not in compliance with any law relating to
pollution, the protection of the environment, or the release or
isposal of waste materials. Such notice shall be in writing an shall
inclu e (i) a escription of the portion of the Properties (if less
than all) affecte by the Environmental Con ition, (ii) the reason
Buyer believes such Environmental Con ition to exist, an (iii) the
action that is require to cure or remove the Environmental Con ition.
Buyer shall be eeme to have waive all Environmental Con itions of
which Seller has not been given such notice.
5.06 - Environmental Reme iation . b Upon being notifie pursuant
to Section 5.05 of any asserte Environmental Con ition, Sellers shall
have thirty (30) ays within which to provi e Buyer with ocumentation
that the Environmental Con ition has been cure or remove . If Seller
is unable or unwilling to cure or remove the Environmental Con ition
within such perio , then Buyer shall have the option of (i)
eliminating such property from this Agreement an procee ing to Closing
on the remaining Properties, with the Purchase Price to be a juste
ownwar by the agree allocate value of the affecte property; or (ii)
waiving the Environmental Con ition with respect to the affecte
property an procee ing to Closing on all Properties, with the full
payment of the Purchase Price. The Closing ate as agree upon herein
shall be exten e for such perio of time as may be necessary to provi e
Seller the perio of time provi e for in this paragraph within which to
cure or remove Environmental Con itions.
ARTICLE VI
CONDITIONS TO CLOSING
6.01 - Con itions to the Obligations of Buyer. The obligations of
Buyer to procee with the Closing contemplate hereby are subject to the
satisfaction on or prior to the Closing of all of the following con
itions, any one or more of which may be waive , in whole or in part,
in writing by Buyer.
(a) The representations an warranties ma e herein by Sellers
shall be correct at an as of the Closing as though such
representations an warranties were ma e at an as of the Closing, an
the factual matters containe in any warranty ma e by Sellers to
Sellers '92 knowle ge, or similar language, shall be true an correct
at an as of the Closing without regar to Sellers '92 knowle ge of
same, an Sellers shall have complie with all the covenants hereof
require by this Agreement to be performe by them on or prior to the
Closing.
(b) The Closing hereun er shall not violate any or er or ecree of
any court, agency, commission, tribunal, or other governmental
authority having competent juris iction over the transactions
contemplate by this Agreement
(c) All necessary consents, permission, novations an approvals by
thir parties (inclu ing that of Sellers '92 len ing institutions) in
connection with the sale an transfer of the Properties shall have been
receive prior to Closing, except those governmental consents
customarily generate an receive in the or inary course of business at
a post-closing ate. ( ) The existence of efective Interests which have
not been correcte or properties exclu e pursuant to Section 5.06 will
not re uce the Purchase Price by more than 10%.
6.02 - Con itions to the Obligations of Sellers. The obligations
of Sellers to procee with the Closing contemplate hereby are subject
to the satisfaction at or prior to Closing of all of the following con
itions, any one or more of which may be waive , in whole or in part,
in writing by Sellers.
(a) The representations an warranties ma e herein by Buyer shall
be correct at an as of the Closing as though such representations an
warranties were ma e at an as of the Closing, an Buyer shall have
complie with all the covenants hereof require by this Agreement to be
performe by them at or prior to the Closing.
(b) The Closing hereun er shall not violate any or er or ecree of
any court, agency, commission, tribunal or other governmental
authority having competent juris iction over the transactions
contemplate by this Agreement.
(c) The existence of efective Interests which have not been
correcte or properties exclu e pursuant to Section 5.06 will not re
uce the Purchase Price by more than 10%.
ARTICLE VII
CLOSING
7.01 - Closing
Unless the parties hereto agree otherwise an subject to the con
itions state in this Agreement, the consummation of the transactions
contemplate hereby (herein calle the Closing ) shall be hel at the
offices of Wilbanks, in enver, Colora o, on June 15, 1998. The ate on
which closing occurs is referre to herein as the Closing ate.
7.02 - Closing Obligations . At the Closing, the following events
shall occur, each being a con ition prece ent to the others an each
being eeme to have occurre simultaneously with the others:
(a) Sellers shall assign, transfer, an convey the Properties to
Buyer by an assignment with a special warranty substantially in the
form of Exhibit E attache hereto. Sellers shall also execute such a
itional ee s, conveyances an bills of sale as may be necessary to
convey the Properties to Buyer provi e that any such a itional ee s,
conveyances or bills of sale shall not warrant the con ition of
personal property but shall warrant title by, through an un er
Sellers. In a ition to the foregoing, the instruments execute pursuant
to this Section 7.02(a) shall be execute in multiple originals an
counterparts sufficient to facilitate recor ing.
(b) Buyer shall pay the Purchase Price to Sellers by wire
transfer in imme iately available fun s. Buyer is authorize to eliver
an un ivi e 30% of the Purchase Price to Wilbanks for allocation to
the Wilbanks Group an an un ivi e 70% of the Purchase Price to Burnett
Corporation for allocation to the Burnett Group.
(c) Sellers shall eliver to Buyer exclusive possession of the
Properties
(d) Each of the Sellers shall provi e a certificate in form an
substance satisfactory to Buyer '92s counsel certifying as to the
matters set forth in Sections 6.01(a), (b), an (c) at an as of the
Closing.
(e) Buyer shall provi e a certificate in form an substance
satisfactory to Sellers '92 counsel certifying as to the matters set
forth in Sections 6.02(a) an (b) at an as of the Closing.
(f) Wilbanks, if it has not previously one so, shall resign as
operator of any of the Properties which it operates. Sellers an Buyer
shall execute (i) Railroa Commission forms P-4 an other appropriate
forms to provi e for the change of operator, if applicable, an (ii)
transfer or ers or letters in lieu thereof irecting all purchasers of
pro uction to make payment to Buyer of procee s attributable to pro
uction from the Properties assigne to Buyer.
(g) Sellers shall eliver to Buyer all sums hel in suspense by
Sellers for any reason together with a report in sufficient etail to
the best of Sellers '92 current knowle ge to allow Buyer to etermine
the reasons such amounts are hel in suspense, an the Properties with
respect to which such amounts are hel in suspense.
(h) Buyer an Sellers shall execute such other ocuments as may be
necessary to effectuate the intent of this transaction.
ARTICLE VIII
OBLIGATIONS AFTER CLOSING
8.01 - Post-Closing Adjustments.
As soon as practicable after the Closing, but not later than 90 ays after the
Closing, Sellers an Buyer shall con uct a post-closing a justment to account for
a justments in Article II.
8.02 - Sales Taxes and Recording Fee.
Buyer shall pay all sales taxes occasione by the sale of the Properties an all
ocumentary, filing an recor ing fees require in connection with the filing an
recor ing of any assignments.
8.03 - Further Assurances .
After Closing, Sellers an Buyer shall execute, acknowle ge an eliver or cause to
be execute , acknowle ge an elivere such instruments an take such other action
inclu ing payment of monies as may be necessary or a visable to carry out their
obligations un er this Agreement an un er any ocument, certificate or other
instrument elivere pursuant hereto or require ly law.
8.04 - Buyer Post-Closing
Obligation . If any time subsequent to the Closing, Buyer comes into possession
of money or property belonging to the Sellers such money or other property shall
be promptly elivere to the Sellers.
8.05 - Sellers Post-Closing Obligations
If at any time subsequent to the Closing, Sellers comes into possession of money
or property belonging to the Buyer such money or other property shall be
promptly elivere to the Buyer.
8.06 - Files an Records
Within ten (10) ays after Closing, Sellers shall eliver the Recor s to Buyer at
Buyer '92s expense.
8.07 - Survival.
The representations, warranties, covenants, agreements an in emnities inclu e or
provi e herein shall survive the Closing for a two-year perio from the Closing
ate.
ARTICLE IX
TERMINATION OF AGREEMENT
9.01 - Termination .
This Agreement an the transactions contemplate hereby may be terminate in the
following instances:
(a) By Buyer if the con itions set forth in Section 6.01 are not satisfie in all
material respects or waive prior to the Closing ate;
(b) By Sellers if the con itions set forth in Section 6.02 are not satisfie in
all material respects or waive prior to the Closing ate; or
(c) At any time by the mutual written agreement of Buyer an Sellers.
9.02 - Liabilities Upon Termination
If Closing oes not occur ue to Sellers '92 violation of the terms of this
Agreement, then Buyer may seek such legal or equitable reme ies as Buyer may
esire, inclu ing, without limitation, amages for the breach or failure of any
representation, warranty, covenant or agreement containe herein an the right to
enforce specific performance of this Agreement. If Closing oes not occur ue to
Buyer's violation of the terms of this Agreement, Sellers may seek such legal or
equitable reme ies as Sellers may esire, inclu ing, without limitation, amages
for the breach or failure of any representations, warranty, covenant or
agreement containe herein an the right to enforce specific performance of this
Agreement.
ARTICLE X
EARNEST MONEY
Upon the execution of this Agreement, Buyer has eposite into escrow with
Sprouse, Smith & Rowley, P.C.(the Escrow Agent ), the sum of Two Hun re Seventy
Four Thousan Two Hun re an Ninety an No/100 ollars ($274,290.00)as earnest money
(the Earnest Money ). At Closing, the Earnest Money, less any costs incurre ,
shall be applie against the Purchase Price, an all interest shall be elivere to
Sellers but shall not re uce the Purchase Price. If this transaction fails to
close ue to any breach by Buyer of the terms, con itions, representations, an
warranties foun in this Agreement or ue to Buyer '92s failure to fulfill the con
itions of Section 6.02, then as Sellers '92 exclusive reme y, the Earnest Money
an all interest earne thereon shall be elivere to Sellers as liqui ate amages.
If this transaction fails to close ue to any breach by Sellers of the terms, con
itions, representations an warranties foun in this Agreement or ue to Sellers
'92 failure to fulfill the con itions of Section 6.01, then as Buyer '92s
exclusive reme y, either (i) the Earnest Money an all interest earne thereon
shall be elivere to Buyer or (ii) Buyer may enforce specific performance of this
Agreement. If this transaction fails to close for any other reason whatsoever,
then the Earnest Money an all interest earne thereon shall be elivere to Buyer.
Sellers an Buyer agree to give the Escrow Agent joint instructions for the
elivery of the Earnest Money, together with any interest earne thereon, in accor
ance with the terms of this Agreement.
ARTICLE XI
INDEMNIFICATION
11.01 Buyer's Indemnification
b . BUYER SHALL DEFEND, INDEMNIFY, AN SAVE AN HOL HARMLESS SELLER S AGAINST ALL
CLAIMS, COSTS, EXPENSES, AN LIABILITIES (INCLU ING COSTS OF EFENSE, EXPERT FEES,
AN OTHER COSTS) WITH RESPECT TO THE PROPERTIES WHICH ACCRUE OR RELATE TO TIMES
AFTER THE EFFECTIVE ATE (BUT NOT INCLU ING THOSE INCURRE BY SELLERS WITH RESPECT
TO THE SALE OF THE PROPERTIES TO BUYER b OR THE NEGOTIATIONS LEA ING TO SUCH
SALE OR THOSE THAT RESULT FROM OR ARE ATTRIBUTABLE TO THE NEGLIGENCE OR WILLFUL
MISCON UCT OF SELLERS, THEIR EMPLOYEES OR AGENTS WITH RESPECT TO THE OPERATION
AN MAINTENANCE OF THE PROPERTIES, AN NOT INCLU ING THOSE THAT RESULT FROM OR ARE
ATTRIBUTABLE TO ANY REPRESENTATION OF SELLERS CONTAINE IN THIS AGREEMENT BEING
UNTRUE OR A BREACH OF ANY WARRANTY OR COVENANT OF SELLERS CONTAINE IN THIS
AGREEMENT).
Sellers' Indemnification
b . SELLERS, SEVERALLY BUT NOT JOINTLY, SHALL EFEN , IN EMNIFY, AN SAVE AN HOL
HARMLESS BUYER AGAINST ALL CLAIMS, COSTS, EXPENSES, LIABILITIES (INCLU ING COSTS
OF EFENSE, EXPERT FEES, AN OTHER COSTS) b WITH RESPECT TO THE PROPERTIES WHICH
ACCRUE OR RELATE TO TIMES PRIOR TO THE EFFECTIVE ATE (BUT NOT INCLU ING THOSE
INCURRE BY BUYER WITH RESPECT TO THE PURCHASE OF THE PROPERTIES FROM SELLERS OR
THE NEGOTIATIONS LEA ING TO SUCH PURCHASE, AN NOT INCLU ING THOSE THAT RESULT
FROM OR ARE ATTRIBUTABLE TO ANY REPRESENTATION OF BUYER CONTAINE IN THIS
AGREEMENT BEING UNTRUE OR A BREACH OF ANY WARRANTY OR COVENANT OF BUYER CONTAINE
IN THIS AGREEMENT).
11.03 - Time Limitation.
Any claim against any Sellers pursuant to the in emnification provisions of
Section 11.02 must be brought within two (2) years following the Closing ate.
Sellers '92 obligations un er the in emnity provisions of Section 11.2 shall
expire an be of no further force an effect from an after two (2) years from the
Closing ate, save an except for any claims brought by Buyer prior to such ate. b
11.04 - Notice.
Each in emnifie party hereun er agrees that upon its iscovery of facts giving
rise to a claim for in emnity un er the provisions of this Agreement, inclu ing
receipt by it of notice of any eman , assertion, claim, action or procee ing, ju
icial or otherwise, by any thir party (such thir party actions being
collectively referre to hereinafter as the Claim ), with respect to any matter
as to which it is entitle to in emnify un er the provisions of this Agreement,
it will give prompt notice thereof in writing to the in emnifying party together
with a statement of such information respecting any of the foregoing as it shall
then have an a Claim for in emnity. The in emnifying party shall not be obligate
to in emnify the in emnifie party with respect to any Claim with respect to
which the in emnifie party faile to notify the in emnifying party thereof in
accor ance with the provisions of this Agreement to the extent to which the lack
of such notice can be reasonably shown to have increase the amount of the Claim.
11.05 - Defense of Claim.
The in emnifying party is entitle at its cost an expense to contest an efen by
all appropriate legal procee ings any Claim with respect to which it is calle
upon to in emnify the in emnifie party un er the provisions of this Agreement;
provi e , however, that notice of the intention so to contest shall be elivere
by the in emnifying party to the in emnifie party within a reasonable time in
light of the circumstances then an there existing. Any such contest may be con
ucte in the name an on behalf of the in emnifying party or the in emnifie party
as may be appropriate. Such contest shall be con ucte by attorneys employe by
the in emnifying party, but the in emnifie party shall have the right to
participate in such procee ings an to be represente by attorneys of its own
choosing at its cost an expense. If the in emnifie party joins in any such
contest, the in emnifying party shall have full authority to etermine all action
to be taken with respect thereto. If after such opportunity, the in emnifying
party oes not elect to contest any such Claim the in emnifying party shall be
boun by the result obtaine with respect thereto by the in emnifie party. At any
time after the commencement of efense of any Claim, the in emnifying party may
request the in emnifie party to agree in writing to the aban onment of such
contest or to the payment or compromise by the in emnifying party of the asserte
Claim, whereupon such action shall be taken unless the in emnifie party so
etermines that the contest shoul be continue , an so notifies the in emnifying
party in writing within fifteen (15) ays of such request from the in emnifying
party. In the event that the in emnifie party etermines that the contest shoul
be continue , the in emnifying party shall be liable hereun er only to the
extent of the lesser of (i) the amount which the other party to the conteste
Claim ha agree to accept in payment or compromise as of the time the in
emnifying party ma e its request therefor to the in emnifie party or (ii) such
amount for which the in emnifying party may be liable with respect to such Claim
by reason of the provisions hereof.
11.06 - Cooperation.
If requeste by the in emnifying party, the in emnifie party agrees to cooperate
with the in emnifying party an its counsel in contesting any Claim which the in
emnifying party elects to contest or, if appropriate, in making any counterclaim
against the person asserting the Claim, or any cross-complaint against any
person, but the in emnifying party will reimburse the in emnifie party for any
expenses incurre by it in so cooperating. The in emnifie party agrees to affor
the in emnifying party an its counsel the opportunity to be present at, an to
participate in, conferences with all persons, inclu ing governmental
authorities, asserting any Claim against the in emnifie party or conferences
with representatives of or counsel for such persons.
11.07 - Payment .
The in emnifying party shall pay to the in emnifie party in cash the amount to
which the in emnifie party may become entitle by reason of the provisions of
this Agreement, such payment to be ma e within five (5) ays after any such
amount is finally etermine either by mutual agreement of the parties hereto or
pursuant to the final unappealable ju gment of a court of competent juris
iction. Any appropriate costs of efense, expert fees, an other costs shall be
pai on a monthly basis.
11.08 - Notices.
Any notice, request, eman , instruction or other ocument to be given hereun er
by either party to the other shall be in writing an elivere as provi e herein.
ARTICLE XII
GENERAL
12.01 - Claims.
Buyer shall be entitle to the rights an benefits of all claims Sellers have
against thir parties with respect to the Properties arising out of events
occurring prior an subsequent to the Effective Time inclu ing, without
limitation, all rights an benefits un er the Gas Contracts. Sellers shall
cooperate with Buyer in the prosecution of such claims, but Buyer shall bear all
expenses relate to the prosecution of such claims.
12.02 - Expenses.
All fees, costs an expenses incurre by Buyer or Sellers in negotiating this
Agreement or in consummating the transactions contemplate by this Agreement
shall be pai by the party incurring the same inclu ing, without limitation,
legal an accounting fees, costs an expenses.
12.03 - Notices.
All communications require or permitte un er this Agreement shall be in writing,
an any communications hereun er shall be eeme to have been uly ma e if elivere
by (i) han , (ii) overnight elivery service, (iii) telecopy, or (iv) three ays
after being place in first class certifie mail, postage prepai , with return
receipt requeste to the following a resses:
All notices to Sellers shall be delivered to:
Wilbanks Exploration, Inc.
1600 Stout Street, Suite 110
Denver, Colorado 80121
Attn: Jim Wilbanks
With a copy to:
Jeffrey G. Shrader, Esq.
Sprouse, Smith & Rowley, P.C.
P.O. Box 15008
Amarillo, TX 79105-5008
All notices to Buyer shall be delivered to:
Odessa Exploration, Incorporated
191 Professional Center
6010 Highway 191, Suite 210
Odessa, Texas 79762
Attn: . Kirk Edwards
With a copy to:
Jeffrey Hewett, Esq.
Lynch, Chappell & Alsup
300 North Marienfeld
Suite 700, The Summit
Midland, TX 79701-4345
12.04 - Amendments.
This Agreement may not be amen e nor any rights hereun er waive except by an
instrument in writing signe by the party to, be charge with such amen ment or
waiver an elivere by such party to the party claiming the benefit of such amen
ment or waiver.
12.05 - Hearings.
The hearings of the articles an sections of this Agreement are for gui ance an
convenience of reference only an shall not limit or otherwise affect any of the
terms or provisions of this Agreement.
12.06 - Counterparts.
This Agreement may be execute by Buyer an Sellers in any number of counterparts,
each of which shall be eeme an original instrument, but all of which together
shall constitute but one an the same instrument.
12.07 - References.
References ma e in this Agreement, inclu ing use of a pronoun, shall be eeme to
inclu e where applicable, masculine, feminine, singular or plural, in ivi uals,
partnerships or corporations. As use in his Agreement, person shall mean any
natural person, corporation, partnership, trust, estate or other entity. ul
12.08 - Governing Law .
This Agreement an the transactions contemplate hereby shall be construe in accor
ance with, an governe by, the laws of the State of Texas.
12.09 - Entire Agreement.
This Agreement (inclu ing the Exhibits hereto) constitutes the enire un erstan
ing among the parties with respect to the subject matter hereof, superse ing
negotiations, prior iscussions an prior agreements an un erstan ings relating to
such subject matter.
12.10 - Parties in Interest .
This Agreement shall be bin ing upon an shall inure to the benefit of the
parties hereto an , except as otherwise prohibite , their respective successors
an assigns; an except as otherwise state herein, nothing containe in this
Agreement, or implie herefrom, inten e to confer upon any other person or entity
any benefits, rights or reme ies.
12.11 - Assignments.
Except as otherwise provi e herein neither Buyer nor Sellers may assign their
respective rights without the consent of the other.
12.12 - Public Announcements.
The parties hereto agree that prior to making any public announcement or
statement with respect to the transactions contemplate by this Agreement, the
party esiring to make such public announcement or statement shall consult with
the other party hereto an exercise their best efforts to agree upon the text of
a joint public announcement or statement to be ma e. ul 12.13 - Notices After
Closing. Buyer an Sellers hereby agree that each party shall notify the other of
its receipt, after the Closing ate, of any instrument, notification or other
ocument affecting the Properties while owe by such other party.
12.14 - Severability .
If a court of competent juris iction etermines that any clause or provision of
this agreement is voi , illegal or unenforceable, the other clauses an
provisions of the Agreement shall remain in full force an effect an the clauses
an provisions which are etermine to be voi , illegal or unenforceable shall be
limite so that they shall remain in effect to the extent permissible by law.
12.15 - Sellers' Section 1031.
Notwithstan ing any other provision of this Agreement to the contrary, Sellers
have a vise Buyer that Sellers may elect to have the transaction contemplate
hereby structure so as to comply with the requirements of Section 1031 of the
Unite States Internal Revenue Co e entitling Sellers to obtain like-kin income
tax treatment with respect to the sale of the Property. Buyer agrees to
cooperate with Sellers if Sellers make such an election provi e that in no event
shall Buyer incur any a itional liability or expense of any kin whatsoever as a
consequence of Sellers electing to treat this transaction as part of a like-kin
exchange an Buyer '92s obligations are complete within sixty (60) ays following
the Closing ate. A itionally, Buyer shall have no responsibility or liability
whatsoever for Sellers actually obtaining any particular tax treatment as a
result of the transaction contemplate by this Agreement whether or not Seller
seeks to obtain like-kin exchange treatment.
Instead of requesting Buyer's participation in an exchange, Sellers shall have
the right to use a qualifie interme iary party to assist Sellers in effecting
the exchange, an Sellers may assign Sellers's rights un er this Agreement to
that interme iary to effect the exchange. However, that assignment shall not
relieve Sellers of Sellers's obligation to cause the property to be sol pursuant
to this Contract to be transferre to Buyer.
IN WITNESS WHEREOF the parties have execute or cause the Agreement to be
executed as of the ay an year first above written.
SELLERS: BURNETT CORPORATION, INC.
By:_________________________________
Ann C. Fatheree, President
__________________________________
B.O. Cornelius
__________________________________
Ann C. Fatheree
__________________________________
James R. Corbin
__________________________________
Mary Jo Mitton
__________________________________
Birke B. Marsh
__________________________________
H. Brianna Cobb
__________________________________
Birke B. Marsh, Trustee of
the Corbin Trust 1976
__________________________________
Jamie Kim Corbin
__________________________________
Josh Alan Corbin
__________________________________
Jason J. Corbin
WILBANKS
EXPLORATION, INC.
By:__________________________________
James O. Wilbanks,
President
__________________________________
Jeffrey G. Shrader
BUYER:
ODESSA EXPLORATION, INCORPORATED
By:__________________________________
Kirk Edwards,
President
ASSIGNMENT AND BILL OF SALE
STATE OF _____________
KNOW ALL MEN BY THESE
PRESENTS:
COUNTY OF ____________
EXECUTED this ______ Day of
_______________, 1998, but EFFECTIVE as of the
Effective Date.
WITNESSES: ASSIGNOR:
______________________________
______________________________
WITNESSES: ASSIGNEE:
_____________________________
STATE OF TEXAS
COUNTY OF ______________
This instrument was acknowledged before me by
__________________________, this
______ day of May, 1998.
_______________________________
Notary Public in and for
State of Texas
STATE OF TEXAS
COUNTY OF ______________
Asset Purchase Agreement
among
Key Energy Drilling, Inc.,
Lakota Drilling Company
and
Reed Gilmore, Priscilla Gilmore,
M. Reed Gilmore, Jr., Valerie G. Griess,
Joan G. Lindquist, James C. Gilmore,
L. E. Grimes and Larry V. Bohannon
<PAGE>
May 22, 1998
TABLE OF CONTENTS
ARTICLE 1Purchase and Sale of Assets 1
1.1 Purchase and Sale of the Assets 1
1.2 Excluded Assets 2
1.3 Consideration for Assets 2
1.4 Liabilities 3
1.5 Closing 3
1.6 Closing Deliveries 3
1.6.1 Opinion of Buyer's Counsel 3
1.6.2 Opinion of Seller's Counsel. 4
ARTICLE IIRepresentations and Warranties 4
2.1 Representations and Warranties of
the Seller and the Shareholders 4
2.1.1 Organization and Good Standing 4
2.1.2 Agreement Authorized and Effect
on Other Obligations. 4
2.1.3 Contracts 5
2.1.4 Title to Assets 5
2.1.5 Licenses and Permits 5
2.1.6 Intellectual Property 6
2.1.7 Financial Statements 6
2.1.8 Absence of Certain Changes and Events 6
(a) Financial Change 6
(b) Property Damage 6
(c) Waiver 6
(d) Change in Assets 6
(e) Labor Disputes 7
(f) Other Changes 7
2.1.9 Necessary Consents 7
2.1.10 Environmental Matters 7
2.1.11 No ERISA Plans or Labor Issues 8
2.1.12 Investigations; Litigation 8
2.1.13 Absence of Certain Businesses Practices 8
2.1.14 Solvency 8
2.1.15 Finder's Fee 9
2.1.16 Taxes 9
2.2 Representations and Warranties of Buyer 9
2.2.1 Organization and Good Standing 9
2.2.2 Agreement Authorized and its
Effect on Other Obligations 9
2.2.3 Consents and Approvals 9
2.2.4 Finder's Fee 10
ARTICLE IIIAdditional Agreements 10
3.1 Noncompetition. 10
3.2 Hiring Employees 11
3.3 Allocation of Purchase Price 11
3.4 Name Change 11
ARTICLE IVIndemnification 11
4.1 Indemnification by the Seller
and the Shareholders 11
4.2 Indemnification by Buyer 12
4.3 Indemnification Procedure 12
ARTICLE VMiscellaneous 13
5.1 Survival of Representations,
Warranties and Covenants 13
5.2 Entirety 13
5.3 Counterparts. 13
5.4 Notices and Waivers. 14
5.5 Captions. 14
5.6 Successors and Assigns. 14
5.7 Severability. 14
5.8 Applicable Law. 15
<PAGE>
Asset Purchase Agreement
This Asset Purchase Agreement (this Agreement) is entered into as of May 22,
1998 among Key Energy Drilling, Inc., a Delaware corporation (the Buyer), Lakota
Drilling Company, a Nebraska corporation (the Seller), and Reed Gilmore,
Priscilla Gilmore, M.Reed Gilmore, Jr., Valerie G. Griess, Joan G. Lindquist,
James C. Gilmore, L. E. Grimes and Larry V. Bohannon (collectively, the
Shareholders).
RECITATIONS
The Seller desires to sell substantially all of its assets, and Buyer desires to
acquire such assets.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements, and subject to the terms
and conditions herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
Purchase and Sale of Assets
ARTICLE 1
Purchase and Sale of Assets"
1.1 Purchase and Sale of the Assets
Subject to the terms and conditions set forth in this Agreement, the Seller
hereby agrees to sell, convey, transfer, assign and deliver to Buyer effective
as of 11:00 P.M. Texas time on the day preceding the date of execution hereof ,
all of the assets of the Seller existing on the date hereof (the Closing Date)
other than the Excluded Assets (defined below), whether real, personal, tangible
or intangible, including, without limitation, the following assets owned by the
Seller relating to or used or useful in the operation of the business as
conducted by the Seller on and before the date hereof (the Business) (all such
assets being sold hereunder are referred to collectively herein as the Assets):
all tangible personal property owned by Seller (such as machinery, equipment,
leasehold improvements, furniture and fixtures, and vehicles), including,
without limitation, that which is more fully described on Schedule 1.1(a) hereto
(collectively, the Tangible Personal Property);
all of the inventory owned by Seller, including without limitation, that which
is more fully described on Schedule 1.1(b) hereto (collectively, the
Inventory);
all of the Seller's intangible assets (the "Intangibles"), including without
limitation, (i) all of the Seller's rights to the names under which it is
incorporated or under which they currently do business, (ii) all of the Seller's
rights to any patents, patent applications, trademarks and service marks
(including registrations and applications therefor), trade names, and copyrights
and written know-how, trade secrets, licenses and sublicenses and all other
similar proprietary data and the goodwill associated therewith (collectively,
the Intellectual Property) used or held in connection with the Business,
including without limitation, that which is more fully described on Schedule
1.1(c) hereto (the Seller Intellectual Property), (iii) the Seller's telephone
numbers, and (iv) the sales and promotional literature, computer software,
customer and supplier lists and all other records of the Seller relating to the
Assets or the Business, excluding the corporate minute books, accounting
records, files, tax returns and other financial data on whatever media, relating
to the Seller or the Shareholders or the Excluded Assets (the Retained Records);
those leases, subleases, contracts, contract rights and agreements relating to
the Assets or the operation of the Business listed on Schedule 1.1(d) hereto
(collectively, the Contracts);
all of the permits, authorizations, certificates, approvals, registrations,
variances, waivers, exemptions, rights-of-way, franchises, ordinances, orders,
licenses and other rights of every kind and character (collectively, the
Permits) relating to all or any of the Assets or to the operation of the
Business, including, but not limited to, those that are more fully described on
Schedule 1.1(e) hereto;
the goodwill and going concern value of the Business; and
(g) all other or additional privileges, rights, interests, properties and assets
of the Seller of every kind and description and wherever located that are used
in the Business or intended for use in the Business in connection with, or that
are necessary for the continued conduct of, the Business.
1.2 Excluded Assets
The Assets shall not include the following (collectively, the Excluded
Assets): (i) all of the Seller's accounts receivable and all other rights of
the Seller to payment for services rendered by the Seller before Closing, it
being understood that all of Seller's customers shall be billed on the Closing
Date for services or materials provided through that date and that Buyer will
forward any payment on such accounts received by it to Seller within ten (10)
business day of receipt; (ii) all cash accounts of the Seller and all petty cash
of the Seller kept on hand for use in the Business; (iii) all other receivables
and prepaid expenses, including all right, title and interest of the Seller in
and to any prepaid expenses, bonds, deposits and other current assets relating
to any of the Assets or the Businesses; (iv) the Retained Records; (v) the cash
consideration paid or payable by Buyer to Seller pursuant to Section 1.3 hereof;
and (vi) the real estate and other assets described in Schedule 1.2 attached
hereto.
1.3 Consideration for Assets
As consideration for the sale of the Assets to Buyer and for the other covenants
and agreements of the Seller and the Shareholders contained herein, Buyer agrees
to pay on the Closing Date, the sum of Eleven Million, Nine Hundred Fifty
Thousand Dollars ($11,950,000) to Seller by wire transfer of immediately
available funds to an account designated by the Seller or by delivery of
immediately available funds. In addition, within thirty (30) days following the
Closing, Buyer will pay Seller an additional amount equal to the amounts paid by
Seller for equipment purchases made by Seller after May 6, 1998, and before the
date hereof which expand the capabilities of the Business and which are
described on Schedule 1.3 hereto.
1.4 Liabilities
Effective on the Closing Date, Buyer shall assume those, and only those,
liabilities and obligations of the Seller to perform the Contracts described on
Schedule 1.1(d) hereto to the extent that the Contracts have not been performed
and are not in default on the date hereof (the Assumed Liabilities). On and
after the date hereof, the Seller shall be responsible for any and all
liabilities and obligations of the Seller other than the Assumed Liabilities,
including, without limitation, (a) any obligations arising from the Seller's
employment of those employees of the Seller listed on Schedule 3.2 hereto; (b)
any liabilities arising from or relating to Seller's failure to be duly
qualified or licensed to do business and in good standing as a foreign
corporation in all jurisdictions in which the character of the properties owned
or the nature of the business conducted by Seller would make such qualification
or licensing necessary; (c) any failure to pay any taxes owed by Seller which
are applicable to the period ending with the date hereof; (d) any liabilities
arising out of any matters listed on Schedule 2.1.12 hereto; (e) any liability
for commission or other fees payable to brokers, attorneys or others; and (f)
any other liabilities resulting from Seller's operation of the Assets or conduct
of its business before the date hereof (collectively, the Retained Liabilities).
1.5 Closing
The closing of the purchase and sale provided for hereunder (the Closing)
shall take place on the date hereof , at the offices of Norwest Bank, 500 West
Texas, Midland, Texas.
1.6 Closing Deliveries
At the Closing, in addition to the conveyances of the Assets to the Buyer in
exchange for the Purchase Price, Buyer and Seller will deliver to one another
the opinions of counsel described below:
1.6.1 Opinion of Buyer's Counsel
The Seller shall have received a favorable opinion, dated as of the Closing
Date, from Lynch, Chappell & Alsup, P.C., counsel for Buyer, in form and
substance satisfactory to the Seller, to the effect that (i) Buyer has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware and is qualified to do business in the State of
Texas; (ii) all corporate proceedings required to be taken by or on the part of
the Buyer to authorize the execution of this Agreement and the consummation of
the transaction contemplated hereby have been taken; and (iii) this Agreement
has been duly executed and delivered by, and is the legal, valid and binding
obligation of Buyer and is enforceable against Buyer in accordance with its
terms, except as enforceability may be limited by (a) equitable principals of
general applicability or (b) bankruptcy, insolvency, reorganization, fraudulent
conveyance or similar laws affecting the rights of creditors generally. In
rendering such opinion, such counsel may rely upon (x) certificates of public
officials and of officers or Buyer as to the matters of fact and (y) the opinion
or opinions of other counsel, which opinions shall be reasonably satisfactory to
the Seller, as to matters other than federal or Texas law.
1.6.2 Opinion of Seller's Counsel
The Buyer shall have received a favorable opinion, dated as of the Closing Date,
from Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., counsel to Seller and the
Shareholders, in form and substance satisfactory to Buyer, to the effect that
(i) Seller has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the State of Nebraska and is qualified to do
business in the States of Texas and New Mexico and each other state in which the
conduct of its business requires it to be qualified to do business; (ii) all
proceedings required to be taken by or on the part of the Seller and the
Shareholders to authorize the execution of this Agreement and the consummation
of the transaction contemplated hereby have been taken; (iii) the Seller owns
all of the Assets free and clear of any Encumbrances; and (iv) this Agreement
has been duly executed and delivered by, and is the legal, valid and binding
obligation of the Seller and each of the Shareholders and is enforceable against
the Seller and each of the Shareholders in accordance with its terms, except as
the enforceability may be limited by (a) equitable principles of general
applicability or (b) bankruptcy, insolvency, reorganization, fraudulent
conveyance or similar laws affecting the rights of creditors generally. In
rendering such opinion, such counsel may rely upon (x) certificates of public
officials and of officers of the Seller as to the matters of fact and (y) on the
opinion or opinions of other counsel, which opinions shall be reasonably
satisfactory to Buyer, as to matters other than federal or Texas law.
<PAGE>
ARTICLE II
Representations and Warranties"
2.1 Representations and Warranties of the Seller and the Shareholders
The Seller and each of the Shareholders jointly and severally represent and
warrant to Buyer as follows:
2.1.1 Organization and Good Standing
Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Nebraska, is qualified to do
business in the States of Texas and New Mexico and in each other state in
which the nature and conduct of its business requires it to be qualified to
do business, has full requisite corporate power and authority to carry on
its businesses as it is currently conducted, and to own and operate the
properties currently owned and operated by it. The Shareholders
collectively own all of the issued and outstanding shares of the Seller's
capital stock and have the sole right to vote the same.
2.1.2 Agreement Authorized and Effect on Other Obligations.
The execution and delivery of this Agreement and all instruments to be
executed by Seller and the Shareholders hereunder have been authorized by
all necessary corporate, shareholder and other action on the part of the
Seller and each of the Shareholders, and this Agreement and all instruments
to be executed by the Seller and the Shareholders hereunder are the valid
and binding obligations of the Seller and each of the Shareholders
enforceable (subject to normal equitable principals) against each of such
parties in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, debtor relief or similar
laws affecting the rights of creditors generally. The execution, delivery
and performance of this Agreement and all instruments to be executed by the
Seller and the Shareholders hereunder and the consummation of the
transactions contemplated hereby and thereby, will not conflict with or
result in a violation or breach of any term or provision of, nor constitute
a default under (i) the Articles of Incorporation or Bylaws (or other
organizational documents) of the Seller, (ii) any obligation, indenture,
mortgage, deed of trust, lease, contract or other agreement to which the
Seller or any of the Shareholders are a party or by which the Seller or any
of the Shareholders or their respective properties are bound; or (iii) to
the best of their knowledge, any provision of any law, rule, regulation,
order, permits, certificate, writ, judgment, injunction, decree,
determination, award or other decision of any court, arbitrator or other
governmental authority to which the Seller or any of the Shareholders or
any of their respective properties are subject.
2.1.3 Contracts
Schedule 1.1(d) hereto sets forth a complete list of all contracts,
including leases under which the Seller is lessor or lessee, which relate
to the Assets and are to be performed in whole or in part after the date
hereof. In addition, (a) all of the Contracts are in full force and effect,
and constitute valid and binding obligations of the Seller, (b) the Seller
is not, and no other party to any of the Contracts is, in default
thereunder, and no event has occurred which (with or without notice, lapse
of time, or the happening of any other event) would constitute a default
thereunder, (c) no Contract has been entered into on terms which could
reasonably be expected to have an adverse effect on the use of the Assets
by Buyer, (d) neither the Seller nor any of the Shareholders have received
any information which would cause any of such parties to conclude that any
customer of the Seller will (or is likely to) cease doing business with
Buyer (or its successors) as a result of the consummation of the
transactions contemplated hereby.
2.1.4 Title to Assets
The Seller has good, indefeasible and marketable title to all of the
Assets, free and clear of any Encumbrances (defined below). Except as set
forth in Schedule 2.1.4 hereto, all of the Assets are (a) in a state of
good repair generally experienced in the oil and gas well drilling
industry, ordinary wear and tear excepted, (b) are free from any known
defects except as may be repaired by routine maintenance and such minor
defects as do not substantially interfere with the continued use thereof in
the conduct of normal operations and (c) conform to all applicable laws
governing their use. No notice of any violation of any law, statute,
ordinance or regulation relating to any of the Assets has been received by
the Seller or any of the Shareholders, except such as have been fully
complied with. The term Encumbrances means all liens, security interests,
pledges, mortgages, deeds of trust, claims, rights of first refusal,
options, charges, restrictions or conditions to transfer or assignment,
liabilities, obligations, taxes, privileges, equities, easements, rights of
way, limitations, reservations, restrictions and other encumbrances of any
kind or nature.
2.1.6 2.1.5 Licenses and Permits
Schedule 1.1(e) hereto sets forth a complete list of all Permits necessary
under law or otherwise for the operation, maintenance and use of the Assets
in the manner in which they are now being operated, maintained and used;
each of the Permits and the Seller's rights with respect thereto is valid
and subsisting, in full force and effect, and enforceable by the Seller;
the Seller is in compliance in all material respects with the terms of each
of the Permits; none of the Permits have been, or to the knowledge of the
Seller or any of the Shareholders, are threatened to be, revoked, canceled,
suspended or modified.
2.1.6 Intellectual Property
Schedule 1.1(c) hereto sets forth a complete list of all Intellectual
Property material or necessary for the continued use of the Assets; the
Seller Intellectual Property is owned or licensed by the Seller free and
clear of any Encumbrances; the Seller has not granted to any other person
any license to use any Seller Intellectual Property and use of the Seller
Intellectual Property will not, and the conduct of the Business did not,
infringe, misappropriate or conflict with the Intellectual Property rights
of others. Neither the Seller nor any of the Shareholders has received any
notice of infringement, misappropriation or conflict with the Intellectual
Property rights of others in connection with the use by Seller of the
Seller Intellectual Property.
2.1.7 Financial Statements
The Seller has delivered to Buyer a copy of Seller's audited statement of
income for the three (3) month period ended March 31, 1998, a copy of which
is attached hereto as Schedule 2.1.7 (the Seller's Statement of Income);
the Seller's Statement of Income is true, correct and complete in all
material respects and presents fairly and fully the income and expenses of
the Seller as at the date and for the periods indicated thereon, and has
been prepared in accordance with generally accepted accounting principles
as promulgated by the American Institute of Certified Public Accountants
(GAAP) applied on a consistent basis and the Seller's Statement of Income
includes all adjustments which are necessary for a fair presentation of the
Seller's income and expenses for the period indicated.
2.1.8 Absence of Certain Changes and Events
Since March 31, 1998, there has not been:
(a) Financial Change
Any adverse change in the Assets, the Business or the financial condition,
operations, liabilities or prospects of the Seller;
(b) Property Damage Any damage, destruction, or loss to any of the Assets
or the Business (whether or not covered by insurance);
(c) Waiver
Any waiver or release of a material right of or claim held by the Seller;
(d) Change in Assets
Any acquisition, disposition, transfer, encumbrance, mortgage, pledge or
other encumbrance of any asset of the Seller other than in the ordinary
course of business;
(e) Labor Disputes
Any labor disputes between the Seller and its employees; or
(f) Other Changes
Any other event or condition known to the Seller or the Shareholders that
particularly pertains to and has or might have an adverse effect on the
Assets, the operations of the Business or the financial condition or
prospects of the Seller.
2.1.9 Necessary Consents
The Seller has obtained and delivered to Buyer all consents to assignment
or waivers thereof required to be obtained from any governmental authority
or from any other third party in order to validly transfer the Assets
hereunder, including, without limitation, the Contracts and the Seller
Permits.
2.1.10 Environmental Matters
None of the current or past operations of the Business or any of the Assets
are being or have been conducted or used in such a manner as to constitute
a violation of any Environmental Law (defined below); neither the Seller
nor any of the Shareholders has received any notice (whether formal or
informal, written or oral) from any entity, governmental agency or
individual regarding any existing, pending or threatened investigation or
inquiry related to violations of any Environmental Law or regarding any
claims for remedial obligations or contribution for removal costs or
damages under any Environmental Law; there are no writs, injunction
decrees, orders or judgments outstanding, or lawsuits, claims, proceedings
or investigations pending or, to the knowledge of the Seller or any of the
Shareholders, threatened relating to the ownership, use, maintenance or
operation of the Assets or the conduct of the Business, nor, to the
knowledge of the Seller or any of the Shareholders, is there any basis for
any of the foregoing; Buyer is not required to obtain any permits, licenses
or similar authorizations pursuant to any Environmental Law in effect as of
the date hereof to operate and use any of the Assets for their current or
proposed purposes and uses; to the knowledge of the Seller or any of the
Shareholders, the Assets include all environmental and pollution control
equipment necessary for compliance with applicable Environmental Law; no
Hazardous Materials (defined below) have been or are currently being used
by the Seller in the operation of the Assets, except as set forth on
Schedule 2.1.10 hereto; no Hazardous Materials are or have ever been
situated on or under any of the Seller's properties, whether owned or
leased, or incorporated into any of the Assets; there are no, and there
have never been any, underground storage tanks (as defined under
Environmental Law) located under any of the Seller's properties, whether
owned or leased; and there are no environmental conditions or
circumstances, including the presence or release of any Hazardous
Materials, on any property presently or previously owned or leased by the
Seller, or on any property on which Hazardous Materials generated by the
Seller's operations or the use of the Assets were disposed of, which would
result in an adverse change in the Assets, Business or business prospects
of the Seller. The term Environmental Law means any and all laws, rules,
orders, regulations, statutes, ordinances, codes, decrees, and other
legally enforceable requirements (including, without limitation, common
law) of the United states, or any state, regional, city, local, municipal
or other governmental authority or quasi-governmental authority,
regulating, relating to, or imposing environmental standards of conduct
concerning protection of the environment or human health, or employee
health and safety as from time to time has been or is now in effect. The
term Hazardous Materials means (x) asbestos, polychlorinated biphenyls,
urea formaldehyde, lead based paint, radon gas, petroleum, oil, solid
waste, pollutants and contaminants, and (y) any chemicals, materials,
wastes or substances that are defined, regulated, determined or identified
as toxic or hazardous in any Environmental Law.
2.1.11 No ERISA Plans or Labor Issues
No employee benefit plan of the Seller, whether or not subject to any
provisions of the Employee Retirement Income Security Act of 1974, as
amended, will by its terms or applicable law, become binding upon or an
obligation of Buyer; (b) the Seller has not engaged in any unfair labor
practices which could reasonably be expected to result in an adverse effect
on the Assets; (c) the Seller does not have any dispute with any of its
existing or former employees, and (d) there are no labor disputes or, to
the knowledge of the Seller or any of the Shareholders, any disputes
threatened by current or former employees of the Seller.
2.1.12 Investigations; Litigation
No investigation or review by any governmental entity with respect to the
Seller or any of the transactions contemplated by this Agreement is pending
or threatened, nor has any governmental entity indicated to the Seller or
any of the Shareholders an intention to conduct the same; and there is no
suit, action, or legal, administrative, arbitration or other proceeding or
governmental investigation pending, or any other unasserted claims, to
which the Seller or any of the Shareholders is a party or which would have
an adverse effect on any of the Assets or the Business, except as set forth
on the Schedule 2.1.12 hereto.
2.1.13 Absence of Certain Businesses Practices
Neither the Seller, nor any of the Shareholders, nor any officer, employee
or agent of the Seller, or any other person acting on behalf of the Seller
or any of the Shareholders, has, directly or indirectly, within the past
five years, given or agreed to give any gift or similar benefit to any
customer, supplier, government employee or other person who is or may be in
a position to help or hinder the profitable conduct of the Business or the
profitable use of the Assets (or to assist the Seller in connection with
any actual or proposed transaction) which if not given in the past, might
have had an adverse effect on the profitable conduct of the Business or the
profitable use of the Assets, or if not continued in the future, might
adversely affect the profitable conduct of the Business or the profitable
use of the Assets.
2.1.14 Solvency
The Seller is not presently insolvent, nor will the Seller be rendered
insolvent by the occurrence of the transactions contemplated by this
Agreement. The term insolvent, with respect to the Seller, means that the
sum of the present fair and saleable value of the Seller's assets does not
and will not exceed its debts and other probable liabilities, and the term
debts includes any legal liability whether matured or unmatured,
liquidated or unliquidated, absolute fixed or contingent, disputed or
undisputed or secured or unsecured.
2.1.15 Finder's Fee
All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried on by the Seller, the Shareholders
and their counsel directly with Buyer and its counsel, without the
intervention of any other person in such manner as to give rise to any
valid claim against Buyer for a brokerage commission, finder's fee or any
similar payment.
2.1.16 Taxes
All federal, state and local taxes assessed or assessable against the
Assets for periods prior to January 1, 1998 have been paid by Seller and
the Assets will be conveyed to Buyer free and clear of any such taxes or
claims therefor. All taxes assessed against the Assets for the period
commencing January 1, 1998 will be prorated through the Closing Date (based
on 1997 assessed values) with Seller paying to Buyer at Closing an amount
equal to the portion of such taxes applicable to the period between January
1, 1998 and the Closing Date. Buyer shall be responsible for the payment of
any sales taxes due as a result of the sale of the Assets by Seller to
Buyer.
2.2 Representations and Warranties of Buyer
Buyer represents and warrants to the Seller and the Shareholder as follows:
2.2.1 Organization and Good Standing
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, has full requisite
corporate power and authority to carry on its businesses as it is currently
conducted, and to own and operate the properties currently owned and
operated by it, and is duly qualified or licensed to do businesses and is
in good standing as a foreign corporation authorized to do business in the
State of Texas.
2.2.2 Agreement Authorized and its Effect on Other Obligations
The consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of Buyer,
and this Agreement is a valid and binding obligation of Buyer enforceable
(subject to normal equitable principles) in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, debtor relief or similar laws affecting the rights of
creditors generally. The execution, delivery and performance of this
Agreement by Buyer will not conflict with or result in a violation or
breach of any term or provision of, or constitute a default under (a) the
Certificate of Incorporation or Bylaws of Buyer or (b) any obligation,
indenture, mortgage, deed of trust, lease, contract or other agreement to
which Buyer or any of its property is bound.
2.2.3 Consents and Approvals
No consent, approval or authorization of, or filing of a registration with,
any governmental or regulatory authority, or any other person or entity is
required to be made or obtained by Buyer in connection with the execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby.
2.2.4 Finder's Fee
All negotiations relative to this Agreement and the transactions
contemplated hereby have been carried on by Buyer and its counsel directly
with the Seller and the Shareholders and their counsel, without the
intervention by any other person as the result of any act of Buyer in such
a manner as to give rise to any valid claim against the Seller of any of
the Shareholders hereto for any brokerage commission, finder's fee or any
similar payments.
<PAGE>
ARTICLE III
Additional Agreements
3.1 Noncompetition.
Except as set forth below or as otherwise consented to or approved in
writing by Buyer, the Seller and each of the Shareholders agree that for a
period of 60 months following the date hereof, such party will not,
directly or indirectly, acting alone or as a member of a partnership or as
an officer, director, employee, consultant, representative, advisor, lender
(including gifts used for capitalization or collateral), a holder of, or
investor in as much as 3% of any security of any class of any corporation
or other business entity (a) engage in any business in competition with the
business or businesses conducted by the Seller on or before the date hereof
or by Buyer on or after the date hereof, or in any service business the
services of which were provided and marketed by the Seller on or before the
date hereof or by Buyer on or after the date hereof in the states of Texas
or New Mexico; (b) request any present customers or suppliers of the Seller
or any customers of Buyer or with Yale E. Key, Inc., T.S.T. Paraffin
Service Company, Inc., Ram Oil Well Service, Inc., Rowland Trucking Co.,
Inc., WellTech Eastern, Inc. or Key Four Corners, Inc. (Buyer's
Affiliates) to curtail or cancel their business with Buyer (or Buyer's
Affiliates); (c) disclose to any person, firm or corporation any trade,
technical or technological secrets of Buyer (or Buyer's Affiliates) or of
the Seller or any details of their organization or business affairs or (d)
induce or actively attempt to influence any employee of Buyer (or Buyer's
Affiliates) to terminate his or her employment. The Seller and each of the
Shareholders agree that if either the length of time or geographical area
as set forth in this Section 3.1 is deemed too restrictive in any court
proceeding, the court may reduce such restrictions to those which it deems
reasonable under the circumstances. The obligations expressed in this
Section 3.1 are in addition to any other obligations that the Seller and
the Shareholders may have under the laws of any state requiring a
corporation selling its assets (or a shareholder of such corporation) to
limit its activities so that the goodwill and business relations being
transferred with such assets will not be materially impaired. The Seller
and the Shareholders further agree and acknowledge that Buyer does not have
any adequate remedy at law for the breach or threatened breach by the
Seller or the Shareholders of the covenants contained in this Section 3.1,
and agree that Buyer may, in addition to the other remedies which may be
available to it hereunder, file a suit in equity to enjoin the Seller or
the Shareholders from such breach or threatened breach. If any provisions
of this Section 3.1 are held to be invalid or against public policy, the
remaining provisions shall not be affected thereby. The Seller and the
Shareholders acknowledge that the covenants set forth in this Section 3.1
are being executed and delivered by such party in consideration of (i) the
covenants of Buyer contained in this Agreement, (ii) additional
consideration in the amount of $50,000 payable by Buyer on the date hereof
by wire transfer of immediately available funds to the Seller and the
Shareholders, in those amounts and to those accounts specified in Schedule
3.1 hereto and (iii) for other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged.
3.2 Hiring Employees
Schedule 3.2 hereto is a complete and accurate listing of all employees of
the Seller who devote their full time in the operation of the Assets and
the conduct of the Business (the Employees). Effective as of the date of
Closing, substantially all of the Employees shall be offered employment by
Buyer, subject to such Employees meeting Buyer's standard employment
eligibility requirements. Buyer shall have no liability or obligation with
respect to any employee benefits of any Employee except those benefits that
accrue pursuant to such Employees' employment with Buyer on or after the
date hereof. The Seller and the Shareholders shall cooperate with Buyer in
connection with any offer of employment from Buyer to the Employees and use
its best efforts to cause the acceptance of any and all such offers.
3.3 Allocation of Purchase Price
The parties hereto agree to allocate the Purchase Price payable by Buyer
for the Assets hereunder as set forth on Schedule 3.3 hereto, and shall
report this transaction for federal income tax purposes in accordance with
the allocation so agreed upon. The parties hereto for themselves and for
their respective successors and assigns covenant and agree that they will
file coordinating Form 8594's in accordance with Section 1060 of the
Internal Revenue Code of 1986, as amended, with their respective income tax
returns for the taxable year that includes the date hereof.
3.4 Name Change
The Seller and the Shareholders shall, within ten (10) days from the date
of Closing, cause to be filed with the Secretary of State of Nebraska an
amendment to the Articles of Incorporation of the Seller changing the names
of the Seller from its current name to a name that is not similar to such
name. The Seller and the Shareholders shall, within five (5) days from the
date of its receipt of confirmation of such filings from the Secretary of
State of Nebraska, cause the same to be filed with the appropriate office
of each state in which the Seller is qualified to do business and deliver
to Buyer a copy of such filings.
<PAGE>
ARTICLE IV
Indemnification
4.1 Indemnification by the Seller and the Shareholders
In addition to any other remedies available to Buyer under this Agreement,
or at law or in equity, the Seller and each of the Shareholders owning ten
percent (10%) or more of the capital stock of Seller as of the date hereof
(being Reed Gilmore, Priscilla Gilmore, L. E. Grimes and Larry V. Bohannon)
shall, jointly and severally, indemnify, defend and hold harmless Buyer and
its officers, directors, employees, agents and stockholders (collectively,
the Buyer Indemnified Parties), against and with respect to any and all
claims, costs, damages, losses, expenses, obligations, liabilities,
recoveries, suits, causes of action and deficiencies, including interest,
penalties and reasonable attorneys' fees and expenses (collectively, the
Damages) a Buyer Indemnified Party shall incur or suffer (whether the
damages are suffered or incurred by such Buyer Indemnified Party directly
or as a result of a third party claim against such Buyer Indemnified
Party), which arise, result from or relate to (a) any material breach of,
or failure by the Seller or any of the Shareholders to perform, their
respective representations, warranties, covenants or agreements in this
Agreement or in any schedule, certificate, exhibit or other instrument
furnished or delivered to Buyer by the Seller or the Shareholders under
this Agreement or (b) the Retained Liabilities. In addition, each
Shareholder owning less than ten percent (10%) of the capital stock of
Seller as of the date hereof (being M. Reed Gilmore, Jr., Valerie G.
Griess, Joan G. Lindquist and James C. Gilmore) shall indemnify, defend and
hold the Buyer Indemnified Parties harmless against and with respect to any
and all Damages a Buyer Indemnified Party shall incur or suffer which
arise, result from or relate to any material breach of, or failure by such
Shareholder to perform his or her representations, warranties, covenants or
agreements in this Agreement or in any schedule, certificate, exhibit or
other instrument furnished or delivered by such Shareholder to Buyer.
4.2 Indemnification by Buyer
In addition to any other remedies available to the Seller or the
Shareholders under this Agreement, or at law or in equity, Buyer shall
indemnify, defend and hold harmless the Seller and its officers, directors,
employees, agents and stockholders and each of the Shareholders against and
with respect to any and all Damages that such indemnitees shall incur or
suffer, which arise, result from or relate to (a) any material breach of,
or failure by Buyer to perform, any of its representations, warranties,
covenants or agreements in this Agreement or in any schedule, certificate,
exhibit or other instrument furnished or delivered to the Seller or the
Shareholders by or on behalf of Buyer under this Agreement or (b) the
Assumed Liabilities.
4.3 Indemnification Procedure
If any party hereto discovers or otherwise becomes aware of an
indemnification claim arising under Section 4.1 or 4.2 of this Agreement,
such indemnified party shall give written notice to the indemnifying party,
specifying such claim, and may thereafter exercise any remedies available
to such party under this Agreement; provided, however, that the failure of
an indemnified party to give notice as provided herein shall not relieve
the indemnifying party of any obligation hereunder to the extent the
indemnifying party is not materially prejudiced thereby. Further, promptly
after receipt by an indemnified party hereunder of written notice of the
commencement of any third party action or proceeding against such
indemnified party with respect to which a claim for indemnification may be
made pursuant to this Article IV, such indemnified party shall, if a claim
in respect thereof is to be made against any indemnifying party, give
written notice to the latter of the commencement of such third party
action; provided, however, that the failure of an indemnified party to give
notice as provided herein shall not relieve the indemnifying party of any
obligation hereunder to the extent the indemnifying party is not materially
prejudiced thereby. In case any such third party action is brought against
an indemnified party, the indemnifying party shall be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified, to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after such
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not
be liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense thereof
unless the indemnifying party has failed to assume the defense of such
third party claim and to employ counsel reasonably satisfactory to such
indemnified person. An indemnifying party who elects not to assume the
defense of a third party claim shall not be liable for the fees and
expenses of more than one counsel in any single jurisdiction for all
parties indemnified by such indemnifying party with respect to such third
party claim or with respect to third party claims separate but similar or
related in the same jurisdiction arising out of the same general
allegations. Notwithstanding any of the foregoing to the contrary, the
indemnified party will be entitled to select its own counsel and assume the
defense of any third party action brought against it if the indemnifying
party fails to select counsel reasonably satisfactory to the indemnified
party, the expenses of such defense to be paid by the indemnifying party.
No indemnifying party shall consent to entry of any judgment or enter into
any settlement with respect to a third party claim without the consent of
the indemnified party, which consent shall not be unreasonably withheld, or
unless such judgment or settlement includes as an unconditional term
thereof the giving by the third party claimant or plaintiff to such
indemnified party of a release from all liability with respect to such
third party claim. No indemnified party shall consent to entry of any
judgment or enter into any settlement of any such third party action, the
defense of which has been assumed by an indemnifying party, without the
consent of such indemnifying party, which consent shall not be unreasonably
withheld, delayed or continued.
<PAGE>
ARTICLE V
Miscellaneous
5.1 Survival of Representations, Warranties and Covenants
All representations and warranties made by the parties hereto shall survive
indefinitely without limitation, notwithstanding any investigation made on
the part of the parties hereto. All statements contained in any
certificate, schedule, exhibit or other instrument delivered pursuant to
this Agreement shall be deemed to have been representations and warranties
by the respective party or parties, as the case may be, and shall also
survive indefinitely without limitation, notwithstanding any investigations
made by any party hereto or on its behalf. All covenants and agreements
contained herein shall survive as provided herein.
5.2 Entirety
This Agreement embodies the entire agreement among the parties with respect
to the subject matter hereof, and all prior agreements between the parties
with respect thereto are hereby superseded in their entirety.
5.3 Counterparts.
Any number of counterparts of this Agreement may be executed and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one instrument.
5.4 Notices and Waivers.
Any notice or waiver to be given to any party hereto shall be in writing
and shall be delivered by courier, sent by facsimile transmission or first
class registered or certified mail, postage prepaid, return receipt
requested:
If to Buyer
Addressed to:
With a copy to:
Key Energy Drilling, Inc.
Two Tower Center, 20th Floor
East Brunswick, New Jersey 08816
Attn: General Counsel
Facsimile: (908) 247-5148
Lynch, Chappell & Alsup, P.C.
300 N. Marienfeld, Suite 700
Midland, Texas 79701
Attn: James M. Alsup, Esq.
Facsimile: (915) 683-2587
If to the Seller or the Shareholders
Addressed to:
With a copy to:
Lakota Drilling Company
415 West Wall Street, Suite 200
Midland, Texas 79701
Attn: Mr. L. E. Grimes
Facsimile: _______________
Hinkle, Cox, Eaton, Coffield & Hensley
550 West Texas, Suite 1200
Midland, Texas 79701
Attn: John C. Chambers, Esq.
Facsimile: (915) 683-6518
Any communication so addressed and mailed by first-class registered or
certified mail, postage prepaid, with return receipt requested, shall be
deemed to be received on the fifth (5th) businesses day after so mailed,
and if delivered by courier or facsimile to such address, upon delivery
during normal businesses hours on any businesses day.
5.5 Captions.
The captions contained in this Agreement are solely for convenient
reference and shall not be deemed to affect the meaning or interpretation
of any article, section, or paragraph hereof.
5.6 Successors and Assigns.
This Agreement shall be binding upon and shall inure to the benefit of and
be enforceable by the successors and assigns of the parties hereto.
5.7 Severability.
If any term, provision, covenant or restriction of this Agreement is held
by a court of competent jurisdiction to be invalid, void, or unenforceable,
the remainder of the terms, provisions, covenants and restrictions shall
remain in full force and effect and shall in no way be affected, impaired
or invalidated. It is hereby stipulated and declared to be the intention of
the parties that they would have executed the remaining terms, provisions,
covenants and restrictions without including any of such which may be
hereafter declared invalid, void or unenforceable.
5.8 Applicable Law.
This Agreement shall be governed by and construed and enforced in
accordance with the applicable laws of the State of Texas.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
IN WITNESS WHEREOF, the Shareholders have executed this Agreement and the
other parties hereto have caused this Agreement to be executed in their
respective corporate names by their respective duly authorized
representatives, all as of the day and year first above written.
BUYER:
KEY ENERGY DRILLING, INC.
a Delaware corporation
By:
Joe Dee Brooks, President
SELLER:
LAKOTA DRILLING COMPANY
By:
Name:_____________________________________
Title:______________________________________
SHAREHOLDERS:
___________________________________________
Reed Gilmore
__________________________________________
Priscilla Gilmore
___________________________________________
M. Reed Gilmore, Jr.
____________________________________________
Valerie G. Griess
____________________________________________
Joan C. Lindquist
____________________________________________
James C. Gilmore
____________________________________________
L. E. Grimes
____________________________________________
Larry V. Bohannon
To the Board of Directors and Stockholders
Key Energy Group, Inc. :
We consent to incorporation by reference in the registration statement No.
333-46733 on Form S-8 and registration statements No. 333-01777, No. 333-24497,
No. 333-24499, No. 333-43115, No. 333-43779 and No. 333-44677 on Forms S-3 of
Key Energy Group, Inc. and Subsidiaries of our report dated September 1, 1998,
relating to the consolidated balance sheets of Key Energy Group, Inc. and
Subsidiaries as of June 30, 1998, and 1997, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
years in the three-year period ended June 30, 1998, which report appears in the
June 30, 1998 annual report on Form 10-K of Key Energy Group, Inc. and
Subsidiaries.
KPMG PEAT MARWICK LLP
Midland, Texas
September 1, 1998
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