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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
OR
/ / 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 Identification No.)
incorporation or organization) 79705
6 DESTA DRIVE, MIDLAND, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (915) 620-0300
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
---------------------------- -----------------------------------------
Common Stock, $.10 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
5% Convertible Subordinated Notes Due 2004
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the Common Stock held by nonaffiliates of the
Registrant as of October 25, 2001 was approximately $854,169,893.
Common Stock outstanding at October 25, 2001: 102,357,547
DOCUMENTS INCORPORATED BY REFERENCE: None
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KEY ENERGY SERVICES, INC.
INDEX
PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings and Other Actions......................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 20
Item 8. Consolidated Financial Statements and Supplementary Data.... 21
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 60
PART III.
Item 10. Directors and Executive Officers............................ 60
Item 11. Executive Compensation...................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 66
Item 13. Certain Relationships and Related Transactions.............. 68
PART IV.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K...... 68
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements in this document that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this document and the documents incorporated
by reference, words such as "anticipate," "believe," "expect," "plan," "intend,"
"estimate," "project," "will," "could," "may," "predict" and similar expressions
are intended to identify forward-looking statements. Further events and actual
results may differ materially from the results set forth in or implied in the
forward-looking statements. Factors that might cause such a difference include:
- fluctuations in world-wide prices and demand for oil and natural gas;
- fluctuations in level of oil and natural gas exploration and development
activities;
- fluctuations in the demand for well servicing, contract drilling and
ancillary oilfield services;
- the existence of competitors, technological changes and developments in
the industry;
- the existence of operating risks inherent in the well servicing, contract
drilling and ancillary oilfield services; and
- general economic conditions, the existence of regulatory uncertainties,
and the possibility of political instability in any of the countries in
which Key does business, in addition to other matters discussed under
"Part II--Item 7--Management's Discussion and Analysis of Results of
Operations and Financial Condition."
PART I
ITEM 1. BUSINESS.
THE COMPANY
Key Energy Services, Inc. (the "Company" or "Key"), is the largest onshore,
rig-based well servicing contractor in the world, with approximately 1,477 well
service rigs and 1,455 oilfield service vehicles as of June 30, 2001. Key
provides a complete range of well services to major oil companies and
independent oil and natural gas production companies, including: rig-based well
maintenance, workover, completion, and recompletion services (including
horizontal recompletions); oilfield trucking services; and ancillary oilfield
services. Key conducts well servicing operations onshore the continental United
States in the following regions: Gulf Coast (including South Texas, Central Gulf
Coast of Texas and South Louisiana), Permian Basin of West Texas and Eastern New
Mexico, Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins and the
ArkLaTex region), Four Corners (including the San Juan, Piceance, Uinta, and
Paradox Basins), Eastern (including the Appalachian, Michigan and Illinois
Basins), Rocky Mountains (including the Denver-Julesberg, Powder River, Wind
River, Green River and Williston Basins), and California (the San Joaquin
Basin), and internationally in Argentina and Ontario, Canada. Key is also a
leading onshore drilling contractor, with 79 land drilling rigs as of June 30,
2001. Key conducts land drilling operations in a number of major domestic
producing basins, as well as in Argentina and in Ontario, Canada. Key also
produces and develops oil and natural gas reserves in the Permian Basin region
and Texas Panhandle.
Key's principal executive office is located at 6 Desta Drive, Midland, Texas
79705. Key's phone number is (915) 620-0300 and website address is
www.keyenergy.com.
BUSINESS STRATEGY
Key has built its leadership position through the consolidation of smaller,
less viable competitors. This consolidation, together with a continuing decline
in the number of available domestic well service rigs due to attrition,
cannibalization and transfers outside of the United States, has given Key the
opportunity to
3
capitalize on improved market conditions which existed during fiscal 2001. Key
has focused on maximizing results by reducing debt, building strong customer
alliances, refurbishing rigs and related equipment, and training personnel to
maintain a qualified and safe employee base.
REDUCING DEBT. Over the past fiscal year, Key has significantly reduced
debt and strengthened its balance sheet. At June 30, 2001, Key's long-term
funded debt net of cash and capitalized leases ("net funded debt") was
approximately $468,845,000 and its net funded debt to capitalization ratio was
approximately 50% as compared to approximately $534,816,000 and 58%,
respectively, at June 30, 2000. Key expects to be able to continue to reduce
debt from available cash flow from operations and from anticipated interest
savings resulting from prior and future debt reductions and future debt
refinancings.
BUILDING STRONG CUSTOMER ALLIANCES. Key seeks to maximize customer
satisfaction by offering a broad range of equipment and services in conjunction
with highly trained and motivated employees. As a result, Key is able to offer
proactive solutions for most of its customer's wellsite needs. Key ensures
consistent high standards of quality and customer satisfaction by continually
evaluating its performance. Key maintains strong alliances with major oil
companies as well as numerous independent oil and natural gas production
companies and believes that such alliances improve the stability of demand for
its oilfield services.
REFURBISHING RIGS AND RELATED EQUIPMENT. Key intends to continue actively
refurbishing its rigs and related equipment to maximize the utilization of its
rig fleet. The increase in Key's cash flow, both from operations and from
anticipated interest savings from reduced levels of debt, combined with Key's
borrowing availability under its revolving credit facility, has provided ample
liquidity and resources necessary to make the capital expenditures to refurbish
such equipment.
TRAINING AND DEVELOPING EMPLOYEES. Key has, and will continue to, devote
significant resources to the training and professional development of its
employees with a special emphasis on safety. Key currently has two training
centers in Texas and one training center in California to improve its employees'
understanding of operating and safety procedures. Key recognizes the
historically high turn-over rate in the industry and is committed to offering
compensation, benefits and incentive programs for its employees that are
attractive and competitive in its industry, in order to ensure a steady stream
of qualified, safe personnel to provide quality service to its customers.
MAJOR DEVELOPMENTS DURING FISCAL 2001
FAVORABLE INDUSTRY CONDITIONS
Operating conditions improved significantly during fiscal 2001 as capital
spending by oil and natural gas producers for well servicing and contract
drilling services increased over prior year levels. The increased spending was
primarily due to higher commodity prices with WTI Cushing prices for light sweet
crude averaging approximately $26.97 per barrel and Nymex Henry Hub natural gas
prices averaging approximately $5.09 per MMbtu during fiscal 2001, as compared
to an average WTI Cushing price for light sweet crude of $25.97 per barrel and
an average Nymex Henry Hub natural gas price of $3.04 per MMbtu during fiscal
2000.
This increase in commodity prices during fiscal 2001 led to a steady,
sequential increase in the demand for Key's services and equipment during fiscal
2001 as Key's customers increased their exploration and development activity in
Key's primary market areas, enabling Key to increase the rates it charges for
its services. This increase in demand and rates resulted in sequential increases
in revenues, cash flow and net income in each quarter of fiscal 2001 over the
same quarter of fiscal 2000. Key expects demand for its services to remain at or
above current levels as long as capital spending by Key's customers remains at
or near their current levels.
4
During fiscal 2001, crude oil prices continued to trade at healthy levels
due largely to the ability of the Organization of Petroleum Exporting Countries
("OPEC") to adhere to its production quotas designed to keep crude oil prices in
the range of $22.00 to $28.00 per barrel. The adherence to the production quotas
brought more stability to crude oil prices. Since June 30, 2001, however, both
crude oil and natural gas prices have weakened significantly, falling below
$22.00 per barrel and $2.00 per Mmbtu, respectively. While management believes
that many of its customers generally base their capital spending budgets on a
crude oil price of $18.00 to $22.00 per barrel and a natural gas price of $2.00
to $2.75 per MMbtu, there can be no assurances that its customers will not
postpone and/or reduce their capital spending plans if crude oil prices and
natural gas prices continue to remain at or below their current levels. In
addition, the terrorist attacks on the World Trade Center and the Pentagon that
occurred on September 11, 2001 threaten to increase the downward pressure on
commodity prices as U.S. fuel consumption decreases due to significantly reduced
air and other travel, the general demand for energy decreases as consumer
anxiety further weakens the U.S. economy, and OPEC faces political pressure to
reduce its price targets for crude oil.
The level of Key's revenues, cash flows, losses and earnings are
substantially dependent upon, and affected by, the level of domestic and
international oil and gas exploration and development activity (see
Part II-Item 7-Management's Discussion and Analysis of Results of Operations and
Financial Condition).
DEBT REDUCTION
During fiscal 2001, Key significantly reduced its long-term debt and
strengthened its balance sheet. At June 30, 2001, Key's net funded debt was
approximately $468,845,000 and its net funded debt to capitalization ratio was
approximately 50% as compared to approximately $534,816,000 and 58%,
respectively, at June 30, 2000. Proceeds from the Debt Offering (defined below)
and from the exercise of options and warrants, as well as cash flow from
operations were used to accomplish this reduction in net funded debt (see
Part II-Item 7-Management's Discussion and Analysis of Results of Operations and
Financial Condition-Long-Term Debt).
DEBT OFFERING
On March 6, 2001, Key completed the public offering of $175,000,000 of
8 3/8% Senior Notes Due 2008 (the "Debt Offering"). Net proceeds from the Debt
Offering were approximately $170.0 million, which was used to immediately repay
the term loans in full and to repay a portion of the revolver outstanding under
Key's senior credit facility.
DESCRIPTION OF BUSINESS SEGMENTS
Key operates in two primary business segments which are well servicing and
contract drilling. Key's operations are conducted domestically and in Argentina
and Canada. The following is a description of each of these business segments
(for financial information regarding these business segments, see Note 15 to
Consolidated Financial Statements-Business Segment Information).
WELL SERVICING
Key provides a full range of well services, including rig-based services,
oilfield trucking services and ancillary oilfield services, necessary to
maintain and workover oil and natural gas producing wells. Rig-based services
include: maintenance of existing wells, workovers of existing wells, completion
of newly drilled wells, recompletion of existing wells (including horizontal
recompletions) and plugging and abandonment of wells at the end of their useful
lives.
5
WELL SERVICE RIGS
Key uses its well service rig fleet to perform four major categories of rig
services for oil and natural gas producers.
MAINTENANCE SERVICES. Key estimates that there are approximately 600,000
producing oil wells and approximately 300,000 producing natural gas wells in the
United States. Key provides the well service rigs, equipment and crews for
maintenance services, which are performed on both oil and natural gas wells, but
which are more commonly required on oil wells. While some oil wells in the
United States flow oil to the surface without mechanical assistance, most
require pumping or some other method of artificial lift. Oil wells that require
pumping characteristically require more maintenance than flowing wells due to
the operation of the mechanical pumping equipment installed. Few natural gas
wells have mechanical pumping systems in the wellbore, and, as a result,
maintenance work on natural gas wells is less frequent.
Maintenance services are required throughout the life of most producing oil
and natural gas wells to ensure efficient and continuous operation. These
services consist of routine mechanical repairs necessary to maintain production
from the well, such as repairing inoperable pumping equipment in an oil well or
replacing defective tubing in an oil or natural gas well, and removing debris
such as sand and paraffin from the well. Other services include pulling the
rods, tubing, pumps and other downhole equipment out of the wellbore to identify
and repair a production problem.
Maintenance services are often performed on a series of wells in proximity
to each other and typically require less than 48 hours per well to complete. The
general demand for maintenance services is closely related to the total number
of producing oil and natural gas wells in a geographic market, and maintenance
services are generally the most stable type of well service activity.
WORKOVER SERVICES. In addition to periodic maintenance, producing oil and
natural gas wells occasionally require major repairs or modifications, called
"workovers." Workover services are performed to enhance the current production
of existing wells. Such services include extensions of existing wells to drain
new formations either through deepening wellbores to new zones or through
drilling of horizontal lateral wellbores to improve reservoir drainage patterns.
In less extensive workovers, Key's rigs are used to seal off depleted zones in
existing wellbores and access previously bypassed productive zones. Key's
workover rigs are also used to convert former producing wells to injection wells
through which water or carbon dioxide is then pumped into the formation for
enhanced recovery operations. Other workover services include: major subsurface
repairs such as casing repair or replacement, recovery of tubing and removal of
foreign objects in the wellbore, repairing downhole equipment failures, plugging
back the bottom of a well to reduce the amount of water being produced with the
oil and natural gas, cleaning out and recompleting a well if production has
declined, and repairing leaks in the tubing and casing. These extensive workover
operations are normally performed by a well service rig with a workover package,
which may include rotary drilling equipment, mud pumps, mud tanks and blowout
preventers depending upon the particular type of workover operation. Most of
Key's well service rigs are designed for and can be equipped to perform complex
workover operations.
Workover services are more complex and time consuming than routine
maintenance operations and consequently may last from a few days to several
weeks. These services are almost exclusively performed by well service rigs.
The demand for workover services is more sensitive to expectations relating
to, and changes in, oil and natural gas prices than the demand for maintenance
services. As oil and natural gas prices increase, the level of workover activity
tends to increase as operators seek to increase production by enhancing the
efficiency of their wells at higher commodity prices with correspondingly higher
rates of return.
6
COMPLETION SERVICES. Key's completion services prepare a newly drilled oil
or natural gas well for production. The completion process may involve
selectively perforating the well casing to access producing zones, stimulating
and testing these zones and installing downhole equipment. Key typically
provides a well service rig and may also provide other equipment such as a
workover package to assist in the completion process. Producers use well service
rigs to complete their wells because the rigs have specialized equipment,
properly trained employees and the experience necessary to perform these
services. However, during periods of weak drilling rig demand, drilling
contractors may compete with service rigs for completion work.
The completion process typically requires a few days to several weeks,
depending on the nature and type of the completion, and generally requires
additional auxiliary equipment that can be provided for an additional fee. The
demand for well completion services is directly related to drilling activity
levels, which are highly sensitive to expectations relating to, and changes in,
oil and natural gas prices. As the number of newly drilled wells decreases, the
number of completion jobs correspondingly decreases.
PLUGGING AND ABANDONMENT SERVICES. Well service rigs and workover equipment
are also used in the process of permanently closing oil and natural gas wells at
the end of their productive lives. Plugging and abandonment work can be
performed with a well servicing rig along with wireline and cementing equipment.
The services generally include the sale or disposal of equipment salvaged from
the well as part of the compensation received and require compliance with state
regulatory requirements. The demand for oil and natural gas does not
significantly affect the demand for plugging and abandonment services, as well
operators are required by state regulations to plug a well that it is no longer
productive. The need for these services is also driven by lease and/or operator
policy requirements.
OILFIELD TRUCKING
Key provides liquid/vacuum truck services and fluid transportation and
disposal services for operators whose wells produce saltwater and other fluids,
in addition to oil and natural gas. These trucks are also utilized in connection
with drilling and workover projects, which tend to produce and use large amounts
of various oilfield fluids. Key also owns a number of salt water disposal wells.
In addition, Key provides haul/ equipment trucks that are used to move large
pieces of equipment from one wellsite to the next. Demand and pricing for these
services are generally related to demand for Key's well service and drilling
rigs.
ANCILLARY OILFIELD SERVICES
Key provides ancillary oilfield services, which include among others: hot
oiling; wireline; frac tank rentals; well site construction; roustabout
services; fishing and other tool rentals; blowout preventers (BOPs); and foam
units and air drilling services. Demand and pricing for these services are
generally related to demand for Key's well service and drilling rigs.
CONTRACT DRILLING
Key provides contract drilling services to major oil companies and
independent oil and natural gas producers onshore the continental United States
in the Permian Basin, the Four Corners region, Michigan, the Northeast, and the
Rocky Mountains and internationally in Argentina and Ontario, Canada. Contract
drilling services are primarily provided under standard dayrate, and, to a
lesser extent, footage or turnkey contracts. Drilling rigs vary in size and
capability and may include specialized equipment. The majority of Key's drilling
rigs are equipped with mechanical power systems and have depth ratings ranging
from approximately 4,500 to 12,000 feet. Key has one drilling rig with a depth
rating of approximately 18,000 feet. Like workover services, the demand for
contract drilling is directly related to expectations relating to, and changes
in, oil and natural gas prices which in turn, are driven by the supply of and
demand for these commodities.
7
FOREIGN OPERATIONS
Key also operates each of its business segments discussed above in Argentina
and Ontario, Canada. Key's foreign operations currently own 26 well servicing
rigs, 57 oilfield trucks and eight drilling rigs in Argentina and three well
servicing rigs, four oilfield trucks and three drilling rigs in Ontario, Canada.
CUSTOMERS
Key's customers include major oil companies, independent oil and natural gas
production companies, and foreign national oil and natural gas production
companies. No single customer in fiscal 2001 accounted for 10% or more of Key's
consolidated revenues.
COMPETITION AND OTHER EXTERNAL FACTORS
Despite the significant consolidation in the domestic well servicing
industry, there are numerous smaller companies that compete in Key's well
servicing markets. Nonetheless, Key believes that its performance, equipment,
safety, and availability of equipment to meet customer needs and availability of
experienced, skilled personnel is superior to that of its competitors.
In the well servicing markets, an important competitive factor in
establishing and maintaining long-term customer relationships is having an
experienced, skilled and well-trained work force. In recent years, many of Key's
larger customers have placed increased emphasis on the safety records and
quality of the crews, equipment and services provided by their contractors. Key
has, and will continue to devote substantial resources toward employee safety
and training programs. Management believes that many of Key's competitors,
particularly small contractors, have not undertaken similar training programs
for their employees. Management believes that Key's safety record and reputation
for quality equipment and service are among the best in the industry.
In the contract drilling market, Key competes with other regional and
national oil and natural gas drilling contractors, some of which have larger rig
fleets with greater average depth capabilities and a few that have better
capital resources than Key. Management believes that the contract drilling
industry is less consolidated than the well servicing industry, resulting in a
contract drilling market that is more price competitive. Nonetheless, Key
believes that it is competitive in terms of drilling performance, equipment,
safety, pricing, availability of equipment to meet customer needs and
availability of experienced, skilled personnel in those regions in which it
operates.
The need for well servicing and contract drilling fluctuates, primarily, in
relation to the price of oil and natural gas which, in turn, is driven by the
supply of and demand for oil and natural gas. As supply of those commodities
decreases and demand increases, service and maintenance requirements increase as
oil and natural gas producers attempt to maximize the producing efficiency of
their wells in a higher priced environment.
EMPLOYEES
As of June 30, 2001, Key employed approximately 9,300 persons (approximately
9,220 in well servicing and contract drilling and 80 in corporate). Key's
employees are not represented by a labor union and are not covered by collective
bargaining agreements. Key has not experienced work stoppages associated with
labor disputes or grievances and considers its relations with its employees to
be satisfactory.
ENVIRONMENTAL REGULATIONS
Key's operations are subject to various local, state and federal laws and
regulations intended to protect the environment. Key's operations routinely
involve the handling of waste materials, some of which are classified as
hazardous substances. Consequently, the regulations applicable to Key's
operations include those with respect to containment, disposal and controlling
the discharge of any hazardous oilfield
8
waste and other non-hazardous waste material into the environment, requiring
removal and cleanup under certain circumstances, or otherwise relating to the
protection of the environment. Laws and regulations protecting the environment
have become more stringent in recent years, and may in certain circumstances
impose "strict liability," rendering a party liable for environmental damage
without regard to negligence or fault on the part of such party. Such laws and
regulations may expose us to liability for the conduct of, or conditions caused
by, others, or for Key's acts, which were in compliance with all applicable laws
at the times such acts were performed. Cleanup costs and other damages arising
as a result of environmental laws, and costs associated with changes in
environmental laws and regulations could be substantial and could have a
material adverse effect on Key's financial condition. From time to time, claims
have been made and litigation has been brought against Key under such laws.
However, the costs incurred in connection with such claims and other costs of
environmental compliance have not had any material adverse effect on Key's
operations or financial statements in the past, and management is not currently
aware of any situation or condition that it believes is likely to have any such
material adverse effect in the future. Management believes that it conducts
Key's operations in substantial compliance with all material federal, state and
local regulations as they relate to the environment. Although Key has incurred
certain costs in complying with environmental laws and regulations, such amounts
have not been material to Key's financial results during the past three fiscal
years.
ITEM 2. PROPERTIES.
Key's corporate headquarters are located in Midland, Texas. Key leases
office space at this location from an independent third party.
WELL SERVICING AND CONTRACT DRILLING
The following table sets forth the type, number and location of the major
equipment owned and operated by Key's operating divisions as of June 30, 2001:
WELL SERVICE/ OILFIELD DRILLING
OPERATING DIVISION WORKOVER RIGS TRUCKS RIGS
------------------ -------------- --------- --------
DOMESTIC:
Permian Basin (well servicing)................. 466 357 0
Gulf Coast..................................... 244 338 0
Mid-Continent.................................. 313 285 0
Four Corners................................... 61 79 17
Eastern........................................ 95 208 3
Rocky Mountains................................ 134 54 12
California..................................... 135 24 0
Key Energy Drilling (Permian Basin)............ 0 48 36
DOMESTIC SUBTOTAL................................ 1,448 1,393 68
INTERNATIONAL:
Argentina...................................... 26 57 8
Canada......................................... 3 5 3
TOTALS........................................... 1,477 1,455 79
9
The Permian Basin Well Servicing division owns 35 and leases six office and
yard locations. The Gulf Coast division owns 16 and leases 18 office and yard
locations. The Mid-Continent division owns 28 and leases 20 office and yard
locations. The Four Corners division owns eight and leases two office and yard
locations. The Eastern division owns three and leases ten office and yard
locations. The Rocky Mountain division owns 17 and leases three office and yard
locations. The California division owns one and leases one office and yard
locations. The Permian Basin Drilling division owns two and leases two office
and yard locations. The Argentina division owns two and leases one office and
yard locations. The Canadian operation owns one yard location. Odessa
Exploration owns interests in 515 gross (348 proved developed) oil properties
and 53 gross (45 proved developed) gas properties. The corporate division leases
two office locations in addition to its headquarters.
All operating facilities are one story office and/or shop buildings. All
buildings are occupied and considered to be in satisfactory condition.
ITEM 3. LEGAL PROCEEDINGS AND OTHER ACTIONS.
See Note 4 to Consolidated Financial Statements--Commitments and
Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Key's common stock is currently traded on the New York Stock Exchange, under
the symbol "KEG". As of June 30, 2001, there were 669 registered holders of
101,440,166 issued and outstanding shares of common stock, including 416,666
shares of common stock held in treasury (101,023,500 net of treasury shares).
The following table sets forth, for the periods indicated, the high and low
sales prices of Key's common stock on the New York Stock Exchange for fiscal
2001 and fiscal 2000, as derived from published sources.
HIGH LOW
---------- ---------
Fiscal Year Ending 2001:
Fourth Quarter............................................ $15 1/3 $9 11/20
Third Quarter............................................. 13 13/25 8 1/8
Second Quarter............................................ 10 1/2 6 13/16
First Quarter............................................. 11 11/25 7 1/16
Fiscal Year Ending 2000:
Fourth Quarter............................................ $11 7/8 $8 1/16
Third Quarter............................................. 12 1/4 5
Second Quarter............................................ 5 7/8 3 1/8
First Quarter............................................. 5 13/16 3 3/8
There were no dividends paid on Key's common stock during the fiscal years
ended June 30, 2001, 2000 or 1999. Key does not intend, for the foreseeable
future, to pay dividends on its common stock. In addition, Key is contractually
restricted from paying dividends under the terms of its existing credit
facilities.
10
RECENT SALES OF UNREGISTERED SECURITIES
Key did not make any unregistered sales of its securities during the twelve
months ended June 30, 2001 that were not previously included in its Quarterly
Reports filed for such period.
ITEM 6. SELECTED FINANCIAL DATA.
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
2001 2000 1999(1) 1998 1997
---------- ---------- ---------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues.................................... $ 873,262 $ 637,732 $ 491,817 $ 424,543 $165,773
Operating costs:
Direct costs.............................. 574,938 462,386 371,428 293,448 114,598
Depreciation, depletion and
amortization............................ 75,147 70,972 62,074 31,001 11,076
General and administrative................ 66,071 58,772 53,108 38,987 17,447
Bad debt expense.......................... 1,263 1,648 5,928 826 98
Debt issuance costs....................... -- -- 6,307 -- --
Restructuring charge...................... -- -- 4,504 -- --
Interest.................................. 56,560 71,930 67,401 21,476 7,879
Income (loss) before income taxes, minority
interest, and extraordinary items......... 99,283 (27,976) (78,933) 38,805 14,675
Net income (loss)........................... 62,710 (18,959) (53,258) 24,175 9,098
Income (loss) per common share:
Basic..................................... $ 0.63 $ (0.23) $ (1.94) $ 1.41 $ 0.81
Diluted................................... $ 0.61 $ (0.23) $ (1.94) $ 1.23 $ 0.66
Average common shares outstanding:
Basic..................................... 98,195 83,815 27,501 17,153 11,216
Assuming full dilution.................... 102,271 83,815 27,501 24,024 17,632
Common shares issued at period end.......... 101,440 97,210 82,738 18,267 12,298
Market price per common share at period
end....................................... $ 10.84 $ 9.64 $ 3.56 $ 13.12 $ 17.81
Cash dividends paid on common shares........ -- -- -- -- --
BALANCE SHEET DATA:
Cash........................................ $ 2,098 $ 109,873 $ 23,478 $ 25,265 $ 41,704
Current assets.............................. 206,150 253,589 132,543 127,557 93,333
Property and equipment...................... 1,014,675 920,437 871,940 547,537 227,255
Property and equipment, net................. 793,716 760,561 769,562 499,152 208,186
Total assets................................ 1,228,284 1,246,265 1,148,138 698,640 320,095
Current liabilities......................... 115,553 92,848 73,151 48,029 33,142
Long-term debt, including current portion... 493,907 666,600 699,978 399,779 174,167
Stockholders' equity........................ 476,878 382,887 288,094 154,928 73,179
OTHER DATA:
Adjusted EBITDA(2).......................... $ 232,253 $ 116,574 $ 67,281 $ 92,108 $ 33,728
Net cash provided by (used in):
Operating activities...................... 142,717 34,860 (13,427) 40,925 843
Investing activities...................... (83,350) (37,766) (294,654) (306,339) (80,749)
Financing activities...................... (167,142) 89,301 306,294 248,975 117,399
Working capital............................. 90,597 160,741 59,392 79,528 60,191
Book value per common share(3).............. $ 4.70 $ 3.94 $ 3.47 $ 8.48 $ 5.95
--------------------------
(1) FINANCIAL DATA FOR THE YEAR ENDED JUNE 30, 1999 INCLUDES THE ALLOCATED
PURCHASE PRICE OF DAWSON PRODUCTION SERVICES, INC. AND THE RESULTS OF THEIR
OPERATIONS, BEGINNING SEPTEMBER 15, 1998.
(2) ADJUSTED EBITDA IS NET INCOME BEFORE INTEREST EXPENSE, INCOME TAXES,
DEPRECIATION, DEPLETION AND AMORTIZATION, BAD DEBT EXPENSE, DEBT ISSUANCE
COSTS CHARGED TO EARNINGS, RESTRUCTURING CHARGE AND EXTRAORDINARY ITEMS.
ADJUSTED EBITDA IS PRESENTED BECAUSE OF ITS ACCEPTANCE AS A COMPONENT OF A
COMPANY'S POTENTIAL VALUATION IN COMPARISON TO COMPANIES
11
IN THE SAME INDUSTRY AND OF A COMPANY'S ABILITY TO SERVICE OR INCUR DEBT.
MANAGEMENT INTERPRETS TRENDS INDICATED BY CHANGES IN ADJUSTED EBITDA AS AN
INDICATOR OF THE EFFECTIVENESS OF ITS STRATEGIES IN ACHIEVING REVENUE GROWTH
AND CONTROLLING DIRECT AND INDIRECT COSTS OF SERVICES PROVIDED. INVESTORS
SHOULD CONSIDER THAT THIS MEASURE DOES NOT TAKE INTO CONSIDERATION DEBT
SERVICE, INTEREST EXPENSES, COSTS OF CAPITAL, IMPAIRMENTS OF LONG LIVED
ASSETS, DEPRECIATION OF PROPERTY, THE COST OF REPLACING EQUIPMENT OR INCOME
TAXES. ADJUSTED EBITDA SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET
INCOME, INCOME BEFORE TAXES, CASH FLOWS FROM OPERATING ACTIVITIES OR ANY
OTHER MEASURE OF FINANCIAL PERFORMANCE PRESENTED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND IS NOT INTENDED TO REPRESENT
CASH FLOW. ADJUSTED EBITDA MAY NOT BE COMPARABLE TO SIMILARLY TITLED
MEASURES OF OTHER COMPANIES.
(3) BOOK VALUE PER COMMON SHARE IS STOCKHOLDERS' EQUITY AT PERIOD END DIVIDED BY
THE NUMBER OF ISSUED COMMON SHARES AT PERIOD END.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
The following discussion provides information to assist in the understanding
of the Company's financial condition and results of operations. It should be
read in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this report. Please note that certain reclassifications
have been made to the fiscal 2000 and 1999 financial data presented below to
conform to the fiscal 2001 presentation. The reclassifications consist primarily
of reclassifying oil and natural gas production revenues and expenses. Oil and
natural gas production revenues and related expenses have been reclassified to
other revenues and other expenses because the Company does not believe this
business segment is material to the Company's consolidated financial statements.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2001 VERSUS FISCAL YEAR ENDED JUNE 30, 2000
The Company's results of operations for the year ended June 30, 2001 reflect
the impact of favorable industry conditions resulting from increased commodity
prices which in turn caused increased demand for the Company's equipment and
services during fiscal 2001 (see Part I--Item--Major Developments During Fiscal
2001--Favorable Industry Conditions). The positive impact of this increased
demand on the Company's operating results was partially offset by increased
operating expenses incurred as a result of the increase in the Company's
business activity.
THE COMPANY
Revenues for the year ended June 30, 2001 increased $235,530,000, or 36.9%,
to $873,262,000 from $637,732,000 in fiscal 2000, while net income for fiscal
2001 increased $81,669,000 to $62,710,000 from a net loss of $18,959,000 in
fiscal 2000. The increase in revenues and net income is due to improved
operating conditions, higher rig hours, and increased pricing, with lower
interest expense from debt reduction also contributing to net income.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the year ended June 30, 2001
increased $198,781,000, or 35.5%, to $758,273,000 from $559,492,000 in fiscal
2000. The increase was due to increased demand for the Company's well servicing
equipment and services and higher pricing.
12
CONTRACT DRILLING. Contract drilling revenues for the year ended June 30,
2001 increased $39,211,000, or 57.3%, to $107,639,000 from $68,428,000 in fiscal
2000. The increase was due to increased demand for the Company's contract
drilling equipment and services and higher pricing.
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the year ended June 30, 2001
increased $93,168,000, or 23.3%, to $493,108,000 from $399,940,000 in fiscal
2000. The increase in expenses is due to higher utilization of the Company's
well servicing equipment, higher labor costs and the overall increase in the
Company's well servicing business. Despite the increased costs, well servicing
expenses as a percentage of well servicing revenues decreased from 71.5% for
fiscal 2000 to 65% for fiscal 2001. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.
CONTRACT DRILLING. Contract drilling expenses for the year ended June 30,
2001, increased $19,067,000, or 32.7%, to $77,366,000 from $58,299,000 in fiscal
2000. The increase is due to higher utilization of the Company's contract
drilling equipment, higher labor costs and the overall increase in the Company's
contract drilling business. Despite the increased costs, contract drilling
expenses as a percentage of contract drilling revenues decreased from 85.2% in
fiscal 2000 to 71.9% in fiscal 2001. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
The Company's depreciation, depletion and amortization expense for the year
ended June 30, 2001 increased $4,175,000, or 5.9%, to $75,147,000 from
$70,972,000 in fiscal 2000. The increase is due to higher capital expenditures
incurred during fiscal 2001 as the Company refurbished equipment and increased
utilization of its contract drilling equipment (which it depreciates partially
based on utilization).
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses for the year ended
June 30, 2001 increased $7,299,000, or 12.4%, to $66,071,000 from $58,772,000 in
fiscal 2000. The increase was due to higher administrative costs resulting from
the growth of the Company's operations as a result of improved industry
conditions. Despite the increased costs, general and administrative expenses as
a percentage of total revenues declined from 9.2% in fiscal 2000 to 7.6% in
fiscal 2001.
INTEREST EXPENSE
The Company's interest expense for the year ended June 30, 2001 decreased
$15,370,000, or 21.4%, to $56,560,000 from $71,930,000 in fiscal 2000. The
decrease was primarily due to the impact of the long-term debt reduction during
fiscal 2001 and, to a lesser extent, lower short-term interest rates and
borrowing margins on floating rate debt.
BAD DEBT EXPENSE
The Company's bad debt expense for the year ended June 30, 2001 decreased
$385,000, or 23.4%, to $1,263,000 from $1,648,000 in fiscal 2000. The decrease
was primarily due to improved industry conditions for Key's customers and, to a
lesser extent, the centralization of the Company's internal credit approval
process.
EXTRAORDINARY GAIN
During fiscal 2001, the Company repurchased $257,115,000 of its long-term
debt at various discounts and premiums to par value and expensed related
unamortized debt issuance costs, all of which resulted in an after-tax
extraordinary gain of $429,000.
13
INCOME TAXES
The Company's income tax expense for the year ended June 30, 2001 increased
$44,408,000 to $37,002,000 from a benefit of $7,406,000 in fiscal 2000. The
increase in income tax expense is due to increased pre-tax income. The Company's
effective tax rate for fiscal 2001 and 2000 was 37.2% and 26.5%, respectively.
The effective tax rates vary from the statutory rate of 35% principally because
of certain non-deductible goodwill amortization, other non-deductible expenses
and state and local taxes.
CASH FLOW
The Company's net cash provided by operating activities for the year ended
June 30, 2001 increased $107,857,000 to $142,717,000 from $34,860,000 in fiscal
2000. The increase is due to higher revenues resulting from increased demand for
the Company's equipment and services and higher pricing, partially offset by
higher operating and general and administrative expenses resulting from
increased business activity.
The Company's net cash used in investing activities for the year ended
June 30, 2001 increased $45,584,000 to $83,350,000 from $37,766,000 in fiscal
2000. The increase is due primarily to higher capital expenditures.
The Company's net cash used by financing activities for the year ended
June 30, 2001 increased $256,443,000 to a use of $167,142,000 from cash provided
of $89,301,000 in fiscal 2000. The increase is primarily the result of
significant debt reduction during fiscal 2001, partially offset by proceeds from
the Debt Offering and the exercise of stock options and warrants.
FISCAL YEAR ENDED JUNE 30, 2000 VERSUS FISCAL YEAR ENDED JUNE 30, 1999
The Company's results of operations for the year ended June 30, 2000 reflect
the impact of the industry recovery during such period resulting from increased
commodity prices which in turn caused increased demand for the Company's
equipment and services during fiscal 2000. The positive impact of this increased
demand on the Company's operating results was partially offset by increased
operating expenses incurred as a result of the increase in the Company's
business activity.
THE COMPANY
Revenues for the year ended June 30, 2000 increased $145,915,000, or 29.7%,
to $637,732,000 from $491,817,000 in fiscal 1999, while net income for fiscal
2000 increased $34,299,000 to a net loss of $18,959,000 from a net loss of
$53,258,000 in fiscal 1999. The increase in revenues is due to improved
operating conditions and higher rig hours, the full year effect of the
acquisitions completed during the early portion of fiscal 1999 and, to a lesser
extent, higher pricing. The decrease in net loss is the result of improved
operating conditions, higher pricing, and cost reduction initiatives. In
addition, fiscal 1999 included non-recurring charges for debt issuance costs and
restructuring initiatives as well as higher bad debt expense.
OPERATING REVENUES
WELL SERVICING. Well servicing revenues for the year ended June 30, 2000
increased $125,835,000 or 29%, to $559,492,000 from $433,657,000 in fiscal 1999.
The increase was due to increased demand for the Company's well servicing
equipment and services, the full year effect of the acquisitions completed
during the early portion of fiscal 1999 and, to a lesser extent, higher pricing.
CONTRACT DRILLING. Contract drilling revenues for the year ended June 30,
2000 increased $17,815,000, or 35.2%, to $68,428,000 from $50,613,000 in fiscal
1999. The increase was due to increased demand for the Company's contract
drilling equipment and services, the full year effect of the acquisition
completed during the early portion of fiscal 1999 and, to a lesser extent,
higher pricing.
14
OPERATING EXPENSES
WELL SERVICING. Well servicing expenses for the year ended June 30, 2000
increased $74,975,000, or 23.1%, to $399,940,000 from $324,965,000 in fiscal
1999. The increase in expenses is due to higher utilization of the Company's
well servicing equipment, higher labor costs and the overall increase in the
Company's well servicing business. Despite the increased costs, well servicing
expenses as a percent of well servicing revenues decreased from 74.9% for fiscal
1999 to 71.5% for fiscal 2000. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.
CONTRACT DRILLING. Contract drilling expenses for the year ended June 30,
2000, increased $14,743,000, or 33.8%, to $58,299,000 from $43,556,000 in fiscal
1999. The increase is due to higher utilization of the Company's contract
drilling equipment, higher labor costs and the overall increase in the Company's
contract drilling business. Despite the increased costs, contract drilling
expenses as a percentage of contract drilling revenues decreased from 86.1% in
fiscal 1999 to 85.2% in fiscal 2000. The margin improvement is due to improved
operating efficiencies and the effects of higher pricing.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
The Company's depreciation, depletion and amortization expense for the year
ended June 30, 2000 increased $8,898,000, or 14.3%, to $70,972,000 from
$62,074,000 in fiscal 1999. The increase is due to higher capital expenditures
incurred during fiscal 2000 as the Company refurbished equipment and increased
utilization of its contract drilling equipment (which it depreciates partially
based on utilization).
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses for the year ended
June 30, 2000 increased $5,664,000, or 10.7%, from $53,108,000 to $58,772,000 in
fiscal 2000. The increase was due to higher administrative costs necessitated by
the growth of the Company's operations as a result of the fiscal 1999
acquisitions and improved industry conditions. Despite the increased costs,
general and administrative expenses as a percentage of total revenues declined
from 10.8% in fiscal 1999 to 9.2% in fiscal 2000.
INTEREST EXPENSE
The Company's interest expense for the year ended June 30, 2000 increased
$4,529,000, or 6.7%, to $71,930,000 from $67,401,000 in fiscal 1999. The
increase was primarily due to the full year effect of the debt incurred in
connection with the acquisitions completed during the early portion of fiscal
1999, and, to a lesser extent, higher interest rates during fiscal 2000
partially offset by the impact of the long-term debt reduction during fiscal
2000.
BAD DEBT EXPENSE
The Company's bad debt expense for the year ended June 30, 2000 decreased
$4,280,000, or 72.2%, to $1,648,000 from $5,928,000 in fiscal 1999. The decrease
was primarily due to improved industry conditions for Key's customers and, to a
lesser extent, the centralization of the Company's internal credit approval
process.
EXTRAORDINARY GAIN
During the fourth quarter of fiscal 2000, the Company repurchased
$10,190,000 of its 5% Convertible Subordinated Notes which resulted in an
after-tax gain of $1,611,000.
15
INCOME TAXES
The Company's income tax benefit for the year ended June 30, 2000 decreased
$18,269,000 to $7,406,000 from $25,675,000 in fiscal 1999. The decrease in
income tax benefit is due to the decrease in pretax loss. The Company's
effective tax benefit rate for fiscal 2000 and 1999 was 26.5% and 32.5%,
respectively. The fiscal 2000 effective tax benefit rate is different from the
statutory rate of 35% principally because of certain non-deductible goodwill
amortization, other non-deductible expenses and state and local taxes. The
decrease in the fiscal 2000 effective tax benefit rate was due to an increase in
the amount of non-deductible expenses, primarily as a result of the full year
effect of the goodwill amortization of the acquisitions completed during the
early portion of fiscal 1999.
CASH FLOW
The Company's net cash provided by operating activities for the year ended
June 30, 2000 increased $48,287,000 to a $34,860,000 from a use of $13,427,000
in fiscal 1999. The increase is due to higher revenues resulting from increased
demand for the Company's equipment and services, the full year effect of the
acquisitions completed during the early portion of fiscal 1999 and, to a lesser
extent, higher pricing, partially offset by higher operating and general and
administrative expenses resulting from increased business activity.
The Company's net cash used in investing activities for the year ended
June 30, 2000 decreased $256,888,000, or 87.2%, to $37,766,000 from $294,654,000
in fiscal 1999. The decrease is due to no acquisitions having occurred during
fiscal 2000 partially offset by higher capital expenditures.
The Company's net cash provided by financing activities for the year ended
June 30, 2000 decreased $216,993,000, or 70.8%, to $89,301,000 from $306,294,000
in fiscal 1999. The decrease is primarily the result of significantly decreased
borrowings during fiscal 2000 and, to a lesser extent, the repayment of
long-term debt partially offset by proceeds from the equity offering and the
volumetric production payment completed in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital
expenditures and working capital requirements from cash flow from operations,
bank borrowings and the issuance of equity and long-term debt. The Company
believes that its current reserves of cash and cash equivalents, availability of
its existing credit lines, access to capital markets and internally generated
cash flow from operations are sufficient to finance the cash requirements of its
current and future operations.
The Company's cash and cash equivalents decreased $107.8 million to
$2.1 million as of June 30, 2001 from $109.9 million as of June 30, 2000, which
included $100.6 million in net proceeds from the Company's equity offering which
closed on June 30, 2000 and had not yet been applied to debt reduction.
The Company projects approximately $65 million for capital expenditures for
fiscal 2002 as compared to $82 million and $38 million in fiscal 2001 and 2000,
respectively. The Company expects to finance its capital expenditures using net
cash provided by operating activities and available credit. The Company believes
that its cash flow and, to the extent required, borrowings under its current and
future credit facilities, will be sufficient to fund such expenditures.
As of June 30, 2001 the Company had working capital (excluding the current
portion of long-term debt) of approximately $98,543,000, which includes cash and
cash equivalents of approximately $2,098,000, as compared to working capital
(excluding the current portion of long-term debt) of approximately $175,396,000,
which includes cash and cash equivalents of approximately $109,873,000, as of
June 30, 2000. The decrease in working capital is primarily due to the use of
the net cash proceeds of $100,571,000 from the June 30, 2000 equity offering to
repay long-term debt during the fiscal year ended June 30, 2001. Working capital
at June 30, 2001, excluding the change in cash, increased from June 30, 2000 due
to
16
continuing improvement in operating results and timing differences related to
cash receipts and disbursements.
LONG-TERM DEBT
Other than capital lease obligations and miscellaneous notes payable, as of
June 30, 2001, the Company's long-term debt was comprised of (i) a senior credit
facility, (ii) a series of 8 3/8% Senior Notes Due 2008, (iii) a series of 14%
Senior Subordinated Notes Due 2009, (iv) a series of 5% Convertible Subordinated
Notes Due 2004, and (v) a series of 9 3/8% Senior Notes Due 2007.
SENIOR CREDIT FACILITY
As of June 30, 2001, the Company had a senior credit facility with 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 (as subsequently amended, the "Senior
Credit Facility"), which consisted of a $125 million revolving loan facility. In
addition, up to $20 million of letters of credit can be issued under the Senior
Credit Facility, but any outstanding letters of credit reduce borrowing
availability under the revolving loan facility. The commitment to make revolving
loans was reduced to $100 million on September 14, 2001 and will reduce to
$75 million on September 14, 2002. The revolving commitment will terminate on
September 14, 2003, and all the revolving loans must be paid on or before that
date. The revolving loan bears interest at rates based upon, at the Company's
option, either the prime rate plus a margin ranging from 0.75% to 2.00% or a
Eurodollar rate plus a margin ranging from 2.25% to 3.50%, in each case
depending upon the ratio of the Company's total debt (less cash on hand over
$5 million) to the Company's trailing 12-month EBITDA, as adjusted.
During fiscal 2001, the Company repaid in full approximately $198.9 million
under the term loans which were originally included in the Senior Credit
Facility while decreasing net borrowings under the revolver by $91 million. As a
result, at June 30, 2001 the principal amounts outstanding under (i) the
original term loans were fully repaid and (ii) the revolver was approximately
$2.0 million. Additionally, at June 30, 2001, the Company had outstanding
letters of credit totaling approximately $12.0 million related to its workers
compensation insurance program. Since June 30, 2001 the principal amount
outstanding under the revolver has increased to $38.0 million as of
September 25, 2001. These funds were used to repurchase certain long-term debt
of the Company.
See Note 5 to Consolidated Financial Statements-Long Term Debt for further
discussion of the Senior Credit Facility.
8 3/8% SENIOR NOTES
On March 6, 2001, the Company completed a private placement of $175,000,000
of 8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The net cash
proceeds from the private placement were used to repay all of the remaining
balance of the original term loans under the Senior Credit Facility and a
portion of the revolving loans under the Senior Credit Facility. The 8 3/8%
Senior Notes are senior unsecured obligations, ranking equally with the
Company's other senior unsecured indebtedness. The 8 3/8% Senior Notes are
effectively subordinated to Key's secured indebtedness which includes borrowings
under the Senior Credit Facility and the Dawson 9 3/8% Senior Notes.
On and after March 1, 2005 the Company may redeem some or all of the 8 3/8%
Senior Notes at any time at varying redemption prices in excess of par, plus
accrued interest. In addition, before March 1, 2004, the Company may redeem up
to 35% of the aggregate principal amount of the 8 3/8% Senior Notes with the
proceeds of certain sales of equity at 108.375% of par plus accrued interest.
At June 30, 2001, $175,000,000 principal amount of the 8 3/8% Senior Notes
remained outstanding. The 8 3/8% Senior Notes pay interest semi-annually on
March 1 and September 1 of each year.
17
14% SENIOR SUBORDINATED NOTES
On January 22, 1999 the Company completed the private placement of 150,000
units (the "Units") consisting of $150,000,000 of 14% Senior Subordinated Notes
due 2009 (the "14% Senior Subordinated Notes") and 150,000 warrants to purchase
2,173,433 shares of common stock at an exercise price of $4.88125 per share (the
"Unit Warrants"). The net cash proceeds from the private placement were used to
repay substantially all of the remaining $148.6 million principal amount (plus
accrued interest) owed under the Company's bridge loan facility arranged in
connection with the acquisition of Dawson Production Services, Inc. ("Dawson").
On and after January 15, 2004, the Company may redeem some or all of the 14%
Senior Subordinated Notes at any time at varying redemption prices in excess of
par, plus accrued interest. In addition, before January 15, 2002, the Company
may redeem up to 35% of the aggregate principal amount of the 14% Senior
Subordinated Notes with the proceeds of certain sales of equity at 114% of par
plus accrued interest. On June 11, 2001 the Company exercised its right of
redemption for $10,313,000 principal amount of the 14% Senior Subordinated Notes
at a price of 114% of the principal amount plus accrued interest, leaving
$139,687,000 principal amount outstanding as of June 30, 2001.
The Unit Warrants have separated from the 14% Senior Subordinated Notes and
became exercisable on January 25, 2000. On the date of issuance, the value of
the Unit Warrants was estimated at $7,434,000 and is classified as a discount to
the 14% Senior Subordinated Notes on the Company's consolidated balance sheet.
The discount is being amortized to interest expense over the term of the 14%
Senior Subordinated Notes. The 14% Senior Subordinated Notes mature and the Unit
Warrants expire on January 15, 2009. The 14% Senior Subordinated Notes are
subordinate to the Company's senior indebtedness, which includes borrowings
under the Senior Credit Facility, the Dawson 9 3/8% Senior Notes and the 8 3/8%
Senior Notes.
At June 30, 2001, $139,687,000 principal amount of the 14% Senior
Subordinated Notes remained outstanding. The 14% Senior Subordinated Notes pay
interest semi-annually on January 15 and July 15 of each year. Interest payments
of approximately $10,500,000 were made on July 15, 2000 and January 15, 2001,
respectively. As of June 30, 2001, 62,500 Unit Warrants had been exercised,
producing approximately $4,173,000 of proceeds to the Company and leaving 87,500
Unit Warrants outstanding. Since June 30, 2001, the Company repurchased (and
canceled) an additional $6,784,000 principal amount of the 14% Senior
Subordinated Notes, leaving $132,903,000 outstanding as of September 25, 2001.
5% CONVERTIBLE SUBORDINATED NOTES
In late September and early October 1997, the Company completed a private
placement of $216 million of 5% Convertible Subordinated Notes due 2004 (the "5%
Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes are
subordinate to the Company's senior indebtedness, which includes borrowings
under the Senior Credit Facility, the 14% Senior Subordinated Notes, the Dawson
9 3/8% Senior Notes and the 8 3/8% Senior Notes. The 5% Convertible Subordinated
Notes are convertible, at the holder's option, into shares of the Company's
common stock at a conversion price of $38.50 per share, subject to certain
adjustments.
The 5% Convertible Subordinated Notes are redeemable, at the Company's
option, on and after September 15, 2000, in whole or part, together with accrued
and unpaid interest. The initial redemption price is 102.86% for the year
beginning September 15, 2000 and declines ratably thereafter on an annual basis.
During fiscal 2001, the Company repurchased (and canceled) $47,384,000
principal amount of the 5% Convertible Subordinated Notes, leaving $158,426,000
principal amount of the 5% Convertible Subordinated Notes outstanding at
June 30, 2001. Since June 30, 2001, the Company repurchased (and
18
canceled) an additional $46,493,000 principal amount of the 5% Convertible
Subordinated Notes, leaving $111,933,000 outstanding as of September 25, 2001.
Interest on the 5% Convertible Subordinated Notes is payable on March 15 and
September 15. Interest of approximately $4,890,000 and $4,815,000 million was
paid on September 15, 2000 and March 15, 2001, respectively.
DAWSON 9 3/8% SENIOR NOTES
As a result of the Dawson acquisition, the Company, its subsidiaries and
U.S. Trust Company of Texas, N.A., as trustee ("U.S. Trust"), entered into a
Supplemental Indenture dated September 21, 1998 (the "Supplemental Indenture"),
pursuant to which the Company assumed the obligations of Dawson under the
Indenture dated February 20, 1997 (the "Dawson Indenture") between Dawson and
U.S. Trust. The senior notes due 2007 (the "Dawson 9 3/8% Senior Notes") issued
pursuant to the Dawson Indenture were equally and ratably secured with the
obligations under the Senior Credit Facility. As a result of a mandatory tender
offer made in connection with the Dawson acquisition and subsequent repurchases,
only $1,106,000 principal amount of Dawson 9 3/8% Senior Notes remained
outstanding at June 30, 2000.
During the quarter ended September 30, 2000, the Company repurchased (and
canceled) $800,000 principal amount of Dawson 9 3/8% Senior Notes. During the
quarter ended June 30, 2001, the Company repurchased an additional $60,000
principal amount of the Dawson 9 3/8% Senior Notes, leaving $246,000 principal
amount of the Dawson 9 3/8% Senior Notes outstanding at June 30, 2001. Interest
on the Dawson 9 3/8% Senior Notes is payable on February 1 and August 1 of each
year. Interest of approximately $52,000 and $14,000 was paid on August 1, 2000
and February 1, 2001, respectively.
7% CONVERTIBLE SUBORDINATED DEBENTURES
In July 1996, the Company completed a private placement of $52,000,000
principal amount of 7% Convertible Subordinated Debentures due 2003 (the "7%
Convertible Subordinated Debentures"). During the quarter ended September 30,
2000, $985,000 principal amount of the 7% Convertible Subordinated Debentures
were surrendered for conversion by the holders thereof and 101,025 shares of
common stock were issued on September 1, 2000 in connection with the conversion.
On September 1, 2000, the remaining $15,000 principal amount of the outstanding
7% Convertible Subordinated Debentures was redeemed at 103% of the principal
amount plus accrued interest, leaving none outstanding. Interest on the 7%
Convertible Subordinated Debentures is payable on January 1 and July 1 of each
year. Interest of approximately $35,000 was paid on July 1, 2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB recently issued Statements of Financial Accounting Standards
No. 141 "Business Combinations", No.142 "Goodwill and Other Intangible Assets"
and No. 143 "Accounting for Asset Retirement Obligations". Statement 141
requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. Statement 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment. The
standard is effective for fiscal years beginning after December 15, 2001. Early
adoption is permitted for entities with fiscal years beginning after March 15,
2001, provided the first interim financial statements have not previously been
issued. Statement 143 establishes requirements for the accounting of
removal-type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company is currently assessing the impact of these statements on
its consolidated financial statements and whether to early adopt Statement 142
in the first quarter of fiscal 2002.
IMPACT OF INFLATION ON OPERATIONS
Management is of the opinion that inflation has not had a significant impact
on Key's business.
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements". See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about Key's potential
exposure to market risks. The term "market risk" refers to the risk of loss
arising from adverse changes in foreign currency exchange risk, interest rates
and oil and natural gas prices. The disclosures are not meant to be precise
indicators of expected future losses, but rather indicators of reasonably
possible losses. This forward-looking information provides indicators of how Key
views and manages its ongoing market risk exposures.
INTEREST RATE RISK
At June 30, 2001, Key had long-term debt outstanding of $493,907,000. Of
this amount, $468,943,000 or 94.9%, bears interest at fixed rates as follows:
BALANCE AT
6/30/01
-----------
(THOUSANDS)
8 3/8% Senior Notes Due 2008................................ $175,000
5% Convertible Subordinated Notes Due 2004.................. 158,426
14% Senior Subordinated Notes Due 2009...................... 134,466
Dawson 9 3/8% Senior Notes Due 2007......................... 246
Other (rates generally ranging from 8.0% to 8.5%)........... 805
--------
$468,943
========
The remaining $24,964,000 of debt outstanding as of June 30, 2001 bears
interest at floating rates which averaged approximately 9.34% at June 30, 2001.
A 10% increase in short-term interest rates on the floating-rate debt
outstanding at June 30, 2001 would equal approximately 93 basis points. Such an
increase in interest rates would increase Key's fiscal 2002 interest expense by
approximately $200,000 assuming borrowed amounts remain outstanding.
The above sensitivity analysis for interest rate risk excludes accounts
receivable, accounts payable and accrued liabilities because of the short-term
maturity of such instruments.
FOREIGN CURRENCY RISK
Key's net assets, net earnings and cash flows from its Argentina
subsidiaries are currently not exposed to foreign currency risk, as Argentina's
currency is tied to the U.S. dollar. Key's net assets, net earnings and cash
flows from its Canadian subsidiary is based on the U.S. dollar equivalent of
such amounts measured in Canadian dollars. Assets and liabilities of the
Canadian operations are translated to U.S. dollars using the applicable exchange
rate as of the end of a reporting period. Revenues, expenses and cash flow are
translated using the average exchange rate during the reporting period.
A 10% change in the Canadian-to-U.S. Dollar exchange rate would not be
material to the net assets, net earnings or cash flows of Key.
20
COMMODITY PRICE RISK
Key's major market risk exposure for its oil and natural gas production
operations is in the pricing applicable to its oil and natural gas sales.
Realized pricing is primarily driven by the prevailing worldwide price for crude
oil and spot market prices for natural gas. Pricing for oil and natural gas
production has been volatile and unpredictable for several years.
The Company periodically hedges a portion of its oil and natural gas
production through collar and option agreements. The purpose of the hedges is to
provide a measure of stability in the volatile environment of oil and natural
gas prices and to manage exposure to commodity price risk under existing sales
commitments. The Company's risk management objective is to lock in a range of
pricing for expected production volumes. This allows the Company to forecast
future earnings within a predictable range. The Company meets this objective by
entering into collar and option arrangements which allow for acceptable cap and
floor prices.
As of June 30, 2001, Key had oil and natural gas price collars and put
options in place, as detailed in the following table. The total fiscal 2001
hedged oil and natural gas volumes represent approximately 32% and 20%,
respectively, of expected calendar year total production. A 10% variation in the
market price of oil or natural gas from their levels at June 30, 2001 would have
no material impact on the Company's net assets, net earnings or cash flows (as
derived from commodity option contracts).
The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at June 30, 2001 and 2000:
MONTHLY INCOME STRIKE PRICE
---------------------- PER BBL/MMBTU
OIL NATURAL GAS -------------------
(BBLS) (MMBTU) TERM FLOOR CAP FAIR VALUE
-------- ----------- ---------------------- -------- -------- ----------
At June 30, 2001
Oil Collar.......... 5,000 -- Mar 2001 - Feb 2002 $19.70 $ 23.70 $(115,000)
Oil Put............. 5,000 -- Mar 2002 - Feb 2003 22.00 -- 141,000
Gas Collar.......... -- 40,000 Mar 2001 - Feb 2002 2.40 2.91 (229,000)
Gas Put............. -- 75,000 Mar 2002 - Feb 2003 3.00 -- 894,000
At June 30, 2000
Oil Collars......... 4,000 -- May 2000 - Feb 2001 $22.20 $ 26.50 $(118,000)
5,000 -- Mar 2001 - Feb 2002 19.70 23.70 (140,000)
Gas Collars......... -- 30,000 May 2000 - Feb 2001 2.60 3.19 (272,000)
-- 40,000 Mar 2001 - Feb 2002 2.40 2.91 (248,000)
(The strike prices for the oil collars and put are based on the NYMEX spot price
for West Texas Intermediate; the strike prices for the natural gas collars are
based on the Inside FERC-West Texas Waha spot price; the strike price for the
natural gas put is based on the Inside FERC-El Paso Permian spot price.)
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Presented herein are the consolidated financial statements of Key Energy
Services, Inc. as of June 30, 2001 and 2000 and the years ended June 30, 2001,
2000 and 1999.
Also included is the report of KPMG LLP, independent certified public
accountants, on such consolidated financial statements as of June 30, 2001 and
2000 and for the years ended June 30, 2001, 2000 and 1999.
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Consolidated Statements of Comprehensive Income............. 25
Consolidated Statements of Cash Flows....................... 26
Consolidated Statements of Stockholders' Equity............. 27
Notes to Consolidated Financial Statements.................. 28
Independent Auditors' Report................................ 59
22
KEY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
(THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,098 $ 109,873
Accounts receivable, net of allowance for doubtful
accounts ($4,082--2001, $3,189--2000)................... 177,016 123,203
Inventories............................................... 16,547 10,028
Income taxes receivable................................... -- 5,588
Prepaid expenses and other current assets................. 10,489 4,897
---------- ----------
Total current assets........................................ 206,150 253,589
---------- ----------
Property and equipment:
Well servicing equipment.................................. 723,724 668,107
Contract drilling equipment............................... 119,122 105,454
Motor vehicles............................................ 64,907 55,042
Oil and gas properties and other related equipment,
successful efforts method............................... 44,245 43,855
Furniture and equipment................................... 24,865 11,013
Buildings and land........................................ 37,812 36,966
---------- ----------
Total property and equipment................................ 1,014,675 920,437
Accumulated depreciation & depletion........................ (220,959) (159,876)
---------- ----------
Net property and equipment.................................. 793,716 760,561
---------- ----------
Goodwill, net of accumulated amortization ($28,168--2001,
$18,849--2000).......................................... 189,875 198,633
Deferred costs, net....................................... 17,624 18,855
Notes receivable--related parties......................... 6,050 5,150
Other assets.............................................. 14,869 9,477
---------- ----------
Total assets................................................ $1,228,284 $1,246,265
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 42,544 $ 35,801
Other accrued liabilities................................. 48,923 26,398
Accrued interest.......................................... 16,140 15,994
Current portion of long-term debt......................... 7,946 14,655
---------- ----------
Total current liabilities................................... 115,553 92,848
---------- ----------
Long-term debt, less current portion........................ 485,961 651,945
Deferred revenue............................................ 14,104 17,031
Non-current accrued expenses................................ 8,388 1,847
Deferred tax liability...................................... 127,400 99,707
Commitments and contingencies............................... -- --
Stockholders' equity:
Common stock, $0.10 par value; 200,000,000 shares
authorized, 101,440,166 and 97,209,504 shares issued,
respectively at June 30, 2001 and June 30, 2000,
respectively............................................ 10,144 9,723
Additional paid-in capital................................ 444,768 413,962
Treasury stock, at cost; 416,666 shares at June 30, 2001
and June 30, 2000....................................... (9,682) (9,682)
Accumulated other comprehensive income.................... 62 8
Retained earnings (deficit)............................... 31,586 (31,124)
---------- ----------
Total stockholders' equity.................................. 476,878 382,887
---------- ----------
Total liabilities and stockholders' equity.................. $1,228,284 $1,246,265
========== ==========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
23
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Well servicing............................................ $758,273 $559,492 $433,657
Contract drilling......................................... 107,639 68,428 50,613
Other..................................................... 7,350 9,812 7,547
-------- -------- --------
Total revenues.............................................. 873,262 637,732 491,817
-------- -------- --------
COSTS AND EXPENSES:
Well servicing............................................ 493,108 399,940 324,965
Contract drilling......................................... 77,366 58,299 43,556
Depreciation, depletion and amortization.................. 75,147 70,972 62,074
General and administrative................................ 66,071 58,772 53,108
Bad debt expense.......................................... 1,263 1,648 5,928
Debt issuance costs....................................... -- -- 6,307
Interest.................................................. 56,560 71,930 67,401
Other expenses............................................ 4,464 4,147 2,907
Corporate restructuring................................... -- -- 4,504
-------- -------- --------
Total costs and expenses.................................... 773,979 665,708 570,750
-------- -------- --------
Income (loss) before income taxes........................... 99,283 (27,976) (78,933)
Income tax benefit (expense)................................ (37,002) 7,406 25,675
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN (LOSS).............. $ 62,281 $(20,570) $(53,258)
Extraordinary gain (loss) on retirement of debt, less
applicable income taxes of $255--2001 and $580--2000...... 429 1,611 --
-------- -------- --------
NET INCOME (LOSS)........................................... $ 62,710 $(18,959) $(53,258)
======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic--before extraordinary gain (loss)................... $ 0.63 $ (0.25) $ (1.94)
Extraordinary gain (loss) on retirement of debt, net of
tax..................................................... -- 0.02 --
-------- -------- --------
Basic--after extraordinary gain........................... $ 0.63 $ (0.23) $ (1.94)
======== ======== ========
Diluted--before extraordinary gain........................ $ 0.61 $ (0.25) $ (1.94)
Extraordinary gain on retirement of debt, net of tax...... -- 0.02 --
-------- -------- --------
Diluted--after extraordinary gain......................... $ 0.61 $ (0.23) $ (1.94)
======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic..................................................... 98,195 83,815 27,501
Diluted................................................... 102,271 83,815 27,501
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
24
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED JUNE 30,
------------------------------
2001 2000 1999
-------- -------- --------
(THOUSANDS)
NET INCOME (LOSS)........................................... $62,710 $(18,959) $(53,258)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Derivative transition adjustment (See Note 8)............. (778) -- --
Oil and natural gas derivatives adjustment (See Note 8)... 306 -- --
Amortization of oil and natural gas derivatives (See Note
8)...................................................... 558 -- --
Reversal of unrealized gains on available-for-sale
securities.............................................. -- -- (1,525)
Currency translation gain(loss)........................... (32) (1) 9
------- -------- --------
COMPREHENSIVE INCOME (LOSS), NET OF TAX..................... $62,764 $(18,960) $(54,774)
======= ======== ========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
25
KEY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
--------------------------------
2001 2000 1999
--------- --------- --------
(THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 62,710 $ (18,959) $(53,258)
ADJUSTMENTS TO RECONCILE INCOME FROM OPERATIONS TO NET
CASH PROVIDED BY (USED IN) OPERATIONS:
Depreciation, depletion and amortization.................. 75,147 70,972 62,074
Bad debt expense.......................................... 1,263 1,648 5,928
Amortization of deferred debt issuance costs.............. 4,317 5,919 5,216
Restructuring charge...................................... -- -- 233
Deferred income taxes..................................... 34,698 (1,818) (25,675)
(Gain) loss on sale of assets............................. 173 25 111
Extraordinary (gain) loss, net of tax..................... (429) (1,611) --
Other non-cash items...................................... -- -- 13
CHANGE IN ASSETS AND LIABILITIES NET OF EFFECTS FROM THE
ACQUISITIONS:
(Increase) decrease in accounts receivable.............. (55,076) (32,853) 9,741
(Increase) decrease in other current assets............. (4,485) (5,483) (432)
Increase (decrease) in accounts payable, accrued
interest and accrued expenses......................... 29,414 18,875 (17,378)
Other assets and liabilities............................ (5,015) (1,855) --
--------- --------- --------
Net cash provided by (used in) operating activities....... 142,717 34,860 (13,427)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures--well servicing...................... (50,799) (26,469) (26,776)
Capital expenditures--contract drilling................... (15,884) (8,282) (1,063)
Capital expenditures--other............................... (15,437) (3,422) (3,468)
Proceeds from sale of fixed assets........................ 3,415 2,722 7,110
Notes receivable from related parties..................... (1,500) (2,315) (2,835)
Cash received in acquisitions............................. -- -- 27,008
Acquisitions--well servicing.............................. (2,345) -- (292,638)
Acquisitions--contract drilling........................... (800) -- --
Other assets and liabilities.............................. -- -- (1,992)
--------- --------- --------
Net cash provided by (used in) investing activities....... (83,350) (37,766) (294,654)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt and capital lease
obligations............................................. (382,540) (51,077) (487,376)
Borrowings under line-of-credit........................... 30,000 12,000 328,411
Proceeds from equity offerings, net of expenses........... -- 100,571 180,441
Proceeds from long-term debt.............................. 175,210 -- 142,566
Proceeds paid for debt issuance costs..................... (4,958) -- (15,274)
Proceeds from other long-term debt........................ -- -- 150,000
Proceeds from forward sale, net of expenses............... -- 18,236 --
Proceeds from issuance of warrants........................ -- -- 7,434
Proceeds from exercise of warrants........................ 847 8,473 --
Proceeds from exercise of stock options................... 14,617 1,098 92
Other..................................................... (318) -- --
--------- --------- --------
Net cash provided by (used in) financing activities....... (167,142) 89,301 306,294
--------- --------- --------
Net increase (decrease) in cash........................... (107,775) 86,395 (1,787)
Cash and cash equivalents at beginning of period.......... 109,873 23,478 25,265
--------- --------- --------
Cash and cash equivalents at end of period................ $ 2,098 $ 109,873 $ 23,478
========= ========= ========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
26
KEY ENERGY SERVICES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS)
COMMON STOCK ACCUMULATED
----------------------- ADDITIONAL OTHER
NUMBER OF AMOUNT AT PAID-IN TREASURY RETAINED COMPREHENSIVE
SHARES PAR CAPITAL STOCK EARNINGS INCOME TOTAL
---------- ---------- ---------- -------- -------- -------------- --------
BALANCE AT JUNE 30, 1998................ 18,685 $ 1,868 $119,303 $(9,682) $41,093 $ 1,525 $154,107
------- ------- -------- ------- -------- ------- --------
Reversal of unrealized gain on available
for sale securities................... -- -- -- -- -- (1,525) (1,525)
Foreign currency translation adjustment,
net of tax............................ -- -- -- -- -- 9 9
Issuance of warrants with 14% Notes..... -- -- 7,434 -- -- -- 7,434
Issuance of common stock in equity
offering, net of offering costs....... 64,245 6,425 174,016 -- -- -- 180,441
Issued to lender in lieu of fee......... 200 20 980 -- -- -- 1,000
Exercise of options..................... 15 2 92 -- -- -- 94
Other................................... 10 2 (210) -- -- -- (208)
Net income (loss)....................... -- -- -- -- (53,258) -- (53,258)
------- ------- -------- ------- -------- ------- --------
BALANCE AT JUNE 30, 1999................ 83,155 $ 8,317 $301,615 $(9,682) $(12,165) $ 9 $288,094
------- ------- -------- ------- -------- ------- --------
Foreign currency transition adjustment,
net of tax............................ -- -- -- -- -- (1) (1)
Exercise of warrants.................... 2,431 243 8,230 -- -- -- 8,473
Exercise of options..................... 241 24 1,074 -- -- -- 1,098
Conversion of 7% Debentures............. 380 38 3,568 -- -- -- 3,606
Issuance of common stock in equity
offering, net of offering costs....... 11,000 1,100 99,471 -- -- -- 100,571
Other................................... 3 1 4 -- -- -- 5
Net income (loss)....................... -- -- -- -- (18,959) -- (18,959)
------- ------- -------- ------- -------- ------- --------
BALANCE AT JUNE 30, 2000................ 97,210 $ 9,723 $413,962 $(9,682) $(31,124) $ 8 $382,887
------- ------- -------- ------- -------- ------- --------
Derivative transition adjustment (see
Note 8)............................... -- -- -- -- -- (778) (778)
Oil and natural gas derivatives
adjustment, net of tax (See Note 8)... -- -- -- -- -- 306 306
Amortization of oil and natural gas
derivatives (see Note 8).............. -- -- -- -- -- 558 558
Foreign currency translation adjustment,
net of tax............................ -- -- -- -- -- (32) (32)
Exercise of warrants.................... 185 19 828 -- -- -- 847
Exercise of options..................... 3,106 308 14,309 -- -- -- 14,617
Conversion of 7% Debentures............. 101 10 947 -- -- -- 957
Issuance of common stock for
acquisitions.......................... 838 84 8,036 -- -- -- 8,120
Deferred tax benefit--compensation
expense............................... -- -- 7,004 -- -- -- 7,004
Other................................... -- -- (318) -- -- -- (318)
Net income (loss)....................... -- -- -- -- 62,710 -- 62,710
------- ------- -------- ------- -------- ------- --------
BALANCE AT JUNE 30, 2001................ 101,440 $10,144 $444,768 $(9,682) $31,586 $ 62 $476,878
======= ======= ======== ======= ======== ======= ========
SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
27
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Key Energy Services, Inc. (the "Company" or "Key"), is the largest onshore,
rig-based well servicing contractor in the world, with approximately 1,477 well
service rigs and 1,455 oilfield service vehicles as of June 30, 2001. The
Company provides a complete range of well services to major oil companies and
independent oil and natural gas production companies, including: rig-based well
maintenance, workover, completion, and recompletion services (including
horizontal recompletions); oilfield trucking services; and ancillary oilfield
services. Key conducts well servicing operations onshore the continental United
States in the following regions: Gulf Coast (including South Texas, Central Gulf
Coast of Texas, and South Louisiana), Permian Basin of West Texas and Eastern
New Mexico, Mid-Continent (including the Anadarko, Hugoton and Arkoma Basins,
and the ArkLaTex region), Four Corners (including the San Juan, Piceance, Uinta,
and Paradox Basins), Eastern (including the Appalachian, Michigan and Illinois
Basins), Rocky Mountains (including the Denver-Julesberg, Powder River, Wind
River, Green River and Williston Basins), and California (the San Joaquin
Basin), and internationally in Argentina and Ontario, Canada. The Company is
also a leading onshore drilling contractor, with 79 land drilling rigs as of
June 30, 2001. Key conducts land drilling operations in a number of major
domestic producing basins, as well as in Argentina and in Ontario, Canada. Key
also produces and develops oil and natural gas reserves in the Permian Basin
region and Texas Panhandle.
BASIS OF PRESENTATION
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated. The accounting policies
presented below have been followed in preparing the accompanying consolidated
financial statements.
ESTIMATES AND UNCERTAINTIES
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories, which consist primarily of oilfield service parts and supplies
held for consumption and parts and supplies held for sale at the Company's
various retail supply stores, are valued at the lower of average cost or market.
28
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization of oilfield service
and related equipment using the straight-line method, excluding its drilling
rigs, over the following estimated useful lives of the assets:
DESCRIPTION YEARS
----------- --------
Well service rigs........................................... 25
Motor vehicles.............................................. 5
Furniture and equipment..................................... 3-7
Buildings and improvements.................................. 10-40
Gas processing facilities................................... 10
Disposal wells.............................................. 15-30
Trucks, trailers and related equipment...................... 7-15
The components of a well service rig that generally require replacement
during the rig's life are depreciated over their estimated useful lives, which
range from three to 15 years. The basic rigs, excluding components, have
estimated useful lives from date of original manufacture ranging from 25 to
35 years. Salvage values are assigned to the rigs based on an estimate of 10%.
Effective July 1, 1998, the Company made certain changes in the estimated
useful lives of its well service rigs, increasing the lives from 17 years to
25 years. This change decreased the net loss for the twelve months ended
June 30, 1999 by approximately $3,100,000 ($0.11 per share-basic). This change
was made to better reflect the expected utilization of these assets over time,
to better provide matching of revenues and expenses and to better reflect the
industry standard in regards to estimated useful lives of workover rigs.
The Company uses the units-of-production method to depreciate its drilling
rigs. This method takes into consideration the number of days the rigs are
actually in service each month and depreciation is recorded for at least
15 days each month for each rig that is available for service. The Company
believes that this method appropriately reflects its financial results by
matching revenues with expenses and appropriately reflects how the assets are to
be used over time.
The Company uses the successful efforts method of accounting for its oil and
gas properties. Under this method, all costs associated with productive wells
and nonproductive development wells are capitalized, while nonproductive
exploration costs and geological and geophysical costs (if any), are expensed.
Capitalized costs relating to proved properties are depleted using the
units-of-production method.
The Company follows the provisions of FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets including certain identifiable
intangibles, held and used by the Company, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For purposes of applying this statement, the Company
groups its long-lived assets, including goodwill, on a yard-by-yard basis and
compares the estimated future cash flows of each yard to the yard's net carrying
value including allocable goodwill. The Company would record an impairment
charge, reducing the yard's net carrying value to an estimated fair value, if
the estimated future cash flows
29
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
were less than the yard's net carrying value. Since adoption of this statement
no impairment charges have been required.
HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, primarily commodity
option contracts to reduce the exposure of its oil and gas producing operations
to changes in the market price of natural gas and crude oil and to fix the price
for natural gas and crude oil independently of the physical sale.
The financial instruments that the Company accounts for as hedging contracts
must meet the following criteria: the underlying asset or liability must expose
the Company to price risk that is not offset in another asset or liability, the
hedging contract must reduce that price risk, and the instrument must be
designated as a hedge at the inception of the contract and throughout the
contract period. In order to qualify as a hedge, there must be clear correlation
between changes in the fair value of the financial instrument and the fair value
of the underlying asset or liability such that changes in the market value of
the financial instrument will be offset by the effect of price rate changes on
the exposed items.
Prior to the adoption of SFAS 133, premiums paid for commodity option
contracts, which qualify as hedges, are amortized to oil and natural gas sales
over the terms of the contracts. Unamortized premiums are included in other
assets in the consolidated balance sheet. Amounts receivable under the commodity
option contracts are accrued as an increase in oil and natural gas sales for the
applicable periods.
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS
No. 137 and No. 138 ("SFAS 138"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and hedging activities. It requires the recognition
of all derivative instruments as assets and liabilities in the Company's balance
sheet and measurement of those instruments at fair value. The accounting
treatment of changes in fair value is dependent upon whether or not a derivative
instrument is designated as a hedge and if so, the type of hedge. For
derivatives designated as cash flow hedges, changes in fair value are recognized
in other comprehensive income until the hedged item is recognized in earnings.
See Note 8.
COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for reporting and presentation of comprehensive income and
its components. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. In accordance with the provisions of SFAS 130, the
Company has presented the components of comprehensive income in its Consolidated
Statements of Comprehensive Income.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the adverse environmental effects of the disposal or
30
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future economic
benefit. Expenditures that relate to an existing condition caused by past
operations and that have no future economic benefits are expensed. Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated.
GOODWILL
Net goodwill, totaling $189.9 million and $198.6 million at June 30, 2001
and 2000, respectively, represents the cost in excess of fair value of the net
tangible and identifiable intangible assets acquired and liabilities assumed in
purchase transactions. Goodwill is being amortized on a straight-line basis over
periods ranging from ten to 25 years. Amortization of goodwill for fiscal 2001,
2000 and 1999 was approximately $9,322,000, $9,840,000 and $9,202,000,
respectively. The carrying amount of unamortized goodwill is reviewed for
potential impairment loss whenever events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable (see Property and
Equipment above, for further discussion).
DEFERRED COSTS
Deferred costs totaling $31,052,000 and $30,998,000 at June 30, 2001 and
2000, respectively, represent debt issuance costs and are recorded net of
accumulated amortization of $13,428,000 and $12,143,000 at June 30, 2001 and
2000, respectively. Deferred costs are amortized to interest expense using the
straight-line method over the life of each applicable debt instrument or to
extraordinary loss as related debt is retired early. This method approximates
the amortization which would be recorded using the effective interest method.
Amortization of deferred costs totaled approximately $3,578,000, $5,176,000 and
$4,664,000 for fiscal 2001, 2000 and 1999, respectively. Unamortized debt
issuance costs included in the determination of the extraordinary gain (loss) on
retirement of debt, net of tax, totaled approximately $1,620,000 for fiscal
2001.
INCOME TAXES
The Company accounts for income taxes based upon Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using statutory tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rate is recognized in income in the
period that includes the statutory enactment date. A valuation allowance for
deferred tax assets is recognized when it is more likely than not that the
benefit of deferred tax assets will not be realized.
31
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company and its eligible subsidiaries file a consolidated U. S. federal
income tax return. Certain subsidiaries that are consolidated for financial
reporting purposes are not eligible to be included in the consolidated U. S.
federal income tax return and separate provisions for income taxes have been
determined for these entities or groups of entities.
EARNINGS PER SHARE
The Company presents earnings per share information in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share are
determined by dividing net earnings applicable to common stock by the weighted
average number of common shares actually outstanding during the year. Diluted
earnings per common share is based on the increased number of shares that would
be outstanding assuming conversion of dilutive outstanding convertible
securities using the "as if converted" method.
YEAR ENDED JUNE 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EPS COMPUTATION:
NUMERATOR
Net income (loss) before extraordinary gain (loss)........ $ 62,281 $(20,570) $(53,258)
Extraordinary gain (loss), net of tax..................... 429 1,611 --
-------- -------- --------
Net income (loss)......................................... $ 62,710 $(18,959) $(53,258)
======== ======== ========
DENOMINATOR
Weighted average common shares outstanding................ 98,195 83,815 27,501
-------- -------- --------
BASIC EPS:
Before extraordinary gain (loss).......................... $ 0.63 $ (0.25) $ (1.94)
Extraordinary gain (loss), net of tax..................... -- 0.02 --
-------- -------- --------
Net income (loss)......................................... $ 0.63 $ (0.23) $ (1.94)
======== ======== ========
DILUTED EPS COMPUTATION:
NUMERATOR
Net income (loss) before extraordinary gain (loss) and
effect of dilutive securities, tax effected............. $ 62,281 $(20,570) $(53,258)
Convertible securities.................................... 5 -- --
-------- -------- --------
Net income (loss) before extraordinary gain (loss)...... $ 62,286 $(20,570) $(53,258)
Extraordinary gain (loss), net of tax................... 429 1,611 --
-------- -------- --------
Net income (loss)....................................... $ 62,715 $(18,959) $(53,258)
======== ======== ========
DENOMINATOR
Weighted average common shares outstanding................ 98,195 83,815 27,501
Warrants.................................................. 205 -- --
Stock options............................................. 3,853 -- --
7% Convertible Debentures................................. 18 -- --
-------- -------- --------
102,271 83,815 27,501
32
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
YEAR ENDED JUNE 30,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE DATA)
DILUTED EPS:
Before extraordinary gain (loss).......................... $ 0.61 $ (0.25) $ (1.94)
Extraordinary gain (loss), net of tax..................... -- 0.02 --
-------- -------- --------
Net income (loss)......................................... $ 0.61 $ (0.23) $ (1.94)
======== ======== ========
The diluted earnings per share calculation for the year ended June 30, 2001
excludes the effect of the exercise of 360,000 stock options and the conversion
of the Company's 5% Convertible Subordinated Notes because the effects of such
instruments on earnings per share would be anti-dilutive.
The diluted earnings per share calculation for the years ended June 30, 2000
and 1999 excludes the effect of the conversion of all of the Company's then
outstanding convertible debt and the exercise of all of the Company's then
outstanding warrants and stock options because the effects of such instruments
on loss per share would be anti-dilutive.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of temporary cash investments
and trade receivables. The Company restricts investment of temporary cash
investments to financial institutions with high credit standing and, by policy,
limits the amount of credit exposure to any one financial institution. The
Company's customer base consists primarily of multi-national and independent oil
and natural gas producers. This may affect the Company's overall exposure to
credit risk either positively or negatively in as much as its customers are
affected by economic conditions in the oil and gas industry, which have
historically been cyclical. However, account receivables are well diversified
among many customers and a significant portion of the receivables are from major
oil companies, which management believes minimizes potential credit risk.
Historically, credit losses have been insignificant. Receivables are generally
not collateralized, although the Company may generally secure a receivable at
any time by filing a mechanic's or material-man's lien on the well serviced. The
Company maintains reserves for potential credit losses, and such losses have
been within management's expectations.
The Company did not have any one customer who represented 10% or more of
consolidated revenues for the fiscal year ended June 30, 2001, 2000 or 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock option grants to employees using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). Under the Company's stock
incentive plans, the price of the stock on the grant date is the same as the
amount an employee must pay to exercise the option to acquire the stock;
accordingly, the options have no intrinsic value at grant date, and in
accordance with the provisions of APB 25, no compensation cost is recognized.
33
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," sets forth alternative accounting and
disclosure requirements for stock-based compensation arrangements. Companies may
continue to follow the provisions of APB 25 to measure and recognize employee
stock-based compensation; however, SFAS 123 requires disclosure of pro forma net
income and earnings per share that would have been reported under the fair value
based recognition provisions of SFAS 123. The Company has disclosed in Note 10
the pro forma information required under SFAS 123.
FOREIGN CURRENCY GAINS AND LOSSES
The local currency is the functional currency for all of the Company's
foreign operations (Argentina and Canada). The cumulative translation gains and
losses, resulting from translating each foreign subsidiary's financial
statements from the functional currency to U.S. dollars, is included in other
comprehensive income and accumulated in stockholders' equity until a partial or
complete sale or liquidation of the Company's net investment in the foreign
entity.
CASH AND CASH EQUIVALENTS
The Company considers all unrestricted highly liquid investments with less
than a three-month maturity when purchased, as cash equivalents.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 2000 and 1999
consolidated financial statements to conform to the fiscal 2001 presentation.
The reclassifications consist primarily of reclassifying oil and natural gas
productions revenues and expenses. Oil and natural gas production revenues and
related expenses have been reclassified to other revenues and other expenses
because the Company does not believe this business segment is material to the
Company's consolidated financial statements.
2. RESTRUCTURING CHARGE
In response to an industry downturn caused by historically low oil and gas
prices and the resulting slowdown in business, on December 7, 1998, the Company
announced a company-wide restructuring plan to reduce operating costs beyond
those achieved through the Company's consolidation efforts. The plan involved a
reduction in the size of management and on-site work force, salary reductions
averaging 21% for senior management, the combination of previously separate
operating divisions and the elimination of redundant overhead and facilities.
The restructuring plan resulted in pretax charges to earnings of approximately
$6.7 million in the second quarter ending December 31, 1998 and $1.5 million in
the third quarter ending March 31, 1999. However, due to an increase in oil and
gas prices beginning during the quarter ended March 31,1999, the Company amended
its restructuring plan to decrease the number of planned employee terminations.
Increased demand for the Company's services made such terminations unnecessary
and would have, in management's opinion, restricted the Company's ability to
provide services to its customers. Consequently, the Company did not utilize
approximately $3.7 million of the pretax charges. Essentially all of the
unutilized portion of the restructuring charge was reversed in the fourth
quarter ending June 30, 1999 resulting in a total pretax charge for the fiscal
year ended June 30, 1999 of approximately $4.5 million. The charges included
severance payments and other termination benefits for
34
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
2. RESTRUCTURING CHARGE (CONTINUED)
approximately 97 employees, lease commitments related to closed facilities and
environmental studies performed on closed leased yard locations.
The Company completed the plan at June 30, 2000. There remained
approximately $180,000 for COBRA benefits to terminated employees and $53,000
for contractual payments to an employee at June 30, 1999. The major components
of the restructuring charge and costs incurred through June 30, 1999 were as
follows:
RESTRUCTURING COST INCURRED BALANCE AS OF
DESCRIPTION CHARGE THROUGH JUNE 30, 1999 JUNE 30, 1999
----------- ------------- ---------------------- --------------
(IN THOUSANDS)
Severance/employee costs.......... $4,457 $(4,224) $233
Lease commitments................. 27 (27) --
Environmental clean-up............ 20 (20) --
------ ------- ----
Total............................. $4,504 $(4,271) $233
====== ======= ====
3. BUSINESS AND PROPERTY ACQUISITIONS
ACQUISITIONS COMPLETED IN FISCAL 2001 AND 2000
There were no acquisitions completed by the Company during fiscal 2000.
During fiscal 2001, the Company completed several small acquisitions for a total
consideration of $11,965,000, which was paid using a combination of cash, notes
and shares of the Company's common stock. Through these acquisitions, the
Company acquired 34 well service rigs, 8 trucking vehicles, ancillary equipment
and five salt water disposal facilities. Each of the acquisitions was accounted
for using the purchase method and the results of the operations generated from
the acquired assets are included in the Company's results of operations as of
the completion date of each acquisition.
DAWSON PRODUCTIONS SERVICES, INC.
In September 1998, the Company completed the acquisition of all of the
capital stock of Dawson Production Services, Inc. (Dawson) for an aggregate
consideration of approximately $382.6 million, including approximately
$207.1 million of cash paid for the Dawson stock and for transactional fees and
approximately $175.5 million of net liabilities assumed.
35
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
3. BUSINESS AND PROPERTY ACQUISITIONS (CONTINUED)
Expenditures for the Dawson acquisition, including acquisition costs, less
cash acquired were as follows (in thousands):
Fair value of assets acquired, including goodwill........... $409,722
Liabilities assumed......................................... (199,439)
Liabilities for employee termination costs and lease
termination costs......................................... (3,162)
--------
Cash paid, including acquisition related expenditures and
the cost of Dawson common stock previously held........... 207,121
Less: Cash acquired......................................... (27,008)
--------
Net cash used for the acquisition........................... $180,113
========
At the time of the closing, Dawson owned approximately 527 well service
rigs, 200 oilfield trucks, and 21 production testing units in South Texas and
the Gulf Coast, East Texas and Louisiana, the Permian Basin of West Texas and
New Mexico, the Anadarko Basin of Texas and Oklahoma, California, and in the
inland waters of the Gulf of Mexico.
In connection with the Dawson acquisition, the Company recognized
liabilities for the estimated costs to involuntarily terminate employees of
Dawson and to exit certain activities of Dawson, primarily Dawson's lease
liability for its corporate offices. As of June 30, 1999, the Company had
completed its severance plan, terminating 44 former Dawson employees. At
June 30, 1999, the Company had $592,000 accrued, representing the estimated
lease termination costs of Dawson's former corporate offices.
OTHER FISCAL 1999 ACQUISITIONS
In addition to its acquisition of Dawson, the Company acquired the assets
and/or capital stock of six well servicing and contract drilling businesses
during fiscal 1999, increasing its rig and truck fleet by a total of
approximately 93 well service rigs, 4 drilling rigs and 185 oilfield trucks (and
related equipment) for an aggregate purchase price of approximately
$93.7 million in cash. Each of the acquisitions was accounted for using the
purchase method and the results of the operations, generated from the acquired
assets, are included in the Company's results of operations as of the completion
date of each acquisition.
PRO FORMA RESULTS OF OPERATIONS--(UNAUDITED)
The following unaudited pro forma results of operations have been prepared
as though the Dawson acquisition had been acquired on July 1, 1998 with
adjustments to record specifically identifiable decreases in direct costs and
general and administrative expenses related to the termination of individual
employees. Pro forma amounts are not necessarily indicative of the results that
may be reported in the future.
YEAR ENDED
JUNE 30, 1999
----------------------------------
(THOUSANDS, EXCEPT PER SHARE DATA)
Revenues......................................... $524,924
Net income (loss)................................ (58,211)
Basic earnings (loss) per share.................. (2.12)
36
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
4. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are
pending against the Company. Management does not believe that the disposition of
any of these items will result in a material adverse impact to the consolidated
financial position, results of operations or cash flows of the Company.
In order to retain qualified senior management, the Company enters into
employment agreements with its executive officers. These employment agreements
run for periods ranging from three to five years, but can be automatically
extended on a yearly basis unless terminated by the Company or the executive
officer. In addition to providing a base salary for each executive officer, the
employment agreements provide for severance payments for each executive officer
varying from 1 to 3 years of the executive officer's base salary. At June 30,
2001 the annual base salaries for the executive officers covered under such
employment agreements totaled $1,125,000. The Company also enters into
employment agreements with other key employees as it deems necessary in order to
retain qualified personnel.
5. LONG-TERM DEBT
The components of the Company's long-term debt are as follows:
JUNE 30,
-------------------
2001 2000
-------- --------
(THOUSANDS)
Senior Credit Facility (i)
Revolving Loans....................................... $ 2,000 $ 93,000
Tranche A Term Loan................................... -- 22,987
Tranche B Term Loan................................... -- 175,961
8 3/8% Senior Notes Due 2008 (ii)....................... 175,000 --
14% Senior Subordinated Notes Due 2009 (iii)............ 134,466 143,650
5% Convertible Subordinated Notes Due 2004 (iv)......... 158,426 205,810
Dawson 9 3/8% Senior Notes Due 2007 (v)................. 246 1,106
7% Convertible Subordinated Debentures Due 2003 (vi).... -- 1,000
Capital Leases.......................................... 22,964 21,911
Other notes payable..................................... 805 1,175
-------- --------
493,907 666,600
Less current portion.................................... 7,946 14,655
-------- --------
Total long-term debt.................................... $485,961 $651,945
======== ========
(I) SENIOR CREDIT FACILITY
At June 30, 2001, the Company's senior credit facility (the "Senior Credit
Facility") consisted of a $125 million revolving credit facility. In addition,
up to $20 million of letters of credit can be issued under the Senior Credit
Facility, but any outstanding letters of credit reduces borrowing availability
under the revolver. The commitment to make revolving loans reduced to
$100 million, on September 14, 2001 and will reduce to $75 million on
September 14, 2002. The revolving commitment will terminate on September 14,
2003, and all the revolving loans must be paid on or before that date.
37
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
5. LONG-TERM DEBT (CONTINUED)
The revolving loans bear interest at rates based upon, at the Company's
option, either the prime rate plus a margin ranging from 0.75% to 2.00% or a
Eurodollar rate plus a margin ranging from 2.25% to 3.50%, in each case
depending upon the ratio of the Company's total debt (less cash on hand over
$5 million) to the Company's trailing 12-month EBITDA, as adjusted. The Company
pays commitment fees on the unused portion of the revolving loan at a varying
rate (depending upon the pricing ratio) of between 0.25% and 0.50%.
The Senior Credit Facility contains various financial covenants, including:
(i) consolidated debt-to-capitalization ratio at generally decreasing levels
varying between 79% and 65%, (ii) consolidated interest coverage ratio at
generally increasing levels varying between 2.00-to-1.00 and 3.50-to-1.00,
(iii) consolidated senior leverage ratio at generally decreasing levels varying
between 2.50-to-1.00 and 2.00-to-1.00, and (iv) trailing 12-month EBITDA, as
adjusted, at generally increasing levels varying between $50 million and
$150 million. In addition, the Company must maintain a consolidated fixed charge
coverage ratio at generally decreasing levels varying between 1.25-to-1.00 and
1.00 to 1.00. The covenants for consolidated senior leverage ratio and
consolidated interest coverage ratio are not imposed until the quarter ending
March 31, 2001, and the covenant levels for consolidated debt-to-capitalization
and trailing 12-month EBITDA, as adjusted, will remain fixed at 79% and
$50 million, respectively, for the same period. The Company is also required to
maintain a consolidated liquidity level of at least $30 million.
The Senior Credit Facility subjects the Company to other restrictions,
including restrictions upon the Company's ability to incur additional debt,
liens and guarantee obligations, to merge or consolidate with other persons, to
sell assets, to make dividends, purchases of our stock or subordinated debt, to
make capital expenditures in excess of levels ranging from $37.5 million in
fiscal 1999 to $65 million in fiscal 2004, or to make investments, loans and
advances or changes to debt instruments and organizational documents. The
Company will not be permitted to make acquisitions unless (i) its consolidated
debt to capitalization ratio is not more than 60% or (ii) its consolidated debt
to capitalization ratio is not increased and the acquisition is funded solely
with capital stock. The Company must also maintain consolidated net worth not
less than, $195 million plus (i) 75% of consolidated net income for each fiscal
quarter beginning with the period ending December 31, 1998, (ii) 75% of the net
cash proceeds from issuance of capital stock after September 14, 1998 and
(iii) 75% of the increase in consolidated net worth resulting from the
conversion of the 5% Convertible Subordinated Notes or other convertible debt
issued after September 14, 1998. All obligations under the Senior Credit
Facility are guaranteed by most of the Company's subsidiaries and are secured by
substantially all the Company's assets, including the Company's accounts
receivable, inventory and equipment.
During fiscal 2001, a portion of the net proceeds from the Equity Offering
(see Note 10) was used to repay the entire outstanding balance of the Tranche A
term loan then outstanding under the Senior Credit Facility and $2.3 million of
the Tranche B term loan then outstanding under the Senior Credit Facility. In
addition, $65 million of the net proceeds from the Equity Offering were used to
reduce the principal amount outstanding under the revolver. The remainder of the
net proceeds of the Equity Offering was used to retire other long-term debt. A
portion of the proceeds from the Company's 8 3/8% Senior Note offering in fiscal
2001 was used to repay the entire outstanding balance of the Tranche B term loan
then outstanding under the Senior Credit Facility and approximately
$59.1 million under the revolver.
38
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
5. LONG-TERM DEBT (CONTINUED)
At June 30, 2001, there was approximately $2,000,000 outstanding under the
revolving loans. Additionally, the Company had outstanding letters of credit of
$11,995,000 and $15,132,000 as of June 30, 2001 and 2000, respectively, related
to its workers compensation insurance.
(II) 8 3/8% SENIOR NOTES
On March 6, 2001 the Company completed a private placement of $175,000,000
of 8 3/8% Senior Notes due 2008 (the "8 3/8% Senior Notes"). The net cash
proceeds from the private placement were used to repay all of the remaining
balance of the original term loans under the Senior Credit Facility and a
portion of the revolving loan facility under the Senior Credit Facility. The
8 3/8% Senior Notes are senior unsecured obligations, ranking equally with the
Company's senior unsecured indebtedness. The 8 3/8% Senior Notes are effectively
subordinated to Key's secured indebtedness which includes borrowings under the
Senior Credit Facility and the Dawson 9 3/8% Senior Notes.
On and after March 1, 2005, the Company may redeem some or all of the 8 3/8%
Senior Notes at any time at varying redemption prices in excess of par, plus
accrued interest. In addition, before March 1, 2004, the Company may redeem up
to 35% of the aggregate principal amount of the 8 3/8% Senior Notes with the
proceeds of certain sales of equity at 108.375% of par plus accrued interest.
At June 30, 2001, $175,000,000 principal amount of the 8 3/8% Senior Notes
remained outstanding. The 8 3/8% Senior Notes pay interest semi-annually on
March 1 and September 1 of each year.
(III) 14% SENIOR SUBORDINATED NOTES
On January 22, 1999, the Company completed the private placement of 150,000
units ("the Units") consisting of $150,000,000 of 14% Senior Subordinated Notes
due 2009 (the "14% Senior Subordinated Notes") and 150,000 warrants to purchase
2,173,433 shares of common stock at an exercise price of $4.88125 per share (the
"Unit Warrants"). The net cash proceeds from the private placement were used to
repay substantially all of the remaining $148.6 million principal amount (plus
accrued interest) owed under the Company's bridge loan facility arranged in
connection with the acquisition of Dawson Production Services, Inc. ("Dawson").
On and after January 15, 2004, the Company may redeem some or all of the 14%
Senior Subordinated Notes at any time at varying redemption prices in excess of
par, plus accrued interest. In addition, before January 15, 2002, the Company
may redeem up to 35% of the aggregate principal amount of the 14% Senior
Subordinated Notes with the proceeds of certain sales of equity at 114% of par,
plus accrued interest. On June 11, 2001, the Company exercised its right of
redemption for $10,313,000 principal amount of the 14% Senior Subordinated Notes
at a price of 114% of the principal amount plus accrued interest, leaving
$139,687,000 principal amount outstanding as of June 30, 2001.
The Unit Warrants have separated from the 14% Senior Subordinated Notes and
became exercisable on January 25, 2000. On the date of issuance, the value of
the Unit Warrants was estimated
39
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
5. LONG-TERM DEBT (CONTINUED)
at $7,434,000 and is classified as a discount to the 14% Senior Subordinated
Notes on the Company's consolidated balance sheet. The discount is being
amortized to interest expense over the term of the 14% Senior Subordinated
Notes. The 14% Senior Subordinated Notes mature and the Unit Warrants expire on
January 15, 2009. The 14% Senior Subordinated Notes are subordinate to the
Company's senior indebtedness, which includes borrowings under the Current
Senior Credit Facility, the Dawson 9 3/8% Senior Notes and the 8 3/8% Senior
Notes.
In the event of a change in control of the Company, as defined in the
indenture under which the 14% Senior Subordinated Notes were issued, each holder
of 14% Senior Subordinated Notes will have the right, at the holder's option, to
require the Company to repurchase all or any part of the holder's 14% Senior
Subordinated Notes, within 60 days of such event, at a price equal to 100% of
the principal amount thereof, together with accrued and unpaid interest thereon.
During fiscal 2001, the Company repurchased (and cancelled) $10,313,000
principal amount of the 14% Senior Subordinated Notes and paid a premium of
approximately $1,444,000. At June 30, 2001, $139,687,000 principal amount of the
14% Senior Subordinated Notes remained outstanding. The 14% Senior Subordinated
Notes pay interest semi-annually on January 15 and July 15 of each year,
beginning July 15, 1999. Interest of approximately $10,500,000 was paid on
July 15, 2000 and January 15, 2001. As of June 30, 2001, 62,500 Unit Warrants
had been exercised, producing approximately $4,173,000 of proceeds to the
Company and leaving 87,500 Unit Warrants outstanding.
(IV) 5% CONVERTIBLE SUBORDINATED NOTES
In late September and early October 1997, the Company completed a private
placement of $216 million of 5% Convertible Subordinated Notes due 2004 (the "5%
Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes are
subordinate to the Company's senior indebtedness, which includes borrowings
under the Senior Credit Facility, the 14% Senior Subordinated Notes, the Dawson
9 3/8% Senior Notes and the 8 3/8% Senior Notes. The 5% Convertible Subordinated
Notes are convertible, at the holder's option, into shares of the Company's
common stock at a conversion price of $38.50 per share, subject to certain
adjustments.
The 5% Convertible Subordinated Notes are redeemable, at the Company's
option, on and after September 15, 2000, in whole or part, together with accrued
and unpaid interest. The initial redemption price is 102.86% for the year
beginning September 15, 2000 and declines ratably thereafter on an annual basis.
During fiscal 2001, the Company repurchased (and cancelled) $47,384,000
principal amount of the 5% Convertible Subordinated Notes, leaving $158,426,000
principal amount of the 5% Convertible Subordinated Notes outstanding at
June 30, 2001. These repurchases resulted in an after tax gain of approximately
$3.2 million. Interest on the 5% Convertible Subordinated Notes is payable on
March 15 and September 15. Interest of approximately $4,890,000 was paid on
September 15, 2000 and $4,815,000 was paid on March 15, 2001, respectively.
(V) DAWSON 9 3/8% SENIOR NOTES
As a result of the Dawson acquisition (see Note 3), the Company, its
subsidiaries and U.S. Trust Company of Texas, N.A., as trustee ("U.S. Trust"),
entered into a Supplemental Indenture dated
40
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
5. LONG-TERM DEBT (CONTINUED)
September 21, 1998 (the "Supplemental Indenture"), pursuant to which the Company
assumed the obligations of Dawson under the Indenture dated February 20, 1997
(the "Dawson Indenture") between Dawson and U.S. Trust. The senior notes due
2007 (the "Dawson 9 3/8% Senior Notes") issued pursuant to the Dawson Indenture
were equally and ratably secured with the obligations under the Senior Credit
Facility. As a result of a mandatory tender offer made in connection with the
Dawson acquisition and subsequent repurchases, only $1,106,000 principal amount
of Dawson 9 3/8% Senior Notes remained outstanding at June 30, 2000.
During fiscal 2001, the Company repurchased $860,000 principal amount of the
Dawson 9 3/8% Senior Notes, leaving $246,000 principal amount outstanding as of
June 30, 2001. Interest on the Dawson 9 3/8% Senior Notes is payable on
February 1 and August 1 of each year. Interest of approximately $52,000 and
approximately $14,000 was paid on August 1, 2000 and February 1, 2001,
respectively.
(vi) 7% CONVERTIBLE SUBORDINATED DEBENTURES
In July 1996, the Company completed a private placement of $52,000,000
principal amount of 7% Convertible Subordinated Debentures due 2003 (the "7%
Convertible Subordinated Debentures"). During the quarter ended September 30,
2000, $985,000 principal amount of the 7% Convertible Subordinated Debentures
were surrendered for conversion by the holders thereof and 101,025 shares of
common stock were issued on September 1, 2000 in connection with the conversion.
On September 1, 2000, the remaining $15,000 principal amount of the outstanding
7% Convertible Subordinated Debentures was redeemed at 103% of the principal
amount plus accrued interest, leaving none outstanding. Interest on the 7%
Convertible Subordinated Debentures was payable on January 1 and July 1 of each
year. Interest of approximately $35,000 was paid on July 1, 2000.
CAPITALIZED DEBT ISSUANCE COSTS, REPAYMENT SCHEDULE AND INTEREST EXPENSE
The Company capitalized a total of approximately $4,958,000 and $16,370,000
in fees and costs in connection with its various financings during fiscal 2001
and 1999 respectively. The Company did not incure any fees or costs in
connection with financing activities in fiscal 2000.
Presented below is a schedule of the repayment requirements of long-term
debt for each of the next five years and thereafter as of June 30, 2001:
PRINCIPAL
FISCAL YEAR ENDED JUNE 30, AMOUNT
-------------------------- --------------
(IN THOUSANDS)
2002........................................................ $ 7,946
2003........................................................ 7,912
2004........................................................ 9,911
2005........................................................ 158,426
2006........................................................ --
Thereafter.................................................. 309,712
--------
$493,907
========
41
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
5. LONG-TERM DEBT (CONTINUED)
The Company's interest expense for the years ended June 30, 2001, 2000, and
1999 consisted of the following:
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Cash payments for interest............................ $51,524 $61,956 $52,397
Commitment and agency fees paid....................... 1,203 1,139 527
Accretion of discount on notes........................ 739 743 552
Amortization of debt issuance costs................... 3,578 5,176 4,664
Net change in accrued interest........................ 146 2,916 9,261
Other................................................. (630) -- --
------- ------- -------
$56,560 $71,930 $67,401
======= ======= =======
6. DEBT ISSUANCE COSTS
During fiscal 1999, the Company recorded an expense item of $6,307,000 which
represented the write-off of debt issuance costs. The debt issuance costs were
associated with a bridge loan incurred in connection with the Dawson
acquisition, which was subsequently paid primarily with the proceeds from the
Company's private placement of 14% Senior Subordinated Notes (see Note 5).
During fiscal 2000, the Company expensed $338,000 of debt issuance costs related
to the conversion of 7% Convertible Subordinated Debentures and other
prepayments of debt.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at June 30, 2001 and 2000. FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments", defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
2001 2000
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
Financial Assets:
Cash and cash equivalents............... $ 2,098 $ 2,098 $109,873 $109,873
Accounts receivable, net................ 177,016 177,016 123,203 123,203
Notes receivable--related parties....... 6,050 6,600 5,150 5,150
Commodity option contracts.............. 1,035 1,035 -- --
Financial Liabilities:
Accounts payable........................ 42,544 42,544 34,091 34,091
Commodity option contracts.............. 344 344 -- 778
Long-term debt
Senior Credit Facility................ 2,000 2,000 291,948 291,948
8 3/8% Senior Notes................... 175,000 176,094 -- --
5% Convertible Subordinated Notes..... 158,426 141,989 205,810 160,532
7% Convertible Subordinated
Debentures.......................... -- -- 1,000 1,130
14% Senior Subordinated Notes......... 134,466 153,498 143,650 162,325
Dawson 9 3/8% Senior Notes............ 246 246 1,106 1,029
Capital lease liabilities............. 22,964 22,964 21,911 21,911
Other debt............................ 805 805 1,175 1,175
42
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, trade receivables and trade payables: The carrying amounts approximate
fair value because of the short maturity of those instruments.
Commodity option contracts: For fiscal 2001, under SFAS 133, the carrying
amount of the commodity option contracts approximate fair value. For fiscal
2000, the carrying value is comprised of the unamortized premiums paid for the
option contracts. The fair value of the commodity option contracts is estimated
using the discounted forward prices of each options index price, for the term of
each option contract.
Notes receivable-related parties: The amounts reported relate to notes
receivable from officers of the Company.
Long-term debt: The fair value of the Company's long-term debt is based upon
the quoted market prices for the various notes and debentures at June 30, 2001
and 2000, and the carrying amounts outstanding under the Company's senior credit
facility.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage well defined
commodity price risks. The Company is exposed to credit losses in the event of
nonperformance by the counter-parties to its commodity hedges. The Company only
deals with reputable financial institutions as counter-parties and anticipates
that such counter-parties will be able to fully satisfy their obligations under
the contracts. The Company does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of the counter-parties.
The Company periodically hedges a portion of its oil and natural gas
production through collar and option agreements. The purpose of the hedges is to
provide a measure of stability in the volatile environment of oil and natural
gas prices and to manage exposure to commodity price risk under existing sales
commitments. The Company's risk management objective is to lock in a range of
pricing for expected production volumes. This allows the Company to forecast
future earnings within a predictable range. The Company meets this objective by
entering into collar and option arrangements which allow for acceptable cap and
floor prices.
The Company does not enter into derivative instruments for any purpose other
than for economic hedging. The Company does not speculate using derivative
instruments. The Company has identified the following derivative instruments:
FREESTANDING DERIVATIVES. On March 30, 2000 the Company entered into a
collar arrangement for a 22-month period whereby the Company will pay if the
specified price is above the cap index and the counter-party will pay if the
price should fall below the floor index. The hedge defines a range of cash flows
bounded by the cap and floor prices. On May 25, 2001 the Company entered into an
option arrangement for a 12-month period beginning March 2002. whereby the
counter-party will pay if the price should fall below the floor index. The
Company desires a measure of stability to ensure that cash flows do not fall
below a certain level.
Prior to the adoption of SFAS 133 as discussed in Note 1, these collars and
options were accounted for as cash flow type hedges. Accordingly, the transition
adjustment resulted in recording a $778,000 liability
43
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
8. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
for the fair value of the collars to accumulated other comprehensive income, of
which $520,000 was recognized in earnings during fiscal 2001. It is estimated
that the remaining $258,000 of this transition adjustment will be recognized in
earnings over the next fiscal year. While this arrangement was intended to be an
economic hedge, as of July 1, 2000, the Company had not documented the
March 30, 2000 oil and natural gas collars as cash flow hedges and therefore
reported a charge to operations of $565,000 for the increase in fair value of
the liability as of September 30, 2000 in other income. As of October 1, 2000,
the Company documented these collars as cash flow hedges. As of May 25, 2001,
the Company had not documented the May 25, 2001 oil and natural gas options as
cash flow hedges and therefore has included income of $768,000 for the increase
in fair value of the asset as of June 30, 2001 in other income. As of July 1,
2001, the Company documented these options as cash flow hedges. During fiscal
2001, the Company recorded a net increase of $999,000 in derivative assets, net
of derivative liabilities, of which $132,000 represented ineffectiveness and was
credited to earnings.
EMBEDDED DERIVATIVES. The Company is party to a volumetric production
payment that meets the definition of an embedded derivative under SFAS 133.
Effective July 1, 2000, the Company determined and documented that the
volumetric production payment is excluded from the scope of SFAS 133 under the
normal purchases/sales exclusion as set forth in SFAS 138.
For fiscal 2000 and 1999, gains and amortization of premiums paid on option
contracts are recognized as an adjustment to sales revenue when the related
transactions being hedged are finalized.
The net effect of the Company's commodity hedging activities decreased oil
and natural gas revenues for the year ended June 30, 2000 by $822,270 and
increased oil and natural gas revenues for the year ended June 30, 1999 by
$158,500.
The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at June 30, 2001 and 2000:
MONTHLY INCOME STRIKE PRICE
---------------------- PER BBL/MMBTU
OIL NATURAL GAS -------------------
(BBLS) (MMBTU) TERM FLOOR CAP FAIR VALUE
-------- ----------- ---------------------- -------- -------- ----------
At June 30, 2001
Oil Collars................. 5,000 -- Mar 2001 - Feb 2002 $19.70 $23.70 $(115,000)
Oil Put..................... 5,000 -- Mar 2002 - Feb 2003 22.00 -- 141,000
Natural Gas Collars......... -- 40,000 Mar 2001 - Feb 2002 2.40 2.91 (229,000)
Natural Gas Put............. -- 75,000 Mar 2002 - Feb 2003 3.00 -- 894,000
At June 30, 2000
Oil Collars................. 4,000 -- May 2000 - Feb 2001 $22.20 $26.50 $(118,000)
5,000 -- Mar 2001 - Feb 2002 19.70 23.70 (140,000)
Natural Gas Collars......... -- 30,000 May 2000 - Feb 2001 2.60 3.19 (272,000)
-- 40,000 Mar 2001 - Feb 2002 2.40 2.91 (248,000)
(The strike prices for the oil options are based on the NYMEX spot price for
West Texas Intermediate; the strike prices for the natural gas collars are based
on the Inside FERC-West Texas Waha spot price; the strike price for the natural
gas put is based on the Inside FERC-El Paso Permian spot price.)
44
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
9. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
JUNE 30,
-------------------
2001 2000
-------- --------
(THOUSANDS)
Accrued payroll, taxes and employee benefits.............. $31,242 $15,261
State sales, use and other taxes.......................... 5,825 2,465
Oil and gas revenue distribution.......................... 1,606 1,714
Other..................................................... 10,250 6,958
------- -------
Total..................................................... $48,923 $26,398
======= =======
10. STOCKHOLDERS' EQUITY
EQUITY OFFERINGS
On June 30, 2000, the Company closed the public offering of 11,000,000
shares of common stock at $9.625 per share, or approximately $106 million (the
"Equity Offering"). Net proceeds from the Equity Offering of approximately
$101 million were used to repay a portion of the Company's term loan borrowings
and revolving line of credit under its senior credit facility and retire other
long-term debt.
On May 7, 1999, the Company closed the public offering of 55,300,000 shares
of common stock (300,000 shares of which were sold pursuant to the underwriters'
over-allotment option discussed below) at $3.00 per share, or $166 million (the
"Prior Public Offering"). Concurrently therewith, the Company closed the
offering of 3,508,772 shares of common stock at $2.85 per share, or $10 million
(the "Prior Concurrent Offering" and together with the Prior Public Offering,
the "Prior Equity Offerings"). In addition, on June 7, 1999, the underwriters of
the Prior Public Offering exercised an over-allotment option to purchase an
additional 5,436,000 million shares to cover over-allotments. Net proceeds from
the Prior Equity Offerings of approximately $180.4 million were used to repay a
portion of the Company's term loan borrowings under its senior credit facility.
STOCK INCENTIVE PLANS
On January 13, 1998 the Company's shareholders approved the Key Energy
Group, Inc. 1997 Incentive Plan, as amended (the "1997 Incentive Plan"). The
1997 Incentive Plan is an amendment and restatement of the plans formerly known
as the "Key Energy Group, Inc. 1995 Stock Option Plan" (the "1995 Option Plan")
and the "Key Energy Group, Inc. 1995 Outside Directors Stock Option Plan" (the
"1995 Directors Plan") (collectively, the "Prior Plans").
All options previously granted under the Prior Plans and outstanding as of
November 17, 1997 (the date on which the Company's board of directors adopted
the plan) were assumed and continued, without modification, under the 1997
Incentive Plan.
Under the 1997 Incentive Plan, the Company may grant the following awards to
key employees, directors who are not employees ("Outside Directors") and
consultants of the Company, its controlled subsidiaries, and its parent
corporation, if any: (i) incentive stock options ("ISOs") as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
(ii) "nonstatutory" stock
45
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
10. STOCKHOLDERS' EQUITY (CONTINUED)
options ("NSOs"), (iii) stock appreciation rights ("SARs"), (iv) shares of the
restricted stock, (v) performance shares and performance units, (vi) other
stock-based awards and (vii) supplemental tax bonuses (collectively, "Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options".
The Company may grant Incentive Awards covering an aggregate of the greater
of (i) 3,000,000 shares of the Company's common stock and (ii) 10% of the shares
of the Company's common stock issued and outstanding on the last day of each
calendar quarter, provided, however, that a decrease in the number of issued and
outstanding shares of the Company's common stock from the previous calendar
quarter shall not result in a decrease in the number of shares available for
issuance under the 1997 Incentive Plan. As a result of the Company's equity
offering discussed above, as of June 30, 2001, the number of shares of the
Company's common stock that may be covered by Incentive Awards has increased to
approximately 10.1 million.
Any shares of the Company's common stock that are issued and are forfeited
or are subject to Incentive Awards under the 1997 Incentive Plan that expire or
terminate for any reason will remain available for issuance with respect to the
granting of Incentive Awards during the term of the 1997 Incentive Plan, except
as may otherwise be provided by applicable law. Shares of the Company's common
stock issued under the 1997 Incentive Plan may be either newly issued or
treasury shares, including shares of the Company's common stock that the Company
receives in connection with the exercise of an Incentive Award. The number and
kind of securities that may be issued under the 1997 Incentive Plan and pursuant
to then outstanding Incentive Awards are subject to adjustments to prevent
enlargement or dilution of rights resulting from stock dividends, stock splits,
recapitalizations, reorganization or similar transactions.
The maximum number of shares of the Company's common stock subject to
Incentive Awards that may be granted or that may vest, as applicable, to any one
Covered Employee (defined below) during any calendar year shall be 500,000
shares, subject to adjustment under the provisions of the 1997 Incentive Plan.
The maximum aggregate cash payout subject to Incentive Awards (including
SARs, performance units and performance shares payable in cash, or other
stock-based awards payable in cash) that may be granted to any one Covered
Employee during any calendar year is $2,500,000. For purposes of the 1997
Incentive Plan, "Covered Employees" means a named executive officer who is one
of the group covered employees as defined in Section 162(m) of the Code and the
regulation promulgated thereunder (i.e., generally the chief executive officer
and the other four most highly compensated executive officers for a given year.)
The 1997 Incentive Plan is administrated by the Compensation Committee
appointed by the Board of Directors (the "Committee") consisting of not less
than two directors each of whom is (i) an "outside director" under
Section 162(m) of the Code and (ii) a "non-employee director" under Rule 16b-3
of the Securities Exchange Act of 1934. In addition, subject to applicable
shareholder approval requirements, the Company may issue NSOs outside the 1997
Incentive Plan.
The exercise price of options granted under the 1997 Incentive Plan and
outside the 1997 Incentive Plan is at or above the fair market value per share
on the date the options are granted. The exercise of NSOs results in a U. S. tax
deduction to the Company equal to the income tax effect of the difference
46
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
10. STOCKHOLDERS' EQUITY (CONTINUED)
between the exercise price and the market price at the exercise date. The
following table summarizes the stock option activity related to the Company's
plans (shares in thousands):
FISCAL YEAR ENDING JUNE 30,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding--beginning of fiscal
year............................ 9,470 $6.37 6,920 $5.55 2,292 $10.33
Granted......................... 2,533 8.08 3,688 8.61 5,443 4.32
Exercised....................... (3,107) 4.70 (241) 4.56 (15) 6.36
Forfeited....................... (193) 4.92 (897) 9.80 (800) 10.87
------- ----- -----
Outstanding--end of fiscal year... 8,703 7.49 9,470 6.37 6,920 5.55
======= ===== =====
Exercisable--end of fiscal year... 5,820 4,370 1,020
======= ===== =====
STOCK INCENTIVE PLANS
The foregoing stock option activity summary reflects that effective as of
September 4, 1998, the Committee authorized the cancellation and reissue of
stock options for employees that were not executive officers for the purpose of
changing the exercise price and vesting schedule of such options. A total of
473,556 stock options were cancelled, with a weighted average price of
approximately $13.09 per share, and reissued with an exercise price of $7.125
per share. The vesting of the new options is ratable over a three-year period
from the date of grant.
The following table summarizes information about the stock options
outstanding at June 30, 2001 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -----------------------------------
NUMBER OF SHARES WEIGHTED-AVERAGE WEIGHTED- NUMBER OF SHARES WEIGHTED-
OUTSTANDING AT REMAINING CONTRACTUAL AVERAGE OUTSTANDING AT AVERAGE EXERCISE
RANGE OF EXERCISE PRICES JUNE 30, 2001 LIFE EXERCISE PRICE JUNE 30, 2001 PRICE
------------------------ ---------------- --------------------- -------------- ---------------- ----------------
$3.00 - $6.8125 1,921 6.49 $3.65 1,802 $3.51
$7.125 - $7.4375 1,252 7.82 7.25 439 7.13
$8.125 - $8.3125 2,135 8.67 8.25 1,635 8.26
$8.50 - $13.25 3,395 7.69 9.27 1,943 9.68
The Company applies the intrinsic value method of APB 25 in accounting for
its employee stock incentive plans. Accordingly, no compensation expense has
been recognized for any stock options issued under the employee plans. Had
compensation expense for stock options granted to employees been recognized
based on the fair value at the grant dates, using the methodology prescribed by
SFAS 123, the
47
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
10. STOCKHOLDERS' EQUITY (CONTINUED)
Company's net income (loss) and earnings per share would have been reduced to
pro forma amounts indicated below:
2001 2000 1999
-------- -------- --------
(THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income (loss):
As reported.................................. $62,710 $(18,959) $(53,258)
Pro forma.................................... 52,338 (25,684) (57,057)
Basic earnings per share of common stock:
As reported.................................. $ 0.63 $ (0.23) $ (1.94)
Pro forma.................................... 0.53 (0.31) (2.07)
Diluted earnings per share of common stock:
As reported.................................. $ 0.61 $ (0.23) $ (1.94)
Pro forma.................................... 0.51 (0.31) (2.07)
SFAS 123 does not apply to options granted prior to January 1, 1995;
therefore, the pro forma effect disclosed above may not be representative of pro
forma amounts in future years.
The total fair value of stock options granted during fiscal 2001, 2000 and
1999 was approximately $11,217,000, $19,541,000 and $15,695,000, respectively.
The fair value of each stock option grant was estimated on the date of grant
using the Black-Sholes option-pricing model, based on the following
weighted-average assumptions.
FISCAL YEAR OF GRANT
------------------------------
2001 2000 1999
-------- -------- --------
Risk-free interest rate........................... 4.30% 6.40% 5.09%
Expected life of options.......................... 5 years 5 years 5 years
Expected volatility of the Company's stock
price........................................... 59% 67% 98%
Expected dividends................................ none none none
11. INCOME TAXES
Components of income tax expense (benefit) are as follows:
FISCAL YEAR ENDED JUNE 30,
-------------------------------
2001 2000 1999
-------- --------- --------
(THOUSANDS)
Federal and State:
Current..................................... $ 2,304 $(5,588) $ --
Deferred
U.S....................................... 34,698 (1,818) (25,560)
Foreign................................... -- -- (115)
------- ------- --------
$37,002 $(7,406) $(25,675)
======= ======= ========
48
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
11. INCOME TAXES (CONTINUED)
No income tax payments were made for fiscal 2001, 2000 or 1999. Additionally
a deferred tax benefit of $7,004,000 has been allocated to stockholders' equity
in fiscal 2001 for compensation expense for income tax purposes in excess of
amounts recognized for financial reporting purposes.
Income tax expense (benefit) differs from amounts computed by applying the
statutory federal rate as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------------
2001 2000 1999
-------- -------- --------
Income tax computed at statutory rate.............. 35.0% (35.0)% (35.0)%
Amortization of goodwill disallowance.............. 2.2 7.0 2.0
State taxes........................................ 1.4 -- --
Change in valuation allowance and other............ (1.4) 1.5 0.5
---- ----- -----
37.2% (26.5)% (32.5)%
==== ===== =====
Deferred tax assets (liabilities) are comprised of the following:
FISCAL YEAR ENDED JUNE 30,
--------------------------
2001 2000
---------- ----------
(THOUSANDS)
Net operating loss and tax credit carry forwards.... $ 69,376 $ 88,491
Property and equipment.............................. (182,442) (175,511)
Self insurance reserves............................. 405 1,616
Allowance for bad debts............................. 1,542 1,129
Acquisition expenses, expensed for tax.............. (626) (626)
Other............................................... 148 862
--------- ---------
Net deferred tax liability.......................... (111,597) (84,039)
Valuation allowance of deferred tax assets.......... (15,803) (15,668)
--------- ---------
Net deferred tax liability, net of valuation
allowance......................................... $(127,400) $ (99,707)
========= =========
49
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
11. INCOME TAXES (CONTINUED)
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. As described below, due
to annual limitations on certain net operating loss carryforwards, it does not
appear more likely than not that the Company will be able to utilize all
available carryforwards prior to their ultimate expiration.
The Company estimates that as of June 30, 2001, the Company will have
available approximately $185,474,305 of net operating loss carryforwards (which
will continue to expire in fiscal 2002). Approximately $53,570,522 of the net
operating loss carryforwards are subject to an annual limitation of
approximately $1,012,000, under Sections 382 and 383 of the Internal Revenue
Code.
12. LEASING ARRANGEMENTS
The Company leases certain property and equipment under non-cancelable
operating leases that generally expire at various dates through fiscal 2006. The
term of the operating leases generally run from 24 to 60 months with varying
payment dates throughout each month.
As of June 30, 2001, the future minimum lease payments under non-cancelable
operating leases are as follows (in thousands):
LEASE
FISCAL YEAR ENDING JUNE 30, PAYMENTS
--------------------------- --------
2002........................................................ $ 4,689
2003........................................................ 4,587
2004........................................................ 4,493
2005........................................................ 4,426
2006........................................................ 2,626
-------
$20,821
=======
Operating lease expense was approximately $6,072,000, $6,460,000 and
$7,313,000 for the fiscal years ended June 30, 2001, 2000 and 1999,
respectively.
13. EMPLOYEE BENEFIT PLANS
In order to retain quality personnel, the Company maintains 401(k) plans as
part of its employee benefits package. From July 1, 1998 through December 31,
1998, the Company matched 100% of employee contributions into its 401(k) plan up
to a maximum of $1,000 per participant per year. From January 1, 1999 through
March 31, 2000, the Company elected not to match employee contributions.
Commencing April 1, 2000, the Company matches, 100% of employee contributions
into its 401(k) plan up to a maximum of $250 per participant per year. The
maximum limit was increased to $500 effective October 1, 2000, $750 effective
January 1, 2001 and $1,000 effective July 1, 2001. The Company's matching
contributions for fiscal 2001, 2000 and 1999 were approximately $1,857,000,
$77,000 and $908,000, respectively.
50
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
14. TRANSACTIONS WITH RELATED PARTIES
In connection with the negotiation of the terms of a five-year employment
agreement with Mr. Francis D. John, Chairman of the Board, President and Chief
Executive Officer of the Company, and as an inducement to Mr. John to enter into
such employment agreement, the Company entered into a separate agreement with
Mr. John, dated as of August 2, 1999, which as amended through June 30, 2001,
provides that $6.5 million in loans previously made by the Company to Mr. John,
together with the accrued interest payable thereon, will be forgiven, ratably
during the ten year period commencing on July 1, 2001 and ending on June 30,
2010. The agreement provides that the foregoing forgiveness of indebtedness is
predicated and conditioned upon Mr. John remaining employed by the Company
during such period. In addition, in the event that Mr. John is terminated by the
Company for Cause (as defined in the agreement), or in the event that Mr. John
voluntarily terminates his employment with the Company, the agreement further
provides that the entire remaining principal balance of these loans, together
with accrued interest payable thereon, will become immediately due and payable
by Mr. John. However, in the event that Mr. John's employment is terminated for
"Good Reason", or as a result of Mr. John's death or "Disability", or as a
result of a "Change in Control" (all as defined in that agreement), the
agreement stipulates that the remaining principal balance outstanding on the
loans, together with accrued interest thereon will be forgiven.
In connection with the negotiation of an employment agreement with Thomas K.
Grundman, the Company's Executive Vice President, Chief Financial Officer and
Chief Accounting Officer, the Company made a $240,000 short-term loan and a
$150,000 relocation loan to assist Mr. Grundman's relocation to the Company's
executive offices. Interest on these loans accrues at a rate of 6.125% per
annum. The short-term loan has been repaid. The relocation loan together with
accrued interest will be forgiven in three installments of $50,000 each on
July 1, 2000, 2001 and 2002; provided, however, that if Mr. Grundman's
employment is terminated during such period in a way that (i) triggers severance
obligations, all amounts owed shall be immediately forgiven or (ii) does not
trigger severance obligations, all amounts owed shall be immediately due and
payable.
15. BUSINESS SEGMENT INFORMATION
The Company's reportable business segments are well servicing and contract
drilling. Oil and natural gas production operations previously were presented
separately as a reportable business segment and are now included in
"corporate/other."
WELL SERVICING: the Company's operations provide well servicing (ongoing
maintenance of existing oil and natural gas wells), workover (major repairs or
modifications necessary to optimize the level of production from existing oil
and natural gas wells) and production services (fluid hauling and fluid storage
tank rental).
CONTRACT DRILLING: the Company provides contract drilling services for
major and independent oil companies onshore the continental United States,
Argentina and Ontario, Canada.
The Company's management evaluates the performance of its operating segments
based on net income and operating profits (revenues less direct operating
expenses). Corporate expenses include general corporate expenses associated with
managing all reportable operating segments. Corporate assets
51
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
15. BUSINESS SEGMENT INFORMATION (CONTINUED)
consist principally of cash and cash equivalents, deferred debt financing costs
and deferred income tax assets.
WELL CONTRACT CORPORATE
SERVICING DRILLING /OTHER TOTAL
--------- -------- --------- ----------
TWELVE MONTHS ENDED JUNE 30, 2001
Operating revenues................................. $758,273 $107,639 $ 7,350 $ 873,262
Operating profit................................... 265,165 30,273 2,886 298,324
Depreciation, depletion and amortization........... 63,578 7,947 3,622 75,147
Interest expense................................... 1,831 -- 54,729 56,560
Net income (loss) before extraordinary gain
(loss)*............................................ 109,159 9,466 (56,344) 62,281
Identifiable assets................................ 664,611 95,473 278,325 1,038,409
Capital expenditures (excluding acquisitions)...... 50,799 15,884 15,437 82,120
TWELVE MONTHS ENDED JUNE 30, 2000
Operating revenues................................. $559,492 $ 68,428 $ 9,812 $ 637,732
Operating profit................................... 159,552 10,129 5,665 175,346
Depreciation, depletion and amortization........... 62,680 6,105 2,187 70,972
Interest expense................................... 2,300 -- 69,630 71,930
Net income (loss) before extraordinary gain (loss)
*.................................................. 48,062 (1,664) (56,968) (20,570)
Identifiable assets................................ 635,304 89,574 322,754 1,047,632
Capital expenditures (excluding acquisitions)...... 30,098 8,282 3,422 41,802
TWELVE MONTHS ENDED JUNE 30, 1999
Operating revenues................................. $433,657 $ 50,613 $ 7,547 $ 491,817
Operating profit................................... 108,692 7,057 4,640 120,389
Depreciation, depletion and amortization........... 52,638 6,586 2,850 62,074
Interest expense................................... 1,659 18 65,724 67,401
Net income (loss) before extraordinary gain
(loss)*............................................ 15,447 (4,093) (64,612) (53,258)
Identifiable assets................................ 651,781 81,074 209,860 942,715
Capital expenditures (excluding acquisitions)...... 26,776 1,063 3,468 31,307
------------------------
* Net income (loss) before extraordinary gain (loss) for the contract drilling
segment includes a portion of well servicing general and administrative
expenses allocated on a percentage of revenue basis.
Operating revenues and operating profit for the Company's foreign
operations, which includes Argentina and Canada, were $54.5 million and
$13.4 million, respectively, for the year ended June 30, 2001. Operating
revenues and operating profit for the Company's foreign operations, which
includes Argentina and Canada, were $37.7 million and $7.3 million,
respectively, for the year ended June 30, 2000. Operating revenues and operating
profit for the Company's foreign operations, which includes Argentina and
Canada, were $26.9 million and $5.4 million, respectively, for the year ended
June 30, 1999.
The Company had $84.1 million and $66.9 million of identifiable assets as of
June 30, 2001 and 2000, respectively, related to its foreign operations.
52
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
16. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
YEAR ENDED JUNE 30,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Fair value of common stock issued in purchase
transactions................................................ $8,120 $ -- $ --
Fair value of common stock issued to lender in lieu of
fees........................................................ -- -- 1
Fair value of common stock issued upon conversion of
long-term debt.............................................. 957 3,606 --
Capital lease obligations................................... 9,595 10,758 17,120
17. UNAUDITED SUPPLEMENTARY INFORMATION--QUARTERLY RESULTS OF OPERATIONS
Summarized quarterly financial data for fiscal 2001, 2000 and 1999 are as
follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001
Revenues............................................ $191,679 $203,911 $227,370 $250,302
Income (loss) from operations....................... 12,229 18,063 27,912 41,079
Net income (loss) before extraordinary gain
(loss).............................................. 7,510 11,094 17,587 26,090
Extraordinary gain (loss), net of tax............... 1,197 68 (167) (669)
-------- -------- -------- --------
Net income (loss)................................... 8,707 11,162 17,420 25,421
======== ======== ======== ========
Earnings (loss) per share:
Basic--before extraordinary gain (loss)........... 0.08 0.11 0.18 0.26
Extraordinary gain (loss), net of tax............. 0.01 -- -- (0.01)
-------- -------- -------- --------
Basic--after extraordinary gain (loss)............ 0.09 0.11 0.18 0.25
======== ======== ======== ========
Diluted--before extraordinary gain (loss)......... 0.08 0.11 0.17 0.25
Extraordinary gain (loss),........................ 0.01 -- -- (0.01)
-------- -------- -------- --------
Diluted--after extraordinary gain (loss).......... 0.09 0.11 0.17 0.24
======== ======== ======== ========
Weighted average shares outstanding:
Basic............................................. 96,880 97,534 98,211 100,179
Diluted........................................... 100,472 100,534 103,524 104,401
2000
Revenues............................................ $149,892 $159,389 $158,551 $169,900
Income (loss) from operations....................... (13,191) (7,953) (5,730) (1,102)
Net income (loss) before extraordinary gain
(loss).............................................. (9,451) (5,693) (4,150) (1,276)
Extraordinary gain (loss), net of tax............... -- -- -- 1,611
-------- -------- -------- --------
Net income (loss)................................... (9,451) (5,693) (4,150) 335
======== ======== ======== ========
53
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
17. UNAUDITED SUPPLEMENTARY INFORMATION--QUARTERLY RESULTS OF OPERATIONS
(CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Earnings (loss) per share:
Basic--before extraordinary gain (loss)........... (0.11) (0.07) (0.05) (0.01)
Extraordinary gain (loss), net of tax............. -- -- -- 0.02
-------- -------- -------- --------
Basic--after extraordinary gain (loss)............ (0.11) (0.07) (0.05 0.01
======== ======== ======== ========
Diluted--before extraordinary gain (loss)......... (0.11) (0.07) (0.05) (0.01)
Extraordinary gain (loss), net of tax............. -- -- -- 0.02
-------- -------- -------- --------
Diluted--after extraordinary gain (loss).......... (0.11) (0.07) (0.05 0.01
======== ======== ======== ========
Weighted average shares outstanding:
Basic............................................. 82,738 82,738 84,633 85,567
Diluted........................................... 82,738 82,738 84,633 85,567
18. VOLUMETRIC PRODUCTION PAYMENT
In March 2000, Key sold a portion of its future oil and natural gas
production from Odessa Exploration Incorporated, its wholly owned subsidiary,
for gross proceeds of $20 million pursuant to an agreement under which the
purchaser is entitled to receive a share of the production from certain oil and
natural gas properties in amounts ranging from 3,500 to 10,000 barrels of oil
and 58,800 to 122,100 Mmbtus of natural gas per month over a six year period
ending February 2006. The total volume of the forward sale is approximately
486,000 barrels of oil and 6.135 million Mmbtus of natural gas.
19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's senior notes are guaranteed by all of the Company's
subsidiaries (except for the foreign subsidiaries), all of which are
wholly-owned. The guarantees are joint and several, full, complete and
unconditional. There are currently no restrictions on the ability of the
subsidiary guarantors to tranfer funds to the parent company.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
Statements of Guarantors and Issuers of Guaranteed Securities Registered or
Being Registered." The information is not intended to present the financial
position, results of operations and cash flows of the individual companies or
groups of companies in accordance with generally accepted accounting principles.
54
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2001
-------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Assets:
Current assets..................... $ 10,680 $ 165,653 $29,817 $ -- $ 206,150
Net property and equipment......... 21,418 717,989 54,309 -- 793,716
Goodwill, net...................... 3,374 184,379 2,122 -- 189,875
Deferred costs, net................ 17,624 -- -- -- 17,624
Intercompany receivables........... 664,592 -- -- (664,592) --
Other assets....................... 15,303 5,616 -- -- 20,919
-------- ---------- ------- --------- ----------
Total assets......................... $732,991 1,073,637 $86,248 $(664,592) $1,228,284
======== ========== ======= ========= ==========
Liabilities and equity:
Current liabilities................ $ 35,671 $ 64,679 $15,203 $ -- $ 115,553
Long-term debt..................... 470,668 15,331 (38) -- 485,961
Intercompany paybles............... -- 608,764 55,828 (664,592) --
Deferred tax liability............. 127,400 -- -- -- 127,400
Other long-term liabilities........ 8,240 14,252 -- -- 22,492
Stockholders' equity............... 91,012 370,611 15,255 -- 476,878
-------- ---------- ------- --------- ----------
Total liabilities and stockholders'
equity............................. $732,991 $1,073,637 $86,248 $(664,592) $1,228,284
======== ========== ======= ========= ==========
JUNE 30, 2000
-------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Assets:
Current assets..................... $120,216 $ 115,178 $18,195 $ -- $ 253,589
Net property and equipment......... 7,308 704,531 48,722 -- 760,561
Goodwill, net...................... 3,606 192,641 2,386 -- 198,633
Deferred costs, net................ 18,855 -- -- -- 18,855
Intercompany receivables........... 788,166 -- -- (788,166) --
Other assets....................... 9,062 5,565 -- -- 14,627
-------- ---------- ------- --------- ----------
Total assets......................... $947,213 $1,017,915 $69,303 $(788,166) $1,246,265
======== ========== ======= ========= ==========
Liabilities and equity:
Current liabilities................ $ 33,637 $ 47,736 $11,475 $ -- $ 92,848
Long-term debt..................... 637,438 14,486 21 -- 651,945
Intercompany paybles............... -- 740,268 47,898 (788,166) --
Deferred tax liability............. 99,707 -- -- -- 99,707
Other long-term liabilities........ 1,751 17,127 -- -- 18,878
Stockholders' equity............... 174,680 198,298 9,909 -- 382,887
-------- ---------- ------- --------- ----------
Total liabilities and stockholders'
equity............................. $947,213 $1,017,915 $69,303 $(788,166) $1,246,265
======== ========== ======= ========= ==========
55
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
JUNE 30, 2001
-------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Revenues............................. $ 2,018 $816,724 $54,520 $ -- $873,262
Costs and expenses:..................
Direct expenses.................... -- 533,807 41,131 -- 574,938
Depreciation, depletion and
amortization expense............. 1,353 69,714 4,080 -- 75,147
General and administrative
expense.......................... 18,991 43,644 3,436 -- 66,071
Interest........................... 54,464 1,275 821 -- 56,560
Other.............................. 318 943 2 -- 1,263
-------- -------- ------- ------- --------
Total costs and expenses............. 75,126 649,383 49,470 -- 773,979
-------- -------- ------- ------- --------
Income (loss) before income taxes.... (73,108) 167,341 5,050 -- 99,283
Income tax (expense) benefit......... 27,247 (62,367) (1,882) -- (37,002)
-------- -------- ------- ------- --------
Net income (loss) before
extraordinary items................ (45,861) 104,974 3,168 -- 62,281
Extraordinary items, net of tax...... 429 -- -- -- 429
-------- -------- ------- ------- --------
Net income (loss).................... $(45,432) $104,974 $ 3,168 $ -- $ 62,710
======== ======== ======= ======= ========
JUNE 30, 2000
-------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Revenues.............................. $ 790 $599,225 $37,717 $ -- $637,732
Costs and expenses:
Direct expenses..................... -- 431,997 30,389 -- 462,386
Depreciation, depletion and
amortization expense.............. 1,162 66,453 3,357 -- 70,972
General and administrative
expense........................... 11,101 44,473 3,198 -- 58,772
Interest............................ 69,802 1,527 601 -- 71,930
Other............................... -- 1,648 -- -- 1,648
-------- -------- ------- ------- --------
Total costs and expenses.............. 82,065 546,098 37,545 -- 665,708
-------- -------- ------- ------- --------
Income (loss) before income taxes..... (81,275) 53,127 172 -- (27,976)
Income tax (expense) benefit.......... 21,516 (14,064) (46) -- 7,406
-------- -------- ------- ------- --------
Net income (loss) before extraordinary
items............................... (59,759) 39,063 126 -- (20,570)
Extraordinary items, net of tax....... 1,611 -- -- -- 1,611
-------- -------- ------- ------- --------
Net income (loss)..................... $(58,148) $ 39,063 $ 126 $ -- $(18,959)
======== ======== ======= ======= ========
56
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
JUNE 30, 1999
-------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Revenues.............................. $ 1,086 $463,813 $26,918 $ -- $491,817
Costs and expenses:
Direct expenses..................... -- 349,936 21,492 -- 371,428
Depreciation, depletion and
amortization expense.............. 428 58,403 3,243 -- 62,074
General and administrative
expense........................... 14,962 34,490 3,656 -- 53,108
Interest............................ 65,724 1,559 118 -- 67,401
Other............................... 10,811 5,928 -- -- 16,739
-------- -------- ------- ------- --------
Total costs and expenses.............. 91,925 450,316 28,509 -- 570,750
-------- -------- ------- ------- --------
Income (loss) before income taxes..... (90,839) 13,497 (1,591) -- (78,933)
Income tax (expense) benefit.......... 29,547 (4,390) 518 -- 25,675
-------- -------- ------- ------- --------
Net income (loss) before extraordinary
items............................... (61,292) 9,107 (1,073) -- $(53,258)
Extraordinary items, net of tax....... -- -- -- -- --
-------- -------- ------- ------- --------
Net income (loss)..................... $(61,292) $ 9,107 $(1,073) $ -- $(53,258)
======== ======== ======= ======= ========
FISCAL YEAR ENDED JUNE 30, 2001
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities............... $ 68,567 $ 64,408 $ 9,742 $ -- $ 142,717
Net cash provided by (used in)
investing activities............... (19,459) (56,711) (7,180) -- (83,350)
Net cash provided by (used in)
financing activities............... (158,627) (8,456) (59) -- (167,142)
--------- -------- ------- ------- ---------
Net increase (decrease) in cash...... (109,519) (759) 2,503 -- (107,775)
Cash and cash equivalents at
beginning of period................ 111,166 (1,246) (47) -- 109,873
--------- -------- ------- ------- ---------
Cash and cash equivalents at end of
period............................. $ 1,647 $ (2,005) $ 2,456 $ -- $ 2,098
========= ======== ======= ======= =========
57
KEY ENERGY SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2001, 2000 AND 1999
19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
FISCAL YEAR ENDED JUNE 30, 2000
-------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities............... $ 18,962 $ 10,434 $ 5,464 $ -- $ 34,860
Net cash provided by (used in)
investing activities............... (4,468) (26,671) (6,627) -- (37,766)
Net cash provided by (used in)
financing activities............... 80,070 9,287 (56) -- 89,301
-------- -------- ------- ------- --------
Net increase (decrease) in cash...... 94,564 (6,950) (1,219) -- 86,395
Cash and cash equivalents at
beginning of period................ 16,602 5,704 1,172 -- 23,478
-------- -------- ------- ------- --------
Cash and cash equivalents at end of
period............................. $111,166 $ (1,246) $ (47) $ -- $109,873
======== ======== ======= ======= ========
FISCAL YEAR ENDED JUNE 30, 1999
--------------------------------------------------------------------
NON-
PARENT GUARANTOR GUARANTOR
COMPANY SUBSIDIARIES SUBSIDARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
(IN THOUSANDS)
Net cash provided by (used in)
operating activities............... $ (49,167) $ 26,508 $ 9,232 $ -- $ (13,427)
Net cash provided by (used in)
investing activities............... (272,620) (13,986) (8,048) -- (294,654)
Net cash provided by (used in)
financing activities............... 313,526 (7,196) (36) -- 306,294
--------- -------- ------- ------- ---------
Net increase (decrease) in cash...... (8,261) 5,326 1,148 -- (1,787)
Cash and cash equivalents at
beginning of period................ 24,863 378 24 -- 25,265
--------- -------- ------- ------- ---------
Cash and cash equivalents at end of
period............................. $ 16,602 $ 5,704 $ 1,172 $ -- $ 23,478
========= ======== ======= ======= =========
58
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Key Energy Services, Inc.:
We have audited the accompanying consolidated balance sheets of Key Energy
Services, Inc., and subsidiaries as of June 30, 2001 and 2000, and the related
consolidated statements of operations, comprehensive income, cash flows and
stockholders' equity for each of the years in the three-year period ended
June 30, 2001. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
Index at Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Key Energy Services, Inc. and subsidiaries as of June 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
KPMG LLP
Midland, Texas
August 16, 2001
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The following table sets forth the names and ages, as of October 25, 2001,
of each of the Company's executive officers and directors and includes their
current positions.
NAME AGE POSITION
---- -------- --------
Francis D. John........................... 47 Chairman of the Board, President, Chief
Executive Officer and Chief Operating
Officer
David J. Breazzano........................ 45 Director
Kevin P. Collins.......................... 51 Director
William D. Fertig......................... 45 Director
William D. Manly.......................... 78 Director
W. Phillip Marcum......................... 57 Director
Morton Wolkowitz.......................... 73 Director
Thomas K. Grundman........................ 41 Executive Vice President of International
Operations, Chief Financial Officer and
Chief Accounting Officer
James J. Byerlotzer....................... 55 Executive Vice President of Domestic
Operations
Francis D. John has been the President and Chief Executive Officer since
October 1989. In addition, Mr. John has been Chairman of the Board since August
1996. Mr. John re-assumed the duties of Chief Operating Officer in April 1999.
He has been a Director and President since June 1988 and served as the Chief
Financial Officer from October 1989 through July 1997. Before joining the
Company, he was Executive Vice President of Finance and Manufacturing of
Fresenius U.S.A., Inc. Mr. John previously held operational and financial
positions with Unisys, Mack Trucks and Arthur Andersen. He received a BS from
Seton Hall University and an MBA from Fairleigh Dickinson University.
David J. Breazzano has been a Director since October 1997. Mr. Breazzano is
one of the founding principals at DDJ Capital Management, LLC, an investment
management firm established in 1996. Mr. Breazzano previously served as a Vice
President and Portfolio Manager at Fidelity Investments ("Fidelity") from 1990
to 1996. Prior to joining Fidelity, Mr. Breazzano was President and Chief
Investment Officer of the T. Rowe Price Recovery Fund. He is also a director of
Waste Systems International, Inc. and Samuels Jewelers, Inc. He holds a BA from
Union College and an MBA from Cornell University.
Kevin P. Collins has been a Director since March 1996. Mr. Collins has been
a managing member of the Old Hill Company LLC since 1997. From 1992 to 1997, he
served as a principal of JHP Enterprises, Ltd., and from 1985 to 1992, as Senior
Vice President of DG Investment Bank, Ltd., both of which were engaged in
providing corporate finance and advisory services. Mr. Collins was a director of
WellTech, Inc. ("WellTech") from January 1994 until March 1996 when WellTech was
merged into the Company. Mr. Collins is also a director of The Penn Traffic
Company, Metretek Technologies, Inc. and London Fog Industries, Inc. He holds a
BS and an MBA from the University of Minnesota.
William D. Fertig has been a Director since April 2000. Mr. Fertig has been
a Principal, Manager of Sales and Training at McMahan Securities Co. L.P. since
1990. Mr. Fertig previously served as a Senior Vice President and Manager of
Convertible Sales at Drexel Burnham Lambert prior to joining McMahan
60
Securities in 1990, and from 1979 to 1989, served as Vice President and
Convertible Securities Sales Manager at Credit Suisse First Boston. He holds a
BS from Allegheny College and an MBA from NYU Graduate Business School.
William D. Manly has been a Director since December 1989. He retired from
his position as an Executive Vice President of Cabot Corporation in 1986, a
position he had held since 1978. Mr. Manly is a director of Metallamics, Inc.
and CitiSteel, Inc. He holds a BS and an MS from the University of Notre Dame.
W. Phillip Marcum has been a Director since March 1996. Mr. Marcum was a
director of WellTech from January 1994 until March 1996 when WellTech was merged
into the Company. From October 1995 until March 1996, Mr. Marcum was the acting
Chairman of the Board of Directors of WellTech. He has been Chairman of the
Board, President and Chief Executive Officer of Metretek Technologies, Inc.,
formerly known as Marcum Natural Gas Services, Inc. ("Metretek Technologies"),
since January 1991 and is a director of TestAmerica, Inc. He holds a BBA from
Texas Tech University.
Morton Wolkowitz has been a Director since December 1989. Mr. Wolkowitz
served as President and Chief Executive Officer of Wolkow Braker Roofing
Corporation, a company that provided a variety of roofing services, from 1958
through 1989. Mr. Wolkowitz has been a private investor since 1989. He holds a
BS from Syracuse University.
Thomas K. Grundman has been an Executive Vice President and the Chief
Financial Officer since July 1999 and the Chief Accounting Officer since
November 1999. Effective December 1999, Mr. Grundman became Executive Vice
President of International Operations. Mr. Grundman also served as Treasurer
from July 1999 through August 2000. He joined the Company in April 1999 as Sr.
Vice President of Strategic and Business Development. From late 1996 through
April 1999, Mr. Grundman was Senior Vice President at PNC Bank, N.A. where he
ran the Oil and Gas Corporate Finance Group and was responsible for providing
financing and advisory services in all sectors of the energy industry. From 1984
through 1996, Mr. Grundman held several positions at Chase Manhattan Bank and
its predecessor institutions, most recently as a Managing Director in the oil
and gas group. Mr. Grundman holds a BS in Finance from Syracuse University.
James J. Byerlotzer has been Executive Vice President of Domestic Well
Service and Drilling Operations since July 1999. Effective December 1999,
Mr. Byerlotzer's title was changed to Executive Vice President of Domestic
Operations. He joined the Company in September 1998 as Vice President--Permian
Basin Operations after the Company's acquisition of Dawson Production
Services, Inc. ("Dawson"). From February 1997 to September 1998, he served as
the Senior Vice President and Chief Operating Officer of Dawson. From 1981 to
1997, Mr. Byerlotzer was employed by Pride Petroleum Services, Inc. ("Pride").
Beginning in February 1996, Mr. Byerlotzer served as the Vice President--
Domestic Operations of Pride. Prior to that time, he served as Vice
President--Permian Basin of Pride and in various other operating positions in
Pride's Gulf Coast and California operations. Mr. Byerlotzer holds a BA from the
University of Missouri in St. Louis.
Directors are elected at the Company's annual meeting of stockholders and
serve until the next annual meeting of stockholders and until their successors
are elected and qualified. Each executive officer holds office until the first
meeting of the Board of Directors following the annual meeting of stockholders
and until his successor has been duly elected and qualified.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and persons who beneficially own
more than 10% of a registered class of the Company's equity securities, to file
initial reports of ownership on Form 3 and changes in ownership on Forms 4 or 5
with the Securities and Exchange Commission (the "Commission"). Such officers,
directors and 10%
61
stockholders also are required by Commission rules to furnish the Company with
copies of all Section 16(a) reports they file. Based solely on its review of the
copies of such forms furnished to the Company, the Company believes that its
directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements during the fiscal year ended June 30, 2001.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table reflects the compensation
for services to the Company for the years ended June 30, 2001, 2000 and 1999 for
(i) the Chief Executive Officer of the Company and (ii) the other two executive
officers of the Company other than the Chief Executive Officer who were serving
as executive officers at June 30, 2001 (the "Named Executive Officers").
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SHARES ALL OTHER
FISCAL -------------------- OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(1) ($)
--------------------------- -------- --------- -------- --------------- ------------ -------------
Francis D. John .............. 2001 594,885 835,000 67,211(2) 1,460,000 74,998(3)
President, Chief Executive 2000 589,519 307,776 -- 2,000,000 --
Officer and Chief Operating 1999 429,000 -- -- 1,200,000 --
Officer
Thomas K. Grundman ........... 2001 274,966 315,000 -- 135,000 78,519(4)
Executive Vice President of 2000 203,845 100,000 -- 500,000 24,975(5)
International Operations, 1999 35,259(6) -- -- 300,000 --
Chief Financial Officer, and
Chief Accounting Officer
James J. Byerlotzer .......... 2001 249,324 275,000 -- 115,000 101,000(7)
Executive Vice President of 2000 185,000 89,000 -- 300,000 100,250(8)
Domestic Operations 1999 121,153(9) -- -- 260,000 75,000(10)
------------------------
(1) Represents the number of shares issuable pursuant to vested and non-vested
stock options granted during the applicable fiscal year.
(2) Represents reimbursement of (i) medical expenses of $12,186,
(ii) professional fees of $45,025, and (iii) other miscellaneous personal
expenses of $10,000.
(3) Represents premium payments by the Company for life and health insurance.
(4) Represents (i) forgiveness of relocation loan indebtedness and interest to
Mr. Grundman of $52,794, (ii) premium payments made by the Company for life
insurance of $24,725 and (iii) contributions by the Company on behalf of
Mr. Grundman to the Key Energy Services, Inc. 401(k) Savings & Retirement
Plan of $1,000.
(5) Represents (i) premium payments by the Company for life insurance of $24,725
and (ii) contributions by the Company on behalf of Mr. Grundman to the Key
Energy Services, Inc. 401(k) Savings & Retirement Plan of $250.
(6) Mr. Grundman joined the Company as an executive officer in April 1999.
(7) Represents (i) payments to Mr. Byerlotzer pursuant to a non-competition
agreement entered into in connection with the Company's acquisition of
Dawson Production Services, Inc. of $100,000, and (ii) contributions by the
Company on behalf of Mr. Byerlotzer to the Key Energy Services, Inc. 401(k)
Savings & Retirement Plan of $1,000.
62
(8) Represents (i) payments to Mr. Byerlotzer pursuant to a non-competition
agreement entered into in connection with the Company's acquisition of
Dawson Production Services, Inc. of $100,000, and (ii) contributions by the
Company on behalf of Mr. Byerlotzer to the Key Energy Services, Inc. 401(k)
Savings & Retirement Plan of $250.
(9) Mr. Byerlotzer joined the Company as an executive officer in
September 1998.
(10) Represents payments to Mr. Byerlotzer pursuant to a non-competition
agreement entered into in connection with the Company's acquisition of
Dawson Production Services, Inc.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information relating to options
granted under the Key Energy Group, Inc. 1997 Incentive Plan (the "Plan") and
outside the Plan to the Named Executive Officers during fiscal 2001. The Company
did not grant any stock appreciation rights during fiscal 2001.
NUMBER OF INDIVIDUAL GRANTS
SECURITIES OF % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE GRANT DATE
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION PRESENT
NAME GRANTED FISCAL YEAR(1) SHARE DATE VALUE (2)
---- ------------- ----------------- --------- ---------- ----------
Francis D. John.......................... 960,000(3) 37.9% $8.25 08/07/10 $4,339,000
500,000(4) 19.7% $8.25 12/11/10 2,260,000
Thomas K. Grundman....................... 135,000(5) 5.3% $8.25 12/11/10 620,000
James J. Byerlotzer...................... 115,000(6) 4.5% $8.25 12/11/10 520,000
------------------------
(1) Based on options to purchase a total of 2,533,000 of Common Stock granted
during fiscal 2001.
(2) The grant date value of stock options was estimated using the Black-Scholes
option pricing model with the following assumptions: expected
volatility--59%; risk-free interest rate--4.3%; time of exercise--5 years;
and no dividend yield.
(3) These options were granted on August 7, 2000, and vested immediately on the
date of grant.
(4) These options were granted on December 11, 2000 and vested immediately on
the date of grant.
(5) These options were granted on December 11, 2000 and vest in three equal
annual installments commencing on July 1, 2001 as follows: 45,000 on
July 1, 2001; 45,000 on July 1, 2002; and 45,000 on July 1, 2003.
(6) These options were granted on December 11, 2000 and vest in three equal
annual installments commencing on July 1, 2001 as follows: 38,333 on
July 1, 2001; 38,333 on July 1, 2002; and 38,334 on July 1, 2003.
63
AGGREGATED OPTION EXERCISES AND VALUES AS OF FISCAL YEAR END
The following table sets forth certain information as of June 30, 2001
relating to the number and value of (i) options exercised by the Named Executive
Officers and (ii) unexercised options held by the Named Executive Officers.
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE MONEY-OPTIONS
ACQUIRED OPTIONS AT JUNE 30, 2001 AT JUNE 30, 2001 (2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ --------------- ----------- ------------- ----------- -------------
Francis D. John.............. 1,825,000 12,850,875 2,418,333 791,667 $5,148,066 $1,732,709
Thomas K. Grundman........... 200,000 1,934,000 250,000 485,000 $ 585,000 $1,718,650
James J. Byerlotzer.......... 165,000 1,595,550 159,167 350,833 $ 391,931 $1,311,469
------------------------
(1) The dollar values in this column are calculated by determining the
difference between the fair market value of the Company's common stock on
the date of exercise of the relevant options and the exercise price of such
options. The fair market value on the date of exercise is based on the last
sale price of the Company's common stock on the NYSE on such date.
(2) The dollar values in this column are calculated by determining the
difference between the fair market value of the Common Stock for which the
relevant options are exercisable as of the end of the fiscal year and the
exercise price of the options. The fair market value is based on the last
sale price of the Common Stock on the NYSE on June 29, 2001 which was
$10.84.
EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS
Effective as of July 1, 2001, the Company entered into an amended and
restated employment agreement with Mr. John, which provides that Mr. John will
serve as Chairman of the Board, President and Chief Executive Officer of the
Company for a five-year term commencing July 1, 2001 and continuing until
June 30, 2006, with an automatic one-year renewal on each June 30, commencing on
June 30, 2006, unless terminated by the Company or by Mr. John with proper
notice. Under this employment agreement, Mr. John's annual base salary is
$595,000 per year until December 31, 2002 and $695,000 per year thereafter, in
each case subject to increase after annual reviews by the Board of Directors.
This employment agreement also provides that Mr. John will be entitled to
(i) participate in the Company's Performance Compensation Plan, with performance
criteria to be approved by the Compensation Committee, (ii) receive additional
bonuses at the discretion of the Compensation Committee, and (iii) participate
in stock option grants made to the Company's executives. In addition to salary
and bonus, Mr. John is entitled to medical, dental, accident and life insurance,
reimbursement of expenses and various other benefits. To the extent Mr. John is
taxed on any such reimbursement or benefit, the Company will pay Mr. John an
amount which, on an after-tax basis, equals the amount of these taxes.
In the event that Mr. John's employment is terminated by the Company
voluntarily or by nonrenewal, or by Mr. John for "Good Reason," or by either the
Company or Mr. John following a "Change in Control" (in each case as defined in
the employment agreement), Mr. John will be entitled to receive: (i) his accrued
but unpaid salary and bonuses to the date of termination, and a PRO RATA bonus
for the year in which termination occurs; (ii) a severance payment in an amount
equal to five times his average total annual compensation (I.E., salary plus
bonus) for the preceding three years; (iii) immediate vesting and exercisability
of all stock options held by him (to the extent not already vested and
exercisable) for the remainder of the original terms of the options; (iv) any
other amounts or benefits earned, accruing or owing to him, but not yet paid;
and (v) continued participation in medical, dental and life insurance coverage,
as well as the receipt of other benefits to which he was entitled, until the
first to occur of the third year anniversary of the date his employment was
terminated or the date on which he receives
64
equivalent coverage and benefits under the plans and programs of a subsequent
employer (or, in the event of a "Change in Control," an amount in cash equal to
the reasonable expenses that the Company would incur if it were to provide these
benefits for three years). In the event that Mr. John's employment is terminated
as a result of Mr. John's disability, Mr. John will be entitled to receive
(i) through (v) above, except that his severance compensation will be an amount
equal to three times his average total annual compensation for the preceding
three years, reduced by the amount of any Company-paid disability insurance
proceeds paid to Mr. John. In the event that Mr. John's employment is terminated
by the Company for "Cause," as defined in the employment agreement, or by
Mr. John voluntarily or by nonrenewal, he will be entitled to receive only
(i) and (v) above and will forfeit any restricted stock or options not
previously vested. In the event Mr. John's employment is terminated by reason of
his death, he will be entitled to receive (i), (iii), (iv) and (v) above, except
that his family will be entitled to receive the medical and dental insurance
coverage provided in (v) above until the death of Mr. John's spouse. In
addition, if any of the above benefits are subject to the tax imposed by
Section 4999 of the Internal Revenue Code, the Company will reimburse Mr. John
for such tax on an after-tax basis.
The employment agreement specifies that Mr. John may not engage in any
activities that are competitive with the Company for a period of three years
after the termination of his employment.
Pursuant to the employment agreement, the Company will pay to Mr. John, on
or prior to December 31, 2001, a one-time retention incentive bonus equal to the
aggregate amount of all principal and interest on loans previously made by the
Company to Mr. John that were to be forgiven over a ten year period beginning
July 1, 2001, as well as the amount, on an after-tax basis, required to pay the
taxes incurred Mr. John in connection with such payment. The after-tax proceeds
of the bonus will be used to repay such loans. The employment agreement goes on
to provide that if, prior to June 30, 2011, Mr. John is terminated by the
Company for Cause, or by Mr. John voluntarily or by nonrenewal, Mr. John will
repay to the Company a percentage of the retention incentive bonus beginning at
100% during the first year and declining at the rate of 10% each year to 0% on
and after June 30, 2011.
Mr. Grundman entered into an employment agreement with the Company effective
as of July 1, 1999, which was amended effective July 1, 2000. This agreement is
for a three-year term and thereafter for successive one-year terms unless
terminated 60 days prior to the commencement of an extension term. Under this
agreement, Mr. Grundman initially receives an annual base compensation of
$200,000, which can be increased but not decreased, and is eligible for
additional annual incentive bonuses. If, during the term of his employment
agreement, Mr. Grundman is terminated by the Company for any reason other than
for cause, or if he terminates his employment because of a material breach by
the Company or following a change of control of the Company, he will be entitled
to severance compensation equal to his base compensation in effect at the time
of termination payable in equal installments over a 36-month period following
termination; PROVIDED, HOWEVER, that if termination results from a change of
control of the Company, severance compensation will be payable in a lump sum on
the date of termination. Also, if Mr. Grundman is subject to the tax imposed by
Section 4999 of the Internal Revenue code, the Company has agreed to reimburse
him for such tax on an after-tax basis.
Mr. Byerlotzer entered into an employment agreement with the Company
effective as of July 1, 1999 for a three-year term and thereafter for successive
one-year terms unless terminated 30 days prior to the commencement of an
extension term. Under the agreement, Mr. Byerlotzer receives an annual base
compensation of $185,000 and is eligible for additional annual incentive
bonuses. If during the term of his employment agreement Mr. Byerlotzer is
terminated by the Company for any reason other than for "Cause", or if he
terminates his employment because of a material breach by the Company or
following a change of control of the Company, he will be entitled to severance
compensation equal to his base compensation in effect at the time of termination
payable in equal installments over a 24-month period following termination;
PROVIDED, HOWEVER, that if termination results from a change of control of the
Company, severance compensation will be payable in a lump sum on the date of
termination.
65
DIRECTOR COMPENSATION
No director who is also an employee of the Company or any of its
subsidiaries received any fees from the Company for his services as a Director
or as a member of any committee of the Board. During the fiscal year ended
June 30, 2001 all other Directors ("Non-employee Directors") received a fee
equal to $3,000 per month for each month of service and are reimbursed for
travel and other expenses directly associated with Company business.
Additionally, during fiscal 2001 the Company paid the premiums with respect to
life insurance for the benefit of Messrs. Collins and Marcum in the amount of
$2,906 and $5,389, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MANAGEMENT
The following table sets forth as of October 25, 2001, the number of shares
of Common Stock beneficially owned by each (i) each Director, (ii) each Named
Executive Officer, and (iii) all Directors and executive officers of the Company
as a group. Except as noted below, each holder has sole voting and investment
power with respect to all shares of Common Stock listed as owned by such person.
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME OF BENEFICIAL OWNER SHARES (1) SHARES (2)
------------------------ ---------- -------------
Francis D. John (3)................................... 2,613,833 2.5%
Kevin P. Collins (4).................................. 223,405 *
William D. Fertig (5)................................. 30,000 *
William D. Manly (6).................................. 221,042 *
W. Phillip Marcum (7)................................. 223,405 *
David J. Breazzano (8)................................ 208,333 *
Morton Wolkowitz (9).................................. 608,302 *
Thomas K. Grundman (10)............................... 355,000 *
James J. Byerlotzer (11).............................. 263,667 *
Directors and Executive Officers as a group (9
persons)............................................ 4,716,987 4.4%
------------------------
* Less than 1%
(1) Includes all shares with respect to which each Director or executive officer
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares the power to vote or to direct
voting of such shares and/or to dispose or to direct the disposition of such
shares. Includes shares that may be purchased under currently exercisable
stock options and warrants.
(2) Based on 102,357,547 shares of Common stock outstanding at October 25, 2001,
plus, for each beneficial owner, those number of shares underlying currently
exercisable options held by each executive officer or Director.
(3) Includes 2,543,333 shares issuable upon exercise of vested options. Does not
include 666,667 shares issuable pursuant to options that have not vested.
(4) Includes 218,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not vested.
(5) Includes 25,000 shares issuable upon the exercise of vested options. Does
not include 25,000 shares issuable pursuant to options that have not vested.
(6) Includes 218,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not vested.
66
(7) Includes 218,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not vested.
(8) Includes 148,333 shares issuable upon the exercise of vested options. Does
not include 51,667 shares issuable pursuant to options that have not vested.
(9) Includes 118,000 shares issuable upon the exercise of vested options. Does
not include 57,000 shares issuable pursuant to options that have not vested.
(10) Includes 345,000 shares issuable upon the exercise of vested options. Does
not include 390,000 shares issuable pursuant to options that have not
vested.
(11) Includes 241,667 shares issuable upon the exercise of vested options. Does
not include 268,333 shares issuable pursuant to options that have not
vested.
CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of October 25, 2001, certain information
regarding the beneficial ownership of Common Stock by each person, other than
the Company's directors or executive officers, who is known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock.
SHARES BENEFICIALLY OWNED
AT OCTOBER 19, 2001
NAME AND ADDRESS OF BENEFICIAL --------------------------
OWNER, IDENTITY OF GROUP NUMBER PERCENT
------------------------ -------------- ---------
Perkins, Wolf, McDonnell & Co. (1).......................... 11,036,014(2) 10.8%
53 W. Jackson Blvd., Suite 722
Chicago, IL 60604
Berger, L.L.C. (3).......................................... 9,810,240(2) 9.6%
210 University Boulevard
Suite 900
Denver, CO 80206
Mellon Financial Corporation (4)............................ 6,183,414 6.0%
One Mellon Center
Pittsburgh, PA 15258
T. Rowe Price Associates, Inc. (5).......................... 6,735,600 6.6%
100 E. Pratt Street
Baltimore, MD 21202
------------------------
(1) As reported on Schedule 13G filed with the Commission on October 11, 2001.
(2) The Company believes that Perkins, Wolf, McDonell & Co. shares voting power
with respect to 9,810,240 of its shares with Berger, LLC and that,
therefore, the 9,810,240 shares shown as being beneficially owned by Berger,
LLC are the same securities shown as being beneficially owned by Perkins,
Wolf, McDonnell & Co.
(3) As reported on Schedule 13F filed with the Commission on August 14, 2001.
(4) As reported on Schedule 13G filed with the Commission on January 26, 2001.
(5) As reported on Schedule 13G (Amendment No. 1) filed with the Commission on
February 8, 2001.
67
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the negotiation of the terms of a five-year employment
agreement with Mr. Francis D. John, Chairman of the Board, President and Chief
Executive Officer of the Company, and as an inducement to Mr. John to enter into
such employment agreement, the Company entered into a separate agreement with
Mr. John dated as of August 2, 1999, which as amended through June 30, 2001,
provides that $6.5 million in loans previously made by the Company to Mr. John,
together with the accrued interest payable thereon (accruing at a rate equal to
125 basis points above LIBOR, adjusted monthly) will be forgiven ratably during
the ten year period commencing on July 1, 2001 and ending on June 30, 2011. The
agreement provides that the foregoing forgiveness of indebtedness is predicated
and conditioned upon Mr. John remaining employed by the Company during such
period. In addition, in the event that Mr. John is terminated by the Company for
"Cause" (as defined in the agreement), or in the event that Mr, John voluntarily
terminates his employment with the Company, the agreement further provides that
the entire remaining principal balance of these loans, together with accrued
interest payable thereon, will become immediately due and payable by Mr. John.
However, in the event that Mr. John's employment is terminated for "Good
Reason", or as a result of Mr. John's death or "Disability", or as a result of a
"Change in Control" (all as defined in that agreement), the agreement stipulates
that the remaining principal balance outstanding on the loans, together with
accrued interest thereon will be forgiven. This agreement further provides that
with respect to any forgiveness of the payment of principal and interest on the
loans, Mr. John will be entitled to receive a "gross-up" payment in an amount
sufficient for him to pay any federal, state, or local income taxes that may be
due and payable by him with respect to the forgiveness of such indebtedness
(principal and interest). The agreement has been effectively superseded by
Mr. John's new employment agreement that provides for a one-time retention
incentive bonus used to repay all amounts owed under the agreement (See Item
11--Executive Compensation--Employment Agreements with Executive Officers).
In connection with the negotiation of an employment agreement with Thomas K.
Grundman, the Company's Executive Vice President of International Operations,
Chief Financial Officer and Chief Accounting Officer, the Company made a
$240,000 short-term loan and a $150,000 relocation loan to assist
Mr. Grundman's relocation to the Company's executive offices. Interest on these
loans accrues at a rate of 6.125% per annum. The short-term loan has been
repaid. The relocation loan together with accrued interest will be forgiven in
three installments of $50,000 each on July 1, 2000, 2001 and 2002; PROVIDED,
HOWEVER, that if Mr. Grundman's employment is terminated during such period in a
way that (i) triggers severance obligations, all amounts owed shall be
immediately forgiven or (ii) does not trigger severance obligations, all amounts
owed shall be immediately due and payable. This agreement further provides that
with respect to any forgiveness of the payment of principal and interest on the
loans, Mr. Grundman will be entitled to receive a "gross-up" payment in an
amount sufficient for him to pay any federal, state, or local income taxes that
may be due and payable by him with respect to the forgiveness of such
indebtedness (principal and interest).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) Index to Exhibits
The following documents are filed as part of this report:
(1) See Index to Financial Statements set forth in Item 8.
(2) Financial Statements Schedules:
Key Energy Services, Inc.:
Consolidated Supplementary Financial Statement Schedule As of and for
Each of the
68
Three Years Ended June 30, 2001:
Schedule II-Consolidated Valuation and Qualifying
Accounts.......S-1
The supplemental schedules other than the one listed above are
omitted because of the absence of the conditions under which they are
required or because the required information is included in the
Consolidated Financial Statements or Notes thereto.
(3) Exhibits:
3.1 Amended and Restated Articles of Incorporation of the
Company. (Incorporated by reference to the Company's
Registration Statement on Form S-4, Registration
No. 333-369).
3.2 Amended and Restated By-Laws of the Company. (Incorporated
by reference to the Company's Registration Statement on
Form S-4 dated March 8, 1996, Registration No. 333-369).
3.3 Amendment to the Amended and Restated Articles of
Incorporation of the Company. (Incorporated by reference to
Exhibit 3.1 of the Company's Current Report on Form 8-K
dated February 2, 1998, File No. 1-8038).
3.4 Amendment to the Amended and Restated Articles of
Incorporation of the Company. (Incorporated by reference to
Exhibit A of the definitive proxy statement on Schedule 14A
filed by the Company on November 17, 1998, File
No. 1-8038).
3.5 Articles of Amendment to Amended and Restated Articles of
Incorporation of the Company (Incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000, File No. 1-8038).
3.6 Unanimous Consent of the Board of Directors of the Company
dated January 11, 2000, limiting the designation of the
additional authorized shares to common stock (Incorporated
by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000,
File No. 1-8038).
4.1 7% Convertible Subordinated Debenture of the Company due
July 1, 2003. (Incorporated by reference to Exhibit 4.1 of
the Company's Annual Report on Form 10-K dated June 30,
1996, File No. 1-8038).
4.2 Indenture for the 7% Convertible Subordinated Debentures of
the Company due July 1, 2003. (Incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K
dated June 30, 1996, File No. 1-8038).
4.3 First Supplemental Indenture dated as of November 20, 1996
by and between Key Energy Group, Inc. and American Stock
Transfer & Trust Company, as Trustee. (Incorporated by
reference to Exhibit 10(i) to the Company's Quarterly Report
on Form 10-Q dated December 31, 1996, File No. 1-8038).
4.4 Registration Rights Agreement among the Company, McMahan
Securities Co., L.P. and Rausher Pierce Refsnes, Inc., dated
as of July 3, 1996. (Incorporated by reference to Exhibit
4.3 of the Company's Annual Report on Form 10-K dated
June 30, 1996, File No. 1-8038).
4.5 Registration Rights Agreement dated as of March 2, 1996
among the Company and certain of its stockholders.
(Incorporated by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-4, Registration
No. 333-369).
4.6 Form of Common Stock Purchase Warrant to Purchase Key Common
Stock issued in connection with the WellTech Merger.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-4, Registration
No. 333-369).
69
4.7 Indenture dated as of September 25, 1997, among Key Energy
Group, Inc. and American Stock Transfer and Trust Company.
(Incorporated by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 1-8038).
4.8 Registration Rights Agreement among Key Energy Group, Inc.,
Lehman Brothers Inc., and McMahan Securities Co. L.P. dated
as of September 25, 1997. (Incorporated by reference to
Exhibit 10(a) of the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, File
No. 1-8038).
4.9 Indenture dated February 20, 1997 between Dawson Production
Services, Inc. and U.S. Trust Company of Texas, N.A.
(Incorporated by reference to Exhibit 99.10 of the Company's
Current Report on Form 8-K dated September 28, 1998, File
No. 1-8038).
4.10 Supplemental Indenture dated September 21, 1998, among Key
Energy Group, Inc., its Subsidiaries and U.S. Trust Company
of Texas, N.A. (Incorporated by reference to Exhibit 99.11
of the Company's Current Report on Form 8-K dated September
28, 1998, File No. 1-8038).
4.11 Warrant Agreement dated as of January 22, 1999 between the
Company and The Bank of New York, a New York banking
corporation as warrant agent. (Incorporated by reference to
Exhibit 99(b) of the Company's Form 8-K filed on February 3,
1999, File No. 1-8038).
4.12 Indenture dated as of January 22, 1999 between the Company
and The Bank of New York as trustee. (Incorporated by
reference to Exhibit 99(c) of the Company's Form 8-K filed
on February 3, 1999, File No. 1-8038).
4.13 Registration Rights Agreement dated January 22, 1999 by and
among the Registrant, certain of its subsidiaries, and
Lehman Brothers, Inc., Bear, Stearns & Co. Inc.,
F.A.C./Equities, a division of First Albany Corporation, and
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated. (Incorporated by reference to Exhibit 99(d) of
the Company's Form 8-K filed on February 3, 1999, File
No. 1-8038).
4.14 Warrant Registration Rights Agreement dated January 22,
1999, by and among the Company and Lehman Brothers Inc.,
Bear, Stearns & Co. Inc., F.A.C./Equities, a division of
First Albany Corporation, and Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated. (Incorporated by
reference to Exhibit 99(e) of the Company's Form 8-K filed
on February 3, 1999, File No. 1-8038).
4.15 Indenture dated March 6, 2001 between the Company and The
Chase Manhattan Bank, a New York banking corporation, as
Trustee (Incorporated by reference to Exhibit 4.1 of the
Company's Form 8-K filed on March 20, 2001, File
No. 1-8038)
4.16 Registration Rights Agreement dated March 6, 2001 among the
Company, certain of its subsidiaries, Lehman Brothers, Inc.,
and Bear Stearns & Co., Inc. (Incorporated by reference to
Exhibit 99.2 of the Company's Current Report of Form 8-K
dated March 20, 2001 File No. 1-8038)
10.1 Employment Agreement between the Company and D. Kirk
Edwards, dated as of July 1, 1996. (Incorporated by
reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended June 30, 1997, File
No. 1-8038).
70
10.2 Amended and Restated Senior Credit Facility among Key Energy
Group, Inc. and several other financial institutions dated
as of June 6, 1997 as amended and restated through November
6, 1997. (Incorporated by reference to Exhibit 10(s) of the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997, File No. 1-8038).
10.3 First Amendment to the Amended and Restated Credit Agreement
dated as of June 6, 1997, as amended and restated through
November 6, 1997 dated December 3, 1997. (Incorporated by
reference to Exhibit 10(t) of the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997, File
No. 1-8038).
10.4 Escrow Agreement among Key Energy Group, Inc., Lehman
Brothers Inc., Lehman Commercial Paper Inc. and The Bank of
New York, dated as of September 14, 1998 (Incorporated by
reference to Exhibit 99.6 of the Company's Current Report on
Form 8-K dated September 28, 1998, File No. 1-8038).
10.5 $550,000,000 Second Amended and Restated Senior Credit
Facility, among Key Energy Group, Inc., PNC Bank, National
Association, Norwest Bank Texas, N.A., PNC Capital Markets,
Inc. and the several lenders from time to time parties
thereto, dated as of June 6, 1997, as amended and restated
through September 14, 1998 (Incorporated by reference to
Exhibit 99.7 of the Company's Current Report on Form 8-K
dated September 28, 1998, File No. 1-8038).
10.6 Amended and Restated Master Guarantee and Collateral
Agreement made by Key Energy Group, Inc. and certain of its
subsidiaries in favor of Norwest Bank Texas, N.A., dated as
of June 6, 1998, as amended and restated through September
14, 1998 (Incorporated by reference to Exhibit 99.8 of the
Company's Current Report on Form 8-K dated September 28,
1998, File No. 1-8038).
10.7 Intercreditor and Collateral Agency Agreement, dated as of
September 14, 1998. (Incorporated by reference to Exhibit
99.9 of the Company's Current Report on Form 8-K dated
September 28, 1998, File No. 1-8038).
10.8 Consulting Agreement, dated as of October 7, 1998, by and
among Key Energy Group, Inc. and Michael E. Little.
(Incorporated by reference to Exhibit 10(a) of the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, File No. 1-8038).
10.9 Employment Agreement, dated November 13, 1998, by and
between Key Energy Group, Inc. and James J. Byerlotzer.
(Incorporated by reference to Exhibit 10(b) the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, File No. 1-8038).
10.10 Non-Compete Agreement, dated November 13, 1998, by and
between Key Energy Group, Inc. and James J. Byerlotzer.
(Incorporated by reference to Exhibit 10(c) of the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, File No. 1-8038).
10.11 Non-Compete Agreement, dated October 20, 1998, by and
between Key Energy Group, Inc. and Joseph B. Eustace.
(Incorporated by reference to Exhibit 10(e) of the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, File No. 1-8038).
10.12 Consulting Agreement, dated as of November 12, 1998, by and
among Key Energy Group, Inc. and C. Ron Laidley.
(Incorporated by reference to Exhibit 10(f) of the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, File No. 1-8038).
71
10.13 Key Energy Group, Inc. Performance Compensation Plan.
(Incorporated by reference to Exhibit 10(g) of the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1998, File No. 1-8038).
10.14 First Amendment, dated as of December 3, 1997, to the Second
Amended and Restated Senior Credit Facility, dated as of
June 6, 1997, as amended and restated through November 6,
1997. (Incorporated by reference to Exhibit 10(h) of the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, File No. 1-8038).
10.15 Second Amendment, dated as of December 29, 1998, to the
Second Amended and Restated Senior Credit Facility, 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. (Incorporated by reference to Exhibit
10(i) of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1998, File No. 1-8038).
10.16 Purchase Agreement dated January 19, 1999 by and among the
Registrant, certain of its subsidiaries, Lehman Brothers,
Inc., Bear, Stearns & Co. Inc., First Albany Corporation,
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated. (Incorporated by reference to Exhibit 99(a) of
the Company's Form 8-K filed on February 3, 1999, File
No. 1-8038).
10.17 Employment Agreement between the Company and William C.
McCurdy dated as of January 4, 1999. (Incorporated by
reference to Exhibit 10(f) of the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1998, File
No. 1-8038).
10.18 Employment Agreement between the Company and Michael R.
Furrow dated as of January 4, 1999. (Incorporated by
reference to Exhibit 10(g) of the Company's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1998, File
No. 1-8038).
10.19 Purchase Agreement, among the Company, Green-Cohn Group,
LLC, ZPG Securities L.L.C. and DFG Corporation, dated as of
April 15, 1999. (Incorporated by reference to Exhibit 99.2
of the Company's Current Report on Form 8-K dated April 8,
1999, File No. 1-8038).
10.20 Commitment Letter, between the Company and PNC Investment
Corp., dated April 15, 1999. (Incorporated by reference to
Exhibit 99.3 of the Company's Current Report on Form 8-K
dated April 8, 1999, File No. 1-8038).
10.21 Fee letter, between the Company and PNC Capital Markets,
Inc., dated April 15, 1999. (Incorporated by reference to
Exhibit 99.4 of the Company's Current Report on Form 8-K
dated April 8, 1999, File No. 1-8038).
10.22 Third Amendment, dated as of April 8, 1999, to the Second
Amended and Restated Senior Credit Facility, among the
Company, the several lenders from time to time parties
thereto, PNC Bank, National Association, as Administrative
Agent, Norwest Bank Texas, N.A., as Collateral Agent and PNC
Capital Markets, Inc., as Arranger. (Incorporated by
reference to Exhibit 99.5 of the Company's Current Report on
Form 10-K dated April 8, 1999, File No. 1-8038).
72
10.23 Fourth Amendment, dated as of April 15, 1999, to the Second
Amended and Restated Senior Credit Facility, among the
Company, the several lenders from time to time parties
thereto, PNC Bank, National Association, as Administrative
Agent, Norwest Bank Texas, N.A., as Collateral Agent and PNC
Capital Markets, Inc., as Arranger. (Incorporated by
reference to Exhibit 99.6 of the Company's Current Report on
Form 10-K dated April 8, 1999, File No. 1-8038).
10.24 Underwriting Agreement, dated May 4, 1999, among the
Company, and Friedman, Billings, Ramsey & Co., Inc., for
itself and as representative for the other underwriter named
in Schedule I thereto. (Incorporated by reference to Exhibit
1.1 of the Company's Current Report on Form 8-K dated May 4,
1999, File No. 1-8038).
10.25 Letter Agreement, dated May 4, 1999, among the Company, PNC
Capital Markets, Inc. and PNC Investment Corp. (Incorporated
by reference to Exhibit 99.1 of the Company's Current Report
on Form 8-K dated May 4, 1999, File No 1-8038).
10.26 Fifth Amendment, dated as of May 10, 1999, to the Second
Amended and Restated Senior Credit Facility, among the
Company, the several lenders from time to time parties
thereto, PNC Bank, National Association, as Administrative
Agent, Norwest Bank Texas, N.A., as Collateral Agent, and
PNC Capital Markets, Inc., as Arranger. (Incorporated by
reference to Exhibit 10.91 of the Company's Annual Report on
Form 10-K dated June 30, 1999, File No. 1-8038).
10.27 Consulting Agreement between Key Energy Group, Inc. and The
Old Hill Company LLC dated as of December 2, 1998.
(Incorporated by reference to Exhibit 10.92 of the Company's
Annual Report on Form 10-K dated June 30, 1999, File
No. 1-8038).
10.28 Amended and Restated Employment Agreement dated July 1,
1999, between Francis D. John and Key Energy Services, Inc.
(Incorporated by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, File No. 1-8038).
10.29 Employment Agreement dated August 5, 1999, between Thomas K.
Grundman and Key Energy Services, Inc. (Incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File
No. 1-8038).
10.30 Employment Agreement dated July 1, 1999, between Danny R.
Evatt and Key Energy Services, Inc.(Incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File
No. 1-8038).
10.31 Employment Agreement dated July 1, 1999, between James J.
Byerlotzer and Key Energy Services, Inc. (Incorporated by
reference to Exhibit 10.4 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File
No. 1-8038).
10.32 Agreement dated as of August 2, 1999, between Francis D.
John and Key Energy Services, Inc. (Incorporated by
reference to Exhibit 10.5 of the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999, File
No. 1-8038).
73
10.33 Promissory Note dated August 3, 1999, made by Thomas K.
Grundman in favor of Key Energy Services, Inc. (Incorporated
by reference to Exhibit 10.6 of the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File
No. 1-8038).
10.34 Demand Note dated August 3, 1999, made by Thomas K. Grundman
in favor of Key Energy Services, Inc. (Incorporated by
reference to Exhibit 10.7 of the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999, File
No. 1-8038).
10.35 Confidential Separation and Release Agreement dated as of
July 1, 1999, between Key Energy Services, Inc. and Stephen
E. McGregor (Incorporated by reference to Exhibit 10.8 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, File No. 1-8038).
10.36 Amendment No. 1 dated as of December 1, 1999, to Agreement
dated as of August 2, 1999, between Francis D. John and Key
Energy Services, Inc. (Incorporated by reference to Exhibit
10.1 of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999, File No. 1-8038).
10.37 Amendment No. 1 dated as of November 24, 1999, to the
Confidential Separation and Release Agreement dated as of
July 1, 1999, between Key Energy Services, Inc. and Stephen
E. McGregor (Incorporated by reference to Exhibit 10.2 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999, File No. 1-8038).
10.38 Sixth Amendment, dated as of July 14, 1999, to the Second
Amended and Restated Senior Credit Facility, among the
Company, the several lenders from time to time parties
thereto, PNC Bank, National Association, as Administrative
Agent, Norwest Bank Texas, N.A., as Collateral Agent, and
PNC Capital Markets, Inc., as Arranger (Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000, File
No. 1-8038).
10.39 Seventh Amendment, dated as of March 1, 2000, to the Second
Amended and Restated Senior Credit Facility, among the
Company, the several lenders from time to time parties
thereto, PNC Bank, National Association, as Administrative
Agent, Norwest Bank Texas, N.A., as Collateral Agent, and
PNC Capital Markets, Inc., as Arranger (Incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000, File
No. 1-8038).
10.40 Production and Delivery Agreement dated March 31, 2000,
among Odessa Exploration Incorporated and Norwest Energy
Capital, Inc., (Incorporated by reference to Exhibit 10.3 of
the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000, File No. 1-8038).
10.41 Agreement dated March 31, 2000, among Odessa Exploration
Incorporated, Norwest Energy Capital, Inc. and the Company
(Incorporated by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, File No. 1-8038).
10.42 Underwriting Agreement dated June 27, 2000, among the
Company and Lehman Brothers Inc. for itself and as
Representative of the several underwriters named in Schedule
I thereto (Incorporated by reference to Exhibit 1.1 of the
Company's Current Report on Form 8-K dated June 29, 2000,
File No. 1-8038).
74
10.43 Membership Interest Exchange Agreement dated April 5, 2000
by and between Tetra Services, Inc. and Brooks Well
Servicing, Inc. (Incorporated by reference to Exhibit 10.82
of the Company's Annual Report on Form 10-K dated June 30,
2000, File No. 1-8038).
10.44 Amendment No. 2 dated as of June 16, 2000 to Agreement dated
as of August 2, 1999, as amended between Francis D. John
and Key Energy Services, Inc. (Incorporated by reference to
Exhibit 10.83 of the Company's Annual Report on Form 10-K
dated June 20, 2000, File No. 1-8038).
10.45 Amendment dated July 1, 2000 to Employment Agreement dated
August 5, 1999 between Thomas K. Grundman and Key Energy
Services, Inc. (Incorporated by reference to Exhibit 10.1 of
the Company's Quarterly report on Form 10-Q for the quarter
ended September 30, 2000, File No. 1-8038).
10.46 Letter Agreement Amendment dated July 1, 2000 to the Demand
Note dated August 3, 1999 made by Thomas K. Grundman in
favor of Key Energy Services, Inc. (Incorporated by
reference to Exhibit 10.2of the Company's Quarterly Report
of Form 10-Q for the quarter ended September 30, 2000, File
No. 1-8038).
10.47 Purchase Agreement dated March 1, 2001 among the Company,
certain of its subsidiaries, Lehman Brothers, Inc., and Bear
Stearns & Co., Inc. (Incorporated by reference to Exhibit
1.1 of the Company's Form 8-K filed on March 20, 2001, File
No. 1-8038)
10.48 Eighth Amendment to the Second Amended and Restated Senior
Credit Facility, dated as of June 6, 1997, as amended and
restated through September 14, 1998 and as further amended,
among Key Energy Group, Inc. (now known as Key Energy
Services, Inc.), the several Lenders from time to time
parties thereto, PNC Bank, National association, as
Administrative Agent, Norwest Bank Texas, N.A., as
Collateral Agent and PNC Capital markets, Inc., as Arranger.
(Incorporated by reference to Exhibit 99.3 of the Company's
Form 8-K filed on March 20, 2001, File No. 1-8038)
10.49 Amendment No. 3 dated as of May 14, 2001 to Agreement dated
as of August 2, 1999, as amended, between Francis D. John
and Key Energy Services, Inc.
*10.50 Second Amended and Restated Employment Agreement dated
October 16, 2001 between Francis D. John and Key Energy
Services, Inc.
21 Significant Subsidiaries of the Company.
23 Consent of KPMG LLP.
------------------------
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2001.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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)
Dated: October 26, 2001 By: /s/ FRANCIS D. JOHN
-----------------------------------------
Francis D. John
CHAIRMAN OF THE BOARD, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: October 26, 2001 By: /s/ FRANCIS D. JOHN
-----------------------------------------
Francis D. John
CHAIRMAN OF THE BOARD, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER
Dated: October 26, 2001 By: /s/ THOMAS K. GRUNDMAN
-----------------------------------------
Thomas K. Grundman
CHIEF FINANCIAL OFFICER
AND CHIEF ACCOUNTING OFFICER
Dated: October 26, 2001 By: /s/ MORTON WOLKOWITZ
-----------------------------------------
Morton Wolkowitz
DIRECTOR
Dated: October 26, 2001 By: /s/ DAVID J. BREAZZANO
-----------------------------------------
David J. Breazzano
DIRECTOR
Dated: October 26, 2001 By: /s/ WILLIAM MANLY
-----------------------------------------
William Manly
DIRECTOR
Dated: October 26, 2001 By: /s/ KEVIN P. COLLINS
-----------------------------------------
Kevin P. Collins
DIRECTOR
Dated: October 26, 2001 By: /s/ W. PHILLIP MARCUM
-----------------------------------------
W. Phillip Marcum
DIRECTOR
Dated: October 26, 2001 By: /s/ WILLIAM D. FERTIG
-----------------------------------------
William D. Fertig
DIRECTOR
76
SCHEDULE II
KEY ENERGY SERVICES, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
AS OF JUNE 30,
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF YEAR EXPENSES OTHER ACCOUNTS(A) DEDUCTIONS END OF YEAR
----------------- ---------- ----------------- ---------- -----------
(IN THOUSANDS)
Allowance for doubtful accounts:
2001.............................. $3,189 $1,263 $ -- $ 370 $4,082
2000.............................. 6,790 1,648 -- 5,249 3,189
1999.............................. 2,843 5,928 3,112 5,093 6,790
------------------------
(a) Additions to allowance for doubtful accounts established through purchase
accounting.
S-1