1
[AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1999]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
[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 ________ to ___________
Commission file number 1-8038
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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
2
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements 3
PART II. OTHER INFORMATION
Signatures 20
2
3
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
method 43,160 42,638
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.
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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.
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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.
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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.
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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.
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
RESTRUCTURING CHARGE In response to the current industry downturn caused by
historically low oil and gas prices and the resulting slowdown in our business,
on December 7, 1998, we announced a company-wide restructuring plan to reduce
operating costs beyond those achieved through our consolidation efforts. The
plan involved a reduction in the size of our management and on-site work force,
salary reductions of up to 20% for senior management, the combination of
previously separate operating divisions and the elimination of redundant
divisional overhead and facilities. We currently expect approximately $9 million
of annualized cost savings from this plan within the next six months. The
restructuring plan resulted in a one-time pretax charge to earnings of
approximately $6.7 million in the second fiscal quarter ending December 31,
1998. 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. Approximately
110 employees were terminated, all of which served in either executive or
supervisory positions. We expect to complete the plan by June 30, 1999. The
major components of the restructuring charge and costs incurred to date are as
follows (in thousands):
Costs Balance as of
Restructuring Incurred December 31,
Charge to Date 1998
------ -------- ------------
Severance/employee costs $6,231 $ (834) $5,397
Lease commitments 433 -- 433
Environmental cleanup 35 -- 35
------ ------ ------
Total $6,699 $ (834) $5,865
====== ====== ======
In addition, we have completed the integration of Dawson into our business, from
which we expect annualized cost savings of approximately $12 million. In
connection with the Dawson acquisition, we anticipate we will incur an
additional, extraordinary pretax charge of approximately $6.1 million in the
third fiscal quarter ending March 31, 1998, expensing debt issuance costs and
fees related to the syndication of our bridge credit facility.
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.
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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"),
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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").
As a result of industry conditions and for certain other reasons, in December of
1998 we amended our credit facility to ease required financial covenant levels,
to add a requirement that we achieve certain minimum levels of trailing 12-month
EBITDA (as defined in the credit facility), to tighten restrictions on making
acquisitions that are not funded solely with our capital stock and to further
limit the funds we may use on capital expenditures. The amended covenants are
set forth herein.
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The consolidated leverage ratio was amended as set forth below:
Old Old Consolidated Consolidated
Date Leverage Ratio Date Leverage Ratio
---- ---------------- ---- --------------
September 30, 1998 5.25 to 1.00 December 31, 1998 5.90 to 1.00
December 31, 1998 5.00 to 1.00 March 31, 1999 5.90 to 1.00
March 31, 1999 5.00 to 1.00 June 30, 1999 5.90 to 1.00
June 30, 1999 4.75 to 1.00 September 30, 1999 5.90 to 1.00
September 30, 1999 4.75 to 1.00 December 31, 1999 5.75 to 1.00
December 31, 1999 4.50 to 1.00 March 31, 2000 5.00 to 1.00
March 31, 2000 4.25 to 1.00 June 30, 2000 4.50 to 1.00
June 30, 2000 4.25 to 1.00 September 30, 2000 4.00 to 1.00
September 30, 2000 4.25 to 1.00 December 31, 2000 3.75 to 1.00
December 31, 2000 4.00 to 1.00 March 31, 2001 3.50 to 1.00
March 31, 2001 3.50 to 1.00 June 30, 2001 3.25 to 1.00
June 30, 2001 3.50 to 1.00 September 30, 2001 3.00 to 1.00
September 30, 2001 3.50 to 1.00 December 31, 2001 3.00 to 1.00
December 31, 2001 3.50 to 1.00 March 31, 2002 3.00 to 1.00
March 31, 2002 3.50 to 1.00 June 30, 2002 3.00 to 1.00
June 30, 2002 3.00 to 1.00 September 30, 2002 3.00 to 1.00
September 30, 2002 3.00 to 1.00 December 31, 2002 3.00 to 1.00
December 31, 2002 3.00 to 1.00 March 31, 2003 3.00 to 1.00
March 31, 2003 3.00 to 1.00 June 30, 2003 3.00 to 1.00
June 30, 2003 3.00 to 1.00 September 30, 2003 3.00 to 1.00
September 30, 2003 3.00 to 1.00 December 31, 2003 3.00 to 1.00
December 31, 2003 3.00 to 1.00 March 31, 2004 3.00 to 1.00
March 31, 2004 2.50 to 1.00 June 30, 2004 3.00 to 1.00
June 30, 2004 2.50 to 1.00 September 30, 2004 3.00 to 1.00
September 30, 2004 2.50 to 1.00
The consolidated interest coverage ratio was amended as follows:
Old Consolidated Consolidated
Old Interest Interest
Date Coverage Ratio Date Coverage Ratio
---- ---------------- ---- --------------
December 31, 1998 2.00 to 1.00 December 31, 1998 1.50 to 1.00
March 31, 1999 2.25 to 1.00 March 31, 1999 1.50 to 1.00
June 30, 1999 2.25 to 1.00 June 30, 1999 1.50 to 1.00
September 30,1999 2.50 to 1.00 September 30, 1999 1.40 to 1.00
December 31, 1999 2.75 to 1.00 December 31, 1999 1.50 to 1.00
March 31, 2000 2.75 to 1.00 March 31, 2000 1.75 to 1.00
June 30, 2000 3.00 to 1.00 June 30, 2000 1.75 to 1.00
September 30, 2000 3.00 to 1.00 September 30, 2000 2.00 to 1.00
December 31, 2000 3.50 to 1.00 December 31, 2000 2.25 to 1.00
March 31, 2001 3.50 to 1.00 March 31, 2001 2.50 to 1.00
June 30, 2001 4.00 to 1.00 June 30, 2001 2.50 to 1.00
September 30, 2001 4.00 to 1.00 September 30, 2001 2.75 to 1.00
December 31, 2001 4.00 to 1.00 December 31, 2001 3.00 to 1.00
March 31, 2002 4.00 to 1.00 March 31, 2002 3.25 to 1.00
June 30, 2002 4.00 to 1.00 June 30, 2002 3.50 to 1.00
September 30, 2002 4.00 to 1.00 September 30, 2002 3.75 to 1.00
March 31, 2003 4.00 to 1.00 December 31, 2002 4.00 to 1.00
June 30, 2003 4.00 to 1.00 March 31, 2003 4.00 to 1.00
September 30, 2003 4.00 to 1.00 June 30, 2003 4.00 to 1.00
December 31, 2003 4.00 to 1.00 September 30, 2003 4.00 to 1.00
March 31, 2004 4.00 to 1.00 December 31, 2003 4.00 to 1.00
June 30, 2004 4.00 to 1.00 March 31, 2004 4.00 to 1.00
September 30, 2004 4.00 to 1.00 June 30, 2004 4.00 to 1.00
September 30, 2004 4.00 to 1.00
13
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KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The consolidated senior leverage ratio was amended as follows:
Old Consolidated Consolidated
Old Senior Leverage Senior Leverage
Date Ratio Date Ratio
---- --------------- ---- ---------------
September 30, 1998 3.75 to 1.00 December 31, 1998 4.50 to 1.00
December 31, 1998 3.75 to 1.00 March 31, 1999 4.50 to 1.00
March 31, 1999 3.75 to 1.00 June 30, 1999 4.50 to 1.00
June 30, 1999 3.50 to 1.00 September 30, 1999 4.50 to 1.00
September 30, 1998 3.75 to 1.00 December 31, 1999 4.25 to 1.00
September 30,1999 3.50 to 1.00 March 31, 2000 3.75 to 1.00
December 31, 1999 3.25 to 1.00 June 30, 2000 3.25 to 1.00
March 31, 2000 3.25 to 1.00 September 30, 2000 2.75 to 1.00
June 30, 2000 3.25 to 1.00 December 31, 2000 2.50 to 1.00
September 30, 2000 3.25 to 1.00 March 31, 2001 2.25 to 1.00
December 31, 2000 2.75 to 1.00 June 30, 2001 2.00 to 1.00
March 31, 2001 2.75 to 1.00 September 30, 2001 2.00 to 1.00
June 30, 2001 2.50 to 1.00 December 31, 2001 2.00 to 1.00
September 30, 2001 2.50 to 1.00 March 31, 2002 2.00 to 1.00
December 31, 2001 2.50 to 1.00 June 30, 2002 2.00 to 1.00
March 31, 2002 2.50 to 1.00 September 30, 2002 2.00 to 1.00
June 30, 2002 2.50 to 1.00 December 31, 2002 2.00 to 1.00
September 30, 2002 2.50 to 1.00 March 31, 2003 2.00 to 1.00
December 31, 2002 2.00 to 1.00 June 30, 2003 2.00 to 1.00
March 31, 2003 2.00 to 1.00 September 30, 2003 2.00 to 1.00
June 30, 2003 2.00 to 1.00 December 31, 2003 2.00 to 1.00
September 30, 2003 2.00 to 1.00 March 31, 2004 2.00 to 1.00
December 31, 2003 2.00 to 1.00 June 30, 2004 2.00 to 1.00
March 31, 2004 2.00 to 1.00 September 30, 2004 2.00 to 1.00
June 30, 2004 2.00 to 1.00
September 30, 2004 2.00 to 1.00
14
15
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In addition, the consolidated EBITDA must now meet the amounts set forth below:
Consolidated
Date EBITDA
---- ------------
December 31, 1998 $140,000,000
March 31, 1999 115,000,000
June 30, 1999 100,000,000
September 30, 1999 95,000,000
December 31, 1999 100,000,000
March 31, 2000 115,000,000
June 30, 2000 125,000,000
September 30, 2000 135,000,000
December 31, 2000 140,000,000
March 31, 2001 145,000,000
The minimum consolidated EBITDA from June 30, 2001 until September 30, 2004 is
$150,000,000.
The limitation on capital expenditures was also amended such that the
requirements are now as follows:
Fiscal Year Amount
----------- ------
1999 $30,000,000
2000 $30,000,000
2001 $35,000,000
2002 $45,000,000
2003 $55,000,000
2004 $65,000,000
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.
15
16
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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
16
17
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
17
18
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
18
19
KEY ENERGY SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
19
20
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: March 30, 1999 President and Chief Executive
Officer
By /s/ STEPHEN E. MCGREGOR
----------------------------------
Dated: March 30, 1999 Executive Vice President, Chief
Financial Officer and Treasurer
20