<PAGE> 1
[AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 06-04-99]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
[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> 2
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
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
Signatures 28
</TABLE>
2
<PAGE> 3
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
(Unaudited)
----------- ---------
<S> <C> <C>
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 method 43,690 42,638
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.
3
<PAGE> 4
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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.
4
<PAGE> 5
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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 9,605 43,628 23,271
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 2,105 (16,352) 14,306
--------- --------- --------- ---------
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) (390) (288,594) (217,507)
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 24,242 288,066 209,259
--------- --------- --------- ---------
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.
5
<PAGE> 6
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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.
6
<PAGE> 7
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.
7
<PAGE> 8
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:
<TABLE>
<CAPTION>
Restructuring Costs Incurred Balance as of
Description (in thousands) Charge through March 31, 1999 March 31, 1999
- -------------------------- ------------- ---------------------- --------------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(in thousands) (in thousands)
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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>
(table continued on next page)
8
<PAGE> 9
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(in thousands) (in thousands)
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
DILUTED EPS COMPUTATION:
(continued)
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
</TABLE>
o 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.
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.
9
<PAGE> 10
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
10
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
(THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
- ---------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
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
million of which was used to partially repay the PNC bank term loans,
(approximately $104.5 million for the
11
<PAGE> 12
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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.
12
<PAGE> 13
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
issuances of our equity and 55% of issuances 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, respectively, for
the same period. The Company is also 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.
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
and Regulation S under the Securities Act of 1933. The Notes are subordinate to
the 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 shares of common stock,
representing 50% of the interest otherwise payable from the date of conversion
through July 1, 1999, are included in
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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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 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
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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.
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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 or $(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 the
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. The decrease is primarily attributable to the
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. The decrease is primarily attributable to the 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
$4,808,000 or 7%, to $76,598,000 compared to $71,790,000 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
$12,487,000 or 39%, to $19,737,000 compared to $32,224,000 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.
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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 $8,893,000, or 93%, to $18,498,000 compared to $9,605,000
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 $15,927,000,
or 312%, to $21,032,000 compared to $5,105,000 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 $4,776,000
to $4,865,000 compared to $89,000 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 $5,762,000 or 274%, to $7,867,000 compared to $2,105,000 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.
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Net cash provided by financing activities for the quarter ended March 31, 1999
decreased by $10,358,000 or 43%, to $13,884,000 compared to $24,242,000
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.
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
or $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 $149,121,000 or 54%, to $423,932,000 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
$47,347,000, or 25%, to $234,865,000 compared to $187,518,000 reported for the
nine months ended March 31, 1998. Oilfield service margins (revenues less
direct costs and expenses) increased for the nine months ended March 31, 1999
by $422,000 or 1%, to $84,409,000 compared to $83,987,000 for
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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 31%, 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 $12,511,000, or 40%, to $43,628,000 compared to
$31,117,000 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
$35,853,000, or 287%, to $48,359,000 compared to $12,506,000 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 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 $30,658,000 or 214%, to $(16,352,000) compared
to $14,306,000 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.
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Net cash provided by financing activities for the nine months ended March 31,
1999 increased by $78,807,000, or 38%, to $288,066,000 compared to $209,259,000
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 $66.7 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 $21.7 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,
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there can be no assurance that the systems of other companies on which the
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.
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PART II - OTHER INFORMATION
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: June 6, 1999 President and Chief Executive Officer
By /s/ Stephen E. McGregor
---------------------------
Dated: June 6, 1999 Executive Vice President, Chief
Financial Officer and Treasurer
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