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PROSPECTUS SUPPLEMENT DATED JULY 16, 2002 TO PROSPECTUS DATED APRIL 24, 2002
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Filed Pursuant to Rule 424(b)(5)
File No. 333-83924
[LOGO]
279,793 SHARES
KEY ENERGY SERVICES, INC.
COMMON STOCK
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This prospectus relates to 279,793 shares of our common stock issued
in connection with the acquisition of substantially all of the assets of
Unitrak, LLC. The terms of this acquisition were determined by direct
negotiations with the owners of the business, and the shares of common stock
issued are valued at prices reasonably related to current market prices. Our
common stock is listed on the New York Stock Exchange under the symbol "KEG."
The last reported sale price of our common stock on July 15, 2002 was $8.75
per share.
We will pay all expenses of this offering. No underwriting discounts
or commissions will be paid in connection with the issuance of common stock
in business combination transactions or acquisitions, although finder's fees
may be paid with respect to specific acquisitions. Any person receiving a
finder's fee may be deemed to be an underwriter within the meaning of Section
2(11) of the Securities Act of 1933.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON
PAGE 6 OF THE PROSPECTUS DATED APRIL 24, 2002.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus supplement or the
prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is July 16, 2002
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
The Offering.................................................................................................. S-1
Use Of Proceeds............................................................................................... S-2
Price Range Of Common Stock And Dividend Policy............................................................... S-2
Selected Financial Data....................................................................................... S-3
Cautionary Note Regarding Forward-Looking Statements.......................................................... S-4
Management's Discussion And Analysis Of Financial Condition And Results Of Operations......................... S-4
Liquidity and Capital Resources............................................................................... S-11
Recently Issued Financial Accounting Standards................................................................ S-13
Interest Rate Risk............................................................................................ S-14
Foreign Currency Risk......................................................................................... S-14
Commodity Price Risk.......................................................................................... S-15
Business...................................................................................................... S-15
Management.................................................................................................... S-22
Certain Relationships And Related Transactions................................................................ S-28
Ownership Of Capital Stock.................................................................................... S-29
Plan Of Distribution.......................................................................................... S-31
Legal Matters................................................................................................. S-31
Experts....................................................................................................... S-32
Index to Consolidated Financial Statements.................................................................... F-1
PROSPECTUS
About The Prospectus.......................................................................................... 1
Key Energy Services, Inc...................................................................................... 1
Ratio of Earnings to Fixed Charges............................................................................ 2
Risk Factors.................................................................................................. 3
Forward-Looking Statements.................................................................................... 8
Where You Can Find More Information........................................................................... 9
Selling Security Holders And Plan Of Distribution............................................................. 10
Description of Debt Securities................................................................................ 10
Description of Capital Stock.................................................................................. 17
Description of Warrants....................................................................................... 18
Legal Matters................................................................................................. 19
Experts....................................................................................................... 19
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You should rely only on the information contained in this prospectus
and prospectus supplement. We have not authorized anyone to provide you with
information that is different. This prospectus supplement and the prospectus
may only be used where it is legal to sell these securities. The information
in this prospectus and prospectus supplement is only accurate as of the date
of this document.
i
THE OFFERING
Common stock offered........................ 279,793 shares
Common stock to be outstanding
after the Offering (1)...................... 110,183,256
Use of proceeds............................. The shares of common stock offered by this prospectus are being
issued in exchange for substantially all the assets of Unitrak,
LLC. The Company intends to use the assets in the operation of
its business. The Company will not receive any cash proceeds in
exchange for issuance of the shares.
New York Stock Exchange symbol............. KEG
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(1) Based on 109,903,463 shares of common stock outstanding as of July 12,
2002. Excludes shares of common stock reserved for future issuance.
S-1
USE OF PROCEEDS
We will not receive any proceeds of this offering other than the value
of the businesses or properties we acquire in the proposed acquisition.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is currently traded on the New York Stock Exchange,
under the symbol "KEG." The following tables sets forth, for the periods
indicated, the high and low sales prices of our common stock on the New York
Stock Exchange for fiscal 2002, fiscal 2001, and the first quarter of fiscal
2003 as derived from published sources.
HIGH LOW
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Fiscal Year Ending 2003:
First Quarter (as of 7/15/02) 10.45 8.65
Fiscal Year Ending 2002:
Fourth Quarter.................................... 12.59 9.60
Third Quarter..................................... 11.45 7.20
Second Quarter.................................... 9.70 5.99
First Quarter..................................... 11.01 5.58
Fiscal Year Ending 2001:
Fourth Quarter.................................... 15.33 9.55
Third Quarter..................................... 13.52 8.8125
Second Quarter.................................... 10.50 6.8125
First Quarter..................................... 11 7/16 7 1/16
We did not pay dividends on our common stock during the fiscal years
ended June 30, 2002 or 2001. We do not intend, for the foreseeable future, to
pay dividends on our common stock. In addition, we are contractually
restricted from paying dividends under the terms of our existing credit
facilities.
On July 15, 2002 the last reported sale price for our Common Stock
was $8.75 per share.
S-2
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED JUNE 30,
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2001 2000 1999(1) 1998 1997
----------- ---------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues................................ $ 837,262 $ 637,732 $ 491,817 $ 424,543 $ 165,773
Operating costs:
Direct costs.......................... 574,938 462,386 371,428 293,448 114,598
Depreciation, depletion and
amortization........................ 75,147 70,972 62,074 31,001 11,076
General and administrative............ 66,071 58,772 53,108 38,987 17,447
Bad debt expense...................... 1,263 1,648 5,928 826 98
Debt issuance costs................... --- -- 6,307 -- --
Restructuring charge.................. --- -- 4,504 -- --
Interest.............................. 56,560 71,930 67,401 21,476 7,879
Income before income taxes and minority
interest.............................. 99,283 (27,976) (78,933) 38,805 14,675
Net income.............................. 62,710 (18,959) (53,258) 24,175 9,098
INCOME PER COMMON SHARE:
Basic................................. 0.63 $ (0.23) $ (1.94) $ 1.41 $ 0.81
Diluted............................... 0.61 $ (0.23) $ (1.94) $ 1.23 $ 0.66
Average common shares outstanding:
Basic................................. 98,195 83,815 27,501 17,153 11,216
Assuming full dilution................ 102,271 83,815 27,501 24,024 17,632
Common shares outstanding at period end. 101,440 97,210 82,738 18,267 12,298
Market price per common share at period
end................................... 10.84 $ 9.64 $ 3.56 13.12 17.81
Cash dividends paid on common shares.... --- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Cash.................................. 2,098 $ 109,873 $ 23,478 $ 25,265 $ 41,704
Current assets........................ 206,150 253,589 132,543 127,557 93,333
Property and equipment................ 1,014,675 920,437 871,940 547,537 227,255
Property and equipment, net........... 793,716 760,561 769,562 499,152 208,186
Total assets.......................... 1,228,284 1,246,265 1,148,138 698,640 320,095
Current liabilities................... 115,553 92,848 73,151 48,029 33,142
Long-term debt, including current
portion............................. 493,907 666,600 699,978 399,779 174,167
Stockholders' equity.................. 476,878 382,887 288,094 154,928 73,179
OTHER DATA:
Adjusted EBITDA(2).................... 232,253 $ 116,574 $ 67,281 $ 92,108 $ 33,728
Net cash (used in) provided by:
Operating activities................ 142,717 37,051 (13,427) 40,925 843
Investing activities................ (83,350) (37,766) (294,654) (306,339) (80,749)
Financing Activities................ (167,142) 87,110 306,294 248,975 117,399
Working capital..................... 90,597 155,965 59,392 79,528 60,191
Book value per common share(3)...... $ 4.70 $ 3.94 $ 3.47 $ 8.48 $ 5.95
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(1) THE FINANCIAL DATA FOR THE YEAR ENDED JUNE 30, 1999 INCLUDES THE
ALLOCATED PURCHASE PRICE OF DAWSON PRODUCTION SERVICES, INC. AND THE
RESULTS OF THEIR OPERATIONS BEGINNING SEPTEMBER 15, 1998.
(2) ADJUSTED EBITDA IS NET INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
DEPRECIATION, DEPLETION AND AMORTIZATION, BAD DEBT EXPENSE, DEBT
ISSUANCE COSTS CHARGED TO EARNINGS, RESTRUCTURING CHARGE AND
EXTRAORDINARY ITEMS. ADJUSTED EBITDA IS PRESENTED BECAUSE OF ITS
ACCEPTANCE AS A COMPONENT OF A COMPANY'S POTENTIAL VALUATION IN
COMPARISON TO COMPANIES IN THE SAME INDUSTRY AND OF A COMPANY'S ABILITY
TO SERVICE OR INCUR DEBT. MANAGEMENT INTERPRETS TRENDS INDICATED BY
CHANGES IN ADJUSTED EBITDA AS AN INDICATOR OF THE EFFECTIVENESS OF ITS
STRATEGIES IN ACHIEVING REVENUE GROWTH AND CONTROLLING DIRECT AND
INDIRECT COSTS OF SERVICES PROVIDED. INVESTORS SHOULD CONSIDER THAT
THIS MEASURE DOES NOT TAKE INTO CONSIDERATION DEBT SERVICE, INTEREST
EXPENSES, COSTS OF CAPITAL, IMPAIRMENTS OF LONG LIVED ASSETS,
DEPRECIATION OF PROPERTY, THE COST OF REPLACING EQUIPMENT OR INCOME
TAXES. ADJUSTED EBITDA SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO
NET INCOME, INCOME BEFORE INCOME TAXES, CASH FLOWS FROM OPERATING
ACTIVITIES OR ANY OTHER MEASURE OF FINANCIAL PERFORMANCE PRESENTED IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ADJUSTED
EBITDA IS NOT A MEASURE OF FINANCIAL PERFORMANCE UNDER GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES AND IS NOT INTENDED TO REPRESENT CASH
FLOW. ADJUSTED EBITDA MAY NOT BE COMPARABLE TO SIMILARLY TITLED
MEASURES OF OTHER COMPANIES.
(3) BOOK VALUE PER COMMON SHARE IS STOCKHOLDERS' EQUITY AT PERIOD END
DIVIDED BY THE NUMBER OF OUTSTANDING COMMON SHARES AT PERIOD END.
S-3
CAUTIONARY 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:
o fluctuations in world-wide prices and demand for oil and natural
gas;
o fluctuations in the level of oil and natural gas exploration and
development activities;
o fluctuations in the demand for well servicing, contract drilling
and ancillary oilfield services;
o the existence of competitors, technological changes and
developments in the industry;
o the existence of operating risks inherent in well servicing,
contract drilling and ancillary oilfield services; and
o general economic conditions, the existence of regulatory
uncertainties, the possibility of political instability in any of
the countries in which we conduct business, in addition to the
other matters discussed herein.
The following discussion provides information to assist in the
understanding of our financial condition and results of operations. It should
be read in conjunction with the consolidated financial statements and related
notes appearing elsewhere in this prospectus supplement. Please note that
certain reclassifications have been made to the fiscal 1999 and 1998
financial data presented below to conform to the fiscal 2000 presentation.
The reclassifications consist primarily of reclassifying as drilling revenues
and expenses, revenues and expenses from the limited drilling operations
conducted by certain of our well servicing divisions that were previously
included in well servicing revenues and expenses in order to report the
results of all drilling operations separately.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As the more detailed discussions below illustrate, our revenues, net
income and cash flow for the nine months ended March 31, 2002 were at levels
slightly higher than for the same period in fiscal 2001. As oil and natural
gas prices have weakened, activity levels in both the well servicing and
drilling segments have declined as reflected in our third quarter results.
Results for the remainder of fiscal 2002 will clearly be influenced by the
demand for and pricing of natural gas and oil.
THREE MONTHS ENDED MARCH 31, 2002 VERSUS THREE MONTHS ENDED MARCH 31, 2001
Our revenue for the three months ended March 31, 2002 decreased
$57,129,000, or 25.1%, to $170,241,000 from $227,370,000 for the three months
ended March 31, 2001. The decrease in the current period reflects lower
activity levels despite improved rates. Our net loss for the third quarter of
fiscal 2002 totaled $4,626,000, or $0.04 per dilutive share, versus a net
income of $17,420,000, or $0.17 per dilutive share, for the prior year period.
S-4
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the three months ended
March 31, 2002 decreased $43,997,000, or 22.2%, to $154,062,000 from
$198,059,000 for the three months ended March 31, 2001. The decrease in
revenues was primarily due to lower activity levels despite higher rig and
fluid hauling rates.
CONTRACT DRILLING. Contract drilling revenues for the three months
ended March 31, 2002 decreased $13,925,000, or 49.3%, to $14,334,000 from
$28,259,000 for the three months ended March 31, 2001. The decrease in
revenues was primarily due to lower activity levels and slightly lower rig
rates.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the three months ended
March 31, 2002 decreased $15,771,000, or 12.2%, to $113,032,000 from
$128,803,000 for the three months ended March 31, 2001. The decrease was
primarily due to lower levels of activity partially offset by higher
insurance costs. Well servicing expenses, as a percentage of well servicing
revenue, increased to 73.4% for the three months ended March 31, 2002 from
65.0% for the three months ended March 31, 2001.
CONTRACT DRILLING. Contract drilling expenses for the three months
ended March 31, 2002 decreased $8,338,000, or 42.3%, to $11,392,000 from
$19,730,000 for the three months ended March 31, 2001. The decrease was
primarily due to lower levels of activity. Contract drilling expenses, as a
percentage of contract drilling revenues, increased to 79.5% for the three
months ended March 31, 2002 from 69.8% for the three months ended March 31,
2001.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Our depreciation, depletion and amortization expense for the three
months ended March 31, 2002 increased $186,000, or 0.94%, to $19,889,000 from
$19,703,000 for the three months ended March 31, 2001. The increase is due to
recent acquisitions and increased capital expenditures during the past twelve
months as we continued major refurbishments of well servicing and contract
drilling equipment partially offset by discontinued amortization of goodwill
because of our adoption of SFAS 142.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses for the three months ended
March 31, 2002 decreased $2,900,000, or 17.5%, to $13,694,000 from
$16,594,000 for the three months ended March 31, 2001. The decrease was
primarily due to reductions in payroll expense. General and administrative
expenses, as a percentage of revenues, increased to 8.0% for the three months
ended March 31, 2002 from 7.3% for the three months ended March 31, 2001.
INTEREST EXPENSE
Our interest expense for the three months ended March 31, 2002
decreased $3,578,000, or 26.6%, to $9,875,000, from $13,453,000 for the three
months ended March 31, 2001. The decrease was primarily due to a significant
reduction in our long-term debt using operating cash flow, and to a lesser
extent, lower interest rates. Included in the interest expense was the
amortization of debt issuance costs of $568,000 and $743,000 for the three
months ended March 31, 2002 and 2001, respectively.
EXTRAORDINARY LOSS
During the three months ended March 31, 2002, we retired $35,518,000
of our long-term debt, at various discounts and premiums to par value and
expensed the related unamortized debt issuance costs which resulted in a net
after-tax extraordinary loss of $5,261,000. During the three months ended
March 31, 2001, we retired
S-5
$20,000,000 of our long-term debt at a discount, and expensed the related
unamortized debt issuance costs which resulted in a net after-tax
extraordinary loss of $167,000.
INCOME TAXES
Our income tax expense for the three months ended March 31, 2002
decreased $9,552,000 to an expense of $773,000 from an expense of $10,325,000
for the three months ended March 31, 2001. The decrease in income tax expense
is due to the decrease in pretax income. Our effective tax rate for the three
months ended March 31, 2002 and March 31, 2001 was approximately 55% and 37%,
respectively. The effective tax rates vary from the statutory rate of 35%
because of the disallowance of certain goodwill amortization (for the three
months ended March 31, 2001), and other non-deductible expenses, the effects
of state and local taxes, and revisions of the estimated annual effective tax
rate.
NINE MONTHS ENDED MARCH 31, 2002 VERSUS NINE MONTHS ENDED MARCH 31, 2001
Our revenue for the nine months ended March 31, 2002 increased
$9,855,000, or 1.6%, to $632,815,000 from $622,960,000 for the nine months
ended March 31, 2001. The increase in the current period reflects improved
rates. Our net income for the first nine months of fiscal 2002 totaled
$44,009,000, or $0.41 per dilutive share, versus a net income of $37,289,000,
or $0.37 per dilutive share, for the prior year period.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the nine months ended
March 31, 2002 increased $9,627,000, or 1.8%, to $552,901,000 from
$543,274,000 for the nine months ended March 31, 2001. The increase in
revenues was primarily due to higher levels of activity and higher rig and
fluid hauling rates.
CONTRACT DRILLING. Contract drilling revenues for the nine months
ended March 31, 2002 decreased $958,000, or 1.3%, to $73,624,000 from
$74,582,000 for the nine months ended March 31, 2001. The decrease in
revenues was primarily due to lower activity levels and slightly lower rig
rates.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the nine months ended
March 31, 2002 increased $6,118,000, or 1.7% to $368,932,000 from
$362,814,000 for the nine months ended March 31, 2001. The increase was
primarily due to a higher level of activity, increased wages and insurance
costs. Well servicing expenses, as a percentage of well servicing revenue,
decreased to 66.7% for the nine months ended March 31, 2002 from 66.8% for
the nine months ended March 31, 2001.
CONTRACT DRILLING. Contract drilling expenses for the nine months
ended March 31, 2002 decreased $5,628,000, or 10.1%, to $49,920,000 from
$55,548,000 for the nine months ended March 31, 2001. The decrease was
primarily due to lower activity levels. Contract drilling expenses, as a
percentage of contract drilling revenues, decreased to 67.8% for the nine
months ended March 31, 2002 from 74.5% for the nine months ended March 31,
2001.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Our depreciation, depletion and amortization expense for the nine
months ended March 31, 2002 increased $1,322,000, or 2.4%, to $57,482,000
from $56,160,000 for the nine months ended March 31, 2001. The increase is
due to recent acquisitions and increased capital expenditures during the past
twelve months as we continued major refurbishments of well servicing and
contract drilling equipment partially offset by discontinued amortization of
goodwill because of our adoption of SFAS 142.
S-6
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses for the nine months ended
March 31, 2002 increased $313,000, or .73%, to $42,926,000 from $42,613,000
for the nine months ended March 31, 2001. The increase was due to higher
administrative costs related to growth of our operations and reflects
additional resources in technology and internal control functions partially
offset by reductions in payroll expense. General and administrative expenses,
as a percentage of revenues, decreased 6.7% for the nine months ended March
31, 2002 from 6.9% for the nine months ended March 31, 2001.
INTEREST EXPENSE
Our interest expense for the nine months ended March 31, 2002
decreased $11,224,000 or 25.4%, to $32,921,000, from $44,145,000 for the nine
months ended March 31, 2001. The decrease was primarily due to a significant
reduction in our long-term debt using operating cash flow, and to a lesser
extent, lower interest rates. Included in the interest expense was the
amortization of debt issuance costs of $1,961,000 and $2,787,000 for the nine
months ended March 31, 2002 and 2001, respectively.
FOREIGN CURRENCY TRANSACTION LOSS
During the nine months ended March 31, 2002, we recorded an
Argentine foreign currency transaction loss of approximately $1,844,000
related to dollar-denominated receivables resulting from the recent
devaluation of Argentina's currency.
EXTRAORDINARY GAIN / LOSS
During the nine months ended March 31, 2002, we retired $150,376,000
of our long-term debt, at various discounts and premiums to par value and
expensed the related unamortized debt issuance costs which resulted in a net
after-tax extraordinary loss of $2,990,000. During the nine months ended
March 31, 2001, we retired $33,996,000 of our long-term debt at a discount,
and expensed the related unamortized debt issuance costs which resulted in a
net after-tax extraordinary gain of $1,098,000.
INCOME TAXES
Our income tax expense for the nine months ended March 31, 2002
increased $6,805,000 to an expense of $28,818,000 from an expense of
$22,013,000 for the nine months ended March 31, 2001. The increase in income
tax expense is due to the increase in pretax income. Our effective tax rate
for the nine months ended March 31, 2002 and March 31, 2001 was 38%. The
effective tax rates vary from the statutory rate of 35% principally because
of the disallowance of certain goodwill amortization (for the nine months
ended March 31, 2001), and other non-deductible expenses and the effects of
state and local taxes.
FISCAL YEAR ENDED JUNE 30, 2001 VERSUS FISCAL YEAR ENDED JUNE 30, 2000
Our results of operations for the year ended June 30, 2001 reflect
the impact of favorable industry conditions resulting from increased
commodity prices which in turn caused increased demand for our equipment and
services during fiscal 2001 (see Part I--Item--Major Developments During
Fiscal 2001--Favorable Industry Conditions). The positive impact of this
increased demand on our operating results was partially offset by increased
operating expenses incurred as a result of the increase in our business
activity.
THE COMPANY
Revenues for the year ended June 30, 2001 increased $235,530,000, or
36.9%, to $873,262,000 from $637,732,000 in fiscal 2000, while net income for
fiscal 2001 increased $81,669,000 to $62,710,000 from a net loss of
$18,959,000 in fiscal 2000. The increase in revenues and net income is due to
improved operating conditions,
S-7
higher rig hours, and increased pricing, with lower interest expense from
debt reduction also contributing to net income.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the year ended June 30,
2001 increased $198,781,000, or 35.5%, to $758,273,000 from $559,492,000 in
fiscal 2000. The increase was due to increased demand for our well servicing
equipment and services and higher pricing.
CONTRACT DRILLING. Contract drilling revenues for the year ended
June 30, 2001 increased $39,211,000, or 57.3%, to $107,639,000 from
$68,428,000 in fiscal 2000. The increase was due to increased demand for our
contract drilling equipment and services and higher pricing.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the year ended June 30,
2001 increased $93,168,000, or 23.3%, to $493,108,000 from $339,940,000 in
fiscal 2000. The increase in expenses is due to higher utilization of our
well servicing equipment, higher labor costs and the overall increase in our
well servicing business. Despite the increased costs, well servicing expenses
as a percentage of well servicing revenues decreased from 71.5% for fiscal
2000 to 65% for fiscal 2001. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.
CONTRACT DRILLING. Contract drilling expenses for the year ended
June 30, 2001, increased $19,067,000, or 32.7%, to $77,366,000 from
$58,299,000 in fiscal 2000. The increase is due to higher utilization of our
contract drilling equipment, higher labor costs and the overall increase in
our contract drilling business. Despite the increased costs, contract
drilling expenses as a percentage of contract drilling revenues decreased
from 85.2% in fiscal 2000 to 71.9% in fiscal 2001. The margin improvement is
due to improved operating efficiencies and the effects of higher pricing.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Our depreciation, depletion and amortization expense for the year
ended June 30, 2001 increased $4,175,000, or 5.9%, to $75,147,000 from
$70,972,000 in fiscal 2000. The increase is due to higher capital
expenditures incurred during fiscal 2001 as our refurbished equipment and
increased utilization of its contract drilling equipment (which it
depreciates partially based on utilization).
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses for the year ended June 30,
2001 increased $7,299,000, or 12.4%, to $66,071,000 from $58,772,000 in
fiscal 2000. The increase was due to higher administrative costs necessitated
by the growth of our operations as a result of improved industry conditions.
Despite the increased costs, general and administrative expenses as a
percentage of total revenues declined from 9.2% in fiscal 2000 to 7.6% in
fiscal 2001.
INTEREST EXPENSE
Our interest expense for the year ended June 30, 2001 decreased
$15,370,000, or 21.4%, to $56,560,000 from $71,930,000 in fiscal 2000. The
decrease was primarily due to the impact of the long-term debt reduction
during fiscal 2001 and, to a lesser extent, lower short-term interest rates
and borrowing margins on floating rate debt.
S-8
BAD DEBT EXPENSE
Our bad debt expense for the year ended June 30, 2001 decreased
$385,000, or 23.4%, to $1,263,000 from $1,648,000 in fiscal 2000. The
decrease was primarily due to improved industry conditions for our customers
and, to a lesser extent, the centralization of our internal credit approval
process.
EXTRAORDINARY GAIN
During fiscal 2001, we repurchased $257,115,000 of our long-term
debt at various discounts and premiums to par value and expensed related
unamortized debt issuance costs, all of which resulted in an after-tax
extraordinary gain of $429,000.
INCOME TAXES
Our income tax benefit for the year ended June 30, 2001 increased
$44,408,000 to $37,002,000 from a benefit of $7,406,000 in fiscal 2000. The
increase in income tax expense is due to the increased pre-tax income. Our
effective tax rate for fiscal 2001 and 2000 was 37.28% and 26.5%,
respectively. The effective tax rates vary from the statutory rate of 35%
principally because of certain non-deductible goodwill amortization, other
non-deductible expenses and state and local taxes.
CASH FLOW
Our net cash provided by operating activities for the year ended
June 30, 2001 increased $107,857,000 to $142,717,000 from a $34,860,000 in
fiscal 2000. The increase is due to higher revenues resulting from increased
demand for our equipment and services and higher pricing, partially offset by
higher operating and general and administrative expenses resulting from
increased business activity.
Our net cash used in investing activities for the year ended June
30, 2001 increased $45,584,000 to $83,350,000 from $37,766,000 in fiscal
2000. The increase is due primarily to higher capital expenditures.
Our net cash used by financing activities for the year ended June
30, 2001 increased $256,443,000 to a use of $167,142,000 from cash provided
of $89,301,000 in fiscal 2000. The increase is primarily the result of
significant debt reduction during fiscal 2001, partially offset by proceeds
from the Debt Offering and the exercise of stock options and warrants.
FISCAL YEAR ENDED JUNE 30, 2000 VERSUS FISCAL YEAR ENDED JUNE 30, 1999
Our results of operations for the year ended June 30, 2000 reflect
the impact of the industry recovery during such period resulting from
increased commodity prices which in turn caused increased demand for our
equipment and services during fiscal 2000. The positive impact of this
increased demand on our operating results was partially offset by increased
operating expenses incurred as a result of the increase in our business
activity.
THE COMPANY
Revenues for the year ended June 30, 2000 increased $145,915,000, or
29.7%, to $637,732,000 from $491,817,000 in fiscal 1999, while net income for
fiscal 2000 increased $34,299,000 to a net loss of $18,959,000 from a net
loss of $53,258,000 in fiscal 1999. The increase in revenues is due to
improved operating conditions and higher rig hours, the full year effect of
the acquisitions completed during the early portion of fiscal 1999 and, to a
lesser extent, higher pricing. The decrease in net loss is the result of
improved operating conditions, higher pricing, and cost reduction
initiatives. In addition, fiscal 1999 included non-recurring charges for debt
issuance costs and restructuring initiatives as well as higher bad debt
expense.
S-9
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the year ended June 30,
2000 increased $125,835,000 or 29%, to $559,492,000 from $433,656,000 in
fiscal 1999. The increase was due to increased demand for our well servicing
equipment and services, the full year effect of the acquisitions completed
during the early portion of fiscal 1999 and, to a lesser extent, higher
pricing.
CONTRACT DRILLING. Contract drilling revenues for the year ended
June 30, 2000 increased $17,815,000, or 35.2%, to $68,428,000 from
$50,613,000 in fiscal 1999. The increase was due to increased demand for our
contract drilling equipment and services, the full year effect of the
acquisition completed during the early portion of fiscal 1999 and, to a
lesser extent, higher pricing.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the year ended June 30,
2000 increased $74,975,000, or 23.1%, to $399,940,000 from $324,965,000 in
fiscal 1999. The increase in expenses is due to higher utilization of our
well servicing equipment, higher labor costs and the overall increase in our
well servicing business. Despite the increased costs, well servicing expenses
as a percent of well servicing revenues decreased from 74.9% for fiscal 1999
to 71.5% for fiscal 2000. The margin improvement is due to improved operating
efficiencies and the effects of higher pricing.
CONTRACT DRILLING. Contract drilling expenses for the year ended
June 30, 2000, increased $14,743,000, or 33.8%, to $58,299,000 from
$43,556,000 in fiscal 1999. The increase is due to higher utilization of our
contract drilling equipment, higher labor costs and the overall increase in
our contract drilling business. Despite the increased costs, contract
drilling expenses as a percentage of contract drilling revenues decreased
from 86.1% in fiscal 1999 to 85.2% in fiscal 2000. The margin improvement is
due to improved operating efficiencies and the effects of higher pricing.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Our depreciation, depletion and amortization expense for the year
ended June 30, 2000 increased $8,898,000, or 14.3%, to $70,972,000 from
$62,074,000 in fiscal 1999. The increase is due to higher capital
expenditures incurred during fiscal 2000 as we refurbished equipment and
increased utilization of its contract drilling equipment (which it
depreciates partially based on utilization).
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses for the year ended June 30,
2000 increased $5,664,000, or 10.7%, from $53,108,000 to $58,772,000 in
fiscal 2000. The increase was due to higher administrative costs necessitated
by the growth of our operations as a result of the fiscal 1999 acquisitions
and improved industry conditions. Despite the increased costs, general and
administrative expenses as a percentage of total revenues declined from 10.8%
in fiscal 1999 to 9.2% in fiscal 2000.
INTEREST EXPENSE
Our interest expense for the year ended June 30, 2000 increased
$4,529,000, or 6.7%, to $71,930,000 from $67,401,000 in fiscal 1999. The
increase was primarily due to the full year effect of the debt incurred in
connection with the acquisitions completed during the early portion of fiscal
1999, and, to a lesser extent, higher interest rates during fiscal 2000
partially offset by the impact of the long-term debt reduction during fiscal
2000.
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BAD DEBT EXPENSE
Our bad debt expense for the year ended June 30, 2000 decreased
$4,280,000, or 72.2%, to $1,648,000 from $5,928,000 in fiscal 1999. The
decrease was primarily due to improved industry conditions for our customers
and, to a lesser extent, the centralization of our internal credit approval
process.
EXTRAORDINARY GAIN
During the fourth quarter of fiscal 2000, we repurchased $10,190,000
of our 5% Convertible Subordinated Notes which resulted in an after-tax gain
of $1,611,000.
INCOME TAXES
Our income tax benefit for the year ended June 30, 2000 decreased
$18,269,000 to $7,406,000 from $25,675,000 in fiscal 1999. The decrease in
income tax benefit is due to the decrease in pretax loss. Our effective tax
benefit rate for fiscal 2000 and 1999 was 26.5% and 32.5%, respectively. The
fiscal 2000 effective tax benefit rate is different from the statutory rate
of 35% principally because of certain non-deductible goodwill amortization,
other non-deductible expenses and state and local taxes. The decrease in the
fiscal 2000 effective tax benefit rate was due to an increase in the amount
of non-deductible expenses, primarily as a result of the full year effect of
the goodwill amortization of the acquisitions completed during the early
portion of fiscal 1999.
CASH FLOW
Our net cash provided by operating activities for the year ended
June 30, 2000 increased $48,287,000 to a $34,860,000 from a use of
$13,427,000 in fiscal 1999. The increase is due to higher revenues resulting
from increased demand for our equipment and services, the full year effect of
the acquisitions completed during the early portion of fiscal 1999 and, to a
lesser extent, higher pricing, partially offset by higher operating and
general and administrative expenses resulting from increased business
activity.
Our net cash used in investing activities for the year ended June
30, 2000 decreased $256,888,000, or 87.2%, to $37,766,000 from $294,654,000
in fiscal 1999. The decrease is due to no acquisitions having occurred during
fiscal 2000 partially offset by higher capital expenditures.
Our net cash provided by financing activities for the year ended
June 30, 2000 decreased $216,993,000, or 70.8%, to $89,301,000 from
$306,294,000 in fiscal 1999. The decrease is primarily the result of
significantly decreased borrowings during fiscal 2000 and, to a lesser
extent, the repayment of long-term debt partially offset by proceeds from the
equity offering and the volumetric production payment completed in fiscal
2000.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations, acquisitions, capital
expenditures and working capital requirements using cash flow from
operations, bank borrowings and the issuance of equity and long-term debt. We
believe 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 and will be sufficient to finance the cash
requirements of our current and future operations.
CAPITAL EXPENDITURES
Capital expenditures for fiscal 2002 have been and will be directed
toward selectively refurbishing our assets as business conditions warrant. We
will continue to evaluate opportunities to acquire or divest assets or
businesses to enhance our primary operations. Such capital expenditures,
acquisitions and divestitures are at our discretion and will depend on
management's view of market conditions as well as other factors.
S-11
LONG-TERM DEBT
SENIOR CREDIT FACILITY. As of March 31, 2002, we had a senior credit
facility (the "Senior Credit Facility") with a syndicate of banks led by PNC
Bank, N.A. which consisted of a $100,000,000 revolving loan facility. In
addition, up to $30,000,000 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. The commitment to
make revolving loans will reduce to $75,000,000 on September 14, 2002. The
revolving loan commitment will terminate on September 14, 2003, and all
revolving loans must be paid on or before that date. As of March 31, 2002, no
funds were outstanding under the revolving loan facility and approximately
$14,479,000 of letters of credit related to workman's compensation insurance
were outstanding. We drew down approximately $43 million on January 14, 2002
in order to redeem the 14% Senior Subordinated Notes. The funds were repaid
with the issuance of additional 8 3/8% Notes in March 2002.
The revolving loan bears interest based upon, at our 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 Senior 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 as well as restrictions on capital
expenditures, acquisitions and dispositions.
8 3/8% SENIOR NOTES
On March 6, 2001, we completed a private placement of $175,000,000
of 8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The cash
proceeds from the private placement, net of fees and expenses, were used to
repay all of the remaining balance of the Tranche B term loan under the
Senior Credit Facility, and a portion of the revolving loan facility under
the Senior Credit Facility then outstanding. On March 1, 2002, we completed a
private placement of an additional $100,000,000 of 8 3/8% Senior Notes due
2008 at 101.5% of par. The cash proceeds from the private placement, net of
fees and expenses, were used to repay all of the remaining balance of the
revolving loan facility under the Senior Credit Facility. The 8 3/8% Senior
Notes are subordinate to our senior indebtedness which includes borrowings
under the Senior Credit Facility and the Dawson 9 3/8% Senior Notes. At March
31, 2002, $275,000,000 principal amount of the 8 3/8% Senior Notes remained
outstanding.
14% SENIOR SUBORDINATED NOTES
On January 22, 1999, we 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 (as subsequently adjusted) 2,173,433 shares of our Common Stock at
an exercise price of $4.88125 per share (the "Unit Warrants"). The net cash
proceeds from the private placement were used to repay substantially all of
the remaining $148,600,000 principal amount (plus accrued interest) owed
under our bridge loan facility arranged in connection with the acquisition of
Dawson Production Services, Inc. ("Dawson"). The 14% Senior Subordinated
Notes are subordinate to our senior indebtedness which includes borrowings
under the Senior Credit Facility, the Dawson 9 3/8% Senior Notes and the
8 3/8% Senior Notes. The Unit Warrants have separated from the 14% Senior
Subordinated Notes and became exercisable on January 25, 2000. As of March
31, 2002, 63,500 Unit Warrants had been exercised leaving 86,500 Unit
Warrants outstanding.
On and after January 15, 2004, we may redeem some or all of the 14%
Senior Subordinated Notes at any time at varying redemption prices in excess
of par, plus accrued interest. In addition, before January 15, 2002, we were
allowed to redeem up to 35% of the aggregate principal amount of the 14%
Senior Subordinated Notes at 114% of par plus accrued interest with the
proceeds of certain sales of equity. On January 14, 2002, we exercised our
right of redemption for $35,403,000 principal amount of the 14% Senior
Subordinated Notes at a price of 114% of the principal amount plus accrued
interest. This transaction resulted in an extraordinary loss before taxes of
approximately $8,468,000. At March 31, 2002, $97,500,000 principal amount of
the 14% Senior Subordinated Notes remained outstanding.
S-12
5% CONVERTIBLE SUBORDINATED NOTES
In late September and early October 1997, we completed a private
placement of $216,000,000 of 5% Convertible Subordinated Notes due 2004 (the
"5% Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes
are subordinate to our senior indebtedness which includes borrowings under
the Senior Credit Facility, the 14% Senior Subordinated Notes, the Dawson
9 3/8% Senior Notes, and the 8 3/8% Senior Notes. The 5% Convertible
Subordinated Notes are convertible, at the holder's option, into shares of
our common stock at a conversion price of $38.50 per share, subject to
certain adjustments. During the quarter ended March 31, 2002, we repurchased
(and canceled) $115,000 principal amount of the 5% Convertible Subordinated
Notes, leaving $50,237,000 principal amount of the 5% Convertible
Subordinated Notes outstanding at March 31, 2002.
CRITICAL ACCOUNTING POLICIES
We follow certain significant accounting policies when preparing its
consolidated financial statements. A complete summary of these policies is
included in Note 1 to the consolidated financial statements included in our
Annual Report on Form 10-K.
Certain of the policies require management to make significant and
subjective estimates which are sensitive to deviations of actual results from
management's assumptions. In particular, management makes estimates regarding
the fair value of our reporting units in assessing potential impairment of
goodwill. In addition, we make estimates regarding future undiscounted cash
flows from the future use of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset may not
be recoverable.
In assessing impairment of goodwill, we have used estimates and
assumptions in estimating the fair value of its reporting units. Actual
future results could be different than the estimates and assumptions used.
Events or circumstances which might lead to an indication of impairment of
goodwill would include, but might not be limited to, prolonged decreases in
expectations of long-term well servicing and/or drilling activity or rates
brought about by prolonged decreases in oil or natural gas prices, changes in
government regulation of the oil and natural gas industry or other events
which could affect the level of activity of exploration and production
companies.
In assessing impairment of long-lived assets other than goodwill
where there has been a change in circumstances indicating that the carrying
amount of a long-lived asset may not be recoverable, we have estimated future
undiscounted net cash flows from use of the asset based on actual historical
results and expectations about future economic circumstances including oil
and natural gas prices and operating costs. The estimate of future net cash
flows from use of the asset could change if actual prices and costs differ
due to industry conditions or other factors affecting our performance.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Recently the Financial Accounting Standards Board, ("FASB") issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"), Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment of Disposal of Long-Lived
Assets ("SFAS 144"), and Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections ("SFAS 145"). SFAS 143 establishes
requirements for the accounting for removal costs associated with asset
retirements. SFAS 144 addresses financial accounting and reporting for the
impairment of disposal of long-lived assets. SFAS 145 rescinds Statement No.
4, which required all gains and losses from extinguishment of debt to be
aggregated and classified as an extraordinary item and amends Statement No.
13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS 143 is effective for fiscal years beginning
after June 15, 2002, with earlier adoption encouraged. SFAS 144 is effective
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years. SFAS 145 is effective for fiscal
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years beginning after May 15, 2002, with earlier adoption encouraged. We are
currently assessing the impact of these standards on its consolidated
financial statements.
INTEREST RATE RISK
At March 31, 2002, we had long-term debt and capital lease
obligations outstanding of $445,720,000. Of this amount $421,638,000, or 95%,
bears interest at fixed rates as follows:
BALANCE AT
MARCH 31,
2002
--------------
(THOUSANDS)
8 3/8% Senior Notes Due 2008..................................... $ 276,482
14% Senior Subordinated Notes Due 2009........................... 94,216
5% Convertible Subordinated Notes Due 2004....................... 50,237
Other (rates generally ranging from 8.0% to 9 3/8%).............. 703
--------------
$ 421,638
==============
The remaining $24,082,000 of long-term debt and capital lease
obligations outstanding as of March 31, 2002 bears interest at floating rates
which averaged approximately 4.8% at March 31, 2002. A 10% increase in
short-term interest rates on the floating-rate debt outstanding at March 31,
2002 would equal approximately 48 basis points. Such an increase in interest
rates would increase our fiscal 2002 interest expense by approximately
$100,000 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
Recently, the Argentine government suspended the law tying the
Argentine peso to the U.S. dollar at the conversion ratio of 1:1 and created
a dual currency system in Argentina. Our net assets from our Argentina
subsidiaries are based on the U.S. dollar equivalent of such amounts measured
in Argentine pesos as of December 31, 2001. Assets and liabilities of the
Argentine operations were translated to U.S. dollars at March 31, 2002 and
December 31, 2001, using the applicable free market conversion ratio of 2.9:1
and 1.6:1, respectively. Our net earnings and cash flows from our Argentina
subsidiaries were tied to the U.S. dollar for the six months ended December
31, 2001 and will be based on the U.S. dollar equivalent of such amounts
measured in Argentine pesos for periods after December 31, 2001. Revenues,
expenses and cash flow will be translated using the average exchange rates
during the periods after December 31, 2001. See Note 10 to the consolidated
financial statements.
A 10% change in the Argentine peso to the U.S. dollar exchange rate
would not be material to our net assets, net earnings or cash flows.
Our net assets, net earnings and cash flows from our Canadian
subsidiary are 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 and expenses 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 our net assets, net earnings or cash flows.
S-14
COMMODITY PRICE RISK
Our major market risk exposure for our 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.
We periodically hedge a portion of our oil and natural gas
production through collar and option 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. Our risk management objective is to lock in a
range of pricing for expected production volumes. This allows us to forecast
future earnings within a predictable range. We meet this objective by
entering into collar and option arrangements which allow for acceptable cap
and floor prices.
As of March 31, 2002, we had oil and natural gas price collars and
put options in place, as detailed in the following table. The total fiscal
2002 hedged oil and natural gas volumes represent 42% and 34%, respectively,
of estimated 2002 calendar year total production. A 10% variation in the
market price of oil or natural gas from their levels at March 31, 2002 would
not have a material impact on our net assets, net earnings or cash flows (as
derived from the commodity option contracts).
The following table sets forth the future volumes hedged by year and
the weighted-average strike price of the option contracts at March 31, 2002:
STRIKE PRICE
MONTHLY VOLUME PER BBL/MMBTU
-------------------------- -------------------
NATURAL
OIL GAS FAIR
(BBLS) (MMBTUS) TERM FLOOR CAP VALUE
--------- ------------ ------------------- --------- ------ ---------
At March 31, 2002.............
Oil Puts...................... 5,000 - Mar 2002-Feb 2003 $ 22.00 - $ 46,000
Natural Gas Puts.............. - 75,000 Mar 2002-Feb 2003 $ 3.00 - $131,000
(The strike prices for oil puts are based on the NYMEX spot price
for West Texas Intermediate; the strike prices for the natural gas puts are
based on the Inside FERC-El Paso Permian spot price.)
BUSINESS
THE COMPANY
We are the largest onshore, rig-based well servicing contractor in
the world, with approximately 1,477 well service rigs and 1,455 oilfield
service vehicles as of June 30, 2001. We provide a complete range of well
services to major oil companies and independent oil and natural gas
production companies, including: rig-based well maintenance, workover,
completion, and recompletion services (including horizontal recompletions);
oilfield trucking services; and ancillary oilfield services. We conduct well
servicing operations onshore the continental United States in the following
regions: Gulf Coast (including South Texas, Central Gulf Coast of Texas and
South Louisiana), Permian Basin of West Texas and Eastern New Mexico,
Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins and the
ArkLaTex region), Four Corners (including the San Juan, Piceance, Uinta, and
Paradox Basins), Eastern (including the Appalachian, Michigan and Illinois
Basins), Rocky Mountains (including the Denver-Julesberg, Powder River, Wind
River, Green River and Williston Basins), and California (the San Joaquin
Basin), and internationally in Argentina and Ontario, Canada. We are also a
leading onshore drilling contractor, with 79 land drilling rigs as of June
30, 2001. We conduct land drilling operations in a number of major domestic
producing basins, as well as in Argentina and in Ontario, Canada. We also
produce and develop oil and natural gas reserves in the Permian Basin region
and Texas Panhandle.
S-15
Our principal executive office is located at 6 Desta Drive, Midland,
Texas 79705. Our phone number is (915) 620-0300 and website address is
www.keyenergy.com.
BUSINESS STRATEGY
We have built our leadership position through the consolidation of
smaller, less viable competitors. This consolidation, together with a
continuing decline in the number of available domestic well service rigs due
to attrition, cannibalization and transfers outside of the United States, has
given us the opportunity to capitalize on improved market conditions which
existed during fiscal 2001. We have focused on maximizing results by reducing
debt, building strong customer alliances, refurbishing rigs and related
equipment, and training personnel to maintain a qualified and safe employee
base.
REDUCING DEBT. Over the past fiscal year, we have significantly
reduced debt and strengthened our balance sheet. At June 30, 2001, our
long-term funded debt net of cash and capitalized leases ("net funded debt")
was approximately $468,845,000 and its net funded debt to capitalization
ratio was approximately 50% as compared to approximately $534,816,000 and
58%, respectively, at June 30, 2000. We expect to be able to continue to
reduce debt from available cash flow from operations and from anticipated
interest savings resulting from prior and future debt reductions and future
debt refinancings.
BUILDING STRONG CUSTOMER ALLIANCES. We seek to maximize customer
satisfaction by offering a broad range of equipment and services in
conjunction with highly trained and motivated employees. As a result, we are
able to offer proactive solutions for most of its customer's wellsite needs.
We ensure consistent high standards of quality and customer satisfaction by
continually evaluating its performance. We maintain strong alliances with
major oil companies as well as numerous independent oil and natural gas
production companies and believes that such alliances improve the stability
of demand for its oilfield services.
REFURBISHING RIGS AND RELATED EQUIPMENT. We intend to continue
actively refurbishing its rigs and related equipment to maximize the
utilization of its rig fleet. The increase in our cash flow, both from
operations and from anticipated interest savings from reduced levels of debt,
combined with our borrowing availability under its revolving credit facility,
has provided ample liquidity and resources necessary to make the capital
expenditures to refurbish such equipment.
TRAINING AND DEVELOPING EMPLOYEES. We have, and will continue to,
devote significant resources to the training and professional development of
our employees with a special emphasis on safety. We currently have two
training centers in Texas and one training center in California to improve
its employees' understanding of operating and safety procedures. We recognize
the historically high turn-over rate in the industry and is committed to
offering compensation, benefits and incentive programs for its employees that
are attractive and competitive in its industry, in order to ensure a steady
stream of qualified, safe personnel to provide quality service to its
customers.
MAJOR DEVELOPMENTS DURING FISCAL 2001
FAVORABLE INDUSTRY CONDITIONS. Operating conditions improved
significantly during fiscal 2001 as capital spending by oil and natural gas
producers for well servicing and contract drilling services increased over
prior year levels. The increased spending was primarily due to higher
commodity prices with WTI Cushing prices for light sweet crude averaging
approximately $26.97 per barrel and Nymex Henry Hub natural gas prices
averaging approximately $5.09 per MMbtu during fiscal 2001, as compared to an
average WTI Cushing price for light sweet crude of $25.97 per barrel and an
average Nymex Henry Hub natural gas price of $3.04 per MMbtu during fiscal
2000.
This increase in commodity prices during fiscal 2001 led to a
steady, sequential increase in the demand for our services and equipment
during fiscal 2001 as our customers increased their exploration and
development activity in our primary market areas, enabling us to increase the
rates it charges for its services. This increase in demand and rates resulted
in sequential increases in revenues, cash flow and net income in each quarter
of fiscal 2001 over the
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same quarter of fiscal 2000. We expect demand for its services to remain at
or above current levels as long as capital spending by our customers remains
at or near their current levels.
During fiscal 2001, crude oil prices continued to trade at healthy
levels due largely to the ability of the Organization of Petroleum Exporting
Countries ("OPEC") to adhere to its production quotas designed to keep crude
oil prices in the range of $22.00 to $28.00 per barrel. The adherence to the
production quotas brought more stability to crude oil prices. Since June 30,
2001, however, both crude oil and natural gas prices have weakened
significantly, falling below $22.00 per barrel and $2.00 per Mmbtu,
respectively. While management believes that many of its customers generally
base their capital spending budgets on a crude oil price of $18.00 to $22.00
per barrel and a natural gas price of $2.00 to $2.75 per MMbtu, there can be
no assurances that its customers will not postpone and/or reduce their
capital spending plans if crude oil prices and natural gas prices continue to
remain at or below their current levels. In addition, the terrorist attacks
on the World Trade Center and the Pentagon that occurred on September 11,
2001 threaten to increase the downward pressure on commodity prices as U.S.
fuel consumption decreases due to significantly reduced air and other travel,
the general demand for energy decreases as consumer anxiety further weakens
the U.S. economy, and OPEC faces political pressure to reduce its price
targets for crude oil.
The level of our revenues, cash flows, losses and earnings are
substantially dependent upon, and affected by, the level of domestic and
international oil and gas exploration and development activity (see Part
II-Item 7-Management's Discussion and Analysis of Results of Operations and
Financial Condition).
RECENT DEVELOPMENTS
Most of our foreign revenues are derived from our operations in
Argentina. For fiscal 2001, revenues from operations in Argentina were $48.5
million, which accounted for 5.5% of our total revenues for such period. For
fiscal 2001, net income from operations in Argentina was $4.5 million. For
the six months ended December 31, 2001, revenues from operations in Argentina
were $21.3 million, which accounted for 4.6% of our total revenue for such
period. We incurred a net loss of $1.3 million from our operations in
Argentina for the same six-month period. Recently, Argentina has been
negatively affected by volatile economic and political conditions. In
December 2001, the Argentine government announced that it would restrict bank
account withdrawals and would not service its public sector debt. In
addition, in January 2002, the Argentine government abandoned its decade-old
fixed peso-dollar exchange rate and created a dual exchange rate system. As a
result of this abandonment of the fixed peso-dollar exchange rate system, at
December 31, 2001 we recorded a $1.8 million foreign currency transaction
loss on our dollar-denominated accounts receivable and reduced our
stockholders' equity by an additional $24.2 million due to foreign currency
translation related to our net investment in our Argentine subsidiary. The
Argentine government has also recently announced its intent to impose a 20%
tax on oil exports effective March 1, 2002 or other taxes on production that
would produce comparable tax revenues.
We believe that all of these events will negatively affect oil
production in Argentina, and accordingly will have a negative effect on
demand for our services. The economic conditions in Argentina continue to be
unstable and further devaluation of the Argentine peso may occur. We continue
to evaluate the structure of our operations in Argentina, but we are
currently unable to predict the effects that further instability in Argentina
will have on our financial position.
S-17
DEBT REDUCTION
During fiscal 2001, we significantly reduced our long-term debt and
strengthened our balance sheet. At June 30, 2001, our net funded debt was
approximately $468,845,000 and its net funded debt to capitalization ratio
was approximately 50% as compared to approximately $534,816,000 and 58%,
respectively, at June 30, 2000. Proceeds from the Debt Offering (defined
below) and from the exercise of options and warrants, as well as cash flow
from operations were used to accomplish this reduction in net funded debt
(see Part II-Item 7-Management's Discussion and Analysis of Results of
Operations and Financial Condition-Long-Term Debt).
DEBT OFFERING
On March 6, 2001, we completed the public offering of $175,000,000
of 8 3/8% Senior Notes Due 2008 (the "Debt Offering"). Net proceeds from the
Debt Offering were approximately $170.0 million, which was used to
immediately repay the term loans in full and to repay a portion of the
revolver outstanding under our senior credit facility.
DESCRIPTION OF BUSINESS SEGMENTS
We operate in two primary business segments which are well servicing
and contract drilling. Our operations are conducted domestically and in
Argentina and Canada. The following is a description of each of these
business segments (for financial information regarding these business
segments, see Note 15 to Consolidated Financial Statements-Business Segment
Information).
WELL SERVICING
We provide a full range of well services, including rig-based
services, oilfield trucking services and ancillary oilfield services,
necessary to maintain and workover oil and natural gas producing wells.
Rig-based services include: maintenance of existing wells, workovers of
existing wells, completion of newly drilled wells, recompletion of existing
wells (including horizontal recompletions) and plugging and abandonment of
wells at the end of their useful lives.
WELL SERVICE RIGS
We use our well service rig fleet to perform four major categories
of rig services for oil and natural gas producers.
MAINTENANCE SERVICES. We estimate that there are approximately
600,000 producing oil wells and approximately 300,000 producing natural gas
wells in the United States. We provide the well service rigs, equipment and
crews for maintenance services, which are performed on both oil and natural
gas wells, but which are more commonly required on oil wells. While some oil
wells in the United States flow oil to the surface without mechanical
assistance, most require pumping or some other method of artificial lift. Oil
wells that require pumping characteristically require more maintenance than
flowing wells due to the operation of the mechanical pumping equipment
installed. Few natural gas wells have mechanical pumping systems in the
wellbore, and, as a result, maintenance work on natural gas wells is less
frequent.
Maintenance services are required throughout the life of most
producing oil and natural gas wells to ensure efficient and continuous
operation. These services consist of routine mechanical repairs necessary to
maintain production from the well, such as repairing inoperable pumping
equipment in an oil well or replacing defective tubing in an oil or natural
gas well, and removing debris such as sand and paraffin from the well. Other
services include pulling the rods, tubing, pumps and other downhole equipment
out of the wellbore to identify and repair a production problem.
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Maintenance services are often performed on a series of wells in
proximity to each other and typically require less than 48 hours per well to
complete. The general demand for maintenance services is closely related to
the total number of producing oil and natural gas wells in a geographic
market, and maintenance services are generally the most stable type of well
service activity.
WORKOVER SERVICES. In addition to periodic maintenance, producing
oil and natural gas wells occasionally require major repairs or
modifications, called "workovers." Workover services are performed to enhance
the current production of existing wells. Such services include extensions of
existing wells to drain new formations either through deepening wellbores to
new zones or through drilling of horizontal lateral wellbores to improve
reservoir drainage patterns. In less extensive workovers, our rigs are used
to seal off depleted zones in existing wellbores and access previously
bypassed productive zones. Our workover rigs are also used to convert former
producing wells to injection wells through which water or carbon dioxide is
then pumped into the formation for enhanced recovery operations. Other
workover services include: major subsurface repairs such as casing repair or
replacement, recovery of tubing and removal of foreign objects in the
wellbore, repairing downhole equipment failures, plugging back the bottom of
a well to reduce the amount of water being produced with the oil and natural
gas, cleaning out and recompleting a well if production has declined, and
repairing leaks in the tubing and casing. These extensive workover operations
are normally performed by a well service rig with a workover package, which
may include rotary drilling equipment, mud pumps, mud tanks and blowout
preventers depending upon the particular type of workover operation. Most of
our well service rigs are designed for and can be equipped to perform complex
workover operations.
Workover services are more complex and time consuming than routine
maintenance operations and consequently may last from a few days to several
weeks. These services are almost exclusively performed by well service rigs.
The demand for workover services is more sensitive to expectations
relating to, and changes in, oil and natural gas prices than the demand for
maintenance services. As oil and natural gas prices increase, the level of
workover activity tends to increase as operators seek to increase production
by enhancing the efficiency of their wells at higher commodity prices with
correspondingly higher rates of return.
COMPLETION SERVICES. Our completion services prepare a newly drilled
oil or natural gas well for production. The completion process may involve
selectively perforating the well casing to access producing zones,
stimulating and testing these zones and installing downhole equipment. We
typically provide a well service rig and may also provide other equipment
such as a workover package to assist in the completion process. Producers use
well service rigs to complete their wells because the rigs have specialized
equipment, properly trained employees and the experience necessary to perform
these services. However, during periods of weak drilling rig demand, drilling
contractors may compete with service rigs for completion work.
The completion process typically requires a few days to several
weeks, depending on the nature and type of the completion, and generally
requires additional auxiliary equipment that can be provided for an
additional fee. The demand for well completion services is directly related
to drilling activity levels, which are highly sensitive to expectations
relating to, and changes in, oil and natural gas prices. As the number of
newly drilled wells decreases, the number of completion jobs correspondingly
decreases.
PLUGGING AND ABANDONMENT SERVICES. Well service rigs and workover
equipment are also used in the process of permanently closing oil and natural
gas wells at the end of their productive lives. Plugging and abandonment work
can be performed with a well servicing rig along with wireline and cementing
equipment. The services generally include the sale or disposal of equipment
salvaged from the well as part of the compensation received and require
compliance with state regulatory requirements. The demand for oil and natural
gas does not significantly affect the demand for plugging and abandonment
services, as well operators are required by state regulations to plug a well
that it is no longer productive. The need for these services is also driven
by lease and/or operator policy requirements.
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OILFIELD TRUCKING
We provide liquid/vacuum truck services and fluid transportation and
disposal services for operators whose wells produce saltwater and other
fluids, in addition to oil and natural gas. These trucks are also utilized in
connection with drilling and workover projects, which tend to produce and use
large amounts of various oilfield fluids. We also own a number of salt water
disposal wells. In addition, we provide haul/ equipment trucks that are used
to move large pieces of equipment from one wellsite to the next. Demand and
pricing for these services are generally related to demand for our well
service and drilling rigs.
ANCILLARY OILFIELD SERVICES
We provide ancillary oilfield services, which include among others:
hot oiling; wireline; frac tank rentals; well site construction; roustabout
services; fishing and other tool rentals; blowout preventers (BOPs); and foam
units and air drilling services. Demand and pricing for these services are
generally related to demand for our well service and drilling rigs.
CONTRACT DRILLING
We provide contract drilling services to major oil companies and
independent oil and natural gas producers onshore the continental United
States in the Permian Basin, the Four Corners region, Michigan, the
Northeast, and the Rocky Mountains and internationally in Argentina and
Ontario, Canada. Contract drilling services are primarily provided under
standard dayrate, and, to a lesser extent, footage or turnkey contracts.
Drilling rigs vary in size and capability and may include specialized
equipment. The majority of our drilling rigs are equipped with mechanical
power systems and have depth ratings ranging from approximately 4,500 to
12,000 feet. We have one drilling rig with a depth rating of approximately
18,000 feet. Like workover services, the demand for contract drilling is
directly related to expectations relating to, and changes in, oil and natural
gas prices which in turn, are driven by the supply of and demand for these
commodities.
FOREIGN OPERATIONS
We also operate each of our business segments discussed above in
Argentina and Ontario, Canada. Our foreign operations currently own 26 well
servicing rigs, 57 oilfield trucks and eight drilling rigs in Argentina and
three well servicing rigs, four oilfield trucks and three drilling rigs in
Ontario, Canada.
CUSTOMERS
Our customers include major oil companies, independent oil and
natural gas production companies, and foreign national oil and natural gas
production companies. No single customer in fiscal 2001 accounted for 10% or
more of our consolidated revenues.
COMPETITION AND OTHER EXTERNAL FACTORS
Despite the significant consolidation in the domestic well servicing
industry, there are numerous smaller companies that compete in our well
servicing markets. Nonetheless, we believe that our performance, equipment,
safety, and availability of equipment to meet customer needs and availability
of experienced, skilled personnel is superior to that of its competitors.
In the well servicing markets, an important competitive factor in
establishing and maintaining long-term customer relationships is having an
experienced, skilled and well-trained work force. In recent years, many of
our larger customers have placed increased emphasis on the safety records and
quality of the crews, equipment and services provided by their contractors.
We have, and will continue to devote substantial resources toward employee
safety and training programs. Management believes that many of our
competitors, particularly small contractors,
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have not undertaken similar training programs for their employees. Management
believes that our safety record and reputation for quality equipment and
service are among the best in the industry.
In the contract drilling market, we compete with other regional and
national oil and natural gas drilling contractors, some of which have larger
rig fleets with greater average depth capabilities and a few that have better
capital resources than us. Management believes that the contract drilling
industry is less consolidated than the well servicing industry, resulting in
a contract drilling market that is more price competitive. Nonetheless, we
believe that it is competitive in terms of drilling performance, equipment,
safety, pricing, availability of equipment to meet customer needs and
availability of experienced, skilled personnel in those regions in which we
operate.
The need for well servicing and contract drilling fluctuates,
primarily, in relation to the price of oil and natural gas which, in turn, is
driven by the supply of and demand for oil and natural gas. As supply of
those commodities decreases and demand increases, service and maintenance
requirements increase as oil and natural gas producers attempt to maximize
the producing efficiency of their wells in a higher priced environment.
EMPLOYEES
As of June 30, 2001, we employed approximately 9,300 persons
(approximately 9,220 in well servicing and contract drilling and 80 in
corporate). Our employees are not represented by a labor union and are not
covered by collective bargaining agreements. We have not experienced work
stoppages associated with labor disputes or grievances and considers its
relations with its employees to be satisfactory.
ENVIRONMENTAL REGULATIONS
Our operations are subject to various local, state and federal laws
and regulations intended to protect the environment. Our operations routinely
involve the handling of waste materials, some of which are classified as
hazardous substances. Consequently, the regulations applicable to our
operations include those with respect to containment, disposal and
controlling the discharge of any hazardous oilfield waste and other
non-hazardous waste material into the environment, requiring removal and
cleanup under certain circumstances, or otherwise relating to the protection
of the environment. Laws and regulations protecting the environment have
become more stringent in recent years, and may in certain circumstances
impose "strict liability," rendering a party liable for environmental damage
without regard to negligence or fault on the part of such party. Such laws
and regulations may expose us to liability for the conduct of, or conditions
caused by, others, or for our acts, which were in compliance with all
applicable laws at the times such acts were performed. Cleanup costs and
other damages arising as a result of environmental laws, and costs associated
with changes in environmental laws and regulations could be substantial and
could have a material adverse effect on our financial condition. From time to
time, claims have been made and litigation has been brought against us under
such laws. However, the costs incurred in connection with such claims and
other costs of environmental compliance have not had any material adverse
effect on our operations or financial statements in the past, and management
is not currently aware of any situation or condition that it believes is
likely to have any such material adverse effect in the future. Management
believes that it conducts our operations in substantial compliance with all
material federal, state and local regulations as they relate to the
environment. Although we have incurred certain costs in complying with
environmental laws and regulations, such amounts have not been material to
our financial results during the past three fiscal years.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages, as of July 1,
2002, of each of our executive officers and directors and includes their
current positions.
NAME AGE POSITION
---- --- --------
Francis D. John.......................................... 48 Chairman of the Board, President, Chief Executive Officer and
Chief Operating Officer
David J. Breazzano....................................... 45 Director
Kevin P. Collins......................................... 51 Director
William D. Fertig........................................ 45 Director
J. Robinson West......................................... 55 Director
W. Phillip Marcum........................................ 58 Director
Morton Wolkowitz......................................... 74 Director
James J. Byerlotzer...................................... 56 Executive Vice President and Chief Operating Officer
Royce Mitchell........................................... 47 Executive Vice President, Chief Financial Officer and Chief
Accounting Officer
Francis D. John has been the President and Chief Executive Officer since
October 1989. In addition, Mr. John has been Chairman of the Board since
August 1996. Mr. John re-assumed the duties of Chief Operating Officer in
April 1999. He has been a Director and President since June 1988 and served
as the Chief Financial Officer from October 1989 through July 1997. Before
joining the Company, he was Executive Vice President of Finance and
Manufacturing of Fresenius U.S.A., Inc. Mr. John previously held operational
and financial positions with Unisys, Mack Trucks and Arthur Andersen. He
received a BS from Seton Hall University and an MBA from Fairleigh Dickinson
University.
David J. Breazzano has been a Director since October 1997. Mr. Breazzano
is one of the founding principals at DDJ Capital Management, LLC, an
investment management firm established in 1996. Mr. Breazzano previously
served as a Vice President and Portfolio Manager at Fidelity Investments
("Fidelity") from 1990 to 1996. Prior to joining Fidelity, Mr. Breazzano was
President and Chief Investment Officer of the T. Rowe Price Recovery Fund. He
is also a director of Waste Systems International, Inc. and Samuels Jewelers,
Inc. He holds a BA from Union College and an MBA from Cornell University.
Kevin P. Collins has been a Director since March 1996. Mr. Collins has
been a managing member of the Old Hill Company LLC since 1997. From 1992 to
1997, he served as a principal of JHP Enterprises, Ltd., and from 1985 to
1992, as Senior Vice President of DG Investment Bank, Ltd., both of which
were engaged in providing corporate finance and advisory services. Mr.
Collins was a director of WellTech, Inc. ("WellTech") from January 1994 until
March 1996 when WellTech was merged into the Company. Mr. Collins is also a
director of The Penn Traffic Company, Metretek Technologies, Inc. and London
Fog Industries, Inc. He holds a BS and an MBA from the University of
Minnesota.
William D. Fertig has been a Director since April 2000. Mr. Fertig has
been a Principal, Manager of Sales and Training at McMahan Securities Co.
L.P. since 1990. Mr. Fertig previously served as a Senior Vice President and
Manager of Convertible Sales at Drexel Burnham Lambert prior to joining
McMahan Securities in 1990, and from 1979 to 1989, served as Vice President
and Convertible Securities Sales Manager at Credit Suisse First Boston. He
holds a BS from Allegheny College and an MBA from NYU Graduate Business
School.
J. Robinson West was recently elected to the Board of Directors in
November 2001 to fill the vacancy caused by the resignation of William D.
Manly. Mr. West is the founder, and has served as Chairman and a director of
The Petroleum Finance Company, Ltd., strategic advisers to internationals oil
and gas companies, national oil companies, and petroleum ministries, since
1984. Previously, Mr. West served as U.S. Assistant Secretary of the
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Interior with responsibility for offshore oil leasing policy from 1981
through 1983. He was Deputy Assistant Secretary of Defense for International
Economic Affairs from 1976 through 1977 and a member of the White House Staff
from 1974 through 1976. He is currently a member of The Council on Foreign
Relations. He holds a BA with advanced standing from the University of North
Carolina at Chapel Hill and a J.D. from Temple University.
W. Phillip Marcum has been a Director since March 1996. Mr. Marcum was a
director of WellTech from January 1994 until March 1996 when WellTech was
merged into the Company. From October 1995 until March 1996, Mr. Marcum was
the acting Chairman of the Board of Directors of WellTech. He has been
Chairman of the Board, President and Chief Executive Officer of Metretek
Technologies, Inc., formerly known as Marcum Natural Gas Services, Inc.
("Metretek Technologies"), since January 1991 and is a director of
TestAmerica, Inc. He holds a BBA from Texas Tech University.
Morton Wolkowitz has been a Director since December 1989. Mr. Wolkowitz
served as President and Chief Executive Officer of Wolkow Braker Roofing
Corporation, a company that provided a variety of roofing services, from 1958
through 1989. Mr. Wolkowitz has been a private investor since 1989. He holds
a BS from Syracuse University.
James J. Byerlotzer was elected Executive Vice President and Chief
Operating Officer effective January 2002. He served as Executive Vice
President of Domestic Well Service and Drilling Operations from July 1999
through December 1999, and Executive Vice President of Domestic Operations
from December 1999 through December 2001. He joined the Company in September
1998 as Vice President - Permian Basin Operations after the Company's
acquisition of Dawson Productions Services, Inc. ("Dawson"). From February
1997 to September 1998, he served as the Senior Vice President and Chief
Operating Officer of Dawson. From 1981 to 1997, Mr. Byerlotzer was employed
by Pride Petroleum Services, Inc. ("Pride"). Beginning in February 1996, Mr.
Byerlotzer served as the Vice President -Domestic Operations of Pride. Prior
to that time, he served as Vice President -Permian Basin of Pride and in
various other operating positions in Pride's Gulf Coast and California
operations. Mr. Byerlotzer holds a BA from the University of Missouri in St.
Louis.
Royce W. Mitchell was elected Executive Vice President, Chief
Financial Officer and Chief Accounting Officer effective January 2002. Before
joining the Company, he was a partner with KPMG LLP from April 1986 through
December 2001 specializing in the oil and gas industry. He received a BBA
from Texas Tech University and is a certified public accountant.
Directors are elected at the Company's annual meeting of
stockholders and serve until the next annual meeting of stockholders and
until their successors are elected and qualified. Each executive officer
holds office until the first meeting of the Board of Directors following the
annual meeting of stockholders and until his successor has been duly elected
and qualified.
DIRECTOR COMPENSATION
No director who is also an employee of our or any of its
subsidiaries received any fees from us for his services as a Director or as a
member of any committee of the Board. During the fiscal year ended June 30,
2001 all other Directors ("Non-employee Directors") received a fee equal to
$3,000 per month for each month of service and are reimbursed for travel and
other expenses directly associated with Company business. Additionally,
during fiscal 2001 we paid the premiums with respect to life insurance for the
benefit of Messrs. Collins and Marcum in the amount of $2,906 and $5,389,
respectively.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table reflects the
compensation for services to the Company for the years ended June 30, 2001,
2000 and 1999 for (i) the Chief Executive Officer of the Company and (ii) the
other two executive officers of the Company other than the Chief Executive
Officer who were serving as executive officers at June 30, 2001 (the "Named
Executive Officers").
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LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ -------------
OTHER SHARES
ANNUAL UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (1) ($)
--------------------------- ------- -------- -------- ------------ ---------- ------------
Francis D. John............................ 2001 594,885 835,000 67,211(2) 1,460,000 74,998(3)
President, Chief Executive Officer and 2000 589,519 307,776 -- 2,000,000 --
Chief Operating Officer 1999 429,000 -- -- 1,200,000 --
Thomas K. Grundman......................... 2001 274,966 315,000 -- 135,000 78,519(4)
Executive Vice President of International 2000 203,845 100,000 -- 500,000 24,975(5)
Operations, Chief Financial Officer, and 1999 35,259(6) -- -- 300,000 --
Chief Accounting Officer
James J. Byerlotzer........................ 2001 249,324 275,000 -- 115,000 101,000(7)
Executive Vice President of Domestic 2000 185,000 89,000 -- 300,000 100,250(8)
Operation 1999 121,153(9) -- -- 260,000 75,000(10)
-----------------------------
(1) Represents the number of shares issuable pursuant to vested and non-vested
stock options granted during the applicable fiscal year.
(2) Represents reimbursement of (i) medical expenses of $12,186, (ii)
professional fees of $45,025, and (iii) other miscellaneous personal
expenses of $10,000.
(3) Represents premium payments by the Company for life and health insurance.
(4) Represents (i) forgiveness of relocation loan indebtedness and interest to
Mr. Grundman of $52,794, (ii) premium payments made by the Company for life
insurance of $24,725 and (iii) contributions by the Company on behalf of
Mr. Grundman to the Key Energy Services, Inc. 401(k) Savings & Retirement
Plan of $1,000.
(5) Represents (i) premium payments by the Company for life insurance of
$24,725 and (ii) contributions by the Company on behalf of Mr. Grundman to
the Key Energy Services, Inc. 401(k) Savings & Retirement Plan of $250.
(6) Mr. Grundman joined the Company as an executive officer in April 1999.
(7) Represents (i) payments to Mr. Byerlotzer pursuant to a non-competition
agreement entered into in connection with the Company's acquisition of
Dawson Production Services, Inc. of $100,000, and (ii) contributions by the
Company on behalf of Mr. Byerlotzer to the Key Energy Services, Inc. 401(k)
Savings & Retirement Plan of $1,000.
(8) Represents (i) payments to Mr. Byerlotzer pursuant to a non-competition
agreement entered into in connection with the Company's acquisition of
Dawson Production Services, Inc. of $100,000, and (ii) contributions by the
Company on behalf of Mr. Byerlotzer to the Key Energy Services, Inc. 401(k)
Savings & Retirement Plan of $250.
(9) Mr. Byerlotzer joined the Company as an executive officer in September
1998.
(10) Represents payments to Mr. Byerlotzer pursuant to a non-competition
agreement entered into in connection with the Company's acquisition of
Dawson Production Services, Inc.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information relating to
options granted under the Key Energy Group, Inc. 1997 Incentive Plan (the
"Plan") and outside the Plan to the Named Executive Officers during fiscal
2001. The Company did not grant any stock appreciation rights during fiscal
2001.
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INDIVIDUAL
GRANTS
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
OF GRANTED TO GRANT
UNDERLYING EMPLOYEES EXERCISE DATE
OPTIONS IN FISCAL YEAR PRICE EXPIRATION PRESENT
NAME GRANTED (1) PER SHARE DATE VALUE (2)
---- ------------- ----------------- ---------- ------------ -----------
Francis D. John................. 960,000(3) 37.9% $ 8.25 08/07/10 $4,339,000
500,000(4) 19.7% $ 8.25 12/11/10 2,260,000
Thomas K. Grundman.............. 135,000(5) 5.3% $ 8.25 12/11/10 620,000
James J. Byerlotzer............. 115,000(6) 4.5% $ 8.25 12/11/10 520,000
---------------------------
(1) Based on options to purchase a total of 2,533,000 of Common Stock granted
during fiscal 2001.
(2) The grant date value of stock options was estimated using the Black-Scholes
option pricing model with the following assumptions: expected
volatility--59%; risk-free interest rate--4.3%; time of exercise--5 years;
and no dividend yield.
(3) These options were granted on August 7, 2000, and vested immediately on the
date of grant.
(4) These options were granted on December 11, 2000 and vested immediately on
the date of grant.
(5) These options were granted on December 11, 2000 and vest in three equal
annual installments commencing on July 1, 2001 as follows: 45,000 on July
1, 2001; 45,000 on July 1, 2002; and 45,000 on July 1, 2003.
(6) These options were granted on December 11, 2000 and vest in three equal
annual installments commencing on July 1, 2001 as follows: 38,333 on July
1, 2001; 38,333 on July 1, 2002; and 38,334 on July 1, 2003.
AGGREGATED OPTION EXERCISES AND VALUES AS OF FISCAL YEAR END
The following table sets forth certain information as of June 30, 2001
relating to the number and value of (i) options exercised by the Named Executive
Officers and (ii) unexercised options held by the Named Executive Officers.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE MONEY-OPTIONS AT
ACQUIRED VALUE JUNE 30, 2001 JUNE 30, 2000(2)
ON REALIZED --------------------------- ----------------------------
EXERCISE(#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------- ----------- ----------- ------------- ----------- -------------
Francis D. John........... 1,825,000 12,850,875 2,418,333 791,667 $5,148,066 $ 1,732,709
Thomas K. Grundman........ 200,000 1,934,000 250,000 485,000 $ 585,000 $ 1,718,650
James J. Byerlotzer....... 165,000 1,595,550 159,167 350,833 $ 391,931 $ 1,311,469
--------------------------
(1) The dollar values in this column are calculated by determining the
difference between the fair market value of the Company's common stock
on the date of exercise of the relevant options and the exercise price
of such options. The fair market value on the date of exercise is based
on the last sale price of the Company's common stock on the NYSE on
such date.
(2) The dollar values in this column are calculated by determining the
difference between the fair market value of the Common Stock for which
the relevant options are exercisable as of the end of the fiscal year
and the exercise price of the options. The fair market value is based
on the last sale price of the Common Stock on the NYSE on June 29, 2001
which was $10.84.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Effective as of October 16, 2001, we entered into second amended and
restated employment agreement with Mr. John, which provides that Mr. John will
serve as our Chairman of the Board, President and Chief Executive Officer for a
five-year term commencing July 1, 2001 and continuing until June 30, 2006, with
an automatic one-year renewal on each June 30, commencing on June 30, 2006,
unless terminated by us or by Mr. John with proper notice. Under this employment
agreement, Mr. John's annual base salary is $595,000 per year until December 31,
2002 and $695,000 per year thereafter, in each case subject to increase after
annual reviews by the Board of
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Directors. This employment agreement also provides that Mr. John will be
entitled to (i) participate in our Performance Compensation Plan, with
performance criteria to be approved by the Compensation Committee, (ii)
receive additional bonuses at the discretion of the Compensation Committee,
and (iii) participate in stock option grants made to our executives. In
addition to salary and bonus, Mr. John is entitled to medical, dental,
accident and life insurance, reimbursement of expenses and various other
benefits. To the extent Mr. John is taxed on any such reimbursement or
benefit, we will pay Mr. John an amount which, on an after-tax basis, equals
the amount of these taxes.
In the event that we terminate Mr. John's employment voluntarily or
by nonrenewal, or by Mr. John for "Good Reason," or if Mr. John's employment
is terminated by us or by Mr. John following a "Change in Control" (in each
case as defined in the employment agreement), Mr. John will be entitled to
receive: (i) his accrued but unpaid salary and bonuses to the date of
termination, and a PRO RATA bonus for the year in which termination occurs;
(ii) a severance payment in an amount equal to five times his average total
annual compensation (i.e., salary plus bonus) for the preceding three years;
(iii) immediate vesting and exercisability of all stock options held by him
(to the extent not already vested and exercisable) for the remainder of the
original terms of the options; (iv) any other amounts or benefits earned,
accruing or owing to him, but not yet paid; and (v) continued participation
in medical, dental and life insurance coverage, as well as the receipt of
other benefits to which he was entitled, until the first to occur of the
third year anniversary of the date his employment was terminated or the date
on which he receives equivalent coverage and benefits under the plans and
programs of a subsequent employer (or, in the event of a "Change in Control,"
an amount in cash equal to the reasonable expenses that we would incur if it
were to provide these benefits for three years). In the event that Mr. John's
employment is terminated as a result of Mr. John's disability, Mr. John will
be entitled to receive (i) through (v) above, except that his severance
compensation will be an amount equal to three times his average total annual
compensation for the preceding three years, reduced by the amount of any
company-paid disability insurance proceeds paid to Mr. John. In the event
that we terminate Mr. John's employment for "Cause," as defined in the
employment agreement, or by Mr. John voluntarily or by nonrenewal, he will be
entitled to receive only (i) and (v) above and will forfeit any restricted
stock or options not previously vested. In the event Mr. John's employment is
terminated by reason of his death, he will be entitled to receive (i), (iii),
(iv) and (v) above, except that his family will be entitled to receive the
medical and dental insurance coverage provided in (v) above until the death
of Mr. John's spouse. In addition, if any of the above benefits are subject
to the tax imposed by Section 4999 of the Internal Revenue Code, we will
reimburse Mr. John for such tax on an after-tax basis.
The employment agreement specifies that Mr. John may not engage in
any activities that are competitive with ours for a period of three years
after the termination of his employment.
Pursuant to the employment agreement, we will pay to Mr. John, on or
prior to December 31, 2001, a one-time retention incentive bonus equal to the
aggregate amount of all principal and interest on loans we previously made to
Mr. John that were to be forgiven over a ten year period beginning July 1,
2001, as well as the amount, on an after-tax basis, required to pay the taxes
incurred Mr. John in connection with such payment. The after-tax proceeds of
the bonus will be used to repay such loans. The employment agreement goes on
to provide that if, prior to June 30, 2011, we terminate Mr. John for Cause,
or by Mr. John voluntarily or by nonrenewal, Mr. John will repay us a
percentage of the retention incentive bonus beginning at 100% during the
first year and declining at the rate of 10% each year to 0% on and after June
30, 2011.
Effective as of December 31, 2001, we entered into an employment
agreement with Royce Mitchell, which provides that Mr. Mitchell will serve as
our Executive Vice President and Chief Financial Officer for a three-year
term commencing January 1, 2002 and continuing until December 31, 2004, with
an automatic twelve-month renewal on each December 31, commencing on December
31, 2004, unless terminated by us or by Mr. Mitchell with proper notice.
Under this employment agreement, Mr. Mitchell's annual base salary is
$295,000 per year and subject to increase after annual reviews by the Board
of Directors. This employment agreement also provides that Mr. Mitchell will
be entitled to (i) participate in the our Performance Compensation Plan, with
performance criteria to be approved by the Compensation Committee, (ii)
receive additional bonuses at the discretion of the Compensation Committee
which it, after consultation with the Chief Executive Officer, deems
appropriate; and (iii)
S-26
participate in stock option grants made to our executives. In addition to
salary and bonus, Mr. Mitchell is entitled to medical, dental, accident and
life insurance, reimbursement of expenses and various other benefits.
In the event that Mr. Mitchell's employment is terminated by Mr.
Mitchell for "Good Reason" or by us for reasons other than "Cause" (as
defined in the employment agreement) or "Disability" (as defined in the
employment agreement), or if Mr. Mitchell's employment is terminated by
either party following a Change in Control (as defined in the employment
agreement), Mr. Mitchell will be entitled to receive: (i) severance
compensation in the aggregate amount of three times his base salary at the
rate in effect on the termination date, payable in thirty six equal
installments, provided, however, that if Mr. Mitchell's employment is
terminated within one year following a Change in Control or if we terminate
Mr. Mitchell for other than Cause or Disability in anticipation of a Change
in Control, the severance payment shall be increased by an amount equal to
three times the average annual total bonuses we paid to Mr. Mitchell during
the three year period (or shorter period as Mr. Mitchell may have been
employed) preceding the date on which the notice of termination is given and
shall be payable in one lump sum on the effective date of the termination;
(ii) immediate vesting and exercisability of all stock options held by him
(to the extent not already vested and exercisable); (iii) continued
participation in medical, dental and life insurance coverage, as well as the
receipt of other benefits to which he was entitled, until the first to occur
of the third anniversary of the date his employment was terminated or the
date on which he received equivalent coverage and benefits under the plans
and programs of a subsequent employer. In the event Mr. Mitchell's employment
is terminated by reason of disability, in addition to the other severance and
benefits to which he is entitled, he shall also be entitled to three times
his base salary at the rate in effect at the time of termination and payable
in 36 equal monthly installments reduced by the amount of any disability
proceeds paid to Mr. Mitchell. In the event there is a Change of Control
following Mr. Mitchell's termination and while Mr. Mitchell is entitled to
severance payments, any severance payments which remain unpaid as of the
Change of Control shall be paid in one lump sum as of the Change in Control.
Notwithstanding the above, in the event of the termination of Mr. Mitchell's
employment for any reason, Mr. Mitchell (or his estate) is entitled to
receive: (i) any unpaid portion of his base salary through the effective date
of termination; (ii) accrued but unused vacation (payable in an amount equal
to the base salary divided by 255 and multiplied by the number of accrued but
unused vacation days; (iii) any prior fiscal year bonus earned but not paid;
(iv) provided that Mr. Mitchell's employment was not terminated for Cause, a
pro-rata portion of any bonus for the current fiscal year (so long as certain
performance objectives have been met or it is reasonably likely such
performance goals would have been met had Mr. Mitchell remained employed by
us); and (v) any amounts for expense reimbursement and similar items which
have been properly incurred prior to termination and have not yet been paid.
Also, if Mr. Mitchell is subject to the tax imposed by Section 4999 of the
Internal Revenue Code, we have agreed to pay him an amount equal to the tax ,
plus any amounts necessary to "gross up" Mr. Mitchell for additional taxes
resulting from the payments to him.
The employment agreement specifies that Mr. Mitchell may not engage
in any activities that are competitive with ours so long as Mr. Mitchell is
employed by us and for a period thereafter (a) as Mr. Mitchell is entitled to
receive severance payments under the employment agreement; or (b) for a
period of 3 years if Mr. Mitchell's severance payment is accelerated due to a
Change in Control; or (c) for a period of 12 months if we terminate Mr.
Mitchell's employment for Cause or if Mr. Mitchell terminates his employment
for any reason, other than Good Reason.
Pursuant to the employment agreement, we will pay to Mr. Mitchell,
on or prior to December 31, 2001, a one-time bonus of $100,000. The
employment agreement goes on to provide that if, prior to December 31, 2004,
we terminate Mr. Mitchell for Cause, or by Mr. Mitchell for Good Reason, Mr.
Mitchell will repay us a percentage of the bonus beginning at 100% during the
first year and declining at the rate of 33 1/3%% each year to 0% on and after
December 31, 2004.
Effective as of December 31, 2001, we entered into an employment
agreement with Jim Byerlotzer, which provides that Mr. Byerlotzer will serve
as our Executive Vice President and Chief Operating Officer for a term
commencing January 1, 2002 and continuing until June 30, 2004, with an
automatic twelve-month renewal on each June 30, commencing on June 30, 2004,
unless terminated by us or by Mr. Byerlotzer with proper notice. Under this
employment agreement, Mr. Byerlotzer's annual base salary is $275,000 until
July 1,2002 and $340,000 per year thereafter, in each case subject to
increase after annual reviews by the Board of Directors. This employment
S-27
agreement also provides that Mr. Byerlotzer will be entitled to (i)
participate in our Performance Compensation Plan, with performance criteria
to be approved by the Compensation Committee, (ii) receive additional bonuses
at the discretion of the Compensation Committee which it, after consultation
with the Chief Executive Officer, deems appropriate; and (iii) participate in
stock option grants made to our executives. In addition to salary and bonus,
Mr. Byerlotzer is entitled to medical, dental, accident and life insurance,
reimbursement of expenses and various other benefits.
In the event that Mr. Byerlotzer's employment is terminated by Mr.
Byerlotzer for "Good Reason" or by us for reasons other than "Cause" (as
defined in the employment agreement) or "Disability" (as defined in the
employment agreement), or if Mr. Byerlotzer's employment is terminated by
either party following a Change in Control (as defined in the employment
agreement), Mr. Byerlotzer will be entitled to receive: (i) severance
compensation in the aggregate amount of three times his base salary at the
rate in effect on the termination date, payable in thirty six equal
installments, provided, however, that if Mr. Byerlotzer's employment is
terminated within one year following a Change in Control or if we terminate
Mr. Byerlotzer for reasons other than Cause or Disability in anticipation of
a Change in Control, the severance payment shall be increased by an amount
equal to three times the average annual total bonuses we paid to Mr.
Byerlotzer during the three year period (or shorter period as Mr. Byerlotzer
may have been employed) preceding the date on which the notice of termination
is given and shall be payable in one lump sum on the effective date of the
termination; (ii) immediate vesting and exercisability of all stock options
held by him (to the extent not already vested and exercisable); (iii)
continued participation in medical, dental and life insurance coverage, as
well as the receipt of other benefits to which he was entitled, until the
first to occur of the third anniversary of the date his employment was
terminated or the date on which he received equivalent coverage and benefits
under the plans and programs of a subsequent employer. In the event Mr.
Byerlotzer's employment is terminated by reason of disability, in addition to
the other severance and benefits to which he is entitled, he shall also be
entitled to three times his base salary at the rate in effect at the time of
termination and payable in thirty six equal monthly installments reduced by
the amount of any disability proceeds paid to Mr. Byerlotzer. In the event
there is a Change of Control following Mr. Byerlotzer's termination and while
Mr. Byerlotzer is entitled to severance payments, any severance payments
which remain unpaid as of the Change of Control shall be paid in one lump sum
as of the Change in Control. Notwithstanding the above, in the event of the
termination of Mr. Byerlotzer's employment for any reason, Mr. Byerlotzer (or
his estate) is entitled to receive: (i) any unpaid portion of his base salary
through the effective date of termination; (ii) accrued but unused vacation
(payable in an amount equal to the base salary divided by 255 and multiplied
by the number of accrued but unused vacation days; (iii) any prior fiscal
year bonus earned but not paid; (iv) provided that Mr. Byerlotzer's
employment was not terminated for Cause, a pro-rata portion of any bonus for
the current fiscal year (so long as certain performance objectives have been
met or it is reasonably likely such performance goals would have been met had
Mr. Byerlotzer remained employed by us); and (v) any amounts for expense
reimbursement and similar items which have been properly incurred prior to
termination and have not yet been paid. Also, if Mr. Byerlotzer is subject to
the tax imposed by Section 4999 of the Internal Revenue Code, we have agreed
to pay him an amount equal to the tax, plus any amounts necessary to "gross
up" Mr. Byerlotzer for additional taxes resulting from the payments to him.
The employment agreement specifies that Mr. Byerlotzer may not
engage in any activities that are competitive with ours so long as Mr.
Byerlotzer is employed by us and for a period thereafter (a) as Mr.
Byerlotzer is entitled to receive severance payments under the employment
agreement; or (b) for a period of 3 years if Mr. Byerlotzer's severance
payment is accelerated due to a Change in Control; or (c) for a period of 12
months if we terminate Mr. Byerlotzer's employment for Cause or if Mr.
Byerlotzer terminates his employment for any reason, other than Good Reason.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the negotiation of the terms of a five-year
employment agreement with Mr. Francis D. John, our Chairman of the Board,
President and Chief Executive Officer, and as an inducement to Mr. John to
enter into such employment agreement, we entered into a separate agreement
with Mr. John dated as of August 2, 1999, which as amended through June 30,
2001, provides that $6.5 million in loans we previously made to Mr. John,
together with the accrued interest payable thereon (accruing at a rate equal
to 125 basis points above LIBOR, adjusted monthly) will be forgiven ratably
during the ten year period commencing on July 1, 2001 and ending on
S-28
June 30, 2011. The agreement provides that the foregoing forgiveness of
indebtedness is predicated and conditioned upon Mr. John remaining employed
by us during such period. In addition, in the event that Mr. John is
terminated by us for "Cause" (as defined in the agreement), or in the event
that Mr. John voluntarily terminates his employment with us, the agreement
further provides that the entire remaining principal balance of these loans,
together with accrued interest payable thereon, will become immediately due
and payable by Mr. John. However, in the event that Mr. John's employment is
terminated for "Good Reason", or as a result of Mr. John's death or
"Disability", or as a result of a "Change in Control" (all as defined in that
agreement), the agreement stipulates that the remaining principal balance
outstanding on the loans, together with accrued interest thereon will be
forgiven. This agreement further provides that with respect to any
forgiveness of the payment of principal and interest on the loans, Mr. John
will be entitled to receive a "gross-up" payment in an amount sufficient for
him to pay any federal, state, or local income taxes that may be due and
payable by him with respect to the forgiveness of such indebtedness
(principal and interest). The agreement has been effectively superseded by
Mr. John's new employment agreement that provides for a one-time retention
incentive bonus used to repay all amounts owed under the agreement (see Item
11--Executive Compensation--Employment Agreements with Executive Officers).
In connection with the negotiation of an employment agreement with
Thomas K. Grundman, our Executive Vice President of International Operations,
Chief Financial Officer and Chief Accounting Officer, we made a $240,000
short-term loan and a $150,000 relocation loan to assist Mr. Grundman's
relocation to our executive offices. Interest on these loans accrues at a
rate of 6.125% per annum. The short-term loan has been repaid. The relocation
loan together with accrued interest will be forgiven in three installments of
$50,000 each on July 1, 2000, 2001 and 2002; PROVIDED, HOWEVER, that if Mr.
Grundman's employment is terminated during such period in a way that (i)
triggers severance obligations, all amounts owed shall be immediately
forgiven or (ii) does not trigger severance obligations, all amounts owed
shall be immediately due and payable. This agreement further provides that
with respect to any forgiveness of the payment of principal and interest on
the loans, Mr. Grundman will be entitled to receive a "gross-up" payment in
an amount sufficient for him to pay any federal, state, or local income taxes
that may be due and payable by him with respect to the forgiveness of such
indebtedness (principal and interest).
OWNERSHIP OF CAPITAL STOCK
MANAGEMENT
The following table sets forth as of October 25, 2001, the number of
shares of Common Stock beneficially owned by each (i) each Director, (ii)
each Named Executive Officer, and (iii) all Directors and executive officers
of the Company as a group. Except as noted below, each holder has sole voting
and investment power with respect to all shares of Common Stock listed as
owned by such person.
S-29
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME OF BENEFICIAL OWNER SHARES(1) SHARES(2)
------------------------ --------- ---------
Francis D. John (3).......................................................... 2,613,833 2.5%
Kevin P. Collins (4)......................................................... 223,405 *
William D. Fertig (5)........................................................ 30,000 *
William D. Manly (6).......................................................... 221,042 *
W. Philip Marcum (7)......................................................... 223,405 *
David J. Breazzano (8)....................................................... 208,333 *
Morton Wolkowitz (9)......................................................... 608,302 *
Thomas K. Grundman (10)..................................................... 355,000 *
James J. Byerlotzer (11)..................................................... 263,667 *
Directors and Executive Officers as a group (9 persons)...................... 4,716,987 4.4%
---------------------------------
* Less than 1%
(1) Includes all shares with respect to which each Director or executive
officer directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares the power to vote
or to direct voting of such shares and/or to dispose or to direct the
disposition of such shares. Includes shares that may be purchased under
currently exercisable stock options and warrants.
(2) Based on 102,357,547 shares of Common stock outstanding at October 25,
2001, plus, for each beneficial owner, those number of shares underlying
currently exercisable options held by each executive officer or Director.
(3) Includes 2,543,333 shares issuable upon exercise of vested options. Does
not include 666,667 shares issuable pursuant to options that have not
vested.
(4) Includes 218,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not
vested.
(5) Includes 25,000 shares issuable upon the exercise of vested options. Does
not include 25,000 shares issuable pursuant to options that have not
vested.
(6) Includes 218,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not
vested.
(7) Includes 218,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not
vested.
(8) Includes 148,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not
vested.
(9) Includes 118,000 shares issuable upon the exercise of vested options. Does
not include 57,000 shares issuable pursuant to options that have not
vested.
(10) Includes 345,000 shares issuable upon the exercise of vested options. Does
not include 390,000 shares issuable pursuant to options that have not
vested.
(11) Includes 241,667 shares issuable upon the exercise of vested options. Does
not include 268,333 shares issuable pursuant to options that have not
vested.
S-30
CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of October 25, 2001, certain
information regarding the beneficial ownership of Common Stock by each
person, other than the Company's directors or executive officers, who is
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock.
SHARES BENEFICIALLY OWNED AT
OCTOBER 19, 2001
-----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER, IDENTITY OF GROUP NUMBER PERCENT
------------------------------------------------------- --------------- ---------------
Perkins, Wolf, McDonnell and Company (1)..................................... 11,036,014(2) 10.8%
53 W. Jackson Blvd., Suite 722
Chicago, Ill 60604
Berger, L.L.C. (3)........................................................... 9,810,240(2) 9.6%
210 University Boulevard
Suite 900
Denver, CO 80206
Mellon Financial Corporation (4)............................................. 6,183,414 6.0%
One Mellon Center
Pittsburgh, PA 15258
T. Rowe Price Associates, Inc. (5)........................................... 6,735,600 6.6%
100 E. Pratt Street
Baltimore, MD 21202
---------------------------
(1) As reported on Schedule 13G filed with the Commission on October 11, 2001.
(2) The Company believes that Perkins, Wolf, McDonell & Co. shares voting power
with respect to 9,810,240 of its shares with Berger, LLC and that,
therefore, the 9,810,240 shares shown as being beneficially owned by
Berger, LLC are the same securities shown as being beneficially owned by
Perkins, Wolf, McDonnell & Co.
(3) As reported on Schedule 13F filed with the Commission on August 14, 2001.
(4) As reported on Schedule 13G filed with the Commission on January 26, 2001.
(5) As reported on Schedule 13G (Amendment No. 1) filed with the Commission on
February 8, 2001.
PLAN OF DISTRIBUTION
Well will issue common stock from time to time in connection with
acquisitions by us or our subsidiaries of other businesses, assets or
securities. We expect that the terms of the acquisitions involving the
issuance of securities covered by this prospectus will be determined by
direct negotiations with the owners or controlling persons of the businesses,
assets or securities to be acquired by us or our subsidiaries. No
underwriting discounts or commissions will be paid in connection with the
issuance of our common stock, although finders' fees may be paid from time to
time with respect to specific mergers or acquisitions. Any person receiving
such fees may be deemed to be an underwriter within the meaning of the
Securities Act.
LEGAL MATTERS
Certain legal matters in connection with this offering will be
passed upon for us by Porter & Hedges, L.L.P.
S-31
EXPERTS
Our consolidated financial statements as of December 31, 2001 and
2000, and for each of the years in the three-year period ended December 31,
2001, have been included or incorporated by reference herein in reliance upon
the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of such firm as
experts in accounting and auditing.
S-32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
AUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets........................................................................ F-2
Consolidated Statement of Operations............................................................... F-3
Consolidated Statements of Comprehensive Income.................................................... F-4
Consolidated Statements of Cash Flows.............................................................. F-5
Consolidated Statements of Stockholders' Equity.................................................... F-6
Notes to Consolidated Financial Statements......................................................... F-7
Independent Auditors' Report....................................................................... F-37
UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and June 30, 2001................... F-38
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, F-40
2001 and 2000....................................................................................
Unaudited Consolidated Statements of Cash Flows for the Three and Nine Months Ended March 31, F-41
2001 and 2000....................................................................................
Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended F-42
March 31, 2001 and 2000..........................................................................
Notes to Consolidated Financial Statements....................................................... F-43
F-1
KEY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
2001 2000
------------- ----------------
(THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 2,098 $109,873
Accounts receivable, net of allowance for doubtful accounts ($4,082--2001,
$3,189--2000)......................................................... 177,016 123,203
Inventories............................................................ 16,547 10,028
Income taxes receivable................................................ -- 5,588
Prepaid expenses and other current assets.............................. 10,489 4,897
------------- -------------
Total current assets....................................................... 206,150 253,589
------------- -------------
Property and equipment:
Well servicing equipment............................................... 723,724 670,392
Contract drilling equipment............................................ 119,122 105,454
Motor vehicles......................................................... 64,907 55,011
Oil and gas properties and other related equipment, successful efforts
method............................................................... 44,245 43,855
Furniture and equipment................................................ 24,865 11,013
Buildings and land..................................................... 37,812 34,712
------------- -------------
Total property and equipment............................................... 1,014,675 920,437
Accumulated depreciation & depletion....................................... (220,959) (159,876)
------------- -------------
Net property and equipment................................................. 793,716 760,561
------------- -------------
Goodwill, net of accumulated amortization ($28,168--2001,
$18,849--2000)....................................................... 189,875 198,633
Deferred costs, net.................................................... 17,624 18,855
Notes receivable -- related parties.................................... 6,050 5,150
Other assets........................................................... 14,869 9,477
------------- -------------
Total assets............................................................... $1,228,284 $1,246,265
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $42,544 $ 35,801
Other accrued liabilities.............................................. 48,923 26,398
Accrued interest....................................................... 16,140 15,994
Current portion of long-term debt...................................... 7,946 14,655
------------- -------------
Total current liabilities.................................................. 115,553 92,848
------------- -------------
Long-term debt, less current portion....................................... 485,961 651,945
Deferred revenue........................................................... 14,104 17,031
Non-current accrued expenses............................................... 8,388 1,847
Deferred tax liability..................................................... 127,400 99,707
Commitments and contingencies.............................................. -- --
Stockholders' equity:
Common stock, $0.10 par value; 200,000,000 shares authorized,
101,440,166 and 97,209,504 shares issued, respectively at June 30,
2001 and June 30, 2000, respectively................................. 10,144 9,723
Additional paid-in capital............................................. 444,768 413,962
Treasury stock, at cost; 416,666 shares at June 30, 2001 and
June 30, 2000........................................................ (9,682) (9,682)
Accumulated other comprehensive income................................. 62 8
Retained earnings (deficit)............................................ 31,586 (31,124)
------------- -------------
Total stockholders' equity................................................. 476,878 382,887
------------- -------------
Total liabilities and stockholders' equity................................. $1,228,284 $1,246,265
============= =============
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
------------------------------------------------------
2001 2000 1999
---------------- -------------- ---------------
(THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Well servicing........................................ $758,273 $559,492 $433,657
Contract drilling..................................... 107,639 68,428 50,613
Other, net............................................ 7,350 9,812 7,547
---------------- -------------- ---------------
Total revenues............................................ 873,262 637,732 491,817
---------------- -------------- ---------------
COSTS AND EXPENSES:
Well servicing........................................ 493,108 399,940 324,965
Contract drilling..................................... 77,366 58,299 43,556
Depreciation, depletion and amortization.............. 75,147 70,972 62,074
General and administrative............................ 66,071 58,772 53,108
Bad debt expense...................................... 1,263 1,648 5,928
Debt issuance costs................................... -- -- 6,307
Interest.............................................. 56,560 71,930 67,401
Other expenses........................................ 4,464 4,147 2,907
Corporate restructuring............................... -- -- 4,504
---------------- -------------- ---------------
Total costs and expenses.................................. 773,979 665,708 570,750
Income (loss) before income taxes......................... 99,283 (27,976) (78,933)
Income tax benefit (expense).............................. (37,002) 7,406 25,675
---------------- -------------- ---------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (LOSS) $62,281 $(20,570) $(53,258)
Extraordinary gain (loss) on retirement of debt, less
applicable income taxes of $255--23001 and
$580--2000............................................. 429 1,611 --
---------------- -------------- ---------------
NET INCOME (LOSS)......................................... $62,710 $(18,959) $(53,258)
================ ============== ===============
EARNINGS (LOSS) PER SHARE:
Basic--before extraordinary gain (loss)............... $0.63 $(0.25) $(1.94)
Extraordinary gain (loss) on retirement of debt,
net of tax.......................................... -- 0.02 --
---------------- -------------- ---------------
Basic--after extraordinary gain....................... $0.63 $(0.23) $(1.94)
================ ============== ===============
Diluted--before extraordinary gain.................... $0.61 $(0.25) $(1.94)
Extraordinary gain on retirement of debt, net of tax.. -- 0.02 --
---------------- -------------- ---------------
Diluted--after extraordinary gain..................... $0.61 $(0.23) $(1.94)
================ ============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................. 98,195 83,815 27,501
Diluted............................................... 102,271 83,815 27,501
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
------------- ------------- ------------
(THOUSANDS)
NET INCOME (LOSS)................................................ $62,710 $(18,959) $(53,258)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Derivative transition adjustment (See Note 8)................ (778) --- ---
Oil and natural gas derivatives adjustment (See Note 8)...... 306 --- --
Amortization of oil and natural gas derivatives (See Note 8). 558 --- --
Reversal of unrealized gains on available-for-sale
securities................................................. -- --- (1,525)
Currency translation gain (loss)............................. (32) (1) 9
------------- ------------- ------------
COMPREHENSIVE INCOME (LOSS), NET OF TAX.......................... $62,764 $(18,960) $(54,774)
============= ============= ============
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
------------- ------------- ------------
(THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income / (loss).......................................... $62,710 $ (18,959) $ (53,258)
ADJUSTMENTS TO RECONCILE INCOME FROM OPERATIONS TO
NET CASH PROVIDED BY (USED IN) OPERATIONS:
Depreciation, depletion and amortization..................... 75,147 70,972 62,074
Bad debt expense............................................. 1,263 1,648 5,928
Amortization of deferred debt issuance costs................. 4,317 5,919 5,216
Restructuring charge......................................... -- -- 233
Deferred income taxes........................................ 34,698 (1,818) (25,675)
(Gain) loss on sale of assets................................ 173 25 111
Extraordinary (gain) loss, net of tax........................ (429) (1,611) --
Other non-cash items......................................... -- -- 13
CHANGE IN ASSETS AND LIABILITIES NET OF EFFECTS FROM THE
ACQUISITIONS:
(Increase) decrease in accounts receivable................... (55,076) (32,853) 9,741
(Increase) decrease in other current assets.................. (4,485) (5,483) (432)
Increase (decrease) in accounts payable, accrued interest and
accrued expenses........................................... 29,414 18,875 (17,378)
Other assets and liabilities................................. (5,015) (1,855) --
------------- ------------- ------------
Net cash provided by (used in) operating activities.......... 142,717 34,860 (13,427)
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures--well servicing.......................... (50,799) (26,469) (26,776)
Capital expenditures--contract drilling....................... (15,884) (8,282) (1,063)
Capital expenditures--other................................... (15,437) (3,422) (3,468)
Proceeds from sale of fixed assets........................... 3,415 2,722 7,110
Notes receivable from related parties........................ (1,500) (2,315) (2,835)
Cash received in acquisitions................................ -- -- 27,008
Acquisitions--well servicing.................................. (2,345) -- (292,638)
Acquisitions--contract drilling............................... (800) -- --
Other assets and liabilities................................. -- -- (1,992)
------------- ------------- ------------
Net cash provided by (used in) investing activities.......... (83,350) (37,766) (294,654)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital lease obligations.... (382,540) (51,077) (487,376)
Borrowings under line-of-credit.............................. 30,000 12,000 328,411
Proceeds from equity offerings, net of expenses.............. -- 100,571 180,441
Proceeds from long-term debt................................. 175,210 -- 142,566
Proceeds paid for debt issuance costs........................ (4,958) -- (15,274)
Proceeds from other long-term debt........................... -- -- 150,000
Proceeds from forward sale, net of expenses.................. -- 18,236 --
Proceeds from issuance of warrants........................... -- -- 7,434
Proceeds from exercise of warrants........................... 847 8,473 --
Proceeds from exercise of stock options...................... 14,617 1,098 92
Other........................................................ (318) -- --
------------- ------------- ------------
Net cash provided by (used in) financing activities.......... (167,142) 89,301 306,294
------------- ------------- ------------
Net increase (decrease) in cash.............................. (107,775) 86,395 (1,787)
Cash and cash equivalents at beginning of period............. 109,873 23,478 25,265
------------- ------------- ------------
Cash and cash equivalents at end of period................... $2,098 $109,873 $ 23,478
============= ============= ============
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS)
COMMON STOCK ACCUMULATED
-------------------- ADDITIONAL OTHER
NUMBER AMOUNT AT PAID-IN TREASURY RETAINED COMPREHENSIVE
OF SHARES PAR CAPITAL STOCK EARNINGS INCOME TOTAL
--------- --------- ----------- ----------- ---------- ------------- ---------
BALANCE AT JUNE 30, 1998......... 18,685 $1,868 $119,303 $ (9,682) $ 41,093 $1,525 $154,107
--------- --------- ----------- ----------- ---------- ------------- ---------
Reversal of unrealized gain on
available for sale
securities................... --- --- --- --- --- (1,525) (1,525)
Foreign currency translation
adjustment, net of tax....... --- --- --- --- --- 9 9
Issuance of warrants with 14%
Notes........................ --- --- 7,434 --- --- --- 7,434
Issuance of common stock in
equity offering, net of
offering costs............... 64,245 6,425 174,016 --- --- --- 180,441
Issued to lender in lieu of fee.. 200 20 980 --- --- --- 1,000
Exercise of options.............. 15 2 92 --- --- --- 94
Other ......................... 10 2 (210) --- --- --- (208)
Net income (loss)................ --- --- --- --- (53,258) --- (53,258)
--------- --------- ----------- ----------- ---------- ------------- ---------
BALANCE AT JUNE 30, 1999......... 83,155 $8,317 $301,615 $ (9,682) $ (12,165) $ 9 $288,094
--------- --------- ----------- ----------- ---------- ------------- ---------
Foreign currency translation
adjustment, net of tax....... --- --- --- --- --- (1) (1)
Exercise of warrants............. 2,431 243 8,230 --- --- --- 8,473
Exercise of options.............. 241 24 1,074 --- --- --- 1,098
Conversion of 7% Debentures...... 380 38 3,568 --- --- --- 3,606
Issuance of common stock in equity
offering, net of offering
costs........................ 11,000 1,100 99,471 --- --- --- 100,571
Other............................ 3 1 4 --- --- --- 5
Net income (loss)................ --- --- --- --- (18,959) --- (18,959)
--------- --------- ----------- ----------- ---------- ------------- ---------
BALANCE AT JUNE 30, 2000......... 97,210 $9,723 $413,962 $(9,682) $(31,124) $ 8 $382,887
========= ========= =========== =========== ========== ============= =========
Derivative transition adjustment
(see Note 8)................. -- -- -- -- -- (778) (778)
Oil and natural gas derivatives
Adjustment, net of tax (See
Note 8)...................... -- -- -- -- -- 306 306
Amortization of oil and natural gas
Derivatives (see Note 8)..... -- -- -- -- -- 558 558
Foreign currency translation
adjustment, Net of tax....... -- -- -- -- -- (32) (32)
Exercise of warrants............. 185 19 828 -- -- -- 847
Exercise of options.............. 3,106 308 14,309 -- -- -- 14,617
Conversion of 7% Debentures...... 101 10 947 -- -- -- 957
Issuance of common stock for
acquisitions................. 838 84 8,036 -- -- -- 8,120
Deferred tax benefit--compensation
Expense...................... -- -- 7,004 -- -- -- 7,004
Other............................ -- -- (318) -- -- -- (318)
Net income (loss)................ -- -- -- -- 62,710 -- 62,710
--------- --------- ----------- ----------- ---------- ------------- ---------
BALANCE AT JUNE 30, 2001......... 101,440 $10,144 $444,768 $(9,682) $31,586 $62 $476,878
========= ========= =========== =========== ========== ============= =========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Key Energy Services, Inc. (the "Company" or "Key"), is the largest
onshore, rig-based well servicing contractor in the world, with approximately
1,477 well service rigs and 1,455 oilfield service vehicles as of June 30,
2001. The Company provides a complete range of well services to major oil
companies and independent oil and natural gas production companies,
including: rig-based well maintenance, workover, completion, and recompletion
services (including horizontal recompletions); oilfield trucking services;
and ancillary oilfield services. Key conducts well servicing operations
onshore the continental United States in the following regions: Gulf Coast
(including South Texas, Central Gulf Coast of Texas, and South Louisiana),
Permian Basin of West Texas and Eastern New Mexico, Mid-Continent (including
the Anadarko, Hugoton and Arkoma Basins, and the ArkLaTex region), Four
Corners (including the San Juan, Piceance, Uinta, and Paradox Basins),
Eastern (including the Appalachian, Michigan and Illinois Basins), Rocky
Mountains (including the Denver-Julesberg, Powder River, Wind River, Green
River and Williston Basins), and California (the San Joaquin Basin), and
internationally in Argentina and Ontario, Canada. The Company is also a
leading onshore drilling contractor, with 79 land drilling rigs as of June
30, 2001. Key conducts land drilling operations in a number of major domestic
producing basins, as well as in Argentina and in Ontario, Canada. Key also
produces and develops oil and natural gas reserves in the Permian Basin
region and Texas Panhandle.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
inter-company transactions and balances have been eliminated. The accounting
policies presented below have been followed in preparing the accompanying
consolidated financial statements.
ESTIMATES AND UNCERTAINTIES
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amount of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
INVENTORIES
Inventories, which consist primarily of oilfield service parts and
supplies held for consumption and parts and supplies held for sale at the
Company's various retail supply stores, are valued at the lower of average
cost or market.
PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization of oilfield
service and related equipment using the straight-line method, excluding its
drilling rigs, over the following estimated useful lives of the assets:
F-7
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
DESCRIPTION YEARS
----------- -----
Well service rigs.................................... 25
Motor vehicles....................................... 5
Furniture and equipment.............................. 3-7
Buildings and improvements........................... 10-40
Gas processing facilities............................ 10
Disposal wells....................................... 15-30
Trucks, trailers and related equipment............... 7-15
The components of a well service rig that generally require
replacement during the rig's life are depreciated over their estimated useful
lives, which range from three to 15 years. The basic rigs, excluding
components, have estimated useful lives from date of original manufacture
ranging from 25 to 35 years. Salvage values are assigned to the rigs based on
an estimate of 10%.
Effective July 1, 1998, the Company made certain changes in the
estimated useful lives of its well service rigs, increasing the lives from 17
years to 25 years. This change decreased the net loss for the twelve months
ended June 30, 1999 by approximately $3,100,000 ($0.11 per share-basic). This
change was made to better reflect the expected utilization of these assets
over time, to better provide matching of revenues and expenses and to better
reflect the industry standard in regards to estimated useful lives of
workover rigs.
The Company uses the units-of-production method to depreciate its
drilling rigs. This method takes into consideration the number of days the
rigs are actually in service each month and depreciation is recorded for at
least 15 days each month for each rig that is available for service. The
Company believes that this method appropriately reflects its financial
results by matching revenues with expenses and appropriately reflects how the
assets are to be used over time.
The Company uses the successful efforts method of accounting for its
oil and gas properties. Under this method, all costs associated with
productive wells and nonproductive development wells are capitalized, while
nonproductive exploration costs and geological and geophysical costs (if
any), are expensed. Capitalized costs relating to proved properties are
depleted using the units-of-production method.
The Company follows the provisions of FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. This statement requires that long-lived assets including
certain identifiable intangibles, held and used by the Company, be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of applying
this statement, the Company groups its long-lived assets, including goodwill,
on a yard-by-yard basis and compares the estimated future cash flows of each
yard to the yard's net carrying value including allocable goodwill. The
Company would record an impairment charge, reducing the yard's net carrying
value to an estimated fair value, if the estimated future cash flows were
less than the yard's net carrying value. Since adoption of this statement no
impairment charges have been required.
HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, primarily
commodity option contracts to reduce the exposure of its oil and gas
producing operations to changes in the market price of natural gas and crude
oil and to fix the price for natural gas and crude oil independently of the
physical sale.
F-8
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
The financial instruments that the Company accounts for as hedging
contracts must meet the following criteria: the underlying asset or liability
must expose the Company to price risk that is not offset in another asset or
liability, the hedging contract must reduce that price risk, and the
instrument must be designated as a hedge at the inception of the contract and
throughout the contract period. In order to qualify as a hedge, there must be
clear correlation between changes in the fair value of the financial
instrument and the fair value of the underlying asset or liability such that
changes in the market value of the financial instrument will be offset by the
effect of price rate changes on the exposed items.
Prior to the adoption of SFAS 133, premiums paid for commodity
option contracts, which qualify as hedges, are amortized to oil and natural
gas sales over the terms of the contracts. Unamortized premiums are included
in other assets in the consolidated balance sheet. Amounts receivable under
the commodity option contracts are accrued as an increase in oil and natural
gas sales for the applicable periods.
Effective 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 138"). SFAS 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 and 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. See Note 8.
COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and presentation of
comprehensive income and its components. SFAS 130 requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. In
accordance with the provisions of SFAS 130, the Company has presented the
components of comprehensive income in its Consolidated Statements of
Comprehensive Income.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the adverse environmental effects
of the disposal or release of petroleum or chemical substances at various
sites. Environmental expenditures are expensed or capitalized depending on
their future economic benefit. Expenditures that relate to an existing
condition caused by past operations and that have no future economic benefits
are expensed. Liabilities for expenditures of a non-capital nature are
recorded when environmental assessment and/or remediation is probable, and
the costs can be reasonably estimated.
GOODWILL
Net goodwill, totaling $189.9 million and $198.6 million at June 30,
2001 and 2000, respectively, represents the cost in excess of fair value of
the net tangible and identifiable intangible assets acquired and liabilities
assumed in purchase transactions. Goodwill is being amortized on a
straight-line basis over periods ranging from ten to 25 years. Amortization
of goodwill for fiscal 2001, 2000 and 1999 was approximately $9,322,000,
$9,840,000 and $9,202,000, respectively. The carrying amount of unamortized
goodwill is reviewed for potential
F-9
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
impairment loss whenever events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable (see Property and
Equipment above, for further discussion).
DEFERRED COSTS
Deferred costs totaling $31,052,000 and $30,998,000 at June 30, 2001
and 2000, respectively, represent debt issuance costs and are recorded net of
accumulated amortization of $13,428,000 and $12,143,000 at June 30, 2001 and
2000, respectively. Deferred costs are amortized to interest expense using
the straight-line method over the life of each applicable debt instrument or
to extraordinary loss as related debt is retired early. This method
approximates the amortization which would be recorded using the effective
interest method. Amortization of deferred costs totaled approximately
$3,578,000, $5,176,000 and $4,664,000 for fiscal 2001, 2000 and 1999,
respectively. Unamortized debt issuance costs included in the determination
of the extraordinary gain (loss) on retirement of debt, net of tax, totaled
approximately $1,620,000 for fiscal 2001.
INCOME TAXES
The Company accounts for income taxes based upon Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the statutory enactment
date. A valuation allowance for deferred tax assets is recognized when it is
more likely than not that the benefit of deferred tax assets will not be
realized.
The Company and its eligible subsidiaries file a consolidated U.S.
federal income tax return. Certain subsidiaries that are consolidated for
financial reporting purposes are not eligible to be included in the
consolidated U. S. federal income tax return and separate provisions for
income taxes have been determined for these entities or groups of entities.
EARNINGS PER SHARE
The Company presents earnings per share information in accordance
with the provisions of 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
year. 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.
F-10
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
YEAR ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
------------ ------------ -------------
(THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EPS COMPUTATION:
NUMERATOR
Net Income (loss) before extraordinary gain (loss)........... $ 62,281 $ (20,570) $ (53,258)
Extraordinary gain (loss), net of tax........................ 429 1,611 --
------------ ------------ -------------
Net income (loss)............................................ $ 62,710 $ (18,959) $ (53,258)
============ ============ =============
DENOMINATOR
Weighted average common shares outstanding................... 98,195 83,815 27,501
------------ ------------ -------------
BASIC EPS:
Before extraordinary gain (loss)............................. $ 0.63 $ (0.25) $ (1.94)
Extraordinary gain (loss), net of tax........................ -- (0.02) --
------------ ------------ -------------
Net income (loss)............................................ $ 0.63 $ (0.23) $ (1.94)
============ ============ =============
DILUTED EPS COMPUTATION:
NUMERATOR
Net income (loss) before extraordinary gain (loss) and
effect of dilutive securities, tax effected................ $ 62,281 $ (20,570) $ (53,258)
Convertible securities....................................... 5 -- --
------------ ------------ -------------
Net income (loss) before extraordinary gain (loss)........ $ 62,286 $ (20,570) $ (53,258)
Extraordinary gain (loss), net of tax..................... 429 1,611 --
------------ ------------ -------------
Net income (loss)......................................... $ 62,715 $ (18,959) $ (53,258)
============ ============ =============
DENOMINATOR
Weighted average common shares outstanding................... 98,195 83,815 27,501
Warrants..................................................... 205 -- --
Stock options................................................ 3,853 -- --
7% Convertible Debentures.................................... 18 -- --
------------ ------------ -------------
102,271 83,815 27,501
F-11
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
YEAR ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
------------ ------------ -------------
(THOUSANDS, EXCEPT PER SHARE DATA)
DILUTED EPS:
Before extraordinary gain (loss)............................. $ 0.61 $ (0.25) $ (1.94)
Extraordinary gain (loss), net of tax........................ -- 0.02 --
------------ ------------ -------------
Net income (loss)............................................ $ 0.61 $ (0.23) $ (1.94)
============ ============ =============
The diluted earnings per share calculation for the year ended June
30, 2001 excludes the effect of the exercise of 360,000 stock options and the
conversion of the Company's 5% Convertible Subordinated Notes because the
effects of such instruments on earnings per share would be anti-dilutive.
The diluted earnings per share calculation for the years ended June
30, 2000 and 1999 excludes the effect of the conversion of all of the
Company's then outstanding convertible debt and the exercise of all of the
Company's then outstanding warrants and stock options because the effects of
such instruments on loss per share would be anti-dilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of temporary cash
investments and trade receivables. The Company restricts investment of
temporary cash investments to financial institutions with high credit
standing and, by policy, limits the amount of credit exposure to any one
financial institution. The Company's customer base consists primarily of
multi-national and independent oil and natural gas producers. This may affect
the Company's overall exposure to credit risk either positively or negatively
in as much as its customers are affected by economic conditions in the oil
and gas industry, which have historically been cyclical. However, account
receivables are well diversified among many customers and a significant
portion of the receivables are from major oil companies, which management
believes minimizes potential credit risk. Historically, credit losses have
been insignificant. Receivables are generally not collateralized, although
the Company may generally secure a receivable at any time by filing a
mechanic's or material-man's lien on the well serviced. The Company maintains
reserves for potential credit losses, and such losses have been within
management's expectations.
The Company did not have any one customer who represented 10% or
more of consolidated revenues for the fiscal year ended June 30, 2001, 2000
or 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants to employees using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Under the Company's
stock incentive plans, the price of the stock on the grant date is the same
as the amount an employee must pay to exercise the option to acquire the
stock; accordingly, the options have no intrinsic value at grant date, and in
accordance with the provisions of APB 25, no compensation cost is recognized.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," sets forth alternative accounting
and disclosure requirements for stock-based compensation arrangements.
Companies may continue to follow the provisions of APB 25 to measure and
recognize employee
F-12
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
stock-based compensation; however, SFAS 123 requires disclosure of pro forma
net income and earnings per share that would have been reported under the
fair value based recognition provisions of SFAS 123. The Company has
disclosed in Note 10 the pro forma information required under SFAS 123.
FOREIGN CURRENCY GAINS AND LOSSES
The local currency is the functional currency for all of the
Company's foreign operations (Argentina and Canada). The cumulative
translation gains and losses, resulting from translating each foreign
subsidiary's financial statements from the functional currency to U.S.
dollars, is included in other comprehensive income and accumulated in
stockholders' equity until a partial or complete sale or liquidation of the
Company's net investment in the foreign entity.
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted highly liquid investments
with less than a three-month maturity when purchased, as cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2000 and 1999
consolidated financial statements to conform to the fiscal 2001 presentation.
The reclassifications consist primarily of reclassifying oil and natural gas
productions revenues and expenses. Oil and natural gas production revenues
and related expenses have been reclassified to other revenues and other
expenses because the Company does not believe this business segment is
material to the Company's consolidated financial statements.
2. RESTRUCTURING CHARGE
In response to an industry downturn caused by historically low oil
and gas prices and the resulting slowdown in business, on December 7, 1998,
the Company announced a company-wide restructuring plan to reduce operating
costs beyond those achieved through the Company's consolidation efforts. The
plan involved a reduction in the size of management and on-site work force,
salary reductions averaging 21% for senior management, the combination of
previously separate operating divisions and the elimination of redundant
overhead and facilities. The restructuring plan resulted in pretax charges to
earnings of approximately $6.7 million in the second quarter ending December
31, 1998 and $1.5 million in the third quarter ending March 31, 1999.
However, due to an increase in oil and gas prices beginning during the
quarter ended March 31,1999, the Company amended its restructuring plan to
decrease the number of planned employee terminations.
Increased demand for the Company's services made such terminations
unnecessary and would have, in management's opinion, restricted the Company's
ability to provide services to its customers. Consequently, the Company did
not utilize approximately $3.7 million of the pretax charges. Essentially all
of the unutilized portion of the restructuring charge was reversed in the
fourth quarter ending June 30, 1999 resulting in a total pretax charge for
the fiscal year ended June 30, 1999 of approximately $4.5 million. The
charges included severance payments and other termination benefits for
approximately 97 employees, lease commitments related to closed facilities
and environmental studies performed on closed leased yard locations.
F-13
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
The Company completed the plan at June 30, 2000. There remained
approximately $180,000 for COBRA benefits to terminated employees and $53,000
for contractual payments to an employee at June 30, 1999. The major
components of the restructuring charge and costs incurred through June 30,
1999 were as follows:
COST INCURRED
RESTRUCTURING THROUGH BALANCE AS OF
a. Description CHARGE JUNE 30, 1999 JUNE 30, 1999
--------------- ---------------- ---------------
(IN THOUSANDS)
Severance/Employee costs............................. $ 4,457 $ (4,224) $ 233
Lease commitments.................................... 27 (27) --
Environmental clean-up............................... 20 (20) --
--------------- ---------------- ---------------
Total................................................ $ 4,504 $ (4,271) $ 233
=============== ================ ===============
3. BUSINESS AND PROPERTY ACQUISITIONS
ACQUISITIONS COMPLETED IN FISCAL 2001 AND 2000
There were no acquisitions completed by the Company during fiscal
2000. During fiscal 2001, the Company completed several small acquisitions
for a total consideration of $11,965,000, which was paid using a combination
of cash, notes and shares of the Company's common stock. Through these
acquisitions, the Company acquired 34 well service rigs, 8 trucking vehicles,
ancillary equipment and five salt water disposal facilities. 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.
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.
Expenditures for the Dawson acquisition, including acquisition
costs, less cash acquired were as follows (in thousands):
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
==============
F-14
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
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.
In connection with the Dawson acquisition, the Company recognized
liabilities for the estimated costs to involuntarily terminate employees of
Dawson and to exit certain activities of Dawson, primarily Dawson's lease
liability for its corporate offices. As of June 30, 1999, the Company had
completed its severance plan, terminating 44 former Dawson employees. At June
30, 1999, the Company had $592,000 accrued, representing the estimated lease
termination costs of Dawson's former corporate offices.
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 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.
PRO FORMA RESULTS OF OPERATIONS--(UNAUDITED)
The following unaudited pro forma results of operations have been
prepared as though the Dawson acquisition had been acquired 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.
YEAR ENDED
JUNE 30, 1999
-------------------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Revenue.......................................................... $ 524,924
Net income (loss)................................................ (58,211)
Basic earnings (loss) per share.................................. (2.12)
4. 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.
In order to retain qualified senior management, the Company enters
into employment agreements with its executive officers. These employment
agreements run for periods ranging from three to five years, but can be
automatically extended on a yearly basis unless terminated by the Company or
the executive officer. In addition to providing a base salary for each
executive officer, the employment agreements provide for severance payments
for each executive officer varying from 1 to 3 years of the executive
officer's base salary. At June 30, 2001 the annual base salaries for the
executive officers covered under such employment agreements totaled
$1,125,000. The Company also enters into employment agreements with other key
employees as it deems necessary in order to retain qualified personnel.
F-15
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
The components of long-term debt are as follows:
JUNE 30,
--------------------------------
2001 2000
------------- ---------------
(THOUSANDS)
Senior Credit Facility(i)
Revolving Loans................................................... $ 2,000 $ 93,000
Tranche A Term Loan............................................... -- 22,987
Tranche B Term Loan............................................... -- 175,961
8 3/8% Senior Subordinated Notes Due 2009(iii)......................... 134,466 143,650
5% Convertible Subordinated Notes Due 2004(iv)......................... 158,426 205,810
7% Convertible Subordinated Debentures Due 2003(v)..................... -- 1,000
Capital Leases......................................................... 22,964 21,911
Other notes payable.................................................... 805 1,175
------------- ---------------
493,907 666,600
Less current portion................................................... 7,946 14,655
------------- ---------------
Total long-term debt................................................... $ 485,961 $ 651,945
============= ===============
(I) SENIOR CREDIT FACILITY
At June 30, 2001, the Company's senior credit facility (the "Senior
Credit Facility") consisted of a $125 million revolving credit facility. In
addition, up to $20 million of letters of credit can be issued under the
Senior Credit Facility, but any outstanding letters of credit reduces
borrowing availability under the revolver. The commitment to make revolving
loans reduced to $100 million, on September 14, 2001 and will reduce to $75
million on September 14, 2002. The revolving commitment will terminate on
September 14, 2003, and all the revolving loans must be paid on or before
that date.
The revolving loans bear interest at rates based upon, at the
Company's option, either the prime rate plus a margin ranging from 0.75% to
2.00% or a Eurodollar rate plus a margin ranging from 2.25% to 3.50%, in each
case depending upon the ratio of the Company's total debt (less cash on hand
over $5 million) to the Company's trailing 12-month EBITDA, as adjusted. The
Company pays commitment fees on the unused portion of the revolving loan at a
varying rate (depending upon the pricing ratio) of between 0.25% and 0.50%.
The Senior Credit Facility contains various financial covenants,
including: (i) consolidated debt-to-capitalization ratio at generally
decreasing levels varying between 79% and 65%, (ii) consolidated interest
coverage ratio at generally increasing levels varying between 2.00-to-1.00
and 3.50-to-1.00, (iii) consolidated senior leverage ratio at generally
decreasing levels varying between 2.50-to-1.00 and 2.00-to-1.00, and (iv)
trailing 12-month EBITDA, as adjusted, at generally increasing levels varying
between $50 million and $150 million. In addition, the Company must maintain
a consolidated fixed charge coverage ratio at generally decreasing levels
varying between 1.25-to-1.00 and 1.00 to 1.00. The covenants for consolidated
senior leverage ratio and consolidated interest coverage ratio are not
imposed until the quarter ending March 31, 2001, and the covenant levels for
consolidated debt-to-capitalization and trailing 12-month EBITDA, as
adjusted, will remain fixed at 79% and $50 million, respectively, for the
same period. The Company is also required to maintain a consolidated
liquidity level of at least $30 million.
F-16
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
The Senior Credit Facility subjects the Company to other
restrictions, including restrictions upon the Company's ability to incur
additional debt, liens and guarantee obligations, to merge or consolidate
with other persons, to sell assets, to make dividends, purchases of our stock
or subordinated debt, to make capital expenditures in excess of levels
ranging from $37.5 million in fiscal 1999 to $65 million in fiscal 2004, or
to make investments, loans and advances or changes to debt instruments and
organizational documents. The Company will not be permitted to make
acquisitions unless (i) its consolidated debt to capitalization ratio is not
more than 60% or (ii) its consolidated debt to capitalization ratio is not
increased and the acquisition is funded solely with capital stock. The
Company must also maintain consolidated net worth not less than, $195 million
plus (i) 75% of consolidated net income for each fiscal quarter beginning
with the period ending December 31, 1998, (ii) 75% of the net cash proceeds
from issuance of capital stock after September 14, 1998 and (iii) 75% of the
increase in consolidated net worth resulting from the conversion of the 5%
Convertible Subordinated Notes or other convertible debt issued after
September 14, 1998. All obligations under the Senior Credit Facility are
guaranteed by most of the Company's subsidiaries and are secured by
substantially all the Company's assets, including the Company's accounts
receivable, inventory and equipment.
During fiscal 2001, a portion of the net proceeds from the Equity
Offering (see Note 10) was used to repay the entire outstanding balance of
the Tranche A term loan then outstanding under the Senior Credit Facility and
$2.3 million of the Tranche B term loan then outstanding under the Senior
Credit Facility. In addition, $65 million of the net proceeds from the Equity
Offering were used to reduce the principal amount outstanding under the
revolver. The remainder of the net proceeds of the Equity Offering was used
to retire other long-term debt. A portion of the proceeds from the Company's
8 3/8% Senior Note offering in fiscal 2001 was used to repay the entire
outstanding balance of the Tranche B term loan then outstanding under the
Senior Credit Facility and approximately $59.1 million under the revolver.
At June 30, 2001, there was approximately $2,000,000 outstanding
under the revolving loans. Additionally, the Company had outstanding letters
of credit of $11,995,000 and $15,132,000 as of June 30, 2001 and 2000,
respectively, related to its workers compensation insurance.
(II) 8 3/8% SENIOR NOTES
On March 6, 2001 the Company completed a private placement of
$175,000,000 of 8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The
net cash proceeds from the private placement were used to repay all of the
remaining balance of the original term loans under the Senior Credit Facility
and a portion of the revolving loan facility under the Senior Credit
Facility. The 8 3/8% Senior Notes are senior unsecured obligations, ranking
equally with the Company's senior unsecured indebtedness. The 8 3/8% Senior
Notes are effectively subordinated to Key's secured indebtedness which
includes borrowings under the Senior Credit Facility and the Dawson 9 3/8%
Senior Notes.
On and after March 1, 2005, the Company may redeem some or all of
the 8 3/8% Senior Notes at any time at varying redemption prices in excess of
par, plus accrued interest. In addition, before March 1, 2004, the Company
may redeem up to 35% of the aggregate principal amount of the 8 3/8% Senior
Notes with the proceeds of certain sales of equity at 108.375% of par plus
accrued interest.
At June 30, 2001, $175,000,000 principal amount of the 8 3/8% Senior
Notes remained outstanding. The 8 3/8% Senior Notes pay interest
semi-annually on March 1 and September 1 of each year.
F-17
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
(III) 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 2,173,433 shares of common stock at an exercise price of
$4.88125 per share (the "Unit Warrants"). The net cash proceeds from the
private placement were used to repay substantially all of the remaining
$148.6 million principal amount (plus accrued interest) owed under the
Company's bridge loan facility arranged in connection with the acquisition of
Dawson Production Services, Inc. ("Dawson").
On and after January 15, 2004, the Company may redeem some or all of
the 14% Senior Subordinated Notes at any time at varying redemption prices in
excess of par, plus accrued interest. In addition, before January 15, 2002,
the Company may redeem up to 35% of the aggregate principal amount of the 14%
Senior Subordinated Notes with the proceeds of certain sales of equity at
114% of par, plus accrued interest. On June 11, 2001, the Company exercised
its right of redemption for $10,313,000 principal amount of the 14% Senior
Subordinated Notes at a price of 114% of the principal amount plus accrued
interest, leaving $139,687,000 principal amount outstanding as of June 30,
2001.
The Unit Warrants have separated from the 14% Senior Subordinated
Notes and became exercisable on January 25, 2000. On the date of issuance,
the value of the Unit Warrants was estimated at $7,434,000 and is classified
as a discount to the 14% Senior Subordinated Notes on the Company's
consolidated balance sheet. The discount is being amortized to interest
expense over the term of the 14% Senior Subordinated Notes. The 14% Senior
Subordinated Notes mature and the Unit Warrants expire on January 15, 2009.
The 14% Senior Subordinated Notes are subordinate to the Company's senior
indebtedness, which includes borrowings under the Current Senior Credit
Facility, the Dawson 9 3/8% Senior Notes and the 8 3/8% Senior Notes.
In the event of a change in control of the Company, as defined in
the indenture under which the 14% Senior Subordinated Notes were issued, each
holder of 14% Senior Subordinated Notes will have the right, at the holder's
option, to require the Company to repurchase all or any part of the holder's
14% Senior Subordinated Notes, within 60 days of such event, at a price equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest thereon.
During fiscal 2001, the Company repurchased (and cancelled)
$10,313,000 principal amount of the 14% Senior Subordinated Notes and paid a
premium of approximately $1,444,000. At June 30, 2001, $139,687,000 principal
amount of the 14% Senior Subordinated Notes remained outstanding. The 14%
Senior Subordinated Notes pay interest semi-annually on January 15 and July
15 of each year, beginning July 15, 1999. Interest of approximately
$10,500,000 was paid on July 15, 2000 and January 15, 2001. As of June 30,
2001, 62,500 Unit Warrants had been exercised, producing approximately
$4,173,000 of proceeds to the Company and leaving 87,500 Unit Warrants
outstanding.
(IV) 5% CONVERTIBLE SUBORDINATED NOTES
In late September and early October 1997, the Company completed a
private placement of $216 million of 5% Convertible Subordinated Notes due
2004 (the "5% Convertible Subordinated Notes"). 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, the Dawson 9 3/8% Senior Notes and the 8 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.
F-18
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
The 5% Convertible Subordinated Notes are redeemable, at the
Company's option, on and after September 15, 2000, in whole or part, together
with accrued and unpaid interest. The initial redemption price is 102.86% for
the year beginning September 15, 2000 and declines ratably thereafter on an
annual basis.
During fiscal 2001, the Company repurchased (and cancelled)
$47,384,000 principal amount of the 5% Convertible Subordinated Notes,
leaving $158,426,000 principal amount of the 5% Convertible Subordinated
Notes outstanding at June 30, 2001. These repurchases resulted in an after
tax gain of approximately $3.2 million. Interest on the 5% Convertible
Subordinated Notes is payable on March 15 and September 15. Interest of
approximately $4,890,000 was paid on September 15, 2000 and $4,815,000 was
paid on March 15, 2001, respectively.
(V) DAWSON 9 3/8% SENIOR NOTES
As a result of the Dawson acquisition (see Note 3), the Company, its
subsidiaries and U.S. Trust Company of Texas, N.A., as trustee ("U.S.
Trust"), entered into a Supplemental Indenture dated September 21, 1998 (the
"Supplemental Indenture"), pursuant to which the Company assumed the
obligations of Dawson under the Indenture dated February 20, 1997 (the
"Dawson Indenture") between Dawson and U.S. Trust. The senior notes due 2007
(the "Dawson 9 3/8% Senior Notes") issued pursuant to the Dawson Indenture
were equally and ratably secured with the obligations under the Senior Credit
Facility. As a result of a mandatory tender offer made in connection with the
Dawson acquisition and subsequent repurchases, only $1,106,000 principal
amount of Dawson 9 3/8% Senior Notes remained outstanding at June 30, 2000.
During fiscal 2001, the Company repurchased $860,000 principal
amount of the Dawson 9 3/8% Senior Notes, leaving $246,000 principal amount
outstanding as of June 30, 2001. Interest on the Dawson 9 3/8% Senior Notes
is payable on February 1 and August 1 of each year. Interest of approximately
$52,000 and approximately $14,000 was paid on August 1, 2000 and February 1,
2001, respectively.
(VI) 7% CONVERTIBLE SUBORDINATE DEBENTURES
In July 1996, the Company completed a private placement of
$52,000,000 principal amount of 7% Convertible Subordinated Debentures due
2003 (the "7% Convertible Subordinated Debentures"). 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
in connection with the conversion. 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. Interest on the 7% Convertible
Subordinated Debentures was payable on January 1 and July 1 of each year.
Interest of approximately $35,000 was paid on July 1, 2000.
CAPITALIZED DEBT ISSUANCE COSTS, REPAYMENT SCHEDULE AND INTEREST EXPENSE
The Company capitalized a total of approximately $4,958,000 and
$16,370,000 in fees and costs in connection with its various financings
during fiscal 2001 and 1999 respectively. The Company did not incur any fees
or costs in connection with financing activities in fiscal 2000.
Presented below is a schedule of the repayment requirements of
long-term debt for each of the next five years and thereafter as of June 30,
2001:
F-19
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
FISCAL YEAR ENDED JUNE 30, PRINCIPAL
AMOUNT
--------------
(IN THOUSANDS)
2002...................................................... $ 7,946
2003...................................................... 7,912
2004...................................................... 9,911
2005...................................................... 158,426
2006...................................................... --
Thereafter..................................................... 309,712
--------------
$ 493,907
==============
The Company's interest expense for the years ended June 30, 2001,
2000, and 1999 consisted of the following:
2001 2000 1999
-------------- -------------- ------------
(IN THOUSANDS)
Cash payments for interest..................................... $ 51,524 $ 61,956 $ 52,397
Commitment and agency fees paid................................ 1,203 1,139 527
Accretion of discount on notes................................. 739 743 552
Amortization of debt issuance costs............................ 3,578 5,176 4,664
Net change in accrued interest................................. 146 2,916 9,261
Other.......................................................... (630) -- --
-------------- -------------- ------------
$ 56,560 $ 71,930 $ 67,401
============== ============== ============
6. DEBT ISSUANCE COSTS
During fiscal 1999, the Company recorded an expense item of
$6,307,000 which represented the write-off of debt issuance costs. The debt
issuance costs were associated with a bridge loan incurred in connection with
the Dawson acquisition, which was subsequently paid primarily with the
proceeds from the Company's private placement of 14% Senior Subordinated
Notes (see Note 5). During fiscal 2000, the Company expensed $338,000 of debt
issuance costs related to the conversion of 7% Convertible Subordinated
Debentures and other prepayments of debt.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at June 30, 2001 and 2000. FASB
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
F-20
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
2001 2000
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------- ------------- ------------- -------------
Financial Assets:
Cash and cash equivalents................. $ 2,098 $ 2,098 $ 109,873 $ 109,873
Accounts receivable, net.................. 177,016 177,016 123,203 123,203
Notes receivable--related parties......... 6,050 6,600 5,150 5,150
Commodity option contracts................ 1,035 1,035 -- --
Financial Liabilities:
Accounts payable.......................... 42,544 42,544 34,091 34,091
Commodity option contracts................ 344 344 -- 778
Long-term debt
Senior Credit Facility.................. 2,000 2,000 291,948 291,948
8 3/8% Senior Notes..................... 175,000 176,094 -- --
5% Convertible Subordinated Notes....... 158,426 141,989 205,810 160,532
7% Convertible Subordinated Debentures.. -- -- 1,000 1,130
14% Senior Subordinated Notes........... 134,466 153,498 143,650 162,325
Dawson 9 3/8% Senior Notes.............. 246 246 1,106 1,029
Capital lease liabilities............... 22,964 22,964 21,911 21,911
Other debt.............................. 805 805 1,175 1,175
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash, trade receivables and trade payables: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Commodity option contracts: For fiscal 2001, under SFAS 133, the
carrying amount of the commodity option contracts approximate fair value. For
fiscal 2000, the carrying value is comprised of the unamortized premiums paid
for the option contracts. The fair value of the commodity option contracts is
estimated using the discounted forward prices of each options index price,
for the term of each option contract.
Notes receivable-related parties: The amounts reported relate to
notes receivable from officers of the Company.
Long-term debt: The fair value of the Company's long-term debt is
based upon the quoted market prices for the various notes and debentures at
June 30, 2001 and 2000, and the carrying amounts outstanding under the
Company's senior credit facility.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage well
defined commodity price risks. The Company is exposed to credit losses in the
event of nonperformance by the counter-parties to its commodity hedges. The
Company only deals with reputable financial institutions as counter-parties
and anticipates that such counter-parties will be able to fully satisfy their
obligations under the contracts. The Company does not obtain collateral or
other security to support financial instruments subject to credit risk but
monitors the credit standing of the counter-parties.
The Company periodically hedges a portion of its oil and natural gas
production through collar and option 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 collar and option arrangements which
allow for acceptable cap and floor prices.
F-21
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
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 period whereby the Company will pay if
the specified price is above the cap index and the counter-party will pay if
the price should fall below the floor index. The hedge defines a range of
cash flows bounded by the cap and floor prices. On May 25, 2001 the Company
entered into an option arrangement for a 12-month period beginning March
2002. whereby the counter-party will pay if the price should fall below the
floor index. The Company desires a measure of stability to ensure that cash
flows do not fall below a certain level.
Prior to the adoption of SFAS 133 as discussed in Note 1, these
collars and options 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
$520,000 was recognized in earnings during fiscal 2001. It is estimated that
the remaining $258,000 of this transition adjustment will be recognized in
earnings over the next fiscal year. While this arrangement was intended to be
an economic hedge, as of July 1, 2000, the Company had not documented the
March 30, 2000 oil and natural gas collars as cash flow hedges and therefore
reported a charge to operations of $565,000 for the increase in fair value of
the liability as of September 30, 2000 in other income. As of October 1,
2000, the Company documented these collars as cash flow hedges. As of May 25,
2001, the Company had not documented the May 25, 2001 oil and natural gas
options as cash flow hedges and therefore has included income of $768,000 for
the increase in fair value of the asset as of June 30, 2001 in other income.
As of July 1, 2001, the Company documented these options as cash flow hedges.
During fiscal 2001, the Company recorded a net increase of $999,000 in
derivative assets, net of derivative liabilities, of which $132,000
represented ineffectiveness and was credited to earnings.
EMBEDDED DERIVATIVES. The Company is party to a volumetric
production payment that meets the definition of an embedded derivative under
SFAS 133. Effective July 1, 2000, the Company determined and documented that
the volumetric production payment is excluded from the scope of SFAS 133
under the normal purchases/sales exclusion as set forth in SFAS 138.
For fiscal 2000 and 1999, gains and amortization of premiums paid on
option contracts are recognized as an adjustment to sales revenue when the
related transactions being hedged are finalized.
The net effect of the Company's commodity hedging activities
decreased oil and natural gas revenues for the year ended June 30, 2000 by
$822,270 and increased oil and natural gas revenues for the year ended June
30, 1999 by $158,500.
The following table sets forth the future volumes hedged by year and
the weighted-average strike price of the option contracts at June 30, 2001
and 2000:
STRIKE PRICE
MONTHLY INCOME PER BBL/MMBTU
------------------------ ------------------------------------
NATURAL
OIL GAS
(BBLS) (MMBTU) TERM FLOOR CAP VALUE
--------- ----------- -------------------------- --------- -------- -----------
At June 30, 2001
Oil Collars............ 5,000 -- Mar 2001 - Feb. 2002 $19.70 - $23.70 $(115,000)
Oil Put................ 5,000 -- Mar 2002 - Feb. 2003 22.00 - -- 141,000
Natural Gas Collars.... -- 40,000 Mar 2001 - Feb. 2002 2.40 - 2.91 $ 3.19
Natural Gas Put........ -- 75,000 Mar 2002 - Feb. 2003 3.00 - -- 894,000
At June 30, 2000
Oil Collars............ 4,000 -- May 2000 - Feb. 2001 $22.20 - $26.50 $(118,000)
5,000 -- Mar 2001 - Feb. 2002 $19.70 - $23.70 (140,000)
Gas Collars............ 30,000 May 2000 - Feb. 2001 $ 2.60 - $ 3.19 (272,000)
40,000 Mar 2001 - Feb. 2002 $ 2.40 - $ 2.91 (248,000)
F-22
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
(The strike prices for the oil options are based on the NYMEX spot
price for West Texas Intermediate; the strike prices for the natural gas
collars are based on the Inside FERC-West Texas Waha spot price; the strike
price for the natural gas put is based on the Inside FERC-El Paso Permian
spot price.)
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JUNE 30,
--------------------------------
2001 2000
------------- ---------------
(IN THOUSANDS)
Accrued payroll, taxes and employee benefits........................... $ 31,242 $ 15,261
State sales, use and other taxes....................................... 5,825 2,465
Oil and gas revenue distribution....................................... 1,606 1,714
Other.................................................................. 10,250 6,958
------------- ---------------
Total.................................................................. $ 48,923 $ 26,398
============= ===============
10. STOCKHOLDERS' EQUITY
EQUITY OFFERINGS
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 retire other long-term debt.
On May 7, 1999, the Company closed the public offering of 55,300,000
shares of common stock (300,000 shares of which were sold pursuant to the
underwriters' over-allotment option discussed below) at $3.00 per share, or
$166 million (the "Prior Public Offering"). Concurrently therewith, the
Company closed the offering of 3,508,772 shares of common stock at $2.85 per
share, or $10 million (the "Prior Concurrent Offering" and together with the
Prior Public Offering, the "Prior Equity Offerings"). In addition, on June 7,
1999, the underwriters of the Prior Public Offering exercised an
over-allotment option to purchase an additional 5,436,000 million shares to
cover overallotments. Net proceeds from the Prior Equity Offerings of
approximately $180.4 million were used to repay a portion of the Company's
term loan borrowings under its senior credit facility.
STOCK INCENTIVE PLANS
On January 13, 1998 the Company's shareholders approved the Key
Energy Group, Inc. 1997 Incentive Plan, as amended (the "1997 Incentive
Plan"). The 1997 Incentive Plan is an amendment and restatement of the plans
formerly known as the "Key Energy Group, Inc. 1995 Stock Option Plan" (the
"1995 Option Plan") and the "Key Energy Group, Inc. 1995 Outside Directors
Stock Option Plan" (the "1995 Directors Plan") (collectively, the "Prior
Plans").
All options previously granted under the Prior Plans and outstanding
as of November 17, 1997 (the date on which the Company's board of directors
adopted the plan) were assumed and continued, without modification, under the
1997 Incentive Plan.
F-23
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
Under the 1997 Incentive Plan, the Company may grant the following
awards to key employees, directors who are not employees ("Outside
Directors") and consultants of the Company, its controlled subsidiaries, and
its parent corporation, if any: (i) incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) "nonstatutory" stock options ("NSOs"), (iii) stock appreciation
rights ("SARs"), (iv) shares of the restricted stock, (v) performance shares
and performance units, (vi) other stock-based awards and (vii) supplemental
tax bonuses (collectively, "Incentive Awards"). ISOs and NSOs are sometimes
referred to collectively herein as "Options".
The Company may grant Incentive Awards covering an aggregate of the
greater of (i) 3,000,000 shares of the Company's common stock and (ii) 10% of
the shares of the Company's common stock issued and outstanding on the last
day of each calendar quarter, provided, however, that a decrease in the
number of issued and outstanding shares of the Company's common stock from
the previous calendar quarter shall not result in a decrease in the number of
shares available for issuance under the 1997 Incentive Plan. As a result of
the Company's equity offering discussed above, as of June 30, 2001, the
number of shares of the Company's common stock that may be covered by
Incentive Awards has increased to approximately 10.1 million.
Any shares of the Company's common stock that are issued and are
forfeited or are subject to Incentive Awards under the 1997 Incentive Plan
that expire or terminate for any reason will remain available for issuance
with respect to the granting of Incentive Awards during the term of the 1997
Incentive Plan, except as may otherwise be provided by applicable law. Shares
of the Company's common stock issued under the 1997 Incentive Plan may be
either newly issued or treasury shares, including shares of the Company's
common stock that the Company receives in connection with the exercise of an
Incentive Award. The number and kind of securities that may be issued under
the 1997 Incentive Plan and pursuant to then outstanding Incentive Awards are
subject to adjustments to prevent enlargement or dilution of rights resulting
from stock dividends, stock splits, recapitalizations, reorganization or
similar transactions.
The maximum number of shares of the Company's common stock subject
to Incentive Awards that may be granted or that may vest, as applicable, to
any one Covered Employee (defined below) during any calendar year shall be
500,000 shares, subject to adjustment under the provisions of the 1997
Incentive Plan.
The maximum aggregate cash payout subject to Incentive Awards
(including SARs, performance units and performance shares payable in cash, or
other stock-based awards payable in cash) that may be granted to any one
Covered Employee during any calendar year is $2,500,000. For purposes of the
1997 Incentive Plan, "Covered Employees" means a named executive officer who
is one of the group covered employees as defined in Section 162(m) of the
Code and the regulation promulgated thereunder (i.e., generally the chief
executive officer and the other four most highly compensated executive
officers for a given year.)
The 1997 Incentive Plan is administrated by the Compensation
Committee appointed by the Board of Directors (the "Committee") consisting of
not less than two directors each of whom is (i) an "outside director" under
Section 162(m) of the Code and (ii) a "non-employee director" under Rule
16b-3 of the Securities Exchange Act of 1934. In addition, subject to
applicable shareholder approval requirements, the Company may issue NSOs
outside the 1997 Incentive Plan.
The exercise price of options granted under the 1997 Incentive Plan
and outside the 1997 Incentive Plan is at or above the fair market value per
share on the date the options are granted. The exercise of NSOs results in a
U.S. tax deduction to the Company equal to the income tax effect of the
difference between the exercise price and the market price at the exercise
date. The following table summarizes the stock option activity related to the
Company's plans (shares in thousands):
F-24
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
FISCAL YEAR ENDING JUNE 30,
--------------------------------------------------------------------------
2001 2000 1999
------------------------ ---------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- -------- ---------- -------- --------
Outstanding-beginning of fiscal year..... $ 9,470 $ 6.37 6,920 $ 5.55 2,292 $ 10.33
Granted............................... 2,533 8.08 3,688 8.61 5,443 4.32
Exercised............................. (3,107) 4.70 (241) 4.56 (15) 6.36
Forfeited............................. (193) 4.92 (897) 9.80 (800) 10.87
---------- --------- -------- ---------- ------- ---------
Outstanding--end of fiscal year........... 8,703 7.49 9,470 6.37 6.920 5.55
========== ======== =======
Exercisable--end of fiscal year.......... 5,820 4,370 1,020
========== ======== =======
STOCK INCENTIVE PLANS
The foregoing stock option activity summary reflects that effective
as of September 4, 1998, the Committee authorized the cancellation and
reissue of stock options for employees that were not executive officers for
the purpose of changing the exercise price and vesting schedule of such
options. A total of 473,556 stock options were cancelled, with a weighted
average price of approximately $13.09 per share, and reissued with an
exercise price of $7.125 per share. The vesting of the new options is ratable
over a three-year period from the date of grant.
The following table summarizes information about the stock options
outstanding at June 30, 2001 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
NUMBER OF NUMBER OF
SHARES WEIGHTED- SHARES
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
JUNE 30, CONTRACTUAL EXERCISE JUNE 30, EXERCISE
RANGE OF EXERCISE PRICES 2001 LIFE PRICE 2001 PRICE
------------------------ ------------ ------------ ---------- ------------- -----------
$ 3.00 - $ 6.8125.................. 1,921 6.49 $ 3.65 1,802 $ 3.51
$ 6.00 - $ 7.4375.................. 1,252 7.82 7.25 439 7.13
$ 8.125 - $ 8.3125.................. 2,135 8.67 8.25 1,635 8.26
$ 8.50 - $ 13.50.................... 3,395 7.69 9.27 1,943 9.68
The Company applies the intrinsic value method of APB 25 in
accounting for its employee stock incentive plans. Accordingly, no
compensation expense has been recognized for any stock options issued under
the employee plans. Had compensation expense for stock options granted to
employees been recognized based on the fair value at the grant dates, using
the methodology prescribed by SFAS 123, the Company's net income (loss) and
earnings per share would have been reduced to pro forma amounts indicated
below:
F-25
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
2001 2000 1999
----------------- ---------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported.................................. $ 62,710 $ (18,959) $ (53,258)
Pro forma.................................... 52,338 (25,684) (57,057)
Basic earnings per share of common stock:
As reported.................................. $ 0.63 $ (0.23) $ (1.94)
Pro forma.................................... 0.53 (0.31) (2.07)
Diluted earnings per share of common stock:
As reported.................................. $ 0.61 $ (0.23) $ (1.94)
Pro forma.................................... 0.51 (0.31) (2.07)
SFAS 123 does not apply to options granted prior to January 1, 1995;
therefore, the pro forma effect disclosed above may not be representative of
pro forma amounts in future years.
The total fair value of stock options granted during fiscal 2001,
2000 and 1999 was approximately $11,217,000, $19,541,000 and $15,695,000,
respectively. The fair value of each stock option grant was estimated on the
date of grant using the Black-Sholes option-pricing model, based on the
following weighted-average assumptions.
FISCAL YEAR OF GRANT
--------------------------------------------------------
2001 2000 1999
--------------- --------------- -----------------
Risk-free interest rate............................. 4.30% 6.40% 5.09%
Expected life of options............................ 5 years 5 years 5 years
Expected volatility of the Company's stock 59% 67% 98%
price...........................................
Expected dividends.................................. none none none
11. INCOME TAXES
Components of income tax expense (benefit) are as follows:
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------
2001 2000 1999
---------------- ----------------- ------------------
(IN THOUSANDS)
Federal and State:
Current............................... $ 2,304 $ (5,588) $ --
Deferred
U.S............................... 34,698 (1,818) (25,560)
Foreign........................... -- -- (115)
---------------- ----------------- ------------------
$37,002 $ (7,406) $(25,675)
================ ================= ==================
F-26
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
No income tax payments were made for fiscal 2001, 2000 or 1999.
Additionally a deferred tax benefit of $7,004,000 has been allocated to
stockholders' equity in fiscal 2001 for compensation expense for income tax
purposes in excess of amounts recognized for financial reporting purposes.
Income tax expense (benefit) differs from amounts computed by applying
the statutory federal rate as follows:
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------
2001 2000 1999
---------------- ----------------- ------------------
Income tax computed at statutory rate..... 35.0% (35.0)% (35.0)%
Amortization of goodwill disallowance..... 2.2 7.0 2.0
State taxes............................... 1.4 -- --
Change in valuation allowance and other... (1.4) 1.5 0.5
---------------- ----------------- ------------------
37.2% (26.5)% (32.5)%
================ ================= ==================
Deferred tax assets (liabilities) are comprised of the following:
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------
2001 2000
-------------------- ---------------------
(IN THOUSANDS)
Net operating loss and tax credit carryforwards............ $ 69,376 $ 88,491
Property and equipment..................................... (182,442) (175,511)
Self insurance reserves.................................... 405 1,616
Allowance for bad debts.................................... 1,542 1,129
Acquisition expenses, expensed for tax..................... (626) (626)
Other...................................................... 148 862
-------------------- ---------------------
Net deferred tax liability................................. (111,597) (84,039)
Valuation allowance of deferred tax assets................. (15,803) (15,668)
-------------------- ---------------------
Net deferred tax liability, net of valuation allowance..... $ (127,400) $ (99,707)
==================== =====================
A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be realized. As
described below, due to annual limitations on certain net operating loss
carryforwards, it does not appear more likely than not that the Company will
be able to utilize all available carryforwards prior to their ultimate
expiration.
The Company estimates that as of June 30, 2001, the Company will
have available approximately $185,474,305 of net operating loss carryforwards
(which will continue to expire in fiscal 2002). Approximately $53,570,522 of
the net operating loss carryforwards are subject to an annual limitation of
approximately $1,012,000, under Sections 382 and 383 of the Internal Revenue
Code.
12. LEASING ARRANGEMENTS
The Company leases certain property and equipment under
non-cancelable operating leases that generally expire at various dates
through fiscal 2006. The term of the operating leases generally run from 24
to 60 months with varying payment dates throughout each month.
F-27
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
As of June 30, 2001, the future minimum lease payments under
non-cancelable operating leases are as follows (in thousands):
LEASE
FISCAL YEAR ENDING JUNE 30, PAYMENTS
------------------------------------------ ------------------
2002.......................................................... $ 4,689
2003.......................................................... 4,587
2004.......................................................... 4,493
2005.......................................................... 4,426
2006.......................................................... 2,626
------------------
$ 20,821
==================
Operating lease expense was approximately $6,072,000, $6,460,000 and
$7,313,000 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.
13. EMPLOYEE BENEFIT PLANS
In order to retain quality personnel, the Company maintains 401(k)
plans as part of its employee benefits package. From July 1, 1998 through
December 31, 1998, the Company matched 100% of employee contributions into
its 401(k) plan up to a maximum of $1,000 per participant per year. From
January 1, 1999 through March 31, 2000, the Company elected not to match
employee contributions. Commencing April 1, 2000, the Company matches, 100%
of employee contributions into its 401(k) plan up to a maximum of $250 per
participant per year. The maximum limit was increased to $500 effective
October 1, 2000, $750 effective January 1, 2001 and $1,000 effective July 1,
2001. The Company's matching contributions for fiscal 2001, 2000 and 1999
were approximately $1,857,000, $77,000 and $908,000, respectively.
14. TRANSACTIONS WITH RELATED PARTIES
In connection with the negotiation of the terms of a five-year
employment agreement with Mr. Francis D. John, Chairman of the Board,
President and Chief Executive Officer of the Company, and as an inducement to
Mr. John to enter into such employment agreement, the Company entered into a
separate agreement with Mr. John, dated as of August 2, 1999, which as
amended through June 30, 2001, provides that $6.5 million in loans previously
made by the Company to Mr. John, together with the accrued interest payable
thereon, will be forgiven, ratably during the ten year period commencing on
July 1, 2001 and ending on June 30, 2010. The agreement provides that the
foregoing forgiveness of indebtedness is predicated and conditioned upon Mr.
John remaining employed by the Company during such period. In addition, in
the event that Mr. John is terminated by the Company for Cause (as defined in
the agreement), or in the event that Mr. John voluntarily terminates his
employment with the Company, the agreement further provides that the entire
remaining principal balance of these loans, together with accrued interest
payable thereon, will become immediately due and payable by Mr. John.
However, in the event that Mr. John's employment is terminated for "Good
Reason", or as a result of Mr. John's death or "Disability", or as a result
of a "Change in Control" (all as defined in that agreement), the agreement
stipulates that the remaining principal balance outstanding on the loans,
together with accrued interest thereon will be forgiven.
In connection with the negotiation of an employment agreement with
Thomas K. Grundman, the Company's Executive Vice President, Chief Financial
Officer and Chief Accounting Officer, the Company made a $240,000 short-term
loan and a $150,000 relocation loan to assist Mr. Grundman's relocation to
the Company's executive offices. Interest on these loans accrues at a rate of
6.125% per annum. The short-term loan has been repaid. The relocation loan
together with accrued interest will be forgiven in three installments of
$50,000 each on July 1, 2000, 2001 and 2002; provided, however, that if Mr.
Grundman's employment is terminated during such period in a way that (i)
triggers severance obligations, all amounts owed shall be immediately
forgiven or (ii) does not trigger severance obligations, all amounts owed
shall be immediately due and payable.
F-28
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
15. BUSINESS SEGMENT INFORMATION
The Company's reportable business segments are well servicing and
contract drilling. Oil and natural gas production operations previously were
presented separately as a reportable business segment and are now included in
"corporate/other."
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.
The Company's management evaluates the performance of its operating
segments based on net income and operating profits (revenues less direct
operating expenses). Corporate expenses include general corporate expenses
associated with managing all reportable operating segments. Corporate assets
consist principally of cash and cash equivalents, deferred debt financing
costs and deferred income tax assets.
WELL CONTRACT CORPORATE
SERVICING DRILLING /OTHER TOTAL
------------ -------------- ------------ -------------
TWELVE MONTHS ENDED JUNE 30, 2001
Operating revenues.................................... $758,273 $107,639 $ 7,350 $ 873,262
Operating profit ..................................... 265,165 30,273 2,886 298,324
Depreciation, depletion and amortization.............. 63,578 7,947 3,622 75,147
Interest expense...................................... 1,831 -- 54,729 56,560
Net income (loss) before extraordinary gain (loss)*... 109,159 9,466 (56,344) 62,281
Identifiable assets................................... 664,611 95,473 278,325 1,038,409
Capital expenditures (excluding acquisitions)......... 50,799 15,884 15,437 82,120
TWELVE MONTHS ENDED JUNE 30, 2000
Operating revenues.................................... $559,492 68,428 $ 9,812 $ 637,732
Operating profit...................................... 159,552 10,129 5,665 175,346
Depreciation, depletion and amortization.............. 62,680 6,105 2,187 70,972
Interest expense...................................... 2,300 -- 69,630 71,930
Net income (loss) before extraordinary gain (loss)*... 48,062 (1,664) (56,968) (20,570)
Identifiable assets................................... 635,304 89,574 322,754 1,047,632
Capital expenditures (excluding acquisitions)......... 30,098 8,282 3,422 41,802
TWELVE MONTHS ENDED JUNE 30, 1999
Operating revenues.................................... $433,657 $ 50,613 $ 7,547 $ 491,817
Operating profit...................................... 108,692 7,057 4,640 120,389
Depreciation, depletion and amortization.............. 52,638 6,586 2,850 62,074
Interest expense...................................... 1,659 18 65,724 67,401
Net income (loss) before extraordinary gain (loss)*... 15,447 (4,093) (64,612) (53,258)
Identifiable assets................................... 651,781 81,074 209,860 942,715
Capital expenditures (excluding acquisitions)......... 26,776 1,063 3,468 31,307
------------------------------------------------------------------------
* Net income (loss) before extraordinary gain (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 and operating profit for the Company's foreign
operations, which includes Argentina and Canada, were $54.5 million and $13.4
million, respectively, for the year ended June 30, 2001. Operating revenues
and operating profit for the Company's foreign operations, which includes
Argentina and Canada, were $37.7 million and $7.3 million, respectively, for
the year
F-29
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
ended June 30, 2000. Operating revenues and operating profit for the
Company's foreign operations, which includes Argentina and Canada, were $26.9
million and $5.4 million, respectively, for the year ended June 30, 1999.
The Company had $84.1 million and $66.9 million of identifiable
assets as of June 30, 2001 and 2000, respectively, related to its foreign
operations.
16. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------
2001 2000 1999
---------------- --------------- --------------
Fair value of common stock issued in purchase $8,120 $ -- $ --
transactions....................................
Fair value of common stock issued to lender in
lieu of fees.................................... -- -- 1
Fair value of common stock issued upon
conversion of long-term debt.................... 957 3,606 --
Capital lease obligations............................ 9,595 10,758 17,120
17. UNAUDITED SUPPLEMENTARY INFORMATION--QUARTERLY RESULTS OF OPERATIONS
Summarized quarterly financial data for fiscal 2001, 2000 and 1999 are
as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- --------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001
Revenues $191,679 $203,911 $227,370 $250,302
Income (loss) from operations........... 12,229 18,063 27,912 41,079
Net income (loss) before extraordinary gain
(loss)............................... 7,510 11,094 17,587 26,090
Extraordinary gain (loss), net of tax... 1,197 68 (167) (669)
------------- --------------- ------------- --------------
Net income (loss)....................... 8,707 11,162 17,420 25,421
============= =============== ============= ==============
Earnings (loss) per share:
Basic--before extraordinary gain
(loss)............................. 0.08 0.11 0.18 0.26
Extraordinary gain (loss), net of
tax................................ 0.01 -- -- (0.01)
------------- --------------- ------------- --------------
Basic--after extraordinary gain
(loss)............................. 0.09 0.11 0.18 0.25
============= =============== ============= ==============
Diluted--before extraordinary gain
(loss)............................. 0.08 0.11 0.17 0.25
Extraordinary gain (loss),........... 0.01 -- -- (0.01)
------------- --------------- ------------- --------------
Diluted--after extraordinary gain
(loss)............................. 0.09 0.11 0.17 0.24
============= =============== ============= ==============
Weighted average shares outstanding:
Basic................................ 96,880 97,534 98,211 100,179
Diluted.............................. 100,472 100,534 103,524 104,401
F-30
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
2000
Revenues................................ $149,892 $159,389 $158,551 $169,900
Income (loss) from operations........... (13,191) (7,953) (5,730) (1,102)
Net income (loss) before extraordinary
gain (loss).......................... (9,451) (5,693) (4,150) (1,276)
Extraordinary gain (loss), net of tax... -- -- -- 1,611
------------- --------------- ------------- --------------
Net income (loss)....................... (9,451) (5,693) (4,150) 335
============= =============== ============= ==============
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- --------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Earnings (loss) per share:
Basic--before extraordinary gain
(loss).............................. (0.11) (0.07) (0.05) (0.01)
Extraordinary gain (loss), net of
tax................................. -- -- -- 0.02
------------- --------------- ------------- --------------
Basic--after extraordinary gain
(loss).............................. (0.11) (0.07) (0.05) 0.01
============= =============== ============= ==============
Diluted--before extraordinary gain
(loss).............................. (0.11) (0.07) (0.05) (0.01)
Extraordinary gain (loss), net of
tax................................. -- -- -- 0.02
------------- --------------- ------------- --------------
Diluted--after extraordinary gain
(loss).............................. (0.11) (0.07) (0.05) 0.01
============= =============== ============= ==============
Weighted average shares outstanding:
Basic................................ 82,738 82,738 84,633 85,567
Diluted.............................. 82,738 82,738 84,633 85,567
18. VOLUMETRIC PRODUCTION PAYMENT
In March 2000, Key sold a portion 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 Mmbtus 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 Mmbtus of natural gas.
19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's senior notes are guaranteed by all of the Company's
subsidiaries (except for the foreign subsidiaries), all of which are
wholly-owned. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to transfer funds to the parent company.
The accompanying condensed consolidating financial information has
been prepared and presented pursuant to SEC Regulation S-X Rule 3-10
"Financial Statements of Guarantors and Issuers of Guaranteed Securities
Registered or Being Registered." The information is not intended to present
the financial position, results of operations and cash flows of the
individual companies or groups of companies in accordance with generally
accepted accounting principles.
F-31
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2001
---------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ------------------
(IN THOUSANDS)
Assets:
Current assets......... $ 10,680 $ 165,653 $ 29,817 -- 206,150
Net property and
equipment............ 21,418 717,989 54,309 -- 793,716
Goodwill, net.......... 3,374 184,379 2,122 -- 189,875
Deferred costs, net.... 17,624 -- -- -- 17,624
Intercompany
receivables.......... 664,592 -- -- (664,592) --
Other assets........... 15,303 5,616 -- -- 20,919
------------ ---------------- -------------------- ----------------- ------------------
Total assets............... $ 732,991 1,073,637 $ 86,248 $ (664,592) $ 1,228,284
============ ================ ==================== ================= ==================
Liabilities and equity:
Current liabilities.... $ 35,671 $ 64,679 $ 15,203 -- $ 115,553
Long-term debt......... 470,668 15,331 (38) -- 485,961
Intercompany payables.. -- 608,764 55,828 (664,592) --
Deferred tax liability. 127,400 -- -- -- 127,400
Other long-term
liabilities.......... 8,240 14,252 -- -- 22,492
Stockholders' equity... 91,012 370,611 15,255 -- 476,878
------------ ---------------- -------------------- ----------------- ------------------
Total liabilities and
stockholders' equity... $ 732,991 $1,073,637 $ 86,248 $ (664,592) $ 1,228,284
============ ================ ==================== ================= ==================
JUNE 30,2000
---------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ------------------
(IN THOUSANDS)
Assets:
Current assets......... $ 120,216 $ 115,178 $ 18,195 $ -- $ 253,589
Net property and
equipment............ 7,308 704,531 48,722 -- 760,561
Goodwill, net.......... 3,606 192,641 2,386 -- 198,633
Deferred costs, net.... 18,855 -- -- -- 18,855
Intercompany
receivables.......... 788,166 -- -- (664,592) --
Other assets........... 9,062 5,565 -- -- 14,627
------------ ---------------- -------------------- ----------------- ------------------
Total assets............... $ 947,213 $1,017,915 $ 69,303 $ (664,592) $1,246,265
============ ================ ==================== ================= ==================
Liabilities and equity:
Current liabilities.... $ 33,637 $ 47,736 $ 11,475 $ -- $ 92,848
Long-term debt......... 637,438 14,486 21 -- 651,945
Intercompany payables.. -- 740,268 47,898 (788,166) --
Deferred tax liability. 99,707 -- -- -- 99,707
Other long-term
liabilities.......... 1,751 17,127 -- -- 18,878
Stockholders' equity... 174,680 198,298 9,909 -- 382,887
------------ ---------------- -------------------- ----------------- --------------
Total liabilities and
stockholders' equity... $ 947,213 $1,017,915 $ 69,303 $ (788,166) $1,246,265
============ ================ ==================== ================= ==============
F-32
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
JUNE 30, 2001
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Revenues........................ $ 2,018 $816,724 $ 54,520 $ -- $873,262
Costs and expenses..............
Direct expenses................. -- 533,807 41,131 -- 574,938
Depreciation, depletion
and amortization expense.. 1,353 69,714 4,080 -- 75,147
General and administrative
expense................... 18,991 43,644 3,436 -- 66,071
Interest.................... 54,464 1,275 821 -- 56,560
Other....................... 318 943 2 -- 1,263
------------ ---------------- -------------------- ----------------- -----------------
Total costs and expenses........ 75,126 649,383 49,470 -- 773,979
============ ================ ==================== ================= =================
Income (loss) before income
taxes........................ (73,108) 167,341 5,050 -- 99,283
Income tax (expense) benefit..... 27,247 (62,367) (1,882) -- (37,002)
------------ ---------------- -------------------- ----------------- -----------------
Net income (loss) before
extraordinary items........... (45,861) 104,974 3,168 -- 62,281
Extraordinary items, net of tax.. 429 -- -- -- 429
------------ ---------------- -------------------- ----------------- -----------------
Net income (loss)................ $ (45,432) $104,974 $ 3,168 $ -- $ 62,710
============ ================ ==================== ================= =================
JUNE 30, 2000
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Revenues......................... $ 790 $599,225 $ 37,717 $ -- $637,732
Costs and expenses:
Direct expenses.............. -- 431,997 30,389 -- 462,386
Depreciation, depletion and
amortization expense...... 1,162 66,453 3,357 -- 70,972
General and administrative
expense................... 11,101 44,473 3,198 -- 58,772
Interest..................... 69,802 1,527 601 -- 71,930
Other........................ -- 1,648 -- -- 1,648
------------ ---------------- -------------------- ----------------- -----------------
Total costs and expenses......... 82,065 546,098 37,545 -- 665,708
============ ================ ==================== ================= =================
Income (loss) before income
taxes......................... (81,275) 53,127 172 -- (27,976)
Income tax (expense) benefit..... 21,516 (14,064) (46) -- 7,406
------------ ---------------- -------------------- ----------------- -----------------
Net income (loss) before
extraordinary items........... (59,759) 39,063 126 -- (20,570)
Extraordinary items, net of tax.. 1,611 -- -- -- 1,611
------------ ---------------- -------------------- ----------------- -----------------
Net income (loss)................ $ (58,148) $ 39,063 $ 126 $ -- $(18,959)
============ ================ ==================== ================= =================
F-33
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (CONT'D)
JUNE 30, 1999
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Revenues......................... $ 1,086 $463,813 $ 26,918 $ -- $491,817
Costs and expenses:
Direct expenses.............. -- 349,936 21,492 -- 371,428
Depreciation, depletion and
amortization expense...... 428 58,403 3,243 -- 62,074
General and administrative
expense................... 14,962 34,490 3,656 -- 53,108
Interest..................... 65,724 1,559 118 -- 67,401
Other........................ 10,811 5,928 -- -- 16,739
------------ ---------------- -------------------- ----------------- -----------------
Total costs and expenses......... 91,925 450,316 28,509 -- 570,750
============ ================ ==================== ================= =================
Income (loss) before income
taxes......................... (90,839) 13,497 (1,591) -- (78,933)
Income tax (expense) benefit..... 29,547 (4,390) 518 -- 25,675
------------ ---------------- -------------------- ----------------- -----------------
Net income (loss) before
extraordinary items........... (61,292) 9,107 (1,073) -- (53,258)
Extraordinary items, net of tax.. -- -- -- -- --
------------ ---------------- -------------------- ----------------- -----------------
Net income (loss)................ $ (61,292) $ 9,107 $ (1,073) $ -- $(53,258)
============ ================ ==================== ================= =================
F-34
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED JUNE 30, 2001
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities......... $ 68,567 $ 64,408 $ 9,742 $ -- $ 142,717
Net cash provided by (used in)
investing activities......... (19,459) (56,711) (7,180) -- (83,350)
Net cash provided by (used in)
financing activities......... (158,627) (8,456) (59) -- (167,142)
------------ ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in
cash......................... (109,519) (759) 2,503 -- (107,775)
Cash and cash equivalents at
beginning of period.......... 111,166 (1,246) (47) -- 109,873
------------ ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
of period.................... $ 1,647 $ (2,005) $ 2,456 $ -- $ 2,098
============ ================ ==================== ================= =================
FISCAL YEAR ENDED JUNE 30, 2000
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities......... $ 18,962 $ 10,434 $ 5,464 $ -- $ 34,860
Net cash provided by (used in)
investing activities......... (4,468) (26,671) (6,627) -- (37,766)
Net cash provided by (used in)
financing activities......... 80,070 9,287 (56) -- 89,301
------------ ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in
cash......................... 94,564 (6,950) (1,219) -- 86,395
Cash and cash equivalents at
beginning of period.......... 16,602 5,704 1,172 -- 23,478
------------ ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
of period.................... $ 111,166 $ (1,246) $ (47) $ -- $ 109,873
============ ================ ==================== ================= =================
F-35
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000, 1999 AND 1998
FISCAL YEAR ENDED JUNE 30, 1999
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities........ $ (49,167) $ 26,508 $ 9,232 $ -- $ (13,427)
Net cash provided by (used in)
investing activities........ (272,620) (13,986) (8,048) -- (294,654)
Net cash provided by (used in)
financing activities........ 313,526 (7,196) (36) -- 306,294
------------ ---------------- -------------------- ----------------- -----------------
Net increase (decrease) in
cash........................ (8,261) 5,326 1,148 -- (1,787)
Cash and cash equivalents at
beginning of period......... 24,863 378 24 -- 25,265
------------ ---------------- -------------------- ----------------- -----------------
Cash and cash equivalents at end
of period................... $ 16,602 $ 5,704 $ 1,172 $ -- $ 23,478
============ ================ ==================== ================= =================
F-36
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Key Energy Services, Inc. :
We have audited the accompanying consolidated balance sheets of Key
Energy Services, Inc., and subsidiaries as of June 30, 2001 and 2000, and the
related consolidated statements of operations, comprehensive income, cash flows
and stockholders' equity for each of the years in the three-year period ended
June 30, 2001. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
Index at Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Key Energy Services, Inc. and subsidiaries as of June 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.
/s/ KPMG LLP
KPMG LLP
Midland, Texas
August 31, 2000
F-37
KEY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 JUNE 30, 2001
----------------------- -------------------
(Unaudited)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 42,967 $ 2,098
Accounts receivable, net of allowance for doubtful
accounts of $4,307 and $4,082, at March 31, 2002
and June 30, 2001, respectively.............................. 122,734 177,016
Inventories...................................................... 8,712 16,547
Prepaid expenses and other current assets........................ 11,959 10,489
----------------------- -------------------
Total current assets.................................................. 186,372 206,150
----------------------- -------------------
Property and Equipment:
Well servicing equipment......................................... 761,629 723,724
Contract drilling equipment...................................... 120,456 119,122
Motor vehicles................................................... 69,202 64,907
Oil and natural gas properties and other related equipment,
successful efforts method.................................... 44,616 44,245
Furniture and equipment.......................................... 32,515 24,865
Building and land................................................ 38,809 37,812
----------------------- -------------------
Total property and equipment.......................................... 1,067,223 1,014,675
Accumulated depreciation and depletion................................ (266,027) (220,959)
----------------------- -------------------
Net property and equipment............................................ 801,196 793,716
----------------------- -------------------
Goodwill, net of accumulated amortization at $27,970 200,287 189,875
at December 31, 2001 and $28,168 at June30, 2001.............
Deferred costs, net.............................................. 12,990 17,624
Notes and accounts receivable - related parties.................. 521 6,050
Other assets..................................................... 30,541 14,869
----------------------- -------------------
Total assets..................................................... $ 1,231,907 $ 1,228,284
======================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................. $ 20,521 42,544
Other accrued liabilities........................................ 42,299 48,923
Accrued interest................................................. 5,099 16,140
Current portion of long-term debt and capital lease obligations.. 8,370 7,946
----------------------- -------------------
Total current liabilities............................................. 76,289 115,553
----------------------- -------------------
Long-term debt, less current portion.................................. 421,338 470,578
Capital lease obligations, less current portion....................... 16,011 15,383
Deferred revenue...................................................... 10,651 14,104
Non-current accrued expenses.......................................... 10,206 8,388
Deferred tax liability................................................ 151,197 127,400
Commitments and contingencies......................................... --- ---
Stockholders' equity:
Common stock, $.10 par value: 200,000,000 shares
authorized, 110,067,514 and 101,440,166 shares issued, at
December 31, 2001 and June 30, 2001, respectively............ 11,007 10,144
Additional paid-in capital....................................... 513,378 444,768
Treasury stock, at cost; 416,666 shares at December 31, 2001
and June 30, 2001............................................ (9,682) (9,682)
F-38
Accumulated other comprehensive income (loss).................... (44,083) 62
Retained earnings (deficit)...................................... 75,595 31,586
----------------------- -------------------
Total stockholders' equity............................................ 546,215 476,878
----------------------- -------------------
Total liabilities and stockholders' equity............................ $1,231,907 $1,228,284
======================= ===================
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-39
KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Well servicing........................................ $154,062 $ 198,059 $ 552,901 $ 543,274
Contract drilling..................................... 14,334 28,259 73,624 74,582
Other................................................. 1,845 1,052 6,290 5,104
----------- ----------- ----------- -----------
170,241 227,370 632,815 622,960
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Well servicing........................................ 113,032 128,803 368,932 362,814
Contract drilling..................................... 11,392 19,730 49,920 55,548
Depreciation, depletion and amortization.............. 19,889 19,703 57,482 56,160
General and administrative............................ 13,694 16,594 42,613 42,926
Interest.............................................. 9,875 13,453 32,921 44,145
Other expenses........................................ 951 1,175 3,286 3,163
Foreign currency transaction loss, Argentina
(see Note 10)...................................... --- --- 1,844 ---
----------- ----------- ----------- -----------
168,833 199,458 556,998 564,756
----------- ----------- ----------- -----------
Income before income taxes............................ 1,408 27,912 75,817 58,204
Income tax (expense) ................................. (773) (10,325) (28,818) (22,013)
----------- ----------- ----------- -----------
Income before extraordinary gain (loss)............... 635 17,587 46,999 36,191
Extraordinary gain (loss) on retirement of debt, less
applicable income tax benefit of $3,207 and
$1,833 for the three and nine months ended March 31,
2001, respectively, and income tax benefit of $98
and income tax expense of $651, for the three and
nine months ended March 31, 2000, respectively..... (5,261) (167) (2,990) 1,098
----------- ----------- ----------- -----------
NET INCOME (LOSS)......................................... $ (4,626) $ 17,420 $ 44,009 $ 37,289
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic--before extraordinary gain (loss)............... $ 0.01 $ 0.18 $ 0.45 $ 0.37
Extraordinary gain (loss), net of tax................. (0.05) --- (0.03) 0.01
----------- ----------- ----------- -----------
Basic--after extraordinary gain (loss).................... $ (0.04) $ 0.18 $ 0.42 $ 0.38
=========== =========== =========== ===========
Diluted--before extraordinary gain (loss)............. $ 0.01 $ 0.17 0.44 $ 0.36
Extraordinary gain (loss), net of tax................. (0.05) $ --- (0.03) 0.01
----------- ----------- ----------- -----------
Diluted--after extraordinary gain (loss).............. $ (0.04) $ 0.17 $ 0.41 $ 0.37
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................. 108,551 98,211 104,435 97,537
Diluted............................................... 110,059 103,524 105,781 101,969
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
F-40
KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (4,626) $ 17,420 $ 44,099 $ 37,289
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation, depletion and amortization.............. 19,889 19,703 57,482 56,160
Amortization of deferred debt issuance costs and other
deferred costs..................................... 277 928 1,266 3,344
Deferred income taxes................................. 3,076 10,325 25,407 22,013
(Gain) loss on sale of assets......................... 146 50 (684) 10
Foreign currency transaction loss, Argentina.......... --- --- 1,844 ---
Extraordinary (gain) loss, net of tax................. 5,261 167 2,990 (1,098)
CHANGE IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable......... 23,848 (18,018) 47,059 (39,628)
(Increase) decrease in other current assets........ 69 (4,284) (2,428) (2,446)
Increase (decrease) in accounts payable, accrued
interest and accrued expenses.................... (14,963) 11,583 (34,429) 8,267
Other assets and liabilities....................... (3,091) (1,189) (9,813) (1,761)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities....... 29,886 36,685 132,703 82,150
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures--well servicing.................. (13,323) (13,492) (41,635) (30,587)
Capital expenditures--contract drilling............... (3,126) (4,913) (14,203) (12,087)
Capital expenditures--other........................... (2,064) (5,123) (7,603) (11,215)
Proceeds from sale of fixed assets.................... 307 478 3,962 1,430
Acquisitions--well servicing.......................... (8,202) (270) (16,877) (1,970)
Acquisitions--contract drilling....................... --- --- --- (800)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing activities... (26,408) (23,320) (76,356) (55,229)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt........................... (123,782) (207,241) (308,713) (329,838)
Repayment of capital lease obligations................ (2,732) (1,519) (7,731) (5,868)
Proceeds from long-term debt.......................... 159,500 199,000 258,500 203,000
Proceeds from equity offering, net of expense......... --- --- 42,590 ---
Proceeds paid for debt issuance costs................. (1,585) (4,372) (1,585) (4,372)
Proceeds from exercise of warrants.................... --- --- --- 265
Proceeds from exercise of stock options............... 194 1,275 1,814 2,632
Other................................................. 5 (132) (84) (318)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities... 31,600 (12,989) (15,209) (134,499)
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash............... (77) --- (269) ---
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.. 35,001 376 40,869 (107,578)
Cash and cash equivalents at beginning of period...... 7,966 1,919 2,098 109,873
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 42,967 $ 2,295 $ 42,967 $ 2,295
=========== =========== =========== ===========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-41
KEY ENERGY SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ ------------- -----------
(IN THOUSANDS)
NET INCOME (LOSS)..................................... $ (4,626) $ 17,420 $ 44,009 $ 37,289
OTHER COMPREHENSIVE INCOME (LOSS):
Derivative transition adjustment (see Note 7)...... -- -- -- (778)
Oil and natural gas derivatives adjustment, net of
tax (see Note 7)................................. (459) (29) (102) (81)
Amortization of oil and natural gas derivative,
net of tax (see Note 7).......................... (323) 153 (511) 445
Foreign currency translation gain (loss), net of
tax (see Note 10)................................ (19,308) (61) (43,533) (57)
------------- ------------ ------------- -----------
COMPREHENSIVE INCOME (LOSS)........................... $ (24,716) $ 17,483 $ (137) $ 36,818
============= ============ ============= ===========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-42
KEY ENERGY SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Key Energy Services, Inc. (the
"Company" or "Key") and its wholly-owned subsidiaries as of March 31, 2002 and
for the three and nine month periods ended March 31, 2002 and 2001 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, 2001.
The results of operations for the three and nine month periods ended March 31,
2002 are not necessarily indicative of the results of operations for the full
fiscal year ending June 30, 2002.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements for the three and nine months periods ended March 31, 2001 to conform
to the presentation for the three and nine month periods ended March 31, 2002.
The reclassifications consist primarily of reclassifying certain items from
general and administrative expense considered to be direct expenses in nature.
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 commons hare
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.
F-43
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
------------ ----------- ----------- ------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
BASIC EPS COMPUTATION:
NUMERATOR
Net income before extraordinary gain
(loss).................................. $ 635 $ 17,587 $ 46,999 $ 36,191
Extraordinary gain (loss), net of tax..... (5,261) (167) (2,990) 1,098
------------ ----------- ----------- ------------
Net income (loss)......................... $ (4,626) $ 17,420 $ 44,009 $ 37,289
============ =========== =========== ============
DENOMINATOR
Weighted average common shares
outstanding............................. 108,551 98,211 104,435 97,537
------------ ----------- ----------- ------------
BASIC EPS:
Before extraordinary gain (loss).......... $ 0.01 $ 0.18 $ 0.45 $ 0.37
Extraordinary gain (loss), net of tax..... (0.05) --- (0.03) 0.01
------------ ----------- ----------- ------------
After extraordinary gain (loss)........... $ (0.04) $ 0.18 $ 0.42 $ 0.38
============ =========== =========== ============
DILUTED EPS COMPUTATION:
NUMERATOR
Net income before extraordinary gain
(loss).................................. $ 635 $ 17,587 $ 46,999 $ 36,191
Effect of dilutive convertible securities,
tax effected............................ --- --- --- 8
Extraordinary gain (loss), net of tax..... (5,261) (167) (2,990) 1,098
------------ ----------- ----------- ------------
Net income (loss)......................... $ (4,626) $ 17,420 $ 44,009 $ 37,297
============ =========== =========== ============
DENOMINATOR
Weighted average common shares
outstanding............................. 108,551 98,211 104,435 97,537
Warrants.................................. 388 869 368 781
Stock options............................. 1,120 4,444 978 3,627
7% Convertible Debentures................. --- --- --- 24
------------ ----------- ----------- ------------
110,059 103,524 105,781 101,969
============ =========== =========== ============
DILUTED EPS:
Before extraordinary gain (loss).......... $ 0.01 $ 0.17 $ 0.44 $ 0.36
Extraordinary gain (loss), net of tax..... (0.05) --- (0.03) 0.01
------------ ----------- ----------- ------------
After extraordinary gain (loss)........... $ (0.04) $ 0.17 $ 0.41 $ 0.37
============ =========== =========== ============
The diluted earnings per share calculation (i) for the three month
period ended March 31, 2002 excludes the effects of 1,178,000 stock options and
(ii) for the nine month period ended March 31, 2002 excludes the effects of
1,678,000 stock options. Both calculations exclude the effects of the conversion
of the Company's 5% Convertible Subordinated Notes. The effects of such options
and convertible notes on earnings per share would be anti-dilutive.
The diluted earnings per share calculation for the three and nine month
periods ended march 31, 2001 excludes the effects of 375,000 stock options and
the effects of the conversion of the Company's 5% Convertible Subordinated Notes
because the effects of such options and convertible notes on earnings per share
would be anti-dilutive.
F-44
3. STOCKHOLDERS' EQUITY
EQUITY OFFERING
On December 19, 2001, the Company closed a public offering of 5,400,000
shares of common stock, yielding approximately $43.2 million or $8.00 per share
to the Company, (the "Equity Offering"). Net proceeds from the Equity Offering
of approximately $42.6 million were used to temporarily reduce amounts
outstanding under the Company's revolving line of credit. The net proceeds of
the Equity Offering were ultimately used in January, 2002 to redeem a portion of
the Company's 14% Senior Subordinated Notes fully utilizing the Company's equity
"claw-back" rights for up to 35% of the original $150 million issued.
4. 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.
5. INDUSTRY SEGMENT INFORMATION
The Company's reportable business segments are well servicing and
contract drilling.
WELL SERVICING: The Company's operations provide well servicing
(ongoing maintenance of existing oil and natural gas wells), completions,
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.
WELL CONTRACT CORPORATE
SERVICING DRILLING /OTHER TOTAL
------------ -------------- ------------ -------------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 2002
Operating revenues.................................... $ 154,062 $ 14,334 $ 1,845 $ 170,241
Operating profit ..................................... 41,030 2,942 894 44,866
Depreciation, depletion and amortization.............. 16,453 2,351 1,085 19,889
Interest expense...................................... 256 --- 9,619 9,875
Net income (loss) before extraordinary gain (loss)*... 11,406 (804) (9,967) 635
Identifiable assets................................... 679,256 89,795 262,569 1,031,620
Capital expenditures ................................. 13,323 3,126 2,064 18,513
THREE MONTHS ENDED MARCH 31, 2001
Operating revenues.................................... $ 198,059 $ 28,259 $ 1,052 $ 227,370
Operating profit...................................... 69,256 8,529 (123) 77,662
Depreciation, depletion and amortization.............. 16,496 2,009 1,198 19,703
Interest expense...................................... 393 --- 13,060 13,453
Net income (loss) before extraordinary gain (loss)*... 28,919 3,174 (14,506) 17,587
Identifiable assets................................... 648,019 93,926 256,974 998,919
Capital expenditures (excluding acquisitions)......... 13,492 4,913 5,123 23,528
-------------------------------------------------------------------------------
* Net income (loss) includes general and administrative expenses allocated on a
percentage of revenue basis.
Operating revenues for the Company's foreign operations for the three
months ended March 31, 2002 and 2001 were $4.0 million and $13.5 million,
respectively. Operating profits for the Company's foreign operations for the
three months ended March 31, 2002 and 2001 were $0.7 million and $3.5 million,
respectively. The Company had $31.6 million and $84.1 million of identifiable
assets as of March 31, 2002 and 2001, respectively, related to foreign
operations.
F-45
WELL CONTRACT CORPORATE
SERVICING DRILLING /OTHER TOTAL
------------ -------------- ------------ -------------
(IN THOUSANDS)
NINE MONTHS ENDED MARCH 31, 2002
Operating revenues.................................... $ 552,901 $ 73,624 $ 6,290 $ 632,815
Operating profit ..................................... 183,969 23,704 3,004 210,677
Depreciation, depletion and amortization.............. 47,480 6,935 3,067 57,482
Interest expense...................................... 1,209 --- 31,712 32,921
Net income (loss) before extraordinary gain (loss)*... 71,673 7,827 (32,501) 46,999
Identifiable assets................................... 679,256 89,795 262,569 1,031,620
Capital expenditures (excluding acquisitions)......... 41,635 14,203 7,603 63,441
NINE MONTHS ENDED MARCH 31, 2001
Operating revenues.................................... $ 543,274 $ 74,582 $ 5,104 $ 622,960
Operating profit...................................... 180,460 19,034 1,941 201,435
Depreciation, depletion and amortization.............. 47,446 5,705 3,009 56,160
Interest expense...................................... 1,496 --- 42,649 44,145
Net income (loss) before extraordinary gain (loss)*... 74,885 5,529 (44,223) 36,191
Identifiable assets................................... 648,019 93,926 256,974 998,919
Capital expenditures (excluding acquisitions)......... 30,587 12,087 11,215 53,889
-------------------------------------------------------------------------------
* Net income (loss) includes general and administrative expenses allocated on a
percentage of revenue basis.
Operating revenues for the Company's foreign operations for the nine
months ended March 31, 2002 and 2001 were $28.0 million and $40.0 million,
respectively. Operating profits for the Company's foreign operations for the
nine months ended March 31, 2002 and 2001 were $5.4 million and $9.8 million,
respectively. The Company had $31.6 million and $84.1 million of identifiable
assets as of March 31, 2002 and 2001, respectively, related to foreign
operations.
6. VOLUMETRIC PRODUCTION PAYMENT
In March 2000, Key sold a portion 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 portion of the production from certain oil
and natural gas properties over the six year period ending February 28, 2006 in
amounts starting at 10,000 barrels of oil per month and declining to 3,500
barrels of oil per month and starting at 122,100 Mmbtu of natural gas per month
and declining to 58,800 Mmbtu of natural gas per month. The total volume of the
forward sale is approximately 486,000 barrels of oil and 6,135,000 Mmbtu of
natural gas.
7. DERIVATIVE INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price risks. The Company is exposed to credit losses in
the event of nonperformance by the counter-parties to its commodity hedges. The
Company only deals with reputable financial institutions as counter-parties and
anticipates that such counter-parties will be able to fully satisfy their
obligations under the contracts. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk but monitors
the credit standing of the counter-parties.
The Company periodically hedges a portion of its oil and natural gas
production through collar and option 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 collar and option arrangements which allow for acceptable cap and
floor prices.
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:
F-46
FREESTANDING DERIVATIVES: On March 30, 2000 the Company entered into a
collar arrangement for a 22-month period whereby the Company will pay if the
specified price is above the cap index and the counter-party will pay if the
price should fall below the floor index. The hedge defines a range of cash flows
bounded by the cap and floor prices. On May 25, 2001 the Company entered into an
option arrangement for a 12-month period beginning March 2002 whereby the
counter-party will pay should the price fall below the floor index. The Company
desires a measure of stability to ensure that cash flows do not fall below a
certain level.
Prior to the adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS
No. 133"), as amended by SFAS No. 137 and 138, these collars were accounted for
as cash flow type hedges. Accordingly, the July 1, 2000 transition adjustment
resulted in recording a $778,000 liability for the fair value of the collars to
accumulated other comprehensive income. Approximately $64,000 of the transition
adjustment was recognized in earnings during the three months ended March 31,
2002. The transition adjustment has been completely recognized in earnings. As
of October 1, 2000, the Company has documented the March 30, 2000 collars as
cash flow hedges. As of July 1, 2001, the Company has documented the May 25,
2001 options as cash flow hedges. During the quarter ended March 31, 2002, the
Company recorded a net decrease in net derivative assets of approximately
$749,000, which reduced the balance of net derivative assets to $179,000 and
which included an earnings charge of approximately $2,000 from ineffectiveness.
EMBEDDED DERIVATIVES. The Company is party to a volumetric production
payment of which certain terms meet the definition of an embedded derivative
under SFAS No. 133. Effective 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 as set forth in SFAS 138.
8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's senior notes are guaranteed by all of the Company's
subsidiaries (except for the foreign subsidiaries), all of which are
wholly-owned. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to transfer funds to the parent company.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10, Financial
Statements of Guarantors and Issuers of Guaranteed Securities Registered or
Being Registered. The information is not intended to present the financial
position, results of operations and cash flows of the individual companies or
groups of companies in accordance with generally accepted accounting principles.
F-47
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2002
-----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
----------- --------------- ------------------- ----------------- -----------------
(IN THOUSANDS)
Assets:
Current assets......... $ 50,402 $ 126,529 $ 9,441 $ --- $ 186,372
Net property and
equipment............ 31,147 747,851 22,198 --- 801,196
Goodwill, net.......... 3,374 196,192 721 --- 200,287
Deferred costs, net.... 12,990 --- --- --- 12,990
Intercompany
receivables.......... 565,075 --- --- (565,075) ---
Other assets........... 22,517 8,545 --- --- 31,062
----------- --------------- ------------------- ----------------- -----------------
Total assets............... $ 685,505 $ 1,079,117 $ 32,360 $ (565,075) $ 1,231,907
=========== =============== =================== ================= =================
Liabilities and equity:
Current liabilities.... $ 32,340 $ 40,954 $ 2,994 $ --- $ 76,288
Long-term debt......... 421,338 --- --- --- 421,338
Capital lease
obligations.......... 1,160 14,851 --- --- 16,011
Intercompany payables.. --- 541,503 23,572 (565,075) ---
Deferred tax liability. 151,197 --- --- --- 151,197
Other long-term
liabilities.......... 10,106 10,751 --- --- 20,857
Stockholders' equity... 69,364 471,058 5,794 --- 546,216
----------- --------------- ------------------- ----------------- -----------------
Total liabilities and
stockholders' equity... $ 685,505 $ 1,079,117 $ 32,360 $ (565,075) $ 1,231,907
=========== =============== =================== ================= =================
JUNE 30, 2001
-----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
----------- --------------- ------------------- ----------------- -----------------
(IN THOUSANDS)
Assets:
Current assets......... $ 10,680 $ 165,653 $ 29,817 $ --- $ 206,150
Net property and
equipment............ 21,418 717,989 54,309 --- 793,716
Goodwill, net.......... 3,374 184,379 2,122 --- 189,875
Deferred costs, net.... 17,624 --- --- --- 17,624
Intercompany
receivables.......... 664,592 --- --- (664,592) ---
Other assets........... 15,303 5,616 --- --- 20,919
----------- --------------- ------------------- ----------------- -----------------
Total assets............... $ 732,991 $ 1,073,637 $ 86,248 $ (664,592) $ 1,228,284
=========== =============== =================== ================= =================
Liabilities and equity:
Current liabilities.... $ 35,671 $ 64,679 $ 15,203 $ --- $ 115,553
Long-term debt......... 470,578 --- --- --- 470,578
Capital lease
obligations.......... 90 15,331 (38) --- 15,383
Intercompany payables.. --- 608,764 55,828 (664,592) ---
Deferred tax liability. 127,400 --- --- --- 127,400
Other long-term
liabilities.......... 8,240 14,252 --- --- 22,492
Stockholders' equity... 91,012 370,611 15,255 --- 476,878
=========== =============== =================== ================= =================
Total liabilities and
stockholders' equity... $ 732,991 $ 1,073,637 $ 86,248 $ (664,592) $ 1,228,284
=========== =============== =================== ================= =================
F-48
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
----------- --------------- ------------------- ---------------- -----------------
(IN THOUSANDS)
Revenues................... $ 310 $ 165,899 $ 4,032 $ --- $ 170,241
Costs and expenses:
Direct expenses........ --- 122,005 3,370 --- 125,375
Depreciation, depletion
and amortization..... 464 18,811 614 --- 19,889
General and
administrative....... 5,526 7,725 443 --- 13,694
Interest............... 9,619 276 (20) --- 9,875
Argentine foreign
currency transaction
loss................. --- --- --- --- ---
Other expenses......... --- --- --- --- ---
----------- --------------- ------------------- ---------------- -----------------
Total costs and expenses... 15,609 148,817 4,407 --- 168,833
=========== =============== =================== ================ =================
Income (loss) before
income taxes........... (15,299) 17,082 (375) --- 1,408
Income tax (expense)
benefit................ 8,399 (9,378) 206 --- (773)
----------- --------------- ------------------- ---------------- -----------------
Income (loss) before
extraordinary items.... (6,900) 7,704 (169) --- 635
Extraordinary items, net of
tax.................... (5,261) --- --- --- (5,261)
----------- --------------- ------------------- ---------------- -----------------
Net income (loss).......... $ (12,161) $ 7,704 $ (169) $ --- $ (4,626)
=========== =============== =================== ================ =================
THREE MONTHS ENDED MARCH 31, 2001
----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
----------- --------------- ------------------- ---------------- -----------------
(IN THOUSANDS)
Revenues................... $ 246 $ 213,650 $ 13,474 $ --- $ 227,370
Costs and expenses:
Direct expenses........ --- 139,707 10,001 --- 149,708
Depreciation, depletion
and amortization..... 686 17,973 1,044 --- 19,703
General and
administrative....... 5,333 10,368 893 --- 16,594
Interest............... 13,060 183 210 --- 13,453
Other expenses......... --- --- --- --- ---
----------- --------------- ------------------- ---------------- -----------------
Total costs and expenses... 19,079 168,231 12,148 --- 199,458
=========== =============== =================== ================ =================
Income (loss) before
income taxes........... (18,833) 45,419 1,326 --- 27,912
Income tax (expense)
benefit................ 6,966 (16,801) (490) --- (10,325)
----------- --------------- ------------------- ---------------- -----------------
Income (loss) before
extraordinary items.... (11,867) 28,618 836 --- 17,587
Extraordinary items, net of
tax.................... (167) --- --- --- (167)
----------- --------------- ------------------- ---------------- -----------------
Net income (loss).......... $ (12,034) $ 28,618 $ 836 $ --- $ 17,420
=========== =============== =================== ================ =================
F-49
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2002
----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
------------ --------------- ------------------- ---------------- -----------------
(IN THOUSANDS)
Revenues................... $ 1,134 $ 603,656 $ 28,025 $ --- $ 632,815
Costs and expenses:
Direct expenses........ --- 399,486 22,652 --- 422,138
Depreciation, depletion
and amortization..... 1,204 53,534 2,744 --- 57,482
General and
administrative....... 15,448 25,213 1,952 --- 42,613
Interest............... 31,711 622 588 --- 32,921
Argentine foreign currency
transaction loss..... --- --- 1,844 --- 1,844
Other expenses......... --- --- --- --- ---
------------ --------------- ------------------- ---------------- ------------------
Total costs and expenses... 48,363 478,855 29,780 --- 556,998
============ =============== =================== ================ ==================
Income (loss) before
income taxes........... (47,229) 124,801 (1,755) --- 75,817
Income tax (expense)
benefit................ 17,951 (47,436) 667 --- (28,818)
------------ --------------- ------------------- ---------------- ------------------
Income (loss) before
extraordinary items.... (29,278) 77,365 (1,088) --- 46,999
Extraordinary items, net of
tax.................... (2,990) --- --- --- (2,990)
------------ --------------- ------------------- ---------------- ------------------
Net income (loss).......... $ (32,268) $ 77,365 $ (1,088) $ --- 44,009
============ =============== =================== ================ ==================
NINE MONTHS ENDED MARCH 31, 2001
-----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
------------ --------------- ------------------- ---------------- ------------------
(IN THOUSANDS)
Revenues................... $ 1,821 $ 581,126 $ 40,013 $ --- $ 622,960
Costs and expenses:
Direct expenses........ --- 391,239 30,286 --- 421,525
Depreciation, depletion
and amortization..... 1,463 51,668 3,029 --- 56,160
General and
administrative....... 12,538 27,798 2,590 --- 42,926
Interest............... 42,649 977 519 --- 44,145
Other expenses......... --- --- --- --- ---
------------ --------------- ------------------- ---------------- ------------------
Total costs and expenses... 56,650 471,682 36,424 --- 564,756
============ =============== =================== ================ ==================
Income (loss) before
income taxes........... (54,829) 109,444 3,589 --- 58,204
Income tax (expense)
benefit................ 20,736 (41,392) (1,357) --- (22,013)
------------ --------------- ------------------- ---------------- ------------------
Income (loss) before
extraordinary items.... (34,093) 68,052 2,232 --- 36,191
Extraordinary items, net of
tax.................... 1,098 --- --- --- 1,098
------------ --------------- ------------------- ---------------- ------------------
Net income (loss).......... $ (32,995) $ 68,052 $ 2,232 $ --- 37,289
============ =============== =================== ================ ==================
F-50
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
-----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
------------ --------------- ------------------- ---------------- ------------------
(IN THOUSANDS)
Net cash provided by
operating activities... $ 11,408 $ 16,179 $ 2,299 $ --- $ 29,886
Net cash used in investing
activities............. (11,062) (12,781) (2,565) --- (26,408)
Net cash provided by (used in)
financing activities... 34,111 (2,511) --- --- 31,600
Effect of exchange rate
changes on cash........ --- --- (77) --- (77)
------------ --------------- ------------------- ---------------- ------------------
Net increase (decrease) in
cash................... 34,457 887 (343) --- 35,001
Cash at beginning of
period................. 2,507 3,776 1,683 --- 7,966
------------ --------------- ------------------- ---------------- ------------------
Cash at end of period...... $ 36,964 $ 4,663 $ 1,340 $ --- $ 42,967
============ =============== =================== ================ ==================
THREE MONTHS ENDED MARCH 31, 2001
-----------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR ELIMINATIONS CONSOLIDATED
COMPANY SUBSIDIARIES SUBSIDIARIES
------------ --------------- ------------------- ---------------- ------------------
(IN THOUSANDS)
Net cash provided by
operating activities... $ 10,819 $ 22,173 $ 3,693 $ --- $ 36,685
Net cash used in investing
activities............. (5,226) (15,678) (2,416) --- (23,320)
Net cash used in financing
activities............. (11,462) (1,513) (14) --- (12,989)
------------ --------------- ------------------- ---------------- ------------------
Net increase (decrease) in
cash................... (5,869) 4,982 1,263 --- 376
Cash at beginning of
period................. 7,477 (6,387) 829 --- 1,919
------------ --------------- ------------------- ---------------- ------------------
Cash at end of period...... $ 1,608 $ (1,405) $ 2,092 $ --- $ 2,295
============ =============== =================== ================ ==================
F-51
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Net cash provided by
operating activities... $ 66,569 $ 63,064 $ 3,070 $ --- $ 132,703
Net cash used in investing
activities............. (23,443) (49,009) (3,904) --- (76,356)
Net cash used in financing
activities............. (7,809) (7,387) (13) --- (15,209)
Effect of exchange rate
changes on cash........ --- --- (269) (269)
------------ ---------------- -------------------- ----------------- ----------------
Net increase (decrease) in
cash................... 35,317 6,668 (1,116) --- 40,869
Cash at beginning of
period................. 1,647 (2,005) 2,456 --- 2,098
------------ ---------------- -------------------- ----------------- ----------------
Cash at end of period...... $ 36,964 $ (4,663) $ 1,340 $ --- $ 42,967
============ ================ ==================== ================= ================
NINE MONTHS ENDED MARCH 31, 2001
-------------------------------------------------------------------------------------------------
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ---------------- -------------------- ----------------- ----------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities...... $ 32,208 $ 42,097 $ 7,845 $ --- $ 82,150
Net cash provided by (used in)
investing activities...... (13,132) (36,432) (5,665) --- (55,229)
Net cash provided by (used in)
financing activities...... (128,634) (5,824) (41) --- (134,499)
------------ ---------------- -------------------- ----------------- ----------------
Net increase (decrease) in
cash...................... (109,558) (159) 2,139 --- (107,578)
Cash at beginning of period... 111,166 (1,246) (47) --- 109,873
------------ ---------------- -------------------- ----------------- ----------------
Cash at end of period......... $ 1,608 $ (1,405) $ 2,092 $ --- $ 2,295
============ ================ ==================== ================= ================
F-52
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
9. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
The Company has adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets ("SFAS 142") on July 1, 2001.
SFAS 142 eliminates the amortization for goodwill and other intangible assets
with indefinite lives. Intangible assets with lives restricted by
contractual, legal, or other means will continue to be amortized over their
useful lives. Goodwill and other intangible assets not subject to
amortization are tested for impairment annually or more frequently if events
or changes in circumstances indicate that the asset might be impaired. SFAS
142 requires a two-step process for testing impairment. First, the fair value
of each reporting unit is compared to its carrying value to determine whether
an indication of impairment exists. If impairment is indicated, then the fair
value of the reporting unit's goodwill is determined by allocating the unit's
fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a business
combination. The amount of impairment for goodwill and other intangible
assets is measured as the excess of its carrying value over its fair value.
The Company completed its assessment of goodwill impairment during the three
months ended December 31, 2001, as allowed by SFAS 142. The assessment did
not result in an indication of goodwill impairment.
F-52
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
Intangible assets subject to amortization under SFAS 142 consist of
noncompete agreements. Amortization expense is calculated using the
straight-line method over the period of the agreement, ranging from 3 to 5
years.
The gross carrying amount of noncompete agreements subject to
amortization totaled approximately $11,163,000 and $8,099,000 at March 31,
2002 and June 30, 2001, respectively. Accumulated amortization related to
these intangible assets totaled approximately $5,404,000 and $4,953,000 at
March 31, 2002 and June 30, 2001, respectively. Amortization expense for the
three months ended March 31, 2002 and 2001 was approximately $415,000 and
$379,000, respectively. Amortization expense for the nine months ended March
31, 2002 and 2001 was approximately $1,185,000 and $1,107,000, respectively.
Amortization expense for the next five succeeding fiscal years is estimated
to be $1,990,000, $1,048,000, $841,000, $793,000 and $443,000.
The Company has identified its reporting segments to be well
servicing and contract drilling. Goodwill allocated to such reporting
segments at March 31, 2002 is $186,175,000 and $14,112,000, respectively. The
change in the carrying amount of goodwill for the three and nine months ended
March 31, 2002 of $7,070,000 and $10,412,000, respectively, relates
principally to goodwill from well servicing assets acquired during the period
and the translation adjustment for Argentina.
The effect of the adoption of SFAS 142 on net income and earnings per share is
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001
------------ -------------- ------------- ------------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE DATA) PER SHARE DATA)
Reported net income before extraordinary gain (loss). $ 635 $ 17,587 $ 46,999 $ 36,191
Add back: goodwill amortization..................... --- 2,333 --- 6,989
------------ ----------- ----------- ------------
Adjusted net income before extraordinary gain (loss). 635 19,920 46,999 43,180
Extraordinary gain (loss), net of tax................ (5,261) (167) (2,990) 1,098
------------ ----------- ----------- ------------
Adjusted net income (loss)........................... $ (4,626) $ 19,753 $ 44,009 $ 44,278
============ =========== =========== ============
BASIC EARNINGS (LOSS) PER SHARE:
Reported net income before extraordinary gain (loss). $ 0.01 $ 0.18 $ 0.45 $ 0.37
Add back: goodwill amortization..................... --- 0.02 --- 0.07
------------ ----------- ----------- ------------
Adjusted net income before extraordinary gain (loss). $ 0.01 $ 0.20 $ 0.45 $ 0.44
Extraordinary gain (loss), net of tax................ (0.05) --- (0.03) 0.01
------------ ----------- ----------- ------------
Adjusted net income (loss)........................... $ (0.04) $ 0.20 $ 0.42 $ 0.45
============ =========== =========== ============
DILUTED EARNINGS (LOSS) PER SHARE:
Reported net income before extraordinary gain (loss). $ 0.01 $ 0.17 $ 0.44 $ 0.36
Add back: goodwill amortization..................... --- 0.02 --- 0.07
------------ ----------- ----------- ------------
Adjusted net income before extraordinary gain (loss). $ 0.01 $ 0.19 $ 0.44 $ 0.43
Extraordinary gain (loss), net of tax................ (0.05) --- (0.03) 0.01
------------ ----------- ----------- ------------
Adjusted net income (loss)........................... $ (0.04) $ 0.19 $ 0.41 $ 0.44
============ =========== =========== ============
F-53
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
10. ARGENTINA FOREIGN CURRENCY TRANSACTION LOSS
The local currency is the functional currency for all of the
Company's foreign operations (Argentina and Canada). The cumulative
translation gains and losses, resulting from translating each foreign
subsidiary's financial statements from the functional currency to U.S.
dollars are included in other comprehensive income and accumulated in
stockholders' equity until a partial or complete sale or liquidation of the
Company's net investment in the foreign entity.
Since 1991, the Argentine peso has been tied to the U.S. dollar at a
conversion ratio of 1:1. However, in December 2001, the Government of
Argentina announced an exchange holiday and, as a result, Argentine pesos
could not be exchanged into other currencies at December 31, 2001. On January
5 and 6, 2002, the Argentine Congress and Senate gave the President of
Argentina emergency powers and the ability to suspend the law that created
the fixed conversion ratio of 1:1. The Government subsequently announced the
creation of a dual currency system in which certain qualifying transactions
will be settled at an expected fixed conversion ratio of 1.4:1 while all
other transactions will be settled using a free floating market conversion
ratio. Under existing guidance, dividends would not receive the fixed
conversion ratio. On January 11, 2002, the exchange holiday was lifted,
making it possible again to buy and sell Argentine pesos. Banks were legally
allowed to exchange currencies, but transactions were limited and generally
took place at exchange houses. These transactions were conducted primarily by
individuals as opposed to commercial transactions, and occurred at free
conversion ratios ranging between 1.6:1 and 1.7:1.
Due to the events described above, which resulted in the temporary
lack of exchangeability of the two currencies at December 31, 2001, the
Company has translated the assets and liabilities of its Argentine subsidiary
at December 31, 2001 using a conversion ratio of 1.6:1, which management
believes is indicative of the free floating conversion ratio when the
currency market re-opened on January 11, 2002. As a result, a foreign
currency translation loss of approximately $24.2 million is included in other
comprehensive income, a component of stockholders' equity, in the
accompanying December 31, 2001 consolidated balance sheet. Since the 1:1
conversion ratio was in existence prior to December 2001, income statement
and cash flows information has been translated using the historical 1:1
conversion ratio.
Additionally, the Argentine government has indicated that as part of
its monetary policy changes, it will re-denominate certain consumer loans
from U.S. dollar-denominated to Argentine peso-denominated. As a result, the
Company recorded a foreign currency transaction loss of $1.8 million in the
three months ended December 31, 2001 related to accounts receivable subject
to certain U.S. dollar-denominated contracts held by its Argentine subsidiary
which are subject to re-denomination. These receivables are subject to
additional negotiation with the Company's customers which may result in
recovery of a portion of this loss.
F-54