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S-4/A
KEY ENERGY SERVICES INC filed this Form S-4/A on 03/08/1996
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                     KEY ENERGY GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 June 30, 1995, June 30, 1994 and June 30, 1993

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Key

Key Energy  Group,  Inc.  ("Key") was  organized  in April 1977,  and  commenced
operations in July 1978.  Results of operations  for the seven months ended June
30, 1993 and the five months ended  November  30, 1992  include  Key's oil field
service operations conducted by Key's wholly-owned subsidiary, Yale E. Key, Inc.
("Yale E. Key"). Results of operations for the twelve months ended June 30, 1995
and 1994  include  Key,  Yale E. Key's oil and gas  exploration  and  production
wholly-owned subsidiary,  Odessa Exploration Incorporated ("OEI"), and Key's oil
and gas well drilling operations conducted by Key's wholly-owned subsidiary, Key
Energy Drilling,  Inc. d/b/a Clint Hurt Drilling ("Clint Hurt Drilling").  Clint
Hurt Drilling was acquired in March of 1995 (see Note 2).

Basis of Presentation

Key's  consolidated  financial  statements  include the  accounts of Key and its
wholly-owned   subsidiaries.   All  significant  intercompany  transactions  and
balances have been eliminated. The accounting policies presented below have been
followed in preparing the accompanying  financial statements.  Subsequent to the
adoption of  "fresh-start  reporting" (see Note 3), Key will continue to utilize
the same  policies.  However,  due to the  material  nature of the  "fresh-start
reporting"  adjustments,  the financial  statements issued prior to November 30,
1992 will not be  comparable  to those issued  subsequent  to November 30, 1992.
Key's ownership of less than 50% owned entities are accounted for by the cost or
equity methods, depending on Key's ownership percentage.

Cash, Restricted Cash and Marketable Securities

Key holds significant cash in certain financial  institutions.  Restricted cash,
$410,000  and  $456,000  at June 30,  1995 and 1994,  respectively,  consists of
monies held in Key's cash lock-box. The cash lock-box is a requirement under the
line of credit with CIT (see Note 5). Restricted marketable securities, $267,000
and $251,000 at June 30, 1995 and 1994,  respectively,  consist  primarily of an
investment in a mutual fund which invests,  mostly,  in short-term  intermediate
government  securities  which are  recorded  at market  value.  The mutual  fund
investment  is held in escrow  for a  letter-of-credit  (issued in the amount of
approximately $244,000) for workers' compensation insurance.

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