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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2003 | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number 1-8038
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization) | 04-2648081 (I.R.S. Employer Identification No.) | |
6 Desta Drive, Midland, Texas (Address of principal executive offices) | 79705 (ZIP Code) | |
Registrant's telephone number including area code:(432) 620-0300 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes ý No o
Common Shares outstanding at August 5, 2003—129,649,827
Key Energy Services, Inc.
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Key Energy Services, Inc.
Consolidated Balance Sheets
| June 30, 2003 | December 31, 2002 | ||||||
---|---|---|---|---|---|---|---|---|
| (Unaudited) | | ||||||
| (thousands, except share data) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 72,664 | $ | 9,044 | ||||
Accounts receivable, net of allowance for doubtful accounts of $5,131 and $4,439, at June 30, 2003 and December 31, 2002, respectively | 162,410 | 141,958 | ||||||
Inventories | 13,491 | 10,243 | ||||||
Prepaid expenses and other current assets | 13,061 | 14,329 | ||||||
Total current assets | 261,626 | 175,574 | ||||||
Property and equipment: | ||||||||
Well servicing equipment | 952,364 | 935,911 | ||||||
Contract drilling equipment | 132,008 | 128,199 | ||||||
Motor vehicles | 79,349 | 79,110 | ||||||
Oil and natural gas properties and other related equipment, successful efforts method | 48,365 | 48,362 | ||||||
Furniture and equipment | 58,208 | 51,349 | ||||||
Buildings and land | 50,229 | 48,922 | ||||||
Total property and equipment | 1,320,523 | 1,291,853 | ||||||
Accumulated depreciation and depletion | (382,879 | ) | (335,348 | ) | ||||
Net property and equipment | 937,644 | 956,505 | ||||||
Goodwill, net | 344,664 | 322,270 | ||||||
Deferred costs, net | 14,765 | 13,503 | ||||||
Notes and accounts receivable—related parties | 191 | 251 | ||||||
Other assets | 28,570 | 33,899 | ||||||
Total assets | $ | 1,587,460 | $ | 1,502,002 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 22,663 | $ | 28,818 | ||||
Other accrued liabilities | 63,148 | 57,823 | ||||||
Accrued interest | 15,855 | 15,226 | ||||||
Current portion of long-term debt and capital lease obligations | 6,441 | 7,008 | ||||||
Total current liabilities | 108,107 | 108,875 | ||||||
Long-term debt, less current portion | 539,506 | 472,336 | ||||||
Capital lease obligations, less current portion | 12,753 | 14,221 | ||||||
Deferred revenue | 6,570 | 8,460 | ||||||
Non-current accrued expenses | 48,725 | 40,477 | ||||||
Deferred tax liability | 153,309 | 161,265 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders' equity: | ||||||||
Common stock, $0.10 par value; 200,000,000 shares authorized, 130,051,496 and 128,757,693 shares issued at June 30, 2003 and December 31, 2002, respectively | 13,004 | 12,876 | ||||||
Additional paid-in capital | 684,538 | 673,249 | ||||||
Treasury stock, at cost; 416,666 shares at June 30, 2003 and December 31, 2002 | (9,682 | ) | (9,682 | ) | ||||
Accumulated other comprehensive loss | (39,111 | ) | (45,431 | ) | ||||
Retained earnings | 69,741 | 65,356 | ||||||
Total stockholders' equity | 718,490 | 696,368 | ||||||
Total liabilities and stockholders' equity | $ | 1,587,460 | $ | 1,502,002 | ||||
See the accompanying notes which are an integral part of these consolidated financial statements
3
Key Energy Services, Inc.
Unaudited Consolidated Statements of Operations
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| (thousands, except per share data) | ||||||||||||||
REVENUES: | |||||||||||||||
Well servicing | $ | 219,970 | $ | 154,051 | $ | 419,128 | $ | 308,485 | |||||||
Contract drilling | 18,511 | 13,130 | 33,106 | 27,092 | |||||||||||
Other | 1,114 | 2,568 | 2,485 | 4,413 | |||||||||||
Total revenues | 239,595 | 169,749 | 454,719 | 339,990 | |||||||||||
COSTS AND EXPENSES: | |||||||||||||||
Well servicing | 154,333 | 121,003 | 301,238 | 234,361 | |||||||||||
Contract drilling | 13,189 | 10,387 | 24,337 | 21,453 | |||||||||||
Depreciation, depletion and amortization | 25,690 | 20,783 | 51,291 | 40,672 | |||||||||||
General and administrative | 23,585 | 16,881 | 45,703 | 30,575 | |||||||||||
Interest | 12,166 | 10,411 | 23,214 | 20,286 | |||||||||||
Other expenses | 974 | 1,245 | 1,889 | 2,196 | |||||||||||
Foreign currency transaction gain, Argentina | — | (401 | ) | — | (401 | ) | |||||||||
(Gain) loss on retirement of debt | (14 | ) | (11 | ) | (16 | ) | 8,457 | ||||||||
Total costs and expenses | 229,923 | 180,298 | 447,656 | 357,599 | |||||||||||
Income (loss) before income taxes | 9,672 | (10,549 | ) | 7,063 | (17,609 | ) | |||||||||
Income tax benefit (expense) | (3,519 | ) | 4,686 | (2,684 | ) | 7,120 | |||||||||
NET INCOME (LOSS) | $ | 6,153 | $ | (5,863 | ) | $ | 4,379 | $ | (10,489 | ) | |||||
EARNINGS (LOSS) PER SHARE: | |||||||||||||||
Net income (loss) | |||||||||||||||
Basic | $ | 0.05 | $ | (0.05 | ) | $ | 0.03 | $ | (0.10 | ) | |||||
Diluted | $ | 0.05 | $ | (0.05 | ) | $ | 0.03 | $ | (0.10 | ) | |||||
WEIGHTED AVERAGE SHARES OUTSTANDING: | |||||||||||||||
Basic | 129,128 | 109,776 | 128,765 | 109,225 | |||||||||||
Diluted | 131,356 | 109,776 | 130,761 | 109,225 |
See the accompanying notes which are an integral part of these consolidated financial statements
4
Key Energy Services, Inc.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||
| (thousands) | (thousands) | |||||||||||
NET INCOME (LOSS) | $ | 6,153 | $ | (5,863 | ) | $ | 4,379 | $ | (10,489 | ) | |||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | |||||||||||||
Oil and natural gas derivatives adjustment, net of tax | (24 | ) | (177 | ) | (39 | ) | (636 | ) | |||||
Amortization of oil and natural gas derivatives, net of tax | 18 | 144 | 695 | (179 | ) | ||||||||
Foreign currency translation gain (loss), net of tax | 2,353 | (4,850 | ) | 5,664 | (24,158 | ) | |||||||
COMPREHENSIVE INCOME (LOSS), NET OF TAX | $ | 8,500 | $ | (10,746 | ) | $ | 10,699 | $ | (35,462 | ) | |||
See the accompanying notes which are an integral part of these consolidated financial statements
5
Key Energy Services, Inc.
Unaudited Consolidated Statements of Cash Flows
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| (thousands) | (thousands) | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||
Net income (loss) | $ | 6,153 | $ | (5,863 | ) | $ | 4,379 | $ | (10,489 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||
Depreciation, depletion and amortization | 25,690 | 20,783 | 51,291 | 40,672 | |||||||||||
Amortization of deferred debt issuance costs, discount and premium | 833 | 612 | 1,609 | 1,282 | |||||||||||
Deferred income tax expense (benefit) | 3,198 | (2,189 | ) | 2,303 | (2,320 | ) | |||||||||
Loss on sale of assets | 235 | 16 | 291 | 162 | |||||||||||
Foreign currency transaction gain, Argentina | — | (401 | ) | — | (401 | ) | |||||||||
(Gain) loss on retirement of debt | (14 | ) | (11 | ) | (16 | ) | 8,457 | ||||||||
Change in assets and liabilities, net of effects from acquisitions: | |||||||||||||||
(Increase) decrease in accounts receivable | (11,026 | ) | 1,848 | (21,139 | ) | 25,696 | |||||||||
Increase in other current assets | (736 | ) | (1,982 | ) | (686 | ) | (1,913 | ) | |||||||
Increase in accounts payable, accrued interest and accrued expenses | 10,924 | 22,249 | 735 | 7,286 | |||||||||||
Other assets and liabilities | 4,882 | 9,824 | 9,433 | 6,733 | |||||||||||
Net cash provided by operating activities | 40,139 | 44,886 | 48,200 | 75,165 | |||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||
Capital expenditures—well servicing | (15,386 | ) | (16,098 | ) | (31,079 | ) | (29,456 | ) | |||||||
Capital expenditures—contract drilling | (3,073 | ) | (5,658 | ) | (4,003 | ) | (8,784 | ) | |||||||
Capital expenditures—other | (5,177 | ) | (7,373 | ) | (7,772 | ) | (9,795 | ) | |||||||
Proceeds from sale of fixed assets | 565 | 296 | 1,520 | 603 | |||||||||||
Acquisitions—well servicing, net of cash acquired | (3,689 | ) | (396 | ) | (4,248 | ) | (8,598 | ) | |||||||
Acquisitions—contract drilling, net of cash acquired | — | (2,037 | ) | — | (2,037 | ) | |||||||||
Net cash used in investing activities | (26,760 | ) | (31,266 | ) | (45,582 | ) | (58,067 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||
Repayment of long-term debt | (101,632 | ) | (846 | ) | (107,697 | ) | (124,628 | ) | |||||||
Repayment of capital lease obligations | (2,372 | ) | (2,451 | ) | (4,799 | ) | (5,183 | ) | |||||||
Proceeds from long-term debt | 162,000 | — | 175,000 | 159,500 | |||||||||||
Proceeds paid for debt issuance costs | (2,963 | ) | — | (2,963 | ) | (1,585 | ) | ||||||||
Proceeds from exercise of stock options | 1,482 | 1,405 | 2,113 | 1,599 | |||||||||||
Other | — | (214 | ) | (25 | ) | (209 | ) | ||||||||
Net cash provided by financing activities | 56,515 | (2,106 | ) | 61,629 | 29,494 | ||||||||||
Effect of exchange rates on cash | (792 | ) | (334 | ) | (627 | ) | (411 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 69,102 | 11,180 | 63,620 | 46,181 | |||||||||||
Cash and cash equivalents at beginning of period | 3,562 | 42,967 | 9,044 | 7,966 | |||||||||||
Cash and cash equivalents at end of period | $ | 72,664 | $ | 54,147 | $ | 72,664 | $ | 54,147 | |||||||
See the accompanying notes which are an integral part of these consolidated financial statements
6
Key Energy Services, Inc.
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
1. SUMMARY OF SIGNFICANT 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 June 30, 2003 and for the three and six month periods ended June 30, 2003 and 2002 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 (the "SEC"). 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 Transition Report on Form 10-K for the six months ended December 31, 2002. The results of operations for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results of operations for the full fiscal year ending December 31, 2003.
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 ("APB 25"), "Accounting for Stock Issued to Employees." Under the Company's stock incentive plan, 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 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 following table illustrates the effect on net income and
7
earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| (thousands, except per share data) | |||||||||||||
Net income (loss): | ||||||||||||||
As reported | $ | 6,153 | $ | (5,863 | ) | $ | 4,379 | $ | (10,489 | ) | ||||
Deduct: Total stock-based employee compenstation expense determined under fair value based method for all awards, net of tax | (2,191 | ) | (2,651 | ) | (4,504 | ) | (6,013 | ) | ||||||
Pro forma | $ | 3,962 | $ | (8,514 | ) | $ | (125 | ) | $ | (16,502 | ) | |||
Basic earnings per share: | ||||||||||||||
As reported | $ | 0.05 | $ | (0.05 | ) | $ | 0.03 | $ | (0.10 | ) | ||||
Pro forma | $ | 0.03 | $ | (0.08 | ) | $ | — | $ | (0.15 | ) | ||||
Diluted earnings per share: | ||||||||||||||
As reported | $ | 0.05 | $ | (0.05 | ) | $ | 0.03 | $ | (0.10 | ) | ||||
Pro forma | $ | 0.03 | $ | (0.08 | ) | $ | — | $ | (0.15 | ) |
Reclassifications
Certain reclassifications have been made to the consolidated financial statements for the three and six months ended June 30, 2002 to conform to the presentation for the three and six months ended June 30, 2003. The reclassifications consist primarily of gains (losses) on the retirement of debt which are now being recorded as operating expenses rather than as extraordinary items in accordance with SFAS 145, which the Company adopted on July 1, 2002 (See Note 11). In addition, certain property and equipment of the Company, which may be used in either well servicing or drilling that had been previously classified as drilling has now been reclassified as well servicing along with related operating results. The reclassification was made because the majority of the services performed are well servicing in nature.
2. ASSET RETIREMENT OBLIGATIONS—SFAS 143
On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). The new standard requires the Company to recognize a liability for the present value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset depreciating the additional cost over the estimated useful life of the asset. At June 30, 2003 and December 31, 2002, the asset retirement obligation was approximately $9,456,000 and $9,231,000, respectively, related to expected abandonment costs of its oil and natural gas producing properties and salt water disposal wells. The increase in the balance from December 31, 2002 of approximately $225,000 is due to accretion of the discounted liability.
8
3. GOODWILL AND OTHER INTANGIBLE ASSETS—SFAS 142
The Company follows the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). 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 is measured as the excess of its carrying value over its fair value. The Company completed its most recent assessment of goodwill impairment as of June 30, 2003. The assessment did not result in an indication of goodwill impairment.
Intangible assets subject to amortization under SFAS 142 consist of noncompete agreements and patents. Amortization expense for the noncompete agreements is calculated using the straight-line method over the period of the agreement, ranging from three to seven years. Amortization expense for patents is calculated using the straight-line method over the useful life of the patent, ranging from five to seven years.
The gross carrying amount of noncompete agreements subject to amortization totaled approximately $16,143,000 and $18,669,000 at June 30, 2003 and December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately $6,198,000 and $7,511,000 at June 30, 2003 and December 31, 2002, respectively. Amortization expense for the three months ended June 30, 2003 and 2002 was approximately $1,013,000 and $729,000, respectively. Amortization expense for the six months ended June 30, 2003 and 2002 was approximately $2,132,000 and $1,144,000, respectively. Amortization expense for the next five succeeding years is estimated to be approximately $3,554,000, $2,691,000, $2,067,000, $1,498,000 and $117,000.
The gross carrying amount of patents subject to amortization totaled approximately $2,454,000 and $2,380,000 at June 30, 2003 and December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately $336,000 and $160,000 as of June 30, 2003 and December 31, 2002, respectively. The Company began acquiring patents on July 16, 2002. Amortization expense for the three and six months ended June 30, 2003 was approximately $88,000 and $176,000, respectively. Amortization expense for the next five succeeding years is estimated to be approximately $398,000, $398,000, $398,000, $398,000 and $286,000.
The Company has identified its reporting segments to be well servicing and contract drilling. Net goodwill allocated to such reporting segments at June 30, 2003 was approximately $330,346,000 and $14,318,000, respectively, and at December 31, 2002 was approximately $307,987,000 and $14,283,000, respectively. The change in carrying amount of goodwill for the three and six months ended June 30, 2003 was approximately $6,918,000 and $23,715,000, respectively, relates principally to the allocation of goodwill from the acquisition of Q Services, Inc. (See Note 5) and the preliminary allocation of goodwill from other small acquisitions, and the foreign currency translation adjustment for the Company's Argentina operations.
9
4. EARNINGS PER SHARE
The Company accounts for earnings per share based upon Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming exercise of dilutive stock options and warrants and conversion of dilutive outstanding convertible securities using the "as if converted" method.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| (thousands, except per share data) | ||||||||||||||
Basic EPS Computation: | |||||||||||||||
Numerator | |||||||||||||||
Net income (loss) | $ | 6,153 | $ | (5,863 | ) | $ | 4,379 | $ | (10,489 | ) | |||||
Denominator | |||||||||||||||
Weighted average common shares outstanding | 129,128 | 109,776 | 128,765 | 109,225 | |||||||||||
Basic EPS: | |||||||||||||||
Net income (loss) | $ | 0.05 | $ | (0.05 | ) | $ | 0.03 | $ | (0.10 | ) | |||||
Diluted EPS Computation: | |||||||||||||||
Numerator | |||||||||||||||
Net income (loss) | $ | 6,153 | $ | (5,863 | ) | $ | 4,379 | $ | (10,489 | ) | |||||
Denominator | |||||||||||||||
Weighted average common shares outstanding | 129,128 | 109,776 | 128,765 | 109,225 | |||||||||||
Warrants | 465 | — | 444 | — | |||||||||||
Stock options | 1,763 | — | 1,552 | — | |||||||||||
131,356 | 109,776 | 130,761 | 109,225 | ||||||||||||
Diluted EPS: | |||||||||||||||
Net income (loss) | $ | 0.05 | $ | (0.05 | ) | $ | 0.03 | $ | (0.10 | ) | |||||
The diluted earnings per share calculation for the three and six month periods ended June 30, 2003 excludes the effect of the potential exercise of 350,000 of the Company's stock options and the potential exercise of the Company's convertible debt because the effects of such instruments on earnings per share would be anti-dilutive. The diluted earnings per share calculation for the three months and six month periods ended June 30, 2002 excludes the effect of the potential exercise of the Company's convertible debt, outstanding warrants and stock options because the effects of such instruments on earnings per share would be anti-dilutive.
5. Q SERVICES ACQUISITION
On July 19, 2002, the Company acquired Q Services, Inc. ("QSI") pursuant to an Agreement and Plan of Merger dated May 13, 2002, as amended, by and among the Company, Key Merger Sub, Inc. and QSI. As consideration for the acquisition, the Company issued approximately 17.1 million shares of its common stock to the QSI shareholders and paid approximately $94.2 million in cash at the closing to retire debt and preferred stock of QSI and to satisfy certain other obligations of QSI. In addition to
10
assuming the positive working capital of QSI, the Company incurred other direct acquisition costs and assumed certain other liabilities of QSI, resulting in the Company recording an aggregate purchase price of approximately $251 million. The value of the shares issued was based on the closing price of the Company's common stock on the closing date of $8.75 per share. The results of QSI's operations have been included in the consolidated financial statements since the closing date. Prior to the acquisition, QSI was a privately held corporation conducting field production, pressure pumping, and other service operations in Louisiana, New Mexico, Oklahoma, Texas, and the Gulf of Mexico. The Company and QSI operated in adjacent and or overlapping locations and the Company expects to realize future cost savings and synergies in connection with the merger.
The following table summarizes the estimated preliminary fair value of the assets acquired and liabilities assumed at the date of acquisition:
| At July 19, 2002 | |||
---|---|---|---|---|
| (thousands) | |||
Current assets | $ | 37,734 | ||
Property and equipment | 114,519 | |||
Intangible assets | 3,242 | |||
Other assets | 344 | |||
Goodwill | 136,640 | |||
Total assets aquired | 292,479 | |||
Current liabilities | 18,597 | |||
Capital lease obligations | 77 | |||
Non-current accrued expenses | 17,908 | |||
Deferred tax liablity | 5,124 | |||
Total liabilities assumed | 41,706 | |||
Net assets acquired | $ | 250,773 | ||
The $3,242,000 of intangible assets consists of noncompete agreements which have a weighted-average useful life of approximately two years. The $136,640,000 of goodwill was allocated to the well servicing reporting segment. Of that amount, $11,645,000 is expected to be deductible for income taxes.
During the three months ended March 31, 2003, the Company recorded an adjustment of approximately $24.5 million to reduce the cost allocated to certain equipment in the preliminary fair value allocation. The adjustment was based on an independent third party appraisal of the estimated fair value of the equipment as of the July 2002 acquisition date.
11
The following unaudited pro forma results of operations have been prepared as though QSI had been acquired on January 1, 2002. Pro forma amounts are not necessarily indicative of the results that may be reported in the future.
| Three Months Ended June 30, 2002 | Six Months Ended June 30, 2002 | |||||
---|---|---|---|---|---|---|---|
| (thousands, except per share data) | ||||||
Revenues | $ | 208,654 | $ | 417,922 | |||
Net income (loss) | (7,846 | ) | (11,271 | ) | |||
Basic earnings (loss) per share | $ | (0.06 | ) | $ | (0.09 | ) |
6. SENIOR NOTES OFFERING
On May 14, 2003, the Company completed a public offering of $150,000,000 of 63/8% Senior Notes due 2013. The cash proceeds from the debt offering, net of fees and expenses, were used to repay the balance of the revolving loan facility then outstanding under the Company's senior credit facility, with the remainder to be used for general corporate purposes, including further debt retirement.
7. 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.
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 cash flows 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 desires a measure of stability to ensure that cash flows do not fall below a certain level.
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 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 oil and natural gas
12
prices should fall below the floor index. On May 2, 2002, the Company entered into an option arrangement for a 12-month period beginning March 2003 whereby the counter-party will pay if the oil price should fall below the floor index.
The Company did not document the May 25, 2001 and May 2, 2002 oil and natural gas options as cash flow hedges until July 1, 2001 and July 1, 2002, respectively. The Company recorded a net decrease in derivative assets of approximately $27,000 and $778,000 during the six months ended June 30, 2003 and 2002, respectively. The Company recorded no ineffectiveness for the six months ended June 30, 2003 and an earnings charge of approximately $9,000 for the six months ended June 30, 2002.
The following table sets forth the future volumes hedged by year and the weighted-average strike price of the option contracts at June 30, 2003 and 2002:
| | | | Strike Price Per Bbl/Mmbtu | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Oil (Bbls) | Gas (Mmbtu) | | | |||||||||||
| Term | Floor | Cap | Fair Value | |||||||||||
At June 30, 2003 | |||||||||||||||
Oil Put | 4,000 | — | Mar 2003-Feb 2004 | $ | 21.00 | — | $ | 7,000 | |||||||
At June 30, 2002 | |||||||||||||||
Oil Put | 5,000 | — | Mar 2002-Feb 2003 | $ | 22.00 | — | $ | 24,000 | |||||||
Oil Put | 4,000 | — | Mar 2003-Feb 2004 | $ | 21.00 | — | $ | 118,000 | |||||||
Natural Gas Put | — | 75,000 | Mar 2002-Feb 2003 | $ | 3.00 | — | $ | 104,000 |
(The strike prices for the oil puts are based on the NYMEX spot prices for West Texas Intermediate. The strike price for the natural gas put is based on the Inside FERC-El Paso Permian spot price.)
9. BUSINESS SEGMENT INFORMATION
The Company's reportable business segments are well servicing and contract drilling. Oil and natural gas production operations are presented 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, fishing and rental tool services and pressure pumping services).
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
13
assets consist principally of cash and cash equivalents, deferred debt financing costs and deferred income tax assets.
| Well Servicing | Contract Drilling | Corporate /Other | Total | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three Months Ended June 30, 2003 | ||||||||||||||
Operating revenues | $ | 219,970 | $ | 18,511 | $ | 1,114 | $ | 239,595 | ||||||
Operating profit | 65,637 | 5,322 | 140 | 71,099 | ||||||||||
Depreciation, depletion and amortization | 21,367 | 2,649 | 1,674 | 25,690 | ||||||||||
Interest expense | 155 | — | 12,011 | 12,166 | ||||||||||
Net income (loss)* | 13,332 | 566 | (7,745 | ) | 6,153 | |||||||||
Identifiable assets | 817,648 | 89,258 | 335,890 | 1,242,796 | ||||||||||
Capital expenditures (excluding acquisitions) | 15,386 | 3,073 | 5,177 | 23,636 | ||||||||||
Three Months Ended June 30, 2002 | ||||||||||||||
Operating revenues | $ | 154,051 | $ | 13,130 | $ | 2,568 | $ | 169,749 | ||||||
Operating profit | 33,048 | 2,743 | 1,323 | 37,114 | ||||||||||
Depreciation, depletion and amortization | 17,059 | 2,257 | 1,467 | 20,783 | ||||||||||
Interest expense | 239 | — | 10,172 | 10,411 | ||||||||||
Net income (loss)* | 225 | (394 | ) | (5,694 | ) | (5,863 | ) | |||||||
Identifiable assets | 686,423 | 91,374 | 264,129 | 1,041,926 | ||||||||||
Capital expenditures (excluding acquisitions) | 16,098 | 5,658 | 7,373 | 29,129 |
- *
- Net income (loss) for the contract drilling segment includes a portion of well servicing general and administrative expenses allocated on a percentage of revenue basis.
Operating revenues for the Company's foreign operations (which consists of Argentina, Canada and Egypt) for the three months ended June 30, 2003 and 2002 were approximately $12.3 million and $5.1 million, respectively. Operating profits for the Company's foreign operations for the three months ended June 30, 2003 and 2002 were approximately $4.8 million and $1.0 million, respectively. The Company had approximately $57.1 million and $27.9 million of identifiable assets as of June 30, 2003 and 2002, respectively, related to foreign operations. Capital expenditures for the Company's foreign
14
operations for the three months ended June 30, 2003 and 2002 were approximately $0.7 million and $0.4 million, respectively.
| Well Servicing | Contract Drilling | Corporate / Other | Total | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Six Months Ended June 30, 2003 | ||||||||||||||
Operating revenues | $ | 419,128 | $ | 33,106 | $ | 2,485 | $ | 454,719 | ||||||
Operating profit | 117,890 | 8,769 | 596 | 127,255 | ||||||||||
Depreciation, depletion and amortization | 42,917 | 5,212 | 3,162 | 51,291 | ||||||||||
Interest expense | 339 | — | 22,875 | 23,214 | ||||||||||
Net income (loss)* | 20,162 | 146 | (15,929 | ) | 4,379 | |||||||||
Identifiable assets | 817,648 | 89,258 | 335,890 | 1,242,796 | ||||||||||
Capital expenditures (excluding acquisitions) | 31,079 | 4,003 | 7,772 | 42,854 | ||||||||||
Six Months Ended June 30, 2002 | ||||||||||||||
Operating revenues | $ | 308,485 | $ | 27,092 | $ | 4,413 | $ | 339,990 | ||||||
Operating profit | 74,124 | 5,639 | 2,217 | 81,980 | ||||||||||
Depreciation, depletion and amortization | 33,512 | 4,608 | 2,552 | 40,672 | ||||||||||
Interest expense | 495 | — | 19,791 | 20,286 | ||||||||||
Net income (loss)* | 3,018 | (1,227 | ) | (12,280 | ) | (10,489 | ) | |||||||
Identifiable assets | 686,423 | 91,374 | 264,129 | 1,041,926 | ||||||||||
Capital expenditures (excluding acquisitions) | 29,456 | 8,784 | 9,795 | 48,035 |
- *
- Net income (loss) for the contract drilling segment includes a portion of well servicing general and administrative expenses allocated on a percentage of revenue basis.
Operating revenues for the Company's foreign operations for the six months ended June 30, 2003 and 2002 were approximately $21.9 million and $9.2 million, respectively. Operating profits for the Company's foreign operations for the six months ended June 30, 2003 and 2002 were approximately $9.2 million and $1.7 million, respectively. The Company had approximately $57.1 million and $27.9 million of identifiable assets as of June 30, 2003 and 2002, respectively, related to foreign operations. Capital expenditures for the Company's foreign operations for the six months ended June 30, 2003 and 2002 were approximately $1.9 million and $3.1 million, respectively.
10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's senior notes are guaranteed by substantially all of the Company's 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 accounting principles generally accepted in the United States of America.
The 63/8% Senior Notes are guaranteed by the Guarantor A group of subsidiaries, which consists of substantially all of the Company's subsidiaries. The 83/8% Senior Notes and the 14% Senior
15
Subordinated Notes are guaranteed by the Guarantor A group of subsidiaries and Guarantor B, which is Odessa Exploration Incorporated.
CONDENSED CONSOLIDATING BALANCE SHEET
| June 30, 2003 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| (thousands) | |||||||||||||||||
Assets: | ||||||||||||||||||
Current assets | $ | 83,987 | $ | 161,976 | $ | 1,242 | $ | 14,421 | $ | — | $ | 261,626 | ||||||
Net property and equipment | 48,659 | 833,797 | 31,506 | 23,682 | — | 937,644 | ||||||||||||
Goodwill, net | 3,431 | 340,475 | — | 758 | — | 344,664 | ||||||||||||
Deferred costs, net | 14,765 | — | — | — | — | 14,765 | ||||||||||||
Inter-company receivables | 726,164 | — | — | — | (726,164 | ) | — | |||||||||||
Other assets | 15,762 | 12,483 | 516 | — | — | 28,761 | ||||||||||||
Total assets | $ | 892,768 | $ | 1,348,731 | $ | 33,264 | $ | 38,861 | $ | (726,164 | ) | $ | 1,587,460 | |||||
Liabilities and equity: | ||||||||||||||||||
Current liabilities | $ | 38,179 | $ | 62,051 | $ | 2,104 | $ | 5,773 | $ | — | $ | 108,107 | ||||||
Long-term debt | 539,506 | — | — | — | — | 539,506 | ||||||||||||
Capital lease obligations | 1,516 | 11,237 | — | — | — | 12,753 | ||||||||||||
Inter-company payables | — | 692,964 | 15,705 | 17,495 | (726,164 | ) | — | |||||||||||
Deferred tax liability | 153,309 | — | — | — | — | 153,309 | ||||||||||||
Other long-term liabilities | 39,269 | 4,236 | 11,678 | 112 | — | 55,295 | ||||||||||||
Stockholders' equity | 120,989 | 578,243 | 3,777 | 15,481 | — | 718,490 | ||||||||||||
Total liabilities and stockholders' equity | $ | 892,768 | $ | 1,348,731 | $ | 33,264 | $ | 38,861 | $ | (726,164 | ) | $ | 1,587,460 | |||||
CONDENSED CONSOLIDATING BALANCE SHEET
| December 31, 2002 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| (thousands) | |||||||||||||||||
Assets: | ||||||||||||||||||
Current assets | $ | 17,716 | $ | 142,587 | $ | 992 | $ | 14,279 | $ | — | $ | 175,574 | ||||||
Net property and equipment | 43,134 | 861,043 | 32,732 | 19,596 | — | 956,505 | ||||||||||||
Goodwill, net | 3,431 | 318,208 | — | 631 | — | 322,270 | ||||||||||||
Deferred costs, net | 13,503 | — | — | — | — | 13,503 | ||||||||||||
Inter-company receivables | 760,990 | — | — | — | (760,990 | ) | — | |||||||||||
Other assets | 19,687 | 13,882 | 581 | — | — | 34,150 | ||||||||||||
Total assets | $ | 858,461 | $ | 1,335,720 | $ | 34,305 | $ | 34,506 | $ | (760,990 | ) | $ | 1,502,002 | |||||
Liabilities and equity: | ||||||||||||||||||
Current liabilities | $ | 43,701 | $ | 59,410 | $ | 2,061 | $ | 3,703 | $ | — | $ | 108,875 | ||||||
Long-term debt | 472,336 | — | — | — | — | 472,336 | ||||||||||||
Capital lease obligations | 1,648 | 12,573 | — | — | — | 14,221 | ||||||||||||
Inter-company payables | — | 724,341 | 15,501 | 21,148 | (760,990 | ) | — | |||||||||||
Deferred tax liability | 161,265 | — | — | — | — | 161,265 | ||||||||||||
Other long-term liabilities | 31,222 | 4,735 | 12,887 | 93 | — | 48,937 | ||||||||||||
Stockholders' equity | 148,289 | 534,661 | 3,856 | 9,562 | — | 696,368 | ||||||||||||
Total liabilities and stockholders' equity | $ | 858,461 | $ | 1,335,720 | $ | 34,305 | $ | 34,506 | $ | (760,990 | ) | $ | 1,502,002 | |||||
16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| Three Months Ended June 30, 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Revenues | $ | 39 | $ | 230,767 | $ | 1,607 | $ | 7,182 | $ | — | $ | 239,595 | |||||||
Costs and expenses: | |||||||||||||||||||
Direct expenses | — | 161,880 | 1,056 | 5,560 | — | 168,496 | |||||||||||||
Depreciation, depletion and amortization expense | 1,101 | 23,355 | 614 | 620 | — | 25,690 | |||||||||||||
General and administrative expense | 10,243 | 12,636 | 267 | 439 | — | 23,585 | |||||||||||||
Interest | 12,010 | 136 | — | 20 | — | 12,166 | |||||||||||||
Gain on retirement of debt | (14 | ) | — | — | — | — | (14 | ) | |||||||||||
Total costs and expenses | 23,340 | 198,007 | 1,937 | 6,639 | — | 229,923 | |||||||||||||
Income (loss) before income taxes | (23,301 | ) | 32,760 | (330 | ) | 543 | — | 9,672 | |||||||||||
Income tax (expense) benefit | 10,082 | (13,512 | ) | 150 | (239 | ) | — | (3,519 | ) | ||||||||||
Net income (loss) | $ | (13,219 | ) | $ | 19,248 | $ | (180 | ) | $ | 304 | $ | — | $ | 6,153 | |||||
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| Three Months Ended June 30, 2002 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Revenues | $ | 113 | $ | 162,937 | $ | 1,513 | $ | 5,186 | $ | — | $ | 169,749 | |||||||
Costs and expenses: | |||||||||||||||||||
Direct expenses | — | 127,205 | 1,266 | 4,164 | — | 132,635 | |||||||||||||
Depreciation, depletion and amortization expense | 626 | 18,848 | 870 | 439 | — | 20,783 | |||||||||||||
General and administrative expense | 7,267 | 9,147 | 141 | 326 | — | 16,881 | |||||||||||||
Interest | 10,172 | 235 | — | 4 | — | 10,411 | |||||||||||||
Foreign currency transaction (gain), Argentina | — | — | — | (401 | ) | — | (401 | ) | |||||||||||
Gain on retirement of debt | (11 | ) | — | — | — | — | (11 | ) | |||||||||||
Total costs and expenses | 18,054 | 155,435 | 2,277 | 4,532 | — | 180,298 | |||||||||||||
Income (loss) before income taxes | (17,941 | ) | 7,502 | (764 | ) | 654 | — | (10,549 | ) | ||||||||||
Income tax (expense) benefit | 8,670 | (4,045 | ) | 302 | (241 | ) | — | 4,686 | |||||||||||
Net income (loss) | $ | (9,271 | ) | $ | 3,457 | $ | (462 | ) | $ | 413 | $ | — | $ | (5,863 | ) | ||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| Six Months Ended June 30, 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Revenues | $ | 107 | $ | 438,554 | $ | 2,970 | $ | 13,088 | $ | — | $ | 454,719 | |||||||
Costs and expenses: | |||||||||||||||||||
Direct expenses | — | 315,467 | 2,047 | 9,950 | — | 327,464 | |||||||||||||
Depreciation, depletion and amortization expense | 2,016 | 46,929 | 1,228 | 1,118 | — | 51,291 | |||||||||||||
General and administrative expense | 19,006 | 25,385 | 429 | 883 | — | 45,703 | |||||||||||||
Interest | 22,874 | 281 | — | 59 | — | 23,214 | |||||||||||||
Gain on retirement of debt | (16 | ) | — | — | — | — | (16 | ) | |||||||||||
Total costs and expenses | 43,880 | 388,062 | 3,704 | 12,010 | — | 447,656 | |||||||||||||
Income (loss) before income taxes | (43,773 | ) | 50,492 | (734 | ) | 1,078 | — | 7,063 | |||||||||||
Income tax (expense) benefit | 16,634 | (19,187 | ) | 279 | (410 | ) | — | (2,684 | ) | ||||||||||
Net income (loss) | $ | (27,139 | ) | $ | 31,305 | $ | (455 | ) | $ | 668 | $ | — | $ | 4,379 | |||||
18
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
| Six Months Ended June 30, 2002 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Revenues | $ | 423 | $ | 326,980 | $ | 3,369 | $ | 9,218 | $ | — | $ | 339,990 | |||||||
Costs and expenses: | |||||||||||||||||||
Direct expenses | — | 248,260 | 2,216 | 7,534 | — | 258,010 | |||||||||||||
Depreciation, depletion and amortization expense | 1,090 | 37,038 | 1,491 | 1,053 | — | 40,672 | |||||||||||||
General and administrative expense | 12,793 | 16,714 | 299 | 769 | — | 30,575 | |||||||||||||
Interest | 19,791 | 511 | — | (16 | ) | — | 20,286 | ||||||||||||
Foreign currency transaction (gain), Argentina | — | — | — | (401 | ) | — | (401 | ) | |||||||||||
Gain on retirement of debt | 8,457 | — | — | — | — | 8,457 | |||||||||||||
Total costs and expenses | 42,131 | 302,523 | 4,006 | 8,939 | — | 357,599 | |||||||||||||
Income (loss) before income taxes | (41,708 | ) | 24,457 | (637 | ) | 279 | — | (17,609 | ) | ||||||||||
Income tax (expense) benefit | 16,864 | (9,890 | ) | 258 | (112 | ) | — | 7,120 | |||||||||||
Net income (loss) | $ | (24,844 | ) | $ | 14,567 | $ | (379 | ) | $ | 167 | $ | — | $ | (10,489 | ) | ||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| Three Months Ended June 30, 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Net cash provided (used) by operating activities | $ | 21,844 | $ | 19,011 | $ | (70 | ) | $ | (646 | ) | $ | — | $ | 40,139 | |||||
Net cash provided (used) in investing activities | (8,316 | ) | (17,472 | ) | — | (972 | ) | — | (26,760 | ) | |||||||||
Net cash provided (used) in financing activities | 58,661 | (2,146 | ) | — | — | — | 56,515 | ||||||||||||
Effect of exchange rate changes on cash | — | — | — | (792 | ) | — | (792 | ) | |||||||||||
Net increase (decrease) in cash | 72,189 | (607 | ) | (70 | ) | (2,410 | ) | — | 69,102 | ||||||||||
Cash at beginning of period | (1,271 | ) | 1,214 | (204 | ) | 3,823 | — | 3,562 | |||||||||||
Cash at end of period | $ | 70,918 | $ | 607 | $ | (274 | ) | $ | 1,413 | $ | — | $ | 72,664 | ||||||
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| Three Months Ended June 30, 2002 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Net cash provided (used) by operating activities | $ | 28,542 | $ | 16,729 | $ | (1,506 | ) | $ | 1,121 | $ | — | $ | 44,886 | ||||||
Net cash provided (used) in investing activities | (12,908 | ) | (17,969 | ) | 176 | (565 | ) | — | (31,266 | ) | |||||||||
Net cash provided (used) in financing activities | 144 | (2,250 | ) | — | — | — | (2,106 | ) | |||||||||||
Effect of exchange rate changes on cash | — | — | — | (334 | ) | — | (334 | ) | |||||||||||
Net increase (decrease) in cash | 15,778 | (3,490 | ) | (1,330 | ) | 222 | — | 11,180 | |||||||||||
Cash at beginning of period | 36,964 | 3,728 | 935 | 1,340 | — | 42,967 | |||||||||||||
Cash at end of period | $ | 52,742 | $ | 238 | $ | (395 | ) | $ | 1,562 | $ | — | $ | 54,147 | ||||||
20
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| Six Months Ended June 30, 2003 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Net cash provided (used) by operating activities | $ | 11,160 | $ | 36,477 | $ | (14 | ) | $ | 577 | $ | — | $ | 48,200 | ||||||
Net cash provided (used) in investing activities | (11,387 | ) | (32,757 | ) | (2 | ) | (1,436 | ) | — | (45,582 | ) | ||||||||
Net cash provided (used) in financing activities | 65,962 | (4,333 | ) | — | — | — | 61,629 | ||||||||||||
Effect of exchange rate changes on cash | — | — | — | (627 | ) | — | (627 | ) | |||||||||||
Net increase (decrease) in cash | 65,735 | (613 | ) | (16 | ) | (1,486 | ) | — | 63,620 | ||||||||||
Cash at beginning of period | 5,183 | 1,220 | (258 | ) | 2,899 | — | 9,044 | ||||||||||||
Cash at end of period | $ | 70,918 | $ | 607 | $ | (274 | ) | $ | 1,413 | $ | — | $ | 72,664 | ||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| Six Months Ended June 30, 2002 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Parent Company | Guarantor A Subsidiaries | Guarantor B Subsidiary | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (thousands) | ||||||||||||||||||
Net cash provided (used) by operating activities | $ | 40,343 | $ | 32,652 | $ | (1,250 | ) | $ | 3,420 | $ | — | $ | 75,165 | ||||||
Net cash provided (used) in investing activities | (24,363 | ) | (30,636 | ) | 62 | (3,130 | ) | — | (58,067 | ) | |||||||||
Net cash provided (used) in financing activities | 34,255 | (4,761 | ) | — | — | — | 29,494 | ||||||||||||
Effect of exchange rate changes on cash | — | — | — | (411 | ) | — | (411 | ) | |||||||||||
Net increase (decrease) in cash | 50,235 | (2,745 | ) | (1,188 | ) | (121 | ) | — | 46,181 | ||||||||||
Cash at beginning of period | 2,507 | 2,983 | 793 | 1,683 | — | 7,966 | |||||||||||||
Cash at end of period | $ | 52,742 | $ | 238 | $ | (395 | ) | $ | 1,562 | $ | — | $ | 54,147 | ||||||
11. GAINS (LOSSES) ON RETIREMENT OF DEBT—SFAS 145
On July 1, 2002, the Company adopted 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"). The provisions of SFAS 145, which are currently applicable to the Company, rescind FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, and instead requires that such gains and losses be reported in operating income. The Company now records gains and losses from the extinguishment of debt in operating income and has reclassified such gains and losses in the financial statements for the three and six months ended June 30, 2002 to conform to the presentation for the three and six months ended June 30, 2003.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements in this document that relate to matters that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this document and the documents incorporated by reference, words such as "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "could," "may," "predict" and similar expressions are intended to identify forward-looking statements. Further events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. Factors that might cause such a difference include:
- •
- fluctuations in world-wide prices and demand for oil and natural gas;
- •
- fluctuations in level of oil and natural gas exploration and development activities;
- •
- fluctuations in the demand for well servicing, contract drilling and ancillary oilfield services;
- •
- the existence of competitors, technological changes and developments in the industry;
- •
- the existence of operating risks inherent in the well servicing, contract drilling and ancillary oilfield services; and
- •
- general economic conditions, the existence of regulatory uncertainties, and the possibility of political instability in any of the countries in which Key does business, in addition to other matters discussed herein.
These forward looking-statements speak only as of the date of this report and Key disclaims any duty or obligation to update the forward looking statement in this report.
The following discussion provides information to assist in the understanding of the Company's financial condition and results of operations. It should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. As used in this Item 2, references to composite well servicing rig rates means, for a given period, the total well servicing revenues for that period divided by the total well servicing hours for that period. As used in this Item 2, references to composite contract drilling rig rates means, for a given period, the total contract drilling revenues for that period divided by the total contract drilling hours for that period. As used in this Item 2, references to composite truck rates means, for a given period, the total trucking revenues for that period divided by the total trucking hours for that period.
The Company's results of operations for the three and six months ended June 30, 2003 reflect the impact of continued modest improvement in industry conditions resulting from continued strength in oil and natural gas prices.
THREE MONTHS ENDED JUNE 30, 2003 VERSUS THREE MONTHS ENDED JUNE 30, 2002
The Company's revenue for the three months ended June 30, 2003 increased $69,846,000, or 41%, to $239,595,000 from $169,749,000 for the three months ended June 30, 2002. For the three months ended June 30, 2003, the Company had a net income of $6,153,000, an improvement of $12,016,000, from a net loss of $5,863,000 for the three months ended June 30, 2002. The increase in revenues and net income is principally due to increasing levels of activity and the acquisition of QSI. Total rig hours for the three months ended June 30, 2003 increased approximately 12% compared to total rig hours for the three months ended June 30, 2002. Total trucking hours for the three months ended June 30, 2003
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increased approximately 49% compared to total trucking hours for the three months ended June 30, 2002 principally due to the acquisition of QSI and improved activity levels.
Operating Revenues
Well Servicing. Well servicing revenues for the three months ended June 30, 2003 increased $65,919,000, or 43%, to $219,970,000 from $154,051,000 for the three months ended June 30, 2002. The increase in revenues was primarily due to an increase in activity and the acquisition of QSI resulting in an increase in total well servicing hours and total trucking hours and a slight increase in composite well servicing rig rates. Total well servicing hours for the three months ended June 30, 2003 increased approximately 10% compared to total well servicing hours for the three months ended June 30, 2002. Composite well servicing rig rates increased by approximately 4% for the three months ended June 30, 2003 compared to composite well servicing rig rates for the three months ended June 30, 2002. While total trucking hours for the three months ended June 30, 2003 increased approximately 49% compared to total trucking hours for the three months ended June 30, 2002, composite truck rates for the three months ended June 30, 2003 decreased slightly by approximately 1% compared to composite truck rates for the three months ended June 30, 2002.
Contract Drilling. Contract drilling revenues for the three months ended June 30, 2003 increased $5,381,000, or 41%, to $18,511,000 from $13,130,000 for the three months ended June 30, 2002. The increase in revenues was primarily due to an increase in activity resulting in an increase in total contract drilling hours and a slight improvement in composite contract drilling rates. Total contract drilling hours for the three months ended June 30, 2003 increased by approximately 37% compared to total contract drilling hours for the three months ended June 30, 2002, while composite contract drilling rig rates for the three months ended June 30, 2003 increased by approximately 3% compared to composite contract drilling rig rates for the three months ended June 30, 2002.
Operating Expenses
Well Servicing. Well servicing expenses for the three months ended June 30, 2003 increased $33,330,000, or 28%, to $154,333,000 from $121,003,000 for the three months ended June 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance costs, the acquisition of QSI and higher insurance costs, primarily in workers' compensation. Well servicing expenses, as a percentage of well servicing revenue, decreased from 79% for the three months ended June 30, 2002 to 70% for the three months ended June 30, 2003.
Contract Drilling. Contract drilling expenses for the three months ended June 30, 2003 increased $2,802,000, or 27%, to $13,189,000 from $10,387,000 for the three months ended June 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance costs and higher insurance costs, primarily in workers' compensation. Contract drilling expenses, as a percentage of contract drilling revenues, decreased from 79% for the three months ended June 30, 2002 to 71% for the three months ended June 30, 2003.
Depreciation, Depletion and Amortization Expense
The Company's depreciation, depletion and amortization expense for the three months ended June 30, 2003 increased $4,907,000, or 24%, to $25,690,000 from $20,783,000 for the three months ended June 30, 2002. The increase is primarily due to the acquisition of QSI, which added approximately $114,519,000 in property and equipment, and to a lesser extent by the Company's ongoing capital expenditure program, which includes remanufacturing of well service and contract drilling equipment and the Company's technology initiatives.
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General and Administrative Expenses
The Company's general and administrative expenses for the three months ended June 30, 2003 increased $6,704,000, or 40%, to $23,585,000 from $16,881,000 for the three months ended June 30, 2002. The increase was primarily due to the acquisition of QSI and higher costs associated with increased activity levels. Incremental costs include expenses related to additional personnel supporting the implementation of information technology initiatives. General and administrative expenses, as a percentage of revenues, was 10% for the three months ended June 30, 2003 and for the three months ended June 30, 2002.
Interest Expense
The Company's interest expense for the three months ended June 30, 2003 increased $1,755,000, or 17%, to $12,166,000 from $10,411,000 for the three months ended June 30, 2002. The increase was primarily due to higher average long term debt in the quarter ended June 30, 2003 as compared to June 30, 2002 resulting from the issuance of the 63/8% Senior Notes partially offset by the repayment of borrowings outstanding under the revolver and the retirement of a portion of the 5% Convertible Subordinated Notes. Included in interest expense was the amortization of deferred debt issuance costs, discount and premium of approximately $833,000 for the three months ended June 30, 2003 compared to $612,000 for the three months ended June 30, 2002.
Gain (Loss) on Retirement of Debt
During the three months ended June 30, 2003, the Company repurchased approximately $30,800,000 of its long-term debt at a discount and expensed related debt issuance costs which resulted in a gain of $14,000. During the three months ended June 30, 2002, the Company repurchased approximately $532,000 of its long-term debt at a discount which resulted in a gain of $11,000. On July 1, 2002, the Company adopted 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"). The new standard rescinds FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be recorded as extraordinary items.
Income Taxes
The Company's income tax expense for the three months ended June 30, 2003 increased $8,205,000 to an expense of $3,519,000 from a benefit of $4,686,000 for the three months ended June 30, 2002. The Company's effective tax rate for the three months ended June 30, 2003 was 36% compared to (44%) for the three months ended June 30, 2002. The effective tax rates are different from the statutory rate of 35% because of non-deductible expenses and the effects of state, local and foreign taxes.
Cash Flows
The Company's net cash provided by operating activities for the three months ended June 30, 2003 decreased $4,747,000 to $40,139,000 from $44,886,000 for the three months ended June 30, 2002. The decrease in net cash provided by operating activities was due to an increase in working capital, other assets and liabilities, partially offset by an increase in net income from higher activity levels.
The Company's net cash used in investing activities for the three months ended June 30, 2003 decreased $4,506,000 to $26,760,000 from $31,266,000 for the three months ended June 30, 2002. The decrease in net cash used in investing activities was due to lower capital expenditures during the three months ended June 30, 2003 over the three months ended June 30, 2002
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The Company's net cash provided by financing activities for the three months ended June 30, 2003 increased $58,621,000 to $56,515,000 from a use of $2,106,000 for the three months ended June 30, 2002. During the three months ended June 30, 2003, the Company completed a public offering of $150,000,000 of 63/8% Senior Notes due 2013. The Company used a portion of the proceeds to repay its indebtedness under the Senior Credit Facility and to repurchase approximately $30,800,000 of its outstanding 5% Convertible Subordinated Notes.
The effect of exchange rates on cash for the three months ended June 30, 2003 and 2002 was a use of $792,000 and $334,000, respectively. This was principally the result of the change in exchange rates of the Argentine peso for the corresponding periods.
SIX MONTHS ENDED JUNE 30, 2003 VERSUS SIX MONTHS ENDED JUNE 30, 2002
The Company's revenue for the six months ended June 30, 2003 increased $114,729,000, or 34%, to $454,719,000 from $339,990,000 for the six months ended June 30, 2002. For the six months ended June 30, 2003, the Company had a net income of $4,379,000, an improvement of $14,868,000, from a net loss of $10,489,000 for the six months ended June 30, 2002. The increase in revenues and increase in net income is principally due to increasing levels of activity and the acquisition of QSI. Total rig hours for the six months ended June 30, 2003 increased approximately 9% compared to total rig hours for the six months ended June 30, 2002. Total trucking hours for the six months ended June 30, 2003 increased approximately 50% compared to total trucking hours for the six months ended June 30, 2002, principally due to the acquisition of QSI and improved activity levels.
Operating Revenues
Well Servicing. Well servicing revenues for the six months ended June 30, 2003 increased $110,643,000, or 36%, to $419,128,000 from $308,485,000 for the six months ended June 30, 2002. The increase in revenues was primarily due to an increase in activity and the acquisition of QSI resulting in an increase in total well servicing hours and total trucking hours and a slight increase in composite well servicing rig rates, partially offset by declines in composite truck rates. Total well servicing hours for the six months ended June 30, 2003 increased approximately 9% compared to total well servicing hours for the six months ended June 30, 2002. Composite well servicing rig rates increased by approximately 2% for the six months ended June 30, 2003 compared to composite well servicing rig rates for the six months ended June 30, 2002. While total trucking hours for the six months ended June 30, 2003 increased by approximately 50% compared to total trucking hours for the six months ended June 30, 2002, composite truck rates for the six months ended June 30, 2003 decreased by approximately 4% compared to composite truck rates for the six months ended June 30, 2002.
Contract Drilling. Contract drilling revenues for the six months ended June 30, 2003 increased $6,014,000, or 22%, to $33,106,000 from $27,092,000 for the six months ended June 30, 2002. The increase in revenues was primarily due to an increase in activity resulting in an increase in contract drilling rig hours and a slight improvement in composite contract drilling rates. Total contract drilling hours for the six months ended June 30, 2003 increased approximately 18% compared to total contract drilling hours for the six months ended June 30, 2002, while composite contract drilling rig rates for the six months ended June 30, 2003 increased by approximately 3% compared to composite contract drilling rig rates for the six months ended June 30, 2002.
Operating Expenses
Well Servicing. Well servicing expenses for the six months ended June 30, 2003 increased $66,877,000, or 29%, to $301,238,000 from $234,361,000 for the six months ended June 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance costs, the acquisition of QSI and higher insurance costs, primarily in workers' compensation. Well servicing
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expenses, as a percentage of well servicing revenue, decreased from 76% for the six months ended June 30, 2002 to 72% for the six months ended June 30, 2003.
Contract Drilling. Contract drilling expenses for the six months ended June 30, 2003 increased $2,884,000, or 13%, to $24,337,000 from $21,453,000 for the six months ended June 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance costs and higher insurance costs, primarily in workers' compensation. Contract drilling expenses, as a percentage of contract drilling revenues, decreased from 79% for the six months ended June 30, 2002 to 74% for the six months ended June 30, 2003.
Depreciation, Depletion and Amortization Expense
The Company's depreciation, depletion and amortization expense for the six months ended June 30, 2003 increased $10,619,000, or 26%, to $51,291,000 from $40,672,000 for the six months ended June 30, 2002. The increase is primarily due to the acquisition of QSI, which added approximately $114,519,000 in property and equipment and to a lesser extent by the Company's ongoing capital expenditure program, which includes remanufacturing of well service and contract drilling equipment and the Company's technology initiatives.
General and Administrative Expenses
The Company's general and administrative expenses for the six months ended June 30, 2003 increased $15,128,000, or 49%, to $45,703,000, from $30,575,000 for the six months ended June 30, 2002. The increase was primarily due to the acquisition of QSI and higher costs associated with increased activity levels. Incremental costs include expenses related to additional personnel supporting the implementation of information technology initiatives. General and administrative expenses, as a percentage of revenues, increased from 9% for the six months ended June 30, 2002 to 10% for the six months ended June 30, 2003.
Interest Expense
The Company's interest expense for the six months ended June 30, 2003 increased $2,928,000, or 14%, to $23,214,000 from $20,286,000 for the six months ended June 30, 2002. The increase was primarily due to higher average long term debt in the quarter ended June 30, 2003 as compared to June 30, 2002 resulting from the issuance of the 63/8% Senior Notes partially offset by the repayment of borrowings under the revolver and the retirement of a portion of the 5% Convertible Subordinated Notes. Included in interest expense was the amortization of deferred debt issuance costs, discount and premium of approximately $1,609,000 for the six months ended June 30, 2003 compared to $1,282,000 for the six months ended June 30, 2002.
Gain (Loss) on Retirement of Debt
During the six months ended June 30, 2003, the Company repurchased approximately $30,855,000 of its long-term debt at a discount and expensed related debt issuance costs which resulted in a gain of $16,000. During the six months ended June 30, 2002, the Company repurchased approximately $36,050,000 of its long-term debt at a various discounts and premiums and expensed related debt issuance costs, which resulted in a loss of $8,457,000. On July 1, 2002, the Company adopted 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"). The new standard rescinds FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be recorded as extraordinary items.
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Income Taxes
The Company's income tax expense for the six months ended June 30, 2003 increased $9,804,000 to an expense of $2,684,000 from a benefit of $7,120,000 for the six months ended June 30, 2002. The Company's effective tax rate for the six months ended June 30, 2003 was 38% compared to (40%) for the six months ended June 30, 2002. The effective tax rates are different from the statutory rate of 35% because of non-deductible expenses and the effects of state, local and foreign taxes.
Cash Flows
The Company's net cash provided by operating activities for the six months ended June 30, 2003 decreased $26,965,000 to $48,200,000 from $75,165,000 for the six months ended June 30, 2002. The decrease in net cash provided by operating activities was due to an increase in working capital, partially offset by an increase in income from higher activity levels.
The Company's net cash used in investing activities for the six months ended June 30, 2003 decreased $12,485,000 to $45,582,000 from $58,067,000 for the six months ended June 30, 2002. The decrease in net cash used in investing activities was due to lower capital expenditures and minimal acquisition activity during the six months ended June 30, 2003 over the six months ended June 30, 2002.
The Company's net cash provided by financing activities for the six months ended June 30, 2003 increased $32,135,000 to $61,629,000 from $29,494,000 for the six months ended June 30, 2002. During the six months ended June 30, 2003, the Company completed a public offering of $150,000,000 of 63/8% Senior Notes due 2013. The Company used a portion of the proceeds to repay its indebtedness under the Senior Credit Facility and to repurchase approximately $30,800,000 of its outstanding 5% Convertible Subordinated Notes.
The effect of exchange rates on cash for the six months ended June 30, 2003 and 2002 was a use of $627,000 and $411,000, respectively. This was principally the result of the change in exchange rates of the Argentine peso for the corresponding periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital expenditures and working capital requirements from cash flow from operations, bank borrowings and the issuance of equity and long-term debt. The Company believes that its current reserves of cash and cash equivalents, availability of its existing credit lines, access to capital markets and internally generated cash flows from operations are sufficient to finance the cash requirements of its current cash and future operations, acquisitions and capital expenditures.
Other than capital lease obligations and miscellaneous notes payable, as of June 30, 2003, the Company's long-term debt was comprised of (i) a senior credit facility, (ii) a series of 63/8% Senior Notes Due 2013, (iii) a series of 83/8% Senior Notes Due 2008, (iv) a series of 14% Senior Subordinated Notes Due 2009, and (v) a series of 5% Convertible Subordinated Notes Due 2004.
Senior Credit Facility
On July 15, 2002, the Company entered into a Third Amended and Restated Credit Agreement, as subsequently amended (the "Senior Credit Facility"). The Senior Credit Facility consists of a $150,000,000 revolving loan facility with a $75,000,000 sublimit for letters of credit. The loans are secured by most of the tangible and intangible assets of the Company. The revolving loan commitment will terminate on July 15, 2005 and all revolving loans must be paid on or before that date. The
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revolving loans bear interest based upon, at the Company's option, the prime rate plus a variable margin of 0.00% to 1.00% or a Eurodollar rate plus a variable margin of 1.75% to 3.00%. The Senior Credit Facility has customary affirmative and negative covenants including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum net worth, as well as limitations on liens and indebtedness and restrictions on dividends, acquisitions and dispositions. As of June 30, 2003, the Company was in compliance with all covenants contained in the Senior Credit Facility.
As of June 30, 2003, no revolving loans were outstanding under the revolving loan facility and approximately $49,430,000 of letters of credit related to workers' compensation insurance were outstanding. A portion of the net cash proceeds from the debt offering of the 63/8% Senior Notes completed in May 2003 were used to repay the balance of the revolving loan facility then outstanding under the Senior Credit Facility.
63/8% Senior Notes
On May 14, 2003, the Company completed a public offering of $150,000,000 of 63/8% Senior Notes due 2013 (the "63/8% Senior Notes"). The net cash proceeds from the public offering, net of fees and expenses, were used to repay the balance of the revolving loan facility then outstanding under the Senior Credit Facility, with the remainder to be used for general corporate purposes, including further debt retirement. The 63/8% Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed by substantially all of the Company's subsidiaries. The 63/8% Senior Notes are effectively subordinated to Key's secured indebtedness, which includes borrowings under the Senior Credit Facility.
At any time and from time to time, the Company may, at its option, redeem all or a portion of the 63/8% Senior Notes, upon not less than 30 and not more than 60 days prior notice, at the make-whole-price, plus accrued and unpaid interest to the redemption date. The make-whole-price is the sum of the outstanding principal amount of the notes to be redeemed plus an amount equal to the excess, if any, of (i) the present value of the remaining interest (excluding payments of interest accrued as of the redemption date), premium and principal payments due on the notes to be redeemed, computed at a discount rate equal to the treasury rate plus 50 basis points, over (ii) the outstanding principal amount of such notes.
At June 30, 2003, $150,000,000 principal amount of the 63/8% Senior Notes remained outstanding. The 63/8% Senior Notes require semi-annual interest payments on May 15 and November 15 of each year. As of June 30, 2003, the Company was in compliance with all covenants contained in the 63/8% Senior Notes indenture.
83/8% Senior Notes
On March 6, 2001, the Company completed a private placement of $175,000,000 of 83/8% Senior Notes due 2008 (the "83/8% 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 Company's then outstanding senior credit facility (the "Prior Senior Credit Facility") and a portion of the revolving loan facility under the Prior Senior Credit Facility then outstanding. On March 1, 2002, the Company completed a public offering of an additional $100,000,000 of 83/8% Senior Notes due 2008. The net cash proceeds from the public offering were used to repay all of the remaining balance of the revolving loan facility under the Prior Senior Credit Facility. The 83/8% Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed by substantially all of the Company's subsidiaries. The 83/8% Senior Notes are effectively subordinated to Key's secured indebtedness, which includes borrowings under the Senior Credit Facility.
On and after March 1, 2005, the Company may redeem some or all of the 83/8% Senior Notes at any time at varying redemption prices in excess of par, plus accrued interest. In addition, before
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March 1, 2004, the Company may redeem up to 35% of the aggregate principal amount of the 83/8% Senior Notes with the proceeds of certain sales of equity at 108.375% of par plus accrued interest.
At June 30, 2003, $275,000,000 principal amount of the 83/8% Senior Notes remained outstanding. The 83/8% Senior Notes require semi-annual interest payments on March 1 and September 1 of each year. Interest of approximately $11,516,000 was paid on March 1, 2003. As of June 30, 2003, the Company was in compliance with all covenants contained in the 83/8% Senior Notes indenture.
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 the Company's 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 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, which as of January 15, 2004 will be 107% of par, plus accrued interest,. In addition, before January 15, 2002, the Company was 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. During the fiscal year ended June 30, 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. This transaction resulted in a loss of approximately $2,561,000. On January 14, 2002, the Company exercised its 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 a loss of approximately $8,468,000. Also, during the fiscal year ended June 30, 2002, the Company purchased and canceled $6,784,000 principal amount of the 14% Senior Subordinated Notes at a price of 116% of the principal amount plus accrued interest. These transactions resulted in a loss of approximately $1,821,000.
The Unit Warrants 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 Senior Credit Facility, the 83/8% Senior Notes and the 63/8% Senior Notes. The 14% Senior Subordinated Notes are fully and unconditionally guaranteed by substantially all of the Company's subsidiaries.
At June 30, 2003, $97,500,000 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. Interest of approximately $6,825,000 was paid on January 15, 2003. As of June 30, 2003, 63,500 Unit Warrants had been exercised, producing approximately $4,173,000 of proceeds to the Company and leaving 86,500 Unit Warrants outstanding. As of June 30, 2003, the Company was in compliance with all covenants contained in the 14% Senior Subordinated Notes indenture.
5% Convertible Subordinated Notes
In 1997, the Company completed a private placement of $216,000,000 of 5% Convertible Subordinated Notes due 2004 (the "5% Convertible Subordinated Notes"). The 5% Convertible
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Subordinated Notes are subordinate to the Company's senior indebtedness which includes borrowings under the Senior Credit Facility, the 14% Senior Subordinated Notes, the 83/8% Senior Notes and the 63/8% 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. 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 the three months ended June 30, 2003, the Company repurchased (and canceled) $30,800,000 principal amount of the 5% Convertible Subordinated Notes, leaving $18,699,000 outstanding as of June 30, 2003. These repurchases resulted in a gain of approximately $14,000. Interest on the 5% Convertible Subordinated Notes is payable on March 15 and September 15 of each year. Interest of approximately $1,237,000 was paid on March 15, 2003. As of June 30, 2003, the Company was in compliance with all covenants contained in the 5% Convertible Subordinated Notes indenture.
The Company follows 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 the Company's Transition Report on Form 10-K as of and for the six months ended December 31, 2002.
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 the Company's reporting units in assessing potential impairment of goodwill. In addition, the Company makes 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, the Company has 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, the Company has 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 the Company's performance.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amendments require that contracts with comparable characteristics be accounted for similarly, clarifies when a contract with an initial investment meets the characteristic of a derivative and clarifies when a derivative requires special reporting in the statement of cash flows. SFAS 149 is effective for hedging relationships designated and for contracts entered into or modified after June 30, 2003, except for
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provisions that relate to SFAS 133 Statement Implementation Issues that have been effective for fiscal quarters prior to June 15, 2003, which should be applied in accordance with their respective effective dates, and certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not exist, which should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The application of SFAS 149 is not expected to have a material effect on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS 150 as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The application of SFAS 150 is not expected to have a material effect on the Company's consolidated financial statements. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Special Note: Certain statements set forth below under this caption constitute "forward-looking statements". See "Special Note Regarding Forward-Looking Statements" for additional factors relating to such statements.
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about the Key's potential exposure to market risk. The term "market risk" refers to the risk of loss arising from adverse changes in foreign currency exchange, interest rates and oil and natural gas prices. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures.
At June 30, 2003, the Company had long-term debt and capital lease obligations outstanding of approximately $558,700,000. Of this amount, approximately $539,572,000, or 97%, bears interest at fixed rates as follows:
| As of June 30, 2003 | ||
---|---|---|---|
| (thousands) | ||
63/8% Senior Notes Due 2013 | $ | 150,000 | |
83/8% Senior Notes Due 2008 | 276,225 | ||
14% Senior Subordinated Notes Due 2009 | 94,578 | ||
5% Convertible Subordinated Notes Due 2004 | 18,699 | ||
Other at 8.0% | 70 | ||
$ | 539,572 | ||
The remaining $19,128,000 of long-term debt and capital lease obligations outstanding as of June 30, 2003 bears interest at floating rates, which averaged approximately 3.1% at June 30, 2003. A 10% increase in short-term interest rates on the floating-rate debt outstanding at June 30, 2003 would equal approximately 31 basis points. Such an increase in interest rates would increase Key's 2003 annual 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.
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During the year ended June 30, 2002, 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. Key's net assets of its Argentina subsidiaries are based on the U.S. dollar equivalent of such amounts measured in Argentine pesos as of June 30, 2003 and December 31, 2002. Assets and liabilities of the Argentine operations were translated to U.S. dollars at June 30, 2003 and December 31, 2002 using the applicable free market conversion ratio of 2.8:1 and 3.4:1, respectively, and will be translated at future dates using the applicable free market conversion ratio on such dates. Key's net earnings and cash flows from its Argentina subsidiaries are based on the U.S. dollar equivalent of such amounts measured in Argentine pesos. Revenues, expenses and cash flows will be translated using the average exchange rates.
The change in the Argentine peso to the U.S. dollar exchange rate since December 31, 2002 has increased stockholders' equity by approximately $4,482,000, through a credit to other comprehensive loss through June 30, 2003.
Key's net assets, net earnings and cash flows from its 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 the net assets, net earnings or cash flows of the Company.
Key's net assets, net earnings and cash flows from its Egyptian subsidiary are based on the U.S. dollar. Foreign currency transactions are included in determination of net income for the period.
Key's major market risk exposure for its oil and natural gas production operations is in the pricing applicable to its oil and natural gas sales. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices for natural gas. Pricing for oil and natural gas production has been volatile and unpredictable for many years.
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.
As of June 30, 2003, Key had an oil put option in place, as detailed in the following table. Hedged oil volumes as a percentage of actual production was 38% for the three months ended June 30, 2003. A 10% variation in the market price of oil or natural gas from their levels at June 30, 2003 would have no material impact on the Company's net assets, net earnings or cash flows (as derived from commodity option contracts).
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The following table sets forth the future volumes hedged by year and the weighted-average strike price of the option contracts at June 30, 2003 and 2002:
| | | | Strike Price Per Bbl/Mmbtu | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Oil (Bbls) | Gas (Mmbtu) | | | |||||||||||
| Term | Floor | Cap | Fair Value | |||||||||||
At June 30, 2003 | |||||||||||||||
Oil Put | 4,000 | — | Mar 2003 - Feb 2004 | $ | 21.00 | — | $ | 7,000 | |||||||
At June 30, 2002 | |||||||||||||||
Oil Put | 5,000 | — | Mar 2002 - Feb 2003 | $ | 22.00 | — | $ | 24,000 | |||||||
Oil Put | 4,000 | — | Mar 2003 - Feb 2004 | $ | 21.00 | — | $ | 118,000 | |||||||
Natural Gas Put | — | 75,000 | Mar 2002 - Feb 2003 | $ | 3.00 | — | $ | 104,000 |
(The strike prices for the oil puts are based on the NYMEX spot prices for West Texas Intermediate. The strike price for the natural gas put is based on the Inside FERC-El Paso Permian spot price.)
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer undertook an evaluation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this report and concluded that the Company's disclosure controls and procedures were effective.
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None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 6, 2003, a meeting of the holders of common stock of the Company was held to elect the Company's Board of Directors. Only the holders of record as of the close of business on April 21, 2003 (the "Record Date") were entitled to notice of and to vote at the meeting and at any adjournment thereof. On the Record Date, the outstanding number of shares entitled to vote consisted of 128,551,471 shares of the Company's common stock. The stockholders took the following action at the meeting:
Elected the following eight Directors, with the votes indicated opposite each director's name:
Name: | For | Withheld | ||
---|---|---|---|---|
Francis D. John | 113,457,365 | 2,885,231 | ||
David J. Breazzano | 114,527,701 | 1,814,895 | ||
Kevin P. Collins | 113,598,081 | 2,744,515 | ||
William D. Fertig | 114,577,701 | 1,764,895 | ||
W. Phillip Marcum | 70,654,634 | 45,587,962 | ||
Ralph S. Michael, III | 113,599,629 | 2,742,967 | ||
J. Robinson West | 114,516,118 | 1,826,478 | ||
Morton Wolkowitz | 114,517,167 | 1,827,429 |
None.
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Item 6. Exhibits and Reports on Form 8-K.
- (a)
- Exhibits
4.1 | Indenture, dated as of May 9, 2003, between the Company and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K dated May 9, 2003, File No. 1-8038). | |
4.2 | First Supplemental Indenture dated as of May 14, 2003, among the Company, the Guarantors (as defined therein) and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K dated May 14, 2003, File No. 1-8038). | |
10.1* | Second Amendment, dated as of May 9, 2003, to the Third Amended and Restated Credit Agreement, dated as of July 15, 2002, as amended, among the Company, the several Lenders from time to time parties thereto, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets, Inc., and Wells Fargo Bank (Texas), as Co-Lead Arrangers and Credit Lyonnais New York Bank, Lehman Commercial Paper, Inc. and Royal Bank of Canada, as the Co-Documentation Agents. | |
31.1* | Certification of CEO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of CFO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32* | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
- *
- Filed herewith.
- (b)
- Reports on Form 8-K
- (i)
- Current Report on Form 8-K/A dated April 10, 2003 to report the updated historical and pro forma information with respect to the acquisition of Q Services, Inc.
- (ii)
- Current Report on Form 8-K dated April 11, 2003 filed to report the appointment of Ralph S. Michael, III to the Board of Directors of the Company.
- (iii)
- Current Report on Form 8-K dated May 9, 2003 filed to report the offering of up to $150,000,000 of the Company's 63/8% Senior Notes due 2013.
- (iv)
- Current Report on Form 8-K/A dated May 13, 2003 filed to report the Underwriting Agreement, dated as of May 9, 2003, among the Company, the Guarantors named therein, and Lehman Brothers Inc. and Bear Stearns & Co. Inc., as Representatives of the several Underwriters named therein.
- (v)
- Current Report on Form 8-K dated May 14, 2003 filed to report the Supplemental Indenture for the 63/8% Senior Notes due 2013.
The Company filed the following reports on Form 8-K during the quarter ended June 30, 2003:
- (i)
- Current Report on Form 8-K dated April 3, 2002 filed to furnish updated guidance for the quarter ended March 31, 2003.
- (ii)
- Current Report on Form 8-K dated May 1, 2003 filed to furnish the Company's operating results for the quarter ended March 31, 2003.
The Company furnished the following reports on Form 8-K during the quarter ended June 30, 2003:
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEY ENERGY SERVICES, INC. | ||||
Dated: August 6, 2003 | By | /s/ Francis D. John Francis D. John President and Chief Executive Officer | ||
Dated: August 6, 2003 | By | /s/ Royce W. Mitchell Royce W. Mitchell Chief Financial Officer |
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