ACQUISITIONS

2013 Acquisition of Noncontrolling Interests

Geostream. On October 31, 2008, we acquired a 26% interest Geostream, a limited liability company incorporated in the Russian Federation that provides a wide range of drilling, workover and reservoir engineering services for $17.4 million. On September 1, 2009, we acquired an additional 24% interest for $16.4 million, which brought our total investment in Geostream to 50% and provided us a controlling interest with representation on Geostream's board of directors. We accounted for the second investment as a business combination achieved in stages. The results of Geostream have been included in our consolidated financial statements since the initial acquisition date, with the portion outside of our control forming a noncontrolling interest. On April 9, 2013, we completed the acquisition of the remaining 50% noncontrolling interest in Geostream for $14.6 million. Geostream is now our wholly owned subsidiary. The acquisition was accounted for as an equity transaction. Therefore, our acquisition of the noncontrolling interest in Geostream in the second quarter of 2013 did not result in a gain or loss.

AlMansoori Key Energy Services, LLC. On March 7, 2010, we entered into an agreement with AlMansoori Petroleum Services, LLC (“AlMansoori”) to form the joint venture AlMansoori Key Energy Services, LLC, a joint venture under the laws of Abu Dhabi, UAE. The purpose of the joint venture was to engage in conventional workover and drilling services, coiled tubing services, fishing and rental services, rig monitoring services, pipe handling services and fluids, waste treatment and handling services. Although AlMansoori held a 51% interest in the joint venture and we held a 49% interest, we held three of the five board of directors seats and a controlling financial interest. In addition, profits and losses of the joint venture were shared on equal terms and in equal amounts with AlMansoori. Because the joint venture did not have sufficient resources to carry on its activities without our financial support, we determined it to be a variable interest entity of which we were the primary beneficiary. We consolidated the entity in our financial statements. On August 5, 2013, we agreed to the dissolution of AlMansoori Key Energy Services, LLC and the acquisition of the underlying business for $5.1 million. The $5.1 million is expected to be paid in 2014 and is recorded in "other current liabilities" in our 2013 consolidated balance sheet. The acquisition of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC was accounted for as an equity transaction therefore did not result in a gain or loss.

The effects of changes in our ownership interests in Geostream and AlMansoori Key Energy Services, LLC for the year ended December 31, 2013 were as follows (in thousands):



Net loss attributable to Key	$	(21,768	)
Transfers from the noncontrolling interests
Increase in Key's paid-in capital for purchase of the 50% noncontrolling interest in Geostream	22,432
Decrease in Key's paid-in capital for purchase of the 51% noncontrolling interest in AlMansoori Key Energy Services, LLC	(2,888		)
Net transfers from noncontrolling interests	19,544
Change from net loss attributable to Key and transfers from noncontrolling interests	$	(2,224	)

2011 Acquisitions

Edge Oilfield Services, LLC (“Edge”). On August 5, 2011, we completed the acquisition of Edge. We accounted for this acquisition as a business combination. The results of operations for Edge have been included in our consolidated financial statements from the acquisition date.

The total consideration for the acquisition was approximately $305.9 million consisting of approximately 7.5 million shares of our common stock and approximately $187.9 million in cash, which included $26.3 million to reimburse Edge for growth capital expenditures incurred between March 1, 2011 and the date of closing, net of working capital adjustments of $1.8 million. We finalized the purchase accounting related to this acquisition as of June 30, 2012.

The following table summarizes the fair values of the assets acquired and liabilities assumed (in thousands):



Cash	$	189,696
Key common stock	117,919
Consideration transferred	307,615
Working capital adjustment	(1,752		)
Total	$	305,863

The fair value of the 7.5 million common shares issued was $15.62 per share based on the closing price on the acquisition date (August 5, 2011).

The following table summarizes the fair values of the assets acquired and the liabilities assumed (in thousands):



At August 5, 2011:
Cash and cash equivalents	$	886
Accounts receivable	21,124
Other current assets	234
Property and equipment	87,185
Intangible assets	49,310
Other long term assets	3,826
Total identifiable assets acquired	162,565
Current liabilities	19,406
Total liabilities assumed	19,406
Net identifiable assets acquired	143,159
Goodwill	162,704
Net assets acquired	$	305,863

Of the $49.3 million of acquired intangible assets, $40.0 million was assigned to customer relationships that will be amortized as the value of the relationships are realized using expected rates of 12.5%, 30.0%, 30.0%, 11.0%, 6.4%, 3.8%, 2.5%, 1.7%, 1.2% and 0.8% from 2011 through 2020. In addition, $5.1 million of acquired intangible assets was assigned to tradenames and are not subject to amortization. The remaining $4.2 million of acquired intangible assets was assigned to non-compete agreements that will be amortized on a straight-line basis over 38 months.

The fair value and gross contractual amount of accounts receivable acquired on August 5, 2011 was $21.1 million.

All of the goodwill acquired was assigned to our fishing and rental business, which is part of our U.S. reportable segment. We believe the goodwill recognized is attributable primarily to the acquired workforce and expansion of a growing service line. All of the goodwill is expected to be deductible for income tax purposes.

Transaction costs related to this acquisition were $3.6 million for the year ended December 31, 2011, and are included in general and administrative expenses in the 2011 consolidated statement of operations.

Included in our consolidated statements of operations for the year ended December 31, 2011, related to this acquisition are revenues of $52.5 million and operating income of $14.7 million from the acquisition date through December 31, 2011.

The following represents the pro forma consolidated income statement as if the Edge acquisition had been included in our consolidated results prior to 2011 for the year ended December 31, 2011:



	2011
	(unaudited) (in thousands, except per share amounts)
REVENUES	$	1,803,768
COSTS AND EXPENSES:
Direct operating expenses	1,115,770
Depreciation and amortization expense(1)	176,298
General and administrative expenses(2)	227,652
Operating income	284,048
Loss on early extinguishment of debt	46,451
Interest expense, net of amounts capitalized	42,389
Other income, net	(7,585		)
Income from continuing operations before tax	202,793
Income tax expense(3)	(76,169		)
Income from continuing operations	126,624
Loss from discontinued operations, net of tax	(10,303		)
Net income	116,321
Loss attributable to noncontrolling interest	(806		)
INCOME ATTRIBUTABLE TO KEY	$	117,127
Earnings per share attributable to Key:
Basic	$	0.79
Diluted	$	0.79
Weighted average shares outstanding(4):
Basic	150,397
Diluted	150,705


(1)	Depreciation and amortization expense has been adjusted to reflect the additional expense that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied prior to 2011.


(2)	Transaction costs of $3.6 million have been removed as these costs would have occurred prior to 2011.


(3)	Income tax expense has been adjusted to reflect applicable corporate tax as if Edge had been acquired and converted from its LLC status prior to 2011.


(4)	Weighted average shares outstanding has been adjusted to reflect the issuance of shares in the Edge transaction as if the transaction occurred prior to 2011.

These unaudited pro forma results, based on assumptions deemed appropriate by management, have been prepared for informational purposes only and are not necessarily indicative of our results if the acquisition had occurred for the year ended December 2011. These amounts have been calculated after applying our accounting policies and adjusting the results of Edge as if these changes had been applied prior to 2011, together with the consequential tax effects.

Equity Energy Company (“EEC”). In January 2011, we acquired, through purchase or lease, 10 saltwater disposal (“SWD”) wells from EEC for approximately $14.3 million. Most of these SWD wells are located in North Dakota. We accounted for this purchase as an asset acquisition.