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[AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A-2
(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
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8038
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KEY ENERGY SERVICES, INC.
(Formerly Key Energy Group, Inc.)
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, Twentieth Floor, East Brunswick, NJ 08816
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 247-4822
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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
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7% Convertible Subordinated Debentures Due 2003
5% Convertible Subordinated Notes Due 2004
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
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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
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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.
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KEY ENERGY GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I.
Item 1. Business 3
PART II.
Item 8. Financial Statements and Supplementary Data. 9
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51
</TABLE>
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KEY ENERGY GROUP, INC. AND SUBSIDIARIES
PART I.
ITEM 1. BUSINESS.
THE COMPANY
Key Energy Services, Inc., formerly known as 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. As of June 30, 1998, 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
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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 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 guaranteed 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 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.
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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
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 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, 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.
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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.
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
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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
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
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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.
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.
The Company historically has experienced an annual employee turnover rate of
over 50%. The high turnover rate is caused by the nature of the work, which is
physically demanding and performed outdoors. As a result, workers may choose to
pursue employment in fields that offer a more desirable work environment at wage
rates that are competitive with ours. Although the Company currently is
downsizing its workforce, the Company cannot assure that at times of high demand
it will be able to recruit and train workers. Potential inability or lack of
desire by workers to commute to the Company's facilities and job sites and
competition for workers from other industries are factors that could affect the
Company's ability to attract workers. The Company believes that its wage rates
are competitive with the wage rates of its competitors and other potential
employers. A significant increase in the wages other employers pay could result
in a reduction in the Company's workforce, increases in its wage rates, or both.
Either of these events could diminish the Company's profitability and growth
potential.
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
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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.
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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 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
<TABLE>
<CAPTION>
Page
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<S> <C>
Consolidated Balance Sheets.............................. 11
Consolidated Statements of Operations ................... 12
Consolidated Statements of Cash Flows ................... 13
Consolidated Statements of Stockholders' Equity ......... 14
Notes to Consolidated Financial Statements .............. 15
Independent Auditors' Report ............................ 44
</TABLE>
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KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, June 30,
(Thousands, except share and per share data) 1998 1997
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<S> <C> <C>
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
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Total Current Assets 127,557 93,333
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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
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547,537 227,255
Accumulated depreciation & depletion (48,385) (19,069)
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Net Property and Equipment 499,152 208,186
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Goodwill, net of amortization ($2,264 - 1998; $822 - 1997) 44,936 9,256
Other Assets 26,995 9,320
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Total Assets $698,640 $320,095
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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
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Total Current Liabilities 48,029 33,142
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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
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Total Stockholders' Equity 154,928 73,179
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Total Liabilities and Stockholders' Equity $698,640 $320,095
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</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
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KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(Thousands, except per share data) June 30, 1998 June 30, 1997 June 30, 1996
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<S> <C> <C> <C>
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
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420,046 162,425 65,857
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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
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381,241 147,750 60,282
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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
============= ============= =============
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
12
<PAGE> 13
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
(Thousands) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
13
<PAGE> 14
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
(Thousands) UNREALIZED
GAIN ON
NUMBER OF ADDITIONAL AVAILABLE
SHARES AMOUNT PAID-IN TREASURY RETAINED FOR SALE
OUTSTANDING AT PAR CAPITAL STOCK EARNINGS SECURITIES TOTAL
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= ========= ========= =========
</TABLE>
See the accompanying notes which are an integral part of these consolidated
financial statements.
14
<PAGE> 15
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)
15
<PAGE> 16
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Description Years
----------- -----
<S> <C>
Oilfield service equipment 3 - 20
Motor vehicles 3 - 7
Furniture and equipment 3 - 10
Buildings and improvements 10 - 40
Gas processing facilities 10
</TABLE>
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 $12,325,000 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
16
<PAGE> 17
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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.
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. The share effect related to some employees and directors stock options
is omitted for each of the years presented and the share effect related to the
5% convertible notes is omitted for the year ended June 30, 1996 because they
are anti-dilutive to the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED
(THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------
6/30/98 6/30/97 6/30/96
--------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
17
<PAGE> 18
KEY ENERGY GROUP, INC. SUBSIDIARIES
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 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.
18
<PAGE> 19
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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:
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
19
<PAGE> 20
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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.
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 business 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.
20
<PAGE> 21
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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
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, 1997 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.
21
<PAGE> 22
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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.
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
22
<PAGE> 23
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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.
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.
23
<PAGE> 24
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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
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
24
<PAGE> 25
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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.
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.
25
<PAGE> 26
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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
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.
26
<PAGE> 27
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Pro Forma Results of Operations--(unaudited)
The following unaudited pro forma results of operations have been prepared as
though Well-Co, Cobra, 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.
<TABLE>
<CAPTION>
YEAR ENDED
(THOUSANDS, EXCEPT PER SHARE DATA) JUNE 30, 1998 JUNE 30, 1997
-------------------------------- -------------- -------------
<S> <C> <C>
Revenues $ 459,764 $ 316,656
Net income 26,075 13,342
Basic earnings per share $ 1.52 $ 1.19
</TABLE>
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
June 30,
(Thousands) 1998 1997
------------ ------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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 effect to the consolidated
financial position, liquidity, capital resources, resources of future results of
operations 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:
<TABLE>
<CAPTION>
June 30,
(Thousands) 1998 1997
----------- -------- --------
<S> <C> <C>
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
======== ========
</TABLE>
27
<PAGE> 28
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
(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.
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.
28
<PAGE> 29
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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
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.
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
29
<PAGE> 30
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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 issuance of an additional 165,423 shares of common stock,
representing 50% of the interest otherwise payable from the date of conversion
through July 1, 1999, were treated as an equity transaction due to their
inclusion as conversion privileges included in the terms of the indentures at
issuance. 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.
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:
<TABLE>
<CAPTION>
(in thousands)
Fiscal year Principal
Ended Amount
------------ --------
<S> <C>
1999 $ 1,848
2000 2,194
2001 1,417
2002 991
2003 177,329
--------
Thereafter 216,000
========
$399,779
</TABLE>
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.
30
<PAGE> 31
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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:
<TABLE>
<CAPTION>
June 30,
(Thousands) 1998 1997
----------- ------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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 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.
31
<PAGE> 32
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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
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:
<TABLE>
<CAPTION>
Price
Shares Per Share
---------- ----------
<S> <C> <C>
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
==========
</TABLE>
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
32
<PAGE> 33
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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:
<TABLE>
<CAPTION>
(unaudited)
YEAR ENDED JUNE 30, 1998 1997
---- ----
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Risk-free interest rate 5.79% 6.59%
Expected life 5 years 5 years
Expected volatility 136% 28%
Expected dividend yield 0% 0%
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
---------- ------- ------- -------
<S> <C> <C> <C>
Federal and State:
Current $ 7,343 $ 1,664 $ 270
Deferred 7,287 3,836 1,618
------- ------- -------
$14,630 $ 5,500 $ 1,888
======= ======= =======
</TABLE>
Income tax expense differs from amounts computed by applying the statutory
federal rate as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
----------- ---- ---- ----
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
33
<PAGE> 34
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
Deferred tax assets (liabilities) are comprised of the following :
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
(Thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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)
======== ======== ========
</TABLE>
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.
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:
<TABLE>
<CAPTION>
Lease
Fiscal Year Payments
Ending June 30, (thousands)
<S> <C>
1999 $ 7,249
2000 6,022
2001 3,492
2002 1,641
2003 660
-------
$19,064
=======
</TABLE>
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.
34
<PAGE> 35
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
1997 1996
---- ----
<S> <C> <C>
Customer A 13% 20%
Customer B 7% 11%
</TABLE>
The Company did not have any one customer which represented 10% or more of
consolidated revenues for the fiscal year ended June 30, 1998.
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.
35
<PAGE> 36
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
15. BUSINESS SEGMENT INFORMATION
Information about the Company's operations by business segment is as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
(Thousands) 1998 1997 1996
- ------------ --------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
Income before interest, taxes and minority
interest in income:
Oilfield services $ 6,718 $ 21,642 $ 58,082
Oil and gas well drilling services 640 1,036 4,861
Oil and gas 1,177 2,533 1,064
General corporate (483) (2,657) (3,726)
--------- --------- ---------
$ 8,052 $ 22,544 $ 60,281
========= ========= =========
</TABLE>
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.
36
<PAGE> 37
KEY ENERGY GROUP, INC AND SUBSIDIARIES
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.
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.
37
<PAGE> 38
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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.
17. CASH FLOW DISCLOSURES
Supplemental cash flow disclosures for the years ended June 30, 1998, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
Year Ended June 30,
(Thousands) 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C>
Interest paid $ 16,441 $ 5,850 $ 2,205
Taxes paid 9,024 -- 391
</TABLE>
Supplemental schedule detailing the purchase price of acquisitions including
non-cash consideration paid for the year ended June 30, 1996 is presented below:
<TABLE>
<CAPTION>
(thousands)
-----------
<S> <C>
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
</TABLE>
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>
FAIR VALUE ACQUISITION
OF ISSUED ASSUMPTION OF ASSUMPTION OF OF PROPERTY
ACQUISITION COMMON STOCK DEBT LIABILITIES AND EQUIPMENT
- ----------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
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
</TABLE>
38
<PAGE> 39
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
<TABLE>
<S> <C> <C> <C> <C>
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>
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>
FAIR VALUE ACQUISITION
OF ISSUED ASSUMPTION OF ASSUMPTION OF OF PROPERTY
ACQUISITION COMMON STOCK DEBT LIABILITIES AND EQUIPMENT
- ----------- ------------ ---- ----------- -------------
<S> <C> <C> <C> <C>
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>
39
<PAGE> 40
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
18. UNAUDITED SUPPLEMENTARY INFORMATION - QUARTERLY RESULTS OF OPERATIONS
Summarized quarterly financial data for 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1998
<S> <C> <C> <C> <C>
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
</TABLE>
The Company did not perform physical inventories at the end of each fiscal
quarter of 1997. Therefore, although year-end fiscal inventories were correct as
of the fiscal year ended June 30, 1997, fourth quarter results may not be
reflective of actual results due to this adjustment. In addition, since the
Company did not perform physical inventories at the end of each quarter, so
inventories on the Company's quarterly financial statements for each quarter may
not be reflective of actual results. Because the timing of this error cannot be
accurately determined, no restatement of any 1997 quarterly reports on Form 10-Q
were done.
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.
40
<PAGE> 41
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
19. SUPPLEMENTAL INFORMATION ON OIL AND GAS ACTIVITIES (unaudited)
Information concerning the Company's oil and activities was not
significant, as defined under SFAS 69, for the fiscal years ended June 30, 1997
and 1998. Such activities were, however, significant for the fiscal year ended
June 30, 1996.
Capitalized Costs:
<TABLE>
<CAPTION>
June 30,
(in thousands) 1996
- -------------- --------
<S> <C>
Proved properties $ 17,290
Unproved properties --
Less accumulated depletion (1,364)
--------
Net capitalized costs $ 15,926
========
</TABLE>
Costs Incurred:
<TABLE>
<CAPTION>
June 30,
(in thousands) 1996
- -------------- --------
<S> <C>
Proved property acquisition costs $ 7,786
Development costs 1,848
--------
Total costs incurred $ 9,634
========
</TABLE>
Results of Operations:
<TABLE>
<CAPTION>
June 30,
(in thousands) 1996
- -------------- --------
<S> <C>
Oil and gas sales $ 3,555
Production costs, including production taxes (1,350)
Depletion (598)
Income taxes(a) (546)
--------
Results of operations for oil and gas producing activities(b) $ 1,061
========
</TABLE>
- -------------------
(a) Computed at the statutory rate of 35%.
(b) Excludes corporate overhead and financing costs.
Oil and Gas Reserve Information
Estimates of Odessa Exploration's proved oil and gas reserves as of
June 30, 1996 were prepared by the Company and reviewed by an independent
petroleum reservoir engineering firm. Estimates were made in accordance with
guidelines established by the Securities and Exchange Commission. Proved oil and
gas reserves are the estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic
conditions, i.e., prices and costs as of the date the estimate is made. Prices
utilized reflect
41
<PAGE> 42
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
consideration of changes in existing prices provided by contractual
arrangements, if any, but not of escalations based upon future conditions. The
reserve estimates are presented utilizing an average oil price of $19.17 Bbl and
an average natural gas price of $1.85 Mcf as of June 30, 1996.
Proved developed oil and gas reserves are reserves that can be expected
to be recovered through existing equipment and operating methods.
Proved undeveloped oil and gas reserves are proved reserves that are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required for recompletion or
secondary or tertiary recovery. Reserves assigned to undrilled acreage are
limited to those drilling units that offset productive units reasonably certain
of production when drilled.
Odessa Exploration's estimate of reserves has not been filed with or
included in reports to any federal agency other than the Securities and Exchange
Commission.
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
Oil and Gas Producing Activities:
<TABLE>
<CAPTION>
Oil and Natural
Condensate Gas
----------- -----------
(Bbls) (Mcf)
----------- -----------
<S> <C> <C>
Proved Reserves:
Balance, June 30, 1995 1,682,217 13,998,060
Revisions of previous estimates 438,142 6,313,118
Purchases of minerals-in-place 3,162,099 16,456,993
Production (97,130) (1,026,577)
----------- -----------
Balance, June 30, 1996 5,185,328 35,741,594
=========== ===========
Proved Developed Reserves:
June 30, 1996 2,727,967 24,517,362
=========== ===========
</TABLE>
42
<PAGE> 43
JEY ENERGY GROUP, INC. AND SUBSIDIARIES
Standardized Measure of Discounted Future Cash Flows
The following schedules present estimates of the standardized measure
of discounted future net cash flows from the Company's proved reserves as of
June 30, 1996, and an analysis of the changes in these amounts for the year
ended June 30, 1996. Estimated future cash flows are determined using year-end
prices adjusted only for fixed and determinable increases for natural gas
provided by contractual agreement (if any). Estimated future production and
development costs are based on economic conditions at year-end. Future federal
income taxes are computed by applying the statutory federal income tax rate of
35% to the difference between the future pretax net cash flows and the tax basis
of proved oil and gas properties, after considering investment tax credits and
net operating loss carry-forwards (if any), associated with these properties.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
(in thousands) June 30, 1996
- -------------- --------------
<S> <C>
Standardized Measure:
Future cash inflows $ 171,000
Future production costs (61,521)
Future development costs (15,495)
Future income taxes (12,092)
--------------
Future after-tax net cash flows 81,892
10% annual discount (42,188)
--------------
Standardized Measure $ 39,704
==============
Standardized Measure, June 30, 1995 $ 15,158
Oil and gas sales, net of production costs (2,205)
Purchases of minerals in place 24,216
Net change in income taxes 75
Accretion of discount 2,142
Revision of quantity estimates 6,189
Change in future development costs (982)
Extensions and discoveries 2,952
Net change in sales prices 1,397
Changes in production rates (timing) and other (9,238)
--------------
Standardized Measure, June 30, 1996 $ 39,704
==============
</TABLE>
43
<PAGE> 44
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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 LLP
Midland, Texas
September 1, 1998
44
<PAGE> 45
KEY ENERGY GROUP, INC. AND SUBSIDIARIES
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:
23.1 Consent of KPMG LLP
45
<PAGE> 46
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 SERVICES, INC.
(Registrant)
Dated: March 30, 1999 By /s/ FRANCIS D. JOHN
---------------------------------
Francis D. John
President and Chief Executive Officer
Dated: March 30, 1999 By /s/ STEPHEN E. MCGREGOR
---------------------------------
Stephen E. McGregor
Executive Vice President, Chief
Financial Officer and Treasurer
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.
Dated: March 30, 1999 By /s/ FRANCIS D. JOHN
--------------------------------
Francis D. John
President, Chief Executive Officer
and Director
Dated: March 30, 1999 By /s/ MORTON WOLKOWITZ
---------------------------------
Morton Wolkowitz
Director
Dated: March 30, 1999 By /s/ DAVID J. BREAZZANO
---------------------------------
David J. Breazzano
Director
Dated: March 30, 1999 By /s/ WILLIAM MANLY
---------------------------------
William Manly
Director
Dated: March 30, 1999 By /s/ KEVIN P. COLLINS
---------------------------------
Kevin P. Collins
Director
Dated: March 30, 1999 By /s/ W. PHILLIP MARCUM
---------------------------------
W. Phillip Marcum
Director
Dated: March 30, 1999 By /s/ DANNY R. EVATT
---------------------------------
Danny R. Evatt
Vice President of Financial Operations
(Principal Accounting Officer)
Dated: March 30, 1999 By /s/ STEPHEN E. McGREGOR
---------------------------------
Stephen E. McGregor
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
46
<PAGE> 1
EXHIBIT 23.1
To the Board of Directors and Stockholders
Key Energy Services, Inc. (formerly 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 Services, Inc. and Subsidiaries of our report dated September 1,
1998, relating to the consolidated balance sheets of Key Energy Services, 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 Services, Inc. and
Subsidiaries.
KPMG LLP
Midland, Texas
March 30, 1999
