<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS DATED APRIL 16, 1999
- --------------------------------------------------------------------------------
[LOGO]
KEY ENERGY SERVICES, INC.
3,508,772 SHARES
COMMON STOCK
TRADING SYMBOL & MARKET: KEG / NYSE
We plan to use the proceeds of this offering for the retirement of existing
debt and working capital as well as other general corporate purposes.
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6 OF THIS
PROSPECTUS SUPPLEMENT AND BEGINNING ON PAGE 7 OF OUR PROSPECTUS DATED APRIL 16,
1999.
Neither the SEC nor any state securities commission has approved these
securities or determined that this prospectus supplement is accurate or
complete. Any representation to the contrary is illegal.
------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Key Energy Services, Inc............................................................... 3
The Offering........................................................................... 3
The Concurrent Offering................................................................ 3
Recent Developments.................................................................... 4
Risk Factors........................................................................... 6
Unaudited Pro Forma Combined Financial Statements...................................... 7
Selected Financial Data................................................................ 13
Use of Proceeds........................................................................ 15
Legal Matters.......................................................................... 15
Capitalization......................................................................... 16
</TABLE>
<PAGE>
KEY ENERGY SERVICES, INC.
We are the world's largest onshore oil and gas well service and workover
company based on the number of rigs we own and available industry data. We
provide a complete range of rig-based well maintenance, workover, completion,
recompletion, contract drilling and non-rig ancillary well services to major and
independent oil and gas companies. Our principal operating regions in the United
States include West Texas, the Gulf Coast, Oklahoma, Michigan, the Appalachian
Basin, the Rocky Mountains, the Ark La Tex region, the Four Corners area and
California. We also operate in Argentina and have limited operations in Ontario,
Canada. In September 1998, we purchased Dawson Production Services, Inc., which
was the third largest onshore oil and gas well service and workover company in
the United States based on the number of rigs they owned and available industry
data. We estimate that our current share of the domestic onshore well service
rig fleet is approximately 37% based on the number of rigs we own and available
industry data. Our operating assets consist of approximately 1,420 well service
and workover rigs, 75 drilling rigs and 1,130 oilfield trucks. We believe that
we have the most comprehensive array of services of any participant in the
market and have differentiated ourself from our competitors by our position as a
single-source provider of multiple well-head based services and products across
multiple geographic regions.
THE OFFERING
We have entered into a written agreement with three investors who have
agreed to purchase an aggregate of $10 million of our common stock at a per
share purchase price equal to the purchase price being paid by the underwriters
in our concurrent offering described below. Based on this formula, these
investors will purchase 3,508,772 shares of our common stock at a purchase price
of $2.85 per share. The common stock these investors will purchase is part of
the financing described in this prospectus supplement, but is being sold to
these investors directly by us rather than through the underwriters in the
concurrent public offering, and such common stock being sold in the concurrent
public offering is not covered by this prospectus supplement.
THE CONCURRENT OFFERING
We are offering to the public 55,000,000 shares of our common stock in a
concurrent underwritten public offering. The underwriters have an option to
purchase an additional 6,300,000 shares from us to cover over-allotments. Except
as otherwise noted, information in this prospectus supplement assumes that the
underwriters will not exercise their over-allotment option. The closing price of
our common stock on May 3, 1999 was $3 3/16.
<TABLE>
<S> <C>
Number of shares outstanding before this offering:.............................. 18,493,625
Number of shares offered in this offering and the concurrent offering:.......... 58,508,772
Number of shares outstanding after this offering and the concurrent offering:... 77,002,397
</TABLE>
Before this offering and the concurrent public offering, approximately 11.6
million shares of common stock were issuable upon the exercise of outstanding
options, warrants and convertible securities. In addition, this offering and the
concurrent public offering will trigger anti-dilution provisions in certain of
our outstanding warrants resulting in 1,549,552 shares of our common stock being
issuable upon exercise of such warrants. See "Risk Factors--Shares Eligible for
Future Sale." The Company also intends to issue options to certain of its
officers, directors and employees to purchase up to an aggregate of 3,000,000
shares of common stock at an exercise price at or above the price to the public
in this offering.
3
<PAGE>
USE OF PROCEEDS
We intend to use the net proceeds from this offering and the concurrent
offering to other investors to repay amounts due under the term loans under our
senior credit facility and to provide working capital. We do not intend to use
any proceeds from the offerings to repay loans under our revolving credit
facility, and currently do not intend to make repayments under the revolving
credit facility until we have substantially improved our operating results and
financial position.
RECENT DEVELOPMENTS
RENEGOTIATION OF FINANCIAL COVENANTS
Over the past year, the well service industry has experienced a downturn
caused by historically low oil and gas prices. In light of market conditions, in
December 1998 we renegotiated certain financial covenants in our senior credit
facility to levels designed to allow us to remain in compliance for the
remainder of calendar 1999 based on market conditions in December 1998. Because
of continuing deteriorating conditions in the well service industry in the first
quarter of 1999, the financial covenants were renegotiated again in April 1999
to provide us additional financial flexibility. We believe that our renegotiated
financial covenants will allow us to remain in compliance for at least 18
months; however, if depressed conditions in the well service industry continue
beyond anticipated levels, we may not be able to remain in compliance. We
believe that the proceeds from this offering and the concurrent offerings,
together with cash from operations, will enable us to pay operating expenses,
scheduled debt service and anticipated capital needs for at least 18 months.
We cannot assure you that our business will generate sufficient cash flow
from operations to service our outstanding debt, that currently anticipated cost
savings and operating improvements will be realized or that future borrowings
will be available to us under our senior credit facility in an amount sufficient
to enable us to pay our indebtedness or to fund our other liquidity needs.
THIRD QUARTER RESULTS
Based on preliminary interim financial data, we estimate revenues for the
quarter ended March 31, 1999 will be approximately $105 million, compared to
$143.6 million in the previous quarter, a decrease of 27%. We estimate our net
loss for the quarter will be between $1.05 and $1.10 per diluted share,
excluding nonrecurring pretax charges of approximately $19 million to $20
million consisting primarily of a write-off of bridge financing fees, office
lease accruals, employee terminations and unusual bad debt losses, a substantial
portion of which includes a reserve taken during the quarter ended March 31,
1999 for accounts receivable from TransTexas Gas Corporation, a company that has
recently filed for reorganization under federal bankruptcy laws. We do not
expect as significant an amount of these pretax charges to recur in the fiscal
fourth quarter. Based on these assumptions, our estimated EBITDA for the fiscal
quarter ended March 31, 1999 will be in a range of $10 million to $11 million,
excluding approximately $13 million to $15 million of similar non-recurring
pretax charges.
MANAGEMENT
Effective April 9, 1999, Kenneth V. Huseman ceased serving as our executive
vice president and chief operating officer as well in all other offices he held
with our subsidiaries.
Effective April 21, 1999, Thomas K. Grundman began serving as our senior
vice president of strategic and business development. We are currently
negotiating an employment agreement with Mr. Grundman. While no agreements have
been reached as of the date hereof, the currently contemplated terms of his
employment include: (i) a base salary of $200,000; (ii) a three year employment
term with automatic one year renewals thereafter; (iii) a relocation loan of
$150,000; (iv) three years' severance
4
<PAGE>
for certain terminations of the employment agreement; and (v) a one to three
year noncompete term following termination.
Prior to joining Key, Mr. Grundman was a senior vice president at PNC Bank,
N.A. where he ran the Oil and Gas Corporate Finance Group. Mr. Grundman joined
PNC in late 1996 and was responsible for providing financing and advisory
services in all sectors of the energy industry. Prior to his employment with
PNC, Mr. Grundman spent twelve years at Chase Manhattan Bank and its predecessor
institutions in the Acquisition Finance Group, most recently as a managing
director in the oil and gas group. Mr. Grundman is 38 years old and received a
BS in Finance from Syracuse University in 1982.
In order to ensure that Francis D. John will continue to serve as our as
chief executive officer, we are in the process of negotiating the terms of a new
long-term employment contract with him. While no agreements, arrangements or
understandings have been reached regarding the terms of any new employment
agreement, we intend that the terms of the agreement will contain provisions
pursuant to which Mr. John will agree not to (i) exercise any options to
purchase our common stock which have been granted to him (or which may be
granted to him) or (ii) sell any of our common stock or other equity securities
which he owns, each for a period of three years commencing with the effective
date of his new employment agreement. We also intend for the new agreement to
contain salary, bonus and other arrangements which will induce Mr. John to
commit himself to remaining with the Company as its chief executive for a period
of at least five years.
5
<PAGE>
RISK FACTORS
RECENT OPERATING LOSSES
We have experienced a significant decrease in the demand for our services
during the last two quarters that has resulted in the operating losses described
above under "Recent Developments." We believe that the proceeds of this offering
and the concurrent offering will permit us to reduce indebtedness and provide us
with a cash reserve which, together with cash from operations, will permit us to
maintain operations for the balance of calendar 1999 and through 2000. However,
there must be a significant improvement in the demand for our services for us to
be able to generate cash from operations sufficient to service our indebtedness
or to return to profitability. No assurance can be given when or if there will
be any such improvement in demand for our services.
POTENTIAL CONFLICT BETWEEN DEBT AND EQUITY HOLDERS--THE INTERESTS OF INVESTORS
IN THIS OFFERING
MAY BE CONTRARY TO THE INTERESTS OF HOLDERS OF OUR DEBT.
Certain decisions concerning our operations or financial structure may
present conflicts between the owners of our capital stock and the holders of our
debt. For example, if we encounter financial difficulties, or are unable to pay
our debts as they mature, the interests of our equity owners might conflict with
those of the holders of our debt. In addition, restrictions imposed on us by our
lenders may inhibit our ability to pursue acquisitions, divestitures, financings
or other transactions that could enhance your equity investment.
SHARES ELIGIBLE FOR FUTURE SALE--THE MARKET PRICE OF OUR COMMON STOCK COULD BE
ADVERSELY
AFFECTED BY SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK IN THE PUBLIC MARKET OR
THE
PERCEPTION THAT SUCH SALES COULD OCCUR.
As of April 29, 1999, we had 18,493,625 shares of common stock outstanding.
Approximately 11.6 million additional shares of common stock were issuable upon
the exercise of outstanding options, warrants and convertible securities. We are
issuing 58,508,772 shares of our common stock in this offering and the
concurrent offering (64,808,772 shares if the underwriters' over-allotment
option is exercised in full). In addition, this offering has triggered
anti-dilution provisions in certain of our outstanding warrants, resulting in
approximately 1,549,552 additional shares of our common stock being issuable
upon exercise of such warrants. We also intend to issue options to certain of
our officers, directors and employees to purchase up to an aggregate of
3,000,000 shares of common stock at an exercise price at or above the price to
the public in this offering. All of these shares will be registered under the
Securities Act or are subject to registration rights agreements. The market
price of our common stock could be adversely affected by sales of substantial
amounts of common stock in the public market or the perception that such sales
could occur.
TRADING HISTORY--OUR PRIOR TRADING HISTORY MAY NOT BE INDICATIVE OF THE TRADING
VOLUME AND
MARKET PRICE AFTER THE OFFERINGS.
This offering and our concurrent offering of 3,508,772 shares of our common
stock will result in an approximate 315% increase in the number of shares of our
common stock that will be issued and outstanding. The historical volume of
trading and historical trading price of our common stock has been based on a
substantially lower number of outstanding shares of our common stock than will
be outstanding after this offering and the concurrent offering. Therefore, our
prior trading volume and prior market price may not be indicative of the trading
volume and market price after this offering.
ADDITIONAL BORROWINGS AVAILABLE - DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND
OUR SUBSIDIARIES STILL MAY BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. Our credit facility currently permits additional
borrowings of up to approximately $9 million. If new debt is added to our and
our subsidiaries' current debt levels, the related risks that we and they now
face could intensify.
6
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Our unaudited pro forma combined statements of operations have been prepared
to give effect to the Dawson acquisition and related transactions, our January
1999 offering of units consisting of 14% senior subordinated notes and warrants
and the application of the net proceeds therefrom, and this offering and the
concurrent offering and the application of proceeds therefrom as if they had
taken place on July 1, 1997. Our unaudited pro forma combined balance sheet has
been prepared to give effect to the units offering and the application of the
net proceeds therefrom and to this offering and the concurrent offering and the
application of proceeds therefrom as if they had taken place on December 31,
1998. The unaudited pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. Future results may vary
significantly from the results reflected in the accompanying unaudited pro forma
combined financial statements because of, among other factors, changes in
product and service prices, future oil and gas production declines and future
acquisitions.
The unaudited pro forma adjustments are based upon preliminary estimates. We
do not believe that the actual adjustments will differ significantly from these
preliminary estimates. The Unaudited Pro Forma Combined Financial Statements
should be read in conjunction with our consolidated financial statements
incorporated by reference in this prospectus supplement.
7
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
(FORMERLY KEY ENERGY GROUP, INC.)
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA OFFERING PRO FORMA
COMPANY ADJUSTMENTS PRO FORMA ADJUSTMENTS COMBINED
--------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................................. $ 8,181 $ (4,294)(1) $ 3,887 $ 40,477(3) $ 44,364
Accounts receivable, net.............................. 115,881 115,881 115,881
Inventories........................................... 13,576 13,576 13,576
Deferred tax asset.................................... 1,203 1,203 1,203
Prepaid income taxes.................................. 540 540 540
Prepaid expenses and other current assets............. 6,001 6,001 6,001
--------- ----------- -----------
Total Current Assets.................................... 145,382 141,088 181,565
Property and Equipment
Oilfield services equipment........................... 634,114 634,114 634,114
Oil and gas well drilling equipment................... 84,873 84,873 84,873
Motor vehicles........................................ 53,819 53,819 53,819
Oil and gas properties and other related equipment,
successful efforts method........................... 43,160 43,160 43,160
Furniture and equipment............................... 5,950 5,950 5,950
Buildings and land.................................... 34,717 34,717 34,717
--------- ----------- -----------
856,633 856,633 856,633
Accumulated depreciation and depletion.................. (71,506) (71,506) (71,506)
--------- ----------- -----------
Net Property and Equipment.............................. 785,127 785,127 785,127
Goodwill, net........................................... 208,811 208,811 208,811
Other assets............................................ 36,210 5,700(1) 35,621 35,621
(6,289)(2)
--------- ----------- -----------
Total Assets...................................... $1,175,530 $1,170,647 $1,211,124
--------- ----------- -----------
--------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable...................................... $ 20,831 $ 20,831 $ 20,831
Other accrued liabilities............................. 25,175 25,175 25,175
Accrued interest...................................... 4,150 4,150 4,150
Current portion of long-term debt..................... 9,511 9,511 (6,000)(3) 3,511
--------- ----------- -----------
Total Current Liabilities............................... 59,667 59,667 53,667
Long-term debt less current portion..................... 839,870 (6,028)(1) 833,842 (118,473)(3) 715,369
Non-current accrued expense............................. 4,527 4,527 4,527
Deferred tax liability.................................. 126,844 (2,214)(2) 124,630 124,630
Stockholders' equity:
Common stock.......................................... 1,871 1,871 5,851(3) 7,722
Additional paid-in capital............................ 119,300 7,434(1) 126,734 159,099(3) 285,833
Treasury stock........................................ (9,682) (9,682) (9,682)
Retained earnings..................................... 33,133 (4,075)(2) 29,058 29,058
--------- ----------- -----------
Total Stockholders' Equity.............................. 144,622 147,981 312,931
--------- ----------- -----------
Total Liabilities and Stockholders' Equity........ $1,175,530 $1,170,647 $1,211,124
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
8
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
(FORMERLY KEY ENERGY GROUP, INC.)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO
PRO FORMA
DAWSON FORMA COMBINED
PRO COMBINED UNITS AFTER
FORMA WITH OFFERING UNITS OFFERING
COMPANY DAWSON ADJUSTMENTS DAWSON ADJUSTMENTS OFFERING ADJUSTMENTS
----------- --------- ------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Oilfield services......... $ 374,845 $ 223,228 $ 598,073 $ 598,073
Oil and gas well
drilling................ 35,095 -- 35,095 35,095
Oil and gas............... 7,030 -- 7,030 7,030
Other, net................ 3,076 2,304 5,380 5,380
----------- --------- ----------- -----------
420,046 225,532 645,578 645,578
Cost and Expenses:
Oilfield services......... 259,495 156,684 416,179 416,179
Oil and gas well
drilling................ 26,473 -- 26,473 26,473
Oil and gas............... 2,983 -- 2,983 2,983
Depreciation, depletion
and amortization........ 31,001 21,802 $ (2,057)(4) 50,746 50,746
General and
administrative.......... 39,813 22,342 62,155 62,155
Interest.................. 21,476 13,838 31,841(5) 67,155 $ 3,484(6) 70,639 $ (10,506)(7)
----------- --------- ----------- -----------
381,241 214,666 625,691 629,175
Pretax income............... 38,805 10,866 19,887 16,403
Income tax expense.......... 14,630 3,977 (9,984)(8) 8,623 (1,219)(8) 7,404 3,676(8)
----------- --------- ----------- -----------
Net income.................. $ 24,175 $ 6,889 $ 11,264 $ 8,999
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Earnings per share:
Net income................ $ 1.41 $ 0.66 $ 0.52
Basic weighted average
shares outstanding...... 17,153 17,153 17,153
<CAPTION>
PRO
FORMA
COMBINED
-----------
<S> <C>
Revenue:
Oilfield services......... $ 598,073
Oil and gas well
drilling................ 35,095
Oil and gas............... 7,030
Other, net................ 5,380
-----------
645,578
Cost and Expenses:
Oilfield services......... 416,179
Oil and gas well
drilling................ 26,473
Oil and gas............... 2,983
Depreciation, depletion
and amortization........ 50,746
General and
administrative.......... 62,155
Interest.................. 60,133
-----------
618,669
Pretax income............... 26,909
Income tax expense.......... 11,080
-----------
Net income.................. $ 15,829
-----------
-----------
Earnings per share:
Net income................ $ 0.21
Basic weighted average
shares outstanding...... 75,662
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
9
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
(FORMERLY KEY ENERGY GROUP, INC.)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DAWSON PRO FORMA PRO FORMA
PRO COMBINED UNITS COMBINED
FORMA WITH OFFERING AFTER UNITS OFFERING
COMPANY DAWSON ADJUSTMENTS DAWSON ADJUSTMENTS OFFERING ADJUSTMENTS
----------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Oilfield services....... $ 222,939 $ 36,444 $ 259,383 $ 259,383
Oil and gas well
drilling.............. 32,150 -- 32,150 32,150
Oil and gas............. 3,607 -- 3,607 3,607
Other, net.............. 537 (89) 448 448
----------- ----------- ----------- -----------
259,233 36,355 295,588 295,588
Cost and Expenses:
Oilfield services....... 158,267 27,046 185,313 185,313
Oil and gas well
drilling.............. 26,019 -- 26,019 26,019
Oil and gas............. 1,638 -- 1,638 1,638
Depreciation, depletion
and amortization...... 25,130 5,443 $ (1,365)(4) 29,208 29,208
General and
administrative........ 25,776 5,778 $ 31,554 31,554
Corporate
Restructuring......... 6,699 -- 6,699 6,699
Interest................ 27,327 2,914 3,336(5) 33,577 $ 1,763(6) 35,340 $ (5,253)(7)
----------- ----------- ----------- -----------
270,856 41,181 314,008 315,771
Pretax (loss)............. (11,623) (4,826) (18,420) (20,183)
Income tax benefit........ (3,663) (583) 1,200(8) (5,446) (617)(8) (6,063) 1,839(8)
----------- ----------- ----------- -----------
Net loss.................. $ (7,960) $ (4,243) $ (12,974) $ (14,120)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per share:
Net loss................ $ (0.44) $ (0.71) $ (0.77)
Basic weighted average
shares outstanding.... 18,283 18,283 18,283
<CAPTION>
PRO
FORMA
COMBINED
-----------
<S> <C>
Revenue:
Oilfield services....... $ 259,383
Oil and gas well
drilling.............. 32,150
Oil and gas............. 3,607
Other, net.............. 448
-----------
295,588
Cost and Expenses:
Oilfield services....... 185,313
Oil and gas well
drilling.............. 26,019
Oil and gas............. 1,638
Depreciation, depletion
and amortization...... 29,208
General and
administrative........ 31,554
Corporate
Restructuring......... 6,699
Interest................ 30,087
-----------
310,518
Pretax (loss)............. (14,930)
Income tax benefit........ (4,224)
-----------
Net loss.................. $ (10,706)
-----------
-----------
Earnings per share:
Net loss................ $ (0.14)
Basic weighted average
shares outstanding.... 76,792
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
10
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
(FORMERLY KEY ENERGY GROUP, INC.)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Key--Represents our consolidated balance sheet as of December 31, 1998 and
our consolidated statements of operations for the twelve months ended June 30,
1998 and the six months ended December 31, 1998.
Dawson--Represents Dawson's combined statement of operations for the twelve
months ended June 30, 1998 and the operating results from July 1, 1998 through
September 14, 1998.
2. PRO FORMA ADJUSTMENTS
(1) Gives effect to the units offering and the application of the net proceeds
therefrom including debt issuance costs of approximately $7,000,000. The
units offering includes the issuance of 150,000 warrants to purchase an
aggregate of 2,032,565 shares of common stock in connection with the units
offering. Accordingly, $7,434,000 of the proceeds of the units offering was
allocated to the value of the warrants with the remainder allocated to the
14% notes.
(2) Gives effect to the write-off of debt issuance costs incurred in connection
with the bridge credit facility we entered into in connection with the
Dawson acquisition.
(3) Gives effect to this offering and the concurrent offering and the
application of the net proceeds therefrom.
(4) To record the estimated decrease in depreciation and amortization expense
for the property, plant and equipment acquired in the Dawson acquisition,
due to the differences in useful lives and salvage values we assigned
compared to the estimated lives and salvage values Dawson assigned (dollars
in thousands):
<TABLE>
<CAPTION>
10% DEPRECIABLE
FMV SALVAGE BASIS LIFE QUARTERLY ANNUAL
---------- ----------- --------------- ----- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
DEPRECIATION:
Well service rigs-core............... $ 139,500 $ 13,950 $ 125,550 25 $ 1,037 $ 5,022
Well service rigs-components......... 15,500 1,550 13,950 10 288 1,395
Well service equipment............... 31,000 3,100 27,900 10 576 2,790
Motor vehicles....................... 24,000 2,400 21,600 5 892 4,320
Furniture and fixtures............... 2,000 200 1,800 5 74 360
Buildings............................ 5,000 500 4,500 30 32 150
------------- -----------
Total new depreciation.................................................................... 2,899 14,037
Recorded depreciation..................................................................... 4,629 19,081
------------- -----------
Pro forma adjustment...................................................................... $ (1,730) $ (5,044)
------------- -----------
------------- -----------
AMORTIZATION:
Dawson goodwill...................... N/A N/A 80,395 25 $ 664 $ 3,216
Dawson goodwill-deductible........... 42,351 20 437 2,117
Non-competes w/Dawson executives..... N/A N/A 1,125 3 78 375
------------- -----------
Total new amortization.................................................................... 1,179 5,708
Recorded amortization..................................................................... 814 2,721
------------- -----------
Pro forma amortization.................................................................... $ 365 $ 2,987
------------- -----------
------------- -----------
Total pro forma adjustment................................................................ $ (1,365) $ (2,057)
------------- -----------
------------- -----------
</TABLE>
11
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
(FORMERLY KEY ENERGY GROUP, INC.)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) To record incremental interest on the borrowings to finance the Dawson
acquisition. The following table reflects the calculation of the pro forma
adjustment (dollars in thousands):
<TABLE>
<CAPTION>
SIX
YEAR MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31,
1998 1998
--------- -------------
<S> <C> <C>
Incremental interest expense due to increased indebtedness incurred in connection with
the Dawson acquisition ($229,361 of incremental debt to purchase Dawson capital stock,
including fees and expenses, times a weighted average interest rate of 9.38%).......... $ 22,887 $ 1,098
Incremental interest expense due to the higher interest rate and higher principal amount
under the new credit facility compared to the average for the previous credit facility
($150,000 times 8.44% plus $22,000 times 8.94% less historical credit facility interest
expense)............................................................................... 5,069 1,267
Incremental interest expense due to the refinancing of indebtedness in connection with
the Dawson acquisition ($19,425 of incremental debt issuance costs divided by five
years)................................................................................. 3,885 971
--------- ------
$ 31,841 $ 3,336
--------- ------
--------- ------
</TABLE>
(6) To adjust interest expense for incremental effect of 14% notes sold in the
units offering, the proceeds being used to retire the remaining $148.6
million principal amount under the bridge credit facility.
(7) To adjust interest expense for partial repayment of the credit facility with
approximately $124.5 million of the net proceeds of this offering and the
concurrent offering.
(8) To restate combined income tax expense, adjusting for certain permanent
book/tax differences, at our statutory tax rate of 35% adjusted for
non-deductible amounts, primarily amortization of goodwill.
12
<PAGE>
SELECTED FINANCIAL DATA
The following summary historical financial information for the fiscal years
ended June 30, 1996, 1997 and 1998 has been derived from our audited
consolidated financial statements incorporated herein by reference. The
following summary historical financial information for the six months ended
December 31, 1997 and 1998 and as of December 31, 1998 has been derived from our
unaudited financial statements incorporated herein by reference. The unaudited
pro forma combined financial information for the fiscal year ended June 30, 1998
and the six months ended December 31, 1998 gives effect to (i) the acquisition
of Dawson Production Services, Inc. and related transactions; (ii) the offering
on January 19, 1999 of 150,000 units consisting of $150,000,000 principal amount
of our 14% senior notes due 2009 and 150,000 warrants to purchase 2,032,565
shares of our common stock, and the application of the net proceeds therefrom;
and (iii) this offering and the concurrent offering, and the application of the
net proceeds therefrom as if they had occurred on July 1, 1997 for the statement
of operations data. The pro forma combined balance sheet data is presented as if
the units offering and the offering and sale of the common stock offered hereby
had occurred on December 31, 1998. The unaudited pro forma combined financial
information is not necessarily indicative of the financial results for the
periods presented. In addition, future results may vary significantly from the
results reflected in our unaudited pro forma combined financial statements
because of, among other factors, changes in products and service prices and
future acquisitions. This information should be read in conjunction with our
audited consolidated financial statements and the notes thereto incorporated
herein by reference, and the unaudited pro forma combined financial statements
and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
PRO FORMA SIX MONTHS ENDED SIX MONTHS
YEAR ENDED JUNE 30, COMBINED DECEMBER 31, ENDED
---------------------------------- YEAR ENDED JUNE ---------------------- DECEMBER 31,
1996 1997 1998 30, 1998 (1)(4) 1997 1998 1998 (1)
---------- ---------- ---------- ------------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................. $ 65,857 $ 162,425 $ 420,046 $ 645,578 $ 185,072 $ 259,233 $ 295,588
Costs and expenses....... 60,282 147,750 381,241 618,669 166,707 270,856 310,518
Interest expense......... 2,477 7,879 21,476 60,133 9,008 27,327 30,087
Pretax income (loss)..... 5,474 14,671 38,805 26,909 18,365 (11,623) (14,930)
Net income (loss)........ 3,586 9,098 24,175 15,829 11,456 (7,960) (10,706)
Earnings per share--
basic.................. 0.46 0.81 1.41 0.21 0.71 (0.44) (0.14)
OTHER FINANCIAL DATA:
EBITDA (2) $ 12,753 $ 33,630 $ 91,282 $ 137,788(3) $ 39,882 $ 40,834 $ 44,365(3)
Capital expenditures..... 7,665 24,755 59,266 N/A 24,600 19,353 N/A
Depreciation, depletion
and amortization....... 4,701 11,076 31,001 50,746 12,509 25,130 29,208
EQUIPMENT SUMMARY (END OF
PERIOD):
Well service rigs........ 332 523 803 1,330 N/A 1,421 N/A
Drilling rigs............ 6 9 70 70 N/A 74 N/A
Oilfield trucks.......... 222 437 733 933 N/A 1,121 N/A
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
<S> <C> <C>
PRO FORMA
ACTUAL COMBINED
------------ ------------
BALANCE SHEET DATA:
Property and equipment, net......................................................... $ 785,127 $ 785,127
Total assets........................................................................ 1,175,530 1,211,124
Long-term debt, less current maturities............................................. 839,870 715,369(4)
Stockholders' equity................................................................ 144,622 312,931(5)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
13
<PAGE>
(1) See notes to Unaudited Pro Forma Combined Financial Statements.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization. Although EBITDA is not a measure of performance calculated in
accordance with GAAP, we believe that EBITDA is accepted as a generally
recognized measure of performance in our industry. Nevertheless, this
measure should not be considered in isolation or as a substitute for
operating income, net income, net cash provided by operating activities or
any other measure for determining our operating performance or liquidity
which is calculated in accordance with GAAP.
(3) Pro Forma EBITDA includes only the impact of the Dawson acquisition. It does
not include the full EBITDA impact of other acquisitions completed since
July 1, 1997. The pro forma adjustments contained in the following table are
based on historical and estimated historical financial results for other
acquisitions had they been completed on July 1, 1997. Adjusted pro forma
EBITDA is not necessarily indicative of the results that would have accrued
had the acquisitions occurred on July 1, 1997, nor is it necessarily
indicative of future results. None of the adjustments reflect the impact of
cost savings realized from such acquisitions or additional cost savings
estimated to be realized from the consolidation of Dawson and our company
wide restructuring plan.
<TABLE>
<CAPTION>
ADJUSTMENTS TO
PRO FORMA EBITDA
----------------------------
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
1998 1998
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Pro forma EBITDA................................................ $ 137,788 $ 44,365
Adjustments:
Unaudited historical EBITDA of other acquisitions (i)......... 28,236 284
Estimated EBITDA based on unaudited historical EBITDA of other
acquisitions (ii)........................................... 5,723 5,990
----------- -------
Sub-total adjustments....................................... 33,959 6,274
----------- -------
Adjusted pro forma EBITDA....................................... $ 171,747 $ 50,639
----------- -------
----------- -------
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENTS TO PRO FORMA
CASH INTEREST EXPENSE
----------------------------
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
1998 1998
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Adjusted pro forma cash interest expense (iii).................. $ 63,424 $ 31,712
----------- -------
----------- -------
</TABLE>
(i) Historical EBITDA based on unaudited financial statements of acquired
businesses before the acquisitions, which may or may not have been
prepared in accordance with GAAP.
(ii) Estimated historical EBITDA calculated by extending the impact of
unaudited historical EBITDA from the date of the latest statements of
operations for the acquired businesses to the date of the acquisitions.
(iii) Calculated by multiplying pro forma indebtedness, incurred in
connection with all acquisitions and the units offering by the applicable
interest rate for each layer of indebtedness (weighted average of 8.71%).
(4) Gives effect to the issuance of 150,000 warrants to purchase an aggregate of
2,032,565 shares of common stock in connection with the units offering.
Accordingly, $7,434,000 of the proceeds of the units offering were allocated
to the value of the warrants with the remainder allocated to the notes.
Consequently, the notes are recorded at a discount.
(5) Gives effect to the write-off of debt issuance costs incurred in connection
with the bridge credit facility we entered into in connection with the
Dawson acquisition.
14
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of our common stock in this offering and the
concurrent offering are estimated to be approximately $165 million ($183 million
if the underwriters' over-allotment option is exercised in full) after payment
of a $1.5 million commitment fee to an affiliate of PNC related to a standby
financing commitment in connnection with this offering that was not required to
be exercised. We intend to use approximately $124.5 million of such net proceeds
to repay a pro rata portion of each of the Tranche A term loan and Tranche B
term loan under our senior credit facility. The Tranche B loan holders have the
right to refuse prepayments. To the extent any Tranche B term loan prepayments
are refused, we will pay down the Tranche A term loan. The Tranche A term loan
currently bears interest at the annual rate of LIBOR plus 3.50% and matures on
September 14, 2003. The Tranche B term loan currently bears interest at the
annual rate of LIBOR plus 4.0% and matures on June 14, 2004. We do not intend to
pay down the revolver under the senior credit facility until we have
substantially improved our operating results and financial position.
The remaining $40.5 million of estimated net proceeds ($58.4 million if the
underwriters' over-allotment option is exercised in full) will be used for
general corporate purposes, which may include working capital, payment of
operating expenses, capital expenditures, acquisitions and redemptions of
securities; provided that if the over-allotment option is exercised in full,
approximately $4.5 million will be used to repay a pro rata portion of the
Tranche A term loan and Tranche B term loan as described above.
We believe that the cash provided by this offering and the concurrent
offering, together with anticipated cash flow from operations, will enable us to
meet our scheduled debt service requirements for at least the next 18 months.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for Key by Porter & Hedges, L.L.P., Houston, Texas.
15
<PAGE>
CAPITALIZATION
This table sets forth: (i) our total capitalization as of December 31, 1998;
(ii) our pro forma capitalization as of December 31, 1998 giving effect to the
offering and sale of $150 million of units consisting of $150 million of our 14%
senior subordinated notes due 2009 and 150,000 warrants to purchase 2,032,565
shares of our common stock and the application of the net proceeds therefrom;
and (iii) our pro forma combined capitalization giving effect to this offering
and the concurrent offering and the application of the net proceeds therefrom.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA COMBINED
---------- ----------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term debt and capital leases.................... $ 9,511 $ 9,511 $ 3,511(3)
---------- ----------- ------------
---------- ----------- ------------
Long-term debt, less current maturities:
Senior credit facility--Revolver......................................... $ 110,000 $ 110,000 $ 110,000
Senior credit facility--Tranche A term loan.............................. 144,000 144,000 45,977(3)
Senior credit facility--Tranche B term loan.............................. 199,500 199,500 179,050(3)
9 3/8% Senior notes...................................................... 1,406 1,406 1,406
Interim credit facility.................................................. 148,594 -- --
14% Senior subordinated notes............................................ -- 142,566(1) 142,566
7% Convertible subordinated debentures................................... 4,600 4,600 4,600
5% Convertible subordinated notes........................................ 216,000 216,000 216,000
Other long-term debt and capital leases.................................. 15,770 15,770 15,770
---------- ----------- ------------
Total long-term debt, less current maturities............................ 839,870 833,842 715,369
---------- ----------- ------------
Total debt................................................................. $ 849,381 $ 843,353 $ 718,880
---------- ----------- ------------
---------- ----------- ------------
Stockholders' equity:
Common stock, $.10 par value, 100,000,000 shares authorized, 18,709,735
shares issued; 18,709,735 shares issued pro forma; 77,218,507 shares
issued pro forma combined.............................................. $ 1,871 $ 1,871 $ 7,722
Additional paid-in capital............................................... 119,300 126,734 285,833
Treasury stock, 416,666 shares........................................... (9,682) (9,682) (9,682)
Retained earnings........................................................ 33,133 29,058(2) 29,058
---------- ----------- ------------
Total stockholders' equity........................................... 144,622 147,981 312,931
---------- ----------- ------------
Total capitalization....................................................... $ 994,003 $ 991,334 $ 1,031,811
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
- ------------------------
(1) Gives effect to the issuance of 150,000 warrants to purchase an aggregate of
2,032,565 shares of common stock in connection with the units offering.
Accordingly, $7,434,000 of the proceeds of the units offering were allocated
to the value of the warrants with the remainder allocated to the 14% notes.
Consequently, the notes are recorded at a discount.
(2) Gives effect to the write-off of debt issuance costs incurred in connection
with the bridge credit facility we entered into in connection with the
Dawson acquisition.
(3) Assumes that the net proceeds of this offering to be allocated to PNC Bank's
portion of the Tranche B term loan will be applied to the Tranche A term
loan and that certain other holders of the Tranche B term loan also will
refuse the proceeds allocable to their portions of the Tranche B term loans.
To the extent any further proceeds allocable to the Tranche B term loan are
refused, such proceeds will be allocated to the Tranche A term loans.
16
<PAGE>
May 6, 1999
[LOGO]
KEY ENERGY SERVICES, INC.
3,508,772 SHARES
COMMON STOCK
------------------
PROSPECTUS
SUPPLEMENT
------------------
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We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
- --------------------------------------------------------------------------------
