<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2000
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 September 30, 2000
[ ] 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 November 10, 2000 - 97,378,167
<PAGE>
KEY ENERGY SERVICES, INC.
INDEX
-------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and June 30, 2000........................................ 3
Unaudited Consolidated Statements of
Operations for the Three Months Ended
September 30, 2000 and 1999............................................................. 4
Unaudited Consolidated Statements of
Cash Flows for the Three Months Ended
September 30, 2000 and 1999............................................................. 5
Consolidated Statements of Comprehensive
Income for the Three Months Ended
September 30, 2000 and 1999............................................................. 6
Notes to Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 20
Item 2. Changes in Securities and Use of Proceeds................................................... 20
Item 3. Defaults Upon Senior Securities............................................................. 20
Item 4. Submission of Matters to a Vote of Security Holders......................................... 20
Item 5. Other Information........................................................................... 20
Item 6. Exhibits and Reports on Form 8-K............................................................ 20
Signatures.................................................................................................... 21
</TABLE>
2
<PAGE>
KEY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JUNE 30, 2000
------------------ -------------
(UNAUDITED)
(THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................................................. $2,635 $109,873
Accounts receivable, net of allowance for doubtful accounts of $3,424
and $3,189, at September 30, 2000 and June 30, 2000, respectively.................... 138,460 123,203
Inventories........................................................................... 12,613 10,028
Prepaid income taxes.................................................................. - 5,588
Prepaid expenses and other current assets............................................. 5,552 4,897
--------------- ----------------
Total current assets.................................................................... 159,260 253,589
--------------- ----------------
Property and equipment:
Oilfield service equipment............................................................ 677,366 670,392
Contract drilling equipment........................................................... 105,434 105,454
Motor vehicles........................................................................ 57,535 55,011
Oil and gas properties and other related equipment, successful efforts method......... 43,977 43,855
Furniture and equipment............................................................... 12,966 11,013
Buildings and land.................................................................... 34,787 34,712
--------------- ----------------
932,065 920,437
Accumulated depreciation & depletion.................................................... (174,858) (159,876)
--------------- ----------------
Net property and equipment.............................................................. 757,207 760,561
--------------- ----------------
Goodwill, net......................................................................... 196,176 198,633
Deferred costs, net................................................................... 17,605 18,855
Notes receivable - related parties.................................................... 5,100 5,150
Other assets.......................................................................... 9,408 9,477
--------------- ----------------
Total assets.......................................................................... $1,144,756 $1,246,265
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $33,760 $35,801
Other accrued liabilities............................................................. 30,609 26,398
Accrued interest...................................................................... 5,638 15,994
Current portion of long-term debt..................................................... 8,596 14,655
--------------- ----------------
Total current liabilities............................................................... 78,603 92,848
--------------- ----------------
Long-term debt, less current portion.................................................... 549,558 651,945
Deferred revenue........................................................................ 15,899 17,031
Non-current accrued expenses............................................................ 1,936 1,847
Oil and natural gas collars............................................................. 1,343 -
Deferred tax liability.................................................................. 105,304 99,707
Commitments and contingencies........................................................... - -
Stockholders' equity:
Common stock, $.10 par value; 100,000,000 shares authorized, 97,444,859 and 97,209,504
shares issued, respectively at September 30, 2000 and June 30, 2000, respectively..... 9,746 9,723
Additional paid-in capital............................................................ 415,086 413,962
Treasury stock, at cost; 416,666 shares at September 30, 2000 and June 30, 2000....... (9,682) (9,682)
Accumulated other comprehensive income (loss)......................................... (620) 8
Retained earnings (deficit)........................................................... (22,417) (31,124)
--------------- ----------------
Total stockholders' equity.............................................................. 392,113 382,887
--------------- ----------------
Total liabilities and stockholders' equity.............................................. $1,144,756 $1,246,265
=============== ================
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
3
<PAGE>
KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
---- ----
(THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
REVENUES:
Well servicing.......................................................................... $166,565 $130,817
Contract drilling....................................................................... 22,145 16,458
Oil and natural gas production.......................................................... 2,090 2,020
Other, net.............................................................................. 879 597
-------------- -------------
191,679 149,892
-------------- -------------
COSTS AND EXPENSES:
Well servicing.......................................................................... 111,686 99,214
Contract drilling....................................................................... 17,458 14,271
Oil and natural gas production.......................................................... 1,323 1,000
Depreciation, depletion and amortization................................................ 18,311 16,821
General and administrative.............................................................. 14,367 13,912
Bad debt expense........................................................................ 194 477
Interest................................................................................ 16,111 17,388
-------------- -------------
179,450 163,083
-------------- -------------
Income (loss) before income taxes......................................................... 12,229 (13,191)
Income tax benefit (expense).............................................................. (4,719) 3,740
-------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN................................................... 7,510 (9,451)
Extraordinary gain on extinguishment of debt, less applicable income taxes of $752........ 1,197 -
-------------- -------------
NET INCOME (LOSS)......................................................................... $8,707 $(9,451)
============== =============
EARNINGS (LOSS) PER SHARE:
Basic - before extraordinary gain....................................................... $0.08 $(0.11)
Extraordinary gain, net of tax.......................................................... 0.01 -
-------------- -------------
Basic - after extraordinary gain........................................................ $0.09 $(0.11)
============== =============
Diluted - before extraordinary gain..................................................... $0.08 $(0.11)
Extraordinary gain, net of tax.......................................................... 0.01 -
-------------- -------------
Diluted - after extraordinary gain...................................................... $0.09 $(0.11)
============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................................................... 96,880 82,738
Diluted................................................................................. 100,472 82,738
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
---- ----
(THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $8,707 $(9,451)
ADJUSTMENTS TO RECONCILE INCOME FROM OPERATIONS TO NET CASH PROVIDED BY (USED IN)
OPERATIONS:..................................................................
Depreciation, depletion and amortization....................................... 18,311 16,821
Amortization of deferred debt costs and warrants............................... 1,408 1,255
Bad debt expense............................................................... 194 477
Deferred income taxes.......................................................... 4,719 (3,740)
Gain on sale of assets......................................................... 1 (6)
Extraordinary gain, net of tax................................................. (1,197) -
Other non-cash items........................................................... 1,461 916
CHANGE IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM THE ACQUISITIONS:
(Increase) decrease in accounts receivable.................................. (15,451) (20,677)
(Increase) decrease in other current assets................................. 2,348 (3,733)
Increase (decrease) in accounts payable, accrued interest and accrued
expenses.................................................................. (8,181) 3,928
Other assets and liabilities................................................ 791 (185)
-------------- --------------
Net cash provided by (used in) operating activities............................ 13,111 (14,395)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Well servicing.......................................... (10,929) (3,722)
Capital expenditures - Contract drilling....................................... (228) (1,100)
Capital expenditures - Oil and gas............................................. (123) (77)
Capital expenditures - Other................................................... (2,005) (1,233)
Proceeds from sale of fixed assets............................................. 102 127
Notes receivable from related parties.......................................... - (1,915)
-------------- --------------
Net cash from (used in) investing activities................................... (13,183) (7,920)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt and capital lease obligations...................... (111,328) (1,314)
Borrowings under line-of-credit................................................ 4,000 12,000
Equity offering expenses....................................................... (163) -
Proceeds from stock options exercised.......................................... 333 -
Other.......................................................................... (8) 522
-------------- --------------
Net cash provided by (used in) financing activities............................ (107,166) 11,208
-------------- --------------
Net increase (decrease) in cash and cash equivalents........................... (107,238) (11,107)
Cash and cash equivalents at beginning of period............................... 109,873 23,478
-------------- --------------
Cash and cash equivalents at end of period..................................... $2,635 $12,371
============== ==============
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------
2000 1999
---- ----
(THOUSANDS)
<S> <C> <C>
NET INCOME (LOSS)........................................................................... $8,707 $(9,451)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Derivative transition adjustment (See Note 8)............................................. (778) -
Amortization of derivative transition adjustment (See Note 8)............................. 146 -
Foreign currency translation gain (loss), net of tax...................................... 4 -
-------------- -------------
COMPREHENSIVE INCOME (LOSS), NET OF TAX..................................................... $8,079 $(9,451)
============== =============
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
6
<PAGE>
KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Key Energy Services, Inc. (the
"Company") and its wholly-owned subsidiaries as of September 30, 2000 and for
the three month periods ended September 30, 2000 and 1999 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, 2000.
The results of operations for the three month period ended September 30, 2000
are not necessarily indicative of the results of operations for the full
fiscal year ending June 30, 2001.
RECLASSIFICATIONS AND ADJUSTMENTS
Certain reclassifications have been made to the consolidated financial
statements for the three month period ended September 30, 1999 to conform to
the presentation for the three month period ended September 30, 2000.
7
<PAGE>
2. EARNINGS PER SHARE
The Company accounts for earnings per share based upon Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS
128, basic earnings per common share are determined by dividing net earnings
applicable to common stock by the weighted average number of common shares
actually outstanding during the period. Diluted earnings per common share is
based on the increased number of shares that would be outstanding assuming
exercise of dilutive stock options and warrants and conversion of dilutive
outstanding convertible securities using the "as if converted" method.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPT. 30,
--------------------
2000 1999
---- ----
(THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
BASIC EPS COMPUTATION:
NUMERATOR
Income (loss) before extraordinary gain........................ $7,510 $(9,451)
Extraordinary gain, net of tax................................. 1,197 -
--------------- -------------
Net income (loss).............................................. $8,707 $(9,451)
=============== =============
DENOMINATOR
Weighted average common shares outstanding..................... 96,880 82,738
--------------- -------------
BASIC EPS:
Before extraordinary gain...................................... $0.08 $(0.11)
Extraordinary gain, net of tax................................. 0.01 -
--------------- -------------
After extraordinary gain....................................... $0.09 $(0.11)
=============== =============
DILUTED EPS COMPUTATION:
NUMERATOR
Income (loss) before extraordinary gain........................ $7,510 $(9,451)
Effect of dilutive convertible securities, tax effected........ 5 -
Extraordinary gain, net of tax................................. 1,197 -
--------------- -------------
Net income (loss).............................................. $8,712 $(9,451)
=============== =============
DENOMINATOR
Weighted average common shares outstanding:.................... 96,880 82,738
Warrants....................................................... 75 -
Stock options.................................................. 3,437 -
7% Convertible Debentures...................................... 70 -
5% Convertible Notes........................................... 10 -
--------------- -------------
100,472 82,738
--------------- -------------
DILUTED EPS:
Before extraordinary gain...................................... $0.08 $(0.11)
Extraordinary gain, net of tax................................. 0.01 -
--------------- -------------
After extraordinary gain....................................... $0.09 $(0.11)
=============== =============
</TABLE>
The earnings per share calculation for the three month period ended September
30, 1999 excludes the Company's convertible debt, outstanding warrants and
stock options, because the effects of such instruments on earnings per share
would be anti-dilutive.
8
<PAGE>
3. ACQUISITIONS
There were no acquisitions by the Company during the three months ended
September 30, 2000 or the three months ended September 30, 1999.
4. STOCKHOLDERS' EQUITY
EQUITY OFFERING
On June 30, 2000, the Company closed the public offering of 11,000,000 shares
of common stock at $9.625 per share, or approximately $106 million (the
"Equity Offering"). Net proceeds from the Equity Offering of approximately
$101 million were used to repay a portion of the Company's term loan
borrowings and revolving line of credit under its senior credit facility and
to retire other long-term debt.
5. 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, results of operations or cash flows of the
Company.
9
<PAGE>
6. INDUSTRY SEGMENT INFORMATION
The Company operates in three business segments: well servicing, contract
drilling and oil and natural gas production.
WELL SERVICING: The Company's operations provide well servicing (ongoing
maintenance of existing oil and natural gas wells), workover (major repairs
or modifications necessary to optimize the level of production from existing
oil and natural gas wells) and production services (fluid hauling and fluid
storage tank rental).
CONTRACT DRILLING: The Company provides contract drilling services for major
and independent oil companies onshore the continental United States,
Argentina and Ontario, Canada.
OIL AND NATURAL GAS PRODUCTION: The Company produces crude oil and natural
gas, in the Permian Basin and Panhandle areas of West Texas.
<TABLE>
<CAPTION>
WELL CONTRACT OIL AND NATURAL CORPORATE /
SERVICING DRILLING GAS PRODUCTION OTHER TOTAL
--------- -------- -------------- ----- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000
Operating revenues...................................... $166,565 $22,145 $2,090 $879 $191,679
Operating profit ....................................... 54,879 4,687 767 879 61,212
Depreciation, depletion and amortization................ 15,689 1,806 570 246 18,311
Interest expense........................................ 657 - - 15,454 16,111
Net income (loss) before extraordinary gain *........... 21,778 654 (13) (14,909) 7,510
Identifiable assets..................................... 634,123 87,850 35,234 191,373 948,580
Capital expenditures ................................... 10,929 228 123 2,005 13,285
THREE MONTHS ENDED SEPTEMBER 30, 1999
Operating revenues...................................... $130,817 $16,458 $2,020 $597 $149,892
Operating profit ....................................... 31,603 2,187 1,020 597 35,407
Depreciation, depletion and amortization................ 14,282 1,782 570 187 16,821
Interest expense........................................ 374 - - 17,014 17,388
Net income (loss) *..................................... 8,149 (722) 302 (17,180) (9,451)
Identifiable assets..................................... 648,420 76,833 36,196 187,888 949,337
Capital expenditures .................................. 3,722 1,100 77 1,233 6,132
</TABLE>
------------------
* Net income (loss) for the contract drilling segment
includes a portion of well servicing general and
administrative expenses allocated on a percentage
of revenue basis.
Operating revenues for the Company's foreign operations for the three months
ended September 30, 2000 and 1999 were $11.6 million and $8.0 million,
respectively. Operating profits for the Company's foreign operations for the
three months ended September 30, 2000 and 1999 were $2.5 million and $1.5
million, respectively. The Company had $63.7 million and $60.5 million of
identifiable assets as of September 30, 2000 and 1999, respectively, related
to foreign operations.
10
<PAGE>
7. VOLUMETRIC PRODUCTION PAYMENT
In March 2000, Key sold a part of its future oil and natural gas production
from Odessa Exploration Incorporated, its wholly owned subsidiary, for gross
proceeds of $20 million pursuant to an agreement under which the purchaser is
entitled to receive a share of the production from certain oil and natural
gas properties in amounts ranging from 3,500 to 10,000 barrels of oil and
58,800 to 122,100 Mmbtu of natural gas per month over a six year period
ending February 2006. The total volume of the forward sale is approximately
486,000 barrels of oil and 6.135 million Mmbtu of natural gas.
8. DERIVATIVE INSTRUMENTS
As of July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) as amended by SFAS
No. 137 and No. 138. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. It requires the recognition
of all derivative instruments as assets or liabilities in the Company's
balance sheet and measurement of those instruments at fair value. The
accounting treatment of changes in fair value is dependent upon whether or
not a derivative instrument is designated as a hedge and if so, the type of
hedge. For derivatives designated as cash flow hedges, changes in fair value
are recognized in other comprehensive income until the hedged item is
recognized in earnings.
The Company periodically hedges a portion of its oil and natural gas
production through collar agreements. The purpose of the hedges is to provide
a measure of stability in the volatile environment of oil and natural gas
prices and to manage exposure to commodity price risk under existing
sales commitments. The Company's risk management objective is to lock in a
range of pricing for expected production volumes. This allows the Company to
forecast future earnings within a predictable range. The Company meets this
objective by entering into a collar arrangement which allows for an
acceptable cap and floor price.
The Company does not enter into derivative instruments for any purpose other
than for economic hedging. The Company does not speculate using derivative
instruments. The Company has identified the following derivative instruments:
Freestanding derivatives - On March 30, 2000 the Company entered into a
collar arrangement for a 22 month time period whereby the Company will pay if
the specified price is above the cap index and the counterparty will pay if
the price should fall below the floor index. The combination of the floor and
cap results in a determinable cash flow for those production streams over
that time period.
11
<PAGE>
Prior to the adoption of SFAS No. 133, these collars were accounted for as
cash flow type hedges. Accordingly, the transition adjustment resulted in
recording a $778,000 liability for the fair value of the collars to
accumulated other comprehensive income, of which $146,000 was recognized in
earnings during the quarter. It is estimated that $470,000 of this transition
adjustment will be recognized in earnings over the next twelve months. While
this arrangement was intended to be an economic hedge, as of July 1, 2000 the
Company had not documented the oil and natural gas collars as cash flow
hedges and therefore has included a change of $565,000 for the increase in
the fair value of the liability as of September 30, 2000 in other income and
expense. As of October 1, 2000, the Company has documented these collars as
cash flow hedges.
Embedded derivatives - The Company is party to a production payment that meets
the definition of an embedded derivative under SFAS No. 133. As of July 1,
2000, the Company has determined and documented that the production payment
is excluded from the scope of SFAS No. 133 under the normal purchases/sales
exclusion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
NOTE REGARDING FORWARD - LOOKING STATEMENTS
The statements in this document that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this document and the documents
incorporated by reference, words such as "anticipate," "believe," "expect,"
"plan," "intend," "estimate," "project," "will," "could," "may," "predict"
and similar expressions are intended to identify forward-looking statements.
Further events and actual results may differ materially from the results set
forth in or implied in the forward-looking statements. Factors that might
cause such a difference include:
- fluctuations in world-wide prices and demand for oil and natural gas;
- fluctuations in the level of oil and natural gas exploration and
development activities;
- fluctuations in the demand for well servicing, contract drilling and
ancillary oilfield services;
- the existence of competitors, technological changes and developments
in the industry;
- the existence of operating risks inherent in well servicing, contract
drilling and ancillary oilfield services; and
- general economic conditions, the existence of regulatory
uncertainties, the possibility of political instability in any of the
countries in which the Company does business, in addition to the other
matters discussed herein.
12
<PAGE>
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 consolidated financial statements and related
notes appearing elsewhere in this report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1999
The Company's revenue for the first quarter of fiscal 2001 totaled
$191,679,000, representing an increase of $41,787,000, or 28.0% as compared
to the prior year period. The increase in the current period reflects higher
activity levels and improved rates. The Company's net income for the first
quarter of fiscal 2001 totaled $8,707,000, or $0.09 per share, versus a net
loss of $9,451,000, or $0.11 per share, for the prior year period.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the quarter ended September 30,
2000 increased $35,748,000, or 27.3%, to $166,565,000 from $130,817,000 for
the three months ended September 30, 1999. The increase in revenues was
primarily due to an increase in the number of hours worked and the effect of
higher rig and fluid hauling rates.
CONTRACT DRILLING. Revenues from contract drilling activities for the quarter
ended September 30, 2000 increased $5,687,000, or 34.6%, to $22,145,000 from
$16,458,000 for the three months ended September 30, 1999. The increase in
revenues was primarily due to an increase in equipment utilization and the
effect of higher prices.
OIL AND NATURAL GAS PRODUCTION. Revenues from oil and natural gas production
activities for the quarter ended September 30, 2000 increased $70,000, or
3.5%, to $2,090,000 from $2,020,000 for the three months ended September 30,
1999. The increase in revenues was due to higher oil and natural gas prices
which were partially offset by lower production volumes.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the quarter ended September 30,
2000 increased $12,472,000, or 12.6%, to $111,686,000 from $99,214,00 for the
three months ended September 30, 1999. The increase was primarily due to a
higher level of activity, increased wages and the cost of bringing crews and
previously idle equipment on line. Well servicing expenses, as a percentage
of well servicing revenue, decreased to 67.1% for the three months ended
September 30, 2000 from 75.8% for the three months ended September 30, 1999.
CONTRACT DRILLING. Expenses related to contract drilling activities for the
quarter ended September 30, 2000 increased $3,187,000, or 22.3%, to
$17,458,000 from $14,271,000 for the three months ended September 30, 1999.
The increase was primarily due to higher wages and the cost of bringing crews
and previously idle equipment on line and was partially offset by a shift
away from turnkey contracts to footage and day rates. Contract drilling
expenses, as a percentage of contract drilling revenues, decreased to 78.8%
for the three months ended September 30, 2000 from 86.7% for the three months
ended September 30, 1999.
13
<PAGE>
OIL AND NATURAL GAS PRODUCTION. Expenses related to oil and natural gas
production activities for the quarter ended September 30, 2000 increased
$323,000, or 32.3%, to $1,323,000 from $1,000,000 for the three months ended
September 30, 1999. Oil and natural gas production costs decreased to $6.98
per BOE for the three months ended September 30, 2000 from $7.32 per BOE for
the three months ended September 30, 1999. The increase in production costs
is primarily due to increased rates for electricity and other operating
services partially offset by lower production volumes.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
The Company's depreciation, depletion and amortization expense for the
quarter ended September 30, 2000 increased $1,490,000, or 8.9% to $18,311,000
from $16,821,000 for the three months ended September 30, 1999. The increase
is due to increased capital expenditures during the past twelve months as the
Company refurbished equipment and increased utilization of its contract
drilling equipment (which it depreciates based on utilization).
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses for the quarter ended
September 30, 2000 increased $455,000, or 3.3% to $14,367,000 from
$13,912,000 for the three months ended September 30, 1999. The increase was
due to higher administrative costs necessitated by growth of the Company's
operations as a result of improved industry conditions. Despite the increased
costs, general and administrative expenses, as a percentage of revenues,
decreased to 7.5% for the three months ended September 30, 2000 from 9.3% for
the three months ended September 30, 1999.
INTEREST EXPENSE
The Company's interest expense for the quarter ended September 30, 2000
decreased $1,277,000, or 7.3% to $16,111,000, from $17,388,000 for the three
months ended September 30, 1999. The decrease was primarily due to a
significant reduction in the Company's long-term debt using proceeds from the
Equity Offering and operating cash flow and was partially offset by higher
interest rates on the Company's floating rate debt. Included in the interest
expense was the amortization of debt issuance costs of $1,408,000 and
$1,255,000 for the three months ended September 30, 2000 and 1999,
respectively.
BAD DEBT EXPENSE
The Company's bad debt expense for the quarter ended September 30, 2000
decreased $283,000, or 59.3% to $194,000 from $477,000 for the three months
ended September 30, 1999. The decrease was largely due to an improvement in
market conditions for its customers.
EXTRAORDINARY GAIN
During the three months ended September 30, 2000, the Company repurchased
$10,996,000 of its long-term debt which resulted in an after-tax gain of
$1,197,000.
14
<PAGE>
INCOME TAXES
The Company's income tax expense for the quarter ended September 30, 2000
increased $8,459,000 to an expense of $4,719,000 from a benefit of $3,740,000
for the three months ended September 30, 1999. The increase in income tax
expense is due to the increase in pretax income. The Company's effective tax
rate for the three months ended September 30, 2000 and 1999 was 39% and 28%,
respectively. The effective tax rates are different from the statutory rate
of 35% because of the disallowance of certain goodwill amortization, other
non-deductible expenses and state and local taxes. The Company does not
expect to be required to remit federal income taxes for the next few fiscal
years because of the availability of net operating loss carry forwards from
fiscal 1999 and previous years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and the issuance of equity and long-term debt. The Company
believes that the current reserves of cash and cash equivalents, access to
our existing credit lines, access to capital markets and internally generated
cash flow from operations are sufficient to finance the cash requirements of
our current and future operations.
As of September 30, 2000, the Company had working capital (excluding the
current portion of long-term debt) of approximately $89,253,000 which
includes cash and cash equivalents of approximately $2,635,000 as compared to
working capital (excluding the current portion of long-term debt) of
approximately $175,396,000, which includes and cash and cash equivalents of
approximately $109,873,000 as of June 30, 2000. The decrease in working
capital is primarily due to the use of cash to repay long-term debt during
the quarter ended September 30, 2000. Working capital, excluding the change
in cash, actually increased for the three months ended September 30, 2000
which was the result of timing differences related to cash receipts and
disbursements. Receivables are higher due to the increase in revenues caused
by the increased utilization of the Company's equipment base and payables are
also higher due to the addition of more employees and greater costs related
to the increased equipment utilization.
CAPITAL EXPENDITURES
Capital expenditures for fiscal 2001 are expected to equal or exceed fiscal
2000 levels. Expenditures will be directed toward selectively refurbishing
our assets as business conditions warrant. The Company will continue to
evaluate opportunities to acquire or divest assets or businesses to enhance
the Company's primary operations. Such capital expenditures, acquisitions and
divestitures are at the discretion of the Company and will depend on
management's view of market conditions as well as other factors.
LONG-TERM DEBT
SENIOR CREDIT FACILITY
As of September 30, 2000, the Company had an approximately $323 million
senior credit facility (the "Senior Credit Facility") with a syndicate of
banks led by PNC Bank, N.A. which consisted
15
<PAGE>
of a $150,000,000 revolving loan facility and $173,223,907 in Tranche B term
loans. In addition, up to $20,000,000 of letters of credit can be issued
under the Senior Credit Facility, but any outstanding letters of credit
reduce the borrowing availability under the revolving loan facility. As of
September 30, 2000, approximately $23,000,000 was drawn under the revolving
loan facility and approximately $15,132,000 of letters of credit related to
workmen's compensation insurance were outstanding.
The revolving loan bears interest based upon, at the Company's option, the
prime rate plus a variable margin of 0.75% to 2.00% or a Eurodollar rate plus
a variable margin of 2.25% to 3.50%. The Tranche B loans bear interest based
upon, at the Company's option, the prime rate plus 2.50% or a Eurodollar rate
plus 4.00%. The Credit Facility has customary affirmative and negative
covenants including a maximum debt to capitalization ratio, a minimum
interest coverage ratio, a maximum senior leverage ratio, a minimum net worth
and minimum EBITDA ratio as well as restrictions on capital expenditures,
acquisitions and dispositions.
14% SENIOR SUBORDINATED NOTES
On January 22, 1999, 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 "14% 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 private
placement, net of fees and expenses, were used to repay substantially all of
the remaining $148,600,000 principal (plus accrued interest) owed under the
Company's bridge loan facility arranged in connection with the acquisition of
Dawson. The 14% Senior Subordinated Notes are subordinate to the Company's
senior indebtedness which includes borrowings under the Senior Credit
Facility and the Dawson 9 3/8% Senior Notes. The Unit Warrants have separated
from the 14% Senior Subordinated Notes and became exercisable on January 25,
2000. At September 30, 2000, $150,000,000 principal amount of the 14% Senior
Subordinated Notes remained outstanding. As of September 30, 2000, 52,000
Unit Warrants had been exercised leaving 98,000 Unit Warrants outstanding.
5% CONVERTIBLE SUBORDINATED NOTES
On September 25, 1997, the Company completed an initial closing of its
private placement of $200,000,000 of 5% Convertible Subordinated Notes due
2004 (the "5% Convertible Subordinated Notes"). On October 7, 1997, the
Company completed a second closing of its private placement of an additional
$16,000,000 of the 5% Convertible Subordinated Notes pursuant to the exercise
of the remaining portion of an over-allotment option. The 5% Convertible
Subordinated Notes are subordinate to the Company's senior indebtedness which
includes borrowings under the Senior Credit Facility, the 14% Senior
Subordinated Notes and the Dawson 9 3/8% Senior Notes. The 5% Convertible
Subordinated Notes are convertible, at the holder's option, into shares of
the Company's common stock at a conversion price of $38.50 per share, subject
to certain adjustments. During the quarter ended September 30, 2000, the
Company repurchased (and canceled) $10,196,000 principal amount of the 5%
Convertible Subordinated Notes, leaving $195,614,000 principal amount of the
5% Convertible Subordinated Notes outstanding at September 30, 2000.
16
<PAGE>
7% CONVERTIBLE SUBORDINATED DEBENTURES
In July 1996, the Company completed a $52,000,000 private placement of 7%
Convertible Subordinated Debentures due 2003 (the "7% Convertible
Subordinated Debentures"). The 7% Convertible Subordinated Debentures are
subordinate to the Company's senior indebtedness which includes borrowings
under the Senior Credit Facility, the 14% Senior Subordinated Notes and the
Dawson 9 3/8% Senior Notes. The Debentures are convertible, at any time prior
to maturity, at the holders' option, into shares of the Company's common
stock at a conversion price of $9.75 per share, subject to certain
adjustments. In addition, holders who converted prior to July 1, 1999 were
entitled to receive a payment, in cash or the Company's 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. During the quarter ended
September 30, 2000, $985,000 principal amount of the 7% Convertible
Subordinated Debentures were surrendered for conversion by the holders
thereof and 101,025 shares of common stock were issued on September 1, 2000.
On September 1, 2000 the remaining $15,000 principal amount of the
outstanding 7% Convertible Subordinated Debentures was redeemed at 103% of
the principal amount plus accrued interest, leaving none outstanding as of
September 30, 2000.
DAWSON 9 3/8% SENIOR NOTES
In February 1997, Dawson issued $140,000,000 9 3/8% Senior Notes due 2007
(the "Dawson 9 3/8% Senior Notes"). As the result of the Dawson acquisition,
the Company assumed Dawson's obligations under the Dawson 9 3/8% Senior Notes
which were equally and ratably secured with the obligations under the Senior
Credit Facility. As a result of mandatory tender offer made in connection
with the Dawson acquisition, only $1,406,000 principal amount of the Dawson
9 3/8% Senior Notes remained outstanding at March 31, 2000. During the
quarter ended June 30, 2000, the Company purchased (and canceled) $300,000 of
the Dawson 9 3/8% Senior Notes. During the quarter ended September 30, 2000,
the Company repurchased (and canceled) $800,000 principal amount of the
Dawson 9 3/8% Senior Notes, leaving $306,000 principal amount outstanding as
of September 30, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements". See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such
statements.
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about the Company's
potential exposure to market risk. The term "market risk" refers to the risk
of loss arising from adverse changes in foreign currency exchange, interest
rates and oil and gas prices. The disclosures are not meant to be precise
indicators of expected future losses, but rather indicators of reasonably
possible losses. This forward-looking information provides indicators of how
the Company views and manages its ongoing market risk exposures.
INTEREST RATE RISK
At September 30, 2000, Key had long-term debt outstanding of $558,154,000. Of
this amount $340,931,000 or 61.1%, bears interest at fixed rates as follows:
17
<PAGE>
<TABLE>
<CAPTION>
(000's)
Balance at
9/30/00
-----------------
<S> <C>
5% Convertible Subordinated Notes Due 2004....................................... $195,614
14% Senior Subordinated Notes Due 2009........................................... 143,836
Dawson 9 3/8% Senior Notes Due 2007.............................................. 306
Other (rates generally ranging from 8.0% to 8.5%)................................ 1,175
-----------------
$340,931
=================
</TABLE>
The remaining $217,223,000 of debt outstanding as of September 30, 2000 bears
interest at floating rates which averaged approximately 10.27% at September
30, 2000. A 10% increase in short-term interest rates on the floating-rate
debt outstanding at September 30, 2000 would equal approximately 103 basis
points. Such an increase in interest rates would increase Key's fiscal 2001
interest expense by approximately $2.2 million assuming borrowed amounts
remain outstanding.
The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the
short-term maturity of such instruments.
FOREIGN CURRENCY RISK
Key's net assets, net earnings and cash flows from its Argentina subsidiaries
are currently not exposed to foreign currency risk, as Argentina's currency
is tied to the U.S. dollar. Key's net assets, net earnings and cash flows
from its Canadian subsidiary is based on the U.S. dollar equivalent of such
amounts measured in Canadian dollars. Assets and liabilities of the Canadian
operations are translated to U.S. dollars using the applicable exchange rate
as of the end of a reporting period. Revenues, expenses and cash flow are
translated using the average exchange rate during the reporting period.
A 10% change in the Canadian-to-U.S. Dollar exchange rate would not be
material to the net assets, net earnings or cash flows of Key.
COMMODITY PRICE RISK
Key's major market risk exposure for its oil and natural gas production
operations is in the pricing applicable to its oil and natural gas sales.
Realized pricing is primarily driven by the prevailing worldwide price for
crude oil and spot market for natural gas. Pricing for oil and natural gas
production has been volatile and unpredictable for several years.
Key periodically enters into financial hedging activities with respect to a
portion of its projected oil and natural gas production through commodity
option or collar contracts. Key pays a premium for its option contracts.
These financial hedging activities are intended to support oil and natural
gas prices at targeted levels and to manage Key's exposure to oil and gas
price fluctuations. Realized gains or losses from the settlement of these
financial hedging instruments are recognized in oil and gas sales when the
associated production occurs. The gains and losses realized as a result of
these hedging activities are substantially offset in the cash market when the
hedged commodity is delivered.
18
<PAGE>
As of September 30, 2000, Key had oil and natural gas price collars in place
which represented 4,000 barrels of oil production per month and approximately
30,000 Mmbtu of gas production per month. The total fiscal 2001 hedged oil
and natural gas volumes represent 26% and 18% respectively, of expected
calendar year total production.
The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at September 30, 2000:
<TABLE>
<CAPTION>
Monthly Income
---------------------
Oil Gas Strike Price Fair
(Bbls) (Mmbtu) Term Per Bbl/Mmbtu Value
--------- ---------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
At September 30, 2000
Oil Collars............................. 4,000 -- Oct 2000-Feb 2001 $22.20-$26.50 99,820
5,000 -- Mar 2001-Feb 2002 $19.70-$23.70 272,580
Gas Collars............................. 30,000 Oct 2000-Feb 2001 $ 2.60-$ 3.19 300,450
40,000 Mar 2001-Feb 2002 $ 2.40-$ 2.91 670,560
</TABLE>
(The strike prices for oil are based on the NYMEX spot price for West
Texas Intermediate; the strike prices for gas are based on the Inside
FERC-West Texas Waha spot price).
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 1, 2000, the Company issued a total of 101,025 shares
of its Common Stock in connection with the conversion of $985,000 principal
amount of 7% Convertible Subordinated Debentures Due 2003 (the "Debentures").
No underwriters were involved in the conversion of the Debentures. The shares
were issued in a transaction exempt from registration pursuant to Section
3(a)(9) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
10.1* Amendment dated July 1, 2000 to Employment Agreement
dated August 5, 1999 between Thomas K. Grundman and Key
Energy Services, Inc.
10.2* Letter Agreement Amendment dated July 1, 2000 to the
Demand Note dated August 3, 1999 made by Thomas K.
Grundman in favor of Key Energy Services, Inc.
27(a)* Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 2000.
</TABLE>
------------------
* Filed herewith.
20
<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.
Dated: November 14, 2000 By: /s/ FRANCIS D. JOHN
-------------------
President and Chief Executive Officer
Dated: November 14, 2000 By: /s/ THOMAS K. GRUNDMAN
----------------------
Chief Financial Officer and
Chief Accounting Officer
21
