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Key Energy Services, Inc. INDEXUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from toCommission file number 1-8038
KEY ENERGY SERVICES, INC.
(Exact
(Exact name of registrant as specified in its charter)Maryland 04-2648081 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6 Desta Drive, Midland, Texas 79705 ----------------------------------------------------- (Address of principal executive offices) (ZIP Code)
Maryland 04-2648081 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)
6 Desta Drive, Midland, Texas
(Address of principal executive offices)
79705
(ZIP Code)
Registrant's telephone number including area code: (915) 620-0300Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
/X/ý No/ /oIndicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes ý No o
Common Shares outstanding at
November 12, 2002 - 128,288,527KEY ENERGY SERVICES, INC.May 14, 2003: 129,477,901
Key Energy Services, Inc.
INDEX2
Key Energy Services, Inc.
Consolidated Balance Sheets
March 31, 2003 December 31, 2002 (Unaudited) (thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 3,562 $ 9,044 Accounts receivable, net of allowance for doubtful accounts of $4,768 and $4,439, at March 31, 2003 and December 31, 2002, respectively 151,534 141,958 Inventories 11,684 10,243 Prepaid expenses and other current assets 13,713 14,329 Total current assets 180,493 175,574 Property and equipment: Well servicing equipment 928,733 935,911 Contract drilling equipment 129,510 128,199 Motor vehicles 78,987 79,110 Oil and natural gas properties and other related equipment, successful efforts method 48,365 48,362 Furniture and equipment 53,853 51,349 Buildings and land 49,274 48,922 Total property and equipment 1,288,722 1,291,853 Accumulated depreciation and depletion (359,548 ) (335,348 ) Net property and equipment 929,174 956,505 Goodwill, net 337,746 322,270 Deferred costs, net 12,783 13,503 Notes and accounts receivable—related parties 322 251 Other assets 32,096 33,899 Total assets $ 1,492,614 $ 1,502,002 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 26,903 $ 28,818 Other accrued liabilities 59,768 57,823 Accrued interest 5,466 15,226 Current portion of long-term debt and capital lease obligations 6,637 7,008 Total current liabilities 98,774 108,875 Long-term debt, less current portion 479,300 472,336 Capital lease obligations, less current portion 13,132 14,221 Deferred revenue 7,590 8,460 Non-current accrued expenses 43,922 40,477 Deferred tax liability 150,688 161,265 Commitments and contingencies — —
Stockholders' equity:
Common stock, $0.10 par value: 200,000,000 shares authorized, 128,887,088 and 128,757,963 shares issued at March 31, 2003 and December 31, 2002, respectively 12,899 12,876 Additional paid-in capital 673,867 673,249 Treasury stock, at cost: 416,666 shares at March 31, 2003 and December 31, 2002 (9,682 ) (9,682 ) Accumulated other comprehensive loss (41,458 ) (45,431 ) Retained earnings 63,582 65,356 Total stockholders' equity 699,208 696,368 Total liabilities and stockholders' equity $ 1,492,614 $ 1,502,002 See the accompanying notes which are an integral part of these consolidated financial statements.
3
Key Energy Services, Inc.
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 2003 2002 (thousands, except per share data) REVENUES: Well servicing $ 197,600 $ 154,062 Contract well drilling 16,153 14,334 Other 1,371 1,845 Total revenues 215,124 170,241
COSTS AND EXPENSES:
Well servicing 146,110 113,032 Contract drilling 11,943 11,392 Depreciation, depletion and amortization 25,601 19,889 General and administrative 22,118 13,694 Interest 11,048 9,875 Other expenses 915 951 (Gain) loss on retirement of debt (2 ) 8,468 Total costs and expenses 217,733 177,301 Income (loss) before income taxes (2,609 ) (7,060 ) Income tax benefit (expense) 835 2,434
NET INCOME (LOSS)
$
(1,774
)
$
(4,626
)
EARNINGS (LOSS) PER SHARE:
Net income (loss) Basic $ (0.01 ) $ (0.04 ) Diluted $ (0.01 ) $ (0.04 )
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 128,399 108,551 Diluted 128,399 108,551 See the accompanying notes which are an integral part of these consolidated financial statements
4
Key Energy Services, Inc.
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 2002 (thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,774 ) $ (4,626 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 25,601 19,889 Amortization of deferred debt issuance costs, discount and premium 776 277 Deferred income tax expense (benefit) (895 ) 3,076 Loss on sale of assets 56 146 (Gain) loss on retirement of debt (2 ) 8,468 Change in assets and liabilities, net of effects from acquisitions: (Increase) decrease in accounts receivable (10,113 ) 23,848 Decrease in other current assets 50 69 Decrease in accounts payable, accrued interest and accrued expenses (10,189 ) (14,963 ) Other assets and liabilities 4,551 (6,298 ) Net cash provided by operating activities 8,061 29,886
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures—well servicing (15,693 ) (13,323 ) Capital expenditures—contract drilling (930 ) (3,126 ) Capital expenditures—other (2,595 ) (2,064 ) Proceeds from sale of fixed assets 955 307 Acquisitions—well servicing, net of cash acquired (559 ) (8,202 ) Net cash used in investing activities (18,822 ) (26,408 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (6,065 ) (123,782 ) Repayment of capital lease obligations (2,427 ) (2,732 ) Proceeds from long-term debt 13,000 159,500 Proceeds paid for debt issuance costs — (1,585 ) Proceeds from exercise of stock options 631 194 Other (25 ) 5 Net cash provided by financing activities 5,114 31,600 Effect of exchange rates on cash 165 (77 )
Net increase (decrease) in cash and cash equivalents
(5,482
)
35,001
Cash and cash equivalents at beginning of period 9,044 7,966
Cash and cash equivalents at end of period
3,562
$
42,967
See the accompanying notes which are an integral part of these consolidated financial statements.
5
Key Energy Services, Inc.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2003 2002 (thousands) NET LOSS $ (1,774 ) $ (4,626 ) OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Oil and natural gas derivatives adjustment, net of tax (15 ) (459 ) Amortization of oil and natural gas derivatives, net of tax 677 (323 ) Foreign currency translation gain (loss), net of tax 3,311 (19,308 ) COMPREHENSIVE INCOME (LOSS), NET OF TAX $ 2,199 $ (24,716 ) See the accompanying notes which are an integral part of these consolidated financial statements.
6
KEY ENERGY SERVICES, INC.CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 JUNE 30, 2002 ------------- ------------- (UNAUDITED) (THOUSANDS, EXCEPT SHARE DATA)ASSETS Current assets: Cash
Notes to Consolidated Financial Statements
March 31, 2003 andcash equivalents............................................................... $ 3,828 $ 54,147 Accounts receivable, net of allowance for doubtful accounts of $3,986 and $3,969, respectively........................................................................... 140,511 117,907 Inventories............................................................................. 8,969 7,776 Prepaid expenses and other current assets............................................... 18,114 12,243 ----------- ----------- Total current assets...................................................................... 171,422 192,073 ----------- ----------- Property and equipment: Well servicing equipment................................................................ 922,159 776,271 Contract drilling equipment............................................................. 123,568 124,191 Motor vehicles.......................................................................... 78,253 68,977 Oil and natural gas properties and other related equipment, successful efforts method... 44,479 44,439 Furniture and equipment................................................................. 44,835 38,979 Buildings and land...................................................................... 49,060 40,247 ----------- ----------- Total property and equipment.............................................................. 1,262,354 1,093,104 Accumulated depreciation and depletion.................................................... (311,169) (284,204) ----------- ----------- Net property and equipment................................................................ 951,185 808,900 ----------- ----------- Goodwill, net........................................................................... 320,550 201,069 Deferred costs, net..................................................................... 13,993 12,580 Notes and accounts receivable - related parties........................................ 712 274 Other assets............................................................................ 33,328 28,099 ----------- ----------- Total assets.............................................................................. $ 1,491,190 $ 1,242,995 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................................ $ 21,090 $ 24,625 Other accrued liabilities............................................................... 57,452 49,465 Accrued interest........................................................................ 5,310 14,864 Current portion of long-term debt and capital lease obligations......................... 7,311 7,674 ----------- ----------- Total current liabilities................................................................. 91,163 96,628 ----------- ----------- Long-term debt, less current portion...................................................... 482,520 420,717 Capital lease obligations, less current portion........................................... 14,621 15,219 Deferred revenue.......................................................................... 9,223 10,001 Non-current accrued expenses.............................................................. 40,922 13,574 Deferred tax liability.................................................................... 160,630 149,990 Commitments and contingencies............................................................. - - Stockholders' equity: Common stock, $.10 par value; 200,000,000 shares authorized, 128,525,250 and 110,308,463 shares issued at September 30, 2002 and June 30, 2002, respectively........ 12,853 11,031 Additional paid-in capital.............................................................. 671,874 514,752 Treasury stock, at cost; 416,666 shares at September 30, 2002 and June 30, 2002......... (9,682) (9,682) Accumulated other comprehensive loss.................................................... (47,156) (48,967) Retained earnings....................................................................... 64,222 69,732 ----------- ----------- Total stockholders' equity................................................................ 692,111 536,866 ----------- ----------- Total liabilities and stockholders' equity................................................ $ 1,491,190 $ 1,242,995 =========== ===========SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 3KEY ENERGY SERVICES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 2002 2001 --------- --------- (THOUSANDS, EXCEPT PER SHARE DATA)REVENUES: Well servicing.......................................................................... $ 184,887 $ 212,501 Contract well drilling.................................................................. 15,479 33,636 Other................................................................................... 1,701 3,100 --------- --------- Total revenues............................................................................ 202,067 249,237 --------- --------- COSTS AND EXPENSES: Well servicing.......................................................................... 131,271 135,761 Contract drilling....................................................................... 10,957 21,188 Depreciation, depletion and amortization................................................ 25,802 17,869 General and administrative.............................................................. 26,008 15,147 Interest................................................................................ 11,262 11,949 Other expenses.......................................................................... 1,030 1,185 Gain on retirement of debt.............................................................. (10) (287) --------- --------- Total costs and expenses.................................................................. 206,320 202,812 --------- --------- Income (loss) before income taxes......................................................... (4,253) 46,425 Income tax benefit (expense).............................................................. 1,616 (17,249) --------- --------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE................ (2,637) 29,176 Cumulative effect on prior years of a change in accounting principle, less applicable income taxes of $1,761................................................................... (2,873) - --------- --------- NET INCOME (LOSS)......................................................................... $ (5,510) $ 29,176 ========= ========= EARNINGS (LOSS) PER SHARE: Basic - before cumulative effect of a change in accounting principle.................... $ (0.02) $ 0.29 Cumulative effect of a change in accounting principle, net of tax....................... (0.02) - --------- --------- Basic - after cumulative effect of a change in accounting principle..................... $ (0.04) $ 0.29 ========= ========= Diluted - before cumulative effect of a change in accounting principle.................. $ (0.02) $0.28 Cumulative effect of a change in accounting principle, net of tax....................... (0.02) - --------- --------- Diluted - after cumulative effect of a change in accounting principle................... $ (0.04) $ 0.28 ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic................................................................................... 122,475 101,727 Diluted................................................................................. 122,475 103,829SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS 4KEY ENERGY SERVICES, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 2002 2001 ---------- --------- (THOUSANDS)CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................................................... $ (5,510) $ 29,176 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:............................................................................ Depreciation, depletion and amortization................................................ 25,802 17,869 Amortization of deferred debt issuance costs, discount and premium...................... 967 905 Deferred income taxes................................................................... (1,616) 14,707 (Gain) loss on sale of assets........................................................... 145 (1,062) Gain on retirement of debt.............................................................. (10) (287) Cumulative effect on prior years of a change in accounting principle, net of tax........ 2,873 - CHANGE IN ASSETS AND LIABILITIES, NET OF EFFECTS FROM ACQUISITIONS: Increase in accounts receivable...................................................... (1,290) (7,900) (Increase) decrease in other current assets.......................................... 5,035 (170) Decrease in accounts payable, accrued interest and accrued expenses.................. (21,246) (1,988) Other assets and liabilities......................................................... 2,727 (5,705) ---------- --------- Net cash provided by operating activities............................................... 7,877 45,545 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - well servicing................................................... (12,115) (11,911) Capital expenditures - contract drilling................................................ (191) (8,154) Capital expenditures - other............................................................ (4,286) (3,424) Proceeds from sale of fixed assets...................................................... 82 3,416 Acquisitions - well servicing, net of cash acquired..................................... (98,093) (2,673) Net cash used in investing activities................................................... (114,603) (22,746) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt............................................................. (1,211) (66,490) Repayment of capital lease obligations.................................................. (2,387) (2,455) Proceeds from long-term debt............................................................ 63,000 46,000 Debt issuance costs..................................................................... (2,355) - Proceeds from exercise of stock options................................................. 447 541 Other................................................................................... (38) - ---------- --------- Net cash provided by (used in) financing activities..................................... 57,456 (22,404) ---------- --------- Effect of exchange rates on cash........................................................ (1,049) - Net increase (decrease) in cash and cash equivalents.................................... (50,319) 395 Cash and cash equivalents at beginning of period........................................ 54,147 2,098 ---------- --------- Cash and cash equivalents at end of period.............................................. $ 3,828 $ 2,493 ========== =========SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 5KEY ENERGY SERVICES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED SEPTEMBER 30, --------------------------- 2002 2001 ---------- --------- (THOUSANDS)NET INCOME (LOSS)......................................................................... $ (5,510) $ 29,176 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Oil and natural gas derivatives adjustment, net of tax (See Note 7)..................... (344) 176 Amortization of oil and natural gas derivatives, net of tax (See Note 7)................ 210 (33) Foreign currency translation gain (loss), net of tax.................................... 1,945 (23) ---------- --------- COMPREHENSIVE INCOME (LOSS), NET OF TAX................................................... $ (3,699) $ 29,296 ========== =========SEE THE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 6KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30,2002AND 20011. SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATIONBasis of Presentation
The consolidated financial statements of Key Energy Services, Inc. (the "Company", or "Key") and its wholly-owned subsidiaries as of
September 30, 2002March 31, 2003 and for the three month periods endedSeptember 30,March 31, 2003 and 2002and 2001are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the Company'sAnnualTransition Report on Form 10-K for thefiscal yearsix months endedJune 30,December 31, 2002. The results of operations for the three month period endedSeptember 30, 2002March 31, 2003 are not necessarily indicative of the results of operations for the full fiscal year endingJune 30,December 31, 2003.RECLASSIFICATIONSReclassifications
Certain reclassifications have been made to the consolidated financial statements for the three months ended
September 30, 2001March 31, 2002 to conform to the presentation for the three months endedSeptember 30, 2002.March 31, 2003. The reclassifications consist primarily ofreclassifying certain items from general and administrative expense to direct expenses, and reclassifyinggains (losses) on the retirement of debt which are now being recorded as operating expenses rather than as extraordinary items in accordance with SFAS 145, which the Company adopted on July 1, 2002 (See Note 11).7KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30,2. ASSET RETIREMENT OBLIGATIONS—SFAS 143
On July 1, 2002,
AND 2001 2. EARNINGS PER SHARE Thethe Companyaccounts for earnings per share based uponadopted Statement of Financial Accounting Standards No.128, "Earnings per Share"143, Accounting for Asset Retirement Obligations ("SFAS128"143").Under SFAS 128, basic earnings per common share are determined by dividing net earnings applicableThe new standard requires the Company tocommon stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming exercise of dilutive stock options and warrants and conversion of dilutive outstanding convertible securities using the "as if converted" method.
THREE MONTHS ENDED SEPTEMBER 30, ------------------------- 2002 2001 --------- ---------- (THOUSANDS, EXCEPT PER SHARE DATA)BASIC EPS COMPUTATION: NUMERATOR Net income (loss) before cumulative effect of a change in accounting principle.......................................... $ (2,637) $ 29,176 Cumulative effect of a change in accounting principle, net of tax........................................................... (2,873) - --------- ---------- Net income (loss).............................................. $ (5,510) $ 29,176 ========= ========== DENOMINATOR Weighted average common shares outstanding..................... 122,475 101,727 --------- ---------- BASIC EPS: Net income (loss) before cumulative effect of a change in accounting principle.......................................... $ (0.02) $ 0.29 Cumulative effect of a change in accounting principle, net of tax........................................................... (0.02) - --------- ---------- Net income (loss).............................................. $ (0.04) $ 0.29 ========= ========== DILUTED EPS COMPUTATION: NUMERATOR Net income (loss) before cumulative effect of a change in accounting principle.......................................... $ (2,637) $ 29,176 Cumulative effect of a change in accounting principle, net of tax........................................................... (2,873) - --------- ---------- Net income (loss).............................................. $ (5,510) $ 29,176 ========= ========== DENOMINATOR Weighted average common shares outstanding:.................... 122,475 101,727 Warrants....................................................... - 577 Stock options.................................................. - 1,525 --------- ---------- 122,475 103,829 --------- ---------- DILUTED EPS: Net income (loss) before cumulative effect of a change in accounting principle.......................................... $ (0.02) $ 0.28 Cumulative effect of a change in accounting principle, net of tax........................................................... (0.02) - --------- ---------- Net income (loss).............................................. $ (0.04) $ 0.28 ========= ==========The diluted earnings per share calculationsrecognize a liability for thethree months ended September 30, 2001 excludespresent value of all legal obligations associated with theeffectretirement of tangible long-lived assets and capitalize an equal amount as a cost of thepotential exercise of stock options of 1,463,000 andasset depreciating thepotential 8KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 conversion ofadditional cost over theCompany's 5% Convertible Subordinated Notes because the effects of such instruments on earnings per share would be anti-dilutive. 3. ACQUISITIONS ACQUISITION OF Q SERVICES, INC. On July 19, 2002, Key acquired Q Services, Inc. ("QSI") pursuant to an Agreement and Plan of Merger dated May 13, 2002, as amended, by and among Key, Key Merger Sub, Inc. and QSI. As consideration for the merger, the Company issued approximately 17.1 million shares of its common stock to the QSI shareholders and paid approximately $94.2 million in cash at the closing to retire debt and preferred stock of QSI and to satisfy certain other obligations of QSI. In addition to assuming the positive working capital of QSI, the Comany incurred other direct acquisition costs and assumed certain other liabilities of QSI, resulting in the Company recording an aggregate purchase price of approximately $248 million. The value of those shares was based on the closing price of the Key common stock on the closing date of $8.75 per share. The results of QSI's operations have been included in the consolidated financial statements since the closing date. Prior to the acquisition, QSI was a privately held corporation conducting field production, pressure pumping and other service operations in Louisiana, New Mexico, Oklahoma, Texas and the Gulf of Mexico. The Company and QSI operate in adjacent and/or overlapping locations and expect to realize future cost savings and synergies in connection with the merger. The combination of the companies formed the largest oil field trucking fleet in the United States complementing the Company's well service rig fleet, which is the largest in the world. The following table summarizes theestimatedfair value of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain non-current accrued liabilities; thus, the allocation of the purchase price is subject to refinement.
AT JULY 19, 2002 ----------- (THOUSANDS)Current assets....................................... $ 37,734 Property and equipment............................... 138,898 Intangible assets.................................... 3,243 Other assets......................................... 342 Goodwill............................................. 117,060 --------- Total assets acquired............................. 297,277 --------- Current liabilities.................................. 16,787 Capital lease obligations............................ 77 Non-current accrued expenses......................... 17,908 Deferred tax liability............................... 14,347 --------- Total liabilities assumed......................... 49,119 --------- Net assets acquired.................................. $ 248,158 =========9KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 The $3,243,000 of intangible assets consists of noncompete agreements which have a weighted-averageuseful life ofapproximately three years. The $117,060,000 of goodwillthe asset. At March 31, 2003 and December 31, 2002, the asset retirement obligation wasallocated to the well servicing reporting segment. Of that amount, $11,645,000 is expected to be deductible for income taxes. The following unaudited pro forma results of operations have been prepared as though QSI had been acquired on July 1, 2001. Pro forma amounts are not necessarily indicative of the results that may be reported in the future.
THREE MONTHS ENDED ----------------------- 9/30/02 9/30/01 --------- --------- (THOUSANDS, EXCEPT PER SHARE AMOUNT)Revenues.......................................................... $ 209,770 $ 307,391 Income (loss) before cumulative effect of a change in accounting principle, net of tax............................................ (4,296) 34,488 Cumulative effect of a change in accounting principle, net of tax. (2,873) - Net income (loss)................................................. (7,169) 34,488 Basic earnings (loss) per share................................... $ (0.06) $ 0.29In addition to the acquisition of QSI, during the three months ended September 30, 2002, Key completed several small acquisitions for a total of approximately $12,065,000, which consisted of a combination of cash$9,344,000 andshares of Key common stock. Each of the acquisitions made during such three-month period was accounted for using the purchase method and the results of the operations generated from the acquired assets are included in the Key's results of operations as of the completion date of each acquisition. There were no acquisitions by the Company during the three months ended September 30, 2001. 4. COMMITMENTS AND CONTINGENCIES Various suits and claims arising in the ordinary course of business are pending against the Company. Management does not believe that the disposition of any of these items will result in a material adverse impact to the consolidated financial position, results of operations or cash flows of the Company. 5. INDUSTRY SEGMENT INFORMATION The Company's reportable business segments are well servicing and contract drilling. WELL SERVICING: The Company's operations provide well servicing (ongoing maintenance of existing oil and natural gas wells), completions, workover (major repairs or modifications necessary to optimize the level of production from existing oil and natural gas wells) and production and well intervention services (fluid hauling and fluid storage tank rental and fishing and rental tools). 10KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 CONTRACT DRILLING: The Company provides contract drilling services for major and independent oil companies onshore the continental United States, Argentina and Ontario, Canada.
WELL CONTRACT CORPORATE / SERVICING DRILLING OTHER TOTAL --------- --------- ----------- -----------THREE MONTHS ENDED SEPTEMBER 30, 2002 Operating revenues...................................... $ 184,887 $ 15,479 $ 1,701 $ 202,067 Operating profit ....................................... 53,616 4,522 671 58,809 Depreciation, depletion and amortization................ 22,069 2,392 1,341 25,802 Interest expense........................................ 276 - 10,986 11,262 Net income (loss) before cumulative effect of a change in accounting principle*............................... 8,962 262 (11,861) (2,637) Identifiable assets..................................... 828,845 88,742 253,053 1,170,640 Capital expenditures (excluding acquisitions)........... 12,115 191 4,286 16,592 THREE MONTHS ENDED SEPTEMBER 30, 2001 Operating revenues...................................... $ 212,501 $ 33,636 $ 3,100 $ 249,237 Operating profit ....................................... 76,740 12,448 1,915 91,103 Depreciation, depletion and amortization................ 14,557 2,380 932 17,869 Interest expense........................................ 548 - 11,401 11,949 Net income (loss) before cumulative effect of a change in accounting principle*............................... 34,259 5,735 (10,818) 29,176 Identifiable assets..................................... 676,410 101,161 290,112 1,067,683 Capital expenditures (excluding acquisitions)........... 11,911 8,154 3,424 23,489* Net income (loss) before cumulative effect of a change in accounting principle for the contract drilling segment includes a portion of well servicing general and administrative expenses allocated on a percentage of revenue basis. Operating revenues for the Company's foreign operations for the three months ended September 30, 2002 and 2001 were $6.1 million and $12.1 million, respectively. Operating profits for the Company's foreign operations for the three months ended September 30, 2002 and 2001 were $1.4 million and $2.6 million, respectively. The Company had $41.1 million and $82.6 million of identifiable assets as of September 30, 2002 and 2001,$9,231,000, respectively, related toforeign operations. 6. VOLUMETRIC PRODUCTION PAYMENT In March 2000, Key sold a portion of its future oil and natural gas production from Odessa Exploration Incorporated, its wholly owned subsidiary, for gross proceeds of $20 million pursuant to an agreement under which the purchaser is entitled to receive a portion of the production from certain oil and natural gas properties over the six year period ending February 28, 2006 in amounts starting at 10,000 barrels of oil per month and declining to 3,500 barrels of oil per month and starting at 122,100 Mmbtus of natural gas per month and declining to 58,800 Mmbtus of natural gas per month. The total volume of the forward sale is approximately 486,000 barrels of oil and 6,135,000 Mmbtus of natural gas. 7. DERIVATIVE INSTRUMENTS The Company utilizes derivative financial instruments to manage well defined commodity price risks. The Company is exposed to credit losses in the event of nonperformance by the counter-parties to its commodity hedges. The Company only deals with reputable financial 11KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 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 portionexpected abandonment costs of its oil and natural gasproduction through collarproducing properties andoption agreements.salt water disposal wells. Thepurposeincrease in the balance from December 31, 2002 of $113,000 is due to accretion of thehedges is to provide a measure of stability in the volatile environment of oil and natural gas prices and to manage exposure to commodity price risk under existing sales commitments. The Company's risk management objective is to lock in a range of pricing for expected production volumes. This allows the Company to forecast future cash flows within a predictable range. The Company meets this objective by entering into collar and option arrangements which allow for acceptable cap and floor prices. The Company does not enter into derivative instruments for any purpose other than for economic hedging. The Company does not speculate using derivative instruments. The Company has identified the following derivative instruments: FREESTANDING DERIVATIVES. On May 25, 2001 the Company entered into an option arrangement for a 12-month period beginning March 2002 whereby the counter-party will pay if the price should fall below the floor index. On May 2, 2002 the Company entered into an option arrangement for a 12-month period beginning March 2003 whereby the counter-party will pay if the 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. 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. As of May 2, 2002, the Company had documented the May 2, 2002 oil and natural gas options as cash flow hedges. The Company recorded a net decrease in derivative assets of approximately $163,000 during the three months ended September 30, 2002. EMBEDDED DERIVATIVES. The Company is party to a volumetric production payment of which certain terms meet 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. 8. CONDENSED CONSOLIDATING FINANCIAL INFORMATION The Company's senior notes are guaranteed by all of the Company's subsidiaries (except for the foreign subsidiaries), all of which are wholly-owned. The guarantees are joint and several, full, complete and unconditional. There are currently no restrictions on the ability of the subsidiary guarantors to transfer funds to the parent company. The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial Statements of Guarantors and 12KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001 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. CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2002 -------------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (THOUSANDS)Assets: Current assets................ $ 8,625 $ 150,435 $ 12,362 $ - $ 171,422 Net property and equipment.... 37,776 884,694 28,715 - 951,185 Goodwill, net................. 3,431 316,551 568 - 320,550 Deferred costs, net........... 13,993 - - - 13,993 Inter-company receivables..... 786,580 - - (786,580) - Other assets.................. 19,779 14,260 1 - 34,040 --------- ----------- --------- ---------- ----------- Total assets.................... $ 870,184 $ 1,365,940 $ 41,646 $ (786,580) $ 1,491,190 ========= =========== ========= ========== =========== Liabilities and equity: Current liabilities........... $ 35,507 $ 52,547 $ 3,109 $ - $ 91,163 Long-term debt................ 482,520 - - - 482,520 Capital lease obligations..... 1,421 13,200 - - 14,621 Inter-company payables........ - 752,813 33,767 (786,580) - Deferred tax liability ....... 160,630 - - - 160,630 Other long-term liabilities... 14,283 35,862 - - 50,145 Stockholders' equity.......... 175,823 511,518 4,770 - 692,111 --------- ----------- --------- ---------- ----------- Total liabilities and stockholders' equity........... $ 870,184 $ 1,365,940 $ 41,646 $ (786,580) $ 1,491,190 ========= =========== ========= ========== ===========13KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001
JUNE 30, 2002 -------------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (THOUSANDS)Assets: Current assets................ $ 64,814 $ 117,140 $ 10,119 $ - $ 192,073 Net property and equipment.... 43,003 748,158 17,739 - 808,900 Goodwill, net................. 3,374 197,144 551 - 201,069 Deferred costs, net........... 12,580 - - - 12,580 Inter-company receivables..... 537,416 - - (537,416) - Other assets.................. 21,593 6,780 - - 28,373 --------- ----------- --------- ---------- ----------- Total assets.................... $ 682,780 $ 1,069,222 $ 28,409 $ (537,416) $ 1,242,995 ========= =========== ========= ========== =========== Liabilities and equity: Current liabilities........... $ 48,388 $45,427 $ 2,813 $ - $ 96,628 Long-term debt................ 420,717 - - - 420,717 Capital lease obligations..... 1,457 13,762 - - 15,219 Inter-company payables........ - 516,761 20,655 (537,416) - Deferred tax liability ....... 149,990 - - - 149,990 Other long-term liabilities... 13,474 10,101 - - 23,575 Stockholders' equity.......... 48,754 483,171 4,941 - 536,866 --------- ----------- --------- ---------- ----------- Total liabilities and stockholders' equity........... $ 682,780 $ 1,069,222 $ 28,409 $ (537,416) $ 1,242,995 ========= =========== ========= ========== ===========CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 -------------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (THOUSANDS)Revenues........................ $ 46 $ 195,952 $ 6,069 $ - $ 202,067 Costs and expenses: Direct expenses............... - 138,598 4,660 - 143,258 Depreciation, depletion and amortization expense......... 793 24,622 387 - 25,802 General and administrative expense...................... 11,104 14,540 364 - 26,008 Interest...................... 10,986 259 17 - 11,262 Gain on retirement of debt... (10) - - - (10) --------- ----------- --------- ---------- ----------- Total costs and expenses........ 22,873 178,019 5,428 - 206,320 --------- ----------- --------- ---------- ----------- Income (loss) before income taxes.......................... (22,827) 17,933 641 - (4,253) Income tax (expense) benefit.... 8,674 (6,814) (244) - 1,616 --------- ----------- --------- ---------- ----------- Net income (loss) before cumulative effect of a change in accounting principle........ (14,153) 11,119 397 - (2,637) Cumulative effect of a change in accounting principle, net of tax......................... - (2,873) - - (2,873) --------- ----------- --------- ---------- ----------- Net income (loss)............... $ (14,153) $ 8,246 $ 397 $ - $ (5,510) ========= =========== ========= ========== ===========14KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001
THREE MONTHS ENDED SEPTEMBER 30, 2001 -------------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ (THOUSANDS)Revenues........................ $ 493 $ 236,641 $ 12,103 $ - $ 249,237 Costs and expenses: Direct expenses............... - 148,631 9,503 - 158,134 Depreciation, depletion and amortization expense..... 311 16,508 1,050 - 17,869 General and administrative expense...................... 5,328 9,015 804 - 15,147 Interest...................... 11,401 205 343 - 11,949 Gain on retirement of debt.... (287) - - (287) --------- ----------- --------- ---------- ----------- Total costs and expenses........ 16,753 174,359 11,700 - 202,812 --------- ----------- --------- ---------- ----------- Income (loss) before income taxes.......................... (16,260) 62,282 403 - 46,425 Income tax (expense) benefit.... 6,041 (23,140) (150) - (17,249) --------- ----------- --------- ---------- ----------- Net income (loss) before cumulative effect of a change in accounting principle........ (10,219) 39,142 253 - 29,176 Cumulative effect of a change in accounting principle, net of tax......................... - - - - - --------- ----------- --------- ---------- ----------- Net income (loss)............... $ (10,219) $ 39,142 $ 253 $ - $ 29,176 ========= =========== ========= ========== ===========CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2002 --------------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ ------------- ------------ ------------ (THOUSANDS)Net cash provided (used) by operating activities........... $ (11,098) $ 15,043 $ 3,932 $ - $ 7,877 Net cash provided (used) in investing activities........... (101,843) (10,813) (1,947) - (114,603) Net cash provided (used) in financing activities........... 59,671 (2,215) - - 57,456 Effect of exchange rate changes on cash................ - - (1,049) - (1,049) ---------- ----------- --------- ---------- ----------- Net increase (decrease) in cash (53,270) 2,015 936 - (50,319) Cash at beginning of period..... 52,742 (157) 1,562 - 54,147 ---------- ----------- --------- ---------- ----------- Cash at end of period........... $ (528) $ 1,858 $ 2,498 $ - $ 3,828 ========== =========== ========= ========== ===========15KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001
THREE MONTHS ENDED SEPTEMBER 30, 2001 --------------------------------------------------------------------------- PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------ --------------- ------------ ------------ (THOUSANDS)Net cash provided (used) by operating activities........... $ 20,909 $ 25,818 $ (1,182) $ - $ 45,545 Net cash provided (used) in investing activities........... (5,247) (17,383) (116) - (22,746) Net cash provided (used) in financing activities........... (19,957) (2,434) (13) - (22,404) ---------- ----------- --------- ---------- ----------- Net increase (decrease) in cash. (4,295) 6,001 (1,311) - 395 Cash at beginning of period.... 1,647 (2,005) 2,456 - 2,098 ---------- ----------- --------- ---------- ----------- Cash at end of period........... $ (2,648) $ 3,996 $ 1,145 $ - $ 2,493 ========== =========== ========= ========== ===========9.discounted liability.3. GOODWILL AND OTHER INTANGIBLE
ASSETS -ASSETS—SFAS 142The Company
adoptedfollows the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142")on July 1, 2001.. SFAS 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. SFAS 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been7
acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its fair value. The Company completed its most recent assessment of goodwill impairment as of
the date of adoption during the three months ended December 31, 2001, as allowed by SFAS 142.June 30, 2002. The assessment did not result in an indication of goodwill impairment.Intangible assets subject to amortization under SFAS 142 consist of noncompete agreements and patents. Amortization expense for the noncompete agreements is calculated using the straight-line method over the period of the agreement, ranging from three to seven years. Amortization expense for patents is calculated using the straight-line method over the useful life of the patent, ranging from five to seven years.
The gross carrying amount of noncompete agreements subject to amortization totaled approximately
$17,999,000$15,274,000 and$11,727,000$18,669,000 atSeptember 30, 2002March 31, 2003 andJune 30,December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately$7,351,000$5,235,000 and$6,130,000$7,511,000 atSeptember 30, 2002March 31, 2003 andJune 30,December 31, 2002, respectively. Amortization expense for the three months endedSeptember 30,March 31, 2003 and 2002and 2001was approximately$1,261,000$1,119,000 and$400,000,$415,000, respectively. Amortization expense for the next five succeeding years is estimated to be$3,727,000, $2,698,000, $1,986,000, $1,456,000approximately $3,582,000, $2,544,000, $1,950,000, $1,597,000 and$747,000, respectively. 16KEY ENERGY SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 AND 2001$343,000.The gross carrying amount of patents subject to amortization totaled approximately
$2,213,000$2,396,000 and $2,380,000 atSeptember 30, 2002.March 31, 2003 and December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately $248,000 and $160,000 as of March 31, 2003 and December 31, 2002, respectively. The Company acquired the patents on July 16, 2002.Accumulated amortization related to these intangible assets totaled approximately $72,000 at September 30, 2002.Amortization expense for the three months endedSeptember 30, 2002March 31, 2003 was approximately$72,000.$88,000. Amortization expense for the next five succeeding years is estimated to be$348,000, $348,000, $348,000, $348,000approximately $352,000, $352,000, $352,000, $352,000 and$325,000, respectively.$303,000.The Company has identified its reporting segments to be well servicing and contract drilling.
GoodwillNet goodwill allocated to such reporting segments atSeptember 30,March 31, 2003 is approximately $323,440,000 and $14,306,000, respectively, and at December 31, 2002 is$306,293,000approximately $307,987,000 and$14,257,000,$14,283,000, respectively. The change in the carrying amount of goodwill for the three months endedSeptember 30, 2002March 31, 2003 of$119,481,000, respectively,approximately $15,476,000 relates principally to goodwillacquired in connection withfrom the Q Services acquisitionof QSI and other well servicing assets acquired during the period(See Note 6) and the foreign currency translation adjustment forArgentina. 10. ASSET RETIREMENT OBLIGATIONS - ADOPTION OF SFAS 143 On July 1, 2002,the Company's Argentina operations.4. EARNINGS PER SHARE
The Company
adoptedaccounts for earnings per share based upon Statement of Financial Accounting Standards No.143,128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming exercise of dilutive8
stock options and warrants and conversion of dilutive outstanding convertible securities using the "as if converted" method.
Three Months Ended March 31, 2003 2002 (thousands, except per share data) Basic EPS Computation: Numerator Net income (loss) $ (1,774 ) $ (4,626 )
Denominator
Weighted average common shares outstanding 128,399 108,551
Basic EPS:
Net income (loss) $ (0.01 ) $ (0.04 )
Diluted EPS Computation:
Numerator Net income (loss) $ (1,774 ) $ (4,626 )
Denominator
Weighted average common shares outstanding: 128,399 108,551
Diluted EPS:
Net income (loss) $ (0.01 ) $ (0.04 ) The diluted earnings per share calculations for the three months ended March 31, 2003 and 2002, excludes the effect of the potential exercise of the Company's convertible debt, outstanding warrants and stock options because the effects of such instruments on earnings per share would be anti-dilutive.
5. STOCK-BASED COMPENSATION
The Company accounts for stock option grants to employees using the intrinsic value method of accounting prescribed by APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Under the Company's stock incentive plan, the price of the stock on the grant date is the same as the amount an employee must pay to exercise the option to acquire the stock; accordingly, the options have no intrinsic value at grant date, and in accordance with the provisions of APB 25, no compensation cost is recognized.
Statement of Financial Accounting
for Asset Retirement ObligationsStandards No. 123 ("SFAS143"123"). Adoption, "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 SFAS143 is required for all companies with fiscal years beginning after June 15, 2002.123. Thenew standard requiresfollowing table illustrates the effect on net income and9
earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to
recognize a liabilitystock-based employee compensation:
Three Months Ended March 31, 2003 2002 (thousands, except per share data) Net income (loss): As reported $ (1,774 ) $ (4,626 ) Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax(2,313 ) (3,362 ) Pro forma $ (4,087 ) $ (7,988 )
Basic earnings per share:
As reported $ (0.01 ) $ (0.04 ) Pro forma $ (0.03 ) $ (0.07 )
Diluted earnings per share:
As reported $ (0.01 ) $ (0.04 ) Pro forma $ (0.03 ) $ (0.07 ) 6. Q SERVICES ACQUISITION
On July 19, 2002, the Company acquired Q Services, Inc. ("QSI") pursuant to an Agreement and Plan of Merger dated May 13, 2002, as amended, by and among the Company, Key Merger Sub, Inc. and QSI. As consideration for the
presentacquisition, the Company issued approximately 17.1 million shares of its common stock to the QSI shareholders and paid approximately $94.2 million in cash at the closing to retire debt and preferred stock of QSI and to satisfy certain other obligations of QSI. In addition to assuming the positive working capital of QSI, the Company incurred other direct acquisition costs and assumed certain other liabilities of QSI, resulting in the Company recording an aggregate purchase price of approximately $250 million. The value ofall legal obligations associatedthe shares issued was based on the closing price of the Company's common stock on the closing date of $8.75 per share. The results of QSI's operations have been included in the consolidated financial statements since the closing date. Prior to the acquisition, QSI was a privately held corporation conducting field production, pressure pumping, and other service operations in Louisiana, New Mexico, Oklahoma, Texas, and the Gulf of Mexico. The Company and QSI operate in adjacent and or overlapping locations and expect to realize future cost savings and synergies in connection with theretirement of tangible long-lived assets and capitalize an equal amount as a costmerger.10
The following table summarizes the estimated fair value of the
asset depreciatingassets acquired and liabilities assumed at theadditional cost over the estimateddate of acquisition:
At July 19,
2002(Thousands) Current assets $ 37,734 Property and equipment 114,519 Intangible assets 3,242 Other assets 344 Goodwill 134,567 Total assets acquired 290,406 Current liabilities 17,213 Capital lease obligations 77 Non-current accrued expenses 17,908 Deferred tax liability 5,158 Total liabilities assumed 40,356 Net assets acquired $ 250,050 The $3,242,000 of intangible assets consists of noncompete agreements which have a weighted-average useful life of approximately two years. The $134,567,000 of goodwill was allocated to the
asset.well servicing reporting segment. Of that amount $11,645,000 is expected to be deductible for income taxes.During the three months ended March 31, 2003, the Company recorded an adjustment of approximately $25 million to reduce the cost allocated to certain equipment in the preliminary purchase price allocation. The adjustment was based on a preliminary independent third party appraisal of the estimated fair value of the equipment as of the July 2002 acquisition date. The purchase price allocation process will be completed during the quarter ended June 30, 2003 upon receipt of the final appraisal.
The following unaudited pro forma results of operations have been prepared as though QSI had been acquired on January 1, 2002. Pro forma amounts are not necessarily indicative of the results that may be reported in the future.
Three Months Ended
March 31, 2002(thousands, except per
share data)Revenues $ 209,268 Net income (loss) (3,140 ) Basic earnings (loss) per share $ (0.02 ) 7. COMMITMENTS AND CONTINGENCIES
Various suits and claims arising in the ordinary course of business are pending against the Company. Management does not believe that the disposition of any of these items will result in a material adverse impact to the consolidated financial position, results of operations or cash flows of the Company.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company
recorded additional costs, netutilizes derivative financial instruments to manage well defined commodity price risks. The Company is exposed to credit losses in the event ofaccumulated depreciation, of approximately $4,372,000, a non-current liability of approximately $9,005,000nonperformance by the counter-parties11
to its commodity hedges. The Company only deals with reputable financial institutions as counter-parties and
an after-tax charge of approximately $2,873,000 foranticipates that such counter-parties will be able to fully satisfy their obligations under thecumulative effect on prior years for depreciationcontracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of theadditional costs and accretion expense on the liability related to expected abandonment costscounter-parties.The Company periodically hedges a portion of its oil and natural gas
producing propertiesproduction through collar andsalt water disposal wells.option agreements. The purpose of the hedges is to provide a measure of stability in the volatile environment of oil and natural gas prices and to manage exposure to commodity price risk under existing sales commitments. The Company's risk management objective is to lock in a range of pricing for expected production volumes. This allows the Company to forecast future cash flows within a predictable range. The Company meets this objective by entering into collar and option arrangements which allow for acceptable cap and floor prices. The Company desires a measure of stability to ensure that cash flows do not fall below a certain level.The Company does not enter into derivative instruments for any purpose other than for economic hedging. The Company does not speculate using derivative instruments. The Company has identified the following derivative instruments:
Freestanding Derivatives. On May 25, 2001, the Company entered into an option arrangement for a 12-month period beginning March 2002 whereby the counter-party will pay if the oil and natural gas prices should fall below the floor index. On May 2, 2002, the Company entered into an option arrangement for a 12-month period beginning March 2003 whereby the counter-party will pay if the oil price should fall below the floor index.
The Company did not document the May 25, 2001 and May 2, 2002 oil and natural gas options as cash flow hedges until July 1, 2001 and July 1, 2002, respectively. The Company recorded a net decrease in derivative assets of approximately $17,000 and $179,000 during the three months ended March 31, 2003 and 2002, respectively. The Company recorded no ineffectiveness for the three months ended March 31, 2003 and an earnings charge of approximately $9,000 for the three months ended March 31, 2002.
The following table sets forth the future volumes hedged by year and the weighted-average strike price of the option contracts at March 31, 2003 and 2002:
Monthly Income Strike Price
Per Bbl/MMbtuOil
(Bbls)Gas
(MMbtu)Term Floor Cap Fair Value At March 31, 2003 Oil Put 4,000 — Mar 2003-Feb 2004 $ 21.00 — $ 17,000
At March 31, 2002
Oil Put 5,000 — Mar 2002-Feb 2003 $ 22.00 — $ 46,000 Natural Gas Put — 75,000 Mar 2002-Feb 2003 $ 3.00 — $ 131,000 (The strike prices for the oil puts are based on the NYMEX spot price for West Texas Intermediate; the strike price for the natural gas put is based on the Inside FERC-El Paso Permian spot price.)
9. BUSINESS SEGMENT INFORMATION
The Company's reportable business segments are well servicing and contract drilling. Oil and natural gas production operations are presented in "Corporate/Other".
Well Servicing: The Company's operations provide well servicing (ongoing maintenance of existing oil and natural gas wells), workover (major repairs or modifications necessary to optimize the level of
12
production from existing oil and natural gas wells) and production services (fluid hauling and fluid storage tank rental, fishing and rental tool services and pressure pumping services).
Contract Drilling: The Company provides contract drilling services for major and independent oil companies onshore the continental United States, Argentina and Ontario, Canada.
The Company's management evaluates the performance of its operating segments based on net income and operating profits (revenues less direct operating expenses). Corporate expenses include general corporate expenses associated with managing all reportable operating segments. Corporate assets consist principally of cash and cash equivalents, deferred debt financing costs and deferred income tax assets.
Well
ServicingContract
DrillingCorporate /
OtherTotal Three Months Ended March 31, 2003 Operating revenues $ 197,600 $ 16,153 $ 1,371 $ 215,124 Operating profit 51,490 4,210 456 56,156 Depreciation, depletion and amortization 21,550 2,563 1,488 25,601 Interest expense 184 — 10,864 11,048 Net income (loss)* 10,209 49 (12,032 ) (1,774 ) Identifiable assets 808,457 89,370 257,041 1,154,868 Capital expenditures (excluding acquisitions) 15,693 930 2,595 19,218
Three Months Ended March 31, 2002
Operating revenues $ 154,062 $ 14,334 $ 1,845 $ 170,241 Operating profit 41,030 2,942 894 44,866 Depreciation, depletion and amortization 16,453 2,351 1,085 19,889 Interest expense 256 — 9,619 9,875 Net income (loss)* 6,468 (1,070 ) (10,024 ) (4,626 ) Identifiable assets 679,256 89,795 262,569 1,031,620 Capital expenditures (excluding acquisitions) 13,323 3,126 2,064 18,513
- *
- Net income (loss) for the contract drilling segment includes a portion of well servicing general and administrative expenses allocated on a percentage of revenue basis.
13
Operating revenues for the Company's foreign operations for the three months ended March 31, 2003 and 2002 were $9.6 million and $4.0 million, respectively. Operating profits for the Company's foreign operations for the three months ended March 31, 2003 and 2002 were $4.4 million and $0.7 million, respectively. The Company had $56.2 million and $31.6 million of identifiable assets as of March 31, 2003 and 2002, respectively, related to foreign operations.
10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The Company's senior notes are guaranteed by all of the Company's subsidiaries (except for its foreign subsidiaries operating in Argentina and Canada), all of which are wholly-owned. The guarantees are joint and several, full, complete and unconditional. There are currently no restrictions on the ability of the subsidiary guarantors to transfer funds to the parent company.
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered." The information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with accounting principles generally accepted in the United States of America.
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2003 Parent
CompanyGuarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated (thousands) Assets: Current assets $ 11,263 $ 153,648 $ 15,582 $ — $ 180,493 Net property and equipment 45,026 862,493 21,655 — 929,174 Goodwill, net 3,431 333,602 713 — 337,746 Deferred costs, net 12,783 — — — 12,783 Inter-company receivables 742,567 — — (742,567 ) — Other assets 19,220 13,198 — — 32,418 Total assets $ 834,290 $ 1,362,941 $ 37,950 $ (742,567 ) $ 1,492,614
Liabilities and equity:
Current liabilities $ 35,670 $ 59,277 $ 3,827 $ — $ 98,774 Long-term debt 479,300 — — — 479,300 Capital lease obligations 1,671 11,461 — — 13,132 Inter-company payables — 721,868 20,699 (742,567 ) — Deferred tax liability 150,688 — — — 150,688 Other long-term liabilities 19,483 31,933 96 — 51,512 Stockholders' equity 147,478 538,402 13,328 — 699,208 Total liabilities and stockholders' equity $ 834,290 $ 1,362,941 $ 37,950 $ (742,567 ) $ 1,492,614 14
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2002 Parent
CompanyGuarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated (thousands) Assets: Current assets $ 17,716 $ 143,579 $ 14,279 $ — $ 175,574 Net property and equipment 43,134 893,775 19,596 — 956,505 Goodwill, net 3,431 318,208 631 — 322,270 Deferred costs, net 13,503 — — — 13,503 Inter-company receivables 760,990 — — (760,990 ) — Other assets 19,687 14,463 — — 34,150 Total assets $ 858,461 $ 1,370,025 $ 34,506 $ (760,990 ) $ 1,502,002
Liabilities and equity:
Current liabilities $ 50,644 $ 54,528 $ 3,703 $ — $ 108,875 Long-term debt 472,336 — — — 472,336 Capital lease obligations 1,648 12,573 — — 14,221 Inter-company payables — 739,842 21,148 (760,990 ) — Deferred tax liability 161,265 — — — 161,265 Other long-term liabilities 28,530 20,314 93 — 48,937 Stockholders' equity 144,038 542,768 9,562 — 696,368 Total liabilities and stockholders' equity $ 858,461 $ 1,370,025 $ 34,506 $ (760,990 ) $ 1,502,002 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2003 Parent
CompanyGuarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated (thousands) Revenues $ 68 $ 209,084 $ 5,972 $ — $ 215,124 Costs and expenses: Direct expenses — 154,578 4,390 — 158,968 Depreciation, depletion and amortization expense 915 24,188 498 — 25,601 General and administrative expense 8,763 12,911 444 — 22,118 Interest 10,864 145 39 — 11,048 Gain on retirement of debt (2 ) — — — (2 ) Total costs and expenses 20,540 191,822 5,371 — 217,733 Income (loss) before income taxes (20,472 ) 17,262 601 — (2,609 ) Income tax (expense) benefit 6,552 (5,525 ) (192 ) — 835 Net income (loss) $ (13,920 ) $ 11,737 $ 409 $ — $ (1,774 ) 15
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2002 Parent
CompanyGuarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated (thousands) Revenues $ 310 $ 165,899 $ 4,032 $ — $ 170,241 Costs and expenses: Direct expenses — 122,005 3,370 — 125,375 Depreciation, depletion and amortization expense 464 18,811 614 — 19,889 General and administrative expense 5,526 7,725 443 — 13,694 Interest 9,619 276 (20 ) — 9,875 Loss on retirement of debt 8,468 — — — 8,468 Total costs and expenses 24,077 148,817 4,407 — 177,301 Income (loss) before income taxes (23,767 ) 17,082 (375 ) — (7,060 ) Income tax (expense) benefit 8,195 (5,890 ) 129 — 2,434 Net income (loss) $ (15,572 ) $ 11,192 $ (246 ) $ — $ (4,626 ) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2003 Parent
CompanyGuarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated (thousands) Net cash provided (used) by operating activities $ (10,684 ) $ 16,174 $ 2,571 $ — $ 8,061 Net cash provided (used) in investing activities (3,071 ) (14,445 ) (1,306 ) — (18,822 ) Net cash provided (used) in financing activities 7,301 (2,187 ) — — 5,114 Effect of exchange rate changes on cash — — 165 — 165 Net increase (decrease) in cash (6,454 ) 102 870 — (5,482 ) Cash at beginning of period 5,183 908 2,953 — 9,044 Cash at end of period $ (1,271 ) $ 1,010 3,823 $ — $ 3,562 16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2002 Parent
CompanyGuarantor
SubsidiariesNon-Guarantor
SubsidiariesEliminations Consolidated (thousands) Net cash provided (used) by operating activities $ 11,408 $ 16,179 $ 2,299 $ — $ 29,886 Net cash provided (used) in investing activities (11,062 ) (12,781 ) (2,565 ) — (26,408 ) Net cash provided (used) in financing activities 34,111 ) (2,511 ) — — 31,600 Effect of exchange rate changes on cash — — (77 ) — (77 ) Net increase (decrease) in cash 34,457 887 (343 ) — 35,001 Cash at beginning of period 2,507 3,776 1,683 — 7,966 Cash at end of period $ 36,964 $ 4,663 1,340 $ — $ 42,967 11. GAINS (LOSSES) ON RETIREMENT OF
DEBT - ADOPTION OFDEBT—SFAS 145On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The provisions of SFAS 145, which are currently applicable to the Company, rescind Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, and instead requires that such gains and losses be reported in operating income. The Company now records gains and losses from the extinguishment of debt in operating income and has reclassified such gains and losses in the financial statements for the three months ended
September 30, 2001March 31, 2002 to conform to the presentation for the three months endedSeptember 30, 2002.March 31, 2003.12. SUBSEQUENT
EVENT - SALE OF PRESSURE PUMPING BUSINESSEVENT—SENIOR NOTES OFFERINGOn
October 31, 2002,May 14, 2003, the Companyentered intocompleted aletterpublic offering ofintent$150,000,000 of its 63/8% Senior Notes due 2013. The cash proceeds from the debt offering, net of fees and expenses, will be used tosell its pressure pumping business to a privately held company for approximately $40,000,000 in cash and notes. The Company expectsrepay thetransaction to close by January 31, 2003. This business was acquired as partbalance of theQ Services acquisition in July 19, 2002. Detailed terms ofrevolving loan facility then outstanding under thesale are subjectCompany's senior credit facility, with the remainder tofinal negotiation of a definitive purchase and sale agreement.be used for general corporate purposes, including further debt retirement.17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONNOTE REGARDING
FORWARD -FORWARD—LOOKING STATEMENTSThe 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 herein.
These forward looking-statements speak only as of the date of this report and Key disclaims any duty or obligation to update the forward looking statement in this report.
The following discussion provides information to assist in the understanding of the Company's financial condition and results of operations. It should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. As used in this Item 2, references to composite well servicing rig rates means, for a given period, the total well servicing revenues for that period divided by the total well servicing hours for that period. As used in this Item 2, references to composite contract drilling rig rates means, for a given period, the total contract drilling revenues for that period divided by the total contract drilling hours for that period. As used in this Item 2, references to composite truck rates means, for a given period, the total trucking revenues for that period divided by the total trucking hours for that period.
The Company's results of operations for the first quarter of fiscal 2003 reflect the impact of
a declinecontinued improvement in industry conditions resulting fromdecreased commodity prices (and its customers' perception that commodity prices may decrease further) whichcontinued strength inturn caused a decline in demand for the Company's equipment and services.natural gas prices.THREE MONTHS ENDED
SEPTEMBER 30, 2002MARCH 31, 2003 VERSUS THREE MONTHS ENDEDSEPTEMBER 30, 2001MARCH 31, 2002The Company's revenue for the
quarterthree months endedSeptember 30, 2002 decreased $47,170,000,March 31, 2003 increased $44,883,000, or19%26%, to$202,067,000$215,124,000 from$249,237,000 for the quarter ended September 30, 2001 while net income for the quarter ended September 30, 2002 decreased $34,686,000, or 119%, to a net loss of $5,510,000, or ($0.04) per share, from net income of $29,176,000, or $0.28 18per diluted share for the quarter ended September 30, 2001. The decrease in revenues and net income is due to lower levels of activity and lower pricing partially offset by the acquisition of QSI. Net income in the quarter ended September 30, 2002 was also adversely affected by the cumulative effect of the Company's mandatory adoption of SFAS 143, costs associated with the integration of QSI, unusually high general liability costs and start-up costs associated with the Company's new Egypt project. OPERATING REVENUES WELL SERVICING. Well servicing revenues decreased $27,614,000, or 13%, to $184,887,000$170,241,000 for the three months endedSeptember 30, 2002March 31, 2002. For the three months ended March 31, 2003, the Company incurred a net loss of $1,774,000, an improvement of $2,852,000, or 62%, from$212,501,000a net loss of $4,626,000 for the three months endedSeptember 30, 2001.March 31, 2002. The increase in revenues and decrease in net loss is principally due to increasing levels of activity and the acquisition of QSI, partially offset by lower composite truck rates and inclement weather in the form of heavy ice and snow storms during the last two weeks of February and early March. Overall rig hours for the three months ended March 31, 2003 increased approximately 7% compared to overall rig hours for the three months ended March 31, 2002. Trucking hours for the three months ended March 31, 2003 increased 51% compared to trucking hours for the three months ended March 31, 2002 principally due to the acquisition of QSI and improved activity levels. However, composite truck rates for the three months ended March 31, 2003 declined approximately 7% compared to composite truck rates for the three months ended March 31, 2002. Contributing to the net loss for the three months ended March 31, 2003, were costs of approximately $1,100,000 associated with the closure of two of the Company's pressure pumping facilities and additional repair and maintenance costs incurred by the Company as it took advantage of weather-related downtime.Operating Revenues
Well Servicing. Well servicing revenues for the three months ended March 31, 2003 increased $43,538,000, or 28%, to $197,600,000 from $154,062,000 for the three months ended March 31, 2002. The increase in revenues was primarily due to
a declinean increase in activity andoilfield service ratesthe acquisition of QSI partially offset bythe acquisition of QSI. CONTRACT DRILLING. Contract drilling revenues decreased $18,157,000, or 54%, to $15,479,000declines in composite truck rates. Well servicing hours for the three months endedSeptember 30, 2002 from $33,636,000March 31, 2003 increased 7% compared to well servicing hours for the three months endedSeptember 30, 2001.March 31, 2002, while composite well servicing rig rates declined by approximately 1% for the three months ended March 31, 2003 compared to well servicing rig rates for the three months ended March 31, 2002. While trucking hours for the three months ended March 31, 2003 increased approximately 51% compared to trucking hours for the three months ended March 31, 2002, composite truck rates for the three months ended March 31, 2003 decreased by approximately 7% compared to composite truck rates for the three months ended March 31, 2002.Contract Drilling. Contract drilling revenues for the three months ended March 31, 2003 increased $1,819,000, or 13%, to $16,153,000 from $14,334,000 for the three months ended March 31, 2002. The
decreaseincrease in revenues was primarily due toa declinean increase inactivity andcomposite contract drilling rigrates. OPERATING EXPENSES WELL SERVICING. Well servicing expenses decreased $4,490,000, or 3%, to $131,271,000rates and a slight improvement in contract drilling hours. Contract drilling hours for the three months endedSeptember 30, 2002 from $135,761,000March 31, 2003 increased 2% compared to contract drilling hours for the three months endedSeptember 30, 2001.March 31, 2002, while composite contract drilling rig rates for the three months ended March 31, 2003 increased by approximately 10% for the three months ended March 31, 2003 compared to composite contract drilling rig rates for the three months ended March 31, 2002.Operating Expenses
Well Servicing. Well servicing expenses for the three months ended March 31, 2003 increased $33,078,000, or 29%, to $146,110,000 from $113,032,000 for the three months ended March 31, 2002. The
decreaseincrease was primarily due tolowerincreased levels of activitypartially offset byand related repair and maintenance costs, the acquisition of QSI and higher insurance costs,and start-up costs for the Company's new Egypt project.primarily in workers' compensation. Well servicing19
expenses, as a percentage of well servicing revenue, increased
to 71%from 73% for the three months endedSeptember 30,March 31, 2002from 64%to 74% for the three months endedSeptember 30, 2001 CONTRACT DRILLING.March 31, 2003.Contract Drilling. Contract drilling expenses
decreased $10,231,000, or 48%, to $10,957,000for the three months endedSeptember 30, 2002March 31, 2003 increased $551,000, or 5%, to $11,943,000 from$21,188,000$11,392,000 for the three months endedSeptember 30, 2001.March 31, 2002. Thedecreaseincrease was primarily duelowerto increased levels of activitypartially offset byand related repair and maintenance costs and higher insurancecosts. Well servicingcosts primarily in workers' compensation. Contract drilling expenses, as a percentage ofwell servicing revenue, increased to 71%contract drilling revenues, decreased from 79% for the three months endedSeptember 30,March 31, 2002from 63%to 74% for the three months endedSeptember 30, 2001 DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSEMarch 31, 2003.Depreciation, Depletion and Amortization Expense
The Company's depreciation, depletion and amortization expense
increased $7,933,000, or 44%, to $25,802,000for the three months endedSeptember 30, 2002March 31, 2003 increased $5,712,000, or 29%, to $25,601,000 from$17,869,000$19,889,000 for the three months endedSeptember 30, 2001.March 31, 2002. The increase is primarily due to the acquisition of QSI, which added approximately $117,761,000 in net depreciable assets and to a lesser extent by the Company's ongoing capitalexpenditures during the prior year as the Company continued major refurbishmentsexpenditure program, which includes remanufacturing of wellservicingservice and contract drilling equipment andits continued investment in technology. GENERAL AND ADMINISTRATIVE EXPENSESthe Company's technology initiative.General and Administrative Expenses
The Company's general and administrative expenses
increased $10,861,000, or 72%, to 19$26,008,000for the three months endedSeptember 30, 2002March 31, 2003 increased $8,424,000, or 62%, to $22,118,000 from$15,147,000$13,694,000 for the three months endedSeptember 30, 2001.March 31, 2002. The increase was primarily due to the acquisition of QSI, consolidation and severance costs associated with theintegrationclosure ofQSI,two of the Company's pressure pumping facilities and relocation of related equipment to highergeneral liability costsmargin locations, and increases in personnel supporting the implementation of information technologyfunctions.initiatives. General and administrative expenses, as a percentage of revenues, increasedto 13%from 8% for the three months endedSeptember 30,March 31, 2002from 6%to 10% for the three months endedSeptember 30, 2001. INTEREST EXPENSEMarch 31, 2003.Interest Expense
The Company's interest expense
decreased $687,000, or 6%, to $11,262,000for the three months endedSeptember 30, 2002March 31, 2003 increased $1,173,000, or 12%, to $11,048,000 from$11,949,000$9,875,000 for the three months endedSeptember 30, 2001.March 31, 2002. Thedecreaseincrease was primarily due toa reduction in the Company's long-termhigher average long term debt in theprior year and lower interest rates.quarter ended March 31, 2003 as compared to March 31, 2002 resulting from the borrowing under the revolver related to the QSI acquisition. Included in interest expense was the amortization of deferred debt issuance costs, discount and premium of$943,000approximately $776,000 and$738,000$277,000 for the three months endedSeptember 30,March 31, 2003 and 2002,and 2001,respectively.GAIN ON RETIREMENT OF DEBTGain (Loss) on Retirement of Debt
During the three months ended
September 30, 2002,March 31, 2003, the Company repurchased$204,000approximately $55,000 of its long-term debt at a discount, which resulted in a gain of $2,000. During the three months ended March 31, 2002, the Company repurchased approximately $35,518,000 of its long-term debt at a premium and expensed related debt issuance costs which resulted in againloss of$10,000. During the three months ended September 30, 2001, the Company repurchased $53,277,000 of its long-term debt at a discount and expensed related debt issuance costs which resulted in a gain of $287,000.$8,468,000. On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The new standard rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be recorded as extraordinary items.CUMULATIVE EFFECT ON PRIOR YEARS OF A CHANGE IN ACCOUNTING PRINCIPLE On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). Adoption of SFAS 143 is required for all companies with fiscal years beginning after June 15, 2002. The new standard requires the Company to recognize a liability for the present value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset depreciating the additional cost over the estimated useful life of the asset. The Company recorded an after-tax charge of approximately $2,873,000 for the cumulative effect on prior years for depreciation of the additional costs and accretion expense on the liability related to expected abandonment costs related to its oil and natural gas producing properties and salt water disposal wells. INCOME TAXES20
Income Taxes
The Company's income tax benefit
decreased $18,865,000 to a benefit of $1,616,000for the three months endedSeptember 30, 2002March 31, 2003 decreased $1,599,000 to a benefit of $835,000 froman expensea benefit of$17,249,000$2,434,000 for the three months endedSeptember 30, 2001. The decrease in income taxes is due to the decrease in pretax income.March 31, 2002. The Company's effective tax rate for the three months endedSeptember 30,March 31, 2003 and 2002 was 32% and2001 was 38% and 37%34%, respectively. The effective tax rates are different from the statutory rate of 35% because of non-deductible expenses and the effects of state and local taxes.20Cash Flows
The Company's net cash provided by operating activities for the three months ended March 31, 2003 decreased $21,825,000 to $8,061,000 from $29,886,000 for the three months ended March 31, 2002. The decrease was primarily due to the increase in accounts receivable from the three months ended March 31, 2002 compared to the three months ended March 31, 2003 resulting from increased activity levels.
The Company's net cash used in investing activities for the three months ended March 31, 2003 decreased $7,586,000 to $18,822,000 from $26,408,000 for the three months ended March 31, 2002. The decrease from the three months ended March 31, 2002 compared to the three months ended March 31, 2003 was due to the completion of several minor acquisitions during the three months ended March 31, 2002 and minimal acquisition activity in the three months ended March 31, 2003.
The Company's net cash provided by financing activities for the three months ended March 31, 2003 decreased $26,486,000 to $5,114,000 from $31,600,000 for the three months ended March 31, 2002. During the three months ended March 31, 2003, there was minimal debt principal activity as compared to the three months ended March 31, 2002. During the three months ended March 31, 2002, the Company repurchased approximately $35,403,000 of its 14% Senior Subordinated Notes using the net proceeds from the Company's December 2001 equity offering and repaid approximately $45 million in borrowings under its revolver using proceeds from the Company's March 2002 senior notes offering.
The effect of exchange rates on cash for the three months ended March 31, 2003 and 2002 was a source of $165,000 and a use of $77,000, respectively. This was principally the result of the change in exchange rates of the Argentine peso for the corresponding periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions, capital expenditures and working capital requirements from cash flow from operations, bank borrowings and the issuance of equity and long-term debt. The Company believes that its current reserves of cash and cash equivalents,
access toavailability of its existing credit lines, access to capital markets and internally generated cashflowflows from operations areand will besufficient to finance the cash requirements of its current cash and futureoperations. CAPITAL EXPENDITURES Capital expenditures for fiscaloperations, acquisitions and capital expenditures.LONG-TERM DEBT
Other than capital lease obligations and miscellaneous notes payable, as of March 31, 2003,
have been and will be directed toward selectively refurbishingthe Company'sassets as business conditions warrant. The Company will continue to evaluate opportunities to acquire or divest assets or businesses to enhance the Company's primary operations. Such capital expenditures, acquisitionslong-term debt was comprised of (i) a senior credit facility, (ii) a series of 83/8% Senior Notes Due 2008, (iii) a series of 14% Senior Subordinated Notes Due 2009, anddivestitures are at the discretion(iv) a series ofthe Company and will depend on management's view of market conditions as well as other factors. LONG-TERM DEBT SENIOR CREDIT FACILITY5% Convertible Subordinated Notes Due 2004.Senior Credit Facility
On July 15, 2002, the Company entered into a Third Amended and Restated Credit Agreement, as subsequently amended (the
"New Senior"Senior Credit Facility"). TheNewSenior Credit Facility consists of a $150,000,000 revolving loan facility with a$40,000,000$75,000,000 sublimit for letters of credit. The loans are21
secured by most of the tangible and intangible assets of the Company. The revolving loan commitment will terminate on July 15, 2005 and all revolving loans must be paid on or before that date. The revolving loans bear interest based upon, at the Company's option, the prime rate plus a variable margin of 0.00% to
0.75%1.00% or a Eurodollar rate plus a variable margin of1.25%1.75% to2.75%3.00%. TheNewSenior Credit Facility has customary affirmative and negative covenants including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum net worth, as well as limitations on liens and indebtedness and restrictions on dividends, acquisitions and dispositions. As ofSeptember 30, 2002, $62,000,000March 31, 2003, the Company was in compliance with all covenants contained in the Senior Credit Facility.As of March 31, 2003, approximately $59,000,000 was outstanding under the revolving loan facility and approximately
$30,797,000$38,823,000 of letters of credit related toworkersworkers' compensation insurance were outstanding. The Companyborroweddrew down approximately$53,000,000$53 million on July 19, 2002 inJuly under the New Senior Credit Facility in order to completeconnection with the acquisition of QSI.Since September 30, 2002, the Company has repaid $10,000,000 leaving $52,000,000 outstanding under the revolving loan facility as of November 13, 2002.8
3/8% SENIOR NOTES3/8% Senior NotesOn March 6, 2001, the Company completed a private placement of $175,000,000 of 8
3/8%3/8% Senior Notes due 2008 (the "83/8%3/8% Senior Notes"). The net cash proceeds from the private placementnet of fees and expenseswere used to repay all of the remaining balance of the original termloanloans under the Company'spreviousthen outstanding senior credit facility (the "Prior Senior Credit Facility") and a portion of the revolving loan facilitythen outstandingunder theCompany's previous senior credit facility.Prior Senior Credit Facility then outstanding. On March 1, 2002, the Company completed a public offering of an additional $100,000,000 of 83/8%3/8% Senior Notes due2008 at 101.5% of par.2008. The net cash proceeds from the public offering were used to repay all of the remaining balance of the revolving loan facility21under the Company's previous senior credit facility.Prior Senior Credit Facility. The 83/8%3/8% Senior Notes are senior unsecuredobligations.obligations and are fully and unconditionally guaranteed by all of the Company's subsidiaries (except for its foreign subsidiaries operating in Argentina and Canada). The 83/8%3/8% Senior Notes are effectivelysubordinatesubordinated tothe Company'sKey's secured indebtedness, which includes borrowings under theNewSenior Credit Facility.On and after March 1, 2005, the Company may redeem some or all of the 8
3/8%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 83/8%3/8% Senior Notes with the proceeds of certain sales of equity at 108.375% of par plus accrued interest.At
September 30, 2002,March 31, 2003, $275,000,000 principal amount of the 83/8%3/8% Senior Notes remained outstanding. The 83/8% Senior Notes require semi-annual interest payments on March 1 and September 1 of each year. Interest of approximately $11,516,000 was paid on March 1, 2003. As of March 31, 2003, the Company was in compliance with all covenants contained in the 83/8% Senior Notes.14%
SENIOR SUBORDINATED NOTESSenior Subordinated NotesOn January 22, 1999, the Company completed the private placement of 150,000 units (the "Units") consisting of $150,000,000 of 14% Senior Subordinated Notes due 2009 (the "14% Senior Subordinated Notes") and 150,000 warrants to purchase 2,173,433 shares of the Company's
Common Stockcommon stock at an exercise price of $4.88125 per share (the "Unit Warrants"). The net cash proceeds from the private placement were used to repay substantially all of the remaining $148,600,000 principal amount (plus accrued interest) owed under the Company's bridge loan facility arranged in connection with the acquisition of Dawson Production Services, Inc. ("Dawson").The 14% Senior Subordinated Notes are subordinate to the Company's senior indebtedness, which includes borrowings under the New Senior Credit Facility and the 8 3/8% Senior Notes. The Unit Warrants have separated from the 14% Senior Subordinated Notes and became exercisable on January 25, 2000. As of September 30, 2002, 63,500 Unit Warrants had been exercised, producing approximately $4,173,000 of proceeds to the Company and leaving 86,500 Unit Warrants outstanding.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 was allowed to redeem up to 35% of the aggregate principal amount of the 14% Senior Subordinated Notes at 114% of par plus accrued interest with the proceeds of certain sales of equity.
At SeptemberDuring the year ended June 30, 2001, the Company exercised its right of redemption for $10,313,000 principal amount of the 14% Senior Subordinated Notes at a price22
of 114% of the principal amount plus accrued interest. This transaction resulted in a loss of approximately $2,561,000. On January 14, 2002, the Company exercised its right of redemption for $35,403,000 principal amount of the 14% Senior Subordinated Notes at a price of 114% of the principal amount plus accrued interest. This transaction resulted in a loss of approximately $8,468,000. Also, during the year ended June 30, 2002, the Company purchased and canceled $6,784,000 principal amount of the 14% Senior Subordinated Notes at a price of 116% of the principal amount plus accrued interest. These transactions resulted in a loss of approximately $1,821,000.
The Unit Warrants 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 and the 83/8% Senior Notes. The Senior Subordinated Notes are fully and unconditionally guaranteed by the Company's subsidiaries (except for its foreign subsidiaries operating in Argentina and Canada).
At March 31, 2003, $97,500,000 principal amount of the 14% Senior
SubordinateSubordinated Notesremainremained outstanding. The 14% Senior Subordinated Notes pay interest semi-annually on January 15 and July 15 of each year. Interest of approximately $6,825,000 was paid on January 15, 2003. As of March 31, 2003, 63,500 Unit Warrants had been exercised, producing approximately $4,173,000 of proceeds to the Company and leaving 86,500 Unit Warrants outstanding. As of March 31, 2003, the Company was in compliance with all covenants contained in the 14% Senior Subordinated Notes.5%
CONVERTIBLE SUBORDINATED NOTESConvertible Subordinated NotesIn
late September and early October1997, the Company completed a private placement of $216,000,000 of 5% Convertible Subordinated Notes due 2004 (the "5% Convertible Subordinated Notes"). The 5% Convertible Subordinated Notes are subordinate to the Company's senior indebtedness which includes borrowings under theNewSenior Credit Facility, the 14% Senior Subordinated Notes and the 83/8%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 the
quarterthree months endedSeptember 30, 2002,March 31, 2003, the Company repurchased (and canceled)an additional $204,000approximately $55,000 principal amount of the 5% Convertible Subordinated Notes, leaving$49,747,000$49,499,000 outstanding as ofSeptember 30, 2002.March 31, 2003. These repurchases resulted ingainsa gain of approximately$10,000. 22$2,000. Interest on the 5% Convertible Subordinated Notes is payable on March 15 and September 15 of each year. Interest of approximately $1,237,000 was paid on March 15, 2003. As of March 31, 2003, the Company was in compliance with all covenants contained in the 5% Convertible Subordinated Notes. The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in Note 1 to the consolidated financial statements included in the Company's
AnnualTransition Report on Form10-K.10-K as of and for the six months ended December 31, 2002.Certain of the policies require management to make significant and subjective estimates which are sensitive to deviations of actual results from management's assumptions. In particular, management makes estimates regarding the fair value of the Company's reporting units in assessing potential impairment of goodwill. In addition, the Company makes estimates regarding future undiscounted cash flows from the future use of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.
In assessing impairment of goodwill, the Company has used estimates and assumptions in estimating the fair value of its reporting units. Actual future results could be different than the estimates and assumptions used. Events or circumstances which might lead to an indication of impairment of goodwill would include, but might not be limited to, prolonged decreases in expectations of long-term well servicing and/or drilling activity or rates brought about by prolonged decreases in oil or natural gas prices, changes in government regulation of the oil and natural gas industry or other events which could affect the level of activity of exploration and production companies.
In assessing impairment of long-lived assets other than goodwill where there has been a change in circumstances indicating that the carrying amount of a long-lived asset may not be recoverable, the Company has estimated future undiscounted net cash flows from use of the asset based on actual historical results and expectations about future economic circumstances including oil and natural gas prices and operating costs. The estimate of future net cash flows from use of the asset could change if actual prices and costs differ due to industry conditions or other factors affecting the Company's performance.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDSRecently,In January 2003, the
Financial Accounting Standards Board,FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 ("FASB"FIN 46"). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in FIN 46. FIN 46 applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of FIN 46 is not expected to have a material effect on the Company's financial statements. FIN 46 requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities FIN 46 becomes effective.In April 2003, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS146"149"). SFAS146 establishes requirements149 amendments require that contracts with comparable characteristics be accounted forfinancial accountingsimilarly, clarifies when a contract with an initial investment meets the characteristic of a derivative and clarifies when a derivative requires special reportingfor costs associated with exit or disposal activities.in the statement of cash flows. SFAS146149 is effective forexithedging relationships designated and for contracts entered into ordisposal activities initiatedmodified afterDecember 31, 2002.June 30, 2003, except for24
provisions that relate to SFAS 133 Statement Implementation Issues that have been effective for fiscal quarters prior to June 15, 2003, which should be applied in accordance with their respective effective dates, and certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not exist, which should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The
Companyapplication of SFAS 149 iscurrently assessingnot expected to have a material effect on theimpact of this standard on itsCompany's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSpecial Note: Certain statements set forth below under this caption constitute "forward-looking statements". See
"Note"Special Note Regarding Forward-Looking Statements"in Item 2for additional factors relating to such statements.The primary objective of the following information is to provide forward-looking quantitative and qualitative information about the
Company'sKeys's potential exposure to market risk.23The term "market risk" refers to the risk of loss arising from adverse changes in foreign currency exchange, interest rates and oil and natural gas prices. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures. At
September 30, 2002,March 31, 2003, the Company had long-term debt and capital lease obligations outstanding of$504,452,000.approximately $499,069,000. Of this amount,$420,586,000,approximately $420,365,000 or83%84%, bears interest at fixed rates as follows:
Balance at September 30, 2002 ------------------ (Thousands)8 3/8% Senior Notes Due 2008..................................... $ 276,383 14% Senior Subordinated Notes Due 2009........................... 94,333 5% Convertible Subordinated Notes Due 2004....................... 49,747 Other (rates approximate 8.0%)................................... 123 --------- $ 420,586 =========
At March 31,
2003(thousands) 83/8% Senior Notes Due 2008 $ 276,278 14% Senior Subordinated Notes Due 2009 94,494 5% Convertible Subordinated Notes Due 2004 49,499 Other (rates approximate 8.0%) 94 $ 420,365 The remaining
$83,866,000$78,704,000 of long-term debt and capital lease obligations outstanding as ofSeptember 30, 2002March 31, 2003 bears interest at floating rates, which averaged approximately4.32%4.1% atSeptember 30, 2002.March 31, 2003. A 10% increase in short-term interest rates on the floating-rate debt outstanding atSeptember 30, 2002March 31, 2003 would equal approximately4341 basis points. Such an increase in interest rates would increase Key'sfiscal2003 annual interest expense by approximately$400,000$300,000 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.
During
fiscalthe year ended June 30, 2002, the Argentine government suspended the law tying the Argentine peso to the U.S. dollar at the conversion ratio of 1:1 and created a dual currency system in Argentina.The Company'sKey's net assets of its Argentinasubsidiary issubsidiaries are based on the U.S. dollar equivalent of such amounts measured in Argentine pesos as of March 31, 2003 and December 31,2001.2002. Assets and liabilities of the Argentine operations were translated to U.S. dollars atSeptember 30,March 31, 2003 and December 31, 2002 using the applicable free market conversion ratio of3.7:3.0:1 and 3.4:1, respectively, and will be translated at future dates using the applicable free market conversion ratio on such dates. Key's net earnings and cash flows from its Argentina subsidiarieswere tied to the U.S. dollar for the six months ended December 31, 2001 andare based on the U.S. dollar25
equivalent of such amounts measured in Argentine
pesos for periods after December 31, 2001.pesos. Revenues, expenses and cashflowflows will be translated using the average exchangerates during the periods after December 31, 2001.rates.The change in the Argentine peso to the U.S. dollar exchange rate since December 31,
20012002 hasreducedincreased stockholders' equity by$46,340,000,approximately $3,179,000, through achargecredit to other comprehensive loss throughSeptember 30, 2002. 24March 31, 2003. Key's net assets, net earnings and cash flows from its Canadian subsidiary are based on the U.S. dollar equivalent of such amounts measured in Canadian dollars. Assets and liabilities of the Canadian operations are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenues and expenses are translated using the average exchange rate during the reporting period.
A 10% change in the Canadian-to-U.S. Dollar exchange rate would not be material to the net assets, net earnings or cash flows of the Company.
Key's net assets, net earnings and cash flows from its Egyptian subsidiary
operating in Egyptare based on the U.S. dollar. Foreign currency transactions are included in determination of net income for the period.Key's major market risk exposure for its oil and natural gas production operations is in the pricing applicable to its oil and natural gas sales. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices for natural gas. Pricing for oil and natural gas production has been volatile and unpredictable for
severalmany 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
September 30, 2002,March 31, 2003, Key had an oiland natural gas priceputoptionsoption in place, as detailed in the following table.The total fiscal 2003 hedgedHedged oiland natural gasvolumesrepresent approximately 40% and 32%as a percentage of actual production was 41%,respectively, of expected 2003 calendar year total production.for the three months ended March 31, 2003. A 10% variation in the market price of oil or natural gas from their levels atSeptember 30, 2002March 31, 2003 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
September 30,March 31, 2003 and 2002:
MONTHLY VOLUMES --------------- STRIKE PRICE NATURAL PER BBL/MMBTU OIL GAS ---------------- (BBLS) (MMBTU) TERM FLOOR CAP FAIR VALUE ----- ------ ----------------- ------- --- ----------At September 30, 2002 Oil Put........... 5,000 - Mar 2002-Feb 2003 $ 22.00 - $ 3,000 Oil Put........... 4,000 - Mar 2003-Feb 2004 $ 21.00 - $ 72,000 Gas Put........... - 75,000 Mar 2002-Feb 2003 $ 3.00 - $ 10,000(The
Monthly Income Strike Price
Per Bbl/MMbtuOil
(Bbls)Gas
(MMbtu)Term Floor Cap Fair Value At March 31, 2003 Oil Put 4,000 — Mar 2003-Feb 2004 $ 21.00 — $ 17,000
At March 31, 2002
Oil Put 5,000 — Mar 2002-Feb 2003 $ 22.00 — $ 46,000 Natural Gas Put — 75,000 Mar 2002-Feb 2003 $ 3.00 — $ 131,000 (The strike prices for the oil puts are based on the NYMEX spot price for West Texas Intermediate; the strike price for the natural gas put is based on the Inside FERC-El Paso Permian spot price.)
2526
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
- (a)
- Evaluation of Disclosure Controls and Procedures
Within the
90 day90-day period prior to the filing date of this Quarterly Report on Form 10-Q, the Company, under the supervision, and with the participation, of its management, including its principal executive officer and principal financial officer, performed an evaluation of the design and operation of the Company's disclosure controls and procedures (as defined in Securities and Exchange Act Rule 13a-14(c)). Based on that evaluation, the Company's principal executive officer and principal financial officer concluded that such disclosure controls and procedures are effective to ensure that material information relating to the Company, including its consolidated subsidiaries, is accumulated and communicated to the Company's management and made known to the principal executive officer and principal financial officer, particularly during the period for which this periodic report was being prepared.No
- (b)
- Changes in Internal Controls
There were no significant changes
were madein the Company's internal controlsor induring the three month period ended March 31, 2003 nor did any other factors exist that could significantly affectthesesuch controlssubsequent tothrough the datethe controls were evaluated as discussed above. 26of this report. 27
PARTII -II—OTHER INFORMATIONITEMItem 1.
LEGAL PROCEEDINGS.Legal Proceedings.None.
ITEM
Item 2.CHANGES IN SECURITIES AND USE OF PROCEEDS.Changes in Securities and Use of Proceeds.None.
ITEM
Item 3.DEFAULTS UPON SENIOR SECURITIES.Defaults Upon Senior Securities.None.
ITEM
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.Submission of Matters to a Vote of Security Holders.None.
ITEM
Item 5.OTHER INFORMATIONOther InformationNone.
ITEM
Item 6.EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K.
- (a)
- Exhibits
10.1* Second Amended and Restated Credit Agreement dated as of July 15, 2002, among the Registrant, the several lenders from time to time parties thereto, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets, Inc., and Wells Fargo Bank (Texas), as Co-Lead Arrangers and Credit Lyonnais New York Bank, Lehman Commercial Paper, Inc., and Royal Bank of Canada, as the Documentation Agents. 10.2* Second Amendment to Second Amended and Restated Employment Agreement dated October 28, 2002 between the Registrant and Francis D. John.- 99.1*
- Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ----------
- *
- Filed herewith.
- (b)
- Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended
June 30, 2002:March 31, 2003:
- (i)
- Current Report on Form 8-K dated
July 16, 2002January 31, 2003 filed to report thenew senior credit facility andupdatedguidance on the quarter and fiscal year ended June 30, 2002. (ii) Current Report on Form 8-K dated August 2, 2002 filedpro forma information with respect toreportthe acquisition of Q Services, Inc.2728
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEY ENERGY SERVICES, INC. Dated: November 14, 2002 By /s/ Francis D. John --------------------- President and Chief Executive Officer Dated: November 14, 2002 By /s/ Royce W. Mitchell --------------------- Chief Financial Officer 28
KEY ENERGY SERVICES, INC.
Dated: May 15, 2003
By
/s/ FRANCIS D. JOHN
President and Chief Executive Officer
Dated: May 15, 2003
By
/s/ ROYCE W. MITCHELL
Chief Financial Officer29
I, Francis D. John, certify that:
- 1.
- I have reviewed this quarterly report on Form 10-Q of Key Energy Services, Inc.;
- 2.
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
- 3.
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
thisthe quarterly report.- 4.
- The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
wehave:- a)
Designed- designed such disclosure controls and procedures to ensure that material information relating to the
registrant,Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;- b)
Evaluated- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of
thisthe quarterly report (the "Evaluation Date"); and- c)
Presented- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- 5.
- The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
- a)
All- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material
weaknessesweakness in internal controls; and- b)
Any- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
29- 6.
- The registrant's other certifying officers and I have indicated in
thisthe quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Dated: November 14, 2002 By /s/ Francis D. John ------------------- Francis D. John Chief Executive Officer
Dated: May 15, 2003 By /s/ FRANCIS D. JOHN
Chief Executive Officer30
I, Royce W. Mitchell, certify that:
- 1.
- I have reviewed this quarterly report on Form 10-Q of Key Energy Services, Inc.;
- 2.
- Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
- 3.
- Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
thisthe quarterly report.- 4.
- The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
wehave:- a)
Designed- designed such disclosure controls and procedures to ensure that material information relating to the
registrant,Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;- b)
Evaluated- evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the
thisquarterly report (the "Evaluation Date"); and- c)
Presented- presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
- 5.
- The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
- a)
All- all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material
weaknessesweakness in internal controls; and- b)
Any- any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
31- 6.
- The registrant's other certifying officers and I have indicated in
thisthe quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Dated: November 14, 2002 By /s/ Royce W. Mitchell --------------------- Royce W. Mitchell Chief Financial Officer 32
| Dated: May 15, 2003 | By | /s/ ROYCE W. MITCHELL Chief Financial Officer |