<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 16, 1999
- --------------------------------------------------------------------------------
PRELIMINARY PROSPECTUS SUPPLEMENT
TO
PROSPECTUS DATED APRIL 16, 1999
- --------------------------------------------------------------------------------
[LOGO]
KEY ENERGY SERVICES, INC.
56,000,000 SHARES
COMMON STOCK
TRADING SYMBOL & MARKET: KEG / NYSE
The underwriters have an option to purchase an additional 7,920,000 shares
from Key to cover over-allotments.
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.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price:........................................... $ $
Underwriting fees:............................................... $ $
Proceeds to Key:................................................. $ $
</TABLE>
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.
FRIEDMAN BILLINGS RAMSEY DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
----------------------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS APRIL , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Key Energy Services, Inc............................................................... 3
The Offering........................................................................... 3
The Concurrent Offerings............................................................... 3
Recent Developments.................................................................... 5
Risk Factors........................................................................... 6
Unaudited Pro Forma Combined Financial Statements...................................... 7
Selected Financial Data................................................................ 13
Use of Proceeds........................................................................ 15
Capitalization......................................................................... 16
Non-Voting Common Stock................................................................ 17
Underwriting........................................................................... 17
Legal Matters.......................................................................... 18
</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 intend to sell a number of shares of our common stock sufficient to yield
at least $175 million in gross proceeds in this offering and the concurrent
offerings discussed below. We expect that we will adjust the actual number of
shares that we sell in this offering and the concurrent offerings based on the
market price of the common stock and the demand for the shares offered at the
time of the offering to attempt to reach our gross proceeds target. We reserve
the right to sell more or less than $175 million of common stock. The share
amounts indicated in this prospectus supplement are based on an assumed offering
price of $3.125 per share, the closing price of our common stock on April 15,
1999.
We are offering to the public 56,000,000 shares of our common stock. The
underwriters have an option to purchase an additional 7,920,000 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.
<TABLE>
<S> <C>
Number of shares outstanding before this offering:.............................. 18,493,625
Number of shares offered in this offering and the concurrent offerings:......... 56,000,000
Number of shares outstanding after this offering and the concurrent
offerings:..................................................................... 74,493,625
</TABLE>
Before the offering, approximately 12.4 million shares of common stock were
issuable upon the exercise of outstanding options, warrants and convertible
securities.
If the underwriters are unsuccessful in raising gross proceeds of $175
million, all or a portion of the shortfall will be provided from the proceeds of
the concurrent offerings described below. See "Underwriting."
THE CONCURRENT OFFERINGS
PNC STANDBY COMMITMENT
THE COMMITMENT. An affiliate of PNC Bank, the principal lender under our
senior credit facility, has entered into a standby commitment agreement with us
to purchase up to $50 million of our common stock if the gross proceeds from
this offering and from a purchase commitment we have received from three
additional investors equal, in the aggregate, at least $100 million. The PNC
affiliate's obligation to purchase up to $50 million of our common stock will be
reduced by an amount
3
<PAGE>
and to the extent that the gross proceeds from this offering and from the
offering to other investors, in the aggregate, exceed $125 million, but the PNC
affiliate will have the option to purchase additional common stock to increase
its total investment under its agreement with us to the full $50 million. As a
result, if the gross proceeds from this offering equal $175 million, the PNC
affiliate will not be obligated to purchase any of our common stock. We are not
obligated to sell stock to the PNC affiliate to the extent gross proceeds in
this offering exceed $200 million, including the over-allotment option and the
concurrent offerings. The PNC affiliate's option to purchase shares, if the full
amount of the purchase commitment is not required, will terminate simultaneously
with the consummation of this offering. We also intend to issue warrants to a
PNC affiliate as described below. The PNC affiliate already holds 200,000 shares
of our common stock.
ISSUANCE OF NON-VOTING COMMON STOCK. A portion of the common stock purchased
by the PNC affiliate may be in shares of a new, non-voting series of our common
stock to the extent required under applicable regulatory constraints. To comply
with such regulatory constraints, we have agreed with the PNC affiliate that it
and its affiliates will own not more than 4.9999% of our issued and outstanding
voting common stock and not more than 24.9999% of our total equity at any time.
Upon transfer by the PNC affiliate, the non-voting common stock will convert
into our voting common stock. Other than as described under "Non-Voting Common
Stock," the non-voting common stock will have the same rights and preferences as
the common stock.
The common stock that the PNC affiliate will purchase is part of the
financing described in this prospectus supplement, but is being sold to the PNC
affiliate directly by us rather than through the underwriters in this offering,
and such common stock is not covered by this prospectus supplement.
PURCHASE PRICE AND FEES. The per share price for the shares of common stock
purchased by the PNC affiliate will be subject to a sliding-scale discount of
one percent to five percent from the price to investors in this offering, based
on the market value of the total number of shares of our common stock the PNC
affiliate purchases. We have also agreed to reimburse the PNC affiliate for
reasonable expenses in connection with the PNC affiliate's standby commitment,
not to exceed $50,000 in the aggregate. Another PNC affiliate will receive a fee
equal to $2.5 million for financial advisory services provided to us by that PNC
affiliate, provided that the gross proceeds from this offering and the offering
to the three investors described below are at least $100 million. We have the
option of paying that fee in cash or common stock (at the discounted price per
share being paid by the underwriters in this offering), or some combination
thereof, subject to regulatory constraints applicable to the PNC affiliate.
Although we intend to pay the fee in common stock, we cannot make any assurances
that we will do so. In addition, we may be foreclosed from issuing common stock
to the PNC affiliate if the issuance would cause the PNC affiliate to exceed
regulatory limits. The financial advisory services fee also includes warrants to
purchase 750,000 shares of our common stock at an exercise price equal to the
public offering price of the common stock being sold hereunder; however, such
warrants are issuable to the PNC affiliate only if the gross proceeds from this
offering are at least equal to $125 million.
LISTING. The non-voting common stock that the PNC affiliate purchases will
not be listed for trading on any stock exchange, but the common stock into which
the non-voting common stock is converted upon transfer will be listed on the New
York Stock Exchange.
REGISTRATION RIGHTS. We have agreed to enter into a registration rights
agreement with PNC affiliates that requires us to register for resale under the
Securities Act the common stock the PNC affiliate is purchasing pursuant to its
purchase commitment, the common stock issued upon exercise of the warrants the
PNC affiliate will receive as a financial advisory fee and the 200,000 shares of
our common stock it currently owns. However, the PNC affiliate has informed the
underwriters that it will agree not sell any of our common stock for 180 days
from the date of this offering unless the lead underwriter consents or the PNC
affiliate is required to do so under applicable law.
4
<PAGE>
COMMITMENT BY OTHER INVESTORS
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 this offering. These investors' obligations to purchase is contingent upon
the sale in this offering of at least $90 million of our common stock. 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 this offering, and such common stock is
not covered by this prospectus supplement.
USE OF PROCEEDS
We intend to use the net proceeds from this offering and the concurrent
offerings 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 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. 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. However, if depressed conditions in the well service industry continue
beyond anticipated levels, we may not be able to remain in compliance.
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, unusual
bad debt losses, office lease accruals and employee terminations, which we do
not expect 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.
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 operating losses as described
above under "Recent Developments." We believe that the proceeds of this offering
and the concurrent offerings 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 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 14, 1999, we had 18,493,625 shares of common stock outstanding.
Approximately 12.4 million additional shares of common stock were issuable upon
the exercise of outstanding options, warrants and convertible securities. We
expect to issue approximately $175 million of our common stock in this offering
and the concurrent offerings, and we will issue warrants to purchase 750,000
shares of our common stock to a PNC affiliate if the gross proceeds from this
offering are at least $125 million. In addition, this offering is anticipated to
trigger anti-dilution provisions in certain of our outstanding warrants,
resulting in approximately 1,387,540 additional shares of our common stock being
issuable upon exercise of such warrants. 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 offerings of up to $60 million of our
common stock will result in an approximate 400% 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 offerings. Therefore, our
prior trading volume and prior market price may not be indicative of the trading
volume and market price after this offering.
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 senior subordinated notes and warrants ("the Units") and the
application of the net proceeds therefrom, and this offering and the concurrent
offerings 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 offerings 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,
and we do not believe that the actual adjustments will differ significantly from
these preliminary estimates. Actual adjustments will be based on appraisals and
other analyses of fair values. 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 $ 40,837(3) $ 44,724
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.................................... 145,382 141,088 181,925
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 $1,211,484
--------- ----------- -----------
--------- ----------- -----------
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 (118,913)(3) 714,929
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 5,680(3) 7,551
Additional paid-in capital............................ 119,300 7,434(1) 126,734 160,070(3) 286,804
Treasury stock........................................ (9,682) (9,682) (9,682)
Retained earnings..................................... 33,133 (4,075)(2) 29,058 29,058
--------- ----------- -----------
Total Stockholders' Equity.............................. 144,622 147,981 313,731
--------- ----------- -----------
Total Liabilities and Stockholders' Equity........ $1,175,530 $1,170,647 $1,211,484
--------- ----------- -----------
--------- ----------- -----------
</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 $ (10,543)(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 3,689(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.................. 60,096
-----------
618,632
Pretax income............... 26,946
Income tax expense.......... 11,093
-----------
Net income.................. $ 15,853
-----------
-----------
Earnings per share:
Net income................ $ 0.21
Basic weighted average
shares outstanding...... 73,953
</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 $ (5,272)(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) 1,845(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................ 30,068
-----------
310,499
Pretax (loss)............. (14,911)
Income tax benefit........ (4,218)
-----------
Net loss.................. $ (10,693)
-----------
-----------
Earnings per share:
Net loss................ $ (0.14)
Basic weighted average
shares outstanding.... 75,083
</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
notes.
(2) Gives effect to the write-off of debt issue 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 offerings 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
------------- -----------
Totals 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 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
$125 million of the net proceeds of the Units 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 offerings, 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 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, future oil and gas production
declines 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....... 60,282 147,750 381,241 618,632 166,707 270,856 310,499
Interest expense......... 2,477 7,879 21,476 60,096 9,008 27,327 30,068
Pretax income (loss)..... 5,474 14,671 38,805 26,946 18,365 (11,623) (14,911)
Net income (loss)........ 3,586 9,098 24,175 $ 15,853 11,456 (7,960) (10,693)
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 1,211,484
Long-term debt, less current maturities............................................... 839,870 714,929(4)
Stockholders' equity.................................................................. 144,622 313,731(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 acquisition 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 the recently
announced 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).................. $ 63,387 $ 31,693
----------- -------
----------- -------
</TABLE>
(i) Historical EBITDA based on unaudited financial statements of acquired
businesses before the acquisition, 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 acquisition.
(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 offerings are estimated to be approximately $166 million. We intend
to use approximately $125 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. We expect PNC Bank will exercise its right to refuse prepayments
under the Tranche B loan. 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 3.75% 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 $41 million of estimated net proceeds will be used for general
corporate purposes, which may include working capital, payment of operating
expenses, capital expenditures, acquisitions and redemptions of securities.
We believe that the cash provided by this offering and the concurrent
offerings, together with anticipated cash flow from operations, will enable us
to meet our scheduled debt service requirements for at least the next two years.
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 offerings 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 52,746(3)
Senior credit facility--Tranche B term loan.............................. 199,500 199,500 171,841(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............................ 839,870 833,842 714,929
---------- ----------- ------------
Total debt................................................................. $ 849,381 $ 843,353 $ 718,440
---------- ----------- ------------
---------- ----------- ------------
Stockholders' equity:
Common stock, $.10 par value, 100,000,000 shares authorized, 18,709,735
shares outstanding; 18,709,735 shares outstanding pro forma, 75,509,735
shares outstanding pro forma combined.................................. $ 1,871 $ 1,871 $ 7,551
Additional paid-in capital............................................... 119,300 126,734 286,804
Treasury stock........................................................... (9,682) (9,682) (9,682)
Retained earnings........................................................ 33,133 29,058(2) 29,058
---------- ----------- ------------
Total stockholders' equity........................................... 144,622 147,981 313,731
---------- ----------- ------------
Total capitalization....................................................... $ 994,003 $ 991,334 $ 1,032,171
---------- ----------- ------------
---------- ----------- ------------
</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 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 the holders of the Tranche B term loan other than PNC Bank
will not 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>
NON-VOTING COMMON STOCK
LISTING. Our non-voting common stock will not be listed on any exchange,
but the common stock into which the non-voting stock will be converted will be
listed on the New York Stock Exchange.
DIVIDENDS. The non-voting common stockholders will receive dividends when
and if dividends are received by the voting common stockholders. Dividends may
be paid in cash, stock or another form. However, certain of our existing debt
agreements contain covenants that currently restrict us from paying dividends.
Additionally, in certain cases, common stockholders may not receive dividends
until we have satisfied our obligations to any preferred stockholders.
CONVERSION. Subject to certain limitations, the non-voting common stock
will automatically convert into our voting common stock upon transfer by the PNC
affiliate. The PNC affiliate has agreed that it will not transfer any non-voting
common stock unless the transfer will result in the conversion of the non-voting
common stock into voting common stock.
FULLY PAID. Any non-voting common stock we issue will be fully paid and
non-assessable.
VOTING RIGHTS. Non-voting common stockholders are not entitled to any
voting rights except certain voting rights permitted under applicable law, such
as voting as a class on matters affecting the rights, preferences and
obligations relating to the non-voting common stock; voting together with other
classes of common stock on the consolidation, merger or sale of substantially
all of our assets; or our liquidation or dissolution.
OTHER RIGHTS. Except with respect to voting rights, the non-voting common
stock will have the same rights as the voting common stock. We will notify the
non-voting common stockholders of any stockholders' meetings according to
applicable law. If we liquidate, dissolve or wind-up our business, either
voluntarily or not, non-voting common stockholders will share on a pro-rata
basis with all other common stockholders in the assets remaining after we pay
our creditors and preferred stockholders.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
we have agreed to sell to each of the underwriters named below, and each of the
underwriters has severally agreed to purchase, the number of shares of common
stock set forth opposite their names below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ------------------------------------------------------------------------------------- -----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ..............................................
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated......................
--------
Total............................................................................
--------
--------
</TABLE>
Under the terms and conditions of the underwriting agreement, the
underwriters are committed to purchase all the common stock offered hereby if
any is purchased. We have agreed to indemnify the underwriters against certain
civil liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect thereof.
The underwriters initially propose to offer the common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and to certain dealers at such offering price less a
concession not to exceed $ per share. The underwriters may allow, and such
dealers may reallow, a concession not to exceed $ per share to certain
other dealers. After the common stock is released for sale to the public, the
underwriters may change the offering price and other selling terms.
17
<PAGE>
We have granted to the underwriters an option exercisable during a 30-day
period after the date hereof to purchase, at the initial offering price less
underwriting discounts and commissions, up to an additional 7,920,000 shares of
common stock for the sole purpose of covering over-allotments, if any. To the
extent that the underwriters exercise the option, each underwriter will be
committed, subject to certain conditions, to purchase that number of additional
shares of common stock that is proportionate to such underwriter's initial
commitment.
Our net proceeds from the sale of our common stock in this offering and the
concurrent offerings are estimated to be approximately $166 million. If the
entire over-allotment option is fully exercised, the total public offering price
would be $199.8 million, underwriting fees would be $19.5 million and our net
proceeds would be $189.8 million.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering
creating a syndicate short position. In addition, the underwriters may bid for
and purchase common stock in the open market to cover syndicate short positions
or to stabilize the price of the common stock. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed common stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
The underwriters have informed us that they do not intend to confirm sales
of the common stock offered hereby to any accounts over which they exercise
discretionary authority.
An affiliate of PNC Bank, the principal lender on our senior credit
facility, owns 4.97% of the common stock of Friedman, Billings, Ramsey Group,
Inc., the parent company of Friedman, Billings, Ramsey & Co., Inc., the lead
underwriter in this public offering. PNC Bank and Friedman, Billings, Ramsey
Group, Inc. have formed a strategic alliance and have agreed to work together on
an arms-length basis to refer potential business to each other.
Our directors and executive officers have agreed that they will not,
directly or indirectly offer, sell, offer to sell, contract to sell, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, grant of any option to purchase or other sale
or disposition) of any of our common stock, or any securities convertible or
exercisable or exchangeable for any of our common stock, for a period of 180
days from the effective date of this offering. The PNC affiliate is subject to
similar restrictions on the transfer of common stock it receives in connection
with the PNC standby commitment. The underwriters, at any time and without
notice, may release all or any portion of the common stock subject to the
foregoing lock-up agreements.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for Key by Porter & Hedges, L.L.P., Houston, Texas, and for the underwriters by
Latham & Watkins, New York, New York.
18
<PAGE>
April , 1999
[LOGO]
KEY ENERGY SERVICES, INC.
56,000,000 SHARES
COMMON STOCK
------------------
PRELIMINARY
PROSPECTUS
SUPPLEMENT
------------------
FRIEDMAN BILLINGS RAMSEY
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
