UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ________
Commission file number 1-8038
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, 20th Floor, East Brunswick, NJ 08816
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number including area code: (732) 247-4822
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common Shares outstanding at May 12, 1999 - 77,302,401
<PAGE>
Key Energy Services, Inc. and Subsidiaries
INDEX
PART I. Financial Information
Item 1. Unaudited Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
PART II. Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
<PAGE>
Key Energy Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, June 30,
1999 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $28,451 $25,265
Accounts receivable, net of allowance for doubtful accounts
($7,705 and $2,843 at March 31, 1999 and June 30, 1998, respectively) 88,444 82,406
Inventories 11,529 13,315
Deferred tax asset 1,203 1,203
Prepaid income taxes 537 537
Prepaid expenses and other current assets 6,355 4,831
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 136,519 127,557
- ---------------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 619,790 400,731
Oil and gas well drilling equipment 84,805 61,629
Motor vehicles 71,281 19,748
Oil and gas properties and other related equipment, successful efforts 42,638
method 43,690
Furniture and equipment 6,918 5,333
Buildings and land 38,834 17,458
- ---------------------------------------------------------------------------------------------------------------------------
865,318 547,537
Accumulated depreciation and depletion (87,628) (48,385)
- ---------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 777,690 499,152
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill, net of accumulated amortization ($11,417 and $2,264 at
March 31, 1999 and June 30, 1998, respectively) 205,849 44,936
Other assets 41,990 26,995
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $1,162,048 $698,640
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $18,661 $20,124
Other accrued liabilities 35,093 22,239
Accrued interest 5,396 3,818
Current portion of long-term debt 10,622 1,848
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 69,772 48,029
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 857,099 397,931
Non-current accrued expenses 4,101 4,812
Deferred tax liability 111,071 92,940
Stockholders' equity:
Common stock, $.10 par value; 100,000,000 shares authorized, 18,709,735
and 18,684,479 shares issued at March 31, 1999 and June 30, 1998, respectively 1,870 1,868
Additional paid-in capital 126,735 119,303
Treasury stock, at cost; 416,666 shares at March 31, 1999 and
June 30, 1998 (9,682) (9,682)
Unrealized gain on available-for-sale securities - 2,346
Retained earnings 1,082 41,093
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 120,005 154,928
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,162,048 $698,640
===========================================================================================================================
</TABLE>
See the accompanying notes which are an integral part of these unaudited
consolidated financial statements.
<PAGE>
Key Energy Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
REVENUES:
Oilfield services $96,335 $104,014 $319,274 $271,505
Oil and gas well drilling 7,513 14,078 39,663 25,590
Oil and gas 1,195 1,730 4,802 5,422
Other, net (120) 902 417 3,201
- -----------------------------------------------------------------------------------------------------------------------
104,923 120,724 364,156 305,718
- -----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 76,598 71,790 234,865 187,518
Oil and gas well drilling 7,553 10,434 33,572 19,287
Oil and gas 929 787 2,567 2,282
Depreciation, depletion and amortization 18,498 9,605 43,628 31,117
General and administrative 15,833 11,685 40,754 21,832
Bad debt expense 4,865 89 5,720 269
Debt issuance costs 6,268 - 6,268 -
Interest 21,032 5,105 48,359 12,506
Corporate restructuring 1,500 - 8,199 -
- -----------------------------------------------------------------------------------------------------------------------
153,076 109,495 423,932 274,811
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (48,153) 11,229 (59,776) 30,907
Income tax provision (16,102) 4,147 (19,765) 11,542
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) $ (32,051) $7,082 $(40,011) $19,365
=======================================================================================================================
EARNINGS/(LOSS) PER SHARE :
Basic $ (1.75) $0.39 $ (2.19) $1.15
Diluted $ (1.75) $0.35 $ (2.19) $0.97
=======================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 18,293 18,295 18,286 16,843
Diluted 18,293 25,449 18,286 23,725
=======================================================================================================================
</TABLE>
See the accompanying notes which are an integral part of these unaudited
consolidated financial statements.
<PAGE>
Key Energy Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(32,051) $7,082 $(40,011) $19,365
Adjustments to reconcile income from operations to
net cash provided (used) by operations:
Depreciation, depletion and amortization 18,498 9,215 43,628 22,101
Amortization of deferred debt costs 1,626 - 3,990 -
Deferred income taxes (15,773) (261) (19,423) 3,809
Gain on sale of assets (34) - 13 -
Other non-cash items 11,964 - 18,656 -
Change in assets and liabilities net of effects
from the acquisitions:
(Increase) decrease in accounts receivable 21,241 (2,062) 17,188 (6,396)
(Increase) decrease in other current assets 537 (4,104) 1,731 (4,446)
Increase (decrease) in accounts payable and accrued expenses 7,079 (7,483) (37,097) (17,121)
Increase (decrease) in accrued interest 1,246 (1,989) 1,578 (776)
Other assets and liabilities (6,466) 1,317 (6,605) (3,400)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 7,867 1,715 (16,352) 13,136
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Oilfield service operations (5,090) (9,965) (19,617) (28,927)
Capital expenditures - Oil and gas well drilling operations (593) (1,593) (2,039) (4,966)
Capital expenditures - Oil and gas operations (448) (1,815) (3,828) (4,080)
Capital expenditures - Other (827) - (827) -
Proceeds from sale of fixed assets 5,477 - 5,637 -
Cash received in acquisitions - - 27,252 -
Acquisitions - Oilfield service operations - (24,654) (275,106) (159,314)
Acquisitions - Oil and gas well drilling - (15,216) - (37,082)
Acquisitions - Oil and gas operations - - - (600)
Acquisitions - Minority interest - - - (3,426)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,481) (53,243) (268,528) (238,395)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (1,971) (936) (6,176) (3,483)
Repayment of long-term debt (148,594) - (288,594) (216,337)
Borrowings under line-of-credit 20,000 25,000 458,000 224,000
Purchase of treasury stock - - - (9,682)
Proceeds from long-term debt 142,566 - 142,566 208,500
Proceeds from issuance of stock option warrants 7,434 - 7,434 -
Proceeds paid for debt issuance costs (5,681) - (25,317) -
Proceeds from exercise of warrants - - - 4,222
Proceeds from exercise of stock options - - - 942
Proceeds from other long-term debt 130 568 153 2,267
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,884 24,632 288,066 210,429
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 20,270 (26,896) 3,186 (14,830)
Cash at beginning of period 8,181 53,770 25,265 41,704
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of period $28,451 $26,874 $28,451 $26,874
============================================================================================================================
</TABLE>
See the accompanying notes which are an integral part of these unaudited
consolidated financial statements.
<PAGE>
Key Energy Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------------- --------------- ---------------- --------------
Net income/(loss) $(32,051) $7,082 $(40,011) $ 19,365
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale securities - - 1,200 -
--------------- --------------- ---------------- --------------
Comprehensive income/(loss), net of tax $(32,051) $ 7,082 $ (38,811) $ 19,365
=============== =============== ================ ==============
</TABLE>
See the accompanying notes which are an integral part of these unaudited
consolidated financial statements.
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 1999 and 1998
1. BASIS OF PRESENTATION
The consolidated financial statements of Key Energy Services, Inc. (the
"Company" or "Key") and its wholly-owned subsidiaries for the nine month and
three month periods ended March 31, 1999 and 1998 are unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-Q pursuant to the rules and regulations of
the Securities and Exchange Commission. However, in the opinion of management,
these interim financial statements include all the necessary adjustments to
fairly present the results of the interim periods presented. These unaudited
interim consolidated financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998. The results of operations for the
nine month and three month periods ended March 31, 1999 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
1999.
Accounting Changes.
Effective July 1, 1998 the Company made certain changes in the estimated useful
lives of its workover rigs, increasing the lives from 17 years to 25 years. This
change decreased the net loss by $775,000 and $2,325,000 in the three and nine
months ended March 31, 1999, respectively ($0.04 and $0.13 per share-basic). Had
this change been made effective July 1, 1997, the effect would have increased
net income by $306,000 and $1,011,000 in the three and nine months ended March
31, 1998, respectively ($0.02 and $0.06 per share-basic). This change was made
to better reflect the expected utilization of these assets over time, to better
provide matching of revenues and expenses and to better reflect the industry
standard in regards to estimated useful lives of workover rigs.
Comprehensive Income.
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130") Reporting Comprehensive Income, at the beginning of fiscal year 1999. SFAS
130 establishes standards for reporting and presentation of comprehensive income
and its components. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. In accordance with the provisions of SFAS 130, the
Company has presented the components of comprehensive income in its Unaudited
Consolidated Statements of Comprehensive Income.
Reclassifications and Adjustments.
Certain reclassifications have been made to the fiscal year 1998 results to
conform to the fiscal year 1999 presentations.
Amounts reported for the nine months ended March 31, 1998 differ from the
amounts previously reported on the Company's Quarterly Report on Form 10-Q, for
the nine months ended March 31, 1998, due to non-cash adjustments, recorded in
the fourth quarter of fiscal 1998, associated with the conversion of the
Company's 7% debentures converted in the first quarter of fiscal year 1998. See
footnote 4 for further discussion on conversion of the 7% debentures.
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
Restructuring Charge.
In response to the current industry downturn caused by historically low oil and
gas prices and the resulting slowdown in business, on December 7, 1998, the
Company announced a company-wide restructuring plan to reduce operating costs
beyond those achieved through our consolidation efforts. The plan involved a
reduction in the size of management and on-site work force, salary reductions
averaging 21% for senior management, the combination of previously separate
operating divisions and the elimination of redundant overhead and facilities.
The restructuring plan resulted in pretax charges to earnings of approximately
$6.7 million in the second quarter ending December 31, 1998 and $1.5 million in
the third quarter ending March 31, 1999. These charges include severance
payments and other termination benefits to terminated employees, lease
commitments related to closed facilities and environmental studies performed on
closed leased yard locations. The Company expects to complete the plan by June
30, 1999. The major components of the restructuring charge and costs incurred to
date are as follows:
Restructuring Costs Incurred Balance as of
Description (in thousands) Charge through March 31, 1999 March 31, 1999
- --------------------------------------------------------------------------------
Severance/employee costs $7,731 $(3,544) $4,187
Lease commitments 433 - 433
Environmental clean-up 35 - 35
- --------------------------------------------------------------------------------
Total $8,199 $(3,544) $4,655
================================================================================
In connection with the Dawson acquisition, we recorded an expense of
approximately $6.3 million in the three months ended March 31, 1999 as debt
issuance costs and fees related to the syndication of our bridge credit facility
(see Note 6).
2. EARNINGS PER SHARE
The following table sets forth the computation of diluted net income per
common share:
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
Description (in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Diluted EPS Computation:
Numerator-
Net Income $(32,051) $ 7,082 $(40,011) $19,365
Effect of Dilutive
Securities,Tax Effected:
Interest on
Convertible Debt * - 1,752 - 3,599
- --------------------------------------------------------------------------------
$(32,051) $ 8,834 $(40,011) $22,964
================================================================================
(table continued on next page)
<PAGE>
Three Months Ended Nine Months Ended
March 31, March 31, March 31, March 31,
(in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
(continued)
Diluted EPS Computation:
Denominator-
Weighted Average Common
Shares Outstanding 18,293 18,295 18,286 16,843
Warrants * - 74 - 199
Stock Options * - 997 - 1,357
7% Convertible Subordinated
Debentures * - 472 - 1,497
5% Convertible Subordinated
Notes * - 5,610 - 3,829
------------------------------------------------------------------------------
18,293 25,449 18,286 23,725
==============================================================================
Diluted EPS $ (1.75) $ 0.35 $ (2.19) $ 0.97
* Net income effect and share effect related to Warrants, Stock Options, 7%
Convertible Subordinated Debentures and 5% Convertible Subordinated Notes are
omitted in fiscal 1999 as they have an anti-dilutive effect during the three and
nine months ended March 31, 1999.
<PAGE>
3. BUSINESS AND PROPERTY ACQUISITIONS
The Company
The Company conducts its oil and gas well service operations through
wholly-owned subsidiaries in all major onshore oil and gas producing regions of
the continental United States and in Argentina and Canada. The Company conducts
contract drilling operations through wholly-owned subsidiaries in several oil
and gas producing regions of the continental United States and in Argentina and
Canada. The Company also owns and produces oil and natural gas in the Permian
Basin and the Panhandle of Texas.
As of March 31, 1999, the Company owned a fleet of approximately 1,420 well
service rigs, 1,130 oilfield trucks, and 75 drilling rigs, including 21 service
rigs, 38 trucks and six drilling rigs in Argentina and three drilling rigs and
well servicing equipment in Canada.
Acquisitions Completed During the Nine Months Ended March 31, 1999
The following acquisitions were completed during the nine months ended March 31,
1999. Except as otherwise noted, the results of operations from these
acquisitions are included in the Company's results of operations for the
applicable nine months ended March 31, 1999 (effective as of the date of
completion of the acquisition unless otherwise noted). Each of the acquisitions
was accounted for using the purchase method of accounting. The purchase prices
specified below are based on cash paid at closing and do not include any
post-closing adjustments, if any, paid or to be paid based upon a re-calculation
of the working capital of acquired companies as of the closing dates.
<PAGE>
Colorado Well Service Inc.
On July 15, 1998, the Company completed the acquisition of the assets of
Colorado Well Service, Inc. ("Colorado") for approximately $6.5 million in cash.
These assets included seventeen well service rigs and one drilling rig in Utah
and Colorado.
TransTexas Oilfield Service Assets
On August 19, 1998, the Company completed the acquisition of certain oilfield
service assets of TransTexas Gas Corporation ("TransTexas") for approximately
$20.5 million in cash. The TransTexas assets were based in Laredo, Texas and
included nine well service rigs, approximately 80 oilfield trucks, 173 frac and
other tanks, and various pieces of equipment, parts and supplies.
Dawson Production Services, Inc.
On September 15, 1998, Midland Acquisition Corp. ("Midland"), a New Jersey
corporation and a wholly-owned subsidiary of the Company, completed its cash
tender offer (the "Tender Offer") for all outstanding shares of common stock,
par value $0.01 per share (the "Dawson Shares"), including the associated common
stock purchase rights, of Dawson Production Services, Inc. ("Dawson") at a price
of $17.50 per share. Midland accepted for payment 10,021,601 Dawson Shares for a
total purchase price of approximately $175.4 million. The acceptance of tendered
Dawson Shares, together with Dawson Shares previously owned by Midland and the
Company prior to the commencement of the Tender Offer resulted in Midland and
the Company acquiring approximately 97.0% of the outstanding Dawson Shares. The
purchase price for Dawson Shares pursuant to the Tender Offer was determined
through arms-length negotiations between the parties and was based on a variety
of factors, including, without limitation, the anticipated earnings and cash
flows of Dawson.
The Tender Offer was made pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of August 11, 1998, by and among Midland, the
Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger
Agreement, Midland was merged with and into Dawson (the "First Merger") under
the laws of the States of New Jersey and Texas and all Dawson Shares not owned
by Midland were canceled and retired and converted into the right to receive
$17.50 in cash. On September 21, 1998, Dawson was merged with and into the
Company (the "Second Merger") pursuant to the laws of the States of Maryland and
Texas.
The total consideration paid for the Dawson Shares pursuant to the Tender Offer
and the First Merger was approximately $181.7 million. Including the cost of
Dawson Shares purchased during the fourth quarter of fiscal year 1998 and debt
net of cash assumed, the aggregate purchase price for Dawson was approximately
$321.3 million.
At the time of the closing, Dawson owned approximately 527 well service rigs,
200 oilfield trucks, and 21 production testing units in South Texas and the Gulf
Coast, East Texas and Louisiana, the Permian Basin of West Texas and New Mexico,
the Anadarko Basin of Texas and Oklahoma, California, and in the inland waters
of the Gulf of Mexico.
<PAGE>
Flint Well Servicing Assets
On September 16, 1998, the Company completed the acquisition of substantially
all of the well servicing assets of Flint Engineering & Construction Co., a
subsidiary of Flint Industries, Inc. ("Flint") for approximately $11.9 million
in cash. These assets included 55 well service rigs and 25 oilfield trucks in
Texas, Oklahoma, Kansas, Montana and Utah.
Iceberg S.A.
On September 24, 1998, the Company completed the acquisition of the assets of
Iceberg, S.A. ("Iceberg") for approximately $4.3 million in cash. The Iceberg
assets included four well service rigs in Comodoro Rivadavia, Argentina.
HSI Group
On September 24, 1998, the Company completed the acquisition of substantially
all of the operating assets of Hellums Services II, Inc., Superior Completion
Services, Inc., South Texas Disposal, Inc. and Elsik II, Inc. ("HSI Group") for
$47.9 million in cash. These assets included approximately 80 oilfield trucks
and eight well service rigs in South Texas.
Corunna Drilling
Effective October 21, 1998, the Company completed the acquisition of Corunna
Drilling for approximately $2.8 million in cash. Corunna operates three drilling
rigs and related equipment in Ontario, Canada. The operating results of Corunna
are included in the Company's results of operations effective October 21, 1998.
Pro Forma Results of Operations - (unaudited)
The following unaudited pro forma results of operations have been prepared as
though Dawson had been acquired on July 1, 1997 with adjustments to record
specifically identifiable decreases in direct costs and general and
administrative expenses related to the termination of individual employees.
Dawson is included in financial results for all of the three months ended March
31, 1999.
Three months ended Nine months ended
March 31, March 31,
(Thousands, except per share data)1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues $104,923 $176,887 $400,511 $477,226
Net income/(loss) (32,051) 4,156 (62,848) 10,874
Basic earnings/(loss) per share $ (1.75) $ 0.23 $ (3.44) $ 0.65
4. STOCKHOLDERS' EQUITY
On May 7, 1999, the Company closed the public offering of 55,300,000 shares of
common stock (300,000 shares of which were sold pursuant to the underwriters'
over-allotment option discussed below) at $3.00 per share, or $166 million (the
"Public Offering"). In addition, the Company closed the offering of 3,508,772
shares of common stock at $2.85 per share, or $10 million (the "Concurrent
Offering" and together with the Public Offering, the "Equity Offering"). Net
proceeds from the Equity Offering were approximately $165.8 million, $125.0
<PAGE>
million of which was used to partially repay the PNC bank term loans,
(approximately $104.5 million for the Tranche A Term Loan and approximately
$21.5 million for the Tranche B Term Loan). After repayments, the outstanding
balances were approximately $45.5 million for the Tranche A Term Loan and
approximately $179.5 million for the Tranche B Term Loan with approximately
$40.8 million remaining for working capital. In addition, the Company granted
the underwriters of the Public Offering an option to purchase an additional 6.3
million shares to cover over-allotments, 300,000 shares of which were purchased
at the initial closing of the Public Offering, with the remaining portion of the
option (6.0 million shares) being unexercised as of the date hereof. Total
shares outstanding following the Equity Offering will be approximately 77.3
million shares (83.3 million shares if the over-allotment option is exercised in
full), an increase of approximately 317% (350% assuming full exercise of the
over-allotment option) over the previously outstanding amount of approximately
18.5 million as of April 30, 1999.
5. LONG-TERM DEBT
At March 31, 1999, major components of the Company's long-term debt were as
follows:
(i) PNC Credit Facility
In connection with the acquisition of Dawson, the total consideration paid for
the Dawson Shares pursuant to the Tender Offer and the First Merger was
approximately $181.7 million. The Company's source of funds to pay such amount,
certain outstanding debt of Dawson and the Company and related fees and expenses
was (i) a bridge loan agreement in the amount of $150,000,000, dated as of
September 14, 1998, among the Company, Lehman Brothers Inc., as Arranger, and
Lehman Commercial Paper Inc., as Administrative Agent, and the other lenders
party thereto (the "Bridge Loan Agreement") which was subsequently repaid with
proceeds from the 14% Senior Subordinated Notes - see below and, (ii) a
$550,000,000 Second Amended and Restated Credit Agreement, dated as of June 6,
1997, as amended and restated through September 14, 1998, among the Company, PNC
Bank, National Association, as Administrative Agent, Norwest Bank Texas, N.A.,
as Collateral Agent, PNC Capital Markets, Inc., as Arranger, and the other
lenders named from time to time parties thereto (the "Second Amended and
Restated Credit Agreement").
Between November 1998 and May 1999, the Second Amended and Restated Credit
Agreement was amended to (i) reduce the maximum amount of credit available
thereunder to $500 million, (ii) to change the interest rates payable
thereunder, (iii) to ease required financial covenant levels, (iv) to add a
requirement that the Company achieve certain minimum levels of trailing
12-month EBITDA, (v) to tighten restrictions on acquisitions, (vi) to modify
the amount to be prepaid if the Company issues additional capital stock or if
the Company has excess cash flow (as defined) or if the Company sells certain
specific assets, (vii) to delete certain of the financial covenants and add
others and, (viii) to provide minimum levels of consolidated liquidity (as
defined). Following the amendments, the credit facility provided for $150
million in revolving loans, $150 million in five-year Tranche A term loans and
$200 million in Tranche B term loans maturing sixty-nine months after the date
the loans were made. In addition, up to $20 million of letters of credit can be
issued, but any outstanding letters of credit will reduce the $150 million
revolving credit facility. The commitment to make revolving loans will be
reduced to $125 million and $100 million, respectively, on September 14, 2001
and September 14, 2002. The revolving commitment will terminate on September
14, 2003, and all the revolving loans must be paid on or before that date.
<PAGE>
Loans under the Second Amended and Restated Credit Agreement, as amended must
be prepaid from (i) 100% of the net cash proceeds of up to $75 million in
issuance's of our equity and 55% of issuance's of the Company's equity above
$75 million up to $165.75 million and 25% of issuances of our equity above
$165.75 million and (ii) unless required percentages of the lenders otherwise
agree, 75% of the Company's excess cash for each fiscal year until the
Company's debt-to capitalization ratio (as defined) is less than 60% and 50% of
the Company's excess cash flow for each fiscal year thereafter.
The revolving loans and the Tranche A term loan will bear interest at rates
based upon either the floating prime rate plus a margin ranging from 0.75% and
2.00% or a eurodollar rate plus between 2.25% and 3.50%, in each case depending
upon the ratio of the Company's total debt (less cash over $5 million) to the
Company's trailing 12-month EBITDA. The Tranche B Term Loan will bear interest
at either the prime rate plus 2.50% or a Eurodollar rate plus 4.00%. The
Company pays commitment fees on the unused portion of the revolving loan at a
varying rate (depending upon the pricing ratio) of between 0.25% and 0.50%.
All obligations under the credit facility are guaranteed by most of the
Company's subsidiaries and are secured by substantially all the Company's
assets, including the Company's accounts receivable, inventory and equipment.
The Second Amended and Restated Credit Agreement, as amended and as affected by
the completion of the Equity Offering, contain financial covenants as follows:
(i) consolidated debt-to-capitalization ratio at generally decreasing levels
varying between 79% and 65%, (ii) consolidated interest coverage ratio at
generally increasing levels varying between 2.00 : 1.00 and 3.50 : 1.00, (iii)
consolidated senior leverage ratio at generally decreasing levels varying
between 2.50 : 1.00 and 2.00 : 1.00, and (iv) consolidated EBITDA at generally
decreasing varying amounts between $50 million and $150 million. In addition,
the Company must maintain a consolidated fixed charge coverage ratio at
generally decreasing levels between 1.25 : 1.00 and 1.00 : 1.00. The covenants
for consolidating senior leverage ratio and consolidated interest coverage
ratio are not imposed for the next seven quarters (June 1999 through December
2000)and the covenant levels for consolidated debt-to-capitalization and
consolidated EBITDA will remain fixed at 79% and $50 million, respectivily, for
the same period. The Company also is required to maintain a consolidated
liquidity level of at least $30 million.
The Second Amended and Restated Credit Agreement subjects the Company to other
restrictions, including restrictions upon the Company's ability to incur
additional debt, liens and guarantee obligations, to merge or consolidate with
other persons, to sell assets, to make dividends, purchases of our stock or
subordinated debt, to make capital expenditures in excess of levels ranging
from $30 million in fiscal 1999 to $65 million in fiscal 2004, or to make
investments, loans and advances or changes to debt instruments and
organizational documents. The Company will not be permitted to make
acquisitions unless (i) its consolidated debt to capitalization ratio is not
more than 60% or (ii) its consolidated debt to capitalization ratio is not
increased and the acquisition is funded solely with capital stock. The Company
must also maintain consolidated net worth of (i) at least, $195 million plus
(ii) 75% of consolidated net income for each fiscal quarter beginning with the
period ending December 31, 1998, 75% of the net cash proceeds from issuance of
capital stock after the credit facility closing date and 75% of the increase in
consolidated net worth resulting from the conversion of the 5% convertible
subordinated notes or other convertible debt issued after the credit facility
closing date.
<PAGE>
The Second Amended and Restated Credit Agreement contains events of default,
that are customary in senior credit facilities, including without limitation,
non payment of principal, interest or fees; violation of covenants; inaccuracy
of representations and warranties in any material respect; cross default to
certain other indebtedness and agreements; bankruptcy and insolvency events;
material judgments and liabilities; and change of control.
At March 31, 1999, $480,000,000 in principal amount ($150,000,000 under the
Tranche A Term Loan and $200,000,000 under the Tranche B Term Loan and
$130,000,000 under the revolver) was outstanding under the Second Amended and
Restated Credit Agreement. In addition, at March 31, 1999, there was
$20,000,000 available in revolving commitments under the Second Amended and
Restated Credit Agreement, including amounts reserved in connection with
outstanding letters of credit.
As further described in Note 4, as the result of the Equity Offering, the
Company repaid approximately $104.5 million of the Tranche A Term Loan and
$20.5 million of the Tranche B Term Loan leaving principal balances of
approximately $45.5 million and $179.5 million, respectively.
The Tranche A Term Loan matures in sixteen consecutive quarterly installments
commencing December 14, 1999 with quarterly installment amounts equal to the
applicable percentage for a particular quarter multiplied by the unamortized
principal amount: 4% for installments 1 - 4, 6% for installments 5 - 8, 7% for
installments 9 - 12 and 8% for installments 13 - 16. The Tranche B Term Loan
matures in nineteen consecutive quarterly installments commencing December 14,
1999 with quarterly installment amounts equal to the applicable percentage for
a particular quarter multiplied by the unamortized principal amount: 0.25% for
installments 1 - 16, 24% for installments 17 - 18 and 48% for the final
installment.
In connection with the Second Amended and Restated Credit Agreement referred to
above, the Company capitalized various fees and associated expenses of
approximately $13,136,000.
Additionally, the Company had outstanding letters of credit of $10,832,000 and
$2,612,000 as of March 31, 1999 and June 30, 1998, respectively, related to its
workman's compensation insurance. The Company is contractually restricted from
paying dividends under the terms of the Second Amended and Restated Credit
Agreement.
(ii) Dawson Senior Notes
As the result of the Dawson acquisition (see Note 3), the Company, its
subsidiaries and U.S. Trust Company of Texas, N.A., trustee ("U.S. Trust"),
entered into a Supplemental Indenture dated September 21, 1998 (the
"Supplemental Indenture"), pursuant to which the Company assumed the
obligations of Dawson under the Indenture dated February 20, 1997 (the "Dawson
Indenture") between Dawson and U.S. Trust. Most of the Company's
<PAGE>
subsidiaries guaranteed those obligations and the senior notes ("Dawson Senior
Notes") issued pursuant to the Dawson Indenture were equally and ratably
secured with the obligations under the Second Amended and Restated Credit
Agreement. On November 17, 1998 the Company completed a cash tender offer to
purchase outstanding notes at 101% of the aggregate principal amount of the
notes, using borrowings under the Second Amended and Restated Credit Agreement.
Under the tender offer, $138,594,000 in principal amount of the Dawson Senior
Notes was redeemed and a premium of $1,386,000 was paid. In addition, accrued
interest of $4,078,000 was paid at redemption.
At March 31, 1999, $1,406,000 principal amount of the Dawson Senior Notes
remained outstanding. Interest on the Dawson Senior Notes is payable on
February 1 and August 1 of each year.
(iii) 14% Senior Subordinated Notes
On January 22, 1999 pursuant to Rule 144A and Regulation S under the Securities
Act of 1933, the Company completed the private placement of 150,000 units (the
"Units") consisting of $150,000,000 of 14% Senior Subordinated Notes due 2009
(the "Senior Subordinated Notes") and 150,000 warrants to purchase 2,032,565
shares of common stock at an exercise price of $4.88125 per share (the "Unit
Warrants"). The cash proceeds from the placement were used to repay
substantially all of the remaining $148.6 million principal amount (plus
accrued interest) owed under the company's bridge loan facility arranged in
connection with the acquisition of Dawson Production Services, Inc. in
September 1998.
The Senior Subordinated Notes pay interest semi-annually on January 15 and July
15 of each year, beginning July 15, 1999. On and after January 15, 2004, the
Company may redeem some or all of the Senior Subordinated Notes at any time at
varying redemption prices in excess of par, plus accrued interest. In addition,
before January 15, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the Senior Subordinated Notes with the proceeds of certain
offerings of equity at 114% of par, plus accrued interest.
The Unit Warrants are generally not separable from the Senior Subordinated
Notes until July 15, 1999 and are not exercisable until January 25, 2000. On
the date of issuance, the value of the warrants was estimated at $7.4 million.
The Senior Subordinated Notes mature and the Unit Warrants expire on January
15, 2009.
In the event of a change in control of the Company, as defined in the indenture
under which the Senior Subordinated Notes were issued, each holder of Senior
Subordinated Notes will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Senior Subordinated
Notes, within 60 days of such event, at a price equal to 100% of the principal
amount thereof, together with accrued and unpaid interest thereon.
In connection with the Units Offering referred to above, the Company
capitalized various fees and associated expenses of approximately $6,850,000.
(iv) 5% Convertible Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the
exercise of the remaining portion of the over-allotment option granted to the
initial purchasers of Notes. The placements were made as private offerings
pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The
Notes are subordinate to the
<PAGE>
Company's senior indebtedness, which, as defined in the indenture under which
the Notes were issued, includes the borrowings under the Second Amended and
Restated Credit Agreement. The Notes are convertible, at the holder's option,
into shares of Common Stock at a conversion price of $38.50 per share, subject
to certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holder's option, to require the Company to repurchase all or any part of
the holder's Notes, within 60 days of such event, at a price equal to 100% of
the principal amount thereof, together with accrued and unpaid interest
thereon.
Proceeds from the placement of the Notes were used to repay then outstanding
balances under the Company's credit facilities. At March 31, 1999, $216,000,000
principal amount of the Notes remain outstanding. Interest on the Notes is
payable on March 15 and September 15. Interest of approximately $5.4 million
was paid on March 15, 1999.
(v) 7% Convertible Subordinated Debentures
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act").
The Debentures are subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Second Amended and Restated Credit Agreement.
The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert
prior to July 1, 1999 will be entitled to receive a payment, in cash or Common
Stock (at the Company's option), generally equal to 50% of the interest
otherwise payable from the date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in control of the
Company, as defined in the indenture under which the Debentures were issued,
each holder of Debentures will have the right, at the holder's option, to
require the Company to repurchase all or any part of the holder's Debentures
within 60 days of such event at a price equal to 100% of the principal amount
thereof, together with accrued and unpaid interest thereon.
As of March 31, 1999, $47,400,000 in principal amount of the Debentures had
been converted into 4,861,538 shares of common stock at the option of the
holders. An additional 165,423 shares of common stock were issued representing
50% of the interest otherwise payable from the date of conversion through July
1, 1999 and an additional 35,408 shares of common stock were issued as an
inducement to convert. The additional 165,423
<PAGE>
shares of common stock, representing 50% of the interest otherwise payable from
the date of conversion through July 1, 1999, are included in equity. The fair
value of the additional 35,408 shares of common stock issued as inducement to
convert was $710,186 and is recorded as interest expense in the unaudited
consolidated statement of operations for the six months ended December 31,
1997. In addition, the proportional amount of unamortized debt issuance costs
associated with the converted Debentures was charged to additional paid-in
capital at the time of conversion.
At March 31, 1999, $4,600,000 principal amount of the Debentures remained
outstanding. Interest on the Debentures is payable on January 1 and July 1 of
each year. Interest of approximately $172,500 was paid on January 1, 1999.
(vi) Other Notes Payable
At March 31, 1999, other notes payable consisted primarily of capital leases
for automotive equipment and equipment leases with varying interest rates and
principal and interest payments.
6. DEBT ISSUANCE COSTS
During the quarter ended March 31, 1999, the Company recorded an expense item
of $6,268,000 which represented the write-off of debt issuance costs. The debt
issuance costs were associated with the Company's bridge loan which was
subsequently paid primarily with the proceeds from the Company's private
placement of 14% Senior Subordinated Notes (see Note 5).
7. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131 - Disclosures about
Segments of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") -
Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 also establishes standards for related disclosure about products
and services, geographic areas and major customers. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997.
SFAS 131 need not be applied to interim financial statements in the initial
year of its application. However, comparative information for interim
periods in the initial year of application is to be reported in the
financial statements for interim periods in the second year of application.
The Company will adopt SFAS 131 for the fiscal year ended June 30, 1999.
The Company does not expect SFAS 131 to materially affect the Company's
reporting practices.
8. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the audited consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
June 30, 1998.
Current and Subsequent Events
During the nine months ended March 31, 1999, the Company completed the
acquisition of the following well servicing, trucking, drilling and
ancillary equipment companies and businesses:
Colorado Well Service, Inc.
Oilfield service assets of TransTexas Gas Corporation
Dawson Production Services, Inc.
Well servicing assets of Flint Engineering & Construction Co.
Iceberg, S.A.
HSI Group
Corrunna Drilling, Ltd.
These acquisitions (which are more fully described in Note 3 to the
unaudited consolidated financial statements) involve approximately 620 well
service rigs (including four well service rigs in Argentina), 385 trucks
and four drilling rigs. The total purchase price of these acquisitions was
approximately $415.4 million including debt, net of cash assumed.
As of May 12, 1999, the Company owned a fleet of approximately 1,420 well
service rigs, 1,130 oilfield trucks, and 75 drilling rigs, including 21
service rigs, 38 trucks and six drilling rigs in Argentina and three
drilling rigs and well serving equipment in Canada. Management believes
that the Company's well servicing rig and oilfield truck fleets are the
largest onshore fleets in the world. The Company operates in all major
onshore oil and gas producing regions of the continental United States and
provides a full range of drilling, completion, maintenance, workover and
plugging and abandonment services for the oil and gas industry.
Impact of Lower Crude Oil Prices
As the result of the prolonged period of historically low oil prices, the
Company's drilling, completion and workover activity has been adversely
affected. Equipment utilization for drilling, completion and workover
activity has continued to decline markedly throughout the last three months
of fiscal 1998 and the first nine months of fiscal 1999. The demand for
these services, which generate higher margins than maintenance services,
will continue to be adversely affected until oil prices stabilized and/or
substantially increase from their currently depressed levels.
Growth Strategy
Historically, the domestic well servicing industry has been highly
fragmented, characterized by a large number of smaller companies which have
competed effectively on a local basis in terms of pricing and the quality
of services offered. In recent years, however, many major and independent
oil and gas companies have placed increasing emphasis not only on pricing,
but also on the safety records and quality management systems of, and the
breadth of
<PAGE>
services offered by, their vendors, including well servicing contractors.
This market environment, which requires significant expenditures by smaller
companies to meet these increasingly rigorous standards, has forced many
smaller well servicing companies to sell their operations to larger
competitors. As a result, the industry has seen high levels of
consolidation among the competing contractors.
Over the past three years, the Company has been the leading consolidator of
the well servicing industry, completing in excess of 50 acquisitions of
well servicing and drilling operations through March 31, 1999. This
consolidation has led to reduced fragmentation in the market and a more
predictable demand for well services for the Company and its competitors.
The Company's management structure is decentralized, which allows for rapid
integration of acquisitions and the retention of strong local identities of
many of the acquired businesses.
As a result of the Company's recent growth through acquisitions, the
Company has developed a strategy to:
1. Maximize operating efficiencies by focusing on reducing costs;
2. Fully integrate acquisitions into the Company's decentralized
organizational structure and thereby attempt to maximize operating margins;
3. Expand business lines and services offered by the Company in existing areas
of operations; and
4. Extend the geographic scope and operating environments for the Company's
operations.
If the current decline in the oil prices persists for a protracted period
or if the current apparent recovery in such prices remains uncertain, the
Company may curtail or halt its growth strategy until such time as prices
reach more favorable ranges.
<PAGE>
RESULTS OF OPERATIONS
The following discussion provides information to assist in the
understanding of the Company's financial condition and results of
operations. It should be read in conjunction with the unaudited
consolidated financial statements and related notes thereto appearing
elsewhere in this report.
QUARTER ENDED MARCH 31, 1999 VERSUS THE QUARTER ENDED MARCH 31, 1998
Net Income
For the quarter ended March 31, 1999, the Company reported a net loss of
$32,051,000 $(1.75) per share - basic as compared to net income of
$7,082,000 $.39 per share - basic for the quarter ended March 31, 1998,
representing a decrease of $39,133,000. One factor causing this decline is
the Company's restructuring charge recorded in the quarter ended March 31,
1999 of $975,000 (tax effected) or $(.05) per share - basic, debt issuance
costs written off of $4,074,000 (tax effected) or $(.22) per share - basic,
and an increase in bad debt expense of $3,162,000 (tax effected) or $(.17)
per share - basic. These charges coupled with the Company's decrease in
service and drilling rig utilization rates has caused the decline in net
income.
Revenues
The Company's total revenues for the quarter ended March 31, 1999 decreased
by $15,801,000 or 13%, to $104,923,000 compared to $120,724,000 reported
for the quarter ended March 31, 1998. The decrease is primarily
attributable to Company's decrease in service and drilling rig utilization
rates offset by the Company's acquisitions of oilfield service and drilling
rig companies over the past twelve months.
Oilfield service revenues for the quarter ended March 31, 1999 decreased by
$7,679,000 or 7%, to $96,335,000 compared to $104,014,000 reported for the
quarter ended March 31, 1998. he decrease is primarily attributable to
Company's decrease in service and drilling rig utilization rates offset by
the Company's acquisitions of oilfield service and drilling rig companies
over the past twelve months.
Drilling revenues for the quarter ended March 31, 1999 decreased by
$6,565,000, or 47%, to $7,513,000 compared to $14,078,000 reported for the
quarter ended March 31, 1998. he decrease is primarily attributable to
Company's decrease in service and drilling rig utilization rates offset by
the Company's acquisitions of oilfield service and drilling rig companies
over the past twelve months.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the quarter ended March 31, 1999
increased by $43,581,000 or 40%, to $153,076,000 compared to $109,495,000
reported for the quarter ended March 31, 1998. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's acquisitions over the past twelve months.
Oilfield service expenses for the quarter ended March 31, 1999 increased by
$4,376,000 or 6%, to $76,598,000 compared to $72,222,000 reported for the
quarter ended March 31, 1998. Oilfield service margins (revenues less
direct costs and expenses) decreased for the quarter ended March 31, 1999
by $12,055,000 or 38%, to $19,737,000 compared to $31,792,000 for the
quarter ended March 31, 1998. Oilfield service margins, as a percentage of
oilfield service revenue, for the quarters ended March 31, 1999 and 1998
were 20% and 31%, respectively.
<PAGE>
The Company's contract oilfield drilling costs and expenses for the quarter
ended March 31, 1999 decreased by $2,881,000, or 28%, to $7,553,000
compared to $10,434,000 for the quarter ended March 31, 1998. Oilfield
drilling margins for the Company's drilling operations during the quarter
ended March 31, 1999 decreased by $3,684,000, or 101%, to a loss of $40,000
compared to $3,644,000 for the quarter ended March 31, 1998. Decreases in
oilfield margins are attributable to the decreases in onshore drilling due
to the lower crude oil and natural gas prices.
General and administrative expenses for the quarter ended March 31, 1999
increased by $4,148,000 or 35%, to $15,833,000 compared to $11,685,000 for
the quarter ended March 31, 1998. The increase was primarily attributable
to the Company's recent acquisitions. However, as the result of the
Company's previously announced restructuring plans, general and
administrative expenses are expected to decrease as a percent of revenues
in future quarters.
Depreciation, depletion and amortization expense for the quarter ended
March 31, 1999 increased by $9,283,000, or 101%, to $18,498,000 compared to
$9,215,000 for the quarter ended March 31, 1998. The increase is directly
related to the increase in property and equipment and intangible assets of
the Company over the past twelve months as a result of its acquisitions.
Interest expense for the quarter ended March 31, 1999 increased by
$15,969,000, or 315%, to $21,032,000 compared to $5,063,000 for the quarter
ended March 31, 1998. The increase was primarily the result of increased
indebtedness used to finance the Company's acquisition program.
Debt issuance costs of $6,268,000 for the quarter ended March 31, 1999
compare with none in the quarter ended March 31, 1998. The debt issuance
costs were associated with the Company's bridge loan which was subsequently
paid primarily with the proceeds from the Company's private placement of
14% Senior Subordinated Notes (see Note 5).
Bad debt expense for the quarter ended March 31, 1999 increased by
$4,775,000 to $4,865,000 compared to $90,000 for the quarter ended March
31, 1998. The increase was primarily the result of an increase in the
reserve for doubtful trade accounts for TransTexas Gas Corporation, a
company that has recently filed for reorganization under federal bankruptcy
laws.
Income tax provision for the quarter ended March 31, 1999 decreased by
$20,249,000, or 488%, to ($16,102,000) compared to $4,147,000 for the
quarter ended March 31, 1998. The effective tax rate for the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998 has
decreased due to the loss generated in the quarter ended March 31, 1999.
The Company does not expect to have to pay any income tax provision because
of the availability of accelerated tax depreciation, drilling tax credits,
and tax loss carry-forwards.
Cash Flows
Net cash provided by operating activities for the quarter ended March 31,
1999 increased by $6,152,000 or 359%, to $7,867,000 compared to $1,715,000
provided for the quarter ended March 31, 1998. The increase is primarily
attributable to a decrease in accounts receivable which was partially
offset by a decrease in the Company's service and drilling operating
margin, and service and drilling utilization rates.
Net cash used in investing activities for the quarter ended March 31, 1999
decreased by $51,762,000 or 97%, to $1,481,000 compared to $53,243,000 used
for the quarter ended March 31, 1998. This decrease is primarily related to
the decline in acquisitions the Company has made in this quarter as
compared to the past twelve months.
Net cash provided by financing activities for the quarter ended March 31,
1999 decreased by $10,748,000 or 44%, to $13,884,000 compared to
$24,632,000 provided during the quarter ended March 31, 1998. The decrease
is primarily the result of decreased borrowings of long-term debt, due to
the decline in acquisitions the Company has made in this quarter as
compared to the past twelve months.
<PAGE>
NINE MONTHS ENDED MARCH 31, 1999 VERSUS THE NINE MONTHS ENDED MARCH 31, 1998
Net Income
For the nine months ended March 31, 1999, the Company reported a net loss
of $40,011,000 or $(2.19) per share - basic as compared to net income of
$19,365,000 $1.15 per share - basic for the nine months ended March 31,
1998. This represented a decrease of $59,376,000, or 307% (290% decrease in
basic earnings per share). One factor causing this decline are the
Company's restructuring charges recorded in the quarter ended December 31,
1998 and March 31, 1999 which totaled $5,329,000 (tax effected) or $(.29)
per share - basic, debt issuance costs written off of $4,074,000 (tax
effected) or $(.22) per share - basic, and bad debt expense for the nine
months ended March 31, 1999 of $3,718,000 (tax effected) or $(.20) per
share - basic. These charges coupled with the Company's decrease in service
and drilling rig utilization rates has caused the decline in net income.
Revenues
The Company's total revenues for the nine months ended March 31, 1999
increased by $58,438,000 or 19%, to $364,156,000 compared to $305,718,000
reported for the nine months ended March 31, 1998. The increase is
primarily attributable to the Company's acquisitions of oilfield service
and drilling rig companies over the past twelve months, offset by the
Company's decrease in service and drilling rig utilization rates.
Oilfield service revenues for the nine months ended March 31, 1999
increased by $47,769,000 or 18%, to $319,274,000 compared to $271,505,000
reported for the nine months ended March 31, 1998. The increase is
primarily attributable to the Company's acquisitions of oilfield service
companies over the past twelve months, offset by the Company's decrease in
oilfield service rig utilization rates.
Drilling revenues for the nine months ended March 31, 1999 increased by
$14,073,000, or 55%, to $39,663,000 compared to $25,590,000 reported for
the nine months ended March 31, 1998. The increase is primarily
attributable to the Company's drilling rig acquisitions over the past
twelve months, offset by the Company's decrease in drilling rig utilization
rates.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the nine months ended March 31,
1999 increased by $142,853,000 or 52%, to $417,664,000 compared to
$274,811,000 reported for the nine months ended March 31, 1998. The
increase is directly attributable to increased operating costs and expenses
associated with the Company's acquisitions over the past twelve months.
Oilfield service expenses for the nine months ended March 31, 1999
increased by $46,051,000, or 24%, to $234,865,000 compared to $188,814,000
reported for the nine months ended March 31, 1998. Oilfield service margins
(revenues less direct costs and expenses) increased for the nine months
<PAGE>
ended March 31, 1999 by $1,718,000 or 2%, to $84,409,000 compared to
$82,691,000 for the nine months ended March 31, 1998. Oilfield service
margins as a percentage of oilfield service revenue for the nine months
ended March 31, 1999 and 1998 was 26% and 30%, respectively.
Drilling costs and expenses for the nine months ended March 31, 1999
increased by $14,285,000 or 74%, to $33,572,000 compared to $19,287,000 for
the nine months ended March 31, 1998. Drilling margins during the nine
months ended March 31, 1999 decreased by $212,000, or 3%, to $6,091,000
compared to $6,303,000 for the nine months ended March 31, 1998. Oilfield
drilling margin as a percentage of oilfield drilling revenue for the nine
months ended March 31, 1999 and 1998 was 15% and 25%, respectively.
Decreases in oilfield margins are attributable to the decreases in onshore
drilling due to the lower crude oil and natural gas prices.
There was no significant change in oil and gas production costs and
expenses for nine months ended March 31, 1999 as compared to the nine
months ended March 31, 1998.
General and administrative expenses for the nine months ended March 31,
1999 increased by $18,922,000, or 87%, to $40,754,000 compared to
$21,832,000 for nine months ended March 31, 1998. The increase was
primarily attributable to the Company's recent acquisitions.
Depreciation, depletion and amortization expense for the nine months ended
March 31, 1999 increased by $13,681,000, or 46%, to $43,628,000 compared to
$29,947,000 for nine months ended March 31, 1998. The increase is directly
related to the increase in property and equipment and long-term debt
issuance costs incurred by the Company over the past eighteen months in
conjunction with its acquisitions.
Interest expense for the nine months ended March 31, 1999 increased by
$35,979,000, or 291%, to $48,359,000 compared to $12,380,000 for the nine
months ended March 31, 1998. The increase was primarily the result of
increased indebtedness as a result of the Company's acquisitions.
Bad debt expense for the nine months ended March 31, 1999 increased by
$5,451,000 to $5,720,000 compared to $269,000 for the nine months ended
March 31, 1998. The increase was primarily the result of an increase in the
reserve for doubtful trade accounts for TransTexas Gas Corporation, a
company that has recently filed for reorganization under federal bankruptcy
laws.
Income tax expense for the nine months ended March 31, 1999 decreased by
$31,307,000, or 271%, to ($19,765,000) compared to $11,542,000 for the nine
months ended March 31, 1998. The effective tax rate for the nine months
ended March 31, 1999 as compared to the nine months ended March 31, 1998
has decreased due to the loss generated in the nine months ended March 31,
1999. The Company does not expect to have to pay any income tax provision
because of the availability of accelerated tax depreciation, drilling tax
credits, and tax loss carry-forwards.
Cash Flows
Net cash provided (used) by operating activities for the nine months ended
December 31, 1998 decreased by $29,488,000 or 224%, to $(16,352,000)
compared to $13,136,000 for the nine months ended March 31, 1998. The
decrease is primarily attributable to a decreased service and drilling
operating margin, and service and drilling utilization rates.
Net cash used in investing activities for the nine months ended March 31,
1999 increased by $30,133,000, or 13%, to $268,528,000 compared to
$238,395,000 for the nine months ended March 31, 1998. This increase is
primarily related to the Company's recent acquisitions.
<PAGE>
Net cash provided by financing activities for the nine months ended March
31, 1999 increased by $77,637,000, or 37%, to $288,066,000 compared to
$210,429,000 during the nine months ended March 31, 1998. The increase is
primarily the result of the proceeds from long-term debt (see Note 3 to
consolidated financial statements), partially offset by the repayment of
debt.
LIQUIDITY, CAPITAL COMMITMENTS AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash of $28.4 million compared to $25.3
million at June 30, 1998 and $26.9 million at March 31, 1998. At March 31,
1999, the Company had working capital of $64.7 million compared to $79.5
million at June 30, 1998 and $86.8 million at March 31, 1998.
For fiscal 1999, the Company has projected approximately $26 million of
capital expenditures for improvements of existing service and drilling rig
machinery and equipment, a decrease of approximately $23.7 million from the
$49.7 million expended during fiscal 1998. The Company expects to finance
these capital expenditures through internally generated operating cash
flows. Capital expenditures for service and drilling rig improvements for
the nine months ended March 31, 1999 and 1998 were $21.2 million and $33.9
million, respectively.
The Company has projected approximately $4.0 million of capital
expenditures for oil and gas exploration for fiscal 1999 as compared to
$7.8 million expended for fiscal 1998. Financing of these costs is expected
to come from operations and available credit facilities. For the nine
months ended March 31, 1999 and 1998, the Company expended $3.8 million and
$4.1 million, respectively.
The Company's primary capital resources are net cash provided by operations
and proceeds from certain long-term debt facilities. However, On May 7,
1999, the Company closed the public offering of 55,300,000 shares of common
stock at $3.00 per share, or $166 million. In addition, the Company closed
the offering of 3,508,772 shares of common stock at $2.85 per share, or $10
million. Net proceeds from the Equity Offering were approximately $165.0
million, $125.0 million of which was used to partially repay the PNC bank
term loans (see Note 5). The remaining $40 million will be used to provide
additional cash.
As a result of the public offering described above, the Company, at May 12,
1999 had approximately $70 million in cash and available credit.
Year 2000 Issue
The Company is currently implementing a new integrated management
information system along with updated hardware that will replace most of
our current systems. The implementation of the new management information
system, which will be year 2000 compliant for our systems as well as for
those of our past and future acquisitions, began July 1998 and is scheduled
to be substantially completed by June 1999. The new management information
systems do not currently cover the Company's Argentine operations, but
Argentine operations have established a separate system, which is year 2000
compliant, that will be implemented in late 1999.
The Company has not yet developed a plan to formally communicate with
significant suppliers and customers to determine if those parties have
appropriate plans to remedy year 2000 issues when their systems interface
with the Company's systems or may otherwise have an impact operations. The
Company does not anticipate that this will have a material impact on
operations. However, there can be no assurance that the systems of other
companies on which the
<PAGE>
Company rely will be timely converted, or that failure to successfully
convert by another company, or conversion that is incompatible with the
Company's systems, would not have an impact on operations. The Company
currently does not have a contingency plan to cover any unforeseen problems
encountered that relate to the year 2000, but intends to produce one before
the end of the current fiscal year.
The cost of the new management information system, (a large part of which
management expects will be capitalized) is not expected to have a material
impact on the Company's business, operations or results thereof, financial
condition, liquidity or capital resources. Although the Company is not
aware of any material operational issues or costs associated with preparing
its internal systems for the year 2000, there can be no assurance that
there will not be a delay in, or increased costs associated with, the
implementation of the necessary systems and changes to address the year
2000.
If the Company is unable to adequately address the year 2000 issue in a
timely manner, the worst case scenario would be that the Company could
suffer significant computer downtime, and billings, payments and
collections would revert to manual accounting records. In addition, the
inability of principal suppliers and major customers to be year 2000
compliant could result in delays in product deliveries from those suppliers
and collections of accounts receivable.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(C) The Company sold the following unregistered securities during the quarter
ended March 31, 1999:
(i) Securities Sold. On January 22, 1999, the Company sold 150,000 units (the
"Units") consisting of $150,000,000 14% Senior Subordinated Notes due 2009
(the "Notes") and 150,000 warrants to purchase 2,032,565 shares of common
stock (the "Warrants").
(ii) Underwriters and Other Purchasers. The initial purchasers of the Units
were: Lehman Brothers Inc., Bear Stearns & Co. Inc., First Albany
Corporation and Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated.
(iii)Consideration. The aggregate offering price of the units was $150,000,000.
Net proceeds to the Company less fees and expenses (including underwriter
fees and commissions) was approximately $144.3 million.
(iv) Exemption from Registration Claimed. The Company relied on the exemption
from Registration under the Securities Act provided in Rule 144A
promulgated thereunder.
(v) Terms of Conversion or Exercise. The units consist of 150,000 warrants,
which entitle the holder of each warrant to purchase 13.5504 of shares of
common stock of the Company at an exercise price of $4.88125 per share
(subject to adjustment in certain special circumstances). The warrants will
be exercisable on and after January 25, 2000.
The Indenture pursuant to which the Notes were issued (filed as Exhibit
99(d) to the Company's Form 8-K filed on February 3, 1999) contains certain
financial covenants and prohibitions on the payment of dividends. Item 3.
Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
10(a)Purchase Agreement dated January 19, 1999 by and among the Registrant,
certain of its subsidiaries, Lehman Brothers, Inc., Bear, Stearns & Co.
Inc., First Albany Corporation, Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated. (filed as Exhibit 99(a) to the Company's Form 8-K
filed on February 3, 1999, File No. 001-08038)
10(b)Warrant Agreement dated as of January 22, 1999 between the Registrant and
The Bank of New York, a New York banking corporation as warrant agent.
(filed as Exhibit 99(b) to the Company's Form 8-K filed on February 3,
1999, File No. 001-08038)
10(c)Indenture dated as of January 22, 1999 between the Registrant and The Bank
of New York as trustee. (filed as Exhibit 99(c) to the Company's Form 8-K
filed on February 3, 1999, File No. 001-08038)
10(d)Registration Rights Agreement (relating to the Notes) dated January 22,
1999 by and among the Registrant, certain of its subsidiaries, and Lehman
Brothers, Inc., Bear, Stearns & Co. Inc., F.A.C./Equities, a division of
First Albany Corporation and Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated. (filed as Exhibit 99(d) to the Company's Form 8-K
filed on February 3, 1999, File No. 001-08038)
10(e)Warrant Registration Rights Agreement dated January 22, 1999, by and among
the Registrant and Lehman Brothers Inc., Bear, Stearns & Co. Inc.,
F.A.C./Equities, a division of First Albany Corporation, and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated. (filed as Exhibit 99(e)
to the Company's Form 8-K filed on February 3, 1999, File No. 001-08038)
10(f)* Employment Agreement between the Company and William C. McCurdy dated as
of January 4, 1999.
10(g)* Employment Agreement between the Company and Michael R. Furrow dated as
of January 4, 1999.
27(a) * Statement - Financial Data Schedule
(b) The following current reports on Form 8-K were filed during the quarter
ended March 31, 1999:
(i) a Form 8-K was filed on February 3, 1999 to report, among other things,
that the Company completed a private offering of 150,000 units, consisting
of $150,000,000 of its 14% Senior Subordinated Notes due 2009 and 150,000
warrants to purchase 2,032,565 shares of common stock at an exercise price
of $4.88125; and
(ii) an Amendment to a Form 8-K (filed on September 15, 1998) was filed on March
31, 1999 to report certain pro forma financial information for the Company.
* - filed as exhibits to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY ENERGY SERVICES, INC.
(Registrant)
By /s/ Francis D. John
Dated: May 17, 1999 President and Chief Executive Officer
By /s/ Stephen E. McGregor
Dated: May 17, 1999 Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Danny R. Evatt
Dated: May 17, 1999 Vice President of Financial
Operations
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 28,451
<SECURITIES> 0
<RECEIVABLES> 88,444
<ALLOWANCES> 0
<INVENTORY> 11,529
<CURRENT-ASSETS> 136,519
<PP&E> 865,318
<DEPRECIATION> (87,628)
<TOTAL-ASSETS> 1,162,048
<CURRENT-LIABILITIES> 69,772
<BONDS> 0
<COMMON> 1,870
0
0
<OTHER-SE> 126,735
<TOTAL-LIABILITY-AND-EQUITY> 1,162,048
<SALES> 105,043
<TOTAL-REVENUES> 104,923
<CGS> 85,080
<TOTAL-COSTS> 153,076
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,032
<INCOME-PRETAX> (48,153)
<INCOME-TAX> (16,102)
<INCOME-CONTINUING> (32,051)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,051)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
Key Energy Services, Inc.
Two Tower Center, 20th Floor
East Brunswick, New Jersey
As of January 4, 1999
William C. McCurdy
2342 West Briargate
Bryan, Texas 77802
EMPLOYMENT AGREEMENT
(this "Agreement")
Dear Bill:
Key Energy Services, Inc., a Maryland corporation formerly known as Key Energy
Group, Inc. (the ACompany@), with its principal offices at the address set forth
above, and you, an individual with your address set forth above, agree as
follows:
1. Employment; Term. The Company agrees to employ you, and you agree to devote
your full time and best efforts to serve as a Vice President - Eastern
Operations of the Company. Your employment will commence effective as of
January 4, 1999 (the ACommencement Date@) and continue until the close of
business on January 3, 2002, subject to extension as provided in this
Section 1(a), unless sooner terminated in accordance with this Agreement
(the AInitial Employment Period@). On each January 4, commencing with
January 4, 2000, the term of your employment will be automatically extended
for a period of twelve (12) months unless either you or the Company gives
written notice to the other, no later than thirty (30) days prior to the
relevant January 4, that such automatic extension shall not occur. The
Initial Employment Period, together with any extensions, until termination
in accordance herewith is referred to herein as the AEmployment Period.@
<PAGE>
3
2. Salary; Bonus; Expenses. During the Employment Period, the Company will pay
a salary to you at the annual rate of not less than One Hundred Sixty
Thousand Dollars ($160,000) per year (the ABase Salary@), payable in
substantially equal installments in accordance with the Company=s existing
payroll practices, but no less frequently than monthly. For each fiscal
year of the Company commencing after June 30, 1998, you shall be eligible
to participate in an incentive plan for the Company=s executives, key
employees and other persons involved in the business of the Company and its
subsidiaries (the AIncentive Plan@) and in the Company=s stock-based
incentive plans outstanding from time to time. Under the Incentive Plan,
you shall be eligible to earn a cash bonus, payable within ninety (90) days
after each fiscal year end, of up to fifty percent (50%) of your Base
Salary, such amount to be determined by the Board based upon the level of
achievement of certain goals to be mutually established by you and the
President of the Company (subject to Board approval). You will be
reimbursed by the Company for reasonable travel, lodging, meal and other
expenses incurred by you in connection with performing your services
hereunder in accordance with the Company=s policies from time to time in
effect. You will be entitled to a vehicle allowance of $700 per month (plus
reimbursement for fuel and excess mileage in accordance with the Company=s
expense reimbursement policies from time to time in effect).
3. Benefit Plans; Vacations. You will be entitled during the Employment Period
to not less than 15 vacation days and such other fringe benefits,
including, without limitation, group medical and dental, life, executive
life, accident and disability insurance, retirement plans and supplemental
and excess retirement benefits as the Company may provide from time to time
for its senior management.
<PAGE>
4. Severance. In the event you are terminated (i) by the Company other
than for Cause (defined below) or (ii) automatically as a result of
the Company=s providing notice to you that automatic extension of the
Employment Period shall not occur, you will be entitled to receive
severance compensation at your Base Salary at the monthly rate in
effect on the termination date, payable monthly in arrears, during
that period of time after the termination date equal to the Severance
Period (defined below); provided, however, that (A) in the event your
employment should be terminated by the Company other than for Cause
within six months following a Change of Control (defined below) or in
anticipation of a Change of Control, the severance compensation
referred to above shall be paid in one lump sum on the date of such
termination, and (B) in the event your employment should be terminated
by the Company as a result of your disability, then the severance
compensation referred to above shall be reduced by the amount of any
disability insurance proceeds actually paid to you or for your benefit
during the Severance Period. As used in this Agreement, the term
ACause@ shall mean the willful and continued failure by you to
substantially perform your duties hereunder (other than any such
willful or continued failure resulting from your incapacity due to
physical or mental illness or physical injury), or the willful
engaging by you in misconduct which is materially injurious to the
Company, monetarily or otherwise, or your conviction of a felony by a
court of competent jurisdiction. As used in this Agreement, the term
AChange of Control@ shall have that meaning set forth in the Key
Energy Group, Inc. 1997 Incentive Plan. As used in this Agreement, the
term ASeverance Period@ shall mean a period of time equal to either
(i) 12 months or (ii) the number of months that has passed from the
Commencement Date through the date of termination rounded up to the
next whole month, whichever period of time is shorter.
<PAGE>
5. Period. The compensation pursuant to Section 4 hereof), you shall not,
directly or indirectly, without the prior written consent of the
Company, participate or engage in, whether as a director, officer,
employee, advisor, consultant, stockholder, partner, joint venturer,
owner or in any other capacity, any business engaged in the business
of furnishing oilfield services (a ACompeting Enterprise@); provided,
however, that you shall not be deemed to be participating or engaging
in any such business solely by virtue of your ownership of not more
than five percent of any class of stock or other securities which is
publicly traded on a national securities exchange or in a recognized
over-the-counter market; and, for that same period of time, you shall
not, directly or indirectly, solicit, raid, entice or otherwise induce
any employee of the Company or any of its subsidiaries to be employed
by a Competing Enterprise. You hereby agree and acknowledge that a
portion of the consideration to be paid by the Company to you pursuant
to this Agreement is consideration for your covenants under this
Section 5 and such consideration is fair and adequate whether or not
you receive any severance compensation pursuant to Section 4 hereof.
6. Termination of Prior Agreements. Effective as of the Commencement
Date, all prior agreements and understandings between you and the
Company regarding your employment relationship with the Company,
whether oral or written (including that certain Employment Agreement
dated as of January 4, 1999 that may or may not have been executed by
you and the former Chief Operating Officer of the Company), are hereby
terminated and of no further force or effect.
If this Agreement correctly sets forth your understanding of the agreement
between the Company and you, please indicate your agreement hereto by signing
this Agreement in the space for that purpose below.
KEY ENERGY SERVICES, INC.
By:
Francis D. John
President and Chief Executive Officer
ACCEPTED AND AGREED:
William C. McCurdy
Date: May 11, 1999 (but to be effective as of January 4, 1999)
Key Energy Services, Inc.
Two Tower Center, 20th Floor
East Brunswick, New Jersey
As of January 4, 1999
Mr. Michael Furow
7004 Almey Court
Midland, Texas 79707
EMPLOYMENT AGREEMENT
(this Agreement)
Dear Mike:
Key Energy Services, Inc., a Maryland corporation formerly known as Key
Energy Group, Inc. (the "Company"), with its principal offices at the
address set forth above, and you, an individual with your address set forth
above, agree as follows:
1. Employment; Term. The Company agrees to employ you, and you agree to devote
your full time and best efforts to serve as a Vice President - Central
Operations of the Company. Your employment will commence effective as of
January 4, 1999 (the "Commencement Date") and continue until the close of
business on January 3, 2002, subject to extension as provided in this
Section 1(a), unless sooner terminated in accordance with this Agreement
(the "Initial Employment Period"). On each January 4, commencing with
January 4, 2000, the term of your employment will be automatically extended
for a period of twelve (12) months unless either you or the Company gives
written notice to the other, no later than thirty (30) days prior to the
relevant January 4, that such automatic extension shall not occur. The
Initial Employment Period, together with any extensions, until termination
in accordance herewith is referred to herein as the "Employment Period".
<PAGE>
2. Salary; Bonus; Expenses. During the Employment Period, the Company will pay
a salary to you at the annual rate of not less than One Hundred Sixty
Thousand Dollars ($160,000) per year (the ABase Salary@), payable in
substantially equal installments in accordance with the Company=s existing
payroll practices, but no less frequently than monthly. For each fiscal
year of the Company commencing after June 30, 1998, you shall be eligible
to participate in an incentive plan for the Company=s executives, key
employees and other persons involved in the business of the Company and its
subsidiaries (the AIncentive Plan@) and in the Company=s stock-based
incentive plans outstanding from time to time. Under the Incentive Plan,
you shall be eligible to earn a cash bonus, payable within ninety (90) days
after each fiscal year end, of up to fifty percent (50%) of your Base
Salary, such amount to be determined by the Board based upon the level of
achievement of certain goals to be mutually established by you and the
President of the Company (subject to Board approval). You will be
reimbursed by the Company for reasonable travel, lodging, meal and other
expenses incurred by you in connection with performing your services
hereunder in accordance with the Company=s policies from time to time in
effect. You will be entitled to a vehicle allowance of $750 per month (plus
reimbursement for fuel and excess mileage in accordance with the Company=s
expense reimbursement policies from time to time in effect).
3. Benefit Plans; Vacation; Relocation Expenses. You will be entitled during
the Employment Period to not less than fifteen (15) vacation days and such
other fringe benefits, including, without limitation, group medical and
dental, life, executive life, accident and disability insurance, retirement
plans and supplemental and excess retirement benefits as the Company may
provide from time to time for its senior management. In addition, the
Company will reimburse you for the following out-of-pocket expenses that
you incur in connection with your relocation to Oklahoma City, Oklahoma:
(i) ordinary and reasonable realtor fees and closing costs incurred in
connection with the sale of your current primary residence, (ii) ordinary
and reasonable closing costs incurred in connection with the purchase of
your new primary residence in Oklahoma City, (iii) ordinary and reasonable
costs incurred to transport your household furnishings and effects to your
new primary residence in Oklahoma City, (iv) ordinary and reasonable fees
for connecting utilities in your new primary residence in Oklahoma City,
and (v) ordinary and reasonable costs for up to thirty (30) days of
temporary housing. In addition, the Company will pay you a one-time
relocation allowance of $13,333, subject to standard withholdings and
deductions. If required and at the Company=s sole discretion, the Company
will consider providing additional financial or other assistance in
connection with selling your current primary residence.
<PAGE>
4. Severance. In the event you are terminated (i) by the Company other than
for Cause (defined below) or (ii) automatically as a result of the
Company=s providing notice to you that automatic extension of the
Employment Period shall not occur, you will be entitled to receive
severance compensation at your Base Salary at the monthly rate in effect on
the termination date, payable in arrears, during the period expiring twelve
(12) months after the termination date, commencing at the end of the
calendar month in which the termination date occurs; provided, however,
that (A) in the event your employment should be terminated by the Company
other than for Cause within six months following a Change of Control
(defined below) or in anticipation of a Change of Control, the severance
compensation referred to above shall be paid in one lump sum on the date of
such termination, and (B) in the event your employment should be terminated
by the Company as a result of your disability, then the severance
compensation referred to above shall be reduced by the amount of any
disability insurance proceeds actually paid to you or for your benefit
during the said time period. As used in this Agreement, the term ACause@
shall mean the willful and continued failure by you to substantially
perform your duties hereunder (other than any such willful or continued
failure resulting from your incapacity due to physical or mental illness or
physical injury), or the willful engaging by you in misconduct which is
materially injurious to the Company, monetarily or otherwise, or your
conviction of a felony by a court of competent jurisdiction. As used in
this Agreement, the term AChange of Control@ shall have that meaning set
forth in the Key Energy Group, Inc. 1997 Incentive Plan.
5. Limitation on Competition. During the Employment Period, and for a period
of twelve (12) months after your termination, you shall not, directly or
indirectly, without the prior written consent of the Company, participate
or engage in, whether as a director, officer, employee, advisor,
consultant, stockholder, partner, joint venturer, owner or in any other
capacity, any business engaged in the business of furnishing oilfield
services (a ACompeting Enterprise@); provided, however, that you shall not
be deemed to be participating or engaging in any such business solely by
virtue of your ownership of not more than five percent of any class of
stock or other securities which is publicly traded on a national securities
exchange or in a recognized over-the-counter market; and, for that same
period of time, you shall not, directly or indirectly, solicit, raid,
entice or otherwise induce any employee of the Company or any of its
subsidiaries to be employed by a Competing Enterprise.
<PAGE>
If this Agreement correctly sets forth your understanding of the agreement
between the Company and you, please indicate your agreement hereto by
signing this Agreement in the space for that purpose below.
KEY ENERGY SERVICES, INC.
By:
Kenneth V. Huseman,
Executive Vice President
and Chief Operating Officer
ACCEPTED AND AGREED:
Michael R. Furrow
