-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Svil3IlWXFdm93CX0viuT2zsqD4h6HpFM2GsuE56pPgwQU1ManO0bXKiMWVm/qah l1rp6k+UK45QeDPcnse9HQ== 0000318996-96-000002.txt : 19960216 0000318996-96-000002.hdr.sgml : 19960216 ACCESSION NUMBER: 0000318996-96-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960214 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEY ENERGY GROUP INC CENTRAL INDEX KEY: 0000318996 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 042648081 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08038 FILM NUMBER: 96518347 BUSINESS ADDRESS: STREET 1: 257 LIVINGSTON AVE CITY: NEW BRUNSWICK STATE: NJ ZIP: 08901 BUSINESS PHONE: 9155705721 MAIL ADDRESS: STREET 1: P O BOX 10627 CITY: MIDLAND STATE: TX ZIP: 79702 FORMER COMPANY: FORMER CONFORMED NAME: YANKEE COMPANIES INC DATE OF NAME CHANGE: 19891012 FORMER COMPANY: FORMER CONFORMED NAME: YANKEE OIL & GAS INC DATE OF NAME CHANGE: 19841122 10-Q 1 __________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8038 KEY ENERGY GROUP, INC. (Exact name of registrant as specified in its charter) Maryland 04-2648081 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 255 Livingston Ave., New Brunswick, NJ 08901 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (908) 247-4822 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has filed documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No Common Shares outstanding at January 19, 1996: 6,913,513 ______________________________________________________________ KEY ENERGY GROUP, INC. AND SUBSIDIARIES INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 16 Item 2. Changes in Securities. 16 Item 3. Defaults Upon Senior Securities. 16 Item 4. Submission of Matters to a Vote of Security Holders. 16 Item 6. Exhibits and Reports on Form 8-K. 16 Signatures. 17 Key Energy Group,Inc. and Subsidiaries Consolidated Balance Sheets Consolidated Statements of Stockholders' Equity (unaudited) December 31, June 30, (Thousands, except share and per share data) 1995 1995 - ----------------------------------------------------------------------- ASSETS Current Assets: Cash $503 $865 Restricted cash 452 410 Restricted marketable securities 267 267 Accounts receivable, net 8,352 8,133 Prepaid expenses 225 358 Inventories 1,300 1,257 - ----------------------------------------------------------------------- Total Current Assets 11,099 11,290 - ----------------------------------------------------------------------- Property and Equipment: Oilfield service equipment 25,456 23,726 Oil and gas well drilling equipment 2,374 2,014 Motor vehicles 521 526 Oil and gas properties and other related equipment, successful efforts 9,809 7,652 Furniture and equipment 334 332 Buildings and land 2,086 2,086 - ----------------------------------------------------------------------- 40,580 36,336 Accumulated depreciation & depletion (6,188) (4,394) - ----------------------------------------------------------------------- Net Property and Equipment 34,392 31,942 - ----------------------------------------------------------------------- Other Assets 2,020 2,011 - ----------------------------------------------------------------------- Total Assets $47,511 $45,243 ======================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $3,804 $3,930 Accrued interest 168 145 Other accrued liabilities 1,931 2,612 Accrued income taxes 124 174 Deferred tax liability 118 118 Current portion of long-term debt 1,590 2,249 - ----------------------------------------------------------------------- Total Current Liabilities 7,735 9,228 - ----------------------------------------------------------------------- Long-term debt, less current portion 15,237 13,700 Deferred income taxes 2,934 2,204 Commitments and contingencies Stockholders' equity: Common stock, $.10 par value; 10,000,000 shares authorized, 6,913,513 shares issued and outstanding at December 31, 1995 and June 30, 1995, respectively 691 691 Additional paid-in capital 15,186 15,186 Retained earnings 5,728 4,234 - ----------------------------------------------------------------------- Total Stockholders' Equity 21,605 20,111 - ----------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $47,511 $45,243 ======================================================================= See the accompanying notes which are an integral part of these consolidated financial statements. Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Operations Three Months Ended Six Months Ended December 31, December 31, (Thousands, except per share data) 1995 1994 1995 1994 - ----------------------------------------------------------------------------- REVENUES: Oilfield services $9,381 $10,258 $19,148 $20,923 Oil and gas revenues 911 615 1,727 1,077 Oil and gas well drilling 2,057 - 3,659 - Other revenues, net 45 (92) 258 (38) - ----------------------------------------------------------------------------- 12,394 10,781 24,792 21,962 - ----------------------------------------------------------------------------- COSTS AND EXPENSES: Oilfield services direct costs 6,889 7,932 14,153 16,350 Oil and gas direct costs 354 166 619 431 Oil and gas well drilling 1,388 - 2,735 - Depreciation and depletion expense 971 684 1,794 1,245 General and administrative expense 1,198 933 2,390 1,822 Interest expense 439 343 877 627 - ----------------------------------------------------------------------------- 11,239 10,058 22,568 20,475 - ----------------------------------------------------------------------------- Income before income taxes 1,155 723 2,224 1,487 Income tax expense 387 231 730 476 - ----------------------------------------------------------------------------- NET INCOME $768 $492 $1,494 $1,011 ============================================================================= EARNINGS PER SHARE : Income before income taxes $0.17 $0.11 $0.32 $0.23 Net income $0.11 $0.08 $0.22 $0.16 WEIGHTED AVERAGE SHARES OUTSTANDING 6,914 6,500 6,914 6,500 See the accompanying notes which are an integral part of these consolidated financial statements. Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended Six Months Ended December 31, December 31, (Thousands) 1995 1994 1995 1994 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $768 $492 $1,494 $1,011 Adjustments to reconcile income from operations to net cash provided by operations: Depreciation, depletion and amortization 971 693 1,794 1,245 Deferred income taxes 387 231 730 476 Change in assets and liabilities, net of effects from acquisitions: (Increase) decrease in accounts receivable 279 (129) (219) (960) (Increase) decrease in other current assets (21) 19 90 (71) Decrease in accounts payable and accrued expenses (533) (1,372) (807) (1,564) (Decrease) increase in accrued interest 10 - 23 (16) Decrease in accrued taxes (50) - (50) - (Increase) decrease in other assets - (9) (9) - - ----------------------------------------------------------------------------- Net cash (used in) provided by operating activities 1,811 (75) 3,046 121 - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - Oilwell service operations (841) (732) (1,727) (1,899) Capital expenditures - Oil and gas operations - - (7) (7) Capital expenditures - Oil and gas well drilling operations (220) - (360) - Expenditures for oil and gas properties (1,236) (985) (2,150) (1,211) - ----------------------------------------------------------------------------- Net cash used in investing activities (2,297) (1,717) (4,244) (3,117) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments (514) (651) (1,418) (1,047) Borrowings under line-of-credit 38 383 (28) 971 Proceeds from long-term debt 1,019 2,181 2,324 2,866 - ----------------------------------------------------------------------------- Net cash provided by financing activities 543 1,913 878 2,790 - ----------------------------------------------------------------------------- Net increase (decrease) in cash and restricted cash 57 121 (320) (206) Cash and restricted cash at beginning of period 898 846 1,275 1,173 - ----------------------------------------------------------------------------- Cash and restricted cash at end of period $955 $967 $955 $967 ============================================================================= Supplemental cash flow disclosures: Interest paid $429 $343 $854 $611 Supplemental schedule of non-cash investing and financing transactions: Fair market value of Common Stock issued as payment for the WellTech West Texas equipment $- $- $- $8,584 See the accompanying notes which are an integral part of these consolidated financial statements. Key Energy Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial information in this report includes the accounts of Key Energy Group, Inc. ("Key") and its wholly-owned subsidiaries and was prepared in conformity with accounting policies used in the Annual Report on Form 10-KSB furnished for the preceding fiscal year. The consolidated financial information in this report includes the three operating subsidiaries of the Company; Yale E. Key, Inc. ("Yale E. Key") which is involved in oilwell service operations, Odessa Exploration Inc. ("OEI") which is involved in the production and exploration of oil and natural gas and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling") which is involved in the drilling for oil and natural gas. OEI utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized, while nonproductive exploration costs and geological and geophysical costs (if any) are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method based on proved reserves expressed as net equivalent Bbls as reviewed by independent petroleum engineers. The carrying amounts of properties sold or otherwise disposed of and the related allowance for depletion are eliminated from the accounts and any gain/loss is included in results of operations. OEI's aggregate oil and gas properties are stated at cost, not in excess of total estimated future net revenues net of related income tax effects. In the opinion of Key, the accompanying unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position as of December 31, 1995, the statement of cash flows for the three and six months ended December 31, 1995 and 1994, and the results of operations for the three and six month periods then ended. The consolidated financial statements of Key have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principals for complete financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. 2. ACQUISITIONS Clint Hurt Drilling On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA") entered into an Asset Purchase Agreement pursuant to which CHA sold to Key all of its assets in West Texas. Such assets mainly consisted of four oil and gas drilling rigs and related equipment. As consideration for the acquisition, Key paid CHA $1,750,000, of which $1,000,000 was paid in cash and the balance in the form of a $725,000 note payable to CHA, (the note was paid in full in July 1995). Mr. Clint Hurt entered into consulting and noncompetition agreements with Key in consideration for which Key issued 5,000 shares of Key Common Stock. The acquisition was accounted for using the purchase method and the results of operations of Clint Hurt Drilling have been included in those of Key since April 1, 1995. The Merger In August 1995, Key announced an agreement to acquire, through a merger, WellTech. Key will be the surviving entity in the merger. In the merger, WellTech stockholders will receive an aggregate of 4,929,962 shares of Key Common Stock and warrants to purchase 750,000 shares of Key Common Stock at $6.75 per share. As part of the merger, 1,429,962 of the 1,635,000 shares of Key Common Stock currently owned by WellTech and previously issued warrants to purchase 250,000 shares of Key Common Stock at $5.00 per share will be cancelled. Net consideration for the merger will be 3,500,000 shares of Key Common Stock and warrants to purchase 500,000 additional shares. WellTech's principal line of business is oil and gas well servicing and it currently operates in the Mid-Continent and Northeast areas of the United States and in Argentina. Until November 1995, Welltech also conducted certain operations in Russia. Consummation of the merger is subject to satisfaction of various conditions including, without limitation, shareholder approval and no assurance can be given that the merger will be consummated. On January 23, 1996, Key filed a prospectus - proxy statement which will, upon completion and mailing, be used to solicit shareholder approval of the merger. 3. LONG-TERM DEBT The Yale E. Key C.I.T. Credit Finance ("C.I.T.") term note, ($5,463,000 approximate principal balance at December 31, 1995), as amended, requires principal payments of approximately $95,000, plus interest, due the first day of each month plus a final payment of the unpaid balance of the note due December 31, 1996. The interest rate is two and one-half percent above the stated prime rate; 8.5% at December 31, 1995. The note is collateralized by all of the assets (including equipment and inventory) of Yale E. Key. The Yale E. Key C.I.T. line of credit, ($3,818,000 approximate principal balance at December 31, 1995),as amended, requires monthly payments of interest at two and one-half percent above the stated prime rate (8.5% at December 31, 1995). The expiration of the line of credit is December 31,1996. The line of credit is collateralized by the accounts receivable of Yale E. Key. The line of credit has a maximum limit of 85% of available accounts receivable or $7 million; whichever is less. At December 31, 1995, there was no credit line availability. The agreement with C.I.T. includes certain restrictive covenants, the most restrictive of which prohibits Yale E. Key from making distributions and declaring dividends on Yale E. Key's common stock. The OEI loan agreement, as amended, with Norwest Bank Texas, N.A. ("Norwest") provides for a $7.5 million revolving line of credit note subject to a borrowing base limitation (approximately $6.5 million at December 31, 1995). The borrowing base is redetermined on at least a semi-annual basis. The borrowing base is reduced by approximately $60,000 per month through October 1997; the maturity of the note. The note's interest rate is Norwest's prime rate (8.5% at December 31, 1995) plus one-half percent. The note is secured by substantially all of the oil and gas properties of OEI and the pledge of certain collateral by current and former officers and directors of Key. As of December 31, 1995, Norwest waived the pledge of collateral and released the collateral to the seven individuals who had pledged it. The note is also guaranteed by Key. The loan agreement contains various restrictive covenants and compliance requirements, including covenants which (a) prohibit OEI from declaring or paying dividends on OEI's common stock, (b) limit the incurrence of additional indebtedness by OEI and, (c) limit the disposition of assets and various other financial covenants. The Clint Hurt Drilling loan agreement with Norwest provided for a $1 million term loan and a $200,000 line of credit. The $1 million term loan ($776,000 approximate principal balance at December 31, 1995), requires principal payments of approximately $28,000 per month plus interest for 36 months with a maturity date of April 1998. The $200,000 line of credit, ($77,000 approximate principal balance at December 31, 1995), requires principal payments of $20,000 per month beginning July 5, 1995, plus interest, through its maturity in April 1996. Both the loan and line of credit have an interest rate of Norwest prime rate (8.5% at December 31, 1995), plus 3/4 of one percent. The notes are secured by all of the equipment of Clint Hurt Drilling and are guaranteed by Key. In addition, the loan agreement contains various restrictive covenants and compliance requirements. Each of Key (and Yale E. Key and Clint Hurt) and WellTech recently entered into new credit facilities of approximately $17.5 million (subject to certain advance formulas) the proceeds of the initial borrowings of which were used to repay substantially all of the debt of Key (other than that of OEI) and Welltech (other than that of certain affiliates), respectively. Key believes that such a facility will provide sufficient funds to finance its operating and capital expenditure needs for the foreseeable future. The new indebtedness will be the obligation of Key, as survivor of the merger, and Key's subsidiaries, Yale E. Key and Clint Hurt. The cross-guaranty and cross-collateralization arrangement could, if the merger is not consummated, create contingent liabilities for each of Key and WellTech. The failure to consummate the merger on or prior to April 30, 1996 will, at the option of the lender, constitute an event of default under the new indebtedness if WellTech fails to refinance its credit agreement on or before July 31, 1996 or Key fails to continue to operate Welltech pursuant to the Interim Operations Agreement. Key and WellTech have agreed not to terminate the Interim Operations Agreement without the consent of the lender. (See Note 2, "The Merger) 4. COMMITMENTS AND CONTINGENCIES Various suits and claims arising in the ordinary course of business are pending against Key. Management does not believe that the disposition of any of these suits or claims will result in a material adverse impact on the consolidated financial position of Key. During August 1995, Key entered into employment agreements with certain of its officers. These employment agreements generally run to June 30, 1998, but will automatically be extended on a yearly basis unless terminated by Key or the applicable officer. In addition to providing a base salary for each officer, the employment agreements provide for severance payments for each officer varying from 12 to 36 months of the officer's base salary. The current annual base salaries for the officers covered under such employment agreements total approximately $800,000. KEY ENERGY GROUP, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. QUARTER ENDED DECEMBER 31, 1995 VERSUS QUARTER ENDED DECEMBER 31, 1994 Overview The following discussion provides information to assist in the understanding of Key Energy Group, Inc.s ("Key") financial condition and results of operations. It should be read in conjunction with the financial statements and related notes appearing elsewhere in this report. Operating results for the three and six months ended December 31, 1995 include Key's oilfield well service operations conducted by its wholly-owned subsidiary, Yale E. Key, Inc. ("Yale E. Key"), its oil and natural gas exploration and production operations conducted by its wholly-owned subsidiary, Odessa Exploration Inc. ("OEI") and Key Energy Drilling, Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling") which is engaged in oil and natural gas well contract drilling and was acquired in March 1995. Historically, fluctuations in oilfield well service operations and oil and gas well contract drilling activity have been closely linked to fluctuations in crude oil and natural gas prices. However, Key, through customer alliances and agreements, and diversification of services, is seeking to minimize the effects of such fluctuations on Key's results of operations and financial condition. Results of Operations Key Revenues of Key for the three months ended December 31, 1995 increased 15% to $12,394,000 from $10,781,000 for the comparable 1994 period, while net income of $768,000 increased 56% over the prior year total of $492,000. The increase in revenues was primarily due to the addition of Clint Hurt Drilling on April 1, 1995, whose operations were not included in the prior year quarter results. The improvement in quarterly net income is partially attributable to the inclusion of Clint Hurt Drilling, but is also a result of an increase in net income for OEI and a decrease in total consolidated Key costs and expenses as a percent of total revenues. Yale E. Key, Inc. Oilfield service revenue declined 9% from $10,258,000 for the prior quarter to $9,381,000 for the current quarter. The decline is primarily attributable to curtailed equipment utilization as the result of adverse weather conditions and a slight decline in demand. Yale E. Key averaged an 81% equipment utilization for the quarter; and due to lower expenses and due to the continued diversification of services into higher margin business segments such as oilfield frac tanks, oilfield fishing tools and trucking operations, the gross margin increased from 21% to 24% of revenues for the current quarter Odessa Exploration, Inc. Revenues from oil and gas activities increased 48% from $615,000 in the 1994 quarter to $911,000 for the current quarter despite relatively constant crude oil and lower natural gas prices. The increase in revenues was primarily the result of increased production of oil and natural gas as several oil and natural gas wells which were drilled began production during the 1995 quarter. Of the total $911,000 of revenues for the quarter ended December 31, 1995, approximately $734,000 was from the sale of oil and gas - 22,857 barrels of oil at an average price of $15.57 per barrel and 223,200 MCF of natural gas at an average price of $1.69 per MCF. The remaining $177,000 of revenues represented primarily administrative fee income. Clint Hurt Drilling Clint Hurt Drilling was acquired in March 1995. Comparable numbers for the prior quarter are, therefore, not available. Revenues were $2.1 for the quarter compared to $1.6 million for the prior 1996 fiscal quarter. Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense for Key increased 42% from $684,000 to $971,000 during the three months ended December 31, 1995 as compared with the prior period. The increase is primarily due to oilfield service depreciation expense, which is the result of increased capital expenditure depreciation for the current quarter versus the prior quarter. In addition, depletion expense generated by OEI increased for the quarter due to the increase in the production of oil and natural gas. Interest Expense Interest expense for Key increased 28% from $343,000 during the three months ended December 31, 1994 to $439,000 for the current period. The increase is primarily the result of acquisitions and the addition of certain oil and gas properties by OEI. General and Administrative Expenses General and administrative expenses include those of Key as well as Yale E. Key, OEI and Clint Hurt Drilling. These expenses increased $265,000 or 32% to $1,198,000 during the three months ended December 31, 1995 as compared to $933,000 for the three months ended December 31, 1994. The increase can be primarily attributed to the acquisition and subsequent inclusion of Clint Hurt Drilling's general and administrative expenses. Income Tax Expense Income tax expense for Key for the three months ended December 31, 1995 and 1994 was $387,000 and $231,000 respectively. Net Income Net income before income taxes was $1,155,000 for the three months ended December 31, 1995, which was an increase of $432,000 or 60% over the comparable quarter of $723,000. The increase in net income before income taxes was primarily due to the addition of Clint Hurt Drilling (see Note 2) and increased oil and gas revenues. Net income for the three months ended December 31, 1995 was $768,000, which was a $276,000 or 56% increase from $492,000 for the three months ended December 31, 1994. Cash Flow Net cash provided by operations increased $1,886,000 from $75,000 in net cash used by operations during the three months ended December 31, 1994 to $1,811,000 in net cash provided by operations for the current period. The increase is attributable primarily to lower decrease in accounts payable and accrued expenses and higher net income and depreciation expense over the same period last year. Net cash used in investing activities increased from $1,717,000 for the three months ended December 31, 1994 to $2,297,000 for the current period. The increase is primarily the result of increased expenditures for oil and gas properties. In addition, net cash used in investing activities for the current quarter included $220,000 used in the oil and gas well drilling operations. Net cash provided by financing activities was $543,000, a $1,370,000 decrease, for the three months ended December 31, 1995 as compared to $1,913,000 for the comparable quarter. The decrease is primarily the result of increased principal payments made during the current quarter versus the prior quarter and a decrease in proceeds from long-term debt during the current quarter. Such proceeds were primarily used for the oil and natural gas drilling program conducted by OEI. Cash increased $57,000 for the three months ended December 31, 1995, as compared to a net increase in cash of $121,000 for the three months ended December 31, 1994. SIX MONTHS ENDED DECEMBER 31, 1995 VERSUS SIX MONTHS ENDED DECEMBER 31, 1994 Results of Operations Key Revenues of Key for the six months ended December 31, 1995 increased 13% to $24,792,000 from $21,962,000 for the comparable 1994 period, while net income of $1,494,000 increased 48% over the prior six month total of $1,011,000. The increase in revenues was primarily due to the addition of Clint Hurt Drilling on April 1, 1995, whose operations were not included in the prior year quarter results. The improvement in quarterly net income is partially attributable to the inclusion of Clint Hurt Drilling, but is also a result of an increase in net income for OEI and a decrease in total consolidated Key costs and expenses as a percent of total revenues. Yale E. Key, Inc. Oilfield service revenue declined $1,775,000 or 9% from $20,923,000 for the prior period to $19,148,000 for the current period. The decline is primarily attributable to curtailed equipment utilization as the result of adverse weather conditions and a slight decline in demand. Yale E. Key averaged an 82% equipment utilization for the six months; and due to lower expenses, and due to the continued diversification of services into higher margin business segments such as oilfield frac tanks, oilfield fishing tools and trucking operations, the gross margin increased from 21% to 24% of revenues for the current quarter Odessa Exploration, Inc. Revenues from oil and gas activities increased 60% from $1,077,000 in the 1994 period to $1,727,000 for the current six month period despite relatively constant crude oil and lower natural gas prices. The increase in revenues was primarily the result of increased production of oil and natural gas as several oil and natural gas wells which were drilled began production during the 1996 period. Of the total $1,727,000 of revenues for the six months ended December 31, 1995, approximately $1,308,000 was from the sale of oil and gas - 44,351 barrels of oil at an average price of $16.19 per barrel and 479,149 MCF of natural gas at an average price of $1.62 per MCF. The remaining $419,000 of revenues represented primarily administrative fee income. Clint Hurt Drilling Clint Hurt Drilling was acquired in March 1995. Comparable numbers for the prior six months are, therefore, not available. Depreciation, Depletion and Amortization Depreciation, depletion and amortization expense for Key increased $549,000 or 44% from $1,245,000 to $1,794,000 during the six months ended December 31, 1995 as compared with the prior period. The increase is primarily due to oilfield service depreciation expense, which is the result of increased capital expenditure depreciation for the current period versus the prior period. In addition, depletion expense generated by OEI increased for the period due to the increase in the production of oil and natural gas. Interest Expense Interest expense for Key increased 40% from $627,000 during the six months ended December 31, 1994 to $877,000 for the current period. The increase is primarily the result of acquisitions and the addition of certain oil and gas properties by OEI. General and Administrative Expenses General and administrative expenses include those of Key as well as Yale E. Key, OEI and Clint Hurt Drilling. These expenses increased $568,000 or 31% to $2,390,000 during the six months ended December 31, 1995 as compared to $1,822,000 for the three months ended December 31, 1994. The increase can be primarily attributed to the acquisition and subsequent inclusion of Clint Hurt Drilling's general and administrative expenses. Income Tax Expense Income tax expense for Key for the six months ended December 31, 1995 and 1994 was $730,000 and $476,000 respectively. Net Income Net income before income taxes was $2,224,000 for the six months ended December 31, 1995, which was an increase of $737,000 or 50% over the comparable quarter of $1,487,000. The increase in net income before income taxes was primarily due to the addition of Clint Hurt Drilling (see Note 2) and increased oil and gas revenues. Net income for the six months ended December 31, 1995 was $1,494,000, which was a $483,000 or 48% increase from $1,011,000 for the six months ended December 31, 1994. Cash Flow Net cash provided by operations increased $2,925,000 from $121,000 during the six months ended December 31, 1994 to $3,046,000 for the current period. The increase is attributable primarily to lower decrease in accounts payable and accrued expenses and higher net income and depreciation expense over the same period last year. Net cash used in investing activities increased $1,127,000 or 36% from $3,117,000 for the six months ended December 31, 1994 to $4,244,000 for the current period. The increase is primarily the result of increased expenditures for oil and gas properties. In addition, net cash used in investing activities for the current period included $360,000 used in the oil and gas well drilling operations. Net cash provided by financing activities was $878,000, a $1,912,000 decrease, for the six months ended December 31, 1995 as compared to $2,790,000 for the comparable period. The decrease is primarily the result of increased principal payments made during the current quarter versus the prior quarter and a decrease in proceeds from long-term debt during the current quarter. Such proceeds were primarily used for the oil and natural gas drilling program conducted by OEI. Cash decreased $320,000 for the six months ended December 31, 1995, as compared to a net decrease in cash of $206,000 for the six months ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, Key had $955,000 in cash and restricted cash as compared to $1,275,000 in cash and restricted cash at June 30, 1995. Yale E. Key has projected $2.5 million for oilwell service capital expenditures over the 1996 fiscal year as compared to $2.8 million for the fiscal year ended June 30, 1995. Capital expenditures are expected to be primarily capitalized improvement costs (totaling over $5,000) to existing equipment and machinery. Capital expenditures are expected to decrease from fiscal 1995 levels due to less capital improvements for the acquired WellTech operations of West Texas. Financing of capital expenditures is expected to come from the operating cash flows of Yale E. Key. Capital expenditures were $1,418,000 for the six months ended December 31, 1995. OEI has forecasted approximately $3 million in oil and gas property acquisitions for fiscal 1996 as compared to $2.8 million during fiscal 1995. Financing of oil and gas acquisitions is expected to come from borrowings. Oil and gas acquisitions were $2,150,000 for the six months ended December 31, 1995. Financing of oil and gas acquisitions is expected to be obtained from bank financing and/or private investors. Acquisitions Clint Hurt Drilling On March 30, 1995, Key and Clint Hurt Associates, Inc. ("CHA") entered into an Asset Purchase Agreement pursuant to which CHA sold to Key all of its assets in West Texas. Such assets mainly consisted of four oil and gas drilling rigs and related equipment. As consideration for the acquisition, Key paid CHA $1,750,000, of which $1,000,000 was paid in cash and the balance in the form of a $725,000 note payable to CHA, (the note was paid in full in July 1996). Mr. Clint Hurt entered into consulting and noncompetition agreements with Key in consideration for which Key issued 5,000 shares of Key Common Stock. The acquisition was accounted for using the purchase method and the results of operations of Clint Hurt Drilling have been included in those of Key since April 1, 1995. The Merger In August 1995, Key announced an agreement to acquire, through a merger, WellTech. Key will be the surviving entity in the merger. In the merger, WellTech stockholders will receive an aggregate of 4,929,962 shares of Key Common Stock and warrants to purchase 750,000 shares of Key Common Stock at $6.75 per share. As part of the merger, 1,429,962 of the 1,635,000 shares of Key Common Stock currently owned by WellTech and previously issued warrants to purchase 250,000 shares of Key Common Stock at $5.00 per share will be cancelled. Net consideration for the merger will be 3,500,000 shares of Key Common Stock and warrants to purchase 500,000 additional shares. WellTech's principal line of business is oil and gas well servicing and it currently operates in the Mid-Continent and Northeast areas of the United States and in Argentina. Until November 1995, Welltech also conducted certain operations in Russia. Consummation of the merger is subject to satisfaction of various conditions including, without limitation, shareholder approval and no assurance can be given that the merger will be consummated. On January 23, 1996, Key filed a prospectus - proxy statement which will, upon completion and mailing, be used to solicit shareholder approval of the merger. Each of Key (and Yale E. Key and Clint Hurt) and WellTech recently entered into new credit facilities of approximately $17.5 million (subject to certain advance formulas) the proceeds of the initial borrowings of which were used to repay substantially all of the debt of Key (other than that of OEI) and Welltech (other than that of certain affiliates), respectively. Key believes that such a facility will provide sufficient funds to finance its operating and capital expenditure needs for the foreseeable future. The new indebtedness will be the obligation of Key, as survivor of the merger, and Key's subsidiaries, Yale E. Key and Clint Hurt. The cross-guaranty and cross-collateralization arrangement could, if the merger is not consummated, create contingent liabilities for each of Key and WellTech. The failure to consummate the merger on or prior to April 30, 1996 will, at the option of the lender, constitute an event of default under the new indebtedness if WellTech fails to refinance its credit agreement on or before July 31, 1996 or Key fails to continue to operate Welltech pursuant to the Interim Operations Agreement. Key and WellTech have agreed not to terminate the Interim Operations Agreement without the consent of the lender. (See Note 2, "The Merger) Impact of SFAS 121 In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 - Accounting for Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") regarding the impairment of long-lived assets, identifiable intangibles and goodwill related to those assets. SFAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995, although earlier adoption is encouraged. The application of SFAS 121 will require periodic determination of whether the book value of long-lived assets exceeds the future cash flows expected to result from the use of such assets and, if so, will require reduction of the carrying amount of the "impaired" assets to their estimated fair values. Key estimates that the implementation of SFAS 121 will not have a material effect on Key's financial position. Impact of Inflation on Operations Although in a complex environment it is extremely difficult to make an accurate assessment of the impact of inflation on Key's operations, management is of the opinion that inflation has not had a significant impact on it business. Cautionary Statement for Purposes of The "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. Key desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Key's Report on Form 10-Q contains "forward-looking statements" including statements concerning projections, plans, objectives, future events or performance and underlying assumptions and other statements which are other than statements of historical fact. Key wishes to caution readers that the following important factors, amoung others, may have affected and could in the future affect Keys'actual results and could cause Key's actual results for subsequent periods to differ materially from those expresed in any forward-looking statement made by or on behalf of Key: Occurences affecting the need for, timing and extent of Key's capital expenditures or affecting Key's ability to obtain funds from operations, borrowings or investments to finance needed captial expenditures; Key's ability successfully to identify and finance oil and gas property acquisitions and its ability successfully to operate existing and any subsequently acquired properties; The availability of adquate funds under the new credit facility to fund operations for the foreseeable future, or if such funds are inadquate, the ability of Key to obtain new or additional financing or to generatre adequate funds from operations; Key's ability to enter into and retain profitable oilfield servicing and drilling contracts with customers which make timely payments for such services; The demand for oilfield services, drilling services and for oil and gas, and the supply of and demand for driling and servicing rigs, all of which are subject to fluctuations which could adversely affect Key's operations; The amount and rate of growth in Key's general and admistrative expense, including, but not limited to, the costs of intergrating WellTech's operations into Key assuming consummation of the Merger; The effect of changes in regulations, including environmental regulations with which Key must comply, the cost of such complicance and the potentially material adverse effects if Key were not in substantial compliance either currently or in the future; Key's relationship with its employees and the potential adverse effect if labor disputes or grievances were to occur; The costs and other effects of legal and administrative cases and proceedings and/or settlements, including but not limited to environmental and workers compensation cases; The effect of changes in accounting policies and practices or of changes in Key's organization, compensation and benefit plan, or of changes in Key's material agreements of understandings with third parties. Moreover, in connection with Key's proposed merger with WellTech, readers should consider the important factors set forth under the caption RISK FACTORS in the proxy statement-prospectus forming part of Key's Registration Statement in Form S-4, Commission File No. 333-00369, which RISK FACTORS section, as amended from time to time, is hereby incorporated hereby by reference. Key undertakes no obligation to release publicly the result of any revisions to any forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibit is filed as a part of the Form 10-Q: Number Description 27 (a) Statement - Financial Data Schedule (Filed herewith as part of the Condensed Consolidated Financial Statements). 99 Risk Factors disclosure from Key's Proxy Statement - Prospectus included as part of Key's Registration Statement on Form S-4, Commission File No. 33-00369. (b) There were no reports filed on form 8-K during the quarter ended December 31, 1995. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KEY ENERGY GROUP, INC. (Registrant) By /s/ Francis D. John President, Chief Executive Officer Dated: February 14, 1996 and Chief Financial Officer By /s/ Danny R. Evatt Dated: February 14, 1996 Vice President and Chief Accounting Officer EX-99 2 RISK FACTORS Substantial Leverage and History of Losses. Key, as the surviving company, will be highly leveraged due to the substantial indebtedness Key and WellTech have incurred over time primarily to finance acquisitions and capital expenditures, expand operations and, in the case of WellTech, finance operating losses. As of September 30, 1995, Key's aggregate debt was approximately $16 million. After giving effect to the Merger and the New Indebtedness, as of September 30, 1995, Key's aggregate debt on a pro forma basis would have been approximately $36 million. Key may incur additional indebtedness to make investments, acquisitions and capital expenditures in the future. (See "Management's Discussion and Analysis of Results of Operations and Financial Condition of Key--Liquidity and Capital Resources".) Key anticipates that it will continue to have substantial indebtedness for the foreseeable future. WellTech has had operating losses in each of the five years ended December 31, 1994 but had operating income for the nine months ended September 30, 1995. WellTech has also been in violation of certain restrictive covenants in its loan agreement with its principal lender which has necessitated obtaining waivers from that lender. There can be no assurance that WellTech will not have operating losses for the year ended December 31, 1995 or, if the Merger is consummated, that the operations of Key subsequent to the Merger will not be adversely affected by the same factors that contributed to WellTech's operating losses. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations of WellTech".) In recent years, cash generated from Key's operating activities in conjunction with borrowings and proceeds from private equity issuances has been sufficient to meet its debt service and acquisition, investment and capital expenditure requirements. Key believes that cash generated from operating activities, together with borrowing from existing and future credit facilities and proceeds from future equity issuances, will be sufficient to meet its future debt service requirements and to make anticipated acquisitions, investments and capital expenditures. However, there can be no assurance in this regard or that the terms available for such financing would be favorable to Key or that any such future equity issuance would be at a price per share equal to or greater than the current market price. Any such future equity financing would dilute the interests of current stockholders of Key. (See "Management's Discussion and Analysis of Results of Operations and Financial Condition of Key--Liquidity and Capital Resources".) Cross-Guaranty and Cross-Collateralization of the New Indebtedness. Key has guaranteed WellTech's obligations under the New Indebtedness and has pledged its assets to secure such WellTech obligations and WellTech has guaranteed Key's obligations under the New Indebtedness and has pledged its assets to secure such Key obligations. The obligations of Key and WellTech under the New Indebtedness are also cross defaulted. Accordingly, a default under the New Indebtedness by WellTech or Key could jeopardize the assets of the other party even if such other party were not itself in default. If the Merger is not consummated on or before April 30, 1996, the New Indebtedness will be in default unless WellTech refinances its obligations on or before July 31, 1996 and Key continues to operate WellTech under the Interim Operations Agreement until such refinancing. There can be no assurance, particularly in light of WellTech's operating history, that it will be able to refinance its obligations in the event the Merger is not consummated. In such event, the lender could foreclose on substantially all of Key's as well as WellTech's properties and assets. Potential Obstacles to Integration of WellTech. The success of Key following the Merger will be dependent partially upon Key's ability to integrate the current management and operations of WellTech into its ongoing management and operations. Obstacles to such integration may arise and some of those obstacles could adversely affect Key's ongoing operations and performance. There can be no assurance that Key will be able effectively to integrate its management and operations with those of WellTech or that administrative and operational efficiencies resulting from the Merger can be attained. Customer Response to the Transactions. Management of Key believes that following the Merger Key will be able to provide its customers with a broader array of products and an increased ability to service customer needs. However, there can be no assurance that the current Key and WellTech customers will respond favorable to the Merger. An unfavorable customer response to the Merger could have an adverse effect upon the ongoing operations of Key. Shares Eligible for Future Sale. Upon the consummation of the Merger, giving effect to the Key Charter Amendment, there will be 10,413,510 shares of Key Common Stock outstanding. Of such shares, the 4,929,962 shares of Key Common Stack and New Key Warrants to purchase an additional 750,000 shares of Key Common Stock issued to WellTech stockholders pursuant to the Merger will be freely tradeable without restriction or registration under the Securities Act, including the shares and New Key Warrants to be issued to certain stockholders of WellTech, who will have the benefit of an effective registration statement under the Securities Act. Stockholders should be aware and one group of four affiliated entities will hold approximately 38.2% of the Key Common Stock outstanding after the Merger. All but 155,000 of the remaining shares of Key Common Stock currently outstanding are freely tradeable, although sales of shares held by "affiliates" of Key are subject to volume and other limitations imposed by Rule 144 under the Securities Act. No predictions can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price for the Key Common Stock prevailing from time to time. Sales of substantial amounts of Key Common Stock in the public market could adversely affect the market price of the Key Common Stock. Possible Volatility of Stock Price. The Key Common Stock is traded on the American Stock Exchange. The closing price of the Key Common Stock on August 30, 1995, immediately prior to the announcement of the Merger was 4-15/16, and on January 17, 1996 was 6-1/8. (See "Price Range of Key Common Stock" for additional information with respect to the prices of the Key Common Stock in earlier years.) The New Key Warrants are a new issue and there exists no trading market for them. The volume of transactions in the Key Common Stock has varied from time to time although it has, for the most part been limited. In addition, the stock market in recent years has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of a specific company. These fluctuations could adversely affect the market price of the Key Common Stock and the New Key Warrants. (See "Proposals to be Voted upon at the Key Special Meeting--Item 1: The Merger--Certain Covenants --Registrations Rights.") No Intention to Pay Dividends. Key has no intention to pay cash dividends on the Key Common Stock in the foreseeable future. In addition, under the terms of the New Indebtedness, Key is prohibited from paying cash dividends on its Common Stock. (See "Business and Properties of Key--Recent Developments--New Indebtedness" for a discussion of such restrictions.) Regulation and Competition in the Well Servicing Industry. The oil field service operations, oil and gas production activities and oil and natural gas drilling are subject to various local, state and federal laws and regulations intended, among other things, to protect the environment. Both Key and WellTech compete with many national and local independent companies, many of which have financial and other resources greatly in excess of those available to Key, WellTech or the surviving entity. International Investments. WellTech has made investments in foreign countries (Russia and Argentina) and Key may continue to make additional investments in these and other foreign countries and in companies located or with significant operations outside the United States. (See "Business and Properties of WellTech--Foreign Operations.") Such investments are subject to risks and uncertainties relating to the indigenous political, social and economic structures of those countries. Risks specifically related to investments in foreign companies may include risks of fluctuations in currency valuation, expropriation, confiscatory taxation and nationalization, currency conversion restrictions, increased regulation and approval requirements and governmental policies limiting returns to foreign investors. In that connection, stockholders should be aware the WellTech's contract in Russia was not renewed upon its expiration in November, 1995. Anti-Takeover Effect of Certain Provisions of Key's Articles and By-Laws. Certain provisions of the Key Articles and the Key By-Laws could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding capital stock of Key and could make it more difficult to consummate certain types of transactions involving an actual or potential change in control of Key, such as a merger, tender offer or proxy contest. The most significant of these is the ability of the Board of Directors to issue, without stockholder approval, preferred stock containing class voting rights provided, however that the Board of Directors may not classify or reclassify shares to create any class of stock which (i) has more than one vote per share, (ii) is issued in connection with any shareholder rights plan, "poison pill" or other anti-takeover measure, or (iii) is issued for less than fair consideration, as determined in good faith by the Board of Directors. EX-27 3
5 1,000 6-MOS JUN-30-1996 DEC-31-1995 955 267 8,352 0 1,300 11,099 40,580 6,188 47,511 7,735 0 691 0 0 20,914 47,511 0 24,792 0 22,568 0 0 877 2,224 730 1,494 0 0 0 1,494 .22 .22
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