UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ________
Commission file number 1-8038
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
Maryland 04-2648081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Tower Center, 20th Floor, East Brunswick, NJ 08816
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number including area code: (732) 247-4822
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Common Shares outstanding at February 9, 1999 - 18,293,083
Key Energy Services, Inc. and Subsidiaries
INDEX
PART I. Financial Information
Item 1. Unaudited Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
Key Energy Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31, June 30,
1998 1998
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash $8,181 $25,265
Accounts receivable, net of allowance for doubtful accounts
($3,145 and $2,843 at December 31 and June 30, 1998, respectively) 115,881 82,406
Inventories 13,576 13,315
Deferred tax asset 1,203 1,203
Prepaid income taxes 540 537
Prepaid expenses and other current assets 6,001 4,831
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 145,382 127,557
- ---------------------------------------------------------------------------------------------------------------------------
Property and Equipment:
Oilfield service equipment 634,114 400,731
Oil and gas well drilling equipment 84,873 61,629
Motor vehicles 53,819 19,748
Oil and gas properties and other related equipment, successful efforts 42,638
method 43,160
Furniture and equipment 5,950 5,333
Buildings and land 34,717 17,458
- ---------------------------------------------------------------------------------------------------------------------------
856,633 547,537
Accumulated depreciation and depletion (71,506) (48,385)
- ---------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 785,127 499,152
- ---------------------------------------------------------------------------------------------------------------------------
Goodwill, net of accumulated amortization ($8,288 and $2,264 at
December 31 and June 30, 1998, respectively) 208,811 44,936
Other assets 36,210 26,995
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $1,175,530 $698,640
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $20,831 $20,124
Other accrued liabilities 25,175 22,239
Accrued interest 4,150 3,818
Current portion of long-term debt 9,511 1,848
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 59,667 48,029
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current portion 839,870 397,931
Non-current accrued expenses 4,527 4,812
Deferred tax liability 126,844 92,940
Stockholders' equity:
Common stock, $.10 par value; 100,000,000 shares authorized, 18,709,735
and 18,684,479 shares issued at December 31 and June 30, 1998, respectively 1,871 1,868
Additional paid-in capital 119,300 119,303
Treasury stock, at cost; 416,666 shares at December 31 and
June 30, 1998 (9,682) (9,682)
Unrealized gain on available-for-sale securities - 2,346
Retained earnings 33,133 41,093
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 144,622 154,928
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,175,530 $698,640
===========================================================================================================================
See the accompanying notes which are an integral part of these unaudited consolidated financial statements.
Key Energy Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(in thousands, except per share amounts)
Three months ended Six months ended
December 31, December 31,
1998 1997 1998
1997
- -----------------------------------------------------------------------------------------------------------------------
REVENUES:
Oilfield services $ 126,446 $94,739 $222,939 $161,805
Oil and gas well drilling 15,234 11,492 32,150 16,747
Oil and gas 1,837 1,949 3,607 3,801
Other, net 129 1,493 537 2,719
- -----------------------------------------------------------------------------------------------------------------------
143,646 109,673 259,233 185,072
- -----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Oilfield services 90,862 65,982 158,267 112,170
Oil and gas well drilling 12,399 8,962 26,019 13,276
Oil and gas 879 893 1,638 1,696
Depreciation, depletion and
amortization 14,427 7,371 25,130 12,509
General and administrative 14,338 10,370 25,776 18,048
Interest 18,822 4,248 27,327 9,008
Corporate restructuring 6,699 - 6,699 -
- -----------------------------------------------------------------------------------------------------------------------
158,426 97,826 270,856 166,707
- -----------------------------------------------------------------------------------------------------------------------
Income/ (loss) before income taxes (14,780) 11,847 (11,623) 18,365
Income tax provision (4,983) 4,502 (3,663) 6,909
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) $ (9,797) $7,345 $(7,960) $11,456
=======================================================================================================================
EARNINGS/(LOSS) PER SHARE :
Basic $ (0.54) $0.40 $ (0.44) $0.71
Diluted $ (0.54) $0.35 $ (0.44) $0.58
=======================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 18,291 18,151 18,283 16,133
Diluted 18,291 25,854 18,283 22,847
=======================================================================================================================
See the accompanying notes which are an integral part of these unaudited consolidated financial statements.
Key Energy Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three months ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(9,797) $7,345 $(7,960) $11,456
Adjustments to reconcile income from operations to
net cash provided (used) by operations:
Depreciation, depletion and amortization 14,427 7,371 25,130 12,509
Amortization of deferred debt costs 1,597 369 2,364 378
Deferred income taxes (4,970) 1,177 (3,650) 3,584
Gain on sale of assets - - 47 -
Other non-cash items 6,490 - 6,692 1,313
Change in assets and liabilities net of effects
from the acquisitions:
(Increase) decrease in accounts receivable (8,530) 1,890 (4,053) (4,334)
(Increase) decrease in other current assets 657 (1,742) 1,194 (342)
Increase (decrease) in accounts payable and accrued expenses (39,885) (8,666) (44,176) (9,638)
Increase (decrease) in accrued interest 1,254 3,041 332 1,212
Other assets and liabilities 2,130 (3,424) (139) (4,717)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (36,627) 7,361 (24,219) 11,421
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - Oilfield service operations (7,940) (12,268) (14,527) (18,962)
Capital expenditures - Oil and gas well drilling operations (427) (1,315) (1,446) (1,654)
Capital expenditures - Oil and gas operations (1,772) (1,926) (3,380) (3,984)
Proceeds from sale of fixed assets 69 - 160 -
Cash received in acquisitions 244 - 27,252 2,903
Acquisitions - Oilfield service operations (2,814) (29,933) (275,106) (137,563)
Acquisitions - Oil and gas well drilling - (7,256) - (21,866)
Acquisitions - Oil and gas operations - (600) - (600)
Acquisitions - Minority interest - - - (3,426)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,640) (53,298) (267,047) (185,152)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (2,492) (2,229) (4,205) (2,547)
Repayment of long-term debt (140,000) (19,337) (140,000) (216,337)
Borrowings under line-of-credit 160,000 65,000 438,000 199,000
Purchase of treasury stock - (9,682) - (5,559)
Proceeds from long-term commercial paper - 14,000 - 208,500
Proceeds paid for debt issuance costs - - (19,636) -
Proceeds from exercise of warrants - 99 - 99
Proceeds from exercise of stock options - 942 - 942
Proceeds from other long-term debt 23 1,638 23 1,699
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,531 50,431 274,182 185,797
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (31,736) 4,494 (17,084) 12,066
Cash at beginning of period 39,917 49,276 25,265 41,704
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of period $8,181 $53,770 $8,181 $53,770
============================================================================================================================
See the accompanying notes which are an integral part of these unaudited consolidated financial statements.
Key Energy Services, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(in thousands)
Three months ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
--------------- --------------- ---------------- -----------
Net income/(loss) $(9,797) $7,345 $ (7,960) $11,456
Other comprehensive income, net of tax:
Unrealized gains on available-for-sale securities - - 1,200 -
--------------- --------------- ---------------- -----------
Comprehensive income/(loss), net of tax $ (9,797) $ 7,345 $ (6,760) $11,456
=============== =============== ================ ===========
See the accompanying notes which are an integral part of these unaudited consolidated financial statements.
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
December 31, 1998 and 1997
1. BASIS OF PRESENTATION
The consolidated financial statements of Key Energy Services, Inc. (the
"Company" or "Key") and its wholly-owned subsidiaries for the six month and
three month periods ended December 31, 1998 and 1997 are unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-Q pursuant to the rules and regulations of
the Securities and Exchange Commission. However, in the opinion of management,
these interim financial statements include all the necessary adjustments to
fairly present the results of the interim periods presented. These unaudited
interim consolidated financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1998. The results of operations for the
six month and three month periods ended December 31, 1998 are not necessarily
indicative of the results of operations for the full fiscal year ending June 30,
1999.
Accounting Changes
Effective July 1, 1998 the Company made certain changes in the estimated useful
lives of its workover rigs, increasing the lives from 17 years to 25 years. This
change increased net income by $775,000 and $1,525,000 in the three and six
months ended December 31, 1998, respectively ($.04 and $.08 per share-basic).
Had this change been made effective July 1, 1997, the effect would have
increased net income by $306,000 and $705,000 in the three and six months ended
December 31, 1997, respectively ($.02 and $.04 per share-basic). This change was
made to better reflect the expected utilization of these assets over time, to
better provide matching of revenues and expenses and to better reflect the
industry standard in regards to estimated useful lives of workover rigs.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130") Reporting Comprehensive Income, at the beginning of fiscal year 1999. SFAS
130 establishes standards for reporting and presentation of comprehensive income
and its components. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. In accordance with the provisions of SFAS 130, the
Company has presented the components of comprehensive income in its Unaudited
Consolidated Statements of Comprehensive Income.
Reclassifications and Adjustments
Certain reclassifications have been made to the fiscal year 1998 results to
conform to the fiscal year 1999 presentations.
Amounts reported for the six months ended December 31, 1998 differ from the
amounts previously reported on the Company's Quarterly Report on Form 10-Q, for
the six months ended December 31, 1997, due to non-cash adjustments, recorded in
the forth quarter of fiscal 1998, associated with the conversion of the
Company's 7% debentures converted in the first quarter of fiscal year 1998. See
footnote 4 for further discussion on conversion of the 7% debentures.
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - Continued
Restructuring Charge
During the three months ended December 31, 1998, the Company recorded a
non-recurring charge in conjunction with the company-wide restructuring plan,
designed to streamline our operations that involves closing facilities and
terminating employees. This charge includes severance payments and other
termination benefits to terminated employees, lease commitments related to
closed facilities and environmental studies performed on closed leased yard
locations. The Company expects to complete the plan by June 30, 1999 and has
recorded an aggregate restructuring charge of $6,699,000, which is included in
our Consolidated Statement of Operations for the quarter ended December 31,
1998. The major components of the restructuring charge and costs incurred to
date are as follows:
Restructuring Costs Incurred Balance as of
Description (in thousands) Charge to Date December 31, 1998
-----------------------------------------------------
Severance/employee costs $6,231 $(834) $5,397
Lease commitments 433 - 433
Environmental clean-up 35 - 35
------- ------- ----------
Total $6,699 $(834) $5,865
======= ======= ==========
2. EARNINGS PER SHARE
The following table sets forth the computation of diluted net income per common
share:
Three Months Ended Six Months Ended
December 31, December 31,
(in thousands) (in thousands)
1998 1997 1998 1997
------------------- ------------------
Diluted EPS Computation:
Numerator-
Net Income $(9,797) $ 7,345 $(7,960 $11,456
Effect of Dilutive Securities,
Tax Effected:
Interest on Convertible Debt* - 1,738 - 1,882
------------------ ------------------
$ (9,797) $ 9,083 $(7,960) $13,338
------------------ ------------------
Denominator-
Weighted Average Common
Shares Outstanding 18,291 18,151 18,283 16,133
Warrants* - 91 - 165
Stock Options* - 1,530 - 1,495
7% Convertible Subordinated
Debentures * - 472 - 2,096
5% Convertible Subordinated Notes * - 5,610 - 2,958
----------------- ------------------
18,291 25,854 18,283 22,847
----------------- ------------------
Diluted EPS $(0.54) $0.35 $(0.44) $0.58
* Net income effect and share effect related to Warrants, Stock Options, 7%
Convertible Subordinated Debentures and 5% Convertible Subordinated Notes are
omitted as they produce anti-dilution during the three and six months ended
December 31, 1998.
3. BUSINESS AND PROPERTY ACQUISITIONS
The Company
The Company conducts its oil and gas well service operations through
wholly-owned subsidiaries in all major onshore oil and gas producing regions of
the continental United States and in Argentina. The Company conducts contract
drilling operations through wholly-owned subsidiaries in several oil and gas
producing regions of the continental United States and in Argentina and Canada.
The Company also owns and produces oil and natural gas in the Permian Basin and
the Panhandle of Texas.
As of December 31, 1998, the Company owned a fleet of approximately 1,421 well
service rigs, 1,131 oilfield trucks, and 74 drilling rigs, including 21 service
rigs, 38 trucks and six drilling rigs in Argentina and three drilling rigs in
Canada.
Acquisitions Completed During the Six Months Ended December 31, 1998
The following acquisitions were completed during the six months ended December
31, 1998. Except as otherwise noted, the results of operations from these
acquisitions are included in the Company's results of operations for the
applicable six months ended December 31, 1998 (effective as of the date of
completion of the acquisition unless otherwise noted). Each of the acquisitions
was accounted for using the purchase method of accounting. The purchase prices
specified below are based on cash paid at closing and do not include any
post-closing adjustments, if any, paid or to be paid based upon a re-calculation
of the working capital of acquired companies as of the closing dates.
Colorado Well Service Inc.
On July 15, 1998, the Company completed the acquisition of the assets of
Colorado Well Service, Inc. ("Colorado") for approximately $6.5 million in cash.
These assets included seventeen well service rigs and one drilling rig in Utah
and Colorado.
TransTexas Oilfield Service Assets
On August 19, 1998, the Company completed the acquisition of certain oilfield
service assets of TransTexas Gas Corporation ("TransTexas") for approximately
$20.5 million in cash. The TransTexas assets were based in Laredo, Texas and
included nine well service rigs, approximately 80 oilfield trucks, 173 frac and
other tanks, and various pieces of equipment, parts and supplies.
Dawson Production Services, Inc.
On September 15, 1998, Midland Acquisition Corp. ("Midland"), a New Jersey
corporation and a wholly-owned subsidiary of the Company, completed its cash
tender offer (the "Tender Offer") for all outstanding shares of common stock,
par value $0.01 per share (the "Dawson Shares"), including the associated common
stock purchase rights, of Dawson Production Services, Inc. ("Dawson") at a price
of $17.50 per share. Midland accepted for payment 10,021,601 Dawson Shares for a
total purchase price of approximately $175.4 million. The acceptance of tendered
Dawson Shares, together with Dawson Shares previously owned by Midland and the
Company prior to the commencement of the Tender Offer resulted in Midland and
the Company acquiring approximately 97.0% of the outstanding Dawson Shares. The
purchase price for Dawson Shares pursuant to the Tender Offer was determined
through to arms-length negotiations between the parties and was based on a
variety of factors, including, without limitation, the anticipated earnings and
cash flows of Dawson.
The Tender Offer was made pursuant to an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of August 11, 1998, by and among Midland, the
Company and Dawson. On September 18, 1998, pursuant to the terms of the Merger
Agreement, Midland was merged with and into Dawson (the "First Merger") under
the laws of the States of New Jersey and Texas and all Dawson Shares not owned
by Midland were canceled and retired and converted into the right to receive
$17.50 in cash. On September 21, 1998, Dawson was merged with and into the
Company (the "Second Merger") pursuant to the laws of the States of Maryland and
Texas.
The total consideration paid for the Dawson Shares pursuant to the Tender Offer
and the First Merger was approximately $181.7 million. Including the cost of
Dawson Shares purchased during the fourth quarter of fiscal year 1998 and debt
net of cash assumed, the aggregate purchase price for Dawson was approximately
$321.3 million.
At the time of the closing, Dawson owned approximately 527 well service rigs,
200 oilfield trucks, and 21 production testing units in South Texas and the Gulf
Coast, East Texas and Louisiana, the Permian Basin of West Texas and New Mexico,
the Anadarko Basin of Texas and Oklahoma, California, and in the inland waters
of the Gulf of Mexico.
Flint Well Servicing Assets
On September 16, 1998, the Company completed the acquisition of substantially
all of the well servicing assets of Flint Engineering & Construction Co., a
subsidiary of Flint Industries, Inc. ("Flint") for approximately $11.9 million
in cash. These assets included 55 well service rigs and 25 oilfield trucks in
Texas, Oklahoma, Kansas, Montana and Utah.
Iceberg S.A.
On September 24, 1998, the Company completed the acquisition of the assets of
Iceberg, S.A. ("Iceberg") for approximately $4.3 million in cash. The Iceberg
assets included four well service rigs in Comodoro Rivadavia, Argentina.
HSI Group
On September 24, 1998, the Company completed the acquisition of substantially
all of the operating assets of Hellums Services II, Inc., Superior Completion
Services, Inc., South Texas Disposal, Inc. and Elsik II, Inc. ("HSI Group") for
$47.9 million in cash. These assets included approximately 80 oilfield trucks
and eight well service rigs in South Texas.
Corunna Drilling
Effective October 21, 1998, the Company completed the acquisition of Corunna
Drilling for approximately $2.8 million in cash. Corunna operates three drilling
rigs and related equipment in Ontario, Canada. The operating results of Corunna
are included in the Company's results of operations effective October 21, 1998.
Pro Forma Results of Operations - (unaudited)
The following unaudited pro forma results of operations have been prepared as
though Dawson had been acquired on July 1, 1997 with adjustments to record
specifically identifiable decreases in direct costs and general and
administrative expenses related to the termination of individual employees.
Dawson is included in financial results for all of the three months ended
December 31, 1998.
Three months ended Six months ended
December 31, December 31,
(Thousands, except per share data) 1998 1997 1998 1997
------------------ -------------------
Revenues $143,646 $165,083 $295,588 $300,339
Net income/(loss) (9,797) 4,922 (14,245) 6,718
Basic earnings/(loss) per share $ (.54) $ .27 $ (.78) $ .42
4. LONG-TERM DEBT
At December 31, 1998, major components of the Company's long-term debt were as
follows:
(i) PNC Credit Facility
On June 6, 1997, the Company entered into an agreement (the "Initial Credit
Agreement") with PNC Bank, N.A. ("PNC"), as administrative agent, and a
syndication of other lenders pursuant to which the lenders provided a $255
million credit facility, consisting of a $120 million seven-year term loan and a
$135 million five-year revolver. The interest rate on the term loan was LIBOR
plus 2.75 percent. The interest rate on the revolver varied based on LIBOR and
the level of the Company's indebtedness. The Initial Credit Agreement contained
certain restrictive covenants and required the Company to maintain certain
financial ratios. On September 25, 1997, the Company repaid the term loan and a
portion of the then outstanding amounts under the revolver by applying the
proceeds from the initial and second closings of the Company's private placement
of $216 million of 5% Convertible Subordinated Notes (discussed below).
Effective November 6, 1997, the Company entered into an Amended and Restated
Credit Agreement with PNC (the "Amended PNC Credit Agreement"), as
administrative agent and lender, pursuant to which PNC agreed to make revolving
credit loans of up to a maximum loan commitment of $200 million. The maximum
commitment under the Amended PNC Credit Agreement decreased to $175 million on
November 6, 2000 and to $125 million on November 6, 2001. The loan commitment
terminated on November 6, 2002. Borrowings under the credit facility consisted
of (i) Eurodollar Loans with interest currently payable quarterly at LIBOR plus
1.25% subject to adjustment based on certain financial ratios, (ii) Base Rate
Loans with interest payable quarterly at the greater of PNC Prime Rate or the
Federal Funds Effective Rate plus 1/2 %, or (iii) a combination thereof, at the
Company's option. The Amended PNC Credit Agreement contained certain restrictive
covenants and required the Company to maintain certain financial ratios. A
change of control of the Company, as defined in the Amended PNC Credit
Agreement, was an event of default. Borrowings under the Amended PNC Credit
Agreement were secured by substantially all of the assets of the Company and its
domestic subsidiaries.
Effective December 3, 1997, PNC completed the syndication of the Amended PNC
Credit Agreement. In connection therewith, PNC, as administrative agent, a
syndication of lenders and the Company entered into a First Amendment to the
Amended PNC Credit Agreement providing for, among other things, an increase in
the maximum commitment to $250 million from $200 million.
In connection with the acquisition of Dawson, the total consideration paid for
the Dawson Shares pursuant to the Tender Offer and the First Merger was
approximately $181.7 million. The Company's source of funds to pay such amount,
certain outstanding debt of Dawson and the Company and related fees and expenses
was (i) a bridge loan agreement in the amount of $150,000,000, dated as of
September 14, 1998, among the Company, Lehman Brothers Inc., as Arranger, and
Lehman Commercial Paper Inc., as Administrative Agent, and the other lenders
party thereto (the "Bridge Loan Agreement"). and (ii) a $550,000,000 Second
Amended and Restated Credit Agreement, dated as of June 6, 1997, as amended and
restated through September 14, 1998, among the Company, PNC Bank, National
Association, as Administrative Agent, Norwest Bank Texas, N.A., as Collateral
Agent, PNC Capital Markets, Inc., as Arranger, and the other lenders named from
time to time parties thereto (the "Second Amended and Restated Credit
Agreement").
On November 19, 1998 and December 29, 1998, the Company and its lenders entered
into the First and Second Amendments to the Second Amended and Restated Credit
Agreement. These amendments modified certain financial covenants and certain
other terms of the Second Amended and Restated Credit Agreement.
At December 31, 1998, $150,000,000 in principal amount under the Bridge Loan
Agreement was outstanding. On January 22, 1999 this amount was replaced with the
private placement of $150,000,000 14% Senior Subordinated Notes. See discussion
below.
At December 31, 1998, $460,000,000 in principal amount ($150,000,000 classified
as tranche term loan A, "Tranche A Term Loan" and $200,000,000 classified as
tranche term loan B, "Tranche B Term Loan" and $110,000,000 revolving
commitments) was outstanding under the Second Amended and Restated Credit
Agreement. In addition, at December 31, 1998, there was $40,000,000 available in
revolving commitments under the Second Amended and Restated Credit Agreement,
including amounts reserved in connection with outstanding letters of credit.
The Tranche A Term Loan requires interest payable monthly at LIBOR plus 3.00%
and matures in sixteen consecutive quarterly installments commencing December
14, 1999. Quarterly installment amounts are equal to the applicable percentage
for a particular quarter multiplied by the unamortized principal amount: 4% for
installments 1 - 4, 6% for installments 5 - 8, 7% for installments 9 - 12 and 8%
for installments 13 - 16. Tranche B Term Loan requires interest payable monthly
at LIBOR plus 3.75% and matures in nineteen consecutive quarterly installments
commencing December 14, 1999. Quarterly installment amounts are equal to the
applicable percentage for a particular quarter multiplied by the unamortized
principal amount: 0.25% for installments 1 - 16, 24% for installments 17 - 18
and 48% for the final 19th installment.
The revolving commitment requires interest payable monthly at LIBOR plus 3% and
matures September 14, 2003.
In connection with the Bridge Loan Agreement and the Second Amended and Restated
Credit Agreement referred to above, the Company incurred various fees and
associated expenses of approximately $6,500,000 and $13,136,000, respectively.
In addition, the Company, its subsidiaries and U.S. Trust Company of Texas,
N.A., trustee ("U.S. Trust"), entered into a Supplemental Indenture dated
September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company
assumed the obligations of Dawson under the Indenture dated February 20, 1997
(the "Dawson Indenture") between Dawson and U.S. Trust. Most of the Company's
subsidiaries guaranteed those obligations and the senior notes ("Dawson Senior
Notes") issued pursuant to the Dawson Indenture were equally and ratably secured
with the obligations under the Second Amended and Restated Credit Agreement. On
November 17, 1998 the Company completed a cash tender offer to purchase
outstanding notes at 101% of the aggregate principal amount of the notes, the
source of funds which were borrowed under the Second Amended and Restated Credit
Agreement. Under the tender offer, $138,594,000 in principal amount of the
Dawson Senior Notes was redeemed and a premium of $1,386,000 was paid. In
addition, accrued interest of $4,078,000 was paid at redemption.
At December 31, 1998, $1,406,000 principal amount of the Dawson Senior Notes
remained outstanding. Interest on the Dawson Senior Notes is payable on February
1 and August 1 of each year.
Additionally, the Company had outstanding letters of credit of $2,612,000 as of
December 31 and June 30, 1998 related to its workers compensation insurance. The
Company is contractually restricted from paying dividends under the terms of the
Bridge Loan Agreement and the Second Amended and Restated Credit Agreement.
(ii) 14% Senior Subordinated Notes
On January 22, 1999 the Company completed the private placement of units (the
"Units") consisting of $150,000,000 of 14% Senior Subordinated Notes due 2009
("Senior Subordinated Notes") and 150,000 warrants to purchase 2,032,565 shares
of common stock (the "Warrants"). The placement was made as private offering
pursuant to Rule 144A and Regulation S under the Securities Act of 1933. Each
warrant entitles the holder thereof to purchase 13.5504 shares of common stock
at an exercise price of $4.88125. On January 22, 1999 the value of the warrants
was $7.4 million, using the Black-Sholes pricing model.
Before January 15, 2002, the Company may redeem 35% of the aggregate principal
amount of Senior Subordinated Notes, during the first 36 months at a redemption
price of 114% of the principal amount, plus accrued unpaid interest, with net
cash proceeds of one or more equity offerings. On or after January 15, 2004, the
Company may redeem all or a part of the Senior Subordinated Notes at a
redemption price of 107% of the principal amount, plus accrued unpaid interest,
declining ratably thereafter on an annual basis.
In the event of a change in control of the Company, as defined in the indenture
under which the Senior Subordinated Notes were issued, the Company must commence
within 10 business days an offer to each holder of Senior Subordinated Notes and
such holders will have the right, at the holder's option, to require the Company
to repurchase all or any part of the holder's Senior Subordinated Notes, at a
price equal to 101% of the principal amount thereof, together with accrued and
unpaid interest thereon.
Net proceeds from the private placement of the Senior Subordinated Notes in
addition to cash on hand were used to repay all outstanding balances under the
Company's Bridge Loan Agreement (see above). Interest on the Senior Subordinated
Notes is payable on January 15 and July 15 of each year, beginning July 15,
1999.
(iii) 5% Convertible Subordinated Notes
On September 25, 1997, the Company completed an initial closing of its private
placement of $200 million of 5% Convertible Subordinated Notes due 2004 (the
"Notes"). On October 7, 1997, the Company completed a second closing of its
private placement of an additional $16 million of Notes pursuant to the exercise
of the remaining portion of the over-allotment option granted to the initial
purchasers of Notes. The placements were made as private offerings pursuant to
Rule 144A and Regulation S under the Securities Act of 1933. The Notes are
subordinate to the Company's senior indebtedness, which, as defined in the
indenture under which the Notes were issued, includes the borrowings under the
Second Amended and Restated Credit Agreement. The Notes are convertible, at the
holder's option, into shares of Common Stock at a conversion price of $38.50 per
share, subject to certain adjustments.
The Notes are redeemable, at the Company's option, on or after September 15,
2000, in whole or part, together with accrued and unpaid interest. The initial
redemption price is 102.86% for the year beginning September 15, 2000 and
declines ratably thereafter on an annual basis.
In the event of a change in control of the Company, as defined in the indenture
under which the Notes were issued, each holder of Notes will have the right, at
the holder's option, to require the Company to repurchase all or any part of the
holder's Notes, within 60 days of such event, at a price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest thereon.
Proceeds from the placement of the Notes were used to repay then outstanding
balances under the Company's credit facilities. At December 31, 1998,
$216,000,000 principal amount of the Notes remain outstanding. Interest on the
Notes is payable on March 15 and September 15. Interest of approximately $5.4
million was paid on September 15, 1998.
(iv) 7% Convertible Subordinated Debentures
In July 1996, the Company completed a $52,000,000 private offering of 7%
Convertible Subordinated Debentures due 2003 (the "Debentures") pursuant to Rule
144A under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures are subordinate to the Company's senior indebtedness, which as
defined in the indenture pursuant to which the Debentures were issued includes
the borrowings under the Second Amended and Restated Credit Agreement.
The Debentures are convertible, at any time prior to maturity, at the holders'
option, into shares of Common Stock at a conversion price of $9.75 per share,
subject to certain adjustments. In addition, Debenture holders who convert prior
to July 1, 1999 will be entitled to receive a payment, in cash or Common Stock
(at the Company's option), generally equal to 50% of the interest otherwise
payable from the date of conversion through July 1, 1999.
The Debentures are redeemable, at the option of the Company, on or after July
15, 1999, at a redemption price of 104%, decreasing 1% per year on each
anniversary date thereafter. In the event of a change in control of the Company,
as defined in the indenture under which the Debentures were issued, each holder
of Debentures will have the right, at the holder's option, to require the
Company to repurchase all or any part of the holder's Debentures within 60 days
of such event at a price equal to 100% of the principal amount thereof, together
with accrued and unpaid interest thereon.
As of December 31, 1998, $47,400,000 in principal amount of the Debentures had
been converted into 4,861,538 shares of common stock at the option of the
holders. An additional 165,423 shares of common stock were issued representing
50% of the interest otherwise payable from the date of conversion through July
1, 1999 and an additional 35,408 shares of common stock were issued as an
inducement to convert. The additional 165,423 shares of common stock,
representing 50% of the interest otherwise payable from the date of conversion
through July 1, 1999, are included in equity. The fair value of the additional
35,408 shares of common stock issued as inducement to convert was $710,186 and
is recorded as interest expense in the unaudited consolidated statement of
operations for the six months ended December 31, 1997. In addition, the
proportional amount of unamortized debt issuance costs associated with the
converted Debentures was charged to additional paid-in capital at the time of
conversion.
At December 31, 1998, $4,600,000 principal amount of the Debentures remained
outstanding. Interest on the Debentures is payable on January 1 and July 1 of
each year. Interest of approximately $172,500 was paid on July 1, 1998.
(v) Other Notes Payable
At December 31, 1998, other notes payable consisted primarily of capital leases
for automotive equipment and equipment leases with varying interest rates and
principal and interest payments.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131 - Disclosures about Segments
of an Enterprise and Related Information
Statement of Financial Accounting Standards No. 131 ("SFAS 131") - Disclosures
about Segments of an Enterprise and Related Information, which establishes
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 also establishes standards
for related disclosure about products and services, geographic areas and major
customers. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 need not be applied to interim financial
statements in the initial year of its application. However, comparative
information for interim periods in the initial year of application is to be
reported in the financial statements for interim periods in the second year of
application. The Company will adopt SFAS 131 for the fiscal year ended June 30,
1999. The Company does not expect SFAS 131 to materially affect the Company's
reporting practices.
6. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are pending
against the Company. Management does not believe that the disposition of any of
these items will result in a material adverse impact to the consolidated
financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998.
Current and Subsequent Events
During the six months ended December 31, 1998, the Company completed the
acquisition of the following well servicing, trucking, drilling and ancillary
equipment companies and businesses:
Colorado Well Service, Inc.
Oilfield service assets of TransTexas Gas Corporation
Dawson Production Services, Inc.
Well servicing assets of Flint Engineering & Construction Co.
Iceberg, S.A.
HSI Group
Corrunna Drilling
These acquisitions (which are more fully described in Note 3 to the unaudited
consolidated financial statements) involve approximately 620 well service rigs
(including four well service rigs in Argentina), 385 trucks and four drilling
rigs. The total purchase price of these acquisitions was approximately $415.4
million including debt, net of cash assumed.
As of February 12, 1999, the Company owned a fleet of approximately 1,421 well
service rigs, 1,131 oilfield trucks, and 74 drilling rigs, including 21 service
rigs, 38 trucks and six drilling rigs in Argentina and three drilling rigs in
Canada. Management believes that the Company's well servicing rig and oilfield
truck fleets are the largest onshore fleets in the world. The Company operates
in all major onshore oil and gas producing regions of the continental United
States and provides a full range of drilling, completion, maintenance, workover
and plugging and abandonment services for the oil and gas industry.
Impact of Lower Crude Oil Prices
As the result of the prolonged period of historically low oil prices, the
Company's drilling, completion and workover activity has been adversely
affected. Equipment utilization for drilling, completion and workover activity
has continued to decline markedly throughout the last three months of fiscal
1998 and the first six months of fiscal 1999. The demand for these services,
which generate higher margins than maintenance services, will continue to be
adversely affected until oil prices stabilized and/or substantially increase
from their currently depressed levels.
Growth Strategy
Historically, the domestic well servicing industry has been highly fragmented,
characterized by a large number of smaller companies which have competed
effectively on a local basis in terms of pricing and the quality of services
offered. In recent years, however, many major and independent oil and gas
companies have placed increasing emphasis not only on pricing, but also on the
safety records and quality management systems of, and the breadth of services
offered by, their vendors, including well servicing contractors. This market
environment, which requires significant expenditures by smaller companies to
meet these increasingly rigorous standards, has forced many smaller well
servicing companies to sell their operations to larger competitors. As a result,
the industry has seen high levels of consolidation among the competing
contractors.
Over the past three years, the Company has been the leading consolidator of the
well servicing industry, completing in excess of 50 acquisitions of well
servicing and drilling operations through December 31, 1998. This consolidation
has led to reduced fragmentation in the market and a more predictable demand for
well services for the Company and its competitors. The Company's management
structure is decentralized, which allows for rapid integration of acquisitions
and the retention of strong local identities of many of the acquired businesses.
As a result of the Company's recent growth through acquisitions, the Company has
developed a strategy to:
1. Maximize operating efficiencies by focusing on reducing costs;
2. Fully integrate acquisitions into the Company's decentralized
organizational structure and thereby attempt to maximize operating margins;
3. Expand business lines and services offered by the Company in existing areas
of operations; and
4. Extend the geographic scope and operating environments for the Company's
operations.
If the current decline in the oil prices persists for a protracted period or a
recovery in such prices remains uncertain, the Company may curtail or halt its
growth strategy until such time as prices reach more favorable ranges.
RESULTS OF OPERATIONS
The following discussion provides information to assist in the understanding of
the Company's financial condition and results of operations. It should be read
in conjunction with the unaudited consolidated financial statements and related
notes thereto appearing elsewhere in this report.
QUARTER ENDED DECEMBER 31, 1998 VERSUS THE QUARTER ENDED DECEMBER 31, 1997
Net Income
For the quarter ended December 31, 1998, the Company reported a net loss of
$9,797,000 ($(.54) per share - basic) as compared to net income of $7,345,000
($.40 per share - basic) for the quarter ended December 31, 1997, representing a
decrease of $17,142,000, or 233% (235% decrease in basic earnings per share).
One factor causing this decline is the Company's restructuring charge recorded
in the quarter ended December 31, 1998 of $4,354,000 (tax effected) or $(.24)
per share - basic. Not including this non-recurring charge, the Company reported
a net loss of $5,443,000 ($(.30) per share - basic). This one time non-recurring
charge coupled with the Company's decrease in service and drilling rig
utilization rates has caused the decline in net income.
Revenues
The Company's total revenues for the quarter ended December 31, 1998 increased
by $33,973,000, or 31%, to $143,646,000 compared to $109,673,000 reported for
the quarter ended December 31, 1997. The increase is primarily attributable to
the Company's acquisitions of oilfield service and drilling rig companies over
the past twelve months, offset by the Company's decrease in service and drilling
rig utilization rates.
Oilfield service revenues for the quarter ended December 31, 1998 increased by
$31,707,000, or 34%, to $126,446,000 compared to $94,739,000 reported for the
quarter ended December 31, 1997. The increase is primarily attributable to the
Company's acquisitions of oilfield service companies over the past twelve
months, offset by the Company's decrease in oilfield service rig utilization
rates.
Drilling revenues for the quarter ended December 31, 1998 increased by
$3,742,000, or 33%, to $15,234,000 compared to $11,492,000 reported for the
quarter ended December 31, 1997. The increase is primarily attributable to the
Company's drilling rig acquisitions over the past twelve months, offset by the
Company's decrease in drilling rig utilization rates.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the quarter ended December 31, 1998
increased by $60,600,000, or 62%, to $158,426,000 compared to $97,826,000
reported for the quarter ended December 31, 1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's acquisitions over the past twelve months.
Oilfield service expenses for the quarter ended December 31, 1998 increased by
$24,880,000, or 38%, to $90,862,000 compared to $65,982,000 reported for the
quarter ended December 31, 1997. Oilfield service margins (revenues less direct
costs and expenses) increased for the quarter ended December 31, 1998 by
$6,827,000, or 24%, to $35,584,000 compared to $28,757,000 for the quarter ended
December 31, 1997. Oilfield service margins as a percentage of oilfield service
revenue for the quarters ended December 31, 1998 and 1997 was 28% and 30%,
respectively. In addition, the Company has continued to expand its services,
offering higher margin ancillary services and equipment such as well fishing
tools, blow-out preventers and frac tanks.
The Company's contract drilling costs and expenses for the quarter ended
December 31, 1998 increased by $6,790,000, or 103%, to $13,380,000 compared to
$6,590,000 for the quarter ended December 31, 1997. Oilfield drilling margins
for the Company's drilling operations during the quarter ended December 31, 1998
increased by $305,000, or 12%, to $2,835,000 compared to $2,530,000 for the
quarter ended December 31, 1997. Oilfield drilling margin as a percentage of
oilfield drilling revenue for the quarters ended December 31, 1998 and 1997 was
19% and 22%, respectively. Decreases in oilfield margins are attributable to the
decreases in onshore drilling due to the lower crude oil and natural gas prices.
General and administrative expenses for the quarter ended December 31, 1998
increased by $3,968,000, or 38%, to $14,338,000 compared to $10,370,000 for the
quarter ended December 31, 1997. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenue for the quarters ended December 31,
1997 and 1998 was 10% for each period.
Depreciation, depletion and amortization expense for the quarter ended December
31, 1998 increased by $7,056,000, or 96%, to $14,427,000 compared to $7,371,000
for the quarter ended December 31, 1997. The increase is directly related to the
increase in property and equipment and intangible assets of the Company over the
past twelve months as a result of its acquisitions.
Interest expense for the quarter ended December 31, 1998 increased by
$14,574,000, or 343%, to $18,822,000 compared to $4,248,000 for the quarter
ended December 31, 1997. The increase was primarily the result of increased
indebtedness used to finance the Company's acquisition program.
Income tax expense for the quarter ended December 31, 1998 decreased by
$9,485,000, or 211%, to ($4,983,000) compared to $4,502,000 for the quarter
ended December 31, 1997. The effective tax rate for the quarter ended December
31, 1998 as compared to the quarter ended December 31, 1997 has decreased due to
the loss generated in the quarter ended December 31, 1998. The Company does not
expect to have to pay any income tax provision because of the availability of
accelerated tax depreciation, drilling tax credits, and tax loss carry-forwards.
Cash Flows
Net cash provided by operating activities for the quarter ended December 31,
1998 decreased by $(43,988,000) or 598%, to $(36,627,000) compared to $7,361,000
provided for the quarter ended December 31, 1997. The decrease is primarily
attributable to an decreased service and drilling operating margin, and service
and drilling utilization rates.
Net cash used in investing activities for the quarter ended December 31, 1998
decreased by $40,658,000, or 76%, to $12,640,000 compared to $53,298,000 used
for the quarter ended December 31, 1997. This decrease is primarily related to
the decline in acquisitions the Company has made in this quarter as compared to
the past twelve months.
Net cash provided by financing activities for the quarter ended December 31,
1998 decreased by $32,900,000 or 65%, to $17,531,000 compared to $50,431,000
provided during the quarter ended December 31, 1997. The decrease is primarily
the result of decreased borrowings of long-term debt, due to the decline in
acquisitions the Company has made in this quarter as compared to the past twelve
months.
SIX MONTHS ENDED DECEMBER 31, 1998 VERSUS THE SIX MONTHS ENDED DECEMBER 31, 1997
Net Income
For the six months ended December 31, 1998, the Company reported a net loss of
$7,960,000 ($(.44) per share - basic) as compared to net income of $11,456,000
($.71 per share - basic) for the six months ended December 31, 1997,
representing a decrease of $19,416,000, or 170% (162% decrease in basic earnings
per share). One factor causing this decline is the Company's restructuring
charge recorded in the quarter ended December 31, 1998 of $4,354,000 (tax
effected) or $(.24) per share - basic. Not including this non-recurring charge,
the Company reported a net loss of $3,606,000 ($(.20) per share - basic). This
one time non-recurring charge coupled with the Company's decrease in service and
drilling rig utilization rates has caused the decline in net income.
Revenues
The Company's total revenues for the six months ended December 31, 1998
increased by $74,161,000, or 40%, to $259,233,000 compared to $185,072,000
reported for the six months ended December 31, 1997. The increase is primarily
attributable to the Company's acquisitions of oilfield service and drilling rig
companies over the past twelve months, offset by the Company's decrease in
service and drilling rig utilization rates.
Oilfield service revenues for the six months ended December 31, 1998 increased
by $61,134,000, or 38%, to $222,939,000 compared to $161,805,000 reported for
the six months ended December 31, 1997. The increase is primarily attributable
to the Company's acquisitions of oilfield service companies over the past twelve
months, offset by the Company's decrease in oilfield service rig utilization
rates.
Drilling revenues for the six months ended December 31, 1998 increased by
$15,403,000, or 92%, to $32,150,000 compared to $16,747,000 reported for the
six months ended December 31, 1997. The increase is primarily attributable to
the Company's drilling rig acquisitions over the past twelve months, offset by
the Company's decrease in drilling rig utilization rates.
Costs and Expenses and Operating Margins
The Company's total costs and expenses for the six months ended December 31,
1998 increased by $104,149,000, or 62%, to $270,856,000 compared to $166,707,000
reported for the six months ended December 31, 1997. The increase is directly
attributable to increased operating costs and expenses associated with the
Company's acquisitions over the past twelve months.
Oilfield service expenses for the six months ended December 31, 1998 increased
by $46,097,000, or 41%, to $158,267,000 compared to $112,170,000 reported for
the six months ended December 31, 1997. Oilfield service margins (revenues less
direct costs and expenses) increased for the six months ended December 31, 1998
by $15,037,000, or 30%, to $64,672,000 compared to $49,635,000 for the six
months ended December 31, 1997. Oilfield service margins as a percentage of
oilfield service revenue for the six months ended December 31, 1998 and 1997 was
29% and 31%, respectively. In addition, the Company has continued to expand its
services, offering higher margin ancillary services and equipment such as well
fishing tools, blow-out preventers and frac tanks.
Drilling costs and expenses for the six months ended March 31, 1998 increased by
$12,743,000, or 96%, to $26,019,000 compared to $13,276,000 for the six months
ended December 31, 1997. Drilling margins during the six months ended December
31, 1998 increased by $2,660,000, or 77%, to $6,131,000 compared to $3,471,000
for the six months ended December 31, 1997. Oilfield drilling margin as a
percentage of oilfield drilling revenue for the six months ended December 31,
1998 and 1997 was 19% and 21%, respectively. Decreases in oilfield margins are
attributable to the decreases in onshore drilling due to the lower crude oil and
natural gas prices.
There was no significant change in oil and gas production costs and expenses for
nine months ended March 31, 1998 as compared to the nine months ended March 31,
1997.
General and administrative expenses for the six months ended December 31, 1998
increased by $7,728,000, or 43%, to $25,776,000 compared to $18,048,000 for six
months ended December 31, 1997. The increase was primarily attributable to the
Company's recent acquisitions and expanded services. General and administrative
expenses as a percentage of total revenues for the six months ended December 31,
1998 and 1997 were both 10%.
Depreciation, depletion and amortization expense for the six months ended
December 31, 1998 increased by $12,621,000, or 101%, to $25,130,000 compared to
$12,509,000 for six months ended December 31, 1997. The increase is directly
related to the increase in property and equipment and long-term debt issuance
costs incurred by the Company over the past eighteen months in conjunction with
its acquisitions.
Interest expense for the six months ended December 31, 1998 increased by
$18,319,000, or 203%, to $27,327,000 compared to $9,008,000 for the six months
ended December 31, 1997. The increase was primarily the result of increased
indebtedness as a result of the Company's acquisitions.
Income tax expense for the six months ended December 31, 1998 decreased by
$10,572,000, or 153%, to ($3,663,000) compared to $6,909,000 for the six months
ended December 31, 1997. The effective tax rate for the quarter ended December
31, 1998 as compared to the quarter ended December 31, 1997 has decreased due to
the loss generated in the six months ended December 31, 1998. The Company does
not expect to have to pay any income tax provision because of the availability
of accelerated tax depreciation, drilling tax credits, and tax loss
carry-forwards.
Cash Flows
Net cash provided by operating activities for the six months ended December 31,
1998 decreased by $35,640,000 or 312%, to $(24,219,000) compared to $11,421,000
for six months ended December 31, 1997. The decrease is primarily attributable
to a decreased service and drilling operating margin, and service and drilling
utilization rates.
Net cash used in investing activities for the six months ended December 31, 1998
increased by $81,895,000, or 44%, to $267,047,000 compared to $185,152,000 used
for the six months ended December 31, 1997. This increase is primarily related
to the Company's recent acquisitions.
Net cash provided by financing activities for the six months ended December 31,
1998 increased by $88,385,000, or 48%, to $274,182,000 compared to $185,797,000
provided during the six months ended December 31, 1997. The increase is
primarily the result of the proceeds from long-term debt (see Note 3 to
consolidated financial statements), partially offset by the repayment of debt.
LIQUIDITY, CAPITAL COMMITMENTS AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash of $8.2 million compared to $25.3
million at June 30, 1998 and $53.8 million at December 31, 1997. At December 31,
1998, the Company had working capital of $92.2 million compared to $79.5 million
at June 30, 1998 and $99.1 million at December 31, 1997.
For fiscal 1999, the Company has projected approximately $26 million of capital
expenditures for improvements of existing service and drilling rig machinery and
equipment, a decrease of approximately $26.1 million from the $52.1 million
expended during fiscal 1998. The Company expects to finance these capital
expenditures through internally generated operating cash flows. Capital
expenditures for service and drilling rig improvements for the six months ended
December 31, 1998 and 1997 were $16.0 million and $20.6 million, respectively.
The Company has projected approximately $2.0 million of capital expenditures for
oil and gas exploration for fiscal 1999 as compared to $7.8 million expended for
fiscal 1998. Financing of these costs is expected to come from operations and
available credit facilities. For the six months ended December 31, 1998 and
1997, the Company expended $3.4 million and $4.0 million, respectively.
The Company's primary capital resources are net cash provided by operations and
proceeds from certain long-term debt facilities.
Year 2000 Issue
The Company is currently implementing a new integrated management information
system along with updated hardware that will replace most of our current
systems. The implementation of the new management information system, which will
be year 2000 compliant for our systems as well as for those of our past and
future acquisitions, began July 1998 and is scheduled to be substantially
completed by June 1999. The new management information systems do not currently
cover the Company's Argentine operations, but Argentine operations have
established a separate system, which is year 2000 compliant, that will be
implemented in late 1999.
The Company has not yet developed a plan to formally communicate with
significant suppliers and customers to determine if those parties have
appropriate plans to remedy year 2000 issues when their systems interface with
the Company's systems or may otherwise have an impact operations. The Company
does not anticipate that this will have a material impact on operations.
However, there can be no assurance that the systems of other companies on which
the Company rely will be timely converted, or that failure to successfully
convert by another company, or conversion that is incompatible with the
Company's systems, would not have an impact on operations. The Company currently
does not have a contingency plan to cover any unforeseen problems encountered
that relate to the year 2000, but intends to produce one before the end of the
current fiscal year.
The cost of the new management information system, (a large part of which
management expects will be capitalized) is not expected to have a material
impact on the Company's business, operations or results thereof, financial
condition, liquidity or capital resources. Although the Company is not aware of
any material operational issues or costs associated with preparing its internal
systems for the year 2000, there can be no assurance that there will not be a
delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address the year 2000.
If the Company is unable to adequately address the year 2000 issue in a timely
manner, the worst case scenario would be that the Company could suffer
significant computer downtime, and billings, payments and collections would
revert to manual accounting records. In addition, the inability of principal
suppliers and major customers to be year 2000 compliant could result in delays
in product deliveries from those suppliers and collections of accounts
receivable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 8, 1998, a meeting of the holders of Common Stock was held to elect
the Company's Board of Directors and to vote on certain other matters. Only the
holders of record as of the close of business on November 3, 1998 (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 18,293,055 share of Common Stock. The stockholders
took the following actions at the meeting:
1. Elected the following six Directors, with the votes indicated opposite each
director's name:
For Against
Francis D. John 15,211,712 116,461
Kevin P. Collins 15,202,240 125,933
William Manly 15,211,587 116,586
W. Phillip Marcum 15,202,242 125,931
David J. Breazzano 15,211,309 116,864
Morton Wolkowitz 15,202,215 125,958
2. Ratified a proposal to amend the Company's Amended and Restated Articles of
Incorporation to change the name of the Company to "Key Energy Services,
Inc.". The vote was 15,215,840 for and 71,365 against, with 40,968
abstentions and broker non-votes.
3. Approved the adoption of the Key Energy Services, Inc. Performance
Compensation Plan. The vote was 14,407,890 for and 822,212 against, with
98,071 abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as a part of the Form 10-Q
Number Description
3(a) Articles of Amendment to the Amended and Restated Articles of Incorporation
of the Company (filed as Exhibit A to the Definitive Proxy Statement on
Schedule 14A filed by the Company on November 17, 1998, File No. 001-8038)
10(a)Consulting Agreement, dated as of October 7, 1998, by and among Key Energy
Group, Inc. and Michael E. Little.
10(b)Employment Agreement, dated November 13, 1998, by and between Key Energy
Group, Inc. and James J. Byerlotzer.
10(c)Non-Compete Agreement, dated November 13, 1998, by and between Key Energy
Group, Inc. and James J. Byerlotzer.
10(d)Employment Agreement, dated October 20, 1998, by and between Key Energy
Group, Inc. and Joseph B. Eustace.
10(e)Non-Compete Agreement, dated October 20, 1998, by and between Key Energy
Group, Inc. and Joseph B. Eustace.
10(f)Consulting Agreement, dated as of November 12, 1998, by and among key
Energy Group, Inc. and C. Ron Laidley.
10(g) Key Energy Group, Inc. Performance Compensation Plan.
10(h)Second Amendment, dated as of December 29, 1998 to the Second Amended and
Restated Credit Agreement, dated as of June 6, 1997, as amended and
restated through September 14, 1998 and as amended by the First Amendment
dated as of November 19, 1998.
10(i)Second Amendment, dated as of December 29, 1998 to the Second Amended and
Restated Credit Agreement, dated as of June 6, 1997, as amended and
restated through September 14, 1998 and as amended by the First Amendment
dated as of November 19, 1998.
10(j)Stock Purchase Agreement among 3022481 Nova Scotia Company and Donald
Bowling, Howard Bowling, Ronald Bowling, Corunna Petroleum Limited
effective October 22, 1998.
- --------------------------------------------------------------------------------
* Filed as Exhibits to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998. File No. 001-08038
27(a) Statement - Financial Data Schedule
(b) The following current reports on Form 8-K were filed during the quarter
ended December 31, 1998:
(i) An Amendment to the Form 8-K filed on September 28, 1998 to report the
Company's acquisition of Dawson Production Services, Inc. was filed on
October 28, 1998 to include certain financial information relating to
Dawson and the Company
(ii) a Form 8-K was filed on December 21, 1998 to report the Company's
restructuring plan and to report that the Stockholders' ratified a proposal
to change the name of the Company to "Key Energy Services, Inc."; and
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY ENERGY SERVICES,INC.
(Registrant)
By /s/ Francis D. John
Dated: February 16, 1998 President and Chief Executive Officer
By /s/ Stephen E. McGregor
Dated: February 16, 1998 Executive Vice President, Chief Financial Officer
and Treasurer
By /s/ Danny R. Evatt________
Dated: February 16, 1998 Vice President Financial Operations and
Chief Accounting Officer