<PAGE>
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 December 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 February 10, 2000 - 84,414,014
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
INDEX
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
December 31, 1999 and June 30, 1999.................... 3
Unaudited Consolidated Statements of
Operations for the Three and Six Months Ended
December 31, 1999 and 1998............................. 4
Unaudited Consolidated Statements of
Cash Flows for the Three and Six Months Ended
December 31, 1999 and 1998............................. 5
Consolidated Statements of Comprehensive
Income for the Three and Six Months Ended
December 31, 1999 and 1998............................. 6
Notes to Consolidated Financial Statements............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 23
Item 2. Changes in Securities and Use of Proceeds.................. 23
Item 3. Defaults Upon Senior Securities............................ 23
Item 4. Submission of Matters to a Vote of Security Holders........ 23
Item 5. Other Information.......................................... 23
Item 6. Exhibits and Reports on Form 8-K........................... 23
Signatures .............................................................. 24
</TABLE>
2
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 1999
----------------- -------------
(UNAUDITED)
(THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................................... $ 9,202 $ 23,478
Accounts receivable, net ............................................................... 115,423 91,998
Inventories ............................................................................ 14,407 12,742
Prepaid income taxes ................................................................... - 916
Prepaid expenses and other current assets .............................................. 11,066 3,409
----------- -----------
Total current assets ..................................................................... 150,098 132,543
----------- -----------
Property and equipment:
Oilfield service equipment ............................................................. 643,787 632,854
Contract drilling equipment ............................................................ 87,839 86,225
Motor vehicles ......................................................................... 69,906 70,398
Oil and gas properties and other related equipment, successful efforts method .......... 43,047 42,925
Furniture and equipment ................................................................ 10,410 8,452
Buildings and land ..................................................................... 34,244 31,086
----------- -----------
......................................................................................... 889,233 871,940
Accumulated depreciation & depletion ..................................................... (131,205) (102,378)
----------- -----------
Net property and equipment ............................................................... 758,028 769,562
----------- -----------
Goodwill, net .......................................................................... 203,526 205,423
Deferred costs, net .................................................................... 22,289 23,779
Notes receivable - related parties ..................................................... 5,150 2,835
Other assets ........................................................................... 9,695 13,996
----------- -----------
Total assets ............................................................................. $ 1,148,786 $ 1,148,138
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 33,552 $ 18,527
Other accrued liabilities .............................................................. 20,347 25,291
Accrued interest ....................................................................... 14,330 13,079
Current portion of long-term debt ...................................................... 17,426 16,254
----------- -----------
Total current liabilities ................................................................ 85,655 73,151
----------- -----------
Long-term debt, less current portion ..................................................... 693,534 683,724
Non-current accrued expenses ............................................................. 1,903 1,739
Deferred tax liability ................................................................... 95,141 101,430
Commitments and contingencies ............................................................ - -
Stockholders' equity:
Common stock, $.10 par value; 100,000,000 shares authorized, 83,155,093
and 83,155,072 shares issued, respectively at December 31, 1999 and
June 30, 1999, respectively ............................................................ 8,317 8,317
Additional paid-in capital ............................................................. 301,218 301,615
Treasury stock, at cost; 416,666 shares at December 31, 1999 and June 30, 1999 ......... (9,682) (9,682)
Accumulated other comprehensive income ................................................. 9 9
Retained earnings (deficit) ............................................................ (27,309) (12,165)
----------- -----------
Total stockholders' equity ............................................................... 272,553 288,094
----------- -----------
Total liabilities and stockholders' equity ............................................... $ 1,148,786 $ 1,148,138
=========== ===========
</TABLE>
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
3
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Well servicing ................................. $ 138,722 $ 126,446 $ 269,539 $ 222,939
Contract drilling .............................. 18,212 15,234 34,670 32,150
Oil and gas production ......................... 2,642 1,837 4,662 3,607
Other, net ..................................... (187) 129 410 537
--------- --------- --------- ---------
159,389 143,646 309,281 259,233
--------- --------- --------- ---------
COSTS AND EXPENSES:
Well servicing ................................. 98,952 90,862 198,166 158,267
Contract drilling .............................. 15,766 12,399 30,037 26,019
Oil and gas production ......................... 936 879 1,936 1,638
Depreciation, depletion and amortization ....... 18,055 14,427 34,876 25,130
General and administrative ..................... 14,730 13,910 28,642 25,115
Bad debt expense ............................... 789 428 1,266 661
Interest ....................................... 18,114 18,822 35,502 27,327
Corporate restructuring ........................ - 6,699 - 6,699
--------- --------- --------- ---------
167,342 158,426 330,425 270,856
--------- --------- --------- ---------
Income (loss) before income taxes ................. (7,953) (14,780) (21,144) (11,623)
Income tax benefit ................................ 2,260 4,983 6,000 3,663
--------- --------- --------- ---------
NET INCOME/(LOSS) ................................. ($5,693) ($9,797) ($15,144) (7,960)
========= ========= ========= =========
EARNINGS/(LOSS) PER SHARE :
Basic ........................................... ($0.07) ($0.54) ($0.18) ($0.44)
Diluted ......................................... ($0.07) ($0.54) ($0.18) ($0.44)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ........................................... 82,738 18,291 82,738 18,283
Diluted ......................................... 82,738 18,291 82,738 18,283
</TABLE>
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
4
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) .............................................. ($ 5,693) ($ 9,797) ($ 15,144) ($ 7,960)
ADJUSTMENTS TO RECONCILE INCOME
FROM OPERATIONS TO NET CASH PROVIDED BY (USED
IN) OPERATIONS:
Depreciation, depletion and amortization ....................... 18,055 14,427 34,876 25,130
Bad debt expense ............................................... 789 428 1,266 661
Amortization of deferred debt costs ............................ 1,292 1,597 2,547 2,364
Deferred income taxes .......................................... (2,260) (4,970) (6,000) (3,650)
Loss on sale of assets ......................................... 202 - 196 47
Other non-cash items ........................................... (402) 6,062 514 6,031
CHANGE IN ASSETS AND LIABILITIES NET OF EFFECTS
FROM THE ACQUISITIONS:
(Increase) decrease in accounts receivable ................... (4,014) (8,530) (24,691) (4,053)
(Increase) decrease in other current assets .................. (5,579) 657 (8,406) 1,194
Increase (decrease) in accounts payable ...................... 7,341 (6,742) 15,025 707
Increase (decrease) in other current liabilities ............. 63 (31,889) (3,693) (44,551)
Other assets and liabilities ................................. (873) 2,130 (1,964) (139)
--------- --------- --------- ---------
Net cash provided (used) by operating activities ............... 8,921 (36,627) (5,474) (24,219)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - oilfield service operations ............. (6,245) (7,940) (9,445) (14,527)
Capital expenditures - oil and gas well drilling operations .... (2,121) (427) (3,221) (1,446)
Capital expenditures - oil and gas operations .................. (64) (1,772) (141) (3,380)
Capital expenditures - other ................................... (594) - (1,827) -
Proceeds from sale of fixed assets ............................. 1,842 69 1,969 160
Notes receivable from related parties .......................... (150) - (2,065) -
Cash received in acquisitions .................................. - 244 - 27,252
Acquisitions - oilfield service operations ..................... - (2,814) - (275,106)
--------- --------- --------- ---------
Net cash used in investing activities .......................... (7,332) (12,640) (14,730) (267,047)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt and capital lease obligations ....... (4,758) (2,492) (6,072) (4,205)
Repayment of long-term debt .................................... - (140,000) - (140,000)
Borrowings under line-of-credit ................................ - 160,000 12,000 438,000
Proceeds paid for debt issuance costs .......................... - - - (19,636)
Proceeds from other long-term debt ............................. - 23 - 23
--------- --------- --------- ---------
Net cash provided by (used in) financing activities ............ (4,758) 17,531 5,928 274,182
--------- --------- --------- ---------
Net increase (decrease) in cash ................................ (3,169) (31,736) (14,276) (17,084)
Cash at beginning of period .................................... 12,371 39,917 23,478 25,265
--------- --------- --------- ---------
Cash at end of period .......................................... $ 9,202 $ 8,181 $ 9,202 $ 8,181
========= ========= ========= =========
</TABLE>
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS
5
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ......................................... ($ 5,693) ($ 9,797) ($15,144) ($ 7,960)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains on available-for-sale securities ....... - - - 1,200
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS), NET OF TAX.................... ($ 5,693) ($ 9,797) ($15,144) ($ 6,760)
========= ========= ========= =========
</TABLE>
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
6
<PAGE>
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Key Energy Services, Inc. (the
"Company") and its wholly-owned subsidiaries for the three and six month
periods ended December 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, 1999. The
results of operations for the three and six month periods ended December 31,
1999 are not necessarily indicative of the results of operations for the full
fiscal year ending June 30, 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for
quarters of fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments
and for hedging activities. The Company is currently evaluating what effect,
if any, this statement will have on the Company's financial statements. The
Company will adopt this statement no later than July 1, 2000.
RECLASSIFICATIONS AND ADJUSTMENTS
Certain reclassifications have been made to the consolidated financial
statements for the three and six month periods ended December 31, 1998 to
conform to the presentation for the three and six month periods ended
December 31, 1999.
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
conversion of dilutive outstanding convertible securities using the "as if
converted" method.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
--------- --------- --------- ---------
(THOUSANDS, EXCEPT PER (THOUSANDS, EXCEPT
SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION:
NUMERATOR
Net income (loss) ................................ ($ 5,693) ($ 9,797) ($15,144) ($ 7,960)
DENOMINATOR
Weighted average common shares outstanding ....... 82,738 18,291 82,738 18,283
--------- --------- --------- ---------
BASIC EPS .......................................... ($ 0.07) ($ 0.54) ($ 0.18) ($ 0.44)
========= ========= ========= =========
DILUTED EPS COMPUTATION:
NUMERATOR
Net income (loss) ................................ ($ 5,693) ($ 9,797) ($15,144) ($ 7,960)
Effect of dilutive securities, tax effected:
Convertible securities ........................... - - - -
--------- --------- --------- ---------
($ 5,693) ($ 9,797) ($15,144) ($ 7,960)
========= ========= ========= =========
DENOMINATOR
Weighted average common shares outstanding: ...... 82,738 18,291 82,738 18,283
Warrants ......................................... - - - -
Stock options .................................... - - - -
7% Convertible Debentures ........................ - - - -
5% Convertible Debentures ........................ - - - -
--------- --------- --------- ---------
82,738 18,291 82,738 18,283
--------- --------- --------- ---------
DILUTED EPS ........................................ ($ 0.07) ($ 0.54) ($ 0.18) ($ 0.44)
========= ========= ========= =========
</TABLE>
The earnings per share calculation for the three and six month periods ended
December 31, 1999 and 1998 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 six months ended
December 31, 1999.
DAWSON PRODUCTION SERVICES, INC.
In September 1998, the Company completed the acquisition of all of the
capital stock of Dawson Production Services, Inc. ("Dawson") for an aggregate
consideration of approximately $382.6 million, including approximately $207.1
million of cash paid for the Dawson stock and for transactional fees and
approximately $175.5 million of net liabilities assumed. The Dawson
acquisition was accounted for using the purchase method of accounting and the
results of operations from the Dawson assets are included in the Company's
results of operations effective September 14, 1998.
Expenditures for the Dawson acquisition, including acquisition costs, less
cash acquired were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired, including goodwill................................ $ 409,722
Liabilities assumed.............................................................. (199,439)
Liabilities for employee termination costs and lease termination costs........... (3,162)
-----------
Cash paid, including acquisition related expenditures and the cost of
Dawson common stock previously held............................................ 207,121
Less: Cash acquired.............................................................. (27,008)
-----------
Net cash used for the acquisition................................................ $ 180,113
===========
</TABLE>
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.
OTHER FISCAL 1999 ACQUISITIONS
In addition to its acquisition of Dawson, the Company acquired the assets
and/or capital stock of six well servicing and contract drilling businesses
during the first two quarters of fiscal 1999, increasing its rig and truck
fleet by a total of approximately 93 well service rigs, 4 drilling rigs and
185 oilfield trucks (and related equipment) for an aggregate purchase price
of approximately $93.7 million in cash. Each of the acquisitions was
accounted for using the purchase method and the results of the operations,
generated from the acquired assets, are included in the Company's results of
operations as of the completion date of each acquisition.
9
<PAGE>
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma results of operations have been prepared as
though the Dawson acquisition had been consummated on July 1, 1998 with
adjustments to record specifically identifiable decreases in direct costs and
general and administrative expenses related to the termination of individual
employees. Pro forma amounts are not necessarily indicative of the results
that may be reported in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
(THOUSANDS, EXCEPT PER (THOUSANDS, EXCEPT PER
SHARE DATA) SHARE DATA)
---------------------- ----------------------
<S> <C> <C>
Revenues.............................................. $309,281 $295,588
Net income (loss)..................................... (15,144) (14,245)
Basic earnings (loss) per share....................... (0.18) (0.78)
</TABLE>
4. STOCKHOLDERS' EQUITY
EQUITY OFFERING
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
$165.9 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 $10.0
million (the "Concurrent Offering" and together with the Public Offering, the
"Equity Offering"). In addition, on June 7, 1999, the underwriters of the
Public Offering exercised an over-allotment option to purchase an additional
5,436,000 million shares to cover over-allotments. Net proceeds from the
Equity Offering of approximately $180.4 million were used to repay a portion
of the Company's term loan borrowings under its senior credit facility.
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.
10
<PAGE>
6. INDUSTRY SEGMENT INFORMATION
The Company operates in three business segments: well servicing, contract
drilling and oil and 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 onshore drilling services
for major and independent oil companies in the continental United States,
Argentina and Ontario, Canada.
OIL AND 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 CORPORATE/
SERVICING DRILLING GAS PRODUCTION OTHER TOTAL
--------- -------- -------------- ----- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, 1999
Operating revenues ................................ $ 138,722 $ 18,212 $ 2,642 $ (187) $ 159,389
Operating profit .................................. 39,770 2,446 1,706 (187) 43,735
Depreciation, depletion and amortization .......... 15,290 1,806 602 357 18,055
Interest expense .................................. 762 - - 17,352 18,114
Net income/(loss) * ............................... 13,679 (1,192) 500 (18,680) (5,693)
Identifiable assets ............................... 753,514 107,767 39,803 44,176 945,260
Capital expenditures (excluding acquisitions) ..... 6,245 2,121 64 594 9,024
THREE MONTHS ENDED DECEMBER 31, 1998
Operating revenues ................................ $ 126,446 $ 15,234 $ 1,837 $ 129 $ 143,646
Operating profit .................................. 35,584 2,835 958 129 39,506
Depreciation, depletion and amortization .......... 11,846 1,691 690 200 14,427
Interest expense .................................. 553 - - 18,269 18,822
Net income/(loss) * ............................... 13,061 (708) 18 (22,168) (9,797)
Identifiable assets ............................... 748,351 109,008 40,482 44,874 942,715
Capital expenditures (excluding acquisitions) ..... 7,940 427 1,772 - 10,139
</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 December 31, 1999 and 1998 were $8.9 million and $8.7 million,
respectively. Operating profits for the Company's foreign operations for the
three months ended December 31, 1999 and 1998 were $2.0 million and $1.9
million, respectively. The Company's assets related to foreign operations for
the period ended December 31, 1999 and 1998 were $62.2 million and $55.9
million, respectively.
11
<PAGE>
<TABLE>
<CAPTION>
WELL CONTRACT OIL AND CORPORATE/
SERVICING DRILLING GAS PRODUCTION OTHER TOTAL
--------- -------- -------------- ----- -----
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED DECEMBER 31, 1999
Operating revenues ............................... $ 269,539 $ 34,670 $ 4,662 $ 410 $ 309,281
Operating profit ................................. 71,373 4,633 2,726 410 79,142
Depreciation, depletion and amortization ......... 29,572 3,588 1,172 544 34,876
Interest expense ................................. 1,136 - - 34,366 35,502
Net income/(loss) * .............................. 21,828 (1,914) 802 (35,860) (15,144)
Identifiable assets .............................. 753,514 107,767 39,803 44,176 945,260
Capital expenditures (excluding acquisitions) .... 9,445 3,221 141 1,827 14,634
SIX MONTHS ENDED DECEMBER 31, 1998
Operating revenues ............................... $ 222,940 $ 32,149 $ 3,607 $ 537 $ 259,233
Operating profit ................................. 64,913 5,890 1,969 537 73,309
Depreciation, depletion and amortization ......... 20,437 3,098 1,314 281 25,130
Interest expense ................................. 647 - - 26,680 27,327
Net income/(loss) * .............................. 23,205 (175) 276 (31,226) (7,960)
Identifiable assets .............................. 748,351 109,008 40,482 44,874 942,715
Capital expenditures (excluding acquisitions) .... 14,527 1,446 3,380 - 19,353
</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 six months
ended December 31, 1999 and 1998 were $16.9 million and $16.3 million,
respectively. Operating profits for the Company's foreign operations for the
six months ended December 31, 1999 and 1998 were $3.5 million and $3.6
million, respectively. The Company's assets related to foreign operations for
the period ended December 31, 1999 and 1998 were $62.2 million and $55.9
million, respectively.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 gas;
- fluctuations in level of oil and 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 the well
servicing, contract drilling and ancillary oilfield services;
- the existence of regulatory uncertainties, the possibility of
political instability in any of the countries in which the
Company does business; and
- year 2000 issues and general economic conditions, in addition
to the other matters discussed herein.
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 DECEMBER 31, 1999 VERSUS THREE MONTHS ENDED DECEMBER 31, 1998
The Company's revenue for the second quarter of fiscal 2000 totaled
$159,389,000, representing an increase of $15,743,000, or 11% as compared to
the prior year period. The results for the prior year period do not include a
full quarter of several fiscal 1999 acquisitions completed and integrated during
the period. Despite the higher revenues in the current period, reduced rates
and a lower margin mix of business combined with higher costs associated with
hiring crews and reactivating equipment continued to adversely impact the
Company's profits. The Company's net loss for the second quarter of fiscal 2000
totaled $5,693,000, or $0.07 per share, versus a net loss of $9,797,000, or
$0.54 per share, for the prior year period. The prior year period, however,
13
<PAGE>
included a corporate restructuring charge of $6,699,000.
The Company's results for the three months ended December 31, 1999 reflect
the third consecutive quarter of improvement in its business. Adverse
business conditions impacted the Company during fiscal 1999. These conditions
were caused by the significant and unprecedented decline in oil prices,
which, in turn, caused a sustained decline in oilfield spending by producers.
Beginning in March 1999, oil production cuts initiated by the Organization of
Petroleum Exporting Countries combined with increasing worldwide demand began
to strengthen both oil and natural gas prices. This has lead to a gradual
recovery in spending by oil and gas producers and increasing hours, revenues
and operating profits for the Company. Such spending has increased cautiously
as producers are taking a more conservative stance waiting to see if the new
price levels are sustainable. Management expects demand for the Company's
services and equipment to improve during calendar 2000, if the current
pricing environment continues.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues increased $12,276,000, or 9.7%, from
$126,446,000 for the three months ended December 31, 1998 to $138,722,000 for
the three months ended December 31, 1999. The increase in revenues was
primarily due to an increase in the number of hours worked and was partially
offset by lower prices. The prior year results do not include the full
quarter effect of several acquisitions completed and integrated during the
period.
CONTRACT DRILLING. Revenues from contract drilling activities increased
$2,978,000, or 19.5%, from $15,234,000 for the three months ended December
31, 1998 to $18,212,000 for the three months ended December 31, 1999. The
increase in revenues was primarily due to an increase in equipment
utilization and was partially offset by lower prices. The prior year results
do not include the full quarter effect of several acquisitions completed and
integrated during the period.
OIL AND NATURAL GAS PRODUCTION. Revenues from oil and natural gas production
activities increased $805,000, or 43.8%, from $1,837,000 for the three months
ended December 31, 1998 to $2,642,000 for the three months ended December 31,
1999. The increase in revenues was primarily due to a 44% increase in the
price of oil and gas received on a barrel of oil equivalent ("BOE") basis for
the three months ended December 31, 1999 compared to the prior year period,
and was partially offset by a 21% decrease in the volume of oil and gas
produced on a BOE basis for the three months ended December 31, 1999 compared
to the prior year period.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses increased $8,090,000, or 8.9%, from
$90,862,000 for the three months ended December 31, 1998 to $98,952,000 for
the three months ended December 31, 1999. The increase was primarily due to a
higher level of activity and the cost of bringing crews and previously idle
equipment on line and was partially offset by cost reductions effected as a
result of the Company's restructuring efforts. Well servicing expenses, as a
percentage of well servicing revenue, decreased from 72% for the three months
ended December 31, 1998 to 71% for the three months ended December 31, 1999.
CONTRACT DRILLING. Expenses related to contract drilling activities increased
$3,367,000, or 27.2%, from $12,399,000 for the three months ended December
31, 1998 to $15,766,000 for the three months ended December 31, 1999. The
increase was primarily due to the cost of bringing crews
14
<PAGE>
and previously idle equipment on line and was partially offset by cost
reductions effected as a result of the Company's restructuring efforts.
Contract drilling expenses, as a percentage of contract drilling revenues,
increased from 81% for the three months ended December 31, 1998 to 87% for
the three months ended December 31, 1999.
OIL AND NATURAL GAS PRODUCTION. Expenses related to oil and natural gas
production activities increased $57,000, or 6.5%, from $879,000 for the three
months ended December 31, 1998 to $936,000 for the three months ended
December 31, 1999. Oil and natural gas production costs increased from $5.08
per BOE for the three months ended December 31, 1998 to $6.81 per BOE for the
three months ended December 31, 1999. The increase per BOE is primarily due
to the costs of placing wells back on production that were not producing
prior to the quarter and, to a lesser extent, increased rates for electricity
and other operating services.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
The Company's depreciation, depletion and amortization expense increased
$3,628,000, or 25.1%, from $14,427,000 for the three months ended December
31, 1998 to $18,055,000 for the three months ended December 31, 1999. The
increase is primarily due to the effect of the acquisitions completed during
the early portion of fiscal 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses increased $820,000, or
5.9%, from $13,910,000 for the three months ended December 31, 1998 to
$14,730,000 for the three months ended December 31, 1999. The increase was
primarily due to an increase in activity and the effect of the acquisitions
completed during the early portion of fiscal 1999 and was largely offset by
cost reductions effected as a result of the Company's restructuring efforts.
General and administrative expenses, as a percentage of revenues, decreased
from 9.7% for the three months ended December 31, 1998 to 9.2% for the three
months ended December 31, 1999.
INTEREST EXPENSE
The Company's interest expense decreased $708,000, or 3.8%, from $18,822,000
for the three months ended December 31, 1998 to $18,114,000 for the three
months ended December 31, 1999. The decrease was primarily due to a
significant reduction in the Company's debt as a result of the Equity
Offering and was partially offset by higher floating interest rates. Included
in interest expense was the amortization of debt issuance costs of $1,292,000
and $1,597,000 for the three months ended December 31, 1999 and 1998,
respectively.
15
<PAGE>
BAD DEBT EXPENSE
The Company's bad debt expense increased $361,000, or 84.3%, from $428,000
for the three months ended December 31, 1998 to $789,000 for the three months
ended December 31, 1999. The increase was primarily due to increased revenues
and the residual effects of a significant decline in commodity prices and a
corresponding deterioration in market conditions during fiscal 1999.
INCOME TAXES
The Company's income tax benefit decreased $2,723,000 from a benefit of
$4,983,000 for the three months ended December 31, 1998 to a benefit of
$2,260,000 for the three months ended December 31, 1999. The decrease in the
income tax benefit is due to the decrease in pretax losses. The Company's
effective tax rate for the three months ended December 31, 1999 and 1998 was
28% and 34%, 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.
SIX MONTHS ENDED DECEMBER 31, 1999 VERSUS SIX MONTHS ENDED DECEMBER 31, 1998
The Company's revenue for the first six months of fiscal 2000 totaled
$309,281,000 representing an increase of $50,048,000, or 19.3% as compared to
the prior year period. The results for the prior year period do not include a
full six months of Dawson's results as well as several other fiscal 1999
acquisitions. The Company's net loss for the six months of fiscal 2000
totaled $15,144,000 or $0.18 per share, versus net loss of $7,960,000 or
$0.44 per share, for the prior year period.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues increased $46,600,000 or 20.9%, from
$222,939,000 for the six months ended December 31, 1998 to $269,539,000 for
the six months ended December 31, 1999. The increase in revenues was due to
the full period effect of the acquisitions completed during the early portion
of fiscal 1999 and by a modest increase in equipment utilization and was
partially offset by lower prices.
CONTRACT DRILLING. Revenues from contract drilling activities increased
$2,520,000, or 7.8%, from $32,150,000 for the six months ended December 31,
1998 to $34,670,000 for the six months ended December 31, 1999. The increase
in revenues was primarily due to an increase in equipment utilization and the
full period effect of the acquisitions completed during the early portion of
fiscal 1999 and was partially offset by lower prices.
16
<PAGE>
OIL AND NATURAL GAS PRODUCTION. Revenues from oil and natural gas production
activities increased $1,055,000 or 29.2%, from $3,607,000 for the six months
ended December 31, 1998 to $4,662,000 for the six months ended December 31,
1999. The increase in revenues was primarily due to a 26% increase in the
price of oil and gas received on a barrel of oil equivalent ("BOE") basis for
the six months ended December 31, 1999 compared to the prior year period, and
was partially offset by a 15% decrease in the volume of oil and gas produced
on a BOE basis for the six months ended December 31, 1999 compared to the
prior year period.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses increased $39,899,000 or 25.2%, from
$158,267,000 for the six months ended December 31, 1998 to $198,166,000 for
the six months ended December 31, 1999. The increase was primarily due to the
full period effect of the acquisitions completed during the early portion of
fiscal 1999 and the cost of bringing crews and previously idle equipment on
line and was partially offset by cost reductions effected as a result of the
Company's restructuring efforts. Well servicing expenses, as a percentage of
well servicing revenue, increased from 71% for the six months ended December
31, 1998 to 74% for the six months ended December 31, 1999.
CONTRACT DRILLING. Expenses related to contract drilling activities increased
$4,018,000 or 15.4%, from $26,019,000 for the six months ended December 31,
1998 to $30,037,000 for the six months ended December 31, 1999. The increase
was primarily due to the full period effect of the acquisition completed
during the early portion of fiscal 1999 and the cost of bringing crews and
previously idle equipment on line and was partially offset by cost reductions
effected as a result of the Company's restructuring efforts. Contract
drilling expenses, as a percentage of contract drilling revenues, increased
from 81% for the six months ended December 31, 1998 to 87% for the six months
ended December 31, 1999.
OIL AND NATURAL GAS PRODUCTION. Expenses related to oil and natural gas
production activities increased $298,000, or 18.2%, from $1,638,000 for the
six months ended December 31, 1998 to $1,936,000 for the six months ended
December 31, 1999. Oil and natural gas production costs increased from $5.14
per BOE for the six months ended December 31, 1998 to $7.07 per BOE for the
six months ended December 31, 1999. The increase per BOE is primarily due to
the costs of placing wells back on production that were not producing prior
to the period and, to a lesser extent, increased rates for electricity and
other operating services.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
The Company's depreciation, depletion and amortization expense increased
$9,746,000, or 38.8%, from $25,130,000 for the six months ended December 31,
1998 to $34,876,000 for the six months ended December 31, 1999. The increase
is primarily due to an increase in oilfield service depreciation resulting
from a full period's effect of the acquisitions completed during the early
portion of fiscal 1999.
17
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses increased $3,527,000, or
14%, from $25,115,000 for the six months ended December 31, 1998 to
$28,642,000 for the six months ended December 31, 1999. The increase was
primarily due to the effect of the acquisitions completed during the early
portion of fiscal 1999 for the full period and was largely offset by cost
reductions effected as a result of the Company's restructuring efforts.
General and administrative expenses, as a percentage of revenues, decreased
from 9.7% for the six months ended December 31, 1998 to 9.3% for the six
months ended December 31, 1999.
INTEREST EXPENSE
The Company's interest expense increased $8,175,000 or 29.9%, from
$27,327,000 for the six months ended December 31, 1998 to $35,502,000 for the
six months ended December 31, 1999. The increase was primarily due to the
full period effect of the additional debt incurred in connection with the
acquisitions completed during the early portion of fiscal 1999 and, to a
lesser extent, higher interest rates and amortization of additional debt
issuance costs and was partially offset by a significant reduction in the
Company's debt as a result of the Equity Offering. Included in interest
expense was the amortization of debt issuance costs of $2,547,000 and
$2,364,000 for the six months ended December 31, 1999 and 1998, respectively.
BAD DEBT EXPENSE
The Company's bad debt expense increased $605,000, or 91.5%, from $661,000
for the six months ended December 31, 1998 to $1,266,000 for the six months
ended December 31, 1999. The increase was primarily due to increased revenues
and the residual effects of a significant decline in commodity prices and a
corresponding deterioration in market conditions during fiscal 1999.
INCOME TAXES
The Company's income tax benefit increased $2,337,000 from a benefit of
$3,663,000 for the six months ended December 31, 1998 to a benefit of
$6,000,000 for the six months ended December 31, 1999. The increase in the
income tax benefit is due to the decrease in pretax income. The Company's
effective tax rate for the six months ended December 31, 1999 and 1998 was
28% and 32%, 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 long term debt and equity. We believe
that the current reserves of cash and cash equivalents, access to our
existing credit lines and internally generated cash flow from operations are
sufficient to finance the cash requirements of our current and future
operations.
18
<PAGE>
As of December 31, 1999, the Company had working capital (after taking into
account the current portion of long term debt) of approximately $64,443,000
and cash and cash equivalents of approximately $9,202,000 as compared to
working capital (after taking into account the current portion of long term
debt) of approximately $59,392,000 and cash and cash equivalents of
approximately $23,478,000 as of June 30, 1999. This increase in working
capital is primarily related to the timing of 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.
The reduction in the Company's cash and cash equivalents since June 30, 1999
was primarily attributable to:
- Cash from (used in) operations of ($5,474,000)
- Borrowings, net of repayments on term debt and revolver,
of $5,928,000
- Capital expenditures of $14,634,000
CAPITAL EXPENDITURES
Capital expenditures for fiscal 2000 are expected to approximate fiscal 1999
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 December 31, 1999, the Company had an approximately $370 million senior
credit facility (the "Senior Credit Facility") with a syndicate of banks led
by PNC Bank, N.A. which consisted of a $150,000,000 revolving loan facility,
$41,630,861 in Tranche A term loans and $177,316,967 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 December 31,
1999, approximately $102,000,000 was drawn under the revolving loan facility
and approximately $15,132,000 of letters of credit related to workmen's
compensation insurance was outstanding, leaving approximately $32,868,000
available under the revolving loan facility.
The revolving loans and Tranche A term loans bear 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.
19
<PAGE>
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 amount (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.
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.
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. As a result of conversions,
only $4,600,000 principal amount of the 7% Convertible Subordinated
Debentures remained outstanding at December 31, 1999.
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 December 31, 1999.
20
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued the following
accounting standards which will be adopted by the Company in the future.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for
quarters of fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company is currently evaluating what effect, if
any, this statement will have on the Company's financial statements. The
Company will adopt this statement no later than July 1, 2000.
YEAR 2000 ISSUE
The Company has initially incurred no significant problems related to the
Year 2000 issue. However, the Company has not fully utilized all functions
and processors of its systems and accordingly cannot be sure that all of its
systems will be free of Year 2000 issues. Also, the Company has no assurance
that third parties have not incurred Year 2000 issues that may affect the
Company.
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 December 31, 1999, Key had long-term debt outstanding of $710,960,000. Of
this amount $366,725,000 or 52%, bears interest at fixed rates as follows:
<TABLE>
<CAPTION>
(000's)
Balance at
12/31/99
----------
<S> <C>
5% Convertible Subordinated Notes Due 2004....................................... $216,000
14% Senior Subordinated Notes Due 2009........................................... 143,278
7% Convertible Subordinated Debentures Due 2003.................................. 4,600
Dawson 9 3/8% Senior Notes Due 2007.............................................. 1,406
Other (rates generally ranging from 8.0% to 8.5%)................................ 1,441
----------
$366,725
==========
</TABLE>
21
<PAGE>
The remaining $344,235,000 of debt outstanding as of December 31, 1999 bears
interest at floating rates which averaged approximately 10.03% at December
31, 1999. A 10% increase in short-term interest rates on the floating-rate
debt outstanding at December 31, 1999 would equal approximately 100 basis
points. Such an increase in interest rates would increase Key's fiscal 2000
interest expense by approximately $3.4 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 gas production operations is
in the pricing applicable to its oil and 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 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 contracts whereby Key will receive a fixed price for its production if
the market price is in excess of the contract's stated price. Key pays a
premium for its option contracts. Such premiums are amortized to oil and gas
revenues over the life of the related 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 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.
As of December 31, 1999, Key had oil and gas price hedging instruments in
place which represented 22,000 barrels of oil production per month and
approximately 100,000 Mmbtu of gas production per month. The total fiscal
2000 hedged oil and gas volumes represent approximately 137% and 56%,
respectively, of expected calendar year total production. A 10% increase in
the index price of oil or gas from their levels at December 31, 1999 would
have no impact on the Company's net assets, net earnings or cash flows (as
derived from the commodity option contracts), as the put options outstanding
at December 31, 1999 are not "in-the-money".
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
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
10.1* Amendment No. 1 dated as of December 1, 1999 to Agreement
dated as of August 2, 1999 between Francis D. John and Key
Energy Services, Inc.
10.2* Amendment No. 1 dated as of November 24, 1999 to the
Confidential Separation and Release Agreement dated as of July
1, 1999 between Key Energy Services, Inc. and Stephen E.
McGregor
27* Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
- ------------------
* Filed herewith.
23
<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: February 14, 2000 By: /s/ Francis D. John
--------------------
President and Chief Executive Officer
Dated: February 14, 2000 By: /s/ Thomas K. Grundman
-----------------------
Chief Financial Officer and
Chief Accounting Officer
24
<PAGE>
AMENDMENT NO. 1
TO
AGREEMENT
This is Amendment No. 1, dated as of December 1, 1999, to the Agreement
made and entered into as of the 2nd day of August, 1999, by and between Francis
D. John, as Borrower, and Key Energy Services, Inc., as Lender, (the
"Agreement"). Unless the context otherwise requires, defined terms used in this
Amendment No. 1 shall have the meaning ascribed to them as set forth in the
Agreement.
BACKGROUND
A. The Borrower and Lender have entered into the Agreement pursuant to
which the Lender has agreed to forgive an aggregate of $5,000,000, together with
accrued interest thereon, which has been borrowed by the Borrower from the
Lender in accordance with the terms and conditions set forth therein.
B. After further deliberations and discussions by and among the members
of the Board of Directors (the "Board")of the Lender, as well as discussions by
members of the Board with the Borrower, the Borrower and Lender have determined
that it would be in the best interests of the Lender and its shareholders to
amend the terms of the Agreement to provide that none of the Indebtedness of
Borrower to Lender shall be forgiven or cancelled unless and until the price of
the Lender's shares of common stock, par value $.10 per share (the "Common
Stock"), reaches $12.00 per share on any trading day from and after the date
hereof.
NOW, THEREFORE, intending to be legally bound, the Borrower and the
Lender hereby agree as follows:
(I). AMENDMENT TO SECTION 1 OF THE AGREEMENT. Section 1 of the
Agreement is hereby amended by deleting the old Section 1 from the Agreement and
substituting therefor a new Section 1 all as set forth below:
"1. FORGIVENESS/CANCELLATION OF INDEBTEDNESS; CONDITION THERETO.
(a) Subject to the satisfaction of the condition set forth in Section 1(b)
below, except (i) in the event of an acceleration in Borrower's obligation to
repay the outstanding Indebtedness and make payment on any of the outstanding
Notes as a result of (A) the termination of the Borrower's employment by the
Lender for "Cause" (as defined and described below) or (B) the voluntary
termination by the Borrower of his employment with the Lender for any reason or
(ii) in the event of an acceleration in the Lender's obligation to
forgive/cancel the Indebtedness and cancel the Notes as a result of (A) the
Borrower's termination of his employment with the Lender as a result of "Good
Reason", "Change in Control" or "Disability" (as defined and described below) or
(B) the death of the Borrower, the Lender hereby agrees that, for so long as the
Borrower remains employed by the Lender, the Indebtedness will be
forgiven/cancelled in the proportions and amounts and on the dates set forth
below:
<PAGE>
<TABLE>
<CAPTION>
PROPORTION/AMOUNT OF
INDEBTEDNESS TO BE
DATE FORGIVEN/CANCELLED
---- ------------------
<S> <C>
December 31, 2000 1/5th (20%)
($1,000,000.00, plus accrued
but unpaid interest thereon)
June 30, 2001 1/5th (20%)
($1,000,000.00, plus accrued
but unpaid interest thereon)
June 30, 2002 1/5th (20%)
($1,000,000.00, plus accrued
but unpaid interest thereon)
June 30, 2003 1/5th (20%)
($1,000,000.00, plus accrued
but unpaid interest thereon)
June 30, 2004 1/5th (20%)
($1,000,000.00, plus accrued
but unpaid interest thereon)
</TABLE>
The Indebtedness will be forgiven/cancelled by Lender chronologically
in the order in which it was incurred by the Borrower.
(b) Except in the case of the occurrence of any event described in
Section 5 of the Agreement, the obligation of the Lender to forgive/cancel the
Indebtedness, as well as cancel the Notes, pursuant to Section 1(a) hereof,
shall be subject to the satisfaction of the following condition:
Commencing on December 1, 1999, on any trading day (A) the sales price
of a share of Common Stock as reported on the principal securities exchange on
which shares of the Lender's Common Stock are then listed or admitted to
trading, or (B) if not so reported, the average of the closing bid and asked
prices for a share of such Common Stock as quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), or (C) if not so
quoted on NASDAQ, the average of the closing bid and asked prices of a share of
such Common Stock as quoted by the National Quotation Bureau's "Pink Sheets" or
the National Association of Securities Dealers OTC Bulletin Board System must
equal or exceed $12.00 per share, as adjusted for any stock split or reverse
stock split."
<PAGE>
(II). AGREEMENT IN FULL FORCE AND EFFECT. Except as otherwise modified
or amended by the provisions of this Amendment No. 1. as set forth above, the
terms and provisions of the Agreement shall remain in full force and effect.
[SIGNATURE PAGE TO FOLLOW]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
KEY ENERGY SERVICES, INC.,
THE LENDER
BY: /s/ Morton Wolkowitz
---------------------------
MORTON WOLKOWITZ
DIRECTOR
BORROWER
/s/ Francis D. John
---------------------------
FRANCIS D. JOHN
<PAGE>
AMENDMENT NO. 1
CONFIDENTIAL SEPARATION AND RELEASE AGREEMENT
This AMENDMENT NO. 1 to the CONFIDENTIAL SEPARATION AND RELEASE
AGREEMENT ("AMENDMENT NO. 1") is made and entered into by and between KEY ENERGY
SERVICES, INC., a Maryland corporation ("COMPANY"), and STEPHEN E. MCGREGOR
("Executive") as of this 24th day of November, 1999 (the "AGREEMENT"). Unless
the context otherwise requires defined terms used herein shall have the same
meaning ascribed to them as set forth in the Agreement.
WHEREAS, the Executive and the Company entered into that certain
Confidential Separation And Release Agreement dated as of July1, 1999;
WHEREAS, the third sentence of section 3(a) of that Agreement
incorrectly stated that the amount of the advance payment which the Executive
received under the Agreement was $275,000.00; however, the correct amount of the
advance payment made to the Executive pursuant to the Agreement was $425,000.00.
WHEREAS, the parties to the Agreement each desire to correct the
aforementioned error to the Agreement.
NOW, THEREFORE, for and in consideration of the premises and the
consideration more fully set forth hereinafter and in the Agreement, and
intending to be legally bound hereby, the Company and Executive mutually agree
as follows:
1. Amendment to Section 3(a) of the Agreement.
The third sentence of Section 3(a) of the Agreement is hereby amended
to read as follows:
* * *
"Executive also acknowledges that, with respect to the Company's
obligation to make the aforementioned payment of $725,000.00 to him, he has
already received an advance payment thereon in the amount of $425,000.000."
* * *
2. Except as otherwise modified or amended by the provisions of the
Amendment No. 1 as set forth above, the terms and provisions of the Agreement
shall remain in full force and effect.
[Signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
KEY ENERGY SERVICES, INC.
/s/ Francis D. John
---------------------------------
Francis D. John
Chairman of the Board, President
and Chief Executive Officer
EXECUTIVE:
/s/ Stephen E. McGregor
---------------------------------
Stephen E. McGregor
2329 California Street
Washington, D.C. 20008
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,202
<SECURITIES> 0
<RECEIVABLES> 115,423
<ALLOWANCES> 0
<INVENTORY> 14,407
<CURRENT-ASSETS> 150,098
<PP&E> 889,233
<DEPRECIATION> 131,205
<TOTAL-ASSETS> 1,148,786
<CURRENT-LIABILITIES> 85,655
<BONDS> 693,594
0
0
<COMMON> 8,317
<OTHER-SE> 291,545
<TOTAL-LIABILITY-AND-EQUITY> 1,148,786
<SALES> 309,281
<TOTAL-REVENUES> 309,281
<CGS> 230,139
<TOTAL-COSTS> 293,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,266
<INTEREST-EXPENSE> 35,502
<INCOME-PRETAX> (21,144)
<INCOME-TAX> 6,000
<INCOME-CONTINUING> (15,144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,144)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
