-----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, IWcu2pOz222ellXrl3/KmfvOFGx59J2fRZwsn5i5IIc9xxc7YkH9bGHqt7GL3Rl7 jNZ6KQ4y+bk2uWckond5TA== 0000318996-98-000022.txt : 19980929 0000318996-98-000022.hdr.sgml : 19980929 ACCESSION NUMBER: 0000318996-98-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NYSE 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-K SEC ACT: SEC FILE NUMBER: 001-08038 FILM NUMBER: 98715923 BUSINESS ADDRESS: STREET 1: TWO TOWER CTR TWENIETH FL CITY: EAST BRUNSWICK STATE: NJ ZIP: 08816 BUSINESS PHONE: 9082474822 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-K 1 FORM 10-K FYE JUNE 30, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8038 KEY ENERGY GROUP, INC. (Exact name of registrant as specified in its charter) Maryland 04-2648081 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Two Tower Center, Twentieth Floor, East Brunswick, NJ 08816 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 247-4822 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.10 par value New York Stock Exchange 7% Convertible Subordinated Debentures Due 2003 None 5% Convertible Subordinated Notes Due 2004 None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Common Shares held by nonaffiliates of the Registrant as of September 11, 1998 was approximately $154,884,755. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No Common Shares outstanding at September 11, 1998: 18,284,048 DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement with respect to the Annual Meeting of Shareholders are incorporated by reference in Part III of this report. Key Energy Group, Inc. and Subsidiaries INDEX PART I. Item 1. Business. 3 Item 2. Properties. 8 Item 3. Legal Proceedings. 9 Item 4. Submission of Matters to a Vote of Security Holders. 9 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 10 Item 6. Selected Financial Data. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. 12 Item 8. Financial Statements and Supplementary Data. 19 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 51 PART III. Item 10. Directors and Executive Officers of the Registrant. 51 Item 11. Executive Compensation. 51 Item 12. Security Ownership of Certain Beneficial Owners and Management. 51 Item 13. Certain Relationships and Related Transactions. 51 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 52 Key Energy Group, Inc. and Subsidiaries PART I. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K under "Item 1. Business", "Item 3. Legal Proceedings", "Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations", and elsewhere in this Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Key Energy Group, Inc. (the "Company" or "Key") to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the volatility of oil and gas prices, the availability of capital resources, operating hazards and uninsured risks, competition, and the ability of the Company to implement its business strategy.ITEM 1. BUSINESS. The Company Key Energy Group, Inc. (the "Company" or "Key") is the largest provider of onshore oil and gas well services in the United States and second largest in Argentina. As of June 30, 1998, the Company operated a fleet of 803 well service rigs, 733 oilfield trucks, and 70 drilling rigs (including 16 well service rigs, 28 oilfield trucks, and six drilling rigs in Argentina). As of June 30, 1998, Key's well service and oilfield truck fleets were the largest fleets, respectively, onshore the continental United States and the Company operated in all major onshore oil and gas producing regions of the continental United States, other than California and in Argentina. Including the consummation of the subsequent acquisitions of Dawson Production Services, Inc. ("Dawson") and the other well servicing companies referred to in "Subsequent Events" below, the Company also operates in California and in the inland waters of the Gulf of Mexico. Including completion of the subsequent acquisitions, the Company operates a fleet of approximately 1,423 well service rigs, 1,121 oilfield trucks, and 71 drilling rigs (including 20 well service rigs, 28 oilfield trucks and six drilling rigs in Argentina). After the subsequent acquisitions, the Company is the world's largest provider of well service rigs. The Company generally provides a full range of maintenance and workover services to major and independent oil and gas companies in all of its operating regions. In addition to maintenance and workover services, Key also provides services which include the completion of newly drilled wells, the recompletion of existing wells (including horizontal recompletions) and the plugging and abandonment of wells at the end of their useful lives. Other services include oil field fluid transportation, storage and disposal services, frac tank rentals, fishing and rental tools, wireline services, air drilling, hot oiling and following the Dawson acquisition, production testing services. In addition, the Company is engaged in contract drilling in several oil and gas producing regions of the continental United States and Argentina, and owns and produces oil and natural gas in the Permian Basin and Texas Panhandle. As of June 30, 1998, the Company conducted operations through eight directly or indirectly wholly-owned subsidiaries; Yale E. Key, Inc. ("Yale E. Key"); WellTech Eastern, Inc. ("WellTech Eastern"); WellTech Mid-Continent, Inc. ("WellTech Mid-Continent"); Odessa Exploration Incorporated ("Odessa Exploration"); Brooks Well Servicing, Inc. ("Brooks""); Key Four Corners, Inc. ("Key Four Corners"); Key Rocky Mountain, Inc. ("Key Rocky Mountain") and Key Energy Drilling, Inc. ("Key Energy Drilling"). In addition, Key operates in Argentina through its wholly-owned subsidiary, Servicios WellTech, S.A. ("Servicios"). Yale E. Key, WellTech Eastern, WellTech Mid-Continent, Brooks, Key Four Corners, Key Rocky Mountain and Servicios provide oil and gas well services. In addition, WellTech Eastern, Key Four Corners, Servicios and Key Energy Drilling provide contract oil and gas well drilling services. Odessa Exploration is engaged in the production of oil and natural gas. Subsequent Events On September 15, 1998, Midland Acquisition Corporation ("Midland"), a New Jersey corporation and a wholly-owned subsidiary of the Company, completed its cash tender offer (the "Tender Offer") for all outstanding shares of common stock, par value $0.01 per share (the "Dawson Shares"), including the associated common stock purchase rights, of Dawson at a price of $17.50 per Dawson Share. The Tender Offer expired at 8:30 a.m., New York City Time, on Tuesday, September 15, 1998. Midland accepted for payment 10,021,601 Dawson Shares for a total purchase price of approximately $175.4 million. The acceptance of tendered Dawson Shares, together with Dawson Shares previously owned by Midland and the Company prior to the commencement of the Tender Offer resulted in Midland and the Company acquiring approximately 97.0% of the outstanding Dawson Shares. The purchase price for Dawson Shares pursuant to the Tender Offer and the merger agreement was determined pursuant to arms-length negotiations between the parties and was based on a variety of factors, including, without limitation, the anticipated earnings and cash flows of Dawson. The Tender Offer was made pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of August 11, 1998, by and among, Midland, the Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger Agreement, Midland was merged with and into Dawson (the "First Merger") under the laws of the States of New Jersey and Texas and all Dawson Shares not owned by Midland were cancelled and retired and converted into the right to receive $17.50 in cash per Dawson Share. On September 21, 1998, Dawson was merged with and into the Company (the "Second Merger") pursuant to the laws of the States of Maryland and Texas. The total consideration paid for the Dawson Shares pursuant to the Tender Offer and the First Merger was approximately $181.7 million. The Company's source of funds to pay such amount, certain outstanding debt of Dawson and the Company and related fees and expenses was (i) a bridge loan agreement in the amount of $150,000,000, dated as of September 14, 1998, among the Company, Lehman Brothers Inc., as Arranger, and Lehman Commercial Paper Inc., as Administrative Agent, and the other lenders party thereto (the "Bridge Loan Agreement") and (ii) a $550,000,000 Second Amended and Restated Credit Agreement, dated as of June 6, 1997, as amended and restated through September 14, 1998, among the Company, PNC Bank, National Association, as Administrative Agent, Norwest Bank Texas, N.A., as Collateral Agent, PNC Capital Markets, Inc., as Arranger and the other lenders named from time to time parties thereto (the "Second Amended and Restated Credit Agreement"). In connection with the Bridge Loan Agreement, the Company entered into Registration Rights Agreements (the "Registration Rights Agreements") with Lehman Brothers Inc. and Lehman Commercial Paper Inc. pursuant to which the Company agreed to file with the Securities and Exchange Commission (the "Commission") within a certain time period a registration statement with respect to (i) an offer to exchange borrowings under the Bridge Loan Agreement for a new issue of debt securities of the Company, and (ii) the resale of warrants (and the shares of common stock of the Company to be issued upon the exercise of such warrant) to purchase shares of common stock of the Company issued to Lehman Brothers Inc. in connection with the Bridge Loan Agreement. Loans outstanding after one year pursuant to the Bridge Loan Agreement will convert into term loans which may be exchanged by the holders thereof for exchange notes issued pursuant to an Indenture dated as of September 14, 1998 (the "Indenture"), between the Company and The Bank of New York, trustee. At the time the Second Merger was consummated, the Company, its subsidiaries and U.S. Trust Company of Texas, N.A., trustee ("U.S. Trust"), entered into a Supplemental Indenture dated September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company assumed the obligations of Dawson under the indenture dated February 20, 1997 (the "Dawson Indenture") between Dawson and U.S. Trust, most of the Company's subsidiaries guarantied those obligations and the notes issued pursuant to the Dawson Indenture were equally and ratably secured with the obligations under the Second Amended and Restated Credit Agreement. Under the terms of the Dawson Indenture, the Company is required to commence a cash tender offer to purchase at 101% of the aggregate principal amount of the outstanding notes (which the outstanding amount is $140 million) by mid-October 1998, the source of funds for which will be borrowings under the Second Amended and Restated Credit Agreement. Dawson operates approximately 527 well service rigs, 200 oilfield trucks, and 21 production testing units in South Texas and the Gulf Coast, East Texas and Louisiana, the Permian Basin of West Texas and New Mexico, the Anadarko Basin of Texas and Oklahoma, California, and in the inland waters of the Gulf of Mexico. In addition, subsequent to June 30, 1998, the Company completed the acquisition of five well servicing companies which collectively operate 93 well service rigs (including four in Argentina), one drilling rig, and 188 oilfield trucks. Growth Strategy The domestic well service rig and production service industry has historically been highly fragmented, characterized by a large number of smaller companies which have competed effectively on a local basis in terms of pricing and the quality of services offered. In recent years, many major and independent oil and gas companies have placed increasing emphasis upon not only pricing, but also on safety records and quality management systems of, and the breadth of services offered by, their vendors, including well servicing contractors. This market environment, which requires significant expenditures by smaller companies to meet these increasingly rigorous standards, has forced many smaller well servicing companies to sell their operations to larger competitors. As a result, the industry has seen high levels of consolidation among the competing contractors. Over the past two and one-half years, Key has been the leading consolidator of this industry, completing in excess of fifty acquisitions. This consolidation has led to reduced fragmentation in the market and has led to more predictable demand for well services for the Company and its competitors. Key's management structure is decentralized, which allows for rapid integration of acquisitions and the retention of strong local identities of many of the acquired businesses. The Company, as a result, has developed a growth strategy to: (i),subject to restrictions under its existing credit facilities, identify, negotiate and consummate additional acquisitions of complementary well servicing operations, including rigs, trucking and other ancillary services; (ii) fully-integrate acquisitions into the Company's decentralized organizational structure and thereby attempt to maximize operating margins; (iii) expand business lines and services offered by the Company in existing areas of operations; and (iv) extend the geographic scope and operating environments for the Company's operations. Oil Field Services The Company provides a full range of well service rig services, oil field liquid services and other production services necessary to maintain and workover producing oil and gas wells through its subsidiaries, Yale E. Key, WellTech Eastern, WellTech Mid-Continent, Brooks, Key Four Corners, Key Rocky Mountain, and Servicios. These services also include the completion of newly drilled wells, the recompletion of existing wells (including horizontal recompletions) and the plugging and abandonment of wells at the end of their useful lives. Other services include oil field fluid transportation, storage and disposal services, frac tank rentals, fishing and rental tools, wireline services, air drilling, hot oiling, and following the Dawson acquisition, production testing services. The Company has more than 1,000 customers which are either major oil and gas companies or independent producers seeking to optimize performance of oil and gas wells. As of June 30, 1998, of the Company's 803 well service rigs, 299 operate in the Permian Basin of West Texas and New Mexico, 187 in the Mid-Continent Region, 80 in the ArkLaTex Region, 84 in Michigan and the Northeast, 29 in the Four Corners Region, 108 in the Rocky Mountain Region and 16 in Argentina. Well Service Rig Services. The Company utilizes its fleet to perform four major categories of service to oil and gas operators including: Maintenance Services. Maintenance services are required on producing oil and gas wells to ensure efficient and continuous operation. These services consist of routine mechanical repairs necessary to maintain production from the well, such as repairing parted sucker rods or defective down-hole pumps in an oil well, or replacing defective tubing in an oil or gas well. The Company provides the well service rigs, equipment and crews for these maintenance services. Many of these well service rigs also have pumps and tanks (a workover package) that can be used for circulating fluids into and out of the well. Maintenance jobs are often performed on a series of wells in proximity to each other and typically take less than 48 hours per well. Maintenance services are generally required throughout the life of a well. The need for these services does not directly depend on the level of drilling activity and is generally independent of short-term fluctuations in oil and gas prices. Accordingly, maintenance services are generally the most stable type of well service activity. The general level of maintenance, however, is affected by changes in the total number of producing oil and gas wells in the Company's geographic service areas. Workover Services. In addition to periodic maintenance, producing oil and gas wells occasionally require major repairs or modifications, called "workovers." Workover services include extensions of existing wells to drain new formations either through deepening well bores or through drilling of horizontal laterals. In less extensive workovers, the Company's rigs are used to seal off depleted zones in existing well bores and access previously bypassed productive zones. The Company's workover rigs are also used to convert producing wells to injection wells for enhanced recovery operations. Workover services include major subsurface repairs such as casing repair or replacement, recovery of tubing and removal of foreign objects in the well bore. These extensive workover operations are normally performed by a well service rig with a workover package, which may include rotary drilling equipment, mud pumps, mud tanks and blowout preventers depending upon the particular type of workover operation. Most of the Company's well service rigs are designed for and can be equipped to perform complex workover operations. A workover may last from a few days to several weeks. The demand for workover services is more sensitive to expectations relating to and changes in oil and gas prices than the demand for maintenance services, but not as sensitive as the demand for completion services. When oil and gas prices are low, there is little incentive to perform workovers on wells to increase production and well operators tend to defer such expenditures. As oil and gas prices increase, the level of workover activity tends to increase as operators seek to increase production by enhancing the efficiency of their wells. Completion Services. Completion services prepare a newly drilled well for production. The completion process may involve selectively perforating the well casing to access producing zones, stimulating and testing these zones and installing downhole equipment. The Company provides a well service and workover package rig to assist in this completion process. Newly drilled wells are frequently completed by a well service rig so that an operator can minimize the use of a higher cost drilling rig. The completion process typically requires a few days to several weeks, depending on the nature and type of the completion, and generally requires additional auxiliary equipment which the Company provides for an additional fee. The demand for well completion services is directly related to drilling activity levels, which are highly sensitive to expectations relating to and changes in oil and gas prices. During periods of weak drilling demand, drilling contractors frequently price well completion work competitively compared to a well service rig so that the drilling rig stays on the job. Thus, excess drilling capacity will serve to reduce the amount of completion work available to the well servicing industry. Plugging and Abandonment Services. Well service rigs and workover equipment are also used in the plugging and abandonment of oil and gas wells no longer capable of producing in economic quantities. The demand for oil and gas does not significantly affect the demand for well plugging services. Liquid Services. The Company provides vacuum truck services, frac tank rentals and salt water disposal services which together provide an integrated mix of liquid services to well site customers. Production Testing Services. Dawson owns 21 gas production testing units that are used to provide services to oil and gas wells located onshore and in inland waters. Dawson performs production testing services for oil and gas producers primarily along the Texas Gulf Coast. Dawson's equipment includes several trailer-mounted manifolds, separators, heater treaters, sand separators, light generators and slickline wireline units. Manifolds are used to reduce the flowing pressure of the well stream to a rate that will easily flow through the production testing equipment. After the appropriate well stream rate is achieved, a separator is used to divide the well stream into its respective components -- oil, gas and water. For gas wells, a heater is used to prevent the gas from freezing during flowbacks. Slickline wireline equipment generally is used to lower measurement equipment into a well for several days to retrieve data to determine the characteristics of the reservoir. Dawson uses its production testing units to perform deliverability tests required upon the initial completion of a well and periodically during the productive life of a gas well to determine the maximum production allowable under certain rules of the Texas Railroad Commission, the state oil and gas regulatory agency. In addition, these units are used to clean and test stimulated wells and to measure the pressure, volume and quality of gas and liquids produced by the well. These units also are used to determine the most efficient production flow rate, to run pressure build-up tests that measure the rate of increase of shut-in gas pressure to determine reservoir characteristics and to determine whether a producing formation has been damaged. Other Production Services. The Company provides production services, which include hot oiler unit services, pipeline installation and testing services, slickline wire-line services and fishing and rental tool services. Contract Drilling Services The Company, primarily through Key Energy Drilling, owns and operates 71 drilling rigs and provides contract drilling services for major and independent oil companies in most onshore oil and gas producing areas of the continental United States. The Company entered the land drilling business in March 1995 with the acquisition of four drilling rigs from an independent third party and, as the result of subsequent acquisitions, acquired 67 additional land drilling rigs (six of which operate in Argentina). The rigs are generally capable of drilling up to 10,000 feet. Production The Company is engaged in the production of oil and natural gas in the Permian Basin area of West Texas through Odessa Exploration. Odessa Exploration acquires and manages interests in producing oil and gas properties for its own account and for drilling partnerships it sponsors. Odessa Exploration acquires producing oil and gas wells and related properties from major and independent producers and, subsequently, either reworks the acquired wells to increase production or forms drilling ventures for additional development wells. Odessa Exploration operates oil and gas wells on behalf of over 250 working interest owners as well as for its own account. Foreign Operations The Company provides oil field services in Argentina through Servicios. As of June 30, 1998, Servicios owned and operated 16 well servicing rigs and six drilling rigs in Argentina. COMPETITION AND OTHER EXTERNAL FACTORS Despite a significant amount of consolidation having occurred, the domestic well service rig and production service industry remains somewhat fragmented and includes a small number of companies that are capable of competing effectively in all or part of the Company's well servicing markets. Nonetheless, the Company believes that it is competitive in terms of pricing, performance, equipment, safety, availability of equipment to meet customer needs and availability of experienced, skilled personnel in those regions in which it operates. In the well servicing market, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well trained work force. In recent years, many of the Company's larger customers have placed emphasis not only on pricing, but also on safety records and quality management systems of contractors. The Company believes that such factors will be of increased importance in the future. The Company has directed substantial resources toward employee safety and training programs, as well as its employee review process. While the Company's efforts in these areas are not unique, many competitors, particularly small contractors, have not undertaken similar training programs for their employees. Management believes that the Company's safety record and reputation for quality equipment and service are among the best in the industry. The Company acquires oil and gas properties from independent and major oil companies and competes with other independent and integrated oil companies for the acquisition of these properties. The Company also competes with other local oil and gas drilling contractors, as well as national oil and gas drilling companies. As with oil field services, the need for drilling oil and gas wells fluctuates, in part, based on the price of, and demand for, oil and natural gas. The Company serves over 1,000 customers in most oil and gas producing regions of the continental United States and Argentina. The Company had no single customer in fiscal 1998 that provided 10% or more of consolidated revenues. The need for oilfield services fluctuates, in part, in relation to the demand for oil and natural gas. As demand for those commodities increases, service and maintenance requirements increase as oil and natural gas producers attempt to maximize the producing efficiency of their wells in a higher priced environment. EMPLOYEES As of June 30, 1998, the Company employed 5,601 persons (4,982 in well service operations, 12 in oil and gas production, 587 in contract drilling operations and 20 in corporate). The Company's employees are not represented by a labor union or collective bargaining agent. The Company has experienced no work stoppages associated with labor disputes or grievances and considers its relations with its employees to be satisfactory. REGULATIONS The oilfield service operations and the oil and gas production and drilling activities of the Company are subject to various local, state and federal laws and regulations intended to protect the environment. The Company's operations routinely involve the handling of waste materials, some of which are classified as hazardous substances. Consequently, the regulations applicable to the Company's operations include those with respect to containment, disposal and controlling the discharge of any hazardous oil field waste and other non-hazardous waste material into the environment, requiring removal and cleanup under certain circumstances, or otherwise relating to the protection of the environment. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a party liable for environmental damage without regard to negligence or fault on the part of such party. Such laws and regulations may expose the Company to liability for the conduct of, or conditions caused by, others, or for acts of the Company which were in compliance with all applicable laws at the times such acts were performed. Management of the Company believes that it is in substantial compliance with all material federal, state and local regulations as they relate to the environment. Although the Company has incurred certain costs in complying with environmental laws and regulations, such amounts have not been material to the Company's financial results during the three past fiscal years. Management believes that the Company is in substantial compliance with all known material local, state and federal safety guidelines and regulations. In order to comply with such safety guidelines and regulations and increase employee awareness of on-the-job safety, the Company employs seven safety officers. The Company also has a safety training and education center that is used by it for continued safety training and awareness. ITEM 2. PROPERTIES. The Company's corporate offices are located in East Brunswick, New Jersey and Midland, Texas where the Company leases office space from an independent third party. Oil Field Services The following table sets forth the type, number and location of the major equipment owned and operated by the Company's oil field service subsidiaries as of June 30, 1998: (table located on next page) Well Service/ Drilling Oilfield Company Workover Rigs Rigs Trucks - ------------------------------------------------------------------------------- Domestic: Yale E. Key (Permian Basin of West Texas and New Mexico) 299 - 215 WellTech Mid-Continent (Mid-Continent Region) 187 - 91 Brooks (ArkLaTex Region) 80 2 105 WellTech Eastern (Michigan and Northeast) 84 5 214 Key Rocky Mountain (Rocky Mountains) 108 - - Key Four Corners (Four Corners Area) 29 17 80 Key Energy Drilling (West Texas and New Mexico) - 40 - International: Servicios (Argentina) 16 6 28 --- --- --- TOTALS 803 70 733 === === === Yale E. Key owns ten and leases six office and yard locations. WellTech Mid-Continent owns sixteen and leases seventeen office and yard locations. WellTech Eastern owns two and leases fourteen office and yard locations. Brooks owns three and leases 11 office and yard locations. Key Rocky Mountain owns four and leases eight office and yard locations. Key Four Corners owns three and leases two office and yard locations. Key Energy Drilling owns three and leases one office and yard location. In Argentina, Servicios leases two office and yard locations. All operating facilities are metal one story office and/or shop buildings. All buildings are occupied and considered to be in satisfactory condition. Production Odessa Exploration's major proved producing properties are located primarily in the Permian Basin area of West Texas. Odessa Exploration leases office space in Odessa, Texas. As of June 30, 1998, the Company owned interests in 452 gross (332 proved developed) oil properties and 60 gross (45 proved developed) gas properties. During the fiscal year ended June 30, 1998, the Company produced 223,009 barrels of oil at an average price of $16.25 per barrel and 1,396 MMcf of natural gas at an average sales price of $2.44 per Mcf. Average production (lifting) costs were $6.54 per barrel of oil equivalent (one barrel of oil equals six thousand cubic feet of natural gas). The Company's reserves had a pre-tax SEC 10 value of approximately $47.8 million as of June 30, 1998. The Company holds proved oil and gas reserves of approximately 93.5 billion cubic feet of natural gas equivalent (15.6 million barrels of oil equivalent) primarily in the Permian Basin and Panhandle of West Texas. ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS. See Item 8, Note 4 to the Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is currently traded on the New York Stock Exchange, under the symbol "KEG". Prior to April 1998, the Company's common stock was traded on the American Stock Exchange. As of June 30, 1998, there were 1,143 holders of record of 18,267,813 shares of common stock outstanding. The following table sets forth, for the periods indicated, the high and low closing prices of the Company's common stock on the New York Stock Exchange for the third and fourth quarters of fiscal 1998 and the American Stock Exchange for the remaining quarters, as derived from published sources. High Low Fiscal Year Ending 1998: First Quarter $ 34 1/2 $18 1/8 Second Quarter 37 3/4 17 1/4 Third Quarter 20 7/8 14 Fourth Quarter 19 1/2 13 Fiscal Year Ending 1997: First Quarter $ 8 3/4 $ 7 1/2 Second Quarter 12 1/4 8 3/8 Third Quarter 14 7/8 11 3/8 Fourth Quarter 17 13/16 12 7/8 There were no dividends paid on the Company's common stock during the fiscal years ended June 30, 1998, 1997 or 1996. The Company does not intend, for the foreseeable future, to pay dividends on its common stock. In addition, the Company is contractually restricted from paying dividends under the terms of its existing credit facilities. Recent Sales of Unregistered Securities: The Company effected the following unregistered sales of its securities during the twelve months ended June 30, 1998 that were not previously included in the Company's Quarterly Reports filed for such period. Each of the following issuances by the Company of the securities sold in the transactions referred to below were not registered under the Securities Act of 1933, as amended, pursuant to the exemption provided under Section 4 (2) thereof for transactions not involving a public offering: Effective March 19, 1998, the Company issued to various employees, pursuant to the Key Energy Group, Inc. 1997 Incentive Plan, options to purchase shares of the Company's common stock. Effective January 8, 1998, the Company issued a warrant to purchase 265,000 shares of Common Stock at an exercise price of $18.00 per share, subject to certain adjustments, as partial consideration in connection with the purchase by Key Rocky Mountain, a wholly-owned subsidiary of the Company, of substantially all the capital stock of J.W. Gibson Well Service Company. Item 6. Selected Financial Data.
Fiscal Fiscal Fiscal Fiscal Fiscal Year Year Year(1) Year Year Ended Ended Ended Ended Ended June 30, June 30, June 30, June 30, June 30, (in thousands) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING DATA: Revenues $420,046 $162,425 $65,857 $44,689 $34,621 Operating costs: Direct costs 288,951 111,250 46,962 32,793 26,585 Depreciation, depletion and amortization 31,001 11,076 4,701 2,738 1,371 General and administrative 39,813 17,545 6,142 4,352 3,540 Interest 21,476 7,879 2,477 1,478 830 Income before income taxes, minority interest and extraordinary items 38,805 14,675 5,575 3,328 2,295 Net income 24,175 9,098 3,586 2,178 1,345 Income per common share: Basic $1.41 $0.81 $0.46 $0.33 $0.26 Diluted $1.23 $0.66 $0.45 $0.33 $0.25 Average common shares outstanding: Basic 17,153 11,216 7,789 6,647 5,274 Dilution 24,024 17,632 7,941 6,647 5,288 Common shares outstanding at period end 18,267 12,298 10,414 6,914 5,274 Market price per common share at period end $13.12 $17.81 $8.19 $5.06 $4.67 Cash dividends paid on common shares $ - $ - $ - $ - $ - BALANCE SHEET DATA: Cash $25,265 $41,704 $4,211 $1,275 $1,173 Current assets 127,557 93,333 27,481 11,290 9,167 Property and equipment 547,537 227,255 96,127 36,336 18,935 Property and equipment, net 499,152 208,186 87,207 31,942 17,159 Total assets 698,640 320,095 121,722 45,243 28,095 Current liabilities 48,029 33,142 24,339 9,228 8,383 Long-term obligations, including current 399,779 174,167 46,825 15,949 11,501 Stockholders' equity 154,928 73,179 41,624 20,111 9,263 OTHER DATA: EBITDA (2) 91,282 33,630 12,753 7,544 4,496 Net cash (used in) provided by: Operating activities 34,349 2,156 7,121 3,258 1,842 Investing activities (299,763) (82,062) (13,551) (7,154) (5,608) Financing activities 248,975 117,399 9,366 3,998 4,316 Working capital 79,528 60,191 3,142 2,062 784 Book value per common share (3) $8.48 $5.95 $4.00 $2.91 $1.76 Ratio of earnings to fixed charges (4) 2.61 2.52 2.62 2.57 2.65
(1) Financial data for the year ended June 30, 1996 includes the allocated purchase price of WellTech Eastern and the results of their operations, beginning March 26, 1996. (2) Net income before interest expense, income taxes, depreciation, depletion and amortization. EBITDA is presented because of its wide acceptance as a financial indicator of a company's ability to service or incur debt. EBITDA should not be considered as an alternative to operating net income, as defined by generally accepted accounting principals, as indicators of the Company's financial performance or to cash flow as a measure of liquidity. (3) Book value per common share is stockholders' equity at period end divided by the number of outstanding common shares at period end. (4) For purposes of computing the ratios of earnings to fixed charges, earnings consist of income from continuing operations before income taxes and fixed charges. Fixed charges consist of interest expenses, amortization of debt issuance expenses and the portion of rental and lease obligations representative of the interest factor. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Special Note: Certain statements set forth below under this caption consitute "forward-looking statements" within the meaning of the Reform Act. See "Special Note Regarding Forward-Looking Statements" for additional factors relating to such statements. The following discussion provides information to assist in the understanding of the Company's financial condition and results of operations. It should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. Overview Historically, fluctuations in well servicing activity have had a strong correlation with fluctuations in oil and gas prices. During fiscal 1998, oil prices have decreased from an average of approximately $21 per barrel for West Texas Intermediate crude oil in July of 1997 to an average of approximately $12 per barrel in June of 1998. As a result, the Company experienced a decrease in demand for drilling and services. Even though the Company experienced a successful fiscal year ended June 30, 1998, in terms of earnings and earnings per share compared to previous years, continued low oil prices may continue to negatively affect the Company's operating performance. The Company seeks to minimize the effects of such low oil prices and fluctuations of pricing on its operations and financial condition through reduction of operating and capital costs, diversification of services, entry into new markets and customer alliances. FISCAL YEAR ENDED JUNE 30, 1998 VERSUS FISCAL YEAR ENDED JUNE 30, 1997 Results of Operations Operating Income The Company Revenues for the year ended June 30, 1998 increased $257,621,000, or 159%, from $162,425,000 in fiscal 1997 to $420,046,000 in fiscal 1998, while net income for fiscal 1998 increased $15,077,000, or 166% , from $9,098,000 in fiscal 1997 to $24,175,000 in fiscal 1998. The increase was primarily due to well service and oil and gas well drilling acquisitions throughout the year and increased well service and oil and gas drilling revenues from existing equipment through the third quarter of fiscal 1998. Oilfield Services Oilfield service revenues for the year ended June 30, 1998 increased $230,460,000, or 160%, from $144,385,000 for the year ended June 30, 1997 to $374,845,000 for the year ended June 30, 1998. The increase is primarily attributable to acquisitions throughout the year and higher equipment use through the third quarter of fiscal 1998 resulting from an increase in demand for oilfield services. Oil and Natural Gas Well Drilling Revenues from oil and gas well drilling activities increased $25,139,000, or 253%, from $9,956,000 during the year ended June 30, 1997 to $35,095,000 for the year ended June 30, 1998. The increase was primarily the result of acquisitions. Oil and Natural Gas Exploration and Production Revenues from oil and gas activities increased $55,000, or 1%, from $6,975,000 during the year ended June 30, 1997 to $7,030,000 for the current year. The increase was primarily the result of increased production in the current year which was partially offset with a decrease in the average price of oil and natural gas for fiscal 1998 as compared to fiscal 1997. Operating Expenses Oilfield Services Oilfield service expenses for the year ended June 30, 1998 increased $159,129,000, or 159%, from $100,366,000 for the year ended June 30, 1997 to $259,495,000 for the year ended June 30, 1998. The increase was due primarily to acquisitions made throughout the fiscal year and the increased demand for oilfield services through the third quarter of fiscal 1998. Oil and Natural Gas Well Drilling Expenses related to oil and gas well drilling activities increased $18,318,000, or 225%, from $8,155,000 for the year ended June 30, 1997 to $26,473,000 for the year ended June 30, 1998. The increase was primarily the result of acquisitions throughout fiscal 1998. Oil and Natural Gas Exploration and Production Expenses related to oil and gas activities increased $253,000, or 9%, from $2,729,000 for the year ended June 30, 1997 to $2,983,000 for the year ended June 30, 1998. The increase was primarily the result of an increase in the total number of producing oil and gas wells from fiscal 1997 to 1998. Depreciation and Depletion Expense Depreciation, depletion and amortization expense increased $19,925,000, or 180%, from $11,076,000 for fiscal 1997 to $31,001,000 for fiscal 1998. The increase is primarily due to oilfield service depreciation expense, which is the result of the acquisitions completed throughout fiscal 1998 and 1997. General and Administrative Expenses General and administrative expenses increased $22,268,000, or 127%, from $17,545,000 for the year ended June 30, 1997 to $39,813,000 for the year ended June 30, 1998. The increase was primarily attributable to oilfield service and oil and gas well drilling acquisitions throughout the fiscal year. Interest Expense Interest expense increased $13,597,000, or 173%, from $7,879,000 for fiscal 1997 to $21,476,000 in fiscal 1998. The increase was primarily the result of debt incurred in connection with acquisitions completed throughout fiscal 1998 and 1997. Income Taxes Income tax expense increased $9,057,000, or 163%, from $5,573,000 in income tax expense for fiscal 1997 to $14,630,000 for fiscal 1998. The increase in income taxes is primarily due to the increase in operating income. However, the Company does not expect to be required to remit the total amount of the $14,630,000 in total federal income taxes for fiscal year 1998 because of the availability of net operating loss carryforwards and accelerated depreciation. Cash Flow Net cash provided by operating activities increased $32,193,000, or 1,493%, from $2,156,000 during fiscal 1997 to $34,349,000 for fiscal 1998. The increase is attributable primarily to the increase in net income in fiscal 1998 compared to fiscal 1997 and decreases in accounts payable and accrued expenses and increases in depreciation. Net cash used in investing activities increased $217,701,000, or 265%, from $82,062,000 for fiscal 1997 to $299,763,000 for fiscal 1998. The increase is primarily the result of increased capital expenditures for well service operations and well service and oil and gas well drilling acquisitions. Net cash provided by financing activities increased $131,576,000 or 112% from $117,399,000 for fiscal 1997 to $248,975,000 for fiscal 1998. The increase is primarily the result of proceeds from long-term commercial paper and borrowings under the Company's existing line-of-credit during the current fiscal year. FISCAL YEAR ENDED JUNE 30, 1997 VERSUS FISCAL YEAR ENDED JUNE 30, 1996 Operating Income The Company Revenues for the year ended June 30, 1997 increased $96,568,000, or 147%, from $65,857,000 in fiscal 1996 to $162,425,000 in fiscal 1997, while net income for fiscal 1997 increased $5,512,000, or 154% , from $3,586,000 in fiscal 1996 to $9,098,000 in fiscal 1997. The increase was primarily due to well service acquisitions throughout the year, increased oil and gas revenues from Odessa Exploration, and increased oil and gas drilling revenues. Oilfield Services Oilfield service revenues for the year ended June 30, 1997 increased $88,452,000, or 158%, from $55,933,000 for the year ended June 30, 1996 to $144,385,000 for the year ended June 30, 1997. The increase is primarily attributable to acquisitions throughout the year and higher equipment use resulting from an increase in demand for oilfield services. Oil and Natural Gas Exploration and Production Revenues from oil and gas activities increased $3,421,000, or 96%, from $3,554,000 during the year ended June 30, 1996 to $6,975,000 for the current year. The increase was primarily the result of increased production of oil and natural gas from several wells that were drilled and began production during fiscal 1997, higher oil and natural gas prices for fiscal 1997, and the April 1996 purchase of $6.9 million of oil and gas properties from an unrelated third party. Oil and Natural Gas Well Drilling Revenues from oil and gas well drilling activities increased $3,768,000, or 61%, from $6,188,000 during the year ended June 30, 1996 to $9,956,000 for the year ended June 30, 1997. The increase was primarily the result of increased well drilling activity and an increase in the Company's pricing structure. Operating Expenses Oilfield Services Oilfield service expenses for the year ended June 30, 1997 increased $59,629,000, or 146%, from $40,737,000 for the year ended June 30, 1996 to $100,366,000 for the year ended June 30, 1997. The increase was due primarily to acquisitions made throughout the fiscal year and the increased demand for oilfield services. In addition, the Company has continued to expand its services, offering fishing tools, blow-out preventers and oilwell frac tanks. Oil and Natural Gas Exploration and Production Expenses related to oil and gas activities increased $1,534,000, or 128%, from $1,195,000 for the year ended June 30, 1996 to $2,729,000 for the year ended June 30, 1997. The increase was primarily the result of costs associated with several oil and natural gas wells that were drilled and began producing during fiscal 1997 and the April 1996 purchase of $6.9 million in oil and gas properties. Oil and Natural Gas Well Drilling Expenses related to oil and gas well drilling activities increased $3,125,000, or 62%, from $5,030,000 for the year ended June 30, 1996 to $8,155,000 for the year ended June 30, 1997. The increase was primarily the result of increased revenues. Depreciation and Depletion Expense Depreciation, depletion and amortization expense increased $6,375,000, or 136%, from $4,701,000 for fiscal 1996 to $11,076,000 for fiscal 1997. The increase is primarily due to oilfield service depreciation expense, which is the result of increased oilfield service capital expenditures for the current period versus the prior period and the acquisitions completed throughout fiscal 1997. In addition, depletion expense increased for the period due to the increase in the production of oil and natural gas.. General and Administrative Expenses General and administrative expenses increased $11,403,000, or 186%, from $6,142,000 for the year ended June 30, 1996 to $17,545,000 for the year ended June 30, 1997. The increase was primarily attributable to oilfield service acquisitions throughout the fiscal year. Interest Expense Interest expense increased $5,402,000, or 218%, from $2,477,000 for fiscal 1996 to $7,879,000 in fiscal 1997. The increase was primarily the result of debt incurred in connection with acquisitions completed throughout fiscal 1997. Income Taxes Income tax expense increased $3,685,000, or 195%, from $1,888,000 in income tax expense for fiscal 1996 to $5,573,000 for fiscal 1997. The increase in income taxes is primarily due to the increase in operating income. However, the Company does not expect to be required to remit a significant amount of the $5,573,000 in total federal income taxes for fiscal year 1997 because of the availability of net operating loss carryforwards, accelerated depreciation and drilling tax credits. Cash Flow Net cash provided by operating activities decreased $4,965,000, or 70%, from $7,121,000 during fiscal 1996 to $2,156,000 for fiscal 1997. The decrease is attributable primarily to increases in accounts receivable, decreases in accounts payable and accrued expenses, but was partially off set by increases in depreciation and net income. Net cash used in investing activities increased $68,511,000, or 506%, from $13,551,000 for fiscal 1996 to $82,062,000 for fiscal 1997. The increase is primarily the result of increased capital expenditures for well service operations and well service acquisitions. Net cash provided by financing activities was $117,399,000 for fiscal 1997 as compared to $9,366,000 for fiscal 1996, which represents an increase of $108,033,000, or 1,153%. The increase, which is partially offset by repayments of long-term debt, is primarily the result of proceeds from the existing Debentures and commercial paper during the current fiscal year. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased by $16.4 million for the year ended June 30, 1998 from $41.7 million as of June 30, 1997 to $25.3 million as of June 30, 1998. The Company has projected, without consideration of acquisitions subsequent to June 30, 1998, $51 million for oilfield service capital expenditures for fiscal 1999 as compared to $44.3 million and $15 million in fiscal 1998 and 1997, respectively. Odessa Exploration has projected outlays of approximately $6 million in development costs for fiscal 1999, as compared to $7.8 million and $8.2 million in fiscal 1998 and 1997, respectively. The Company's oil and gas well drilling operations have forecast approximately $5 million for capital expenditures for fiscal 1999, primarily for improvements to existing equipment and machinery, as compared to $5.4 million for fiscal 1998 and $1.5 million in fiscal 1997. The Company expects to finance these capital expenditures and development costs using cash flows from operations and available credit. The Company believes that its cash flows and, to the extent required, borrowings under the Second Amended and Restated Credit Agreement, will be sufficient to fund such expenditures. Debt On June 6, 1997, the Company entered into an agreement (the "Initial Credit Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a syndication of other lenders pursuant to which the lenders provided a $255 million credit facility, consisting of a $120 million seven-year term loan and a $135 million five-year revolver. The interest rate on the term loan was LIBOR plus 2.75 percent. The interest rate on the revolver varied based on LIBOR and the level of the Company's indebtedness. The Initial Credit Agreement contained certain restrictive covenants and required the Company to maintain certain financial ratios. On September 25, 1997, the Company repaid the term loan and a portion of the then outstanding amounts under the revolver by applying the proceeds from the initial and second closings of the Company's private placement of $216 million of 5% Convertible Subordinated Notes (discussed below). Effective November 6, 1997, the Company entered into an Amended and Restated Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as administrative agent and lender, pursuant to which PNC agreed to make revolving credit loans of up to a maximum loan commitment of $200 million. The maximum commitment decreases to $175 million on November 6, 2000 and to $125 million on November 6, 2001. The loan commitment terminates on November 6, 2002. Borrowings under the credit facility may be either (i) Eurodollar Loans with interest currently payable quarterly at LIBOR plus 1.25% subject to adjustment based on certain financial ratios, (ii) Base Rate Loans with interest payable quarterly at the greater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2%, or (iii) a combination thereof, at the Company's option. The Amended PNC Credit Agreement contains certain restrictive covenants and requires the Company to maintain certain financial ratios. A change of control of the Company, as defined in the Amended PNC Credit Agreement, is an event of default. Borrowings under the Amended PNC Credit Agreement are secured by substantially all of the assets of the Company and its domestic subsidiaries. Effective December 3, 1997, PNC completed the syndication of the Amended PNC Credit Agreement. In connection therewith, PNC, as administrative agent, a syndication of lenders and the Company entered into a First Amendment to the Amended and Restated Credit Agreement (the "Amendment to Amended PNC Credit Agreement") providing for, among other things, an increase in the maximum commitment to $250 million from $200 million. On September 25, 1997, the Company completed an initial closing of its private placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the "Notes"). On October 7, 1997, the Company completed a second closing of its private placement of an additional $16 million of Notes pursuant to the exercise of the remaining portion of the over-allotment option granted to the initial purchasers of the Notes. The placements were made as private offerings pursuant to Rule 144A under the Securities Act of 1933. The Notes are subordinate to the Company's senior indebtedness, which, as defined in the indenture under which the Notes were issued, includes the borrowings under the Amended PNC Credit Agreement, as amended. The Notes are convertible, at the holder's option, into shares of Common Stock at a conversion price of $38.50 per share, subject to certain adjustments. The Notes are redeemable, at the Company's option, on or after September 15, 2000, in whole or part, together with accrued and unpaid interest. The initial redemption price is 102.86% for the year beginning September 15, 2000 and declines ratably thereafter on an annual basis. In July 1996, the Company completed a $52,000,000 private offering of 7% Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Debentures are subordinate to the Company's senior indebtedness, which as defined in the indenture pursuant to which the Debentures were issued includes the borrowings under the Amended PNC Credit Agreement, as amended. The Debentures are convertible, at any time prior to maturity, at the holders' option, into shares of Common Stock at a conversion price of $9.75 per share, subject to certain adjustments. In addition, Debenture holders who convert prior to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock (at the Company's option), generally equal to 50% of the interest otherwise payable from the date of conversion through July 1, 1999. The Debentures are redeemable, at the option of the Company, on or after July 15, 1999, at a redemption price of 104%, decreasing 1% per year on each anniversary date thereafter. In the event of a change in control of the Company, as defined in the indenture under which the Debentures were issued, each holder of Debentures will have the right, at the holder's option, to require the Company to repurchase all or any part of the holder's Debentures within 60 days of such event at a price equal to 100% of the principal amount thereof, together with accrued and unpaid interest thereon. As of June 30, 1998, $47,400,000 in principal amount of the Debentures had been converted into 4,861,538 shares of common stock at the option of the holders. An additional 165,423 shares of common stock were issued representing 50% of the interest otherwise payable from the date of conversion through July 1, 1999, and an additional 35,408 shares of common stock were issued as an inducement to convert. The additional 165,423 shares of common stock, representing 50% of the interest otherwise payable from the date of conversion through July 1, 1999, are included in equity. The fair value of the additional 35,408 shares of common stock issued as inducement to convert was $710,186 and is recorded as interest expense in the consolidated statement of operations. In addition, the proportional amount of unamortized debt issuance costs associated with the converted Debentures was charged to additional paid-in capital at the time of conversion. Impact of SFAS 121 As of July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("FAS 121"). Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. Long-lived assets to be disposed of are to be accounted for at the lower of carrying amount or fair value less cost to sell when management has committed to a plan to dispose of the assets. All companies, including successful efforts oil and gas companies, are required to adopt FAS 121 for fiscal years beginning after December 15, 1995. In order to determine whether an impairment had occurred, the Company estimated the expected future cash flows of its income producing equipment and oil and gas properties and compared such future cash flows to the carrying amount of the asset to determine if the carrying amount was recoverable. Based on this process, no writedown in the carrying amount of the Company's property was necessary at June 30, 1998. Impact of Recently Issued Accounting Standards The Financial Accounting Standards Board has recently issued the following accounting standards which will be adopted by the Company in the future. Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting Comprehensive Income, is effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Specifially, SFAS 130 requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company will adopt SFAS 130 in the first quarter of its fiscal year ended June 30, 1999. Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures about Segments of an Enterprise and Related Information, is effective for financial statements for periods beginning after December 15, 1997. SFAS 131 establishes standards for the way that company's report information about operating segments in annual financial statements and requires that those company's report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 need not be applied to interim financial statements in the initial year of its application. However, comparative information for interim periods in the initial year of application is to be reported in the financial statements for interim periods in the second year of application. The Company will adopt SFAS 131 for the fiscal year ended June 30, 1999. Impact of Inflation on Operations Management is of the opinion that inflation has not had a significant impact on the Company's business. Year 2000 Issue As a result of the acquisitions completed by the Company over the past twenty-four months, the Company utilizes several management information systems in connection with its business operations and financial reporting process. The Company made an assessment of its Year 2000 issues, and determined that many of these management information systems would be adversely impacted by the arrival of the Year 2000. Accordingly, for operational efficiency, and to prevent any adverse impacts that may result from the arrival of the Year 2000, the Company is currently implementing a new integrated management information system along with updated hardware that will replace most of the systems currently utilized. The implementation of the new management information system, which is Year 2000 compliant, began in July of 1998 and is scheduled to be completed by June of 1999, assuming no unforeseen circumstances which are beyond the Company's control. Year 2000 issues as they relate to suppliers and customers remain to be evaluated by the Company. However, based on current available information, the Company does not anticipate that the costs associated with any necessary modifications will be material to the Company's operations or financial condition. The cost of the new management information system, (a large part of which management expects will be capitalized) is not expected to have a material impact on the Company's business, operations or results thereof, financial condition, liquidity or capital resources. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Presented herein are the consolidated financial statements of Key Energy Group, Inc. and Subsidiaries as of June 30, 1998 and 1997 and the years ended June 30, 1998, 1997 and 1996. Also, included is the report of KPMG Peat Marwick LLP, independent certified public accountants, on such consolidated financial statements as of June 30, 1998 and 1997 and for the years ended June 30, 1998, 1997 and 1996. INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets 20 Consolidated Statements of Operations 21 Consolidated Statements of Cash Flows 22 Consolidated Statements of Stockholders' Equity 23 Notes to Consolidated Financial Statements 24 Independent Auditors' Report 50 Key Energy Group, Inc. and Subsidiaries Consolidated Balance Sheets
June 30, June 30, (Thousands, except share and per share data) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash $25,265 $41,704 Accounts receivable, net of allowance for doubtful accounts ( $2,843 - 1998, $1,552 - 1997) 82,406 45,230 Inventories 13,315 5,171 Deferred tax asset 1,203 - Prepaid income taxes 537 - Prepaid expenses and other current assets 4,831 1,228 - -------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 127,557 93,333 - -------------------------------------------------------------------------------------------------------------------------------- Property and Equipment: Oilfield service equipment 400,731 176,326 Oil and gas well drilling equipment 61,629 6,319 Motor vehicles 19,748 10,569 Oil and gas properties and other related equipment, successful efforts method 42,638 23,622 Furniture and equipment 5,333 1,661 Buildings and land 17,458 8,758 - -------------------------------------------------------------------------------------------------------------------------------- 547,537 227,255 Accumulated depreciation & depletion (48,385) (19,069) - -------------------------------------------------------------------------------------------------------------------------------- Net Property and Equipment 499,152 208,186 - -------------------------------------------------------------------------------------------------------------------------------- Goodwill, net of amortization ($2,264 - 1998; $822 - 1997) 44,936 9,256 Other Assets 26,995 9,320 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets $698,640 $320,095 ================================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $20,124 $15,339 Other accrued liabilities 22,239 12,507 Accrued interest 3,818 2,102 Accrued income taxes - 1,664 Deferred tax liability - 126 Current portion of long-term debt 1,848 1,404 - -------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 48,029 33,142 - -------------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current portion 397,931 172,763 Non-current accrued expenses 4,812 4,017 Deferred tax liability 92,940 35,738 Minority interest - 1,256 Stockholders' equity: Common stock, $.10 par value; 100,000,000 shares authorized, 18,684,479 and 12,297,752 shares issued, respectively at June 30, 1998 and 1997, respectively 1,868 1,230 Additional paid-in capital 119,303 55,031 Treasury stock, at cost; 416,666 shares at June 30, 1998 and none at June 30, 1997 (9,682) - Unrealized gain on available-for-sale securities 2,346 - Retained earnings 41,093 16,918 - -------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 154,928 73,179 - -------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $698,640 $320,095 ================================================================================================================================ See the accompanying notes which are an integral part of these consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Operations
Year Ended Year Ended Year Ended (Thousands, except per share data) June 30, 1998 June 30, 1997 June 30, 1996 - --------------------------------------------------------------------------------------------------------------------------------- REVENUES: Oilfield services $374,845 $144,385 $55,933 Oil and gas well drilling 35,095 9,956 6,188 Oil and gas 7,030 6,975 3,554 Other, net 3,076 1,109 182 - -------------------------------------------------------------------------------------------------------------------------------- 420,046 162,425 65,857 - -------------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES: Oilfield services 259,495 100,366 40,737 Oil and gas well drilling 26,473 8,155 5,030 Oil and gas 2,983 2,729 1,195 Depreciation, depletion and amortization 31,001 11,076 4,701 General and administrative 39,813 17,545 6,142 Interest 21,476 7,879 2,477 - -------------------------------------------------------------------------------------------------------------------------------- 381,241 147,750 60,282 - -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 38,805 14,675 5,575 Income tax expense 14,630 5,573 1,888 Minority interest in net income - 4 101 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $24,175 $9,098 $3,586 ================================================================================================================================ EARNINGS PER SHARE : Basic $1.41 $0.81 $0.46 Diluted $1.23 $0.66 $0.45 ================================================================================================================================ WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 17,153 11,216 7,789 Diluted 24,024 17,632 7,941 ================================================================================================================================ See the accompanying notes which are an integral part of these consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended Year Ended Year Ended June 30, June 30, June 30, (Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $24,175 $9,098 $3,586 Adjustments to reconcile income from operations to net cash provided by operations: Depreciation, depletion and amortization 31,001 11,076 4,701 Amortization of deferred debt costs 2,006 - - Deferred income taxes 7,287 4,180 1,618 Minority interest in net income - 4 101 Gain on sale of assets (189) (235) (186) Other non-cash items 1,313 - 6 Change in assets and liabilities net of effects from the acquisitions: (Increase) in accounts receivable (3,173) (14,904) (2,180) (Increase) decrease in other current assets (4,051) (2,811) 765 Decrease in accounts payable, accrued interest and accrued expenses (17,444) (5,565) (1,293) Other assets and liabilities (6,576) 1,313 3 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 34,349 2,156 7,121 - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures - Well service operations (44,284) (15,084) (5,188) Capital expenditures - Oil and gas operations (7,849) (8,188) (1,879) Capital expenditures - Oil and gas well drilling operations (5,385) (1,483) (598) Capital expenditures - Other (1,748) - - Proceeds from sale of fixed assets 1,279 3,159 574 Cash received in acquisitions 2,903 2,342 1,168 Acquisitions - Well service operations (172,536) (62,808) - Acquisitions - Oil and gas well drilling (49,440) - - Acquisitions - Oil and gas operations (9,298) - (7,895) Purchase of Marketable equity securities (9,979) - - Acquisitions - minority interest (3,426) - - Redemption of restricted marketable securities - - 267 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (299,763) (82,062) (13,551) - ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt (6,087) (1,772) (2,601) Repayment of long-term debt (231,337) (47,815) - Borrowings under line-of-credit 280,770 120,000 1,100 Proceeds from stock options exercised 1,042 141 - Proceeds from warrants exercised 4,223 1,362 - Purchase of treasury stock (9,682) - - Proceeds from convertible subordinated debentures - 52,000 - Proceeds from long-term commercial paper debt 216,000 - - Proceeds paid for debt issuance costs (9,270) (7,389) - Proceeds from other long-term debt 3,316 872 10,867 - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 248,975 117,399 9,366 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (16,439) 37,493 2,936 Cash at beginning of period 41,704 4,211 1,275 - ----------------------------------------------------------------------------------------------------------------------- Cash at end of period $25,265 $41,704 $4,211 ======================================================================================================================= See the accompanying notes which are an integral part of these consolidated financial statements.
Key Energy Group, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Common Stock Unrealized -------------------- Gain on Number of Additional Available Shares Amount Paid-in Treasury Retained for Sale (thousands) Outstanding at par Capital Stock Earnings Securities Total - --------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 6,914 $691 $15,186 $ - $4,234 $ - $20,111 - --------------------------------------------------------------------------------------------------------------------------- Issuance of common stock for WellTech Merger 3,500 350 17,577 - - - 17,927 Net income - - - - 3,586 - 3,586 - --------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 10,414 $1,041 $32,763 - $7,820 - $41,624 - --------------------------------------------------------------------------------------------------------------------------- Issuance of common stock for Brownlee Well Service stock 61 6 665 - - - 671 Issuance of common stock for Woodward Well Service stock 75 8 555 - - - 563 Issuance of common stock for Brooks Well Service stock 918 92 11,033 - - - 11,125 Issuance of common stock for Enerair Oilwell Service assets 4 - 48 - - - 48 Issuance of common stock for Cobra Well Service stock 175 18 2,368 - - - 2,386 Issuance of common stock for Tri-State Well Service assets 84 8 992 - - - 1,000 Issuance of common stock for Kal-Con Well Service assets and stock 78 8 1,103 - - - 1,111 Issuance of common stock for Well-Co Well Service stock 240 24 4,026 - - - 4,050 Exercise of warrants 221 22 1,340 - - - 1,362 Exercise of options 28 3 138 - - - 141 Net income - - - - 9,098 - 9,098 - --------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1997 12,298 $1,230 $55,031 - $16,918 - $73,179 - --------------------------------------------------------------------------------------------------------------------------- Issuance of common stock for Big A Well Service assets 125 12 4,066 - - - 4,078 Issuance of common stock for Critchfield Well Service assets and stock 240 24 5,736 - - - 5,760 Issuance of common stock for Sitton Drilling stock 100 10 2,159 - - - 2,169 Issuance of common stock for Gibson Well Service assets 100 10 1,846 - - - 1,856 Exercise of warrants 609 61 4,162 - - - 4,223 Exercise of options 209 21 1,021 - - - 1,042 Conversion of 7% Notes 5,062 506 45,282 - - - 45,788 Purchase of treasury stock - 416,666 shares (417) - - (9,682) - - (9,682) Mark to market of available for sale securities - - - - - 2,346 2,346 Other (59) (6) (6) Net income - - - - 24,175 - 24,175 - --------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 18,267 $1,868 $119,303 $(9,682) $41,093 $2,346 $154,928 =========================================================================================================================== See the accompanying notes which are an integral part of these consolidated financial statements.
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) Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Description Years ---------------------------------------- Oilfield service equipment 3 - 20 Motor vehicles 3 - 7 Furniture and equipment 3 - 10 Buildings and improvements 10 - 40 Gas processing facilities 10 ---------------------------------------- Upon disposition or retirement of property and equipment, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is included in the results of operations. Odessa Exploration utilizes the successful efforts method of accounting for its oil and gas properties. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized, while nonproductive exploration costs and geological and geophysical costs (if any), are expensed. Capitalized costs relating to proved properties are depleted using the unit-of-production method. Upon disposition, the carrying amounts of properties sold or otherwise disposed of and the related allowance for depletion are eliminated from the accounts and any gain/loss is included in results of operations. As of July 1, 1997 the Company changed their method of calculating depreciation on its oil and gas well drilling rigs from the straight-line method to the units-of-production method. The new method takes into consideration the number of days the rigs are actually in service each month and depreciation is recorded for at least 15 days each month for each rig that is available for service. The Company believes the new method will more appropriately reflect its financial results by better matching of revenues with expenses and to better reflect how the assets are to be used over time. The effect of this change on net income for 1998, 1997 and 1996 was not material. Environmental The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Other Assets and Goodwill Other assets consist primarily of goodwill, capitalized debt issuance costs, investment in common stock (accounted for using the cost-method) and security and escrow deposits from Key's workers' compensation retrospective insurance program, in addition to an interest, (approximately 13%), in an insurance company (the insurance company is affiliated with Key's workers' compensation carrier). Marketable equity securities are deemed by management to be available for sale and are classified in the consolidated balance sheet at fair value of approximately $12,307,000 as other long-term assets with net unrealized gains of approximately $2,346,000 reported within stockholders' equity. At June 30, 1998, 1997 and 1996, the Company classified as goodwill the cost in excess of fair value of the net tangible assets acquired in purchase transactions. Goodwill of $37,122,000 was added in 1998. Goodwill is being amortized on a straight-line basis over ten to twenty-five years. Management continually evaluates whether events or circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or the remaining balance of goodwill may not be recoverable. Goodwill amortization expense totaled $1,442,000 for fiscal 1998 and $622,000 for fiscal 1997 and $100,000 for fiscal 1996. Debt issuance costs are amortized over the term of the applicable debt and such amortization is classified as interest expense. Amortization of debt issuance costs totaled $2,006,000 and $344,000 for the fiscal years ended 1998 and 1997, respectively. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Earnings per Share The Company accounts for earnings per share upon Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the year. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming conversion of dilutive outstanding convertible securities using the "as if converted" method. Year Ended (thousands, except per share data) ------------------------------------ 6/30/98 6/30/97 6/30/96 ------------------------------------ Basic EPS Computation: Numerator- Net Income $ 24,175 $ 9,098 $ 3,586 Denominator- Weighted Average Common Shares Outstanding 17,153 11,216 7,789 ----------------------------------- Basic EPS $ 1.41 $ 0.81 $ 0.46 =================================== Diluted EPS Computation: Numerator- Net Income $ 24,175 $ 9,098 $ 3,586 Effect of dilutive securities, tax effected: Convertible Securities 5,331 2,578 - ------------------------------------ $ 29,506 $ 11,676 $ 3,586 ------------------------------------ Denominator- Weighted Average Common Shares Outstanding: 17,153 11,216 7,789 Warrants 141 340 - Stock options 1,266 743 152 7% Convertible Debentures 1,191 5,333 - 5% Convertible Debentures 4,273 - - ------------------------------------ 24,024 17,632 7,941 ------------------------------------ Diluted EPS $ 1.23 $ 0.66 $ 0.45 =================================== Income Taxes The Company accounts for income taxes based upon Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is recognized when it is "more likely than not" that the benefit of deferred tax assets will not be realized. The Company and its eligible subsidiaries file a consolidated U. S. federal income tax return. Certain subsidiaries that are consolidated for financial reporting purposes are not eligible to be included in the consolidated U. S. federal income tax return and separate provisions for income taxes have been determined for these entities or groups of entities. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing and by policy limits the amount of credit exposure to any one financial institution. The Company's customer base consists primarily of multi-national, foreign national and independent oil and natural gas producers. See Note 12 for additional information regarding customers which accounted for more than 10% of consolidated revenues. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on its trade receivables. Such credit risk is considered by management to be limited due to the large number of customers comprising the Company's customer base. The Company maintains reserves for potential credit losses, and such losses have been within management's expectations. Impact of SFAS 121 On July 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121 - Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("FAS 121"). This Statement requires that long-lived assets, goodwill and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this Statement did not have an impact on the Company's consolidated financial position, results of operations, or liquidity. Stock-based Compensation The Company accounts for employee stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Accordingly, the company has only adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). See Note 8 for the pro forma disclosures of compensation expense determined under the fair-value provisions of SFAS 123. Cash and Cash Equivalents For cash flow purposes, the Company considers all unrestricted highly liquid investments with less than a three month maturity when purchased as cash equivalents. Reclassifications Certain reclassifications have been made to the fiscal 1997 and 1996 consolidated financial statements to conform to the fiscal 1998 presentation. Impact of Recently Issued Accounting Standards The Financial Accounting Standards Board has recently issued the following accounting standards which will be adopted by the Company in the future: Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Statement of Financial Accounting Standards No. 130 ("SFAS 130") - Reporting Comprehensive Income, is effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Specifially, SFAS 130 requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company will adopt SFAS 130 in the first quarter of its fiscal year ended June 30, 1999. Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures about Segments of an Enterprise and Related Information, is effective for financial statements for periods beginning after December 15, 1997. SFAS 131 establishes standards for the way that company's report information about operating segments in annual financial statements and requires that those company's report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 need not be applied to interim financial statements in the initial year of its application. However, comparative information for interim periods in the initial year of application is to be reported in the financial statements for interim periods in the second year of application. The Company will adopt SFAS 131 for the fiscal year ended June 30, 1999. Impact of Inflation on Operations Although in our complex environment it is extremely difficult to make an accurate assessment of the impact of inflation on the Company's operations, management is of the opinion that inflation has not had a significant impact on its business. 2. BUSINESS AND PROPERTY ACQUISITIONS The following acquisitions have been completed during fiscal 1998 are included in the Company's results of operations for the twelve months ended June 30, 1998. Each of the acquisitions were accounted for using the purchase method of accounting. Unless otherwise noted, the purchase prices specified below are based on cash paid and/or the fair value of the Company's common stock, par value $0.10 (the "Common Stock"). Transportes Dimopulos S.R.L. On June 5, 1998, the Company completed the acquisition of Transportes Dimopulos S.R.L. ("Transportes") which operates in Argentina. Transportes was acquired for approximately $2.2 million in cash and future obligations and included approximately 28 oilfield service trucks and trailers, all located in Argentina. The operating results of Transportes are included in the Company's results of operations effective June 5, 1998. Watson Truck & Supply, Inc. On May 19, 1998, the Company completed the acquisition of certain assets of Watson Truck & Supply, Inc. ("Watson") for approximately $2.6 million in cash. The asset purchased included a repair and refurbishment facility and a supply store in Mills, Wyoming. The operating results of Watson are included in the Company's results of operations effective June 1, 1998. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Lakota Drilling Company On May 22, 1998, the Company completed the acquisition of the assets of Lakota Drilling Company ("Lakota") for approximately $12 million in cash. Lakota operates seven drilling rigs in the Permian Basin region of West Texas. The operating results of Lakota are included in the Company's results of operations effective June 1, 1998. Odessa Exploration Properties On June 14, 1998, Odessa Exploration completed the purchase of approximately $8.7 million of oil and gas producing and undeveloped properties from a group of sellers unrelated to the Company. JPF Well Service, Inc. and JPF Lease Service, Inc. On April 20, 1998, the Company completed the acquisition of the assets of JPF Well Service, Inc. and JPF Lease Service, Inc. (collectively, "JPF") for approximately $6.2 million in cash. JPF operates nine well service rigs and oilfield construction equipment in Southeast Texas. The operating results of JPF are included in the Company's results of operations effective April 20, 1998. Edwards Transport, Inc. On March 27, 1998, the Company completed the acquisition of the assets of Edwards Transport, Inc. ("Edwards") for approximately $3.0 million in cash. Edwards operates fifteen vacuum and pump trucks in West Texas. The operating results of Edwards are included in the Company's results of operations effective April 1, 1998. Lundy Vacuum Service, Inc. On March 3, 1998, the Company completed the acquisition of the assets of Lundy Vacuum Service, Inc. ("Lundy") for approximately $1.4 million in cash. Lundy operates eight vacuum trucks, other oilfield fluid hauling trucks and an oilfield construction site buisiness in East Texas. The operating results of Lundy are included in the Company's results of operations effective March 3, 1998. Lauffer Well Service, Inc. On March 2, 1998, the Company completed the acquisition of the assets of Lauffer Well Service, Inc. ("Lauffer") for approximately $400,000 in cash. Lauffer operates four well service rigs in Kentucky. The operating results of Lauffer are included in the Company's results of operations effective March 2, 1998. Updike Brothers, Inc. On February 6, 1998, the Company completed the acquisition of Updike Brothers, Inc. ("Updike") for approximately $10.6 million in cash. Updike operates 25 well service rigs in Wyoming. The operating results of Updike are included in the Company's results of operations effective February 6, 1998. Four Corners Drilling Company On February 4, 1998, the Company completed the acquisition of the assets of Four Corners Drilling Company ("Four Corners") for approximately $10.0 million in cash. Four Corners owns 12 drilling rigs in the four corners region of the Southwestern United States. The operating results of Four Corners are included in the Company's results of operations effective February 4, 1998. Kingsley Enterprises, Inc. d/b/a Legacy Drilling Co. On January 30, 1998, the Company completed the acquisition of Kingley Enterprises, Inc. d/b/a Legacy Drilling Co. ("Legacy") for approximately $2.6 million in cash. Legacy operates four drilling rigs in the Permian Basin region Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) of West Texas. The operating results of Legacy are included in the Company's results of operations effective February 1, 1998. Circle M Vacuum Services, Inc. On January 30, 1998, the Company completed the acquisition of the assets of Circle M Vacuum Services, Inc. ("Circle M") for approximately $800,000 in cash. Circle M operates four vacuum trucks, trailers and a salt water disposal well in Southeast Texas. The operating results of Circle M are included in the Company's results of operations effective February 1, 1998. Hot Oil Plus, Inc. On January 29, 1998, the Company completed the acquisition of the assets of Hot Oil Plus, Inc. ("Hot Oil Plus") for approximately $2.2 million in cash. Hot Oil Plus operates eight hot oil trucks, a pump truck and a steam heater in Southeast Texas. The operating results of Hot Oil Plus are included in the Company's results of operations effective February 1, 1998. J.W. Gibson Well Service Company On January 8, 1998, the Company completed the acquisition of J.W. Gibson Well Service Company ("Gibson") for approximately $25.8 million, consisting of $23.9 million in cash, 100,000 shares of Common Stock and warrants to acquire 265,000 shares of Common Stock at an exercise price of $18.00 per share, subject to certain adjustments. Gibson operates 74 well service rigs and related equipment in eight states. From August 1, 1997 through the closing of the acquisition, the Company managed the operations of Gibson pursuant to an interim operating agreement. Under the operating agreement, the Company received a management fee equal to the operating income from Gibson's operations less $25,000 per month and received a one-time management fee of $300,000. The total management fee earned from August 1, 1997 through September 30, 1998 of $361,000 is classified as other revenue in the consolidated statement of operations. The operating results of Gibson are included in the Company's consolidated results of operations effective January 8, 1998. The payment of the management fee was not contingent upon closing of this transaction. Sitton Drilling Co. On January 1, 1998, the Company completed the acquisition of Sitton Drilling Co. ("Sitton") for approximately $15.0 million, including $12.9 million in cash and 100,000 shares of Common Stock. Sitton operates five drilling rigs in the Permian Basin region of West Texas. The operating results of Sitton are included in the Company's results of operations effective January 1, 1998. Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc. On December 2, 1997, the Company completed the acquisition of the assets of Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc. (collectively the "Critchfield Assets") for approximately $8.4 million, consisting of $2.7 million in cash and 240,000 shares of Common Stock. The Critchfield Assets consist of five land drilling rigs, five well service rigs and other related equipment in Michigan. The operating results of Critchfield Assets are included in the Company's results of operations effective December 2, 1997. Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation On November 24, 1997, the Company completed the acquisition of Win-Tex Drilling Co., Inc. and Win-Tex Trucking Corporation ("Win-Tex") for approximately $6.5 million in cash. Win-Tex operates six land drilling rigs, trucks, trailers and related equipment in West Texas. The operating results of Win-Tex are included in the Company's results of operations effective December 1, 1997. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Jeter Service Co. On November 18, 1997, the Company completed the acquisition of Jeter Service Co. ("Jeter") for approximately $6.7 million in cash. Jeter operates 15 well service rigs, an oilfield supply store and an oilfield location construction/maintenance business with 15 trucks and other related equipment in Oklahoma. The operating results of Jeter are included in the Company's results of operations effective December 1, 1997. GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. On October 3, 1997, the Company acquired certain assets of GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. ("GSI, Kahlden and McCurdy") for approximately $1.8 million in cash. GSI, Kahlden and McCurdy operate 12 fluid and 5 equipment hauling trucks in Southeast Texas. The operating results of GSI, Kahlden and McCurdy are included in the Company's results of operations effective October 3, 1997. Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc. On October 1, 1997, the Company completed the acquisition of substantially all of the assets of Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc. (collectively "Big A/Sunco") for approximately $31.1 million, consisting of $27 million in cash and 125,000 shares of Common Stock. Big A/Sunco operates 25 well service rigs, four drilling rigs, 75 oilfield trucks, related equipment and a machine shop/supply store in the Four Corners region of the Southwestern United States. The operating results of Big A/Sunco are included in the Company's results of operations effective October 1, 1997. Frontier Well Service, Inc. On September 30, 1997, the Company completed the acquisition of Frontier Well Service, Inc. ("Frontier") for approximately $3.5 million in cash. Frontier operates 12 well service rigs and related equipment in Wyoming. The operating results of Frontier are included in the Company's results of operations effective October 1, 1997. Dunbar Well Service, Inc. On September 29, 1997, the Company completed the acquisition of Dunbar Well Service, Inc. ("Dunbar") for approximately $11.8 million in cash. Dunbar operates 38 well service rigs and related equipment in Wyoming. The operating results of Dunbar are included in the Company's results of operations effective October 1, 1997. BRW Drilling, Inc. On September 25, 1997, the Company completed the acquisition of BRW Drilling, Inc. ("BRW") for approximately $14.6 million in cash. BRW operates seven drilling rigs and related equipment in the Permian Basin region of West Texas and Eastern New Mexico. The operating results of BRW are included in the Company's results of operations effective October 1, 1997. Landmark Fishing & Rental, Inc. On September 16, 1997, the Company completed the acquisition of Landmark Fishing & Rental, Inc. ("Landmark") for approximately $3.8 million in cash. Landmark operates a rental tool business in Western Oklahoma and the Texas Panhandle. The operating results of Landmark are included in the Company's results of operations effective September 16, 1997. Waco Oil & Gas Co., Inc. On September 1, 1997, the Company completed the acquisition of certain assets of Waco Oil & Gas Co., Inc. ("Waco") for approximately $7.0 million in cash. The Waco assets included 12 well service rigs, three drilling rigs, 33 oilfield trucks operated in West Virginia. Following the consummation of the acquisition, the three drilling rigs acquired from Waco were sold to an independent third party for $2.3 million in cash. No gain or loss was recognized in the sale of these rigs. The operating results of Waco are included in the Company's results of operations effective September 23, 1997. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc. On September 1, 1997, the Company completed the acquisition of Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc. ("Ram/Rowland") for $21.5 million in cash. Ram/Rowland operates 17 well service rigs, 93 oilfield trucks, 290 frac tanks, three disposal and brine wells, and dirt construction equipment in the Permian Basin region of West Texas and Southeastern New Mexico. The operating results of Ram/Rowland are included in the Company's results of operations effective September 1, 1997. Mosley Well Service, Inc. On August 22, 1997, the Company completed the acquisition of Mosley Well Service, Inc., ("Mosley"), which operates 36 well service rigs and related equipment in East Texas, Northern Louisiana and Arkansas, for approximately $17.2 million in cash. The operating results of Mosley are included in the Company's results of operations effective August 22, 1997. Kenting Holdings (Argentina) S.A. On July 30, 1997, the Company completed the acquisition of Kenting Holdings (Argentina) S.A. ("Kenting") for approximately $10.1 million in cash. Kenting is the sole shareholder of Kenting Drilling (Argentina) S.A. which operates six well service rigs, three drilling rigs and related equipment in Argentina. The operating results of Kenting are included in the Company's results of operations effective August 1, 1997. Patrick Well Service, Inc. On July 17, 1997, the Company completed the acquisition of Patrick Well Service, Inc. ("Patrick") for approximately $7.0 million in cash. Patrick operates 29 well service rigs and related equipment in Southwest Kansas, Oklahoma and Southeast Colorado. The operating results of Patrick are included in the Company's results of operations effective August 1, 1997. Servicios WellTech S.A. On July 1, 1997, the Company purchased the remaining 37% minority interest in Servicios WellTech S.A. ("Servicios") from two unrelated parties for approximately $3.4 million in cash. As a result of the purchase, the Company now owns 100% of Servicios. The operating results of the remaining minority interest in Servicios are included in the Company's results of operations effective July 1, 1997. Acquisition Completed Prior to June 30, 1997 Well-Co Oil Service. Inc. On June 26, 1997, the Company completed its acquisition of Well-Co Oil Service, Inc. ("Well-Co") which operates 79 well service rigs and related equipment in west Texas. Well-Co was acquired for $17.5 million in cash and 240,000 shares of the Company's common stock. The results of operations of Well-Co are included in the Company's results of operations effective June 26, 1997. Phoenix Well Service, Inc. On June 10, 1997, the Company completed its acquisition of Phoenix Well Service, Inc. ("Phoenix") which operates 11 well service rigs and related equipment in west Texas. Phoenix was acquired for $2.3 million in cash. The results of Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) operations of Phoenix are included in the Company's results of operations effective June 26, 1997. Southwest Oilfield Services, Inc. On June 10, 1997, the Company completed its acquisition of Southwest Oilfield Services, Inc. ("Southwest") which operates 3 well service rigs and related equipment in western Oklahoma. Southwest was acquired for $455,000 in cash. The results of operations of Southwest are included in the Company's results of operations effective June 10, 1997. Wireline and Excavation Assets On May 1, 1997, the Company completed an acquisition of ten wireline units and related equipment for approximately $600,000 in cash. On May 5, 1997, the Company completed its acquisition of several dump trucks and related excavation equipment for $410,000 in cash. The results of operations of these assets are included in the Company's results of operations effective May 1, 1997. Shreve's Well Service On April 18, 1997, the Company completed its acquisition of the assets of Shreve's Well Service, Inc. ("Shreve's") which operated in West Virginia. Shreve's assets were acquired for $550,000 in cash and included five well service rigs and related equipment. The results of operations of Shreve's are included in the Company's results of operations effective May 1, 1997. Argentine Drilling Rigs On April 16, 1997, the Company acquired three drilling rigs and related equipment in Argentina from Drillers, Inc. for $1.5 million in cash. The drilling rigs will be operated by WellTech Servicios, the Company's Argentine subsidiary. Diamond Well Service On April 3, 1997, the Company completed the acquisition of the assets of Diamond Well Service, Inc. ("Diamond") for $675,000 in cash. The Diamond assets included four oilwell service rigs and related equipment in Oklahoma. The results of operations of Diamond are included in the Company's results of operations effective April 1, 1997. Kalkaska Construction Service, Inc. ,Kalkaska Oilfield Service, Inc. and Elder Well Service, Inc. On March 31, 1997, the Company completed the acquisition of the assets of Kalkaska Construction Service, Inc., Kalkaska Oilfield Service, Inc. ("KalCon") and Elder Well Service, Inc. ("Elder"), both based in Michigan. The KalCon assets included 40 vacuum (fluid transport) trucks, 40 trucks used in oilfield equipment hauling, seven saltwater disposal wells and other oilfield related equipment, and were acquired for approximately $8.5 million in cash and 77,998 shares of the Company's common stock. The Elder assets included six well service rigs and related equipment and were acquired for $609,000 in cash. The operating results of KalCon and Elder are included in the Company's results of operations effective April 1, 1997. T.S.T. Paraffin Service Co., Inc. On March 27, 1997, the Company completed the acquisition of T.S.T. Paraffin Service Co., Inc. ("TST") for $8.7 million in cash. TST operates approximately 61 trucks, 22 hot oil units and other related equipment in west Texas. The operating results of TST are included in the Company's results of operations effective April 1, 1997. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Tri-State Wellhead & Valve, Inc. The Company completed its acquisition of the assets of Tri-State Wellhead & Valve, Inc. ("Tri-State") on March 17, 1997 for $550,000 in cash and 83,770 shares of the Company's common stock. The Tri-State assets consisted of a wellhead equipment rental business and five well service rigs. The operating results from these assets are included in the Company's results of operations effective April 1, 1997. Cobra Industries, Inc. Effective as of January 13, 1997, the Company completed the purchase of Cobra Industries, Inc. ("Cobra") for $5 million in cash and 175,000 shares of the Company's common stock. Cobra operates 26 well service rigs in southeastern New Mexico. The operating results from Cobra are included in the Company's results of operations effective February 1, 1997. Talon Trucking Co. Effective as of January 7, 1997, the Company completed the acquisition of the assets of Talon Trucking Co. ("Talon") for $2.7 million in cash. Talon operated three well service rigs, 21 trucks and related fluid transportation and disposal assets in Oklahoma. The operating results from these assets are included in the Company's results of operations effective January 7, 1997. B&L Hotshot, Inc. Effective as of December 13, 1996, the Company completed the acquisition of B&L Hotshot, Inc. and affiliated entities ("B&L") for $4.9 million in cash. B&L provides trucking and related services for oil and natural gas wells in Michigan. The operating results from B&L are included in the Company's results of operations effective January 1, 1997. Brooks Well Servicing, Inc. Effective as of December 1, 1996, the Company completed the acquisition of Brooks Well Servicing, Inc. ("Brooks") for 917,500 shares of the Company's common stock. Brooks was a wholly-owned subsidiary of Hunt Oil Company and operated 32 well service rigs and ancillary equipment in east Texas. The operating results from Brooks are included in the Company's results of operations effective December 1, 1996. Hitwell Surveys, Inc. Effective as of December 2, 1996, the Company completed the purchase of Hitwell Surveys, Inc. ("Hitwell") for approximately $1.3 million in cash. Hitwell operates eight well logging and perforating trucks in the Appalachian Basin and Michigan. The operating results from Hitwell are included in the Company's results of operations effective December 1, 1996. Energy Air Drilling Services Co. Effective as of November 1, 1996, the Company completed the acquisition of certain assets of Energy Air Drilling Services Co. ("Energy Air") for $500,000 in cash and 4,386 shares of the Company's common stock. Energy Air operated four air drilling packages in west Texas. Brownlee Well Service Inc. Effective as of October 24, 1996, the Company completed the purchase of Brownlee Well Service, Inc. ("Brownlee") and Integrity Fishing and Rental Tools Inc., ("Integrity"). Consideration for the acquisition was $6.5 million in cash and Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 61,069 shares of the Company's common stock. Brownlee and Integrity operate 16 well service rigs with ancillary equipment and a variety of oilfield fishing tools in west Texas. The operating results from Brownlee are included in the Company's results of operations effective November 1, 1996. Woodward Well Service, Inc Effective as of October 1, 1996, the Company completed the acquisition of Woodward Well Service, Inc. ("Woodward") for 75,000 shares of the Company's common stock and approximately $100,000 in cash, most of which is payable over a four-year period. Woodward operated five well service units in Oklahoma. The operating results from Woodward are included in the Company's results of operations effective October 1, 1996. Acquisitions Completed Prior to June 30, 1996 Odessa Exploration Properties In April of 1996, Odessa Exploration purchased approximately $6.9 million in cash of oil and gas producing properties from an unrelated company using proceeds from bank borrowings, which indebtedness was subsequently repaid. WellTech, Inc. On March 26, 1996, the Company completed the merger of WellTech, Inc. ("WellTech") into the Company. The net consideration for the merger was 3,500,000 shares of the Company's common stock and warrants to purchase 500,000 additional shares of Common Stock at an exercise price of $6.75 per share. WellTech conducted oil and gas well servicing operations in the Mid-Continent and Northeast areas of the United States and in Argentina. Pro Forma Results of Operations - (unaudited) The following unaudited pro forma results of operations have been prepared as though Well-Co, Cobra and T.S.T., Ram/Rowland, Coleman, Dunbar, Gibson, Updike and Lakota had been acquired on July 1, 1996. Proforma amounts are not necessarily indicative of the results that may be reported in the future. Year Ended ---------------------------------------- (Thousands, except per share data) June 30, 1998 June 30, 1997 ----------------------------------------------------------------------------- Revenues $ 459,764 $316,656 Net income 26,075 13,342 Basic earnings per share $ 1.52 $ 1.19 3. OTHER ASSETS Other assets consist of the following: June 30, (Thousands) 1998 1997 --------------------------------------------------------------------------- Investment in securities $12,325 $ - Workers compensation security deposits 1,418 1,817 Debt issuance costs (net of amortization; 1998 - $2,350, 1997 - $344) 11,869 7,045 Other 1,383 458 --------------------------------------------------------------------------- $26,995 $9,320 =========================================================================== Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 4. COMMITMENTS AND CONTINGENCIES Various suits and claims arising in the ordinary course of business are pending against the Company. Management does not believe that the disposition of any of these items will result in a material adverse impact to the consolidated financial position of the Company. During 1995 and subsequent fiscal years, the Company entered into employment agreements with certain of its officers. These employment agreements generally run for two fiscal years, but can be automatically be extended on a yearly basis unless terminated by the Company or the applicable officer. In addition to providing a base salary for each officer, the employment agreements provide for severance payments for each officer varying from 12 to 24 months of the officers base salary. The current annual base salaries for the officers covered under such employment agreements total approximately $1,189,000. 5. LONG-TERM DEBT The components of long-term debt are as follows: June 30, (Thousands) 1998 1997 ----------------------------------------------------------------- PNC Credit Facility (i) $172,000 $120,000 5% Subordinated Debentures (ii) 216,000 - 7% Subordinated Debentures (iii) 4,600 52,000 Other notes payable (iv) 7,179 2,167 ----------------------------------------------------------------- 399,779 174,167 Less current portion 1,848 1,404 ----------------------------------------------------------------- Long-term debt $397,931 $172,763 ================================================================= (i) PNC Credit Facility On June 6, 1997, the Company entered into an agreement (the "Initial Credit Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a syndication of other lenders pursuant to which the lenders provided a $255 million credit facility, consisting of a $120 million seven-year term loan and a $135 million five-year revolver. The interest rate on the term loan was LIBOR plus 2.75 percent. The interest rate on the revolver varied based on LIBOR and the level of the Company's indebtedness. The Initial Credit Agreement contained certain restrictive covenants and required the Company to maintain certain financial ratios. On September 25, 1997, the Company repaid the term loan and a portion of the then outstanding amounts under the revolver by applying the proceeds from the initial and second closings of the Company's private placement of $216 million of 5% Convertible Subordinated Notes (discussed below). Effective November 6, 1997, the Company entered into an Amended and Restated Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as administrative agent and lender, pursuant to which PNC agreed to make revolving credit loans of up to a maximum loan commitment of $200 million. The maximum commitment decreases to $175 million on November 6, 2000 and to $125 million on November 6, 2001. The loan commitment terminates on November 6, 2002. Borrowings under the credit facility may be either (i) Eurodollar Loans with interest currently payable quarterly at LIBOR plus 1.25% subject to adjustment based on certain financial ratios, (ii) Base Rate Loans with interest payable quarterly at the greater of PNC Prime Rate or the Federal Funds Effective Rate plus 1/2%, or (iii) a combination thereof, at the Company's option. The Amended PNC Credit Agreement contains certain restrictive covenants and requires the Company to maintain certain financial ratios. A change of control of the Company, as defined in the Amended PNC Credit Agreement, is an event of default. Borrowings under the Amended PNC Credit Agreement are secured by substantially all of the assets of the Company and its domestic subsidiaries. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Effective December 3, 1997, PNC completed the syndication of the Amended PNC Credit Agreement. In connection therewith, PNC, as administrative agent, a syndication of lenders and the Company entered into a First Amendment to the Amended PNC Credit Agreement providing for, among other things, an increase in the maximum commitment to $250 million from $200 million. In connection with the acquisition of Dawson, the total consideration paid for the Dawson Shares pursuant to the Tender Offer and the First Merger was approximately $181.7 million. The Company's source of funds to pay such amount, certain outstanding debt of Dawson and the Company and related fees and expenses was (i) a bridge loan agreement in the amount of $150,000,000, dated as of September 14, 1998, among the Company, Lehman Brothers Inc., as Arranger, and Lehman Commercial Paper Inc., as Administrative Agent, and the other lenders party thereto (the "Bridge Loan Agreement") and (ii) a $550,000,000 Second Amended and Restated Credit Agreement, dated as of June 6, 1997, as amended and restated through September 14, 1998, among the Company, PNC Bank, National Association, as Administrative Agent, Norwest Bank Texas, N.A., as Collateral Agent, PNC Capital Markets, Inc., as Arranger and the other lenders named from time to time parties thereto (the "Second Amended and Restated Credit Agreement"). In connection with the Bridge Loan Agreement, the Company entered into Registration Rights Agreements (the "Registration Rights Agreements") with Lehman Brothers Inc. and Lehman Commercial Paper Inc. pursuant to which the Company agreed to file with the Securities and Exchange Commission (the "Commission") within a certain time period a registration statement with respect to (i) an offer to exchange borrowings under the Bridge Loan Agreement for a new issue of debt securities of the Company, and (ii) the resale of warrants (and the shares of common stock of the Company to be issued upon the exercise of such warrant) to purchase shares of common stock of the Company issued to Lehman Brothers Inc. in connection with the Bridge Loan Agreement. Loans outstanding after one year pursuant to the Bridge Loan Agreement will convert into term loans which may be exchanged by the holders thereof for exchange notes issued pursuant to an Indenture dated as of September 14, 1998 (the "Indenture"), between the Company and The Bank of New York, trustee. In addition, the Company, its subsidiaries and U.S. Trust Company of Texas, N.A., trustee ("U.S. Trust"), entered into a Supplemental Indenture dated September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company assumed the obligations of Dawson under the Indenture dated February 20, 1997 (the "Dawson Indenture") between Dawson and U.S. Trust, most of the Company's subsidiaries guarantied those obligations and the notes issued pursuant to the Dawson Indenture were equally and ratably secured with the obligations under the Second Amended and Restated Credit Agreement. Under the terms of the Dawson Indenture, the Company is required to commence a cash tender offer to purchase at 101% of the aggregate principal amount of the outstanding notes (which the outstanding amount is $140 million) by mid-October 1998, the source of funds for which will be borrowings under the Second Amended and Restated Credit Agreement. Additionally, the Company has outstanding letters of credit of $2,612,000 as of fiscal 1998 and 1997, related to its workers compensation insurance. Also, the Company is contractually restricted from paying dividends under the terms of the Bridge Loan Agreement and the First Amendment to the Amended PNC Credit Agreement. (ii) 5% Convertible Subordinated Notes On September 25, 1997, the Company completed an initial closing of its private placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the "Notes"). On October 7, 1997, the Company completed a second closing of its private placement of an additional $16 million of Notes pursuant to the exercise of the remaining portion of the over-allotment option granted to the initial purchasers of Notes. The placements were made as private offerings pursuant to Rule 144A and Regulation S under the Securities Act. The Notes are subordinate to the Company's senior indebtedness, which, as defined in the indenture under which the Notes were issued, includes the borrowings under the Amended PNC Credit Agreement, as amended. The Notes are convertible, at the holder's option, into shares of Common Stock at a conversion price of $38.50 per share, subject to certain adjustments. The Notes are redeemable, at the Company's option, on or after September 15, 2000, in whole or part, together with accrued and unpaid interest. The initial redemption price is 102.86% for the year beginning September 15, 2000 and declines ratably thereafter on an annual basis. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) In the event of a change in control of the Company, as defined in the indenture under which the Notes were issued, each holder of Notes will have the right, at the holder's option, to require the Company to repurchase all or any part of the holder's Notes, within 60 days of such event, at a price equal to 100% of the principal amount thereof, together with accrued and unpaid interest thereon. Proceeds from the placement of the Notes were used to repay balances under the Company's credit facilities (see above). At June 30, 1998, $216,000,000 principal amount of the Notes was outstanding. Interest on the Notes is payable on March 15 and September 15. Interest of approximately $5.1 million was paid on March 15, 1998. (iii) 7% Convertible Subordinated Debentures In July 1996, the Company completed a $52,000,000 private offering of 7% Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Debentures are subordinate to the Company's senior indebtedness, which as defined in the indenture pursuant to which the Debentures were issued includes the borrowings under the Amended PNC Credit Agreement, as amended. The Debentures are convertible, at any time prior to maturity, at the holders' option, into shares of Common Stock at a conversion price of $9.75 per share, subject to certain adjustments. In addition, Debenture holders who convert prior to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock (at the Company's option), generally equal to 50% of the interest otherwise payable from the date of conversion through July 1, 1999. The Debentures are redeemable, at the option of the Company, on or after July 15, 1999, at a redemption price of 104%, decreasing 1% per year on each anniversary date thereafter. In the event of a change in control of the Company, as defined in the indenture under which the Debentures were issued, each holder of Debentures will have the right, at the holder's option, to require the Company to repurchase all or any part of the holder's Debentures within 60 days of such event at a price equal to 100% of the principal amount thereof, together with accrued and unpaid interest thereon. As of June 30, 1998, $47,400,000 in principal amount of the Debentures had been converted into 4,861,538 shares of common stock at the option of the holders. An additional 165,423 shares of common stock were issued representing 50% of the interest otherwise payable from the date of conversion through July 1, 1999 and an additional 35,408 shares of common stock were issued as an inducement to convert. The additional 165,423 shares of common stock, representing 50% of the interest otherwise payable from the date of conversion through July 1, 1999, are included in equity. The fair value of the additional 35,408 shares of common stock issued as inducement to convert was $710,186 and is recorded as interest expense in the consolidated statement of operations. In addition, the proportional amount of unamortized debt issuance costs associated with the converted Debentures was charged to additional paid-in capital at the time of conversion. At June 30, 1998, $4,600,000 principal amount of the Debentures remained outstanding. Interest on the Debentures is payable on January 1 and July 1 of each year. (iv) Other Notes Payable At June 30, 1998, other notes payable consist primarily of capital leases for automotive equipment and equipment leases with varying interest rates and principal and interest payments. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Presented below is a schedule of the repayment requirements of long-term debt for each of the next five years and thereafter as of June 30, 1998: (in thousands) Fiscal year Principal Ended Amount ---------------------------------------------- 1999 $ 1,848 2000 2,194 2001 1,417 2002 991 2003 177,329 Thereafter 216,000 ---------------------------------------------- $ 399,779 ============================================== 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, other current assets and other current liabilities approximates fair value because of the short maturity of these instruments. Marketable equity securities with a total cost of approximately $9,961,000 are deemed by management to be available for sale and are classified in the consolidated balance sheet at fair value of approximately $12,307,000 as other long-term assets with net unrealized gains of approximately $2,346,000 reported within stockholders equity. The fair value of the Company's borrowing under its PNC Credit Facility approximates the carrying amount as of June 30, 1998 and 1997, based on the borrowing rates currently estimated to be available to the Company for loans with similar terms. The 7% subordinated convertible debentures have a carrying value of $4.6 million and $52 million and a fair value of approximately $6.7 million and $98.9 million at June 30, 1998 and 1997, respectively. In addition, the 5% Notes have a carrying value of $216 million and a fair value of approximately $164.1 million at June 30, 1998. The fair value of these debentures was estimated using quoted market prices. 7. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following: June 30, (Thousands) 1998 1997 ---------------------------------------------------------------------- Accrued payroll and taxes $10,852 $ 6,674 Unvouchered accounts payable 3,428 - Group medical insurance 695 891 Workers compensation 794 1,683 State sales, use and other taxes 1,030 247 Gas imbalance - deferred income - 155 Oil and Gas revenue distribution 201 145 Acquisition and reorganization accrual 2,066 838 401(k) monies payable 405 - Other 2,768 1,874 ---------------------------------------------------------------------- Total $22,239 $ 12,507 ====================================================================== Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 8. STOCKHOLDERS' EQUITY On January 13, 1998 the Company's shareholders approved the Key Energy Group, Inc. 1997 Incentive Plan (the "1997 Incentive Plan"). The 1997 Incentive Plan is an amendment and restatement of the plans formerly known as the "Key Energy Group, Inc. 1995 Stock Option Plan" (the "1995 Option Plan") and the "Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan" (the "1995 Directors Plan") (collectively, the "Prior Plans"). All outstanding options previously granted under the Prior Plans and outstanding as of November 17, 1997 (the date on which the Company's Board of Directors adopted the plan)were assumed and continued, without modification, under the 1997 Incentive Plan. Under the 1997 Incentive Plan, the Company may grant the following awards to key employees, Directors who are not employees ("Outside Directors") and consultants of the Company, its controlled subsidiaries, and its parent corporation, if any: (i) incentive stock options ("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) "nonstatutory" stock options ("NSOs"), (iii) stock appreciation rights ("SARs"), (iv) shares of the restricted stock, (v) performance shares and performance units, (vi) other stock-based awards and (vii) supplemental tax bonuses (collectively, ("Incentive Awards"). ISOs and NSOs are sometimes referred to collectively herein as "Options". The Company may grant Incentive Awards covering an aggregate of the greater of (i) 3,000,000 shares of the Company's Common Stock and (ii) 10% of the shares of Common Stock issued and outstanding on the last day of each calendar quarter, provided, however, that a decrease in the number of issued and outstanding shares of Common Stock from the previous calendar quarter shall not result in a decrease in Common Stock available for issuance under the 1997 Incentive Plan. Up to 3,000,000 shares of Common Stock shall be available for Incentive Stock Options. Any shares of Common Stock that are issued and are forfeited or are subject to Incentive Awards under the 1997 Incentive Plan that expire or terminate for any reason will remain available for issuance with respect to the granting of Incentive Awards during the term of the 1997 Incentive Plan, except as may otherwise be provided by applicable law. Shares of Common Stock issued under the 1997 Incentive Plan may be either newly issued or treasury shares, including shares of Common Stock that the Company receives in connection with the exercise of an Incentive Awards. The number and kind of securities that may be issued under the 1997 Incentive Plan and pursuant to then outstanding Incentive Awards are subject to adjustments to prevent enlargement or dilution of rights resulting from stock dividends, stock splits, recapitalizations, reorganization or similar transactions. The maximum number of shares of Common Stock subject to Incentive Awards that may be granted or that may vest, as applicable, to any one Covered Employee (defined below) during any calendar year shall be 500,000 shares, subject to adjustment under the provisions of the 1997 Incentive Plan. The maximum aggregate cash payout subject to Incentive Awards (including SARs, performance units and performance shares payable in cash, or other stock-based awards payable in cash) that may be granted to any one Covered Employee during any calendar year is $2,500,000. For purposes of the 1997 Incentive Plan, "Covered Employees" means a named executive officer who is one of the group covered employees as defined in Section 162(m) of the Code and the regulation promulgated thereunder (ie., generally the chief executive officer and the other four most highly compensated executives for a given year.) The 1997 Incentive Plan is administrated by the Compensation Committee appointed by the Board of Directors (the "Committee") consisting of not less than two Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) directors each of whom is (i) an "outside director" under Section 162(m) of the Code and (ii) a "non-employee director" under Rule 16b-3 of the Securities Exchange Act of 1934 . The following table summarizes the stock option activity related to the Company's plans: Price Shares Per Share ----------------------------------------------------------------- Outstanding, July 1, 1995 - - Granted 1,075,000 $ 5.00 --------------------------------------------------------------- Outstanding, June 30, 1996 1,075,000 --------------------------------------------------------------- Granted 175,000 $ 7.50 Granted 175,000 $ 8.313 Granted 50,000 $ 8.375 Granted 25,000 $ 8.50 Granted 25,000 $11.125 Granted 535,000 $13.25 Granted 25,000 $14.50 Granted 50,000 $16.875 Canceled (27,000) $ 5.00 Exercised (28,000) $ 5.00 --------------------------------------------------------------- Outstanding, June 30, 1997 2,080,000 --------------------------------------------------------------- Granted 20,000 $18.125 Granted 250,000 $20.4375 Granted 15,000 $20.50 Granted 116,000 $15.00 Granted 15,000 $16.00 Exercised (209,000) $ 5.00 --------------------------------------------------------------- Outstanding, June 30, 1998 2,287,000 =============================================================== The Company applies APB 25 and related Interpretations in accounting for its stock option awards. Accordingly, no compensation expense has been recognized for its stock option awards. If compensation expense for the stock option awards had been determined consistent with SFAS 123, the Company's net income and net income per share, for the years ended June 30, 1998 and 1997 would have been adjusted to the following pro forma amounts: (unaudited) Year Ended June 30, 1998 1997 -------------------------------------------------------- Net income (in thousands) $22,452 $8,680 Basic net income per share $ 1.31 $ 0.71 Diluted net income per share $ 1.14 $ 0.61 The pro forma net income and pro forma net income per share amounts noted above are not likely to be representative of the pro forma amounts to be reported in future years. Pro forma adjustments in future years will include compensation expense associated with the options granted in fiscal year 1998 and 1997 plus compensation expense associated with any options awarded in future years. As a result, such pro forma compensation expense is likely to be higher than the levels reflected for 1998 and 1997 if any options are awarded in future years. Under SFAS 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grant in 1998 and 1997: Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 1998 1997 --------------------------------------------------------------- Risk-free interest rate 5.79% 6.59% Expected life 5 years 5 years Expected volatility 136% 28% Expected dividend yield 0% 0% The total fair value of options granted at June 30, 1998 and 1997 is $14,098,000 and $6,541,000, respectively. 9. INCOME TAXES Components of income tax expense are as follows: Fiscal Year Ended June 30, (Thousands) 1998 1997 1996 ------------------------------------------------------------------------------ Federal and State: Current $ 7,343 $ 1,664 $ 270 Deferred 7,287 3,836 1,618 ------------------------------------------------------------------------------ $14,630 $ 5,500 $ 1,888 ============================================================================== Income tax expense differs from amounts computed by applying the statutory federal rate as follows: Fiscal Year Ended June 30, (Thousands) 1998 1997 1996 ----------------------------------------------------------------------------- Income tax computed at Statutory rate 35.0% 35.0% 34.0% Amortization of goodwill disallowance 1.1 1.5 - Meals and entertainment disallowance 0.7 0.8 1.7 State taxes 0.7 .2 - Other 0.2 0.4 (1.8) ------------------------------------------------------------------------------ 37.7% 37.9% 33.9% ============================================================================== Deferred tax assets (liabilities) are comprised of the following : Fiscal Year Ended June 30, (Thousands) 1998 1997 1996 ----------------------------------------------------------------------------- Net operating loss and tax credit carry-forwards $ 5,564 $ 4,628 $ 6,293 Property and equipment (99,664) (40,410) (10,942) Other 2,363 (82) 95 ------------------------------------------------------------------------------ Net deferred tax liability $ 91,737 $ (35,864) $ (4,554) ============================================================================== A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Based on expectations for the future, management has determined that taxable income of the Company will more likely than not be sufficient to fully utilize available carryforwards prior to their ultimate expiration. The Company estimates that as of June 30, 1998, the Company will have available approximately $3,290,000 of net operating loss carryforwards (which begin to expire in 2001). The net operating loss carryforwards are subject to an annual limitation of approximately $940,000, under Sections 382 and 383 of the Internal Revenue Code. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 10. LEASING ARRANGEMENTS Among other leases, the Company (primarily its subsidiaries) leases certain automotive equipment under non-cancelable operating leases which expire at various dates through 2002. The term of the operating leases generally run from 36 to 60 months with varying payment dates throughout each month. In addition, in the case of Yale E. Key, each lease includes an option to purchase the equipment and an excess mileage charge as defined in the leases. As of June 30, 1998, the future minimum lease payments under non-cancelable operating leases, in thousands, are as follows: Lease Fiscal Year Payments Ending June 30, (thousands) -------------------------------------------------- 1999 $ 7,249 2000 6,022 2001 3,492 2002 1,641 2003 660 --------------------------------------------------- $19,064 =================================================== Operating lease expense was approximately $8,002,000, $5,299,000, and $2,897,000, for the fiscal years ended June 30, 1998, 1997 and 1996, respectively. 11. EMPLOYEE BENEFIT PLANS Prior to January 1, 1998, the Company maintained two 401(k) plans (the "Old Plans") for its employees such that employees of WellTech Eastern were eligible for participation in one Plan (the "WellTech 401(k) Plan"), while all other employees were eligible for participation in the other Plan (the "Key 401(k) Plan"). At January 1, 1998, the Company merged the two Old Plans into one plan (the "New Plan"). Both the Old Plans and the New Plan cover substantially all employees of the Company. After January 1, 1998, under the New Plan, the Company matches 100% of the employees' contributions up to a maximum of $1,000 per participant per year. Contributions to the New Plan after January 1, 1998 totaled $699,108. Prior to January 1, 1998, under the Old Plans, the Company matched employees' contributions up to 10% of the employees' contribution to the Key 401(k) Plan. These contributions totaled approximately $36,000, $35,000 and $19,000 for the six month period ended December 31, 1997 and the years ended June 30, 1997 and 1996, respectively. Additionally, the Company contributed $172,401 and $300,000 into the WellTech 401(k) Plan for the six month period ended December 31, 1997 and the year ended June 30, 1997, respectively . The Company matched employee contributions up to 50% (to a maximum of $1,000 per employee) of the employees' contributions to the WellTech 401(k) Plan. 12. MAJOR CUSTOMERS Sales to customers representing 10% or more of consolidated revenues for the years ended June 30, 1997, 1996 were as follows: Fiscal Year Ended June 30, 1997 1996 ------------------------------------------------ Customer A 13% 20% Customer B 7% 11% The Company did not have any one customer which represented 10% or more of consolidated revenues for the fiscal year ended June 30, 1998. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 13. TRANSACTIONS WITH RELATED PARTIES WellTech Eastern paid $108,000 and $78,000 for the years ended June 30, 1998 and 1997, respectively, for office/yard rental expense in which an officer of the Company and WellTech Eastern has an interest. In the opinion of the Board of Directors of the Company, based on the Board's review of competitive bids, this transaction was on terms at least as favorable to the Company as could have been obtained from a third party. Odessa Exploration paid $702,000 for the year ended June 30, 1998 for certain oil and gas assets in a transaction involving a company, the president of which is an outside director of the Company. At June 30, 1998, the Company owed $300,000 to the same company. 14. CONCENTRATIONS OF CREDIT RISK The Company has a concentration of customers in the oil and gas industry. Substantially all of the Company's customers are major integrated oil companies, major independent producers of oil and gas and smaller independent producers. This may affect the Company's overall exposure to credit risk either positively or negatively, in as much as its customers are effected by economic conditions in the oil and gas industry, which has historically been cyclical. However, accounts receivable are well diversified among many customers and a significant portion of the receivables are from major oil companies, which management believes minimizes potential credit risk. Historically, credit losses have been insignificant. Receivables are generally not collateralized, although the Company may generally secure a receivable at any time by filing a mechanic's and material-mans' lien on the well serviced. 15. BUSINESS SEGMENT INFORMATION Information about the Company's operations by business segment is as follows: Year Ended June 30, (Thousands) 1998 1997 1996 --------------------------------------------------------------------------- Identifiable assets: Oilfield services $513,583 $242,001 $94,962 Oil and gas well drilling services 84,579 8,365 5,583 Oil and gas 39,047 23,544 18,170 General corporate 61,431 46,185 3,007 --------------------------------------------------------------------------- $698,640 $320,095 $121,722 =========================================================================== Capital expenditures (excluding acquisitions): Oilfield services $ 44,284 $ 15,084 $ 5,188 Oil and gas well drilling services 5,385 1,483 598 Oil and gas 7,849 8,188 1,879 --------------------------------------------------------------------------- $ 57,518 $ 24,755 $ 7,665 =========================================================================== Depreciation, depletion and amortization: Oilfield services $ 26,060 $ 9,198 $ 3,862 Oil and gas well drilling services 2,450 436 221 Oil and gas 2,043 870 618 General corporate 448 572 - --------------------------------------------------------------------------- $ 31,001 $ 11,076 $ 4,701 =========================================================================== Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) The Company's oilfield services subsidiaries operate a variety of oilfield service equipment including workover rigs, hot oil units, transports and various other oilfield servicing equipment. In addition, they perform a variety of other oilfield services including fishing tools, frac tanks and blow-out preventers. Oil and gas production is conducted by Odessa Exploration. Odessa Exploration acquires and manages interests in producing oil and gas properties for its own account and for its sponsored investors. Odessa Exploration is engaged in the drilling and production of oil and natural gas in the United States. Odessa Exploration acquires producing oil and gas properties from major and independent producers. After acquisition, Odessa Exploration may either rework the acquired wells to increase production and/or form drilling partnerships for additional development wells. Oil and gas well drilling services are conducted primarily by Key Energy Drilling. Key Energy Drilling operates forty drilling rigs which drill for oil and gas in the West Texas and New Mexico area. 16. SUBSEQUENT EVENTS. Acquisitions Completed after June 30, 1998 The following acquisitions have been completed after June 30, 1998 and are not included in the Company's results of operations for the twelve months ended June 30, 1998. Colorado Well Service, Inc. On July 15, 1998, the Company closed the acquisition of the assets of Colorado Well Service, Inc. ("Colorado") for approximately $6.5 million in cash. Colorado operates seventeen well service rigs and one drilling rig in Utah and Colorado. TransTexas Assets On August 19, 1998, the Company completed the acquisition of certain oilfield service assets of TransTexas Gas Corporation ("TransTexas") for approximately $20.5 million in cash and future obligations. The TransTexas assets are based in Laredo, Texas and include nine well service rigs, approximately 80 oilfield service trucks and 173 frac and other tanks. Flint Asset Purchase On September 16, 1998, the Company closed the acquisition of certain assets of Flint Engineering & Construction Co., a subsidiary of Flint Industries, Inc. ("Flint") for approximately $11.9 million in cash. Flint operates 55 well service rigs and 25 oilfield trucks in the Rocky Mountains, Four Corners Area, MidContinent Region, Permian Basin and ArkLaTex Region. Iceberg, S.A. On September 24, 1998, the Company closed the acquisition of the assets of Iceberg, S.A. ("Iceberg") for approximately $4.4 million in cash. Iceberg operates four well service rigs in Comodoro Rivadavia, Argentina. HSI Group On September 24, 1998, the Company closed the acquisition of substantially all of the operating assets of Hellums Services II, Inc., Superior Completion Services, Inc., South Texas Disposal, Inc. and Elsik II, Inc. ("HSI Group") for $47.9 million in cash. HSI Group operates, among other assets, approximately 80 oilfield trucks and eight well service rigs in South Texas. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Dawson Production Services Inc. On September 15, 1998, Midland Acquisition Corporation ("Midland"), a New Jersey corporation and a wholly-owned subsidiary of the Company, completed its cash tender offer (the "Tender Offer") for all outstanding shares of common stock, par value $0.01 per share (the "Dawson Shares"), including the associated common stock purchase rights, of Dawson at a price of $17.50 per share. The Tender Offer expired at 8:30 a.m., New York City Time, on Tuesday, September 15, 1998. Midland accepted for payment 10,021,601 Dawson Shares for a total purchase price of approximately $175.4 million. The acceptance of tendered Dawson Shares, together with Dawson Shares previously owned by Midland and the Company prior to the commencement of the Tender Offer resulted in Midland and the Company acquiring approximately 97.0% of the outstanding Dawson Shares. The purchase price for Dawson Shares pursuant to the Tender Offer and the merger agreement was determined pursuant to arms-length negotiations between the parties and was based on a variety of factors, including, without limitation, the anticipated earnings and cash flows of Dawson. The Tender Offer was made pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of August 11, 1998, by and among, Midland, the Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger Agreement, Midland was merged with and into Dawson (the "First Merger") under the laws of the States of New Jersey and Texas and all Dawson Shares not owned by Midland were cancelled and retired and converted into the right to receive $17.50 in cash. On September 21, 1998, Dawson was merged with and into the Company (the "Second Merger") pursuant to the laws of the States of Maryland and Texas. The total consideration paid for the Dawson Shares pursuant to the Tender Offer and the First Merger was approximately $181.7 million. Dawson operates approximately 527 well service rigs, 200 oilfield trucks, and 21 production testing units in South Texas and the Gulf Coast, East Texas and Louisiana, the Permian Basin of West Texas and New Mexico, the Anadarko Basin of Texas and Oklahoma, California, and in the inland waters of the Gulf of Mexico. Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 17. CASH FLOW DISCLOSURES Supplemental cash flow disclosures for the years ended June 30, 1998, 1997 and 1996 are presented below: Year Ended June 30, (Thousands) 1998 1997 1996 -------------------------------------------------------------------- Interest paid $ 16,441 $ 5,850 $2,205 Taxes paid 9,024 - 391 Supplemental schedule detailing the purchase price of acquisitions including non-cash consideration paid for the year ended June 30, 1996 is presented below: (thousands) -------------------------------------------------------------------- Fair value of Common Stock issued for WellTech, Inc. $17,929 Assumption of Welltech, Inc. Working capital deficit 1,734 Assumption of Welltech, Inc. non-current liabilities and debt 27,570 Acquisition of WellTech, Inc. property and equipment 47,455 Supplemental schedule detailing the purchase price of acquisitions including non-cash consideration paid for the year ended June 30, 1997 is presented below (in thousands):
Acquisition Fair Value of Issued Assumption of Assumption of of Property Acquisition Common Stock Debt Liabilities and Equipment - ---------------------------------------------------------------------------------------------------------- Brownlee Well Service Inc. $ 671 $ 1,948 $ 3,558 $ 11,234 Woodward Well Service, Inc. 563 80 771 1,351 Brooks Well Servicing, Inc. 11,125 - 6,291 16,935 Hitwell Surveys, Inc. - 176 1,425 2,655 B&L Hotshot, Inc. - - 175 4,575 Energy Air Drilling Services Co. 48 150 - 700 Talon Trucking Co. - - - 2,700 Cobra Industries, Inc. 2,386 625 3,867 10,171 T.S.T Paraffin Service Co., Inc. - 70 3,599 10,035 Tri-State Wellhead & Valve, Inc. 1,000 - - 1,339 Kalkaska Construction Service, Inc. 1,111 - 1,187 10,711 Well-Co Oil Service, Inc. 4,050 599 11,337 28,463 Shreve's Well Service - - 50 600 Youngs Wireline - - 225 744 Phoenix Well Service - 410 1,761 3,897 Elder Well Service, Inc. - - 40 649 Diamond Well Service, Inc. - - - 675 Southwest Oilfield Services, Inc. - - - 455 Edco Well Service - - 50 460
Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) Supplemental schedule detailing the purchase price of acquisitions including non-cash consideration paid for the year ended June 30, 1998 is presented below (in thousands):
Fair Value Acquisition of Issued Assumption of Assumption of of Property Acquisition Common Stock Debt Liabilities and Equipment - ------------------------------------------------------------------------------------------------------------- Watson Truck & Supply, Inc. $ - $ - $ 100 $ 1,370 Lakota Drilling Company - - 6 11,900 JPF Well Service, Inc. and JPF Lease Service, Inc. - - 6 4,500 Edwards Transport, Inc. - - - 1,037 Lundy Vacuum Service, Inc. - - - 1,061 Lauffer Well Service, Inc. - - 50 350 Updike Brothers, Inc. - 1,197 7,748 10,595 Four Corners Drilling Company - - 150 9,600 Kingsley Enterprises, Inc. - 300 3,692 4,866 Circle M Vacuum Services, Inc. - - - 700 Hot Oil Plus, Inc. - 200 - 1,900 J.W. Gibson Well Service Company 1,856 - 4,532 22,214 Sitton Drilling Co. 2,169 - 4,071 10,642 Wellcorps, L.L.C., White Rhino Drilling, Inc. and S&R Cable, Inc. 5,760 - 500 6,439 Jeter Service Co. - 1,802 3,686 6,553 GSI Trucking Company, Inc., Kahlden Production Services, Inc. and McCurdy Well Service, Inc. - 51 - 1,181 Big A Well Service Co., Sunco Trucking Co. and Justis Supply Co., Inc 4,078 359 2,504 24,618 Frontier Well Service, Inc. - - 2,118 5,478 Dunbar Well Service, Inc. - - 6,273 15,206 BRW Drilling, Inc. - 1,919 6,194 14,140 Landmark Fishing & Rental, Inc. - 539 2,386 5,180 Waco Oil & Gas Co., Inc. - - 500 7,644 Ram Oil Well Service, Inc. and Rowland Trucking Co., Inc. - - 7,669 19,918 Mosley Well Service, Inc. - 933 406 25,246 Kenting Holdings (Argentina) S.A. - - - - Patrick Well Service, Inc. - 563 625 9,263 Win-Tex Drilling and Trucking - 295 3,942 7,392
Key Energy Group Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) 18. Unaudited Supplementary Information - Quarterly Results of Operations Summarized quarterly financial data for 1998 and 1997 are as follows: (in thousands, except per First Second Third Fourth share amounts Quarter Quarter Quarter Quarter --------------------------------------------------------------------------- 1998 Revenues $75,399 $109,595 $120,724 $114,328 Earnings from operations 22,780 33,960 37,281 37,074 Net earnings 4,111 7,345 7,082 5,637 Earnings per share .29 .40 .39 .31 Weighted average common shares and equivalents outstanding 14,126 18,151 18,295 18,261 1997 Revenues $31,462 $36,197 $43,050 $52,921 Earnings from operations 2,396 3,022 3,563 5,621 Net earnings 1,554 2,043 2,365 3,136 Earnings per share .15 .19 .20 .26 Weighted average common shares and equivalents outstanding 10,425 10,850 11,612 11,979 The fourth quarter of fiscal 1997 includes an adjustment of $2 million for previously unrecorded inventory. Amounts reported for the first quarter of 1998 differ from the amounts previously reported on Form 10-Q, filed for the quarter ended September 30, 1997, due to non-cash adjustments recorded in the fourth quarter which are associated with the 7% debentures converted in the first quarter of fiscal year 1998. Independent Auditors' Report To The Board of Directors and Stockholders Key Energy Group, Inc. We have audited the accompanying consolidated balance sheets of Key Energy Group, Inc. and Subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Key Energy Group, Inc. and Subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Midland, Texas September 1, 1998 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III. ITEMS 10 - 13. Pursuant to Instruction G(3) to Form 10-K, the information required in Items 10-13 is incorporated by reference from the Company's definitive proxy statement, which will be filed with the Commission pursuant to Regulation 14A within 120 days of June 30, 1998. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) Index to Exhibits The following documents are filed as part of this report: (1) See Index to Financial Statements set forth in Item 8. (2) Financial Statements Schedules: [None] (3) Exhibits: 2.1 Agreement and Plan o f Merger dated as of November 18, 1995, between Key and WellTech, as amended. (Incorporated by reference to the Company's Registration Statement Form S-4, Registration No. 333-369). 2.2 Joint Plan of Reorganization, dated as of October 20, 1992, of the Company, ESKEY Inc. and YFC International Finance N.V. and Order, dated December 4, 1992, of the United States Bankruptcy Court for the District of New Jersey, approving the Joint Plan of Reorganization (Incorporated by reference to Exhibits 2 (a) and 28 (a) of the Company's Current Report on Form 8-K dated December 14, 1992, File No. 1-8038). 2.3 Agreement and Plan of Merger dated as of July 20, 1993, by and among the Company, OEI Acquisition Corp. and Odessa Exploration Incorporated. (Incorporated by reference to Exhibit 2(a) of the Company's Current Report on Form 8-K dated September 2, 1993, File No. 1-8038). 2.4 Asset Purchase Agreement dated as of December 10, 1993 between the Company and WellTech, Inc. (Incorporated by reference to Exhibit 2(a) of the Company's Current Report on Form 8-K dated August 17, 1984, File No. 1-8038). 3.1 Amended and Restated Articles of Incorporation of the Company (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 333-369). 3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to the Company's Registration Statement on Form S-4 dated March 8, 1996, Registration No. 333-369). 3.3 Amendment to the Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K dated February 2, 1998, File No. 000-22665, and incorporated herein by reference). 4.1 7% Convertible Subordinated Debenture of the Company due July 1, 2003. (Incorporated by reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 4.2 Indenture for the 7% Convertible Subordinated Debenture of the Company due July 1, 2003. (Incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 4.3 Registration Rights Agreement among the Company, McMahan Securities Co., L.P. and Rausher Pierce Refsnes, Inc., dated as of July 3, 1996. (Incorporated by reference to Exhibit 4.3 of the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 4.4 Registration Rights Agreement between the Company and D. Kirk Edwards, dated as of July 20, 1993. (Incorporated by reference to Exhibit 10 ( c ) to the Company's Current Report on Form 8-K/A). 4.5 Registration Rights Agreement dated as of March 2, 1996 among the Company and certain of its stockholders. (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). 4.6 Registration Rights Agreement dated as of March 30, 1995 between the Company, Clint Hurt and Associates, Inc. and Clint Hurt. (Incorporated by reference to Exhibit 10 (d) of the Company's Annual Report on 10-KSB dated June 30, 1995, File No. 1-8038). 4.7 Form of Common Stock Purchase Warrant to Purchase Key Common Stock issued in connection with the WellTech Merger. (Incorporated by reference to the Company's Registration Statement on Form S-4, Registration No. 353-369). 4.8 Indenture dated as of September 25, 1997, among Key Energy Group, Inc. and American Stock Transfer and Trust Company. (Incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 4.9 Registration Rights Agreement among Key Energy Group, Inc., Lehman Brothers Inc., and McMahan Securities Co. L.P. dated as of September 25, 1997. (Incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.1 Employment Agreement between the Company and D. Kirk Edwards, dated as of July 1, 1996. (Incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K for the year ended June 30, 1997, File No. 1-8038) 10.2 Employment Agreement between WellTech Eastern, Inc. and Kenneth Hill, dated as of March 29, 1996. (Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.3 Employment Agreement between the Company and Kenneth Huseman, dated as of August 3, 1996. (Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended June 30, 1997, File No. 1-8038) 10.4 Letter Agreement between Van Greenfield and the Company dated May 15, 1996. (Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.5 Amendment No. 2 to the Company's Employment Agreement between Francis D. John and the Company, dated as of May 15, 1996. ( Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.6 Letter Agreement between Morton Wolkowitz and the Company dated June 3, 1996. ( Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.7 Asset Purchase Agreement between Hardy Oil & Gas USA, Inc. and Arch Petroleum, Inc. dated as of April 1996. (Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.8 Asset Purchase Agreement between Arch Petroleum, Inc. and Odessa Exploration, Inc. dated as of April 18, 1996. (Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.9 General Conveyance by Arch Petroleum, Inc. to Odessa Exploration, Inc. dated as of January 1, 1996. (Incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated June 30, 1996, File No. 1-8038). 10.10Plan and Agreement of Merger among Key Energy Group, Inc., WellTech Eastern, Inc. and Woodward Well Service, Inc. dated as of September 30, 1996. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.11Stock Purchase Agreement among Key Energy Group, Inc., Reo Brownlee, Elvin Brownlee, Jr. And Elvin Brownlee III dated as of October 24, 1996. (Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.12Asset Purchase Agreement among Yale E. Key, Inc., Key Energy Group, Inc., Energy Air Drilling Service Co. and Dale Rennels dated as of November 1, 1996. (Incorporated by reference to Exhibit 10( c ) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.13Stock Purchase Agreement among Key Energy Group, Inc., Ed Hitt, Helen Hitt, Michael E. Thompson and Edward Monroe, Jr. Dated as of December 2, 1996. (Incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.14Plan and Agreement of Merger among Key Energy Group, Inc., WellTech Eastern, Inc., Hunt Oil Company and Brooks Well Servicing, Inc. dated as of November 22, 1996. (Incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.15Asset Purchase Agreement among WellTech Eastern, Inc., B&L Hotshot, Inc., McDowell & Sons, Inc., 4 Star Trucking, Inc., R.B.R. Inc., Royce D. Thomas, John F. McDowell and John R. McDowell dated as of December 13, 1996. (Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.16Asset Purchase Agreement among WellTech Eastern, Inc., Talon Trucking company and Lomak Petroleum, Inc. dated as of December 31, 1996. (Incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.17First Supplemental Indenture dated as of November 20, 1996 by and between Key Energy Group, Inc. and American Stock Transfer & Trust Company, as Trustee. (Incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q dated December 31, 1996, File No. 1-8038). 10.18Stock Purchase Agreement among Key Energy Group, Inc., Michael and Georgia McDermett dated as of January 10, 1997. (Incorporated by reference to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.19Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group, Inc. Tri State Wellhead & Valve, Inc. and John C. Bozeman dated as of March 14, 1997. (Incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.20Stock Purchase Agreement among Yale E. Key, Inc., Keith and Leslie Neill as of March 24, 1997. (Incorporated by reference to Exhibit 10( c ) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.21Asset Purchase Agreement among Key Energy Group, Inc., WellTech Eastern, Inc., Elder Well Service, Inc., Martha Elder, Kenneth L. Ward, Nona Faye Mugraur, Lela Gaye Biehl and Johnny Ray Johnson dated as of March 28, 1997. (Incorporated by reference to Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.22Asset Purchase Agreement #1 among WellTech Eastern, Inc., Key Energy Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide, LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31, 1997. (Incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.23Asset Purchase Agreement #2 among WellTech Eastern, Inc., Key Energy Group, Inc., Kalkaska Construction Service, Inc., Dennis Hogerheide, LaWenda Hogerheide, David Hogerheide and Derek Hogerheide dated March 31, 1997. (Incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.24Stock Purchase Agreement among WellTech Eastern, Inc., Dennis Hogerheide and LaWenda Hogerheide dated as of March 31, 1997. (Incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.25Asset Purchase Agreement among WellTech Eastern, Inc., Diamond Well Service, Inc., John Scott and Dwayne Wardwell dated as of April 3, 1997. (Incorporated by reference to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.26Asset Sale Agreement among WellTech Eastern, Inc. and Drillers, Inc. dated as of April 14, 1997. (Incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.27Asset Purchase Agreement among WellTech Eastern, Inc., Shreve's Well Service, Inc. and William A. Shreve dated April 18, 1997. (Incorporated by reference to Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.28Asset Purchase Agreement among WellTech Eastern, Inc. and Petro Equipment, Inc. and Donald E. Clark dated as of May 1, 1997. (Incorporated by reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q dated March 31, 1997, File No. 1-8038). 10.29Asset Purchase Agreement among WellTech Eastern, Inc., Southwest Oilfield Services, Inc., David Wright and Roy Wofford dated May 29, 1997. . (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038). 10.30Stock Purchase Agreement among Yale E. Key, Inc. and Raleigh K. Turn and David Butts dated June 9, 1997. (Incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038). 10.31Stock Purchase Agreement among Key Energy Group, Inc. and Mark Duane Massingill and Claudia Lynn Massingill dated as of June 25, 1997. (Incorporated by reference to the Company's Current Report on Form 8-K dated July 9, 1997, File No. 1-8038). 10.32Stock Purchase Agreement among WellTech Eastern, Inc. between Monty D. Elmore dated as of July 17, 1997. (Incorporated by reference to the Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038). 10.33Stock Purchase Agreement between WellTech Eastern, Inc. and Kenting Energy Services, Inc. dated as of July 30, 1997. (Incorporated by reference to Exhibit 10.37 of the Company's Annual Report on Form 10-K for the year ended June 30, 1997, File No. 1-8038) 10.34Stock Purchase Agreement between WellTech Eastern, Inc. and Robert E. Mosley, Jr. et al dated as of August 22, 1997. (Incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038). 10.35Credit Agreement dated as of June 6, 1997 among Key Energy Group, Inc., several banks and other financial institutions or entities from time to time parties to the Agreement, PNC Bank, N.A., Norwest Bank of Texas, N.A., and Lehman Commercial Paper Inc. (Incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038). 10.36Master Guarantee and Collateral Agreement made by Key Energy Group, Inc. and certain of its Subsidiaries in favor of Norwest Bank of Texas, N.A. dated as of June 6, 1997. (Incorporated by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K dated June 30, 1997, File No. 1-8038). 10.37Stock Purchase Agreement by and among Nabors Acquisition Corp. IV, as Seller, Key Rocky Mountain, Inc., as Buyer, and Key Energy Group, Inc. dated as of July 31, 1997. ("Gibson Stock Purchase Agreement.") (Incorporated by reference to Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.38Amendment One to the Gibson Stock Purchase Agreement dated as of October 10, 1997.(Incorporated by reference to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.39Stock Purchase Agreement (Ram Oil Well Service, Inc.) by and among, Yale E. Key, Inc. and Robert D. Calhoon dated as of September 1, 1997 (incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K dated September 1, 1997, File No. 1-8038). 10.40Stock Purchase Agreement (Rowland Trucking Co.) by and among, Yale E. Key, Inc. and Robert D. Calhoon dated as of September 1, 1997 (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated September 1, 1997,File No. 1-8038). 10.41Asset Purchase Agreement among WellTech Eastern, Inc., Waco Oil & Gas Co., Inc. and I.L. Morris dated as of September 1, 1997. (Incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.42Asset Purchase Agreement among Key Four Corners, Inc., Key Energy Group,Inc., Coleman Oil & Gas Co., Big A Well Service Co., Sunco Trucking Co., Justis Supply Co., Inc. and George E. Coleman dated as of September 2, 1997 (incorporated by reference to Exhibit 2.1 of the Company's Report on Form 8-K dated October 1, 1997, File No. 1-8038). 10.43Stock Purchase Agreement between WellTech Eastern, Inc. and William Gregory Wines dated as of September 16, 1997. (Incorporated by reference to Exhibit 10(j) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.44Stock Purchase Agreement among, Key Energy Drilling, Inc. and S.K. Rogers, Joe Dee Brooks, Lynn E. Waters and Donnie Roberts dated as of September 25, 1997. (Incorporated by reference to Exhibit 10(k) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.45Stock Purchase Agreement among Key Rocky Mountain, Inc., Joseph R. Dunbar and Janice N. Dunbar dated as of September 29, 1997. (Incorporated by reference to Exhibit 10(m) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.46Stock Purchase Agreement among Key Rocky Mountain, Inc., Bruce L. Bummer, Jack Hartnett, Diane Hartnett and Bruce Bummer 7/14/82 Family Trust dated as of September 30, 1997. (Incorporated by reference to Exhibit 10(n) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.47Amended and Restated Credit Agreement among Key Energy Group, Inc. and several other financial institutions dated as of June 6, 1997 as amended and restated through November 6, 1997. (Incorporated by reference to Exhibit 10(s) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.48First Amendment to the Amended and Restated Credit Agreement dated as of June 6, 1997, as amended and restated through November 6, 1997 dated December 3, 1997. (Incorporated by reference to Exhibit 10(t) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.49Asset Purchase Agreement among WellTech Eastern, Inc. and McCurdy Well Service, Inc. effective as of October 3, 1997. (Incorporated by reference to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.50Asset Purchase Agreement among WellTech Eastern, Inc. and GSI Trucking Company, Inc. effective as of October 3, 1997. (Incorporated by reference to Exhibit 10(e) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.51Asset Purchase Agreement among WellTech Eastern, Inc. and Kahlden Production Services, Inc. effective as of October 3, 1997. (Incorporated by reference to Exhibit 10(f) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.52Stock Purchase Agreement between WellTech Eastern, Inc. and Donald Jeter, effective as of November 11, 1997. (Incorporated by reference to Exhibit 10(g) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.53Stock Purchase Agreement between Key Energy Drilling, Inc. and Robert C. Jones and Dana Lunette Jones, effective as of November 24, 1997. (Incorporated by reference to Exhibit 10(h) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.54Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group, Inc. and White Rhino Drilling, Inc. and Jeff Critchfield, effective as of December 2, 1997. (Incorporated by reference to Exhibit 10(i) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.55Asset Purchase Agreement among WellTech Eastern, Inc., Key Energy Group, Inc., S&R Cable, Inc., Jeff Critchfield, Royce D. Thomas, Ronnie Shaw and Donald Tinker, effective as of December 2, 1997. (Incorporated by reference to Exhibit 10(j) of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 1-8038) 10.56Asset Purchase Agreement among WellTech Eastern, Inc., Wellcorps, L.L.C. and Jeff Critchfield, Terra Energy, Ltd. And Brian Fries, effective as of December 2, 1997. (Incorporated by reference to Exhibit 10(k) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038). 10.57Employment Agreement dated December 5, 1997 by and between Stephen E. McGregor and the Company. (Incorporated by reference to Exhibit 10(e) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-8038) 10.58Stock Purchase Agreement between Key Energy Group, Inc., Key Energy Drilling, Inc. and Ronald M. Sitton and Frank R. Sitton, effective as of December 12, 1997. (Incorporated by reference to Exhibit 10(l) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.59Asset Purchase Agreement between Brooks Well Servicing, Inc. and Sam F. McKee, Individually and d/b/a Circle M Vacuum Services, effective as of January 30, 1998. (Incorporated by reference to Exhibit 10(m) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.60Stock Purchase Agreement between Key Energy Drilling, Inc. and Jack B. Loveless, Jim Mayfield and J.W. Miller, effective as of January 30, 1998. (Incorporated by reference to Exhibit 10(n) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.61Asset Purchase Agreement between Key Four Corners, Inc. and Four Corners Drilling, R.L. Andes and W.E. Lang, effective as of January 30, 1998. (Incorporated by reference to Exhibit 10(o) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.62Asset Purchase Agreement among Key Rocky Mountain, Inc., Updike Brothers, Inc. Employee Stock Ownership Retirement Plan and Trust, David W. Updike Trust, Dorothy A. Updike Trust, Dorothy R. Updike Trust, Mary E. Updike, Ralph O. Updike and Daniel Updike effective February 6, 1998. (Incorporated by reference to Exhibit 10(p) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.63Asset Purchase Agreement among Brooks Well Servicing, Inc., Hot Oil Plus, Inc., Thomas N. Novosad, Jr. and Patricia Novosad effective January 29, 1998. (Incorporated by reference to Exhibit 10(q) of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997, File No. 1-8038) 10.64Asset Purchase Agreement among Brooks Well Servicing, Inc., Lundy Vacuum Service, Inc. and Peyton E. Lundy effective March 3, 1998. (Incorporated by reference to Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-8038) 10.65Asset Purchase Agreement among Yale E. Key, Inc., Edwards Transport, Inc. and Tom Nations effective March 26, 1998. (Incorporated by reference to Exhibit 10(b) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-8038) 10.66Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF Well Service Inc., effective April 20, 1998. (Incorporated by reference to Exhibit 10(c) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-8038) 10.67Asset Purchase Agreement among Brooks Well Servicing, Inc. and JPF Lease Service Inc., effective April 20, 1998. (Incorporated by reference to Exhibit 10(d) of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, File No. 1-8038) * 10.68 Asset Purchase Agreement between Watson Oilfield Service & Supply, Inc. and Watson Truck & Supply, Inc. dated May 19, 1998 * 10.69 Purchase and Sale Agreement among Burnett Corporation, B.O. Cornelius, Ann C. Fatheree, James R. Corbin, Mary Jo Mitton, Birke B. Marsh, H. Cobb, Birke B. Marsh, Trustee of the Corbin Trust, Jamie Kim Corbin, Josh Alan Corbin, Jason J. Corbin, Wilbanks Exploration, Inc. and Odessa Exploration, Inc. dated May 20, 1998. * 10.70 Asset Purchase Agreement among Key Energy Drilling, Inc., Lakota Drilling Company and Reed Gilmore, Priscilla Gilmore, M. Reed Gilmore, Jr., Valerie G. Griess, Joan G. Lindquist, James C. Gilmore, L. E. Grimes and Larry V. Bohannon dated May 22, 1998. 10.71Key Energy Group, Inc. 1997 Incentive Plan (Incorporated by reference to Exhibit B of the Company's definitive proxy statement dated November 28, 1997. * 23.1 Consent of KPMG Peat Marwick LLP * 27(a) Statement - Financial Data Schedule. (Filed herewith as part of the Condensed Consolidated Financial Statements). (b) Reports on Form 8-K The Company did not file a report on Form 8-K during the quarter ended June 30, 1998. *Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KEY ENERGY GROUP, INC. (Registrant) By /s/ Francis D. John Francis D. John President, Chief Executive Officer Dated: September 28, 1998 and Director By /s/ Stephen E. McGregor Stephen E. McGregor Dated: September 28, 1998 Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated By /s/ Francis D. John Francis D. John President, Chief Executive and Chief Dated: September 28, 1998 Financial Officer and Director By /s/ Morton Wolkowitz Morton Wolkowitz Dated: September 28, 1998 Chairman of the Board and Director By /s/ David J. Breazzano David J. Breazzano Dated: September 28, 1998 Director By /s/ William Manly William Manly Dated: September 28, 1998 Director By /s/ Kevin P. Collins Kevin P. Collins Dated: September 28, 1998 Director By /s/ W. Phillip Marcum W. Phillip Marcum Dated: September 28, 1998 Director By /s/ Danny R. Evatt Danny R. Evatt Dated: September 28, 1998 Chief Accounting Officer EX-10.68 2 WATSON PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT BETWEEN WATSON OILFIELD SERVICE & SUPPLY, INC., AND WATSON TRUCK & SUPPLY, INC. May 19, 1998 Asset Purchase Agreement This Asset Purchase Agreement (this Agreement) is entered into as of May 19, 1998 between Watson Oilfield Service & Supply, Inc., a Delaware corporation ("Buyer"), and Watson Truck & Supply, Inc., a New Mexico corporation ("Seller"). W I T N E S S E T H: WHEREAS, Seller is engaged in the business of the refurbishing and repairing of oilfield service equipment, including well service rigs, workover rigs, drilling rigs and components and parts thereof and selling oilfield parts and equipment for customers in the Territories (as defined in Section 3.1), including, but not limited to, Hopper parts under the provisions of and subject to the Watson Hopper Distribution Agreement (as hereinafter defined) with Watson Hopper, Inc., a New Mexico corporation ("Watson Hopper"), which is a wholly-owned subsidiary of Seller (the "Business"); WHEREAS, in addition to the Business, Seller is also currently engaged in the business of the refurbishing and repairing of well service rigs, workover rigs, drilling rigs and refurbishing, repairing and fabricating components and parts thereof and selling of oilfield parts and equipment for customers outside the Territories, selling of new and used pulling units, manufacturing of pulling units and parts (through its subsidiary, Watson Hopper), selling and leasing of new and used vehicles (automobiles and trucks), vehicle repair and maintenance services, and financing and insurance activities related to such businesses (collectively, the "Excluded Business"); and WHEREAS, Seller desires to sell the assets of the Business, and Buyer desires to purchase such assets. NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties, covenants and agreements, and subject to the terms and conditions herein contained, the parties hereto hereby agree as follows: Article I Purchase and Sale of Assets 1.1 Purchase and Sale of the Assets. Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer at the Closing (as defined in Section 5.1 hereof) all of the assets of the Seller existing on the Closing Date (as defined in Section 5.1 hereof) relating to or used or useful in the conduct of the Business other than the Excluded Assets (as defined in Section 1.2 hereof), whether real, personal, tangible or intangible, including, without limitation, the following assets owned by Seller (all such assets being sold hereunder are referred to collectively herein as the Assets): (a) all of the inventory of Seller relating to, used or useful in the conduct of the Business, including, without limitation, that which is more fully described on Schedule 1.1(a) hereto (the Inventory); (b) all tangible personal property owned by Seller relating to, used or useful in the conduct of the Business (such as machinery, equipment, leasehold improvements, furniture and fixtures, and vehicles), including, without limitation, that which is more fully described on Schedule 1.1(b) hereto (collectively, the "Tangible Personal Property"); (c) all of Seller's uncompleted repair services constituting work in progress relating to, used or useful in the conduct of the Business including, without limitation, that which is described on Schedule 1.1(c) hereto (the "Work in Progress"); (d) those leases, subleases, contracts, subcontracts, contract rights, and agreements described on Schedule 1.1(d) hereto (collectively, the Contracts); (e) all of the permits, authorizations, certificates, approvals, registrations, variances, waivers, exemptions, rights-of-way, franchises, ordinances, orders, licenses and other rights of every kind and character (collectively, the Permits) relating to the conduct of the Business or the ownership or operation of any of the Assets , including, but not limited to, that which is more fully described on Schedule 1.1(e) hereto (collectively, the Seller Permits) ; (f) all of the Seller's intangible assets relating to, used or useful in the operation of the Assets or the conduct of the Business (the "Intangibles"), including without limitation, (i) Seller's rights to any patents, patent applications, trademarks and service marks (including registrations and applications therefor), trade names, and copyrights and written know-how, trade secrets, licenses and sublicenses and all other similar proprietary data and the goodwill associated therewith used or held in connection with the Business (collectively, the "Intellectual Property"), (ii) the Seller's telephone numbers relating to the Business, and (iii) the sales and promotional literature, computer software, customer and supplier lists and all other records of the Seller relating to the Assets or the Business, excluding the corporate minute books, accounting records, files, tax returns and other financial data on whatever media, relating to the Seller or the Excluded Assets (the "Retained Records"); (g) subject to Section 3.6 hereof, the goodwill and going concern value of the Business; and (h) all other or additional privileges, rights, interests, properties and assets of the Seller of every kind and description and wherever located that are related to, used or useful in the Business or intended for use in the Business in connection with, or that are necessary for the continued conduct of, the Business (other than the Excluded Assets). 1.2 Excluded Assets. The Assets shall not include the following (collectively, the "Excluded Assets"): (i) all of the Seller's accounts receivable and all other rights of the Seller to payment for services rendered by the Seller before Closing (except service rendered in connection with the Work in Progress), it being understood that all of Seller's customers relating to the Business shall be billed on the Closing Date (as defined in Section 5.1 hereof) for services or materials provided through that date and that Buyer will forward any payment on such accounts received by it to Seller within five (5) business days of receipt; (ii) all cash accounts of the Seller and all petty cash of the Seller kept on hand for use in the Business; (iii) all other receivables and prepaid expenses, including all right, title and interest of the Seller in and to any prepaid expenses, bonds, deposits and other current assets relating to any of the Assets or the Business; (iv) the Retained Records; (v) the cash consideration paid or payable by Buyer to Seller pursuant to Section 1.3 hereof; (vi) the assets listed on Schedule 1.2 hereto; (vii) all rights of Seller covered by the Watson Hopper Distribution Agreement; and (viii) all assets whether real, personal, tangible, or intangible related to the Excluded Business and which are not also related to the Business. 1.3 Consideration for Assets. As consideration for the sale of the Assets to Buyer and for the other covenants and agreements of Seller contained herein, Buyer agrees to pay to Seller, on the Closing Date, the amount of One Million Three Hundred Twenty-Seven Thousand Thirty-Five Dollars and Seventy-Four Cents ($1,327,035.74) by wire transfer of immediately available funds to an account designated by Seller. 1.4 Liabilities. Effective on the Closing Date, Buyer shall assume those, and only those, liabilities and obligations of the Seller to perform the Contracts described on Schedule 1.1(d) hereto to the extent such Contracts have not been performed and are not in default on the Closing Date (the "Assumed Liabilities"). On and after the Closing Date, the Seller shall be responsible for any and all liabilities and obligations of the Seller other than the Assumed Liabilities, including, without limitation, (a) any obligations arising from the Seller's employment of employees of the Seller; (b) any liabilities arising from or relating to Seller's failure to be duly qualified or licensed to do business and in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by Seller would make such qualification or licensing necessary; (c) any failure to pay any taxes owed by Seller which are applicable to the period ending with the Closing Date (including, specifically, all taxes applicable to any of the Assets); (d) any liabilities resulting from or related to Seller's violation of Environmental Laws (as hereinafter defined); (e) any liabilities arising out of any matters listed on Schedule 2.1.9 hereto; (f) all products liability claims, as well as other liabilities involving products sold or services provided by the Seller prior to the Closing Date, and (g) any other liabilities or obligations arising out of Seller's ownership or operation of the Assets or conduct of the Business prior to the Closing Date or Seller's ownership of the Excluded Assets or conduct of the Excluded Business whether before or after the Closing Date (collectively, the "Retained Liabilities"). Article I Representations and Warranties Article I.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: Article I.1.1. Organization and Good Standing. Seller is a corporation duly organized, validly existing and in good standing under the laws of its state of organization, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary except where the failure to make such qualification would not have a material adverse effect on Seller. Article I.1.1. Agreements Authorized and their Effect on Other Obligations. The execution and delivery of this Agreement have been authorized by all necessary corporate, shareholder and other action on the part of Seller, and this Agreement is the valid and binding obligation of Seller enforceable (subject to normal equitable principals) against Seller in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (i) the charter or bylaws (or other organizational documents) of Seller, (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Seller is a party or by which Seller or its properties are bound; or (iii) any provision of any law, rule, regulation, order, permits, certificate, writ, judgment, injunction, decree, determination, award or other decision of any court, arbitrator, or other governmental authority to which Seller or any of its properties are subject. 2.1.3 Contracts. Schedule 1.1(d) hereto sets forth a complete list of all contracts, including leases under which Seller is lessor or lessee, that relate to the conduct of the Business or the ownership or operation of the Assets and are to be performed in whole or in part after the Closing Date. All of the Contracts are in full force and effect and constitute valid and binding obligations of Seller. Seller is not, and to the knowledge of Seller, no other party to any of the Contracts is, in default thereunder, and to the knowledge of Seller, no event has occurred which (with or without notice, lapse of time, or the happening of any other event) would constitute a default thereunder. No Contract has been entered into on terms which could reasonably be expected to have an adverse effect on the use of the Assets by Buyer. Seller has not received any definitive information which would cause Seller to conclude that any customer of Seller related to the Business representing more than ten (10%) percent of Seller's total revenue from the Business for the fiscal year of Seller ended April 30, 1998 will (or is likely to) cease doing business with Buyer (or its successors) as a result of the consummation of the transactions contemplated hereby. All of the Contracts are assignable (and are hereby validly assigned) to Buyer without the consent of any other party thereto. 2.1.4 Title to and Condition of Assets. Seller has good, indefeasible and marketable title to all of the Assets, free and clear of any Encumbrances (defined below). Assets are being transferred as is, where is. Seller makes no warranties as to general condition or fitness for a particular purpose or otherwise regarding the condition of the Assets save and except as provided in this Agreement. No notice of any violation of any law, statute, ordinance, or regulation relating to any of the Assets has been received by Seller or any director, officer, or shareholder of Seller, except such as have been fully complied with. The term "Encumbrances" means all liens, security interests, pledges, mortgages, deeds of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, privileges, equities, easements, rights of way, limitations, reservations, restrictions, and other encumbrances of any kind or nature. 2.1.5 Licenses and Permits. Schedule 1.1(e) hereto sets forth a complete list of all Permits necessary under law or otherwise for the conduct of the Business and the ownership, operation, maintenance and use of the Assets in the manner in which the Business is currently being conducted and in the manner in which the Assets are now being operated, maintained and used . Each of the Seller Permits and Seller's rights with respect thereto is valid and subsisting, in full force and effect, and enforceable by Seller subject to administrative powers of regulatory agencies having jurisdiction. Seller is in compliance in all material respects with the terms of each of the Seller Permits. None of the Seller Permits has been, or to the knowledge of Seller are threatened to be, revoked, canceled, suspended or modified. Upon consummation of the transactions contemplated hereby, all of the Seller Permits shall be assignable (and are hereby assigned) to Buyer without the consent of any regulatory agency or any other third party. On and after the Closing Date, each of the Seller Permits and Buyer's rights with respect thereto will be valid and subsisting in full force and effect, and enforceable by Buyer subject only to the administrative powers of regulatory agencies having jurisdiction over the applicable Seller Permit. 2.1.6 Financial Information. Seller has delivered to Buyer copies of certain financial information of Seller related to the Business, copies of which are attached hereto as Schedule 2.1.6 (collectively, the "Seller Financial Information"), and include a "Gross Margin Statement" as of March 31, 1998 (the "Statement Date"). The Seller Financial Information is true, correct and complete in all material respects and presents fairly and fully such financial information of the Business for the periods indicated thereon. The inventories of Seller, which have thereafter been acquired by Seller, consist of items of a quality and quantity salable in the normal course of the applicable Business. The values at which such inventories are carried are consistent with the normal inventory level and practices of Seller with respect to the Business. 2.1.7 Absence of Certain Changes and Events. Since the Statement Date, there has not been: (a) Financial Change. Any adverse change in the Assets or the Business or prospects of the Business; (a) Property Damage. Any damage, destruction, or loss to any of the Assets (whether or not covered by insurance); (a) Waiver. Any waiver or release of a material right of or claim held by Seller related to the Assets or the Business; (a) Change in Assets. Any acquisition, disposition, transfer, encumbrance, mortgage, pledge or other encumbrance of any of the Assets other than in the ordinary course of business; (a) Labor Disputes. Any labor disputes between the Seller and the Employees, as defined in Section 3.2 hereof; or (a) Other Changes. Any other event or condition known to the Seller that particularly pertains to and has or might have a material adverse effect on the Assets, the operations of the Business or the prospects of the Business. 2.1.8 Necessary Consents. Seller has obtained and delivered to Buyer all consents to assignment or waivers thereof required to be obtained from any governmental authority or from any other third party in order to validly transfer the Assets hereunder, including, without limitation, any consents required to assign the Contracts and the Seller Permits. 2.1.9 Environmental Matters. None of the current or past operations of the Business, any of the Assets or the Land, as that term is defined in that certain Real Estate Purchase Agreement (the "Real Estate Purchase Agreement") between Charley R. Smith and Julee W. Smith, as Co-Trustees of the Charley and Julee Smith Living Trust (the "Smith Trust") and Charley R. Smith and Julee W. Smith, individually (the "Trustors"), dated May 19, 1998, is being or has been conducted or used in such a manner as to constitute a violation of any Environmental Law (defined below). Except as disclosed on Schedule 2.1.9 hereto Seller has not received any notice (whether formal or informal, written or oral) from any entity, governmental agency or individual regarding any existing, pending or threatened investigation or inquiry related to violations of any Environmental Law or regarding any claims for remedial obligations or contribution for removal costs or damages under any Environmental Law. There are no writs, injunction decrees, orders or judgments outstanding, or lawsuits, claims, proceedings or investigations pending or, to the knowledge of Seller , threatened relating to the ownership, use, maintenance or operation of the Assets, the conduct of the Business or the Land, nor, to the knowledge of Seller, is there any basis for any of the foregoing. Buyer is not required to obtain any permits, licenses or similar authorizations pursuant to any Environmental Law in effect as of the Closing Date to operate and use any of the Assets for their current or proposed purposes and uses. To the knowledge of Seller, the Assets include all environmental and pollution control equipment necessary for compliance with applicable Environmental Law. No Hazardous Materials (defined below) have been or are currently being used by Seller in the operation of the Assets, the Business or the Land. No Hazardous Materials are or have ever been situated on or under the Land, or incorporated into any of the Assets. There are no underground storage tanks (as defined under Environmental Law) currently located under the Land, and any underground storage tanks previously located on or under the Land have been removed in compliance with all applicable Environmental Law. There are no environmental conditions or circumstances, including the presence or release of any Hazardous Materials, on any property presently or previously owned or leased by Seller related to the Business or Assets, including but not limited to, the Land, or on any property on which Hazardous Materials generated by Seller's operations of the Business or the use of the Assets were disposed of, which would result in an adverse change in the Assets, the Business or business prospects of the Business. The term Environmental Law means any and all laws, rules, orders, regulations, statutes, ordinances, codes, decrees, and other legally enforceable requirements (including, without limitation, common law) of the United States, or any state, regional, city, local, municipal or other governmental authority or quasi-governmental authority, regulating, relating to, or imposing environmental standards of conduct concerning protection of the environment or human health, or employee health and safety as from time to time has been or is now in effect. The term "Hazardous Materials" means (x) asbestos, polychlorinated biphenyls, urea formaldehyde, lead based paint, radon gas, petroleum, oil, solid waste, pollutants and contaminants, and (y) any chemicals, materials, wastes or substances that are defined, regulated, determined or identified as toxic or hazardous in any Environmental Law. 2.1.10 No ERISA Plans or Labor Issues. No employee benefit plan of Seller, whether or not subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended, will by its terms or applicable law, become binding upon or an obligation of Buyer. Seller has not engaged in any unfair labor practices which could reasonably be expected to result in an adverse effect on the Assets. Seller does not have any dispute with any of the Employees or any of its former employees, and there are no labor disputes or, to the knowledge of Seller, any disputes threatened by current or former employees of Seller which would have an adverse effect on the Assets or the Business. 2.1.11 Investigations; Litigation. No investigation or review by any governmental entity with respect to Seller or any of the transactions contemplated by this Agreement is pending or, to the knowledge of Seller, threatened, nor has any governmental entity indicated to Seller an intention to conduct the same. There is no suit, action, or legal, administrative, arbitration, or other proceeding or governmental investigation pending to which Seller is a party or might become a party or any other unasserted claims against Seller which would have an adverse effect on the Assets or the Business. 2.1.12 Absence of Certain Business Practices. Neither Seller, nor any officer, employee or agent of Seller, nor any other person acting on behalf of Seller, has, directly or indirectly, within the past five years, given or agreed to give any gift or similar benefit to any customer, supplier, government employee or other person who is or may be in a position to help or hinder the profitable conduct of the Business or the profitable use of the Assets (or to assist Seller in connection with any actual or proposed transaction) which if not given in the past, might have had an adverse effect on the profitable conduct of the Business or the profitable use of the Assets, or if not continued in the future, might adversely affect the profitable conduct of the Business or the profitable use of the Assets. 2.1.13 Solvency. Seller is not presently insolvent, nor will Seller be rendered insolvent by the occurrence of the transactions contemplated by this Agreement. The term "insolvent", with respect to Seller, means that the sum of the present fair and saleable value of Seller's assets does not and will not exceed its debts and other probable liabilities, and the term "debts" includes any legal liability whether matured or unmatured, liquidated or unliquidated, absolute fixed or contingent, disputed or secured or unsecured. 2.1.14 Untrue Statements. This Agreement and all other agreements executed by Seller and delivered to Buyer do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Seller has also made available to Buyer true, complete and correct copies of all contracts, documents concerning all litigation and administrative proceedings, licenses, permits, insurance policies, lists of suppliers and customers, and records relating principally to the Business and the Assets, and such information covers all commitments and liabilities of Buyer relating principally to the Business and the Assets. 2.1.15 Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Seller and its counsel directly with Buyer and its counsel, without the intervention of any other person in such manner as to give rise to any valid claim against any of the parties hereto for a brokerage commission, finder's fee or any similar payment. 2.1.16 Taxes. All federal, state and local taxes assessed or assessable against the Assets for periods prior to January 1, 1998 have been paid by Seller and the Assets will be conveyed to Buyer free and clear of any such taxes or claims therefor. All taxes assessed against the Assets for the period commencing January 1, 1998 will be prorated through the Closing Date (based on 1997 assessed values) with the Seller paying to Buyer at Closing an amount equal to the portion of such taxes applicable to the period between January 1, 1998 and the Closing Date. Buyer agrees to pay all such taxes on or before the due date of such taxes to the appropriate taxing authority. 2.1.17 Bulk Sales. Seller has complied with all provisions of any applicable, laws, rules or regulations relating to "Bulk Sales" (as that term is interpreted in accordance with Uniform Commercial Code as enacted in the jurisdiction in which the Assets are located and in which this Agreement is to be enforced). 2.1.18 Intellectual Property. The Intangibles are all of the intangible assets relating to, used or useful in the operation of the Assets or the conduct of the Business. To the knowledge of Seller, the Intellectual Property is owned or licensed by the Seller free and clear of any Encumbrances; Seller has not granted to any other person any license to use any of the Intellectual Property; and, to the knowledge of Seller, use of the Intellectual Property will not, and the conduct of the Business did not, infringe, misappropriate or conflict with the intellectual property rights of others. The Seller has not received any notice of infringement, misappropriations or conflict with the intellectual property rights of others in connection with the use by Seller of the Intellectual Property. Article I.1 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: Article I.1.1. Organization and Good Standing. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full requisite corporate power and authority to carry on its business as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do business and is in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or the nature of the business conducted by it would make such qualification or licensing necessary. Article I.1.1. Agreement Authorized and its Effect on Other Obligations. The consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer, and this Agreement is a valid and binding obligation of Buyer enforceable (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement by Buyer will not conflict with or result in a violation or breach of any term or provision of, or constitute a default under (a) the Certificate of Incorporation or Bylaws of Buyer or (b) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Buyer or any of its property is bound. Article I.1.1. Consents and Approvals. No consent, approval or authorization of, or filing of a registration with, any governmental or regulatory authority, or any other person or entity is required to be made or obtained by Buyer in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. Article I.1.1. Finder's Fee. All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Buyer and its counsel directly with the Seller and its counsel, without the intervention by any other person as the result of any act of Buyer in such a manner as to give rise to any valid claim against any of the parties hereto for any brokerage commission, finder's fee or any similar payments. Article I Additional Agreements 3.1 Noncompetition. Except as otherwise consented to or approved in writing by Buyer, Seller agrees that for a period of 60 months from the Closing Date (the "Noncompetition Period"), Seller will not, directly or indirectly acting alone or as a member of a partnership or as a consultant, representative, advisor, lender (including gifts used for capitalization), holder of, or investor in any security of any class of any corporation or other business entity (i) own, lease, or operate a facility or sell service parts manufactured by Watson Hopper in the states of Wyoming, Colorado, Montana, North Dakota, Utah, Nebraska, and South Dakota, as well as the area which is within a 25 mile radius from the city limits of Farmington, New Mexico (collectively, the "Territories") which would be in competition with any of the Business conducted by Buyer or any affiliate of Buyer; (ii) request any customers or suppliers of Buyer or any affiliate of Buyer to curtail or cancel any of their Business conducted with Buyer or any affiliate of Buyer; (iii) disclose to any person, firm or corporation any trade, technical or technological secrets of the Business other than any such information which relates to the Excluded Business, or any other business of Buyer or any affiliate of Buyer or any details of their organization or business affairs not otherwise available in the public domain; or (iv) induce or actively attempt to influence any Employee, as hereinafter defined, or an Employee of Buyer or any affiliate of Buyer to terminate his or her employment. It is specifically understood and agreed by the parties hereto that in the event a customer or potential customer of Buyer in the Territories desires to utilize the services of Seller from facilities outside the Territories during the Noncompetition Period, such a transaction will not be in violation of this Section 3.1. Seller agrees that if either the length of time or geographical area set forth in this Section 3.1 is deemed too restrictive in any court proceeding, such court may reduce such restrictions to those which it deems reasonable under the circumstances. Seller further agrees and acknowledges that the Buyer and its affiliates do not have any adequate remedy at law for the breach or threatened breach by Seller of this covenant, and agrees that the Buyer or any affiliate of Buyer may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin Seller from such breach or threatened breach. If any provisions of this Section 3.1 are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. Seller acknowledges that the covenants set forth in this Section 3.1 are being executed and delivered by Seller in consideration of the covenants of Buyer contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. 3.2 Hiring Employees. Schedule 3.2 hereto is a complete and accurate listing of certain employees of Seller that devote their full time and effort in the conduct of the Business (the "Employees"). Effective as of the Closing Date, all of the Employees shall be offered employment by Buyer subject to such Employees meeting Buyer's standard employment eligibility requirements. Buyer shall have no liability or obligation with respect to any employee benefits of any Employee except those benefits that accrue pursuant to such Employees' employment with Buyer on or after the Closing Date . Seller shall cooperate with Buyer in connection with any offer of employment from Buyer to the Employees and use its best efforts to cause the acceptance of any and all such offers. Seller acknowledges its understanding that it is Buyer's intent that all Employees hired by Buyer shall be at-will employees of Buyer. Buyer agrees that as to each Employee hired by Buyer that such Employee shall be hired at each such Employee's respective current salary with credit for prior service with Seller as it relates to compensation and benefit plans of Buyer. 3. 3 Allocation of Purchase Price of Assets. The parties hereto agree to allocate the purchase price paid by Buyer for the Assets hereunder as set forth on Schedule 3.3 hereto, and shall report this transaction for federal income tax purposes in accordance with the allocation so agreed upon. The parties hereto for themselves and for their respective successors and assigns covenant and agree that they will file coordinating Form 8594's in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended, with their respective income tax returns for the taxable year that includes the Closing Date . 3.4 Real Estate Purchase. Concurrent with the execution and delivery hereof, the Smith Trust and Buyer shall have entered into the Real Estate Purchase Agreement (and consummated the transactions contemplated thereby) pursuant to which the Smith Trust will have conveyed to Buyer the real property owned by the Smith Trust described on Schedule 3.4 hereto. 3.5 Further Assurances. From time to time, as and when requested by any party hereto, any other party hereto shall execute and deliver, or cause to be executed and delivered, such documents and instruments and shall take, or cause to be taken, such further or other actions as may be reasonably necessary to effect the transactions contemplated hereby. 3.6 Use of Name. Seller consents to the use of the name "Watson Oilfield Service & Supply, Inc." (or a substantially similar name) in the Territories. Seller agrees to execute any and all instruments, certificates or other documents and take any and all action as may be necessary or appropriate of Seller for Buyer to use such name in the Territories. Buyer agrees that prior to a change in control of Buyer that Buyer shall obtain the written consent of Seller to the continued use of the name "Watson Oil Field Service & Supply, Inc." by Buyer, or change the name of Buyer to delete the use of the name "Watson." For purposes of this Section 3.6, the term "control" shall be ownership of voting rights of not less than 70% of the voting rights related to all issued and outstanding securities of Buyer. Additionally, Buyer agrees that it will not sell or transfer the name "Watson Oilfield Service & Supply, Inc." (or a substantially similar name containing the name "Watson") to a non-affiliate of Buyer without the prior written consent of Seller." 3.7 Use of Watson Hopper Blueprints. Seller agrees to make available to Buyer and allow Buyer to use the blueprints and other technical information necessary for Buyer to conduct the Business for the term and any renewals and extensions of the Watson Hopper Distribution Agreement. 3.8 Guaranty by Seller of Indemnification under Real Estate Purchase Agreement. Seller agrees to and hereby unconditionally guarantees the performance of any and all indemnifications and obligations of the Smith Trust or the Trustors under the terms of the Real Estate Purchase Agreement (the "Guaranty"). Seller waives notice of any amendments, changes or modifications to the Real Estate Purchase Agreement or any agreements or obligations of any of the parties to the Real Estate Purchase Agreement which survive the Closing (as that term is defined in the Real Estate Purchase Agreement and the use of the term "Closing" as defined in the Real Estate Purchase Agreement shall be limited to use only in this Section 3.8). Seller further expressly waives notice of non-payment, protest, and notice of protest with respect to the indebtedness and obligations covered by the Guaranty. It shall not be necessary for Buyer, in order to enforce payment by Seller under the Guaranty, to first institute suit or to pursue or exhaust its remedies against either the Smith Trust or the Trustors. Seller agrees that this Guaranty shall continue in full force and effect, notwithstanding the termination of the Smith Trust or the death of either of the Trustors or the release by agreement or by operation of law or the extension of time to the Smith Trust or either of the Trustors as to any of their obligations then existing. Seller acknowledges that the covenants set forth in this Section 3.8 are being delivered by Seller in consideration of the covenants of Buyer contained in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged. Article I Indemnification Article I.1 Indemnification by Seller. In addition to any other remedies available to Buyer under this Agreement, or at law or in equity, Seller shall indemnify, defend and hold harmless Buyer and its affiliates, officers, directors, employees, agents and stockholders, against and with respect to any and all claims, costs, damages, losses, expenses, obligations, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable attorneys' fees and expenses (collectively, the "Damages") that such indemnitee shall incur or suffer (whether the Damages are suffered or incurred by a Buyer Indemnified Party directly or as a result of a third party claim against such Buyer Indemnified Party), which arise, result from or relate to (i) any breach of, or failure by Seller to perform, its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by Seller under this Agreement or (ii) the Retained Liabilities, provided however, that (x) Seller shall not be required to so indemnify, defend and hold harmless Buyer against and with respect to any Damages incurred as a result of a breach by Seller of its representations and warranties in this Agreement, or in any schedule, certificate, exhibit or other instrument furnished or delivered by Seller to Buyer under this Agreement for which Buyer fails to provide written notice of a claim for such damages to Seller on or before the expiration of the survival period. (As specified in Section 6.1 hereof) of the specific representation or warranty alleged to have been breached, and (y) Seller shall not be required to so indemnify, defend and hold harmless Buyer unless and until the Damages equal or exceed $25,000 in the aggregate (the "Indemnification Threshold"), at which time Seller shall indemnify, defend and hold harmless Buyer for all Damages, including but not limited to those Damages less than the Indemnification Threshold. Article I.1 Indemnification by Buyer. In addition to any other remedies available to Seller under this Agreement, or at law or in equity, Buyer shall indemnify, defend and hold harmless Seller against and with respect to any and all Damages that such indemnitees shall incur or suffer, which arise, result from or relate to (i) any breach of, or failure by Buyer to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Seller by or on behalf of Buyer under this Agreement, (ii) the Assumed Liabilities, or (iii) except to the extent that any Damages arise out of a breach by Seller of any of its respective representations, warranties or covenants contained herein, the Buyer's conduct of the Business after the Closing Date save and except for the Retained Liabilities, provided however, that (x) Buyer shall not be required to so indemnify, defend and hold harmless Seller against and with respect to any Damages incurred as a result of a breach by Buyer of its representations and warranties in this Agreement or in any schedule, certificate, exhibit, or other instrument furnished or delivered by Buyer to Seller under this Agreement for which Seller fails to provide written notice of a claim for such Damages to Buyer on or before the expiration of the survival period (as specified in Section 6.1 hereof), of the specific representation or warranty alleged to have been breached, and (y) Buyer shall not be required to so indemnify, defend and hold harmless Seller unless and until the Damages equal or exceed $25,000 in the aggregate (the "Indemnification Threshold"), at which time Buyer shall indemnify, defend and hold harmless Seller for all Damages, including but not limited, to those Damages less than the Indemnification Threshold. Article I.1 Indemnification Procedure. If any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Section 4.1 or 4.2 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any third party action or proceeding against such indemnified party with respect to which a claim for indemnification may be made pursuant to this Article 4, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such third party action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligations hereunder, to the extent the indemnifying party is not materially prejudiced thereby. In case any such third party action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such third party claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a third party claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such third party claim or with respect to third party claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any third party action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a third party claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the third party claimant or plaintiff to such indemnified party of a release from all liability with respect to such third party claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such third party action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld or delayed. Article V THE CLOSING 5.1 Time and Place. The consummation of the transactions contemplated by this Agreement (the "Closing') shall take place on the date hereof (the "Closing Date") at the offices of the Maddox Law Firm, beginning at 9:00 a.m. on the Closing Date. 5.2 Deliveries. At the Closing, the following shall occur: (a) Seller shall transfer good, marketable and valid title to the Assets to Buyer, free and clear of any and all Encumbrances by execution and delivery of a Bill of Sale and Assignment Agreement and such other documents as may be requested by Buyer; (b) The Maddox Law Firm, counsel to Seller, shall deliver its opinion of counsel covering such matters as may be requested by Buyer; and (c) Buyer shall pay to Seller in immediately available funds, the purchase price specified in Section 1.2 hereof. (d) The execution and delivery of a Distribution Agreement between Watson Hopper and Buyer (the "Watson Hopper Distribution Agreement") acceptable to Buyer. (e) The execution and delivery of a Distribution Agreement between Cavins Oil Well Tools, a division of Dawson Enterprises, a California corporation and Buyer acceptable to Buyer. (f) The execution and delivery of a Non-Competition Agreement between the Buyer and Charley R. Smith, Julee W. Smith, and R. Finn Smith. Article I I Miscellaneous 6.1 Survival of Representations, Warranties and Covenants. All representations and warranties made by the parties hereto shall survive until three (3) years after the Closing Date, notwithstanding any investigation made on the part of the parties hereto; provided however, that the representations and warranties made in Section 2.1.16 hereof shall survive until the expiration of applicable statute of limitations associated with tax issues. All statements contained in the certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive until three (3) years after the Closing Date despite any investigation made by any party hereto or on its behalf. All covenants and agreements contained herein shall survive as provided herein. 6.2 Entirety. This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. 6.3 Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. 6.4 Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested: If to Buyer Addressed to: With a copy to: Watson Oilfield Service & Supply, Inc. Cotton, Bledsoe, Tighe & Dawson Two Tower Center, 20th Floor 500 W. Illinois, Suite 300 East Brunswick, New Jersey 08816 Midland, Texas 79701-4337 Attn: General Counsel Attn: Richard T. McMillan Facsimile: (908) 247-5148 Facsimile: (915) 682-3672 If to Seller or any of the Shareholders Addressed to: With a copy to: Watson Truck & Supply, Inc. Maddox Law Firm Attention: Chairman of the Board Attention: James M. Maddox P. O. Box 10 P. O. Box 2508 Hobbs, New Mexico 88241 Hobbs, New Mexico 88241 Facsimile: (505) 397-2646 or or Watson Truck & Supply, Inc. Maddox Law Firm Attention: Chairman of the Board Attention: James M. Maddox 1501 N. Grimes 220 W. Broadway, Suite 200 Hobbs, New Mexico 88240 Hobbs, New Mexico 88240 Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the third business day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal business hours on any business day. 6.5 Captions. The captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. 6.6 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. 6.7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 6.8 Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the State of New Mexico. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed in their respective corporate names by their respective duly authorized representatives, all as of the day and year first above written. BUYER: WATSON OILFIELD SERVICE & SUPPLY, INC. By: Name: William L. Hubbell Title: President SELLER: WATSON TRUCK & SUPPLY, INC. By: Name: Charley R. Smith Title: Chairman of the Board and President EX-10.69 3 WILBANKS PURCHASE AGREEMENT PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement Agreement dated as of the 5th day of May,1998, execute by BURNETT CORPORATION, a Texas corporation; B.O. CORNELIUS; ANN C. FATHEREE; JAMES R. CORBIN; MARY JO MITTON; BIRKE B. MARSH; H. COBB; BIRKE B. MARSH, TRUSTEE OF THE CORBIN TRUST 1976; JAMIE KIM CORBIN; JOSH ALAN CORBIN; an JASON J. plus WILBANKS EXPLORATION, INC. an JEFFREY G. SHRA ER (the Wilbanks Group), (in ivi ually, an collectively, an ODESSA EXPLORATION, INCORPORATED , Delaware corporation, ('Buyer'). In consideration of the mutual promises containe herein, the benefits to be erive byeach party h ereun er an other goo an valuable consi eration the receipt an sufficiency ofwhich are hereby acknowle ge , Sellers an Buyer agree as follows: ARTICLE I PURCHASE AND SALE 1.01 - Purchase and Sale - Subject to the terms an con itions of this Agreement, Sellers agree to sell an convey to Buyer ad Buyer agrees to purchase an pay for the following describe assets (hereinafter referre to as the Properties: (a) The interests escribe in Exhibit A hereto in an to the oil an gas leases escribe in Exhibit hereto (the Leases ) insofar as they cover the lan (the Lan s also escribe in Exhibit hereto, together with correspon ing un ivi e interests in (i) all rights, privileges, benefits, an powers conferre upon the hol er of the Leases with respect to the use an occupation of the surface of the Lan s that may be necessary, convenient, or inci ental to the possession an enjoyment of the Leases, (ii) all rights in respect of any poole or unitize acreage locate in whole or in part within the Lan s by virtue of the Leases, inclu ing rights to pro uction from the pool or unit allocate to any lease being a part thereof, regar less of whether such pro uction is from the Lan s, (iii) all rights, options, titles, an interests of Sellers granting Sellers the right to obtain, or otherwise earn interests within the Lan s no matter how earned, (iv) all tenements, here itaments, an appurtenances belonging to any of the foregoing, an (v) any an all geological ata an reports, subject to all applicable licensing an other agreements an all restrictions on transfer, inclu ing but not limite to all well logs, core reports, seismic ata, interprete maps, contour maps, isopach maps, etc. (b) All permits, licenses, servitu es, rights-of-way, ivision or ers, gas purchase an sale agreements, inclu ing without limitation gas contracts, cru e oil purchase an sale agreements (wherein Sellers are selling parties), surface leases, farmin agreements, farmout agreements, bottom-hole agreements, acreage contribution agreements, operating agreements, unit agreements, processing agreements, options, leases of equipment or facilities, an other contracts, agreements, an rights that are owne by Sellers in whole or in part, an that are appurtenant to the Properties or use or hel for use in connection with the ownership or operation of the Properties or with the pro uction, treatment, sale, or isposal of water, hy rocarbons an associate substances therefrom or thereon; an (c) All of the real, personal an mixe property use in the operation of the Properties (whether locate on or off the Properties, but exclu ing all vehicles use in the operation of the Properties) owne by Sellers in whole or in part or cre ite to the joint account of Seller inclu ing, but not limite to (i) the wells ( Wells ) escribe on Exhibit hereto, all wellhea equipment, fixtures (inclu ing, but not limite to, fiel separators an liqui extractors), pipe, casing, an tubing; (ii) all pro uction, gathering, treating, processing, compression, ehy ration, salt water isposal, injection, gathering line an pipeline equipment an facilities; (iii) all tanks, machines, equipment, tools, ies, vessels an other facilities; an ( ) All of the files, recor s, ocuments, correspon ence an ata now in the possession or control of Sellers that relate to the items escribe in sub-paragraphs (a), (b), or (c) above, without 1imitation (the Recor s ). 1.02 Effective Time . The purchase and sale of the Properties shall be effective as of 7:00 a.m. on May 1, 1998, local time at the location of the Properties (herein calle the Effective Time ). ARTICLE II PURCHASE PRICE 2.01 - Purchase Price . The purchase price payable by Buyer for the Properties shall be Nine Million One Hun re Forty-Three Thousan an No/100 ollars ($9,143,000.00) cash, in imme iately available fun s (the Purchase Price ). 2.02 - A justments to Purchase Price . The Purchase Price shall be subject to a justment as follows: (a) The Purchase Price shall be a juste upwar as follows: (i) The value of all merchantable, allowable oil in storage at the Effective Time, above the pipeline connection; (ii) The amount of all verifiable expen itures un er applicable operating agreements or other similar arrangements or agreements pai by Sellers in connection with the operation of the Property in accor ance with this Agreement for work actually performe subsequent to the Effective Time; (iii) Such increases as are ue to Upwar A justments ( efine below) as provi e in Article V hereof; (iv) Any other amount agree upon by Sellers an Buyer. (b) The Purchase Price shall be a juste ownwar as follows: (i) Procee s receive by Sellers from the sale of oil gas or other hy rocarbons attributable to the Properties an which are pro uce after the Effective Time; (ii) An amount equal to all unpai a valorem, property, pro uction, severance an similar taxes an assessments (but not inclu ing income taxes) base upon or measure by the ownership of property or the pro uction of hy rocarbons or the receipt of procee s therefrom accruing to the Properties prior to the Effective Time (Taxes will be prorate base on 1997 taxes); (iii) Any re uctions for efective Interests as provi e in Article V; (iv) Any casualty losses; an (v) Any other amount agree upon by Sellers an Buyer; (c) The Purchase Price shall be a juste upwar or ownwar , as necessary, as follows: (i) to the extent Sellers '92 actual working interest an net revenue interest in each of the wells iffers than that shown on Exhibit "A;" an (ii) any material non-consent operations in properties which result in an increase or ecrease in Sellers '92 interest in the property; 2.03 - Allocation of Purchase Price. Each party will use its own allocation of the Purchase Price. In the event there is a efective Interest or Environmental Con ition affecting a Property, the parties shall mutually agree upon the value of such affecte Property. ARTICLE III Representations an Warranties 3.01 - Representations an Warranties of Sellers . Sellers severally, but not jointly, represent an warrant to Buyer as follows. (a) As to any corporate Seller, such Seller is a corporation uly organize , vali ly existing an in goo stan ing un er the laws of its juris iction of incorporation, is legally authorize to con uct business in each juris iction where it con ucts business, an has all requisite corporate power an authority to own an lease the properties an assets it currently owns an leases an to carry on its business as such business is currently con ucte . (b) Sellers have all requisite power an authority to execute an eliver this Agreement, to consummate the transactions contemplate hereby an to perform all the terms an con itions hereof to be performe by them. The execution an elivery of this Agreement by Sellers, the performance by Sellers of all the terms an con itions hereof to be performe by them an the consummation of the transactions contemplate hereby have been, or will be, uly authorize an approve by the Boar of irectors of Sellers as to each corporate Seller. This Agreement has been uly execute an elivere by Sellers an constitutes the vali an bin ing obligation of Sellers, enforceable against them in accor ance with its terms, except as such enforceability may be limite by bankruptcy, insolvency or other laws relating to or affecting the enforcement of cre itors rights generally an general principles of equity (regar less of whether such enforceability is consi ere in a procee ing in equity or at law). (c) This Agreement an the execution an elivery hereof by Sellers o not, an the fulfillment an compliance with the terms an con itions hereof an the consummation of the transactions contemplate hereby will not: (i) Conflict with, or require the consent of any person un er, any of the terms, con itions or provisions of the articles or certificate of incorporation, as applicable, or bylaws of any corporate Seller; (ii) Violate any provision of, require any filing, consent, authorization or approval un er, any legal requirement applicable to or bin ing upon Sellers; (iii) Conflict with, result in a breach of, constitute a efault un er (without regar to requirements of notice or the lapse of time or both), accelerate or permit the acceleration of the performance require by, or require any consent, authorization or approval un er, (A) any mortgage, in enture, loan, cre it agreement or other agreement or instrument evi encing in ebte ness for borrowe money to which any Seller is a party or to which any Seller is boun or to which any of the Properties owne by Sellers is subject, or (B) any lease, license, contract or other agreement or instrument to which Sellers are a party or by which they are boun or to which any of the Properties owne by them are subject; or (iv) Result in the creation or imposition of any lien, charge or other encumbrance upon the Properties. (v) Sellers are not in efault un er, an no con ition exists that with notice or lapse of time or both woul constitute a efault un er, (i) any mortgage, in enture, loan, cre it agreement or other agreement or instrument evi encing in ebte ness for borrowe money to which Sellers are a party or by which Sellers are boun or to which any of the Properties are subject, or any other agreement, contract, lease, license or other instrument, (ii) any or er, ju gment or ecree of any court, commission, boar , agency or other governmental bo y, or (iii) any law, statute, or inance, ecree, or er, rule or regulation of any governmental authority. (e) Except as provide for or disclose in Exhibit B attache hereto an e a part hereof, since May 1, 1998, there has not been an will not be: (i) Any material amage, estruction or loss to or of the Properties or other assets, whether or not covere by insurance; (ii) Any sale, lease or other isposition of the Properties or other assets, except as permitte by the terms of this Agreement; (iii) Any mortgage, ple ge or grant of a lien or security interest against any of the Properties, other than in the or inary course of business (except any such encumbrance that will be release at or before the Closing); or (iv) Any contract or commitment to o any of the foregoing. (f) Exhibit C sets forth a list of the following contracts, agreements, plans an commitments to which Sellers are parties or by which Sellers or any of the Properties are boun . Any contract, commitment or agreement that involves aggregate expen itures by Sellers of more than $100,000.00 per year; (ii) Any in enture, trust agreement, loan agreement or note un er which Sellers have outstan ing in ebte ness, obligations or liabilities for borrowe money; (iii) Any lease, sublease, installment purchase or similar arrangement for the use or occupancy of real property (other than the Sellers' Leases) that involves aggregate expen itures by Sellers of more than $100,000.00 per year, together with a list of the location of such lease property, the ate of termination of such arrangements, the name of the other party an the annual rental payments require to be ma e for such arrangements; (iv) Any guaranty, irect or in irect, by any affiliate of Sellers of any contract, lease or agreement entere into by Sellers; (v) Any agreement of surety, guarantee or in emnification by Sellers outsi e of the or inary course of business; (vi) All Gas Contracts ( efine below) an agreements for the sale of gas affecting the Properties; an (vii) All operating agreements. (g) To the knowle ge of each of the Sellers, there are no material efects in the personal property an fixtures to be conveye to Buyer pursuant to the terms hereof which woul prevent the continue operation of the Properties in accor ance with prior practice. (h) To the knowle ge of each of the Sellers, all material royalties (other than royalties hel in suspense), rentals an other payments ue un er the Leases have been properly an timely pai , an all con itions necessary to keep the Leases in force have been fully performe . No notices have been receive by Sellers of any claim to the contrary an to the knowle ge of each of the Sellers , all of the Leases are in full force an effect. (i) Except as set forth on Exhibit A attached hereto an ma e a part hereof, (i) Sellers are not obligate by virtue of any prepayment arrangement un er any contract for the sale of hy rocarbons an containing a take or pay or similar provision or pro uction payment or any other arrangement to eliver hy rocarbons pro uce from the Properties at some future time without then or thereafter receiving full payment therefor, an (ii) Sellers have not pro uce a share of gas greater than their ownership percentage an Sellers are un er no obligation to re uce their share of pro uction un er any gas balancing agreement or similar contract to allow un er-pro uce parties to come back into balance. (j) All a valorem, property, pro uction, severance an similar taxes an assessments base on or measure by the ownership of property or the pro uction of hy rocarbons or the receipt of procee s therefrom on the Properties have been properly pai an all such taxes an assessments which become ue an payable prior to the Effective Time shall be properly pai by Sellers. (k) To the knowle ge of each of the Sellers, all material vali laws, regulations an or ers of all governmental agencies having juris iction over the Properties have been an shall continue to be complie with until the Closing. To the knowle ge of each of the Sellers, all material necessary permits from governmental agencies having juris iction in connection with the Properties have been obaine an all require reports have been timely, properly, an accurately ma e an will continue to be timely, properly an accurately ma e through Closing. To the knowle ge of each of the Sellers base on Texas Railroa Commission recor s, all plugge wells locate on the Properties have been properly plugge an there are no aban one unplugge wellbores locate on the Properties which goo oil fiel practice woul require plugging. (l) Sellers have incurre no liability, contingent or otherwise, for brokers '92 or fin ers '92 fees relating to the transactions contemplate by this Agreement for which Buyer shall have any responsibility whatsoever. (m) To the knowle ge of each of the Sellers, none of the Properties is subject to any top leases or reversionary interests, an there exists no unrecor e ocument or agreement which may result in impairment or loss of Sellers '92 ability to convey the Property. (n) With respect to the Basic ocuments ( efine below), in all material respects to the knowle ge of Sellers: (i) all of such Basic ocuments are in full force an effect an are the vali an legally bin ing obligations of the parties thereto, (ii) Sellers are not in breach or efault with respect to any material obligations pursuant to any such Basic ocument or any regulations incorporate therein or governing same; (iii) all material payments (inclu ing, without limitation, royalties, elay rentals, shut-in royalties, an joint interest or other billings un er unit or operating agreements) ue thereun er have been ma e by Sellers or will be ma e by Sellers prior to Closing; (iv) no other party to any Basic ocument (or any successor in interest therein) is in breach or efault with respect to any of its material obligations thereun er, an (v) neither Sellers nor any other party to any Basic ocument has given or threatene to give notice of any action to terminate, cancel, rescin or procure a ju icial reformation of any Basic ocument or any provision thereof. As use herein the term Basic ocuments shall mean all of the Sellers '92 Leases, contracts for the sale an purchase of gas pro uce from the Properties ( Gas Contracts ), farmout, ry hole, bottom-hole, acreage contribution, purchase an acquisition agreements, area of mutual interest agreements, salt water isposal agreements, servicing contracts, easement an /or right-of-way agreements, unitization or pooling agreements an all other material executory contracts an agreements relating to the Properties. (o) (i) To the knowle ge of each of the Sellers, Sellers have not cause or allowe the generation, treatment, storage, isposal or release of hazar ous substances on the Properties except in accor ance with local, state, an fe eral statutes, or inances, rules an regulations, (ii) Sellers have complie with all laws, regulations an or ers of all governmental agencies having juris iction over the Properties in connection with laws regar ing protection of the environment, (iii) all material necessary permits or exemptions have been obtaine from governmental agencies having juris iction over the Properties in connection witth laws regar ing protection of the environment, (iv) Sellers have not receive notice of any procee ing, claim or lawsuit relating to the breach of any law regar ing protection of the environment an (v) to the best of Sellers '92 knowle ge no hazar ous substance has ever been ispose of on the Properties except in accor ance with local, state, an fe eral statutes, or inances, rules an regulations. (q) Except as may be set forth in Exhibit attache hereto an ma e a part hereof, on the ate hereof no suit, action or other procee ing is pen ing before any court or governmental agency to which Sellers are a party an which might result in impairment or loss of Sellers '92 title to any part of the Properties or that might hin er or impe e operation of the Properties an to the knowle ge of Sellers, no such suit, action or other procee ing is threatene . Sellers shall promptly notify Buyer of any such procee ing arising prior to the Closing -. 3.02 - Representations an Warranties of Buyer. Buyer represents an warrants to the Sellers that: (a) Buyer is a corporation uly organize , vali ly existing an in goo stan ing un er the laws of its juris iction of incorporation. (b) Buyer has all requisite corporate power an authority to execute an eliver this Agreement, to consummate the transactions contemplate hereby an to perform all the terms an con itions hereof to be performe by it. The execution an elivery of this Agreement by Buyer, the performance by Buyer of all the terms an con itions hereof to be performe by it an the consummation of the transactions contemplate hereby have been uly authorize an approve by the Boar of irectors of Buyer . This Agreement has been uly execute an elivere by Buyer an constitutes the vali an bin ing obligation of Buyer, enforceable against it in accor ance with its terms, except as such enforceability may be limite by bankruptcy, insolvency or other laws relating to or affecting the enforcement of cre itors '92 rights generally an general principles of equity (regar less of whether such enforceability is consi ere in a procee ing in equity or at law). (c) This Agreement an the execution an elivery hereof by Buyer oes not, an the fulfillment an compliance with the terms an con itions hereof an the consummation of the transactions contemplate hereby will not: Conflict with, or require the consent of any person un er, any of the terms, con itions, or provisions of the certificate of incorporation or bylaws of Buyer; (ii) Violate any provision of, or require any filing, authorization or approval un er, any legal requirement applicable to or bin ing upon Buyer; (iii) Conflict with, result in a breach of, constitute a efault un er (without regar to requirements of notice or the lapse of time or both) accelerate or permit the acceleration of the performance require by; or require any consent, authorization or approval un er, (i) any mortgage, in enture, loan, cre it agreement or other agreement or instrument evi encing in ebte ness for borrowe money to which Buyer is a party or by which Buyer is boun or to which any of its properties is subject or (ii) any lease, license, contract or other agreement or instrument to which Buyer is a party or by which it is boun or to which any of its properties is subject; or (iv ) Result in the creation or imposition of any lien, charge or other encumbrance upon the assets of Buyer. ( ) There is no action, suit, procee ing or governmental investigation or inquiry pen ing, or to the knowle ge of Buyer, threatene against Buyer or its subsi iaries or any of its properties that might elay, prevent or hin er the consummation of the transactions contemplate hereby. ARTICLE IV COVENANTS 4.01 - Covenants of Sellers. Sellers agree with Buyer that: (a) Prior to closing, Sellers will continue to make available to Buyer for examination at Wilbanks Exploration, Inc. '92s ( Wilbanks ) offices in enver, Colora o, title an other information relating to the Properties insofar as the same are in Wilbanks '92 possession an will cooperate with Buyer in Buyer '92s efforts to obtain, at Buyer's expense, such a itional information relating to the Properties as Buyer may reasonably esire. Sellers shall permit Buyer, at Buyer '92s expense, to inspect an photocopy such information an recor s at any reasonable time but only to the extent, in each case, that Sellers may o so without violating any obligation of confi ence or contractual commitment to a thir party. Sellers shall not be obligate to furnish any up ate abstracts, title opinions or a itional information, but shall cooperate with Buyer in Buyer's efforts to obtain, at Buyer '92s expense, such a itional title information as Buyer may reasonably eem pru ent. (b) After the Effective Time an prior to Closing, Sellers have cause an will continue to cause the Properties to be pro uce , operate an maintaine in a goo an workmanlike manner consistent with prior practices, will not aban on any of the Properties, will maintain insurance now in force with respect to the Properties, will pay or cause to be pai all costs an expenses in connection therewith, will keep the Sellers '92 Leases in full force an effect, an will perform an comply with all the covenants an con itions containe in the Sellers '92 Leases an all agreements relating to the Properties; provi e , however, in the absence of Buyer's written consent, Sellers after the Effective Time an prior to the Closing shall not con uct or authorize any operation on the Sellers '92 Leases requiring Authority for Expen iture approval by working interest owners un er applicable operating agreements, or an expen iture of $15,000.00 or more for the entire 100% of any single project (except emergency operations where Sellers shall give verbal notice of such emergency followe by written confirmation within twenty-four (24) hours thereafter). (c) Without the prior written consent of Buyer, Sellers shall not enter into any new agreements or commitments with respect to the Properties except as to the lawsuit isclose on Exhibit , will not mo ify, terminate or settle any ispute arising out of any of the agreements relating to the Properties, inclu ing, without limitation, the Basic ocuments, an will not encumber, sell, transfer, assign, convey, farmout or otherwise ispose of any of the Properties other than personal property which is replace by equivalent property or consume in the operation of the Properties. Sellers shall imme iately make requests of such thir parties in compliance with applicable agreements, that any require consents be given or waive an that any preferential rights be waive , provi e , however, nothing containe in this Section 4.01 shall require Sellers to pay money or un ertake any a itional legal obligation. (e) Sellers will permit Buyer '92s authorize representatives to consult with Sellers an their agents an employees uring reasonable business hours an to con uct, at Buyer's sole risk an expense, on-site inspections, tests an inventories of the Properties an inspect an examine all well logs an geological an geophysical ata relating to such properties. (f) Sellers will use their best efforts to obtain the satisfaction of the con itions to Closing set forth in Section.6.01 hereof. (g) Sellers shall not solicit from any thir party any proposals or offers or enter into any negotiations relating to the isposition of any of the Properties. 4.02 - Covenants of Buyer. Buyer covenants an agrees with Sellers as follows: (a) Buyer will use its best efforts to obtain the satisfaction of the con itions to Closing set forth in Section 6.02 hereof. (b) In the event that this Agreement is terminate or, if not terminate , until the Closing, the confi entiality of any ata or information receive by Buyer regar ing the business an assets of Sellers shall be maintaine by Buyer an is representatives in accor ance with the agreements execute by Buyer. ARTICLE V TITLE MATTERS, DEFECTIVE INTERESTS ENVIRONMENTAL ISSUES 5.01 - Defensible Title (a) As use herein, the term efensible Title shall mean, as to the Properties an each of them, such title which (i) is free an clear (except for Permitte Encumbrances) of mortgages, liens, security interests, ple ges, charges, encumbrances, claims, limitations, irregularities, bur ens, or efects, an (A) is otherwise only subject to contractually bin ing arrangements which are conventional an which are customarily experience in the oil an gas in ustry an (B) is not subject to any matters which will result in a breach of any warranty ma e by Sellers hereun er, (ii) entitles Sellers to receive not less than the Net Revenue Interests set forth in Exhibit hereto of all oil, gas an associate liqui an gaseous hy rocarbons pro uce , save an markete from the Properties after e ucting all royalty, overri ing royalty an other bur ens (an such interest will not change in the future except as isclose on Exhibit A; an (iii) obligates Sellers to bear costs an expenses relating to the maintenance, evelopment, an operation of the Properties in an amount not greater than the Working Interests set forth in Exhibit hereto an such interest will not change in the future except as isclose on Exhibit A, unless there is a correspon ing an proportionately equal increase in the Net Revenue Interest. (b) The term Permitte Encumbrances as use herein shall mean: (i) Lessors '92 royalties, overri ing royalties; an other bur ens, reversionary interests an similar bur ens if the net cumulative effect of such bur ens oes not operate to re uce the Net Revenue Interests of any of the Properties to less than the Net Revenue Interest set forth in Exhibit A; (ii) Preferential rights to purchase an require thir party consents to assignments an similar agreements with respect to which prior to Closing (A) waivers or consent are obtaine from the appropriate parties, (B) the appropriate time perio for asserting such rights has expire without an exercise of such rights, an (C) with respect to consent, such consent is not necessary to the vali ity of an assignment to Buyer an nee not be obtaine prior to an assignment (the a equacy of such consent shall be etermine by Buyer in its reasonable ju gment); (iii) Liens for taxes or assessments not yet ue or not yet elinquent or; if elinquent, that are being conteste in goo faith in the normal course of business; (iv) All rights to consent by, require notices to, filings with, or other actions by governmental entities in connection with the sale or conveyance of oil an gas leases or interests therein if the same are customarily obtaine subsequent to such sale or conveyance; (v) The terms an con itions of the Leases; (vi) Rights of reassignment in the event of intentional release or surren er of any of the Properties; (vii) Easements, rights-of-way, servitu es, permits, surface leases an other rights in respect of surface operations, pipelines, grazing, or the like; an easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways an other easements, an rights-of-way, on, over or in respect of any of the Properties; (viii) Rights reserve to or veste in any municipality or governmental, statutory or public authority to control or regulate any of the Properties in any manner, an all applicable laws, rules an or ers of any governmental authority; (ix) Such Title efects ( efine below) or other efects as Buyer has waive , an (x) Liens release at Closing as shown on Exhibit (c) The term Title efects as use herein means any encumbrances, encroachments, irregularities, efects or objection to the Properties (expressly exclu ing Permitte Encumbrances), that alone or in combination ren er Sellers '92 title to the Properties less than efensible Title. 5.02 - efective Interests. (a) " efective Interests shall mean: (1) That portion of the Properties affecte by a Title efect. (2) That portion of the Properties materially an a versely affecte by Sellers '92 noncompliance with the material laws, rules, regulations, or inances or or ers of any governmental agency or authority having juris iction over any portion of the Properties. (3) That portion of the Properties which on-site inspection reveals requires removal of use equipment or property, clean-up of spills or umps, plugging of aban one wells, repair of broken, efective or inoperable equipment or of equipment which is incapable of performing its inten e function, or other similar matters. (4) That portion of the Properties with respect to which any preferential right to purchase is exercise or for which consent is enie unless Buyer elects to receive the consi eration receive from the exercise of such preferential right to purchase. (5) That portion of the Properties affecte by any suit, action or other procee ing before any court or government agency that woul result in substantial loss or impairment of Sellers '92 title to any material portion of the Properties, or a material portion of the value thereof. (6) That portion of the Properties estroye by fire or other casualty, or with respect to which there is a taking or threatene taking in con emnation or un er right of eminent omain. (b) Buyer shall give S ellers notice of efective Interests not later than fifteen (15) ays prior to the Closing ate. Such notice shall be in writing an shall inclu e (i) a escription of the efective Interest, (ii) the reason Buyer believes such Properties to be a efective Interest, an (iii) the propose allocate value of the efective Interests. Buyer shall be eeme to have waive all efective Interests of which Sellers have not been given such notice; provi e , however, that such waiver shall not apply with respect to any efective Interest if Buyer coul not reasonably have known of it before the ate such notice is ue. (c) Upon being notifie by Buyer pursuant in Section 5.02(b) of any asserte efective Interest the Sellers shall give written counter-notice to Buyer within ten (10) ays that they (i) inten to correct the asserte efective Interest, or (ii) they o not inten to correct the efective Interest, or (iii) they isagree that the asserte efective Interest exists. If Sellers gives counter-notice of intent to correct such asserte efective Interest, they shall have a perio of thirty (30) ays from the receipt of the Buyer '92s notice (the Cure Perio ) to correct such asserte efective Interest at their own expense, an the Closing ate shall be exten e until the thir ay after the earliest to occur of the following: (A) the efective Interest is correcte , (B) the Sellers notify Buyer they cannot correct the efective Interests, an (C) the expiration of the Cure Perio . The failure of Sellers to eliver written counter-notice shall be eeme to be an a mission of the existence of such efective Interest an a waiver of Sellers '92 right to correct such efective Interest (an an agreement that the amount by which the agree allocate value of the efective Interest to which the efective Interest relates is the amount state in Buyer '92s notice pursuant to clause (iii) of Section 5.02(b)). (i) efective Interests shall be exclu e from the Properties to be purchase by Buyer hereun er, an the Purchase Price shall be re uce in accor ance with Section 2.02 hereof by an amount equal to the agree allocate value thereof unless (i) prior to expiration of the Cure Perio , the basis for treating such Properties as efective Interests has been remove , (ii) Buyer agrees to waive the relevant efective Interest an purchase the efective Interest notwithstan ing the efect, or (iii) Buyer an Sellers agree (or have been eeme to have agree ) to an amount by which the agree allocate value of the efective Interests has been re uce an the Purchase Price is re uce by such amount in accor ance with Section 2.02 hereof. (e) In etermining which portions of the Properties are efective Interests, it is the intent of the parties to inclu e, when possible, only that portion of the Properties affecte by the efect. If the agree allocate value of efective Interests cannot be etermine irectly from Exhibit B because the efective Interests constitute a property inclu e within, but not totally comprising, the Properties to which the agree allocate value relates, Buyer an Sellers shall attempt, where feasible, to proportionately re uce the agree allocate value. 5.03 - I entification of Upwar A justment. If prior to Closing, Sellers notify Buyer that there is any inaccuracy in Exhibit "A" whereby Sellers own more than represente thereon, Buyer an Sellers shall en eavor to agree upon an amount by which the Purchase Price shall be increase to reflect such increase value in accor ance with Section 2.02 (the Upwar A justment ). If Buyer an Sellers fail to agree to the Upwar A justment, Sellers may elect to have that portion of the Properties subject to such increase in value exclu e from the Properties to be purchase by Buyer. 5.04- Environmental Information an Inspections . b Promptly upon the execution of this Agreement, Sellers shall make available to the Buyer such information that is in their possession or control, or to which it has access, relating to the environmental con ition of the Properties, sai information to inclu e, but not to be limite to, any an all information pertaining to cru e oil an pro uce water that may have been spille or ispose of on the Properties an the locations thereof; pits an pit closures locate on the Properties; burial sites locate on the Properties; lan farming sites; lan sprea ing sites; un ergroun injection sites; an soli waste isposal sites. Buyer also shall have the right, at its sole risk an expense, to con uct or have con ucte a Phase I Environmental Au it of such of the Properties as it esignates. To enable Buyer to con uct the Phase I Environmental Au it, Sellers will provi e Buyer (an its representatives) with reasonable access to the Properties; to Sellers' books, recor s, an files relating to the Properties; an to current employees of Sellers. In con ucting the Phase I Environmental Au it, Buyer shall treat, an will cause all of its representative, agents, consultants, contractors, or subcontractors to treat, all information obtaine by Buyer pursuant to the au it as strictly confi ential except to the extent such information is otherwise available to the general public an will not isclose the results without the prior written consent of Sellers, except to the extent that such results are legally require to be isclose by Buyer in which case, Buyer shall provi e Sellers with reasonable notice prior to making such isclosure. Sellers shall have the right to have a representative present uring any inspection of the Properties an uring any interviews of Sellers' employees, con ucte as a part of the Phase I Environmental Au it. Buyer shall coor inate these activities with Sellers so as to allow Sellers to have a representative present if they so esire. 5.05 - Notice of Environmental Con ition . Not later than fifteen (15) ays prior to Closing, Buyer shall give Sellers written notice of any con ition (referre to herein as an "Environmental Con ition") in the air, lan , soil, surface, subsurface strata, surface water, groun water, or se iments in any one or more of the Properties, which causes that Property or Properties to be subject to reme iation un er, or not in compliance with any law relating to pollution, the protection of the environment, or the release or isposal of waste materials. Such notice shall be in writing an shall inclu e (i) a escription of the portion of the Properties (if less than all) affecte by the Environmental Con ition, (ii) the reason Buyer believes such Environmental Con ition to exist, an (iii) the action that is require to cure or remove the Environmental Con ition. Buyer shall be eeme to have waive all Environmental Con itions of which Seller has not been given such notice. 5.06 - Environmental Reme iation . b Upon being notifie pursuant to Section 5.05 of any asserte Environmental Con ition, Sellers shall have thirty (30) ays within which to provi e Buyer with ocumentation that the Environmental Con ition has been cure or remove . If Seller is unable or unwilling to cure or remove the Environmental Con ition within such perio , then Buyer shall have the option of (i) eliminating such property from this Agreement an procee ing to Closing on the remaining Properties, with the Purchase Price to be a juste ownwar by the agree allocate value of the affecte property; or (ii) waiving the Environmental Con ition with respect to the affecte property an procee ing to Closing on all Properties, with the full payment of the Purchase Price. The Closing ate as agree upon herein shall be exten e for such perio of time as may be necessary to provi e Seller the perio of time provi e for in this paragraph within which to cure or remove Environmental Con itions. ARTICLE VI CONDITIONS TO CLOSING 6.01 - Con itions to the Obligations of Buyer. The obligations of Buyer to procee with the Closing contemplate hereby are subject to the satisfaction on or prior to the Closing of all of the following con itions, any one or more of which may be waive , in whole or in part, in writing by Buyer. (a) The representations an warranties ma e herein by Sellers shall be correct at an as of the Closing as though such representations an warranties were ma e at an as of the Closing, an the factual matters containe in any warranty ma e by Sellers to Sellers '92 knowle ge, or similar language, shall be true an correct at an as of the Closing without regar to Sellers '92 knowle ge of same, an Sellers shall have complie with all the covenants hereof require by this Agreement to be performe by them on or prior to the Closing. (b) The Closing hereun er shall not violate any or er or ecree of any court, agency, commission, tribunal, or other governmental authority having competent juris iction over the transactions contemplate by this Agreement (c) All necessary consents, permission, novations an approvals by thir parties (inclu ing that of Sellers '92 len ing institutions) in connection with the sale an transfer of the Properties shall have been receive prior to Closing, except those governmental consents customarily generate an receive in the or inary course of business at a post-closing ate. ( ) The existence of efective Interests which have not been correcte or properties exclu e pursuant to Section 5.06 will not re uce the Purchase Price by more than 10%. 6.02 - Con itions to the Obligations of Sellers. The obligations of Sellers to procee with the Closing contemplate hereby are subject to the satisfaction at or prior to Closing of all of the following con itions, any one or more of which may be waive , in whole or in part, in writing by Sellers. (a) The representations an warranties ma e herein by Buyer shall be correct at an as of the Closing as though such representations an warranties were ma e at an as of the Closing, an Buyer shall have complie with all the covenants hereof require by this Agreement to be performe by them at or prior to the Closing. (b) The Closing hereun er shall not violate any or er or ecree of any court, agency, commission, tribunal or other governmental authority having competent juris iction over the transactions contemplate by this Agreement. (c) The existence of efective Interests which have not been correcte or properties exclu e pursuant to Section 5.06 will not re uce the Purchase Price by more than 10%. ARTICLE VII CLOSING 7.01 - Closing Unless the parties hereto agree otherwise an subject to the con itions state in this Agreement, the consummation of the transactions contemplate hereby (herein calle the Closing ) shall be hel at the offices of Wilbanks, in enver, Colora o, on June 15, 1998. The ate on which closing occurs is referre to herein as the Closing ate. 7.02 - Closing Obligations . At the Closing, the following events shall occur, each being a con ition prece ent to the others an each being eeme to have occurre simultaneously with the others: (a) Sellers shall assign, transfer, an convey the Properties to Buyer by an assignment with a special warranty substantially in the form of Exhibit E attache hereto. Sellers shall also execute such a itional ee s, conveyances an bills of sale as may be necessary to convey the Properties to Buyer provi e that any such a itional ee s, conveyances or bills of sale shall not warrant the con ition of personal property but shall warrant title by, through an un er Sellers. In a ition to the foregoing, the instruments execute pursuant to this Section 7.02(a) shall be execute in multiple originals an counterparts sufficient to facilitate recor ing. (b) Buyer shall pay the Purchase Price to Sellers by wire transfer in imme iately available fun s. Buyer is authorize to eliver an un ivi e 30% of the Purchase Price to Wilbanks for allocation to the Wilbanks Group an an un ivi e 70% of the Purchase Price to Burnett Corporation for allocation to the Burnett Group. (c) Sellers shall eliver to Buyer exclusive possession of the Properties (d) Each of the Sellers shall provi e a certificate in form an substance satisfactory to Buyer '92s counsel certifying as to the matters set forth in Sections 6.01(a), (b), an (c) at an as of the Closing. (e) Buyer shall provi e a certificate in form an substance satisfactory to Sellers '92 counsel certifying as to the matters set forth in Sections 6.02(a) an (b) at an as of the Closing. (f) Wilbanks, if it has not previously one so, shall resign as operator of any of the Properties which it operates. Sellers an Buyer shall execute (i) Railroa Commission forms P-4 an other appropriate forms to provi e for the change of operator, if applicable, an (ii) transfer or ers or letters in lieu thereof irecting all purchasers of pro uction to make payment to Buyer of procee s attributable to pro uction from the Properties assigne to Buyer. (g) Sellers shall eliver to Buyer all sums hel in suspense by Sellers for any reason together with a report in sufficient etail to the best of Sellers '92 current knowle ge to allow Buyer to etermine the reasons such amounts are hel in suspense, an the Properties with respect to which such amounts are hel in suspense. (h) Buyer an Sellers shall execute such other ocuments as may be necessary to effectuate the intent of this transaction. ARTICLE VIII OBLIGATIONS AFTER CLOSING 8.01 - Post-Closing Adjustments. As soon as practicable after the Closing, but not later than 90 ays after the Closing, Sellers an Buyer shall con uct a post-closing a justment to account for a justments in Article II. 8.02 - Sales Taxes and Recording Fee. Buyer shall pay all sales taxes occasione by the sale of the Properties an all ocumentary, filing an recor ing fees require in connection with the filing an recor ing of any assignments. 8.03 - Further Assurances . After Closing, Sellers an Buyer shall execute, acknowle ge an eliver or cause to be execute , acknowle ge an elivere such instruments an take such other action inclu ing payment of monies as may be necessary or a visable to carry out their obligations un er this Agreement an un er any ocument, certificate or other instrument elivere pursuant hereto or require ly law. 8.04 - Buyer Post-Closing Obligation . If any time subsequent to the Closing, Buyer comes into possession of money or property belonging to the Sellers such money or other property shall be promptly elivere to the Sellers. 8.05 - Sellers Post-Closing Obligations If at any time subsequent to the Closing, Sellers comes into possession of money or property belonging to the Buyer such money or other property shall be promptly elivere to the Buyer. 8.06 - Files an Records Within ten (10) ays after Closing, Sellers shall eliver the Recor s to Buyer at Buyer '92s expense. 8.07 - Survival. The representations, warranties, covenants, agreements an in emnities inclu e or provi e herein shall survive the Closing for a two-year perio from the Closing ate. ARTICLE IX TERMINATION OF AGREEMENT 9.01 - Termination . This Agreement an the transactions contemplate hereby may be terminate in the following instances: (a) By Buyer if the con itions set forth in Section 6.01 are not satisfie in all material respects or waive prior to the Closing ate; (b) By Sellers if the con itions set forth in Section 6.02 are not satisfie in all material respects or waive prior to the Closing ate; or (c) At any time by the mutual written agreement of Buyer an Sellers. 9.02 - Liabilities Upon Termination If Closing oes not occur ue to Sellers '92 violation of the terms of this Agreement, then Buyer may seek such legal or equitable reme ies as Buyer may esire, inclu ing, without limitation, amages for the breach or failure of any representation, warranty, covenant or agreement containe herein an the right to enforce specific performance of this Agreement. If Closing oes not occur ue to Buyer's violation of the terms of this Agreement, Sellers may seek such legal or equitable reme ies as Sellers may esire, inclu ing, without limitation, amages for the breach or failure of any representations, warranty, covenant or agreement containe herein an the right to enforce specific performance of this Agreement. ARTICLE X EARNEST MONEY Upon the execution of this Agreement, Buyer has eposite into escrow with Sprouse, Smith & Rowley, P.C.(the Escrow Agent ), the sum of Two Hun re Seventy Four Thousan Two Hun re an Ninety an No/100 ollars ($274,290.00)as earnest money (the Earnest Money ). At Closing, the Earnest Money, less any costs incurre , shall be applie against the Purchase Price, an all interest shall be elivere to Sellers but shall not re uce the Purchase Price. If this transaction fails to close ue to any breach by Buyer of the terms, con itions, representations, an warranties foun in this Agreement or ue to Buyer '92s failure to fulfill the con itions of Section 6.02, then as Sellers '92 exclusive reme y, the Earnest Money an all interest earne thereon shall be elivere to Sellers as liqui ate amages. If this transaction fails to close ue to any breach by Sellers of the terms, con itions, representations an warranties foun in this Agreement or ue to Sellers '92 failure to fulfill the con itions of Section 6.01, then as Buyer '92s exclusive reme y, either (i) the Earnest Money an all interest earne thereon shall be elivere to Buyer or (ii) Buyer may enforce specific performance of this Agreement. If this transaction fails to close for any other reason whatsoever, then the Earnest Money an all interest earne thereon shall be elivere to Buyer. Sellers an Buyer agree to give the Escrow Agent joint instructions for the elivery of the Earnest Money, together with any interest earne thereon, in accor ance with the terms of this Agreement. ARTICLE XI INDEMNIFICATION 11.01 Buyer's Indemnification b . BUYER SHALL DEFEND, INDEMNIFY, AN SAVE AN HOL HARMLESS SELLER S AGAINST ALL CLAIMS, COSTS, EXPENSES, AN LIABILITIES (INCLU ING COSTS OF EFENSE, EXPERT FEES, AN OTHER COSTS) WITH RESPECT TO THE PROPERTIES WHICH ACCRUE OR RELATE TO TIMES AFTER THE EFFECTIVE ATE (BUT NOT INCLU ING THOSE INCURRE BY SELLERS WITH RESPECT TO THE SALE OF THE PROPERTIES TO BUYER b OR THE NEGOTIATIONS LEA ING TO SUCH SALE OR THOSE THAT RESULT FROM OR ARE ATTRIBUTABLE TO THE NEGLIGENCE OR WILLFUL MISCON UCT OF SELLERS, THEIR EMPLOYEES OR AGENTS WITH RESPECT TO THE OPERATION AN MAINTENANCE OF THE PROPERTIES, AN NOT INCLU ING THOSE THAT RESULT FROM OR ARE ATTRIBUTABLE TO ANY REPRESENTATION OF SELLERS CONTAINE IN THIS AGREEMENT BEING UNTRUE OR A BREACH OF ANY WARRANTY OR COVENANT OF SELLERS CONTAINE IN THIS AGREEMENT). Sellers' Indemnification b . SELLERS, SEVERALLY BUT NOT JOINTLY, SHALL EFEN , IN EMNIFY, AN SAVE AN HOL HARMLESS BUYER AGAINST ALL CLAIMS, COSTS, EXPENSES, LIABILITIES (INCLU ING COSTS OF EFENSE, EXPERT FEES, AN OTHER COSTS) b WITH RESPECT TO THE PROPERTIES WHICH ACCRUE OR RELATE TO TIMES PRIOR TO THE EFFECTIVE ATE (BUT NOT INCLU ING THOSE INCURRE BY BUYER WITH RESPECT TO THE PURCHASE OF THE PROPERTIES FROM SELLERS OR THE NEGOTIATIONS LEA ING TO SUCH PURCHASE, AN NOT INCLU ING THOSE THAT RESULT FROM OR ARE ATTRIBUTABLE TO ANY REPRESENTATION OF BUYER CONTAINE IN THIS AGREEMENT BEING UNTRUE OR A BREACH OF ANY WARRANTY OR COVENANT OF BUYER CONTAINE IN THIS AGREEMENT). 11.03 - Time Limitation. Any claim against any Sellers pursuant to the in emnification provisions of Section 11.02 must be brought within two (2) years following the Closing ate. Sellers '92 obligations un er the in emnity provisions of Section 11.2 shall expire an be of no further force an effect from an after two (2) years from the Closing ate, save an except for any claims brought by Buyer prior to such ate. b 11.04 - Notice. Each in emnifie party hereun er agrees that upon its iscovery of facts giving rise to a claim for in emnity un er the provisions of this Agreement, inclu ing receipt by it of notice of any eman , assertion, claim, action or procee ing, ju icial or otherwise, by any thir party (such thir party actions being collectively referre to hereinafter as the Claim ), with respect to any matter as to which it is entitle to in emnify un er the provisions of this Agreement, it will give prompt notice thereof in writing to the in emnifying party together with a statement of such information respecting any of the foregoing as it shall then have an a Claim for in emnity. The in emnifying party shall not be obligate to in emnify the in emnifie party with respect to any Claim with respect to which the in emnifie party faile to notify the in emnifying party thereof in accor ance with the provisions of this Agreement to the extent to which the lack of such notice can be reasonably shown to have increase the amount of the Claim. 11.05 - Defense of Claim. The in emnifying party is entitle at its cost an expense to contest an efen by all appropriate legal procee ings any Claim with respect to which it is calle upon to in emnify the in emnifie party un er the provisions of this Agreement; provi e , however, that notice of the intention so to contest shall be elivere by the in emnifying party to the in emnifie party within a reasonable time in light of the circumstances then an there existing. Any such contest may be con ucte in the name an on behalf of the in emnifying party or the in emnifie party as may be appropriate. Such contest shall be con ucte by attorneys employe by the in emnifying party, but the in emnifie party shall have the right to participate in such procee ings an to be represente by attorneys of its own choosing at its cost an expense. If the in emnifie party joins in any such contest, the in emnifying party shall have full authority to etermine all action to be taken with respect thereto. If after such opportunity, the in emnifying party oes not elect to contest any such Claim the in emnifying party shall be boun by the result obtaine with respect thereto by the in emnifie party. At any time after the commencement of efense of any Claim, the in emnifying party may request the in emnifie party to agree in writing to the aban onment of such contest or to the payment or compromise by the in emnifying party of the asserte Claim, whereupon such action shall be taken unless the in emnifie party so etermines that the contest shoul be continue , an so notifies the in emnifying party in writing within fifteen (15) ays of such request from the in emnifying party. In the event that the in emnifie party etermines that the contest shoul be continue , the in emnifying party shall be liable hereun er only to the extent of the lesser of (i) the amount which the other party to the conteste Claim ha agree to accept in payment or compromise as of the time the in emnifying party ma e its request therefor to the in emnifie party or (ii) such amount for which the in emnifying party may be liable with respect to such Claim by reason of the provisions hereof. 11.06 - Cooperation. If requeste by the in emnifying party, the in emnifie party agrees to cooperate with the in emnifying party an its counsel in contesting any Claim which the in emnifying party elects to contest or, if appropriate, in making any counterclaim against the person asserting the Claim, or any cross-complaint against any person, but the in emnifying party will reimburse the in emnifie party for any expenses incurre by it in so cooperating. The in emnifie party agrees to affor the in emnifying party an its counsel the opportunity to be present at, an to participate in, conferences with all persons, inclu ing governmental authorities, asserting any Claim against the in emnifie party or conferences with representatives of or counsel for such persons. 11.07 - Payment . The in emnifying party shall pay to the in emnifie party in cash the amount to which the in emnifie party may become entitle by reason of the provisions of this Agreement, such payment to be ma e within five (5) ays after any such amount is finally etermine either by mutual agreement of the parties hereto or pursuant to the final unappealable ju gment of a court of competent juris iction. Any appropriate costs of efense, expert fees, an other costs shall be pai on a monthly basis. 11.08 - Notices. Any notice, request, eman , instruction or other ocument to be given hereun er by either party to the other shall be in writing an elivere as provi e herein. ARTICLE XII GENERAL 12.01 - Claims. Buyer shall be entitle to the rights an benefits of all claims Sellers have against thir parties with respect to the Properties arising out of events occurring prior an subsequent to the Effective Time inclu ing, without limitation, all rights an benefits un er the Gas Contracts. Sellers shall cooperate with Buyer in the prosecution of such claims, but Buyer shall bear all expenses relate to the prosecution of such claims. 12.02 - Expenses. All fees, costs an expenses incurre by Buyer or Sellers in negotiating this Agreement or in consummating the transactions contemplate by this Agreement shall be pai by the party incurring the same inclu ing, without limitation, legal an accounting fees, costs an expenses. 12.03 - Notices. All communications require or permitte un er this Agreement shall be in writing, an any communications hereun er shall be eeme to have been uly ma e if elivere by (i) han , (ii) overnight elivery service, (iii) telecopy, or (iv) three ays after being place in first class certifie mail, postage prepai , with return receipt requeste to the following a resses: All notices to Sellers shall be delivered to: Wilbanks Exploration, Inc. 1600 Stout Street, Suite 110 Denver, Colorado 80121 Attn: Jim Wilbanks With a copy to: Jeffrey G. Shrader, Esq. Sprouse, Smith & Rowley, P.C. P.O. Box 15008 Amarillo, TX 79105-5008 All notices to Buyer shall be delivered to: Odessa Exploration, Incorporated 191 Professional Center 6010 Highway 191, Suite 210 Odessa, Texas 79762 Attn: . Kirk Edwards With a copy to: Jeffrey Hewett, Esq. Lynch, Chappell & Alsup 300 North Marienfeld Suite 700, The Summit Midland, TX 79701-4345 12.04 - Amendments. This Agreement may not be amen e nor any rights hereun er waive except by an instrument in writing signe by the party to, be charge with such amen ment or waiver an elivere by such party to the party claiming the benefit of such amen ment or waiver. 12.05 - Hearings. The hearings of the articles an sections of this Agreement are for gui ance an convenience of reference only an shall not limit or otherwise affect any of the terms or provisions of this Agreement. 12.06 - Counterparts. This Agreement may be execute by Buyer an Sellers in any number of counterparts, each of which shall be eeme an original instrument, but all of which together shall constitute but one an the same instrument. 12.07 - References. References ma e in this Agreement, inclu ing use of a pronoun, shall be eeme to inclu e where applicable, masculine, feminine, singular or plural, in ivi uals, partnerships or corporations. As use in his Agreement, person shall mean any natural person, corporation, partnership, trust, estate or other entity. ul 12.08 - Governing Law . This Agreement an the transactions contemplate hereby shall be construe in accor ance with, an governe by, the laws of the State of Texas. 12.09 - Entire Agreement. This Agreement (inclu ing the Exhibits hereto) constitutes the enire un erstan ing among the parties with respect to the subject matter hereof, superse ing negotiations, prior iscussions an prior agreements an un erstan ings relating to such subject matter. 12.10 - Parties in Interest . This Agreement shall be bin ing upon an shall inure to the benefit of the parties hereto an , except as otherwise prohibite , their respective successors an assigns; an except as otherwise state herein, nothing containe in this Agreement, or implie herefrom, inten e to confer upon any other person or entity any benefits, rights or reme ies. 12.11 - Assignments. Except as otherwise provi e herein neither Buyer nor Sellers may assign their respective rights without the consent of the other. 12.12 - Public Announcements. The parties hereto agree that prior to making any public announcement or statement with respect to the transactions contemplate by this Agreement, the party esiring to make such public announcement or statement shall consult with the other party hereto an exercise their best efforts to agree upon the text of a joint public announcement or statement to be ma e. ul 12.13 - Notices After Closing. Buyer an Sellers hereby agree that each party shall notify the other of its receipt, after the Closing ate, of any instrument, notification or other ocument affecting the Properties while owe by such other party. 12.14 - Severability . If a court of competent juris iction etermines that any clause or provision of this agreement is voi , illegal or unenforceable, the other clauses an provisions of the Agreement shall remain in full force an effect an the clauses an provisions which are etermine to be voi , illegal or unenforceable shall be limite so that they shall remain in effect to the extent permissible by law. 12.15 - Sellers' Section 1031. Notwithstan ing any other provision of this Agreement to the contrary, Sellers have a vise Buyer that Sellers may elect to have the transaction contemplate hereby structure so as to comply with the requirements of Section 1031 of the Unite States Internal Revenue Co e entitling Sellers to obtain like-kin income tax treatment with respect to the sale of the Property. Buyer agrees to cooperate with Sellers if Sellers make such an election provi e that in no event shall Buyer incur any a itional liability or expense of any kin whatsoever as a consequence of Sellers electing to treat this transaction as part of a like-kin exchange an Buyer '92s obligations are complete within sixty (60) ays following the Closing ate. A itionally, Buyer shall have no responsibility or liability whatsoever for Sellers actually obtaining any particular tax treatment as a result of the transaction contemplate by this Agreement whether or not Seller seeks to obtain like-kin exchange treatment. Instead of requesting Buyer's participation in an exchange, Sellers shall have the right to use a qualifie interme iary party to assist Sellers in effecting the exchange, an Sellers may assign Sellers's rights un er this Agreement to that interme iary to effect the exchange. However, that assignment shall not relieve Sellers of Sellers's obligation to cause the property to be sol pursuant to this Contract to be transferre to Buyer. IN WITNESS WHEREOF the parties have execute or cause the Agreement to be executed as of the ay an year first above written. SELLERS: BURNETT CORPORATION, INC. By:_________________________________ Ann C. Fatheree, President __________________________________ B.O. Cornelius __________________________________ Ann C. Fatheree __________________________________ James R. Corbin __________________________________ Mary Jo Mitton __________________________________ Birke B. Marsh __________________________________ H. Brianna Cobb __________________________________ Birke B. Marsh, Trustee of the Corbin Trust 1976 __________________________________ Jamie Kim Corbin __________________________________ Josh Alan Corbin __________________________________ Jason J. Corbin WILBANKS EXPLORATION, INC. By:__________________________________ James O. Wilbanks, President __________________________________ Jeffrey G. Shrader BUYER: ODESSA EXPLORATION, INCORPORATED By:__________________________________ Kirk Edwards, President ASSIGNMENT AND BILL OF SALE STATE OF _____________ KNOW ALL MEN BY THESE PRESENTS: COUNTY OF ____________ EXECUTED this ______ Day of _______________, 1998, but EFFECTIVE as of the Effective Date. WITNESSES: ASSIGNOR: ______________________________ ______________________________ WITNESSES: ASSIGNEE: _____________________________ STATE OF TEXAS COUNTY OF ______________ This instrument was acknowledged before me by __________________________, this ______ day of May, 1998. _______________________________ Notary Public in and for State of Texas STATE OF TEXAS COUNTY OF ______________ EX-10.70 4 LAKOTA DRILLING PURCHASE AGREEMENT Asset Purchase Agreement among Key Energy Drilling, Inc., Lakota Drilling Company and Reed Gilmore, Priscilla Gilmore, M. Reed Gilmore, Jr., Valerie G. Griess, Joan G. Lindquist, James C. Gilmore, L. E. Grimes and Larry V. Bohannon May 22, 1998 TABLE OF CONTENTS ARTICLE 1Purchase and Sale of Assets 1 1.1 Purchase and Sale of the Assets 1 1.2 Excluded Assets 2 1.3 Consideration for Assets 2 1.4 Liabilities 3 1.5 Closing 3 1.6 Closing Deliveries 3 1.6.1 Opinion of Buyer's Counsel 3 1.6.2 Opinion of Seller's Counsel. 4 ARTICLE IIRepresentations and Warranties 4 2.1 Representations and Warranties of the Seller and the Shareholders 4 2.1.1 Organization and Good Standing 4 2.1.2 Agreement Authorized and Effect on Other Obligations. 4 2.1.3 Contracts 5 2.1.4 Title to Assets 5 2.1.5 Licenses and Permits 5 2.1.6 Intellectual Property 6 2.1.7 Financial Statements 6 2.1.8 Absence of Certain Changes and Events 6 (a) Financial Change 6 (b) Property Damage 6 (c) Waiver 6 (d) Change in Assets 6 (e) Labor Disputes 7 (f) Other Changes 7 2.1.9 Necessary Consents 7 2.1.10 Environmental Matters 7 2.1.11 No ERISA Plans or Labor Issues 8 2.1.12 Investigations; Litigation 8 2.1.13 Absence of Certain Businesses Practices 8 2.1.14 Solvency 8 2.1.15 Finder's Fee 9 2.1.16 Taxes 9 2.2 Representations and Warranties of Buyer 9 2.2.1 Organization and Good Standing 9 2.2.2 Agreement Authorized and its Effect on Other Obligations 9 2.2.3 Consents and Approvals 9 2.2.4 Finder's Fee 10 ARTICLE IIIAdditional Agreements 10 3.1 Noncompetition. 10 3.2 Hiring Employees 11 3.3 Allocation of Purchase Price 11 3.4 Name Change 11 ARTICLE IVIndemnification 11 4.1 Indemnification by the Seller and the Shareholders 11 4.2 Indemnification by Buyer 12 4.3 Indemnification Procedure 12 ARTICLE VMiscellaneous 13 5.1 Survival of Representations, Warranties and Covenants 13 5.2 Entirety 13 5.3 Counterparts. 13 5.4 Notices and Waivers. 14 5.5 Captions. 14 5.6 Successors and Assigns. 14 5.7 Severability. 14 5.8 Applicable Law. 15 Asset Purchase Agreement This Asset Purchase Agreement (this Agreement) is entered into as of May 22, 1998 among Key Energy Drilling, Inc., a Delaware corporation (the Buyer), Lakota Drilling Company, a Nebraska corporation (the Seller), and Reed Gilmore, Priscilla Gilmore, M.Reed Gilmore, Jr., Valerie G. Griess, Joan G. Lindquist, James C. Gilmore, L. E. Grimes and Larry V. Bohannon (collectively, the Shareholders). RECITATIONS The Seller desires to sell substantially all of its assets, and Buyer desires to acquire such assets. NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties, covenants and agreements, and subject to the terms and conditions herein contained, the parties hereto hereby agree as follows: ARTICLE 1 Purchase and Sale of Assets ARTICLE 1 Purchase and Sale of Assets" 1.1 Purchase and Sale of the Assets Subject to the terms and conditions set forth in this Agreement, the Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer effective as of 11:00 P.M. Texas time on the day preceding the date of execution hereof , all of the assets of the Seller existing on the date hereof (the Closing Date) other than the Excluded Assets (defined below), whether real, personal, tangible or intangible, including, without limitation, the following assets owned by the Seller relating to or used or useful in the operation of the business as conducted by the Seller on and before the date hereof (the Business) (all such assets being sold hereunder are referred to collectively herein as the Assets): all tangible personal property owned by Seller (such as machinery, equipment, leasehold improvements, furniture and fixtures, and vehicles), including, without limitation, that which is more fully described on Schedule 1.1(a) hereto (collectively, the Tangible Personal Property); all of the inventory owned by Seller, including without limitation, that which is more fully described on Schedule 1.1(b) hereto (collectively, the Inventory); all of the Seller's intangible assets (the "Intangibles"), including without limitation, (i) all of the Seller's rights to the names under which it is incorporated or under which they currently do business, (ii) all of the Seller's rights to any patents, patent applications, trademarks and service marks (including registrations and applications therefor), trade names, and copyrights and written know-how, trade secrets, licenses and sublicenses and all other similar proprietary data and the goodwill associated therewith (collectively, the Intellectual Property) used or held in connection with the Business, including without limitation, that which is more fully described on Schedule 1.1(c) hereto (the Seller Intellectual Property), (iii) the Seller's telephone numbers, and (iv) the sales and promotional literature, computer software, customer and supplier lists and all other records of the Seller relating to the Assets or the Business, excluding the corporate minute books, accounting records, files, tax returns and other financial data on whatever media, relating to the Seller or the Shareholders or the Excluded Assets (the Retained Records); those leases, subleases, contracts, contract rights and agreements relating to the Assets or the operation of the Business listed on Schedule 1.1(d) hereto (collectively, the Contracts); all of the permits, authorizations, certificates, approvals, registrations, variances, waivers, exemptions, rights-of-way, franchises, ordinances, orders, licenses and other rights of every kind and character (collectively, the Permits) relating to all or any of the Assets or to the operation of the Business, including, but not limited to, those that are more fully described on Schedule 1.1(e) hereto; the goodwill and going concern value of the Business; and (g) all other or additional privileges, rights, interests, properties and assets of the Seller of every kind and description and wherever located that are used in the Business or intended for use in the Business in connection with, or that are necessary for the continued conduct of, the Business. 1.2 Excluded Assets The Assets shall not include the following (collectively, the Excluded Assets): (i) all of the Seller's accounts receivable and all other rights of the Seller to payment for services rendered by the Seller before Closing, it being understood that all of Seller's customers shall be billed on the Closing Date for services or materials provided through that date and that Buyer will forward any payment on such accounts received by it to Seller within ten (10) business day of receipt; (ii) all cash accounts of the Seller and all petty cash of the Seller kept on hand for use in the Business; (iii) all other receivables and prepaid expenses, including all right, title and interest of the Seller in and to any prepaid expenses, bonds, deposits and other current assets relating to any of the Assets or the Businesses; (iv) the Retained Records; (v) the cash consideration paid or payable by Buyer to Seller pursuant to Section 1.3 hereof; and (vi) the real estate and other assets described in Schedule 1.2 attached hereto. 1.3 Consideration for Assets As consideration for the sale of the Assets to Buyer and for the other covenants and agreements of the Seller and the Shareholders contained herein, Buyer agrees to pay on the Closing Date, the sum of Eleven Million, Nine Hundred Fifty Thousand Dollars ($11,950,000) to Seller by wire transfer of immediately available funds to an account designated by the Seller or by delivery of immediately available funds. In addition, within thirty (30) days following the Closing, Buyer will pay Seller an additional amount equal to the amounts paid by Seller for equipment purchases made by Seller after May 6, 1998, and before the date hereof which expand the capabilities of the Business and which are described on Schedule 1.3 hereto. 1.4 Liabilities Effective on the Closing Date, Buyer shall assume those, and only those, liabilities and obligations of the Seller to perform the Contracts described on Schedule 1.1(d) hereto to the extent that the Contracts have not been performed and are not in default on the date hereof (the Assumed Liabilities). On and after the date hereof, the Seller shall be responsible for any and all liabilities and obligations of the Seller other than the Assumed Liabilities, including, without limitation, (a) any obligations arising from the Seller's employment of those employees of the Seller listed on Schedule 3.2 hereto; (b) any liabilities arising from or relating to Seller's failure to be duly qualified or licensed to do business and in good standing as a foreign corporation in all jurisdictions in which the character of the properties owned or the nature of the business conducted by Seller would make such qualification or licensing necessary; (c) any failure to pay any taxes owed by Seller which are applicable to the period ending with the date hereof; (d) any liabilities arising out of any matters listed on Schedule 2.1.12 hereto; (e) any liability for commission or other fees payable to brokers, attorneys or others; and (f) any other liabilities resulting from Seller's operation of the Assets or conduct of its business before the date hereof (collectively, the Retained Liabilities). 1.5 Closing The closing of the purchase and sale provided for hereunder (the Closing) shall take place on the date hereof , at the offices of Norwest Bank, 500 West Texas, Midland, Texas. 1.6 Closing Deliveries At the Closing, in addition to the conveyances of the Assets to the Buyer in exchange for the Purchase Price, Buyer and Seller will deliver to one another the opinions of counsel described below: 1.6.1 Opinion of Buyer's Counsel The Seller shall have received a favorable opinion, dated as of the Closing Date, from Lynch, Chappell & Alsup, P.C., counsel for Buyer, in form and substance satisfactory to the Seller, to the effect that (i) Buyer has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware and is qualified to do business in the State of Texas; (ii) all corporate proceedings required to be taken by or on the part of the Buyer to authorize the execution of this Agreement and the consummation of the transaction contemplated hereby have been taken; and (iii) this Agreement has been duly executed and delivered by, and is the legal, valid and binding obligation of Buyer and is enforceable against Buyer in accordance with its terms, except as enforceability may be limited by (a) equitable principals of general applicability or (b) bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws affecting the rights of creditors generally. In rendering such opinion, such counsel may rely upon (x) certificates of public officials and of officers or Buyer as to the matters of fact and (y) the opinion or opinions of other counsel, which opinions shall be reasonably satisfactory to the Seller, as to matters other than federal or Texas law. 1.6.2 Opinion of Seller's Counsel The Buyer shall have received a favorable opinion, dated as of the Closing Date, from Hinkle, Cox, Eaton, Coffield & Hensley, L.L.P., counsel to Seller and the Shareholders, in form and substance satisfactory to Buyer, to the effect that (i) Seller has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Nebraska and is qualified to do business in the States of Texas and New Mexico and each other state in which the conduct of its business requires it to be qualified to do business; (ii) all proceedings required to be taken by or on the part of the Seller and the Shareholders to authorize the execution of this Agreement and the consummation of the transaction contemplated hereby have been taken; (iii) the Seller owns all of the Assets free and clear of any Encumbrances; and (iv) this Agreement has been duly executed and delivered by, and is the legal, valid and binding obligation of the Seller and each of the Shareholders and is enforceable against the Seller and each of the Shareholders in accordance with its terms, except as the enforceability may be limited by (a) equitable principles of general applicability or (b) bankruptcy, insolvency, reorganization, fraudulent conveyance or similar laws affecting the rights of creditors generally. In rendering such opinion, such counsel may rely upon (x) certificates of public officials and of officers of the Seller as to the matters of fact and (y) on the opinion or opinions of other counsel, which opinions shall be reasonably satisfactory to Buyer, as to matters other than federal or Texas law. ARTICLE II Representations and Warranties" 2.1 Representations and Warranties of the Seller and the Shareholders The Seller and each of the Shareholders jointly and severally represent and warrant to Buyer as follows: 2.1.1 Organization and Good Standing Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Nebraska, is qualified to do business in the States of Texas and New Mexico and in each other state in which the nature and conduct of its business requires it to be qualified to do business, has full requisite corporate power and authority to carry on its businesses as it is currently conducted, and to own and operate the properties currently owned and operated by it. The Shareholders collectively own all of the issued and outstanding shares of the Seller's capital stock and have the sole right to vote the same. 2.1.2 Agreement Authorized and Effect on Other Obligations. The execution and delivery of this Agreement and all instruments to be executed by Seller and the Shareholders hereunder have been authorized by all necessary corporate, shareholder and other action on the part of the Seller and each of the Shareholders, and this Agreement and all instruments to be executed by the Seller and the Shareholders hereunder are the valid and binding obligations of the Seller and each of the Shareholders enforceable (subject to normal equitable principals) against each of such parties in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement and all instruments to be executed by the Seller and the Shareholders hereunder and the consummation of the transactions contemplated hereby and thereby, will not conflict with or result in a violation or breach of any term or provision of, nor constitute a default under (i) the Articles of Incorporation or Bylaws (or other organizational documents) of the Seller, (ii) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which the Seller or any of the Shareholders are a party or by which the Seller or any of the Shareholders or their respective properties are bound; or (iii) to the best of their knowledge, any provision of any law, rule, regulation, order, permits, certificate, writ, judgment, injunction, decree, determination, award or other decision of any court, arbitrator or other governmental authority to which the Seller or any of the Shareholders or any of their respective properties are subject. 2.1.3 Contracts Schedule 1.1(d) hereto sets forth a complete list of all contracts, including leases under which the Seller is lessor or lessee, which relate to the Assets and are to be performed in whole or in part after the date hereof. In addition, (a) all of the Contracts are in full force and effect, and constitute valid and binding obligations of the Seller, (b) the Seller is not, and no other party to any of the Contracts is, in default thereunder, and no event has occurred which (with or without notice, lapse of time, or the happening of any other event) would constitute a default thereunder, (c) no Contract has been entered into on terms which could reasonably be expected to have an adverse effect on the use of the Assets by Buyer, (d) neither the Seller nor any of the Shareholders have received any information which would cause any of such parties to conclude that any customer of the Seller will (or is likely to) cease doing business with Buyer (or its successors) as a result of the consummation of the transactions contemplated hereby. 2.1.4 Title to Assets The Seller has good, indefeasible and marketable title to all of the Assets, free and clear of any Encumbrances (defined below). Except as set forth in Schedule 2.1.4 hereto, all of the Assets are (a) in a state of good repair generally experienced in the oil and gas well drilling industry, ordinary wear and tear excepted, (b) are free from any known defects except as may be repaired by routine maintenance and such minor defects as do not substantially interfere with the continued use thereof in the conduct of normal operations and (c) conform to all applicable laws governing their use. No notice of any violation of any law, statute, ordinance or regulation relating to any of the Assets has been received by the Seller or any of the Shareholders, except such as have been fully complied with. The term Encumbrances means all liens, security interests, pledges, mortgages, deeds of trust, claims, rights of first refusal, options, charges, restrictions or conditions to transfer or assignment, liabilities, obligations, taxes, privileges, equities, easements, rights of way, limitations, reservations, restrictions and other encumbrances of any kind or nature. 2.1.6 2.1.5 Licenses and Permits Schedule 1.1(e) hereto sets forth a complete list of all Permits necessary under law or otherwise for the operation, maintenance and use of the Assets in the manner in which they are now being operated, maintained and used; each of the Permits and the Seller's rights with respect thereto is valid and subsisting, in full force and effect, and enforceable by the Seller; the Seller is in compliance in all material respects with the terms of each of the Permits; none of the Permits have been, or to the knowledge of the Seller or any of the Shareholders, are threatened to be, revoked, canceled, suspended or modified. 2.1.6 Intellectual Property Schedule 1.1(c) hereto sets forth a complete list of all Intellectual Property material or necessary for the continued use of the Assets; the Seller Intellectual Property is owned or licensed by the Seller free and clear of any Encumbrances; the Seller has not granted to any other person any license to use any Seller Intellectual Property and use of the Seller Intellectual Property will not, and the conduct of the Business did not, infringe, misappropriate or conflict with the Intellectual Property rights of others. Neither the Seller nor any of the Shareholders has received any notice of infringement, misappropriation or conflict with the Intellectual Property rights of others in connection with the use by Seller of the Seller Intellectual Property. 2.1.7 Financial Statements The Seller has delivered to Buyer a copy of Seller's audited statement of income for the three (3) month period ended March 31, 1998, a copy of which is attached hereto as Schedule 2.1.7 (the Seller's Statement of Income); the Seller's Statement of Income is true, correct and complete in all material respects and presents fairly and fully the income and expenses of the Seller as at the date and for the periods indicated thereon, and has been prepared in accordance with generally accepted accounting principles as promulgated by the American Institute of Certified Public Accountants (GAAP) applied on a consistent basis and the Seller's Statement of Income includes all adjustments which are necessary for a fair presentation of the Seller's income and expenses for the period indicated. 2.1.8 Absence of Certain Changes and Events Since March 31, 1998, there has not been: (a) Financial Change Any adverse change in the Assets, the Business or the financial condition, operations, liabilities or prospects of the Seller; (b) Property Damage Any damage, destruction, or loss to any of the Assets or the Business (whether or not covered by insurance); (c) Waiver Any waiver or release of a material right of or claim held by the Seller; (d) Change in Assets Any acquisition, disposition, transfer, encumbrance, mortgage, pledge or other encumbrance of any asset of the Seller other than in the ordinary course of business; (e) Labor Disputes Any labor disputes between the Seller and its employees; or (f) Other Changes Any other event or condition known to the Seller or the Shareholders that particularly pertains to and has or might have an adverse effect on the Assets, the operations of the Business or the financial condition or prospects of the Seller. 2.1.9 Necessary Consents The Seller has obtained and delivered to Buyer all consents to assignment or waivers thereof required to be obtained from any governmental authority or from any other third party in order to validly transfer the Assets hereunder, including, without limitation, the Contracts and the Seller Permits. 2.1.10 Environmental Matters None of the current or past operations of the Business or any of the Assets are being or have been conducted or used in such a manner as to constitute a violation of any Environmental Law (defined below); neither the Seller nor any of the Shareholders has received any notice (whether formal or informal, written or oral) from any entity, governmental agency or individual regarding any existing, pending or threatened investigation or inquiry related to violations of any Environmental Law or regarding any claims for remedial obligations or contribution for removal costs or damages under any Environmental Law; there are no writs, injunction decrees, orders or judgments outstanding, or lawsuits, claims, proceedings or investigations pending or, to the knowledge of the Seller or any of the Shareholders, threatened relating to the ownership, use, maintenance or operation of the Assets or the conduct of the Business, nor, to the knowledge of the Seller or any of the Shareholders, is there any basis for any of the foregoing; Buyer is not required to obtain any permits, licenses or similar authorizations pursuant to any Environmental Law in effect as of the date hereof to operate and use any of the Assets for their current or proposed purposes and uses; to the knowledge of the Seller or any of the Shareholders, the Assets include all environmental and pollution control equipment necessary for compliance with applicable Environmental Law; no Hazardous Materials (defined below) have been or are currently being used by the Seller in the operation of the Assets, except as set forth on Schedule 2.1.10 hereto; no Hazardous Materials are or have ever been situated on or under any of the Seller's properties, whether owned or leased, or incorporated into any of the Assets; there are no, and there have never been any, underground storage tanks (as defined under Environmental Law) located under any of the Seller's properties, whether owned or leased; and there are no environmental conditions or circumstances, including the presence or release of any Hazardous Materials, on any property presently or previously owned or leased by the Seller, or on any property on which Hazardous Materials generated by the Seller's operations or the use of the Assets were disposed of, which would result in an adverse change in the Assets, Business or business prospects of the Seller. The term Environmental Law means any and all laws, rules, orders, regulations, statutes, ordinances, codes, decrees, and other legally enforceable requirements (including, without limitation, common law) of the United states, or any state, regional, city, local, municipal or other governmental authority or quasi-governmental authority, regulating, relating to, or imposing environmental standards of conduct concerning protection of the environment or human health, or employee health and safety as from time to time has been or is now in effect. The term Hazardous Materials means (x) asbestos, polychlorinated biphenyls, urea formaldehyde, lead based paint, radon gas, petroleum, oil, solid waste, pollutants and contaminants, and (y) any chemicals, materials, wastes or substances that are defined, regulated, determined or identified as toxic or hazardous in any Environmental Law. 2.1.11 No ERISA Plans or Labor Issues No employee benefit plan of the Seller, whether or not subject to any provisions of the Employee Retirement Income Security Act of 1974, as amended, will by its terms or applicable law, become binding upon or an obligation of Buyer; (b) the Seller has not engaged in any unfair labor practices which could reasonably be expected to result in an adverse effect on the Assets; (c) the Seller does not have any dispute with any of its existing or former employees, and (d) there are no labor disputes or, to the knowledge of the Seller or any of the Shareholders, any disputes threatened by current or former employees of the Seller. 2.1.12 Investigations; Litigation No investigation or review by any governmental entity with respect to the Seller or any of the transactions contemplated by this Agreement is pending or threatened, nor has any governmental entity indicated to the Seller or any of the Shareholders an intention to conduct the same; and there is no suit, action, or legal, administrative, arbitration or other proceeding or governmental investigation pending, or any other unasserted claims, to which the Seller or any of the Shareholders is a party or which would have an adverse effect on any of the Assets or the Business, except as set forth on the Schedule 2.1.12 hereto. 2.1.13 Absence of Certain Businesses Practices Neither the Seller, nor any of the Shareholders, nor any officer, employee or agent of the Seller, or any other person acting on behalf of the Seller or any of the Shareholders, has, directly or indirectly, within the past five years, given or agreed to give any gift or similar benefit to any customer, supplier, government employee or other person who is or may be in a position to help or hinder the profitable conduct of the Business or the profitable use of the Assets (or to assist the Seller in connection with any actual or proposed transaction) which if not given in the past, might have had an adverse effect on the profitable conduct of the Business or the profitable use of the Assets, or if not continued in the future, might adversely affect the profitable conduct of the Business or the profitable use of the Assets. 2.1.14 Solvency The Seller is not presently insolvent, nor will the Seller be rendered insolvent by the occurrence of the transactions contemplated by this Agreement. The term insolvent, with respect to the Seller, means that the sum of the present fair and saleable value of the Seller's assets does not and will not exceed its debts and other probable liabilities, and the term debts includes any legal liability whether matured or unmatured, liquidated or unliquidated, absolute fixed or contingent, disputed or undisputed or secured or unsecured. 2.1.15 Finder's Fee All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by the Seller, the Shareholders and their counsel directly with Buyer and its counsel, without the intervention of any other person in such manner as to give rise to any valid claim against Buyer for a brokerage commission, finder's fee or any similar payment. 2.1.16 Taxes All federal, state and local taxes assessed or assessable against the Assets for periods prior to January 1, 1998 have been paid by Seller and the Assets will be conveyed to Buyer free and clear of any such taxes or claims therefor. All taxes assessed against the Assets for the period commencing January 1, 1998 will be prorated through the Closing Date (based on 1997 assessed values) with Seller paying to Buyer at Closing an amount equal to the portion of such taxes applicable to the period between January 1, 1998 and the Closing Date. Buyer shall be responsible for the payment of any sales taxes due as a result of the sale of the Assets by Seller to Buyer. 2.2 Representations and Warranties of Buyer Buyer represents and warrants to the Seller and the Shareholder as follows: 2.2.1 Organization and Good Standing Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full requisite corporate power and authority to carry on its businesses as it is currently conducted, and to own and operate the properties currently owned and operated by it, and is duly qualified or licensed to do businesses and is in good standing as a foreign corporation authorized to do business in the State of Texas. 2.2.2 Agreement Authorized and its Effect on Other Obligations The consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Buyer, and this Agreement is a valid and binding obligation of Buyer enforceable (subject to normal equitable principles) in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, debtor relief or similar laws affecting the rights of creditors generally. The execution, delivery and performance of this Agreement by Buyer will not conflict with or result in a violation or breach of any term or provision of, or constitute a default under (a) the Certificate of Incorporation or Bylaws of Buyer or (b) any obligation, indenture, mortgage, deed of trust, lease, contract or other agreement to which Buyer or any of its property is bound. 2.2.3 Consents and Approvals No consent, approval or authorization of, or filing of a registration with, any governmental or regulatory authority, or any other person or entity is required to be made or obtained by Buyer in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. 2.2.4 Finder's Fee All negotiations relative to this Agreement and the transactions contemplated hereby have been carried on by Buyer and its counsel directly with the Seller and the Shareholders and their counsel, without the intervention by any other person as the result of any act of Buyer in such a manner as to give rise to any valid claim against the Seller of any of the Shareholders hereto for any brokerage commission, finder's fee or any similar payments. ARTICLE III Additional Agreements 3.1 Noncompetition. Except as set forth below or as otherwise consented to or approved in writing by Buyer, the Seller and each of the Shareholders agree that for a period of 60 months following the date hereof, such party will not, directly or indirectly, acting alone or as a member of a partnership or as an officer, director, employee, consultant, representative, advisor, lender (including gifts used for capitalization or collateral), a holder of, or investor in as much as 3% of any security of any class of any corporation or other business entity (a) engage in any business in competition with the business or businesses conducted by the Seller on or before the date hereof or by Buyer on or after the date hereof, or in any service business the services of which were provided and marketed by the Seller on or before the date hereof or by Buyer on or after the date hereof in the states of Texas or New Mexico; (b) request any present customers or suppliers of the Seller or any customers of Buyer or with Yale E. Key, Inc., T.S.T. Paraffin Service Company, Inc., Ram Oil Well Service, Inc., Rowland Trucking Co., Inc., WellTech Eastern, Inc. or Key Four Corners, Inc. (Buyer's Affiliates) to curtail or cancel their business with Buyer (or Buyer's Affiliates); (c) disclose to any person, firm or corporation any trade, technical or technological secrets of Buyer (or Buyer's Affiliates) or of the Seller or any details of their organization or business affairs or (d) induce or actively attempt to influence any employee of Buyer (or Buyer's Affiliates) to terminate his or her employment. The Seller and each of the Shareholders agree that if either the length of time or geographical area as set forth in this Section 3.1 is deemed too restrictive in any court proceeding, the court may reduce such restrictions to those which it deems reasonable under the circumstances. The obligations expressed in this Section 3.1 are in addition to any other obligations that the Seller and the Shareholders may have under the laws of any state requiring a corporation selling its assets (or a shareholder of such corporation) to limit its activities so that the goodwill and business relations being transferred with such assets will not be materially impaired. The Seller and the Shareholders further agree and acknowledge that Buyer does not have any adequate remedy at law for the breach or threatened breach by the Seller or the Shareholders of the covenants contained in this Section 3.1, and agree that Buyer may, in addition to the other remedies which may be available to it hereunder, file a suit in equity to enjoin the Seller or the Shareholders from such breach or threatened breach. If any provisions of this Section 3.1 are held to be invalid or against public policy, the remaining provisions shall not be affected thereby. The Seller and the Shareholders acknowledge that the covenants set forth in this Section 3.1 are being executed and delivered by such party in consideration of (i) the covenants of Buyer contained in this Agreement, (ii) additional consideration in the amount of $50,000 payable by Buyer on the date hereof by wire transfer of immediately available funds to the Seller and the Shareholders, in those amounts and to those accounts specified in Schedule 3.1 hereto and (iii) for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged. 3.2 Hiring Employees Schedule 3.2 hereto is a complete and accurate listing of all employees of the Seller who devote their full time in the operation of the Assets and the conduct of the Business (the Employees). Effective as of the date of Closing, substantially all of the Employees shall be offered employment by Buyer, subject to such Employees meeting Buyer's standard employment eligibility requirements. Buyer shall have no liability or obligation with respect to any employee benefits of any Employee except those benefits that accrue pursuant to such Employees' employment with Buyer on or after the date hereof. The Seller and the Shareholders shall cooperate with Buyer in connection with any offer of employment from Buyer to the Employees and use its best efforts to cause the acceptance of any and all such offers. 3.3 Allocation of Purchase Price The parties hereto agree to allocate the Purchase Price payable by Buyer for the Assets hereunder as set forth on Schedule 3.3 hereto, and shall report this transaction for federal income tax purposes in accordance with the allocation so agreed upon. The parties hereto for themselves and for their respective successors and assigns covenant and agree that they will file coordinating Form 8594's in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended, with their respective income tax returns for the taxable year that includes the date hereof. 3.4 Name Change The Seller and the Shareholders shall, within ten (10) days from the date of Closing, cause to be filed with the Secretary of State of Nebraska an amendment to the Articles of Incorporation of the Seller changing the names of the Seller from its current name to a name that is not similar to such name. The Seller and the Shareholders shall, within five (5) days from the date of its receipt of confirmation of such filings from the Secretary of State of Nebraska, cause the same to be filed with the appropriate office of each state in which the Seller is qualified to do business and deliver to Buyer a copy of such filings. ARTICLE IV Indemnification 4.1 Indemnification by the Seller and the Shareholders In addition to any other remedies available to Buyer under this Agreement, or at law or in equity, the Seller and each of the Shareholders owning ten percent (10%) or more of the capital stock of Seller as of the date hereof (being Reed Gilmore, Priscilla Gilmore, L. E. Grimes and Larry V. Bohannon) shall, jointly and severally, indemnify, defend and hold harmless Buyer and its officers, directors, employees, agents and stockholders (collectively, the Buyer Indemnified Parties), against and with respect to any and all claims, costs, damages, losses, expenses, obligations, liabilities, recoveries, suits, causes of action and deficiencies, including interest, penalties and reasonable attorneys' fees and expenses (collectively, the Damages) a Buyer Indemnified Party shall incur or suffer (whether the damages are suffered or incurred by such Buyer Indemnified Party directly or as a result of a third party claim against such Buyer Indemnified Party), which arise, result from or relate to (a) any material breach of, or failure by the Seller or any of the Shareholders to perform, their respective representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to Buyer by the Seller or the Shareholders under this Agreement or (b) the Retained Liabilities. In addition, each Shareholder owning less than ten percent (10%) of the capital stock of Seller as of the date hereof (being M. Reed Gilmore, Jr., Valerie G. Griess, Joan G. Lindquist and James C. Gilmore) shall indemnify, defend and hold the Buyer Indemnified Parties harmless against and with respect to any and all Damages a Buyer Indemnified Party shall incur or suffer which arise, result from or relate to any material breach of, or failure by such Shareholder to perform his or her representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered by such Shareholder to Buyer. 4.2 Indemnification by Buyer In addition to any other remedies available to the Seller or the Shareholders under this Agreement, or at law or in equity, Buyer shall indemnify, defend and hold harmless the Seller and its officers, directors, employees, agents and stockholders and each of the Shareholders against and with respect to any and all Damages that such indemnitees shall incur or suffer, which arise, result from or relate to (a) any material breach of, or failure by Buyer to perform, any of its representations, warranties, covenants or agreements in this Agreement or in any schedule, certificate, exhibit or other instrument furnished or delivered to the Seller or the Shareholders by or on behalf of Buyer under this Agreement or (b) the Assumed Liabilities. 4.3 Indemnification Procedure If any party hereto discovers or otherwise becomes aware of an indemnification claim arising under Section 4.1 or 4.2 of this Agreement, such indemnified party shall give written notice to the indemnifying party, specifying such claim, and may thereafter exercise any remedies available to such party under this Agreement; provided, however, that the failure of an indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligation hereunder to the extent the indemnifying party is not materially prejudiced thereby. Further, promptly after receipt by an indemnified party hereunder of written notice of the commencement of any third party action or proceeding against such indemnified party with respect to which a claim for indemnification may be made pursuant to this Article IV, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party, give written notice to the latter of the commencement of such third party action; provided, however, that the failure of an indemnified party to give notice as provided herein shall not relieve the indemnifying party of any obligation hereunder to the extent the indemnifying party is not materially prejudiced thereby. In case any such third party action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof unless the indemnifying party has failed to assume the defense of such third party claim and to employ counsel reasonably satisfactory to such indemnified person. An indemnifying party who elects not to assume the defense of a third party claim shall not be liable for the fees and expenses of more than one counsel in any single jurisdiction for all parties indemnified by such indemnifying party with respect to such third party claim or with respect to third party claims separate but similar or related in the same jurisdiction arising out of the same general allegations. Notwithstanding any of the foregoing to the contrary, the indemnified party will be entitled to select its own counsel and assume the defense of any third party action brought against it if the indemnifying party fails to select counsel reasonably satisfactory to the indemnified party, the expenses of such defense to be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement with respect to a third party claim without the consent of the indemnified party, which consent shall not be unreasonably withheld, or unless such judgment or settlement includes as an unconditional term thereof the giving by the third party claimant or plaintiff to such indemnified party of a release from all liability with respect to such third party claim. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such third party action, the defense of which has been assumed by an indemnifying party, without the consent of such indemnifying party, which consent shall not be unreasonably withheld, delayed or continued. ARTICLE V Miscellaneous 5.1 Survival of Representations, Warranties and Covenants All representations and warranties made by the parties hereto shall survive indefinitely without limitation, notwithstanding any investigation made on the part of the parties hereto. All statements contained in any certificate, schedule, exhibit or other instrument delivered pursuant to this Agreement shall be deemed to have been representations and warranties by the respective party or parties, as the case may be, and shall also survive indefinitely without limitation, notwithstanding any investigations made by any party hereto or on its behalf. All covenants and agreements contained herein shall survive as provided herein. 5.2 Entirety This Agreement embodies the entire agreement among the parties with respect to the subject matter hereof, and all prior agreements between the parties with respect thereto are hereby superseded in their entirety. 5.3 Counterparts. Any number of counterparts of this Agreement may be executed and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one instrument. 5.4 Notices and Waivers. Any notice or waiver to be given to any party hereto shall be in writing and shall be delivered by courier, sent by facsimile transmission or first class registered or certified mail, postage prepaid, return receipt requested: If to Buyer Addressed to: With a copy to: Key Energy Drilling, Inc. Two Tower Center, 20th Floor East Brunswick, New Jersey 08816 Attn: General Counsel Facsimile: (908) 247-5148 Lynch, Chappell & Alsup, P.C. 300 N. Marienfeld, Suite 700 Midland, Texas 79701 Attn: James M. Alsup, Esq. Facsimile: (915) 683-2587 If to the Seller or the Shareholders Addressed to: With a copy to: Lakota Drilling Company 415 West Wall Street, Suite 200 Midland, Texas 79701 Attn: Mr. L. E. Grimes Facsimile: _______________ Hinkle, Cox, Eaton, Coffield & Hensley 550 West Texas, Suite 1200 Midland, Texas 79701 Attn: John C. Chambers, Esq. Facsimile: (915) 683-6518 Any communication so addressed and mailed by first-class registered or certified mail, postage prepaid, with return receipt requested, shall be deemed to be received on the fifth (5th) businesses day after so mailed, and if delivered by courier or facsimile to such address, upon delivery during normal businesses hours on any businesses day. 5.5 Captions. The captions contained in this Agreement are solely for convenient reference and shall not be deemed to affect the meaning or interpretation of any article, section, or paragraph hereof. 5.6 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the successors and assigns of the parties hereto. 5.7 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the terms, provisions, covenants and restrictions shall remain in full force and effect and shall in no way be affected, impaired or invalidated. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 5.8 Applicable Law. This Agreement shall be governed by and construed and enforced in accordance with the applicable laws of the State of Texas. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Shareholders have executed this Agreement and the other parties hereto have caused this Agreement to be executed in their respective corporate names by their respective duly authorized representatives, all as of the day and year first above written. BUYER: KEY ENERGY DRILLING, INC. a Delaware corporation By: Joe Dee Brooks, President SELLER: LAKOTA DRILLING COMPANY By: Name:_____________________________________ Title:______________________________________ SHAREHOLDERS: ___________________________________________ Reed Gilmore __________________________________________ Priscilla Gilmore ___________________________________________ M. Reed Gilmore, Jr. ____________________________________________ Valerie G. Griess ____________________________________________ Joan C. Lindquist ____________________________________________ James C. Gilmore ____________________________________________ L. E. Grimes ____________________________________________ Larry V. Bohannon EX-23.1 5 CONSENT OF KPMG PEAT MARWICK To the Board of Directors and Stockholders Key Energy Group, Inc. : We consent to incorporation by reference in the registration statement No. 333-46733 on Form S-8 and registration statements No. 333-01777, No. 333-24497, No. 333-24499, No. 333-43115, No. 333-43779 and No. 333-44677 on Forms S-3 of Key Energy Group, Inc. and Subsidiaries of our report dated September 1, 1998, relating to the consolidated balance sheets of Key Energy Group, Inc. and Subsidiaries as of June 30, 1998, and 1997, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the years in the three-year period ended June 30, 1998, which report appears in the June 30, 1998 annual report on Form 10-K of Key Energy Group, Inc. and Subsidiaries. KPMG PEAT MARWICK LLP Midland, Texas September 1, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1998 JUN-30-1998 25,265 0 82,406 0 13,315 127,557 547,537 (48,385) 698,640 48,029 0 1,868 0 0 119,303 698,640 7,030 420,046 2,983 381,241 0 0 21,476 38,805 14,630 24,175 0 0 0 24,175 1.41 1.23
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