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~~Key Energy Services, Inc. INDEX~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

ý	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~
~~For the quarterly period ended 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 to~~

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-8038

KEY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Maryland		04-2648081
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6 Desta Drive, Midland, Texas		79705
(Address of principal executive offices)		~~79705~~ (ZIP Code)

~~Registrant's~~Registrant’s telephone number including area code: ~~(915)~~ (432) 620-0300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes ý Noo

Common Shares outstanding at ~~May 14, 2003: 129,477,901~~

November 13, 2003 130,555,141

Key Energy Services, Inc.

~~INDEX~~
INDEX
PART I. Financial Information

~~Item 1.~~

~~Financial Statements~~
Item 1.
Financial Statements
Consolidated Balance Sheets as of ~~March 31,~~September 30, 2003 (unaudited) and December 31, 2002

Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended ~~March 31,~~September 30, 2003 and 2002

~~Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002~~

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended ~~March 31,~~September 30, 2003 and 2002

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002
Notes to Consolidated Financial Statements

Item 2.

~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Disclosure Controls and Procedures

PART II. Other Information

Item 1.

Legal Proceedings

Item 2.

Changes in Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information

Item 6.

Exhibits and Reports on Form 8-K

Signatures
2

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

September 30,
2003

December 31,
2002

(Unaudited)

(thousands, except share data)

ASSETS

Current assets:

Cash and cash equivalents

$
89,427

$
9,044

Accounts receivable, net of allowance for doubtful accounts of $5,813 and $4,439, at September 30, 2003 and December 31, 2002, respectively

162,819

141,958

Inventories

14,022

10,243

Prepaid expenses and other current assets

12,446

14,329

Total current assets

278,714

175,574

Property and equipment:

Well servicing equipment

967,013

935,911

Contract drilling equipment

132,556

128,199

Motor vehicles

81,554

79,110

Oil and natural gas properties and other related equipment, successful efforts method

—

48,362

Furniture and equipment

61,937

51,349

Buildings and land

50,003

48,922

Total property and equipment

1,293,063

1,291,853

Accumulated depreciation and depletion

(389,329
)
(335,348
)
Net property and equipment

903,734

956,505

Goodwill, net

346,335

322,270

Deferred costs, net

14,182

13,503

Notes and accounts receivable - related parties

190

251

Other assets

24,446

33,899

Total assets

$
1,567,601

$
1,502,002

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$
20,885

$
28,818

Other accrued liabilities

70,504

57,823

Accrued interest

8,841

15,226

Current portion of long-term debt and capital lease obligations

24,616

7,008

Total current liabilities

124,846

108,875

Long-term debt, less current portion

520,837

472,336

Capital lease obligations, less current portion

11,722

14,221

Deferred revenue

726

8,460

Non-current accrued expenses

36,919

40,477

Deferred tax liability

154,182

161,265

Commitments and contingencies

—

—

Stockholders’ equity:

Common stock, $0.10 par value; 200,000,000 shares authorized, 130,337,664 and 128,757,693 shares issued at September 30, 2003 and December 31, 2002, respectively

13,034

12,876

Additional paid-in capital

687,421

673,249

Treasury stock, at cost; 416,666 shares at September 30, 2003 and December 31, 2002

(9,682
)
(9,682
)
Accumulated other comprehensive loss

(41,082
)
(45,431
)
Retained earnings

68,678

65,356

Total stockholders’ equity

718,369

696,368

Total liabilities and stockholders’ equity

$
1,567,601

$
1,502,002

~~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
3

Key Energy Services, Inc.

Unaudited Consolidated Statements of ~~Cash Flows~~
Operations

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(thousands, except per share data)

REVENUES:

Well servicing

$
224,251

$
185,967

$
643,379

$
494,452

Contract drilling

18,819

14,399

51,925

41,491

Other

312

50

(174
)
1,093

Total revenues

243,382

200,416

695,130

537,036

COSTS AND EXPENSES:

Well servicing

154,565

131,630

455,645

365,953

Contract drilling

13,676

10,517

38,013

31,970

Depreciation, depletion and amortization

25,898

24,962

75,960

64,143

General and administrative.

24,974

25,808

70,248

56,103

Interest

12,726

11,262

35,940

31,548

Foreign currency transaction gain, Argentina

—

—

—

(401
)
(Gain) loss on retirement of debt

—

(10
)
(16
)
8,447

Total costs and expenses

231,839

204,169

675,790

557,763

Income (loss) from continuing operations before income taxes

11,543

(3,753
)
19,340

(20,727
)
Income tax benefit (expense)

(5,204
)
1,426

(8,152
)
8,251

INCOME (LOSS) FROM CONTINUING OPERATIONS

6,339

(2,327
)
11,188

(12,476
)
Discontinued operations including loss on sale of $7,804, net of tax

(7,396
)
(310
)
(7,866
)
(650
)
Cumulative effect on prior years of a change in accounting principle, net of tax

—

(2,873
)
—

(2,873
)
NET INCOME (LOSS)

$
(1,057
)
$
(5,510
)
$
3,322

$
(15,999
)

EARNINGS (LOSS) PER SHARE:

Net income (loss) before discontinued operations and cumulative effect of a change in accounting principle, net of tax:

Basic

$
0.05

$
(0.02
)
$
0.09

$
(0.11
)
Diluted

$
0.05

$
(0.02
)
$
0.09

$
(0.11
)

Discontinued operations

Basic

$
(0.06
)
$
—

$
(0.06
)
$
(0.01
)
Diluted

$
(0.06
)
$
—

$
(0.06
)
$
(0.01
)

Cumulative effect

Basic

$
—

$
(0.02
)
$
—

$
(0.03
)
Diluted

$
—

$
(0.02
)
$
—

$
(0.03
)

Net income (loss)

Basic

$
(0.01
)
$
(0.04
)
$
0.03

$
(0.15
)
Diluted

$
(0.01
)
$
(0.04
)
$
0.03

$
(0.15
)

WEIGHTED AVERAGE SHARES OUTSTANDING:

Basic

129,744

122,475

129,095

113,668

Diluted

131,433

122,475

130,987

113,668

See the accompanying notes which are an integral part of these consolidated financial ~~statements.~~statements
5
4

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 )

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(thousands)

(thousands)

NET INCOME (LOSS)

$
(1,057
)
$
(5,510
)
$
3,322

$
(15,999
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

Oil and natural gas derivatives adjustment, net of tax

72

(344
)
33

(980
)
Amortization of oil and natural gas derivatives, net of tax

—

210

695

31

Foreign currency translation gain (loss), net of tax

(2,044
)
1,945

3,620

(22,213
)
COMPREHENSIVE INCOME (LOSS), NET OF TAX

$
(3,029
)
$
(3,699
)
$
7,670

$
(39,161
)
See the accompanying notes which are an integral part of these consolidated financial ~~statements.~~statements
5

Key Energy Services, Inc.
Unaudited Consolidated Statements of Cash Flows

Nine Months Ended
September 30,

2003

2002

(thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)

$
3,322

$
(15,999
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation, depletion and amortization

75,960

64,143

Amortization of deferred debt issuance costs, discount and premium

2,501

2,249

Deferred income tax expense (benefit)

7,180

(3,451
)
Loss on sale of assets

41

307

Foreign currency transaction gain, Argentina

—

(401
)
(Gain) loss on retirement of debt

(16
)
8,447

Discontinued operations, net of tax

1,168

1,846

Cumulative effect of a change in accounting principle, net of tax

—

2,873

Change in assets and liabilities, net of effects from acquisitions:

(Increase) decrease in accounts receivable

(23,206
)
24,406

(Increase) decrease in other current assets

(851
)
3,122

Decrease in accounts payable, accrued interest and accrued expenses

(708
)
(13,960
)
Other assets and liabilities

7,516

9,460

Net cash provided by operating activities

72,907

83,042

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures – well servicing

(46,962
)
(41,571
)
Capital expenditures - contract drilling

(5,063
)
(8,975
)
Capital expenditures – other

(12,663
)
(14,081
)
Proceeds from sale of fixed assets

2,334

685

Proceeds from sale of oil and natural gas properties

19,700

—

Acquisitions – well servicing, net of cash acquired

(5,187
)
(106,691
)
Acquisitions – contract drilling, net of cash acquired

—

(2,037
)
Net cash used in investing activities

(47,841
)
(172,670
)

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of long-term debt

(107,716
)
(125,839
)
Repayment of capital lease obligations

(7,173
)
(7,570
)
Repurchase of volumetric production payment

(4,227
)
—

Proceeds from long-term debt

175,000

222,500

Proceeds paid for debt issuance costs

(2,963
)
(3,940
)
Proceeds from exercise of stock options

2,920

2,046

Other

(299
)
(247
)
Net cash provided by financing activities

55,542

86,950

Effect of exchange rates on cash

(225
)
(1,460
)

Net increase (decrease) in cash and cash equivalents

80,383

(4,138
)
Cash and cash equivalents at beginning of period

9,044

7,966

Cash and cash equivalents at end of period

$
89,427

$
3,828

See the accompanying notes which are an integral part of these consolidated financial statements
6

Key Energy Services, Inc.

~~KEY ENERGY SERVICES, INC.~~

Notes to Consolidated Financial Statements

~~March 31, 2003 and 2002~~
(Unaudited)
1.SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
Basis of Presentation

The consolidated financial statements of Key Energy Services, Inc. (the ~~"Company"~~“Company”, or ~~"Key"~~“Key”) and its wholly-owned subsidiaries as of ~~March 31,~~September 30, 2003 and for the three and nine month periods ended ~~March 31,~~September 30, 2003 and 2002 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange ~~Commission.~~Commission (the “SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. These unaudited interim consolidated financial statements should be read in conjunction with the audited financial statements included in the ~~Company's~~Company’s Transition Report on Form 10-K for the six months ended December 31, 2002. The results of operations for the three and nine month ~~period~~periods ended ~~March 31,~~September 30, 2003 are not necessarily indicative of the results of operations for the full fiscal year ending December 31, 2003.
~~Reclassifications~~Stock Based Compensation
Certain reclassifications have been made to the consolidated financial statements for the three months ended March 31, 2002 to conform to the presentation for the three months ended March 31, 2003. The reclassifications consist primarily of gains (losses) on the retirement of debt which are now being recorded as operating expenses rather than as extraordinary items in accordance with SFAS 145, which the Company adopted on July 1, 2002 (See Note 11).
~~2.    ASSET RETIREMENT OBLIGATIONS—SFAS 143~~
        On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). The new standard requires the Company to recognize a liability for the present value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset depreciating the additional cost over the estimated useful life of the asset. At March 31, 2003 and December 31, 2002, the asset retirement obligation was $9,344,000 and $9,231,000, respectively, related to expected abandonment costs of its oil and natural gas producing properties and salt water disposal wells. The increase in the balance from December 31, 2002 of $113,000 is due to accretion of the discounted liability.
~~3.    GOODWILL AND OTHER INTANGIBLE ASSETS—SFAS 142~~
        The Company follows the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. SFAS 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If impairment is indicated, then the fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been
7

acquired in a business combination. The amount of impairment for goodwill is measured as the excess of its carrying value over its fair value. The Company completed its most recent assessment of goodwill impairment as of June 30, 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 $15,274,000 and $18,669,000 at March 31, 2003 and December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately $5,235,000 and $7,511,000 at March 31, 2003 and December 31, 2002, respectively. Amortization expense for the three months ended March 31, 2003 and 2002 was approximately $1,119,000 and $415,000, respectively. Amortization expense for the next five succeeding years is estimated to be approximately $3,582,000, $2,544,000, $1,950,000, $1,597,000 and $343,000.
        The gross carrying amount of patents subject to amortization totaled approximately $2,396,000 and $2,380,000 at 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. Amortization expense for the three months ended March 31, 2003 was approximately $88,000. Amortization expense for the next five succeeding years is estimated to be approximately $352,000, $352,000, $352,000, $352,000 and $303,000.
        The Company has identified its reporting segments to be well servicing and contract drilling. Net goodwill allocated to such reporting segments at March 31, 2003 is approximately $323,440,000 and $14,306,000, respectively, and at December 31, 2002 is approximately $307,987,000 and $14,283,000, respectively. The change in the carrying amount of goodwill for the three months ended March 31, 2003 of approximately $15,476,000 relates principally to goodwill from the Q Services acquisition (See Note 6) and the foreign currency translation adjustment for the Company's Argentina operations.
~~4.    EARNINGS PER SHARE~~
        The Company accounts for earnings per share based upon Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming exercise of dilutive
8

~~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~~recognition and measurement principles of ~~accounting prescribed by~~ APB Opinion No. 25 ("(“APB ~~25"~~25”), ~~"Accounting~~“Accounting for Stock Issued to ~~Employees."~~Employees” and related interpretations. Under the ~~Company's~~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,~~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.~~recognized in the consolidated statement of operations.

Statement of Financial Accounting Standards No. 123 ("(“SFAS ~~123"~~123”), ~~"Accounting~~“Accounting for Stock-Based Compensation,"” sets forth alternative accounting and disclosure requirements for stock-based compensation arrangements. Companies may continue to follow the provisions of APB 25 to measure and recognize employee stock-based compensation; however, SFAS 123 requires disclosure of pro forma net income and earnings per share that would have been reported under the fair value based recognition provisions of SFAS 123. The following table illustrates the effect on net income and
9

earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:
7

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 )

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(thousands, except per share data)

Net income (loss):

As reported

$
(1,057
)
$
(5,510
)
$
3,322

$
(15,999
)
Deduct: Total stock-based employee compenstation expense determined under fair value based method for all awards, net of tax

(971
)
(2,497
)
(5,475
)
(8,510
)
Pro forma

$
(2,028
)
$
(8,007
)
$
(2,153
)
$
(24,509
)

Basic earnings per share:

As reported

$
(0.01
)
$
(0.04
)
$
0.03

$
(0.15
)
Pro forma

$
(0.02
)
$
(0.07
)
$
(0.02
)
$
(0.22
)

Diluted earnings per share:

As reported

$
(0.01
)
$
(0.04
)
$
0.03

$
(0.15
)
Pro forma

$
(0.02
)
$
(0.07
)
$
(0.02
)
$
(0.22
)
6.    Reclassifications
Certain reclassifications have been made to the consolidated financial statements for the three and nine months ended September 30, 2002 to conform to the presentation for the three and nine months ended September 30, 2003. Certain property and equipment of the Company, which may be used in either well servicing or drilling that had been previously classified as drilling has now been reclassified as well servicing along with related operating results. The reclassification was made because the majority of the services performed are well servicing in nature.
8

2.ASSET RETIREMENT OBLIGATIONS – SFAS 143
On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). The new standard requires the Company to recognize a liability for the present value of all legal obligations associated with the retirement of tangible long-lived assets and capitalize an equal amount as a cost of the asset depreciating the additional cost over the estimated useful life of the asset. At September 30, 2003 and December 31, 2002, the asset retirement obligation was approximately $3,570,000 and $9,231,000, respectively, related to expected abandonment costs of its oil and natural gas producing properties and salt water disposal wells. The decrease in the balance from December 31, 2002 of approximately $5,661,000 is primarily due to the sale of the Company’s oil and natural gas properties (see Note 12) and, to a lesser extent, the plugging and abandonment of saltwater disposal wells, partially offset by the acquisition of saltwater disposals wells and the accretion of the discounted liability.
3.GOODWILL AND OTHER INTANGIBLE ASSETS – SFAS 142
The Company follows the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 eliminates the amortization for goodwill and other intangible assets with indefinite lives. Intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives. Goodwill and other intangible assets no longer subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired as set forth in SFAS 142. The Company completed its most recent assessment of goodwill impairment for each of its reporting units as of June 30, 2003. The assessment did not result in an indication of goodwill impairment and as of September 30, 2003 management believes no additional assessment is necessary.
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 $14,332,000 and $18,669,000 at September 30, 2003 and December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately $5,068,000 and $7,511,000 at September 30, 2003 and December 31, 2002, respectively. Amortization expense for the three months ended September 30, 2003 and 2002 was approximately $982,000 and $1,260,000, respectively. Amortization expense for the nine months ended September 30, 2003 and 2002 was approximately $3,114,000 and $2,404,000, respectively. Amortization expense for the next five succeeding years is estimated to be approximately $3,329,000, $2,613,000, $2,026,000, $1,180,000 and $104,000.
9

The gross carrying amount of patents subject to amortization totaled approximately $2,469,000 and $2,380,000 at September 30, 2003 and December 31, 2002, respectively. Accumulated amortization related to these intangible assets totaled approximately $423,000 and $160,000 as of September 30, 2003 and December 31, 2002, respectively. The Company began acquiring patents on July 16, 2002. Amortization expense for the three months ended September 30, 2003 and 2002 was approximately $88,000 and $72,000, respectively. Amortization expense for the nine months ended September 30, 2003 and 2002 was approximately $263,000 and $72,000, respectively. Amortization expense for the next five succeeding years is estimated to be approximately $401,000, $401,000, $401,000, $373,000 and $290,000.
The Company has identified its reporting units in accordance with SFAS 142 to be well servicing and contract drilling. Net goodwill allocated to such reporting units at September 30, 2003 was approximately $332,026,000 and $14,309,000, respectively, and at December 31, 2002 was approximately $307,987,000 and $14,283,000, respectively. The change in carrying amount of goodwill for the three and nine months ended September 30, 2003 was approximately $1,671,000 and $24,065,000, respectively, and relates principally to the allocation of goodwill from the acquisition of Q Services, Inc. (See Note 5) and the preliminary allocation of goodwill from other small acquisitions, and foreign currency translation adjustments for the Company’s Argentina operations.
4.EARNINGS PER SHARE
The Company accounts for earnings per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”). Under SFAS 128, basic earnings per common share are determined by dividing net earnings applicable to common stock by the weighted average number of common shares actually outstanding during the period. Diluted earnings per common share is based on the increased number of shares that would be outstanding assuming exercise of dilutive stock options and warrants and conversion of dilutive outstanding convertible securities using the “as if converted” method.
10

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(thousands, except per share data)

Basic EPS Computation:

Numerator

Income (loss) before discontinued operations

$
6,339

$
(2,327
)
$
11,188

$
(12,476
)
Discontinued operations, net of tax

(7,396
)
(310
)
(7,866
)
(650
)
Cumulative effect of a change in accounting principle, net of tax

—

(2,873
)
—

(2,873
)
Net income (loss)

$
(1,057
)
$
(5,510
)
$
3,322

$
(15,999
)
Denominator

Weighted average common shares outstanding

129,744

122,475

129,095

113,668

Basic EPS:

Income (loss) before discontinued operations

$
0.05

$
(0.02
)
$
0.09

$
(0.11
)
Discontinued operations, net of tax

(0.06
)
—

(0.06
)
(0.01
)
Cumulative effect of a change in accounting principle, net of tax

—

(0.02
)
—

(0.03
)
Net income (loss)

$
(0.01
)
$
(0.04
)
$
0.03

$
(0.15
)

Diluted EPS Computation:

Numerator

Income (loss) before discontinued operations

$
6,339

$
(2,327
)
$
11,188

$
(12,476
)
Discontinued operations, net of tax

(7,396
)
(310
)
(7,866
)
(650
)
Cumulative effect of a change in accounting principle, net of tax

—

(2,873
)
—

(2,873
)
Net income (loss)

$
(1,057
)
$
(5,510
)
$
3,322

$
(15,999
)
Denominator

Weighted average common shares outstanding

129,744

122,475

129,095

113,668

Warrants

427

—

438

—

Stock options

1,262

—

1,454

—

131,433

122,475

130,987

113,668

Diluted EPS:

Income (loss) before discontinued operations

$
0.05

$
(0.02
)
$
0.09

$
(0.11
)
Discontinued operations, net of tax

(0.06
)
—

(0.06
)
(0.01
)
Cumulative effect of a change in accounting principle, net of tax

—

(0.02
)
—

(0.03
)
Net income (loss)

$
(0.01
)
$
(0.04
)
$
0.03

$
(0.15
)
The diluted earnings per share calculation for the three and nine month periods ended September 30, 2003 excludes the effect of the potential exercise of 1,878,000 of the Company’s stock options and the potential exercise of the Company’s convertible debt because the effects of such instruments on earnings per share would be anti-dilutive. The diluted earnings per share calculation for the three months and nine month periods ended September 30, 2002 excludes the effect of the potential exercise of the Company’s convertible debt, outstanding warrants and stock options because the effects of such instruments on earnings per share would be anti-dilutive.
11

5.Q SERVICES ACQUISITION

On July 19, 2002, the Company acquired Q Services, Inc. ~~("QSI"~~(“QSI”) pursuant to an Agreement and Plan of Merger dated May 13, 2002, as amended, by and among the Company, Key Merger Sub, Inc. and QSI. As consideration for the acquisition, the Company issued approximately 17.1 million shares of its common stock to the QSI shareholders and paid approximately $94.2 million in cash at the closing to retire debt and preferred stock of QSI and to satisfy certain other obligations of QSI. In addition to 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~~$251 million. The value of the shares issued was based on the closing price of the ~~Company's~~Company’s common stock on the closing date of $8.75 per share. The results of ~~QSI's~~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~~operated in adjacent and or overlapping locations and ~~expect~~the Company expects to realize future cost savings and synergies in connection with the merger.
10

The following table summarizes the ~~estimated~~ fair value of the assets acquired and liabilities assumed at the date of acquisition:
12

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

Net Assets
Acquired

(thousands)

Current assets

$
37,734

Property and equipment

114,519

Intangible assets

3,242

Other assets

344

Goodwill

136,640

Total assets aquired

292,479

Current liabilities

18,597

Capital lease obligations

77

Non-current accrued expenses

17,908

Deferred tax liablity

5,124

Total liabilities assumed

41,706

Net assets acquired

$
250,773

The $3,242,000 of intangible assets consists of noncompete agreements which have a weighted-average useful life of approximately two years. The ~~$134,567,000~~$136,640,000 of goodwill was allocated to the well servicing reporting segment. Of that amount, $11,645,000 is expected to be deductible for income taxes.

During the three months ended March 31, 2003, the Company recorded an adjustment of approximately ~~$25~~$24.5 million to reduce the cost allocated to certain equipment in the preliminary ~~purchase price~~fair value allocation. The adjustment was based on ~~a preliminary~~an 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.
13

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 )

Nine Months
Ended September 30,
2002

(thousands, except per share data)

Revenues

$
622,799

Net income (loss)

(17,595
)
Basic earnings (loss) per share

$
(0.14
)
6.SENIOR NOTES OFFERING
On May 14, 2003, the Company completed a public offering of $150,000,000 of 6³/8% Senior Notes due 2013. The cash proceeds from the debt offering, net of fees and expenses, were used to repay the balance of the revolving loan facility then outstanding under the Company’s senior credit facility, with the remainder to be used for general corporate purposes, including further debt retirement.
7.COMMITMENTS AND CONTINGENCIES

Various suits and claims arising in the ordinary course of business are pending against the Company. Management does not believe that the disposition of any of these items will result in a material adverse impact to the consolidated financial position, results of operations or cash flows of the Company.
8.    ~~DERIVATIVE FINANCIAL INSTRUMENTS~~SUPPLEMENTARY INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Cash Payments. 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~~
11

to its commodity hedges. The Company only deals with reputable financial institutions as counter-parties and anticipates that such counter-parties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of the counter-parties.
        The Company periodically hedges a portion of its oil and natural gas production through collar and option agreements. The purpose of the hedges is to provide a measure of stability in the volatile environment of oil and natural gas prices and to manage exposure to commodity price risk under existing sales commitments. The Company's risk management objective is to lock in a range of pricing for expected production volumes. This allows the Company to forecast future cash flows within a predictable range. The Company meets this objective by entering into collar and option arrangements which allow for acceptable cap and floor prices. The Company desires a measure of stability to ensure that cash flows do not fall below a certain level.
        The Company does not enter into derivative instruments for any purpose other than for economic hedging. The Company does not speculate using derivative instruments. The Company has identified the following derivative instruments:
        ~~Freestanding Derivatives.~~    On May 25, 2001, the Company entered into an option arrangement for a 12-month period beginning March 2002 whereby the counter-party will pay if the oil and natural gas 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 assetspaid interest of approximately ~~$17,000~~$39,824,000 and ~~$179,000 during~~$38,422,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2003 and 2002, respectively, net of capitalized interest of approximately $2,154,000 and $1,465,000 for the nine months ended September 30, 2003 and 2002, respectively. The Company ~~recorded no ineffectiveness~~made income tax payments of approximately $992,000 and $246,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2003 and ~~an earnings charge~~2002, respectively.
Non-Cash Investing and Financing Activities. The fair value of common stock issued in purchase transactions, other than for the acquisition of QSI, was approximately $11,404,000 and $23,238,000 for the nine months ended September 30, 2003 and 2002, respectively. The Company incurred a non-compete payment obligation in a purchase transaction of approximately ~~$9,000~~$200,000 for the ~~three~~nine months ended ~~March 31, 2002.~~
September 30, 2003. The ~~following table sets forth~~Company incurred capital lease obligations of approximately $3,597,000 and $5,230,000 for the ~~future volumes hedged by year and the weighted-average strike price of the option contracts at March 31,~~nine months ended September 30, 2003 and ~~2002:~~2002, respectively.

Monthly Income

Strike Price
Per Bbl/MMbtu

Oil
(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.)~~
14

9.BUSINESS SEGMENT INFORMATION

The ~~Company's~~Company’s reportable business segments are well servicing and contract drilling. ~~Oil and natural gas production operations are presented in "Corporate/Other".~~
Well ~~Servicing:~~Servicing: The ~~Company's~~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:~~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~~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
Servicing
Contract
Drilling
Corporate /
Other
Total

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
15

Well
Servicing

Contract
Drilling

Corporate
/ Other

Total

Three Months Ended September 30, 2003

Operating revenues

$
224,251

$
18,819

$
312

$
243,382

Operating profit

69,686

5,143

312

75,141

Depreciation, depletion and amortization

21,473

2,642

1,783

25,898

Interest expense

137

—

12,589

12,726

Net income (loss) from continuing operations*

13,049

319

(7,029
)
6,339

Identifiable assets

815,190

88,531

317,545

1,221,266

Capital expenditures (excluding acquisitions)

15,883

1,060

4,891

21,834

Three Months Ended September 30, 2002

Operating revenues

$
185,967

$
14,399

$
50

$
200,416

Operating profit

54,337

3,882

50

58,269

Depreciation, depletion and amortization

21,876

2,392

694

24,962

Interest expense

276

—

10,986

11,262

Net income (loss) from continuing operations*

4,988

(227
)
(7,088
)
(2,327
)
Identifiable assets

828,845

88,742

253,053

1,170,640

Capital expenditures (excluding acquisitions)

12,115

191

4,286

16,592

*
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~~Company’s foreign operations (which consists of Argentina, Canada and Egypt) for the three months ended September 30, 2003 and 2002 were approximately $12.7 million and $6.1 million, respectively. Operating profits for the Company’s foreign operations for the three months ended ~~March 31,~~September 30, 2003 and 2002 were ~~$9.6~~approximately $5.4 million and ~~$4.0~~$1.4 million, respectively. ~~Operating profits~~The Company had approximately $55.4 million and $41.1 million of identifiable assets as of September 30, 2003 and 2002, respectively, related to foreign operations. Capital expenditures for the ~~Company's~~Company’s foreign operations for the three months ended ~~March 31,~~September 30, 2003 and 2002 were ~~$4.4~~approximately $0.8 million and ~~$0.7~~$1.7 million, respectively.
16

Well
Servicing

Contract
Drilling

Corporate
/ Other

Total

Nine Months Ended September 30, 2003

Operating revenues

$
643,379

$
51,925

$
(174
)
$
695,130

Operating profit

187,734

13,912

(174
)
201,472

Depreciation, depletion and amortization

63,769

7,854

4,337

75,960

Interest expense

476

—

35,464

35,940

Net income (loss) from continuing operations*

33,832

471

(23,115
)
11,188

Identifiable assets

815,190

88,531

317,545

1,221,266

Capital expenditures (excluding acquisitions)

46,962

5,063

12,663

64,688

Nine Months Ended September 30, 2002

Operating revenues

$
494,452

$
41,491

$
1,093

$
537,036

Operating profit

128,499

9,521

1,093

139,113

Depreciation, depletion and amortization

54,517

7,000

2,626

64,143

Interest expense

771

—

30,777

31,548

Net income (loss) from continuing operations*

8,501

(1,464
)
(19,513
)
(12,476
)
Identifiable assets

828,845

88,742

253,053

1,170,640

Capital expenditures (excluding acquisitions)

41,571

8,975

14,081

64,627

* Net income (loss) for the contract drilling segment includes a portion of well servicing general and administrative expenses allocated on a percentage of revenue basis.
Operating revenues for the Company’s foreign operations for the nine months ended September 30, 2003 and 2002 were approximately $34.1 million and $15.3 million, respectively. Operating profits for the Company’s foreign operations for the nine months ended September 30, 2003 and 2002 were approximately $14.2 million and $3.1 million, respectively. The Company had ~~$56.2~~approximately $55.4 million and ~~$31.6~~$41.1 million of identifiable assets as of ~~March 31,~~September 30, 2003 and 2002, respectively, related to foreign operations. Capital expenditures for the Company’s foreign operations for the nine months ended September 30, 2003 and 2002 were approximately $2.6 million and $6.1 million, respectively.
10.CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The ~~Company's~~Company’s senior notes are guaranteed by substantially all of the ~~Company's~~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~~“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
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
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~~The 6³/

December 31, 2002

Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
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~~8

Three Months Ended March 31, 2003

Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
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~~% Senior Notes are guaranteed by the Guarantor A group of subsidiaries, which consists of substantially all of the Company’s subsidiaries. The 8³/

Three Months Ended March 31, 2002

Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
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~~8

Three Months Ended March 31, 2003

Parent
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
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
Company
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
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—SFAS 145~~% Senior Notes and the 14%
~~On July 1, 2002,~~
17

Senior Subordinated Notes are guaranteed by the Guarantor A group of subsidiaries and Guarantor B, which is Odessa Exploration Incorporated (“OEI”). Substantially all of the assets of OEI were oil and gas properties, which were sold by 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")~~in August 2003 (see Note 12).
CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2003

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Assets:

Current assets

$
96,566

$
167,403

$
77

$
14,668

$
—

$
278,714

Net property and equipment

51,156

829,531

13

23,034

—

903,734

Goodwill, net

3,431

342,177

—

727

—

346,335

Deferred costs, net

14,182

—

—

—

—

14,182

Inter-company receivables

697,601

—

—

—

(697,601
)
—

Other assets

12,805

11,373

458

—

—

24,636

Total assets

$
875,741

$
1,350,484

$
548

$
38,429

$
(697,601
)
$
1,567,601

Liabilities and equity:

Current liabilities

$
50,275

$
68,757

$
342

$
5,472

$
—

$
124,846

Long-term debt

520,837

—

—

—

—

520,837

Capital lease obligations

1,403

10,319

—

—

—

11,722

Inter-company payables

—

674,899

3,753

18,949

(697,601
)
—

Deferred tax liability

154,182

—

—

—

—

154,182

Other long-term liabilities

33,346

4,299

—

—

—

37,645

Stockholders’ equity

115,698

592,210

(3,547
)
14,008

—

718,369

Total liabilities and stockholders’ equity

$
875,741

$
1,350,484

$
548

$
38,429

$
(697,601
)
$
1,567,601

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2002

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Assets:

Current assets

$
17,716

$
142,587

$
992

$
14,279

$
—

$
175,574

Net property and equipment

43,134

861,043

32,732

19,596

—

956,505

Goodwill, net

3,431

318,208

—

631

—

322,270

Deferred costs, net

13,503

—

—

—

—

13,503

Inter-company receivables

760,990

—

—

—

(760,990
)
—

Other assets

19,687

13,882

581

—

—

34,150

Total assets

$
858,461

$
1,335,720

$
34,305

$
34,506

$
(760,990
)
$
1,502,002

Liabilities and equity:

Current liabilities

$
43,701

$
59,410

$
2,061

$
3,703

$
—

$
108,875

Long-term debt

472,336

—

—

—

—

472,336

Capital lease obligations

1,648

12,573

—

—

—

14,221

Inter-company payables

—

724,341

15,501

21,148

(760,990
)
—

Deferred tax liability

161,265

—

—

—

—

161,265

Other long-term liabilities

31,222

4,735

12,887

93

—

48,937

Stockholders’ equity

148,289

534,661

3,856

9,562

—

696,368

Total liabilities and stockholders’ equity

$
858,461

$
1,335,720

$
34,305

$
34,506

$
(760,990
)
$
1,502,002

18

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2003

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Revenues

$
149

$
235,631

$
—

$
7,602

$
—

$
243,382

Costs and expenses:

Direct expenses

—

162,413

—

5,828

—

168,241

Depreciation, depletion and amortization expense

1,783

23,544

—

571

—

25,898

General and administrative expense

12,240

12,195

—

539

—

24,974

Interest

12,589

104

—

33

—

12,726

Gain on retirement of debt

—

—

—

—

—

—

Total costs and expenses

26,612

198,256

—

6,971

—

231,839

Income (loss) from continuing operations before income taxes

(26,463
)
37,375

—

631

—

11,543

Income tax (expense) benefit

13,063

(17,954
)
—

(313
)
—

(5,204
)
Income (loss) from continuing operations

(13,400
)
19,421

—

318

—

6,339

Discontinued operations

—

—

(7,396
)
—

—

(7,396
)
Net income (loss)

$
(13,400
)
$
19,421

$
(7,396
)
$
318

$
—

$
(1,057
)

19

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2002

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Revenues

$
46

$
194,469

$
—

$
5,901

$
—

$
200,416

Costs and expenses:

Direct expenses

—

138,184

—

3,963

—

142,147

Depreciation, depletion and amortization expense

793

23,782

—

387

—

24,962

General and administrative expense

11,104

14,436

—

268

—

25,808

Interest

10,986

256

—

20

—

11,262

Foreign currency transaction (gain), Argentina

—

—

—

—

—

—

Gain on retirement of debt

(10
)
—

—

—

—

(10
)
Total costs and expenses

22,873

176,658

—

4,638

—

204,169

Income (loss) from continuing operations before income taxes

(22,827
)
17,811

—

1,263

—

(3,753
)
Income tax (expense) benefit

8,920

(6,993
)
—

(501
)
—

1,426

Income (loss) from continuing operations

(13,907
)
10,818

—

762

—

(2,327
)
Discontinued operations

—

—

(310
)
—

—

(310
)
Cumulative effect

—

(658
)
(2,215
)
—

—

(2,873
)
Net income (loss)

$
(13,907
)
$
10,160

$
(2,525
)
$
762

$
—

$
(5,510
)

20

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2003

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Revenues

$
256

$
674,184

$
—

$
20,690

$
—

$
695,130

Costs and expenses:

Direct expenses

—

477,880

—

15,778

—

493,658

Depreciation, depletion and amortization expense

3,799

70,472

—

1,689

—

75,960

General and administrative expense

31,446

37,380

—

1,422

—

70,248

Interest

35,463

385

—

92

—

35,940

Gain on retirement of debt

(16
)
—

—

—

—

(16
)
Total costs and expenses

70,692

586,117

—

18,981

—

675,790

Income (loss) from continuing operations before income taxes

(70,436
)
88,067

—

1,709

—

19,340

Income tax (expense) benefit

29,689

(37,121
)
—

(720
)
—

(8,152
)
Income (loss) from continuing operations

(40,747
)
50,946

—

989

—

11,188

Discontinued operations

—

—

(7,866
)
—

—

(7,866
)
Net income (loss)

$
(40,747
)
$
50,946

$
(7,866
)
$
989

$
—

$
3,322

21

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2002

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Revenues

$
469

$
521,448

$
—

$
15,119

$
—

$
537,036

Costs and expenses:

Direct expenses

—

386,426

—

11,497

—

397,923

Depreciation, depletion and amortization expense

1,883

60,820

—

1,440

—

64,143

General and administrative expense

23,897

31,169

—

1,037

—

56,103

Interest

30,777

767

—

4

—

31,548

Foreign currency transaction (gain), Argentina

—

—

—

(401
)
—

(401
)
Gain on retirement of debt

8,447

—

—

—

—

8,447

Total costs and expenses

65,004

479,182

—

13,577

—

557,763

Income (loss) from continuing operations before income taxes

(64,535
)
42,266

—

1,542

—

(20,727
)
Income tax (expense) benefit

25,690

(16,825
)
—

(614
)
—

8,251

Income (loss) from
continuing operations

(38,845
)
25,441

—

928

—

(12,476
)
Discontinued operations

—

—

(650
)
—

—

(650
)
Cumulative effect

—

(658
)
(2,215
)
—

—

(2,873
)
Net income (loss)

$
(38,845
)
$
24,783

$
(2,865
)
$
928

$
—

$
(15,999
)

22

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2003

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Net cash provided (used) by operating activities

$
35,927

$
51,996

$
(15,512
)
$
496

$
—

$
72,907

Net cash provided (used) in investing activities

(15,992
)
(49,460
)
19,698

(2,087
)
—

(47,841
)
Net cash provided (used) in financing activities

62,019

(2,250
)
(4,227
)
—

—

55,542

Effect of exchange rate changes on cash

—

—

—

(225
)
—

(225
)
Net increase (decrease) in cash

81,954

286

(41
)
(1,816
)
—

80,383

Cash at beginning of period

5,183

1,220

(258
)
2,899

—

9,044

Cash at end of period

$
87,137

$
1,506

$
(299
)
$
1,083

$
—

$
89,427

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2002

Parent
Company

Guarantor A
Subsidiaries

Guarantor B
Subsidiary

Non-
Guarantor
Subsidiaries

Eliminations

Consolidated

(thousands)

Net cash provided (used) by operating activities

$
29,327

$
48,746

$
(747
)
$
5,716

$
—

$
83,042

Net cash provided (used) in investing activities

(126,288
)
(42,859
)
23

(3,546
)
—

(172,670
)
Net cash provided (used) in financing activities

93,926

(6,976
)
—

—

—

86,950

Effect of exchange rate changes on cash

—

—

—

(1,460
)
—

(1,460
)
Net increase (decrease) in cash

(3,035
)
(1,089
)
(724
)
710

—

(4,138
)
Cash at beginning of period

2,507

2,983

793

1,683

—

7,966

Cash at end of period

$
(528
)
$
1,894

$
69

$
2,393

$
—

$
3,828

11.INCOME TAXES
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 statementsCompany’s effective tax rate for the three months ended ~~March 31, 2002~~September 30, 2003 was 45% compared to ~~conform to the presentation~~(38%) for the three months ended ~~March 31, 2003.~~September 30, 2002. The Company’s effective tax rate for the nine months ended September 30, 2003 was 42% compared to (40%) for the nine months ended September 30, 2002. The effective tax rates are different from the statutory rate of 35% because of non-deductible expenses and the effects of state, local and foreign taxes.
12.    ~~SUBSEQUENT EVENT—SENIOR NOTES OFFERING~~DISCONTINUED OPERATIONS – SALE OF OIL AND GAS PROPERTIES
On ~~May 14,~~August 28, 2003, the Company ~~completed a public offering of $150,000,000 of~~sold its 6³/8~~% Senior Notes due 2013.~~oil and natural gas properties for approximately $19.7 million in cash. The Company received net cash proceeds ~~from~~of approximately $7.2 million after repaying the ~~debt offering, net~~Company’s volumetric production payment, unwinding related hedge arrangements and other related costs. As a result of ~~fees~~the sale, the Company will treat its oil and ~~expenses, will be used~~natural gas production business as a discontinued operation for all periods and has recorded an after-tax
23

charge to ~~repay~~discontinued operations of approximately $7.4 million, or $0.06 per diluted share, during the ~~balance~~three months ended September 30, 2003.
Results for activities reported as discontinued operations were as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2003

2002

2003

2002

(thousands)

Revenues

$
1,250

$
1,651

$
4,221

$
5,021

Costs and expenses

(613
)
(2,151
)
(4,318
)
(6,156
)

Income (loss) before income taxes

637

(500
)
(97
)
(1,135
)
Income tax benefit (expense)

(229
)
190

35

485

Income (loss) before loss on disposal

408

(310
)
(62
)
(650
)
Loss on disposal, net of tax

(7,804
)
—

(7,804
)
—

Income (loss) from discontinued operations

$
(7,396
)
$
(310
)
$
(7,866
)
$
(650
)
Balance Sheet Data:

September 30,
2003

December 31,
2002

(thousands)

Current assets

$
77

$
992

Property and equipment, net

13

32,732

Other assets

458

581

Total assets.

$
548

$
34,305

Current liabilities.

342

2,061

Non-current liabilities

3,753

28,388

Stockholders equity

(3,547
)
3,856

Total liabilities and stockholders’ equity.

$
548

$
34,305

24

13.SUBSEQUENT EVENT – NEW SENIOR CREDIT FACILITY
On November 10, 2003, the Company entered into a Fourth Amended and Restated Credit Agreement (the “New Senior Credit Facility”). The New Senior Credit Facility consists of ~~the~~a $175 million revolving loan facility ~~then outstanding~~with the entire revolving credit facility available for letters of credit. The Company has the right, subject to certain conditions, to increase the total commitment under the ~~Company's senior credit facility,~~New Senior Credit Facility from $175 million to up to $225 million if it is able to obtain additional lending commitments. The revolving loan commitments will terminate on November 10, 2007 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 agent’s base rate for loans or the agent’s reserve adjusted LIBOR rate for loans plus, in either case, a margin which will fluctuate based upon the Company’s consolidated total leverage ratio and in either case, according to the pricing grid set forth in the New Senior Credit Facility.
The New Senior Credit Facility contains various financial covenants based on applicable periods, including: (i) a maximum consolidated total leverage ratio, (ii) a minimum consolidated interest coverage ratio, and (iii) a minimum net worth. The New Senior Credit Facility subjects the Company to other restrictions, including restrictions upon the Company’s ability to incur additional debt, liens and guarantee obligations, to merge or consolidate with other persons, to make acquisitions, to sell assets, to make dividends, purchases of the ~~remainder~~Company’s stock or subordinated debt, or to ~~be used for general corporate purposes,~~make investments, loans and advances or changes to debt instruments and organizational documents. All obligations under the New Senior Credit Facility are guaranteed by most of the Company’s subsidiaries and are secured by most of the Company’s assets, including ~~further debt retirement.~~the Company’s accounts receivable, inventory and most equipment.
17
25

ITEM ~~2. MANAGEMENT'S~~2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NOTE REGARDING ~~FORWARD—~~FORWARD – LOOKING STATEMENTS

The statements in this document that relate to matters that are not historical facts are ~~"forward-looking statements"~~“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of ~~1934.~~1934, as amended. When used in this document and the documents incorporated by reference, words such as ~~"anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "could," "may," "predict"~~“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~~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 rig 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 rig 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.

26

RESULTS OF OPERATIONS

The ~~Company's~~Company’s results of operations for the ~~first quarter of fiscal~~three and nine months ended September 30, 2003 reflect the impact of continued modest improvement in industry conditions resulting from continued strength in oil and natural gas prices.
THREE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2003 VERSUS THREE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2002

The ~~Company's~~Company’s revenue for the three months ended ~~March 31,~~September 30, 2003 increased ~~$44,883,000,~~$42,966,000, or ~~26%~~21%, to ~~$215,124,000~~$243,382,000 from ~~$170,241,000~~$200,416,000 for the three months ended ~~March 31,~~September 30, 2002. For the three months ended ~~March 31,~~September 30, 2003, the Company ~~incurred a~~had net ~~loss~~income from continuing operations of ~~$1,774,000,~~$6,339,000, an improvement of ~~$2,852,000, or 62%,~~$8,666,000, from a net loss from continuing operations of ~~$4,626,000~~$2,327,000 for the three months ended ~~March 31,~~September 30, 2002. The increase in revenues and ~~decrease in~~ net ~~loss~~income from continuing operations 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. Overallactivity. Total rig hours for the three months ended ~~March 31,~~September 30, 2003 increased approximately 7%12% compared to ~~overall~~total rig hours for the three months ended ~~March 31,~~September 30, 2002. ~~Trucking hours for the three months ended March 31, 2003 increased 51% compared to~~Total trucking hours for the three months ended ~~March 31, 2002 principally due~~September 30, 2003 increased approximately 18% compared to ~~the acquisition of QSI and improved activity levels. However, composite truck rates~~total trucking hours for the three months ended ~~March 31, 2003 declined approximately 7% compared~~September 30, 2002 principally due 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.improved activity levels.
Operating Revenues
Well Servicing. Well servicing revenues for the three months ended ~~March 31,~~September 30, 2003 increased ~~$43,538,000,~~$38,284,000, or ~~28%~~21%, to ~~$197,600,000~~$224,251,000 from ~~$154,062,000~~$185,967,000 for the three months ended ~~March 31,~~September 30, 2002. The increase in revenues was primarily due to an increase in activity resulting in an increase in total well servicing rig hours and ~~the acquisition of QSI partially offset by declines~~total trucking hours and a slight increase in composite well servicing rig rates and composite truck rates. ~~Well~~Total well servicing rig hours for the three months ended ~~March 31,~~September 30, 2003 increased 7%approximately 11% compared to total well servicing rig hours for the three months ended ~~March 31, 2002, while composite~~September 30, 2002. Composite well servicing rig rates ~~declined~~increased by approximately 1%4% for the three months ended ~~March 31,~~September 30, 2003 compared to composite well servicing rig rates for the three months ended ~~March 31,~~September 30, 2002. ~~While~~Total trucking hours for the three months ended ~~March 31,~~September 30, 2003 increased approximately ~~51%~~18% compared to total trucking hours for the three months ended ~~March 31,~~September 30, 2002 and composite truck rates for the three months ended ~~March 31,~~September 30, 2003 ~~decreased~~increased by approximately 7%4% compared to composite truck rates for the three months ended ~~March 31,~~September 30, 2002.
Contract Drilling. Contract drilling revenues for the three months ended ~~March 31,~~September 30, 2003 increased ~~$1,819,000,~~$4,420,000, or ~~13%~~31%, to ~~$16,153,000~~$18,819,000 from ~~$14,334,000~~$14,399,000 for the three months ended ~~March 31,~~September 30, 2002. The increase in revenues was primarily due to an increase in ~~composite~~activity resulting in an increase in total contract drilling ~~rig rates~~hours and a slight improvement in composite contract drilling ~~hours. Contract~~rig rates. Total contract drilling rig hours for the three months ended ~~March 31,~~September 30, 2003 increased 2%by approximately 24% compared to total contract drilling rig hours for the three months ended ~~March 31,~~September 30, 2002, while composite contract drilling rig rates for the three
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months ended ~~March 31,~~September 30, 2003 increased by approximately ~~10% for the three months ended March 31, 2003~~5% compared to composite contract drilling rig rates for the three months ended ~~March 31,~~September 30, 2002.
Operating Expenses
Well Servicing. Well servicing expenses for the three months ended ~~March 31,~~September 30, 2003 increased ~~$33,078,000,~~$22,935,000, or ~~29%~~17%, to ~~$146,110,000~~$154,565,000 from ~~$113,032,000~~$131,630,000 for the three months ended ~~March 31,~~September 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance ~~costs, the acquisition of QSI and higher insurance costs, primarily in workers' compensation.~~costs. Well servicing
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expenses as a percentage of well servicing revenue ~~increased~~decreased from ~~73%~~71% for the three months ended ~~March 31,~~September 30, 2002 to ~~74%~~69% for the three months ended ~~March 31,~~September 30, 2003.
Contract Drilling. Contract drilling expenses for the three months ended ~~March 31,~~September 30, 2003 increased ~~$551,000,~~$3,159,000, or 5%30%, to ~~$11,943,000~~$13,676,000 from ~~$11,392,000~~$10,517,000 for the three months ended ~~March 31,~~September 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance ~~costs and higher insurance costs primarily in workers' compensation.~~costs. Contract drilling expenses as a percentage of contract drilling revenues ~~decreased from 79%~~was 73% for the three months ended ~~March 31, 2002 to 74%~~September 30, 2003 and for the three months ended ~~March 31, 2003.~~September 30, 2002.
Depreciation, Depletion and Amortization Expense

The ~~Company's~~Company’s depreciation, depletion and amortization expense for the three months ended ~~March 31,~~September 30, 2003 increased ~~$5,712,000,~~$936,000, or ~~29%~~4%, to ~~$25,601,000~~$25,898,000 from ~~$19,889,000~~$24,962,000 for the three months ended ~~March 31,~~September 30, 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~~Company’s ongoing capital expenditure program, which includes remanufacturing of well ~~service~~servicing and contract drilling equipment and the ~~Company's~~Company’s technology ~~initiative.~~initiatives.
General and Administrative Expenses

The ~~Company's~~Company’s general and administrative expenses for the three months ended ~~March 31,~~September 30, 2003 ~~increased $8,424,000,~~decreased $834,000, or ~~62%~~3%, to ~~$22,118,000~~$24,974,000 from ~~$13,694,000~~$25,808,000 for the three months ended ~~March 31,~~September 30, 2002. The ~~increase~~decrease for the three months ended September 30, 2003 compared to the three months ended September 30, 2002 was primarily due to the ~~acquisition of QSI, consolidation and severance~~integration costs associated with the ~~closure~~acquisition of ~~two of~~QSI and higher general liability costs that were incurred during the ~~Company's pressure pumping facilities and relocation of~~three months ended September 30, 2002 offset by higher costs associated with increased activity levels for the three months ended September 30, 2003. Incremental costs include expenses related ~~equipment~~ to ~~higher margin locations, and increases in~~additional personnel supporting the implementation of information technology ~~initiatives.~~initiatives and corporate infrastructure. General and administrative expenses as a percentage of revenues ~~increased~~decreased from 8%13% for the three months ended ~~March 31,~~September 30, 2002 to 10% for the three months ended ~~March 31,~~September 30, 2003.
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Interest Expense

The ~~Company's~~Company’s interest expense for the three months ended ~~March 31,~~September 30, 2003 increased ~~$1,173,000,~~$1,464,000, or ~~12%~~13%, to ~~$11,048,000~~$12,726,000 from ~~$9,875,000~~$11,262,000 for the three months ended ~~March 31,~~September 30, 2002. The increase was primarily due to higher average long term debt in the quarter ended ~~March 31,~~September 30, 2003 as compared to ~~March 31,~~September 30, 2002 resulting from the ~~borrowing under~~issuance of the 6³/8% Senior Notes, a portion of the proceeds of which was used to repay the outstanding indebtedness on the Company’s revolver ~~related to~~with the ~~QSI acquisition.~~balance being held for future debt repayment. Included in interest expense was the amortization of deferred debt issuance costs, discount and premium of approximately ~~$776,000 and $277,000~~$892,000 for the three months ended ~~March 31,~~September 30, 2003 ~~and 2002, respectively.~~compared to $967,000 for the three months ended September 30, 2002.
Gain (Loss) on Retirement of Debt

During the three months ended ~~March 31, 2003,~~September 30, 2002, the Company repurchased approximately ~~$55,000~~$204,000 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 a loss of $8,468,000.$10,000. 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"~~145”). The new standard rescinds FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be recorded as extraordinary items.
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Income Taxes

The ~~Company's~~Company’s income tax ~~benefit~~expense for the three months ended ~~March 31,~~September 30, 2003 ~~decreased $1,599,000~~increased $6,630,000 to ~~a benefit~~an expense of ~~$835,000~~$5,204,000 from a benefit of ~~$2,434,000~~$1,426,000 for the three months ended ~~March 31,~~September 30, 2002. The ~~Company's~~Company’s effective tax rate for the three months ended ~~March 31,~~September 30, 2003 ~~and 2002~~ was ~~32% and 34%, respectively.~~45% compared to (38%) for the three months ended September 30, 2002. The effective tax rates are different from the statutory rate of 35% because of non-deductible expenses and the effects of state, local and ~~local~~foreign taxes.
Discontinued Operations – Sale of Oil and Natural Gas Properties
On August 28, 2003, the Company sold its oil and natural gas properties. The Company received net cash proceeds of approximately $7.2 million after repaying the Company’s volumetric production payment, unwinding related hedge arrangements and other related costs. As a result of the sale, the Company will treat its oil and natural gas production business as a discontinued operation for all periods and has recorded an after-tax charge to discontinued operations of approximately $7.4 million, or $0.06 per diluted share, during the three months ended September 30, 2003.
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. SFAS 143 requires the
29

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 during the three months ended September 30, 2002 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2002
The Company’s revenue for the nine months ended September 30, 2003 increased $158,094,000, or 29%, to $695,130,000 from $537,036,000 for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, the Company had net income from continuing operations of $11,188,000, an improvement of $23,664,000, from a net loss from continuing operations of $12,476,000 for the nine months ended September 30, 2002. The increase in revenues and increase in net income from continuing operations is principally due to increasing levels of activity and the acquisition of QSI. Total rig hours for the nine months ended September 30, 2003 increased approximately 10% compared to total rig hours for the nine months ended September 30, 2002. Total trucking hours for the nine months ended September 30, 2003 increased approximately 38% compared to total trucking hours for the nine months ended September 30, 2002, principally due to the acquisition of QSI and improved activity levels.
Operating Revenues
Well Servicing. Well servicing revenues for the nine months ended September 30, 2003 increased $148,927,000, or 30%, to $643,379,000 from $494,452,000 for the nine months ended September 30, 2002. The increase in revenues was primarily due to an increase in activity and the acquisition of QSI resulting in an increase in well servicing rig hours and total trucking hours partially offset by a decrease in composite well servicing rig and composite truck rates. Total well servicing rig hours for the nine months ended September 30, 2003 increased approximately 9% compared to total well servicing rig hours for the nine months ended September 30, 2002. Composite well servicing rig rates decreased by approximately 2% for the nine months ended September 30, 2003 compared to composite well servicing rig rates for the nine months ended September 30, 2002. Total trucking hours for the nine months ended September 30, 2003 increased by approximately 38% compared to total trucking hours for the nine months ended September 30, 2002, and composite truck rates for the nine months ended September 30, 2003 decreased by approximately 2% compared to composite truck rates for the nine months ended September 30, 2002.
Contract Drilling. Contract drilling revenues for the nine months ended September 30, 2003 increased $10,434,000, or 25%, to $51,925,000 from $41,491,000 for the nine months ended September 30, 2002. The increase in revenues was primarily due to an increase in activity resulting in an increase in contract drilling rig hours and a slight improvement in composite
30

contract drilling rig rates. Total contract drilling hours for the nine months ended September 30, 2003 increased approximately 21% compared to total contract drilling rig hours for the nine months ended September 30, 2002 and composite contract drilling rig rates for the nine months ended September 30, 2003 increased by approximately 3% compared to composite contract drilling rig rates for the nine months ended September 30, 2002.
Operating Expenses
Well Servicing. Well servicing expenses for the nine months ended September 30, 2003 increased $89,692,000, or 25%, to $455,645,000 from $365,953,000 for the nine months ended September 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance costs and the acquisition of QSI. Well servicing expenses as a percentage of well servicing revenue decreased from 74% for the nine months ended September 30, 2002 to 71% for the nine months ended September 30, 2003.
Contract Drilling. Contract drilling expenses for the nine months ended September 30, 2003 increased $6,043,000, or 19%, to $38,013,000 from $31,970,000 for the nine months ended September 30, 2002. The increase was primarily due to increased levels of activity and related repair and maintenance costs. Contract drilling expenses as a percentage of contract drilling revenues decreased from 77% for the nine months ended September 30, 2002 to 73% for the nine months ended September 30, 2003.
Depreciation, Depletion and Amortization Expense
The Company’s depreciation, depletion and amortization expense for the nine months ended September 30, 2003 increased $11,817,000, or 18%, to $75,960,000 from $64,143,000 for the nine months ended September 30, 2002. The increase is primarily due to the acquisition of QSI, which added approximately $114,519,000 in property and equipment and, to a lesser extent, by the Company’s ongoing capital expenditure program, which includes remanufacturing of well servicing and contract drilling equipment and the Company’s technology initiatives.
General and Administrative Expenses
The Company’s general and administrative expenses for the nine months ended September 30, 2003 increased $14,145,000, or 25%, to $70,248,000, from $56,103,000 for the nine months ended September 30, 2002. The increase was primarily due to the acquisition of QSI and higher costs associated with increased activity levels. Incremental costs include expenses related to additional personnel supporting the implementation of information technology initiatives and corporate infrastructure. General and administrative expenses as a percentage of revenues was 10% for the nine months ended September 30, 2003 and for the nine months ended September 30, 2002.
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Interest Expense
The Company’s interest expense for the nine months ended September 30, 2003 increased $4,392,000, or 14%, to $35,940,000 from $31,548,000 for the nine months ended September 30, 2002. The increase was primarily due to higher average long term debt in the nine months ended September 30, 2003 as compared to September 30, 2002 resulting from the issuance of the 6³/8% Senior Notes, a portion of the proceeds of which was used to repay the outstanding indebtedness on the Company’s revolver and to retire a portion of the 5% Convertible Subordinated Notes with the balance being held for future debt repayment. Included in interest expense was the amortization of deferred debt issuance costs, discount and premium of approximately $2,501,000 for the nine months ended September 30, 2003 compared to $2,249,000 for the nine months ended September 30, 2002.
Gain (Loss) on Retirement of Debt
During the nine months ended September 30, 2003, the Company repurchased approximately $30,855,000 of its long-term debt at a discount and expensed related debt issuance costs which resulted in a gain of $16,000. During the nine months ended September 30, 2002, the Company repurchased approximately $36,254,000 of its long-term debt at a various discounts and premiums and expensed related debt issuance costs, which resulted in a loss of $8,447,000. On July 1, 2002, the Company adopted SFAS 145. SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from extinguishment of debt to be recorded as extraordinary items.
Income Taxes
The Company’s income tax expense for the nine months ended September 30, 2003 increased $16,403,000 to an expense of $8,152,000 from a benefit of $8,251,000 for the nine months ended September 30, 2002. The Company’s effective tax rate for the nine months ended September 30, 2003 was 42% compared to (40%) for the nine months ended September 30, 2002. The effective tax rates are different from the statutory rate of 35% because of non-deductible expenses and the effects of state, local and foreign taxes.
Discontinued Operations – Sale of Oil and Natural Gas Properties
On August 28, 2003, the Company sold its oil and natural gas properties. The Company received net cash proceeds of approximately $7.2 million after repaying the Company’s volumetric production payment, unwinding related hedge arrangements and other related costs. As a result of the sale, the Company will treat its oil and natural gas production business as a discontinued operation for all periods and has recorded an after-tax charge to discontinued operations of approximately $7.4 million, or $0.06 per diluted share, during the September 2003 quarter.
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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. It 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 during the three months ended September 30, 2002 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.
Cash Flows

The ~~Company's~~Company’s net cash provided by operating activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2003 decreased ~~$21,825,000~~$10,135,000 to ~~$8,061,000~~$72,907,000 from ~~$29,886,000~~$83,042,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2002. The decrease in net cash provided by operating activities was ~~primarily~~ due to ~~the~~an increase in ~~accounts receivable~~working capital, partially offset by an increase in income from ~~the three months ended March 31, 2002 compared to the three months ended March 31, 2003 resulting from increased~~higher activity levels.

The ~~Company's~~Company’s net cash used in investing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2003 decreased ~~$7,586,000~~$124,829,000 to ~~$18,822,000~~$47,841,000 from ~~$26,408,000~~$172,670,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2002. The decrease ~~from the three months ended March 31, 2002 compared to the three months ended March 31, 2003~~in net cash used in investing activities was primarily due to the ~~completion~~acquisition of ~~several minor acquisitions during~~QSI in July 2002 partially offset by proceeds from the ~~three months ended March 31, 2002~~sale of the Company’s oil and ~~minimal acquisition activity~~gas properties in ~~the three months ended March 31,~~August 2003.

The ~~Company's~~Company’s net cash provided by financing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2003 decreased ~~$26,486,000~~$31,408,000 to ~~$5,114,000~~$55,542,000 from ~~$31,600,000~~$86,950,000 for the ~~three~~nine months ended ~~March 31,~~September 30, 2002. ~~During~~The decrease was a result of the ~~three~~Company using a portion of the proceeds of the 6³/8% Senior Notes offering to repay its indebtedness under the Senior Credit Facility and to repurchase approximately $30,800,000 of its outstanding 5% Convertible Subordinated Notes during the nine months ended ~~March 31,~~September 30, 2003 ~~there was minimal debt principal activity~~ as compared to a net increase of borrowings under the ~~three months ended March 31, 2002. During the three months ended March 31, 2002, the Company repurchased approximately $35,403,000~~revolver and an issuance of $100,000,000 of its 8³/8% Senior Notes, partially offset by a repurchase of a portion of the Company's 14% Senior Subordinated Notes ~~using~~during 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.nine months ended September 30, 2002.

The effect of exchange rates on cash for the ~~three~~nine months ended ~~March 31,~~September 30, 2003 and 2002 was a ~~source of $165,000 and a~~ use of ~~$77,000,~~$225,000 and $1,460,000, respectively. This was principally the result of the change in exchange rates of the Argentine peso for the corresponding periods.
LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its operations, acquisitions, capital expenditures and working capital requirements from cash flow from operations, bank borrowings and the issuance of equity and long-term debt. The Company believes that its current reserves of cash and cash equivalents, availability of its existing credit lines, access to capital markets and
33

internally generated cash flows from operations are sufficient to finance the cash requirements of its current cash and future operations, acquisitions and capital expenditures.
LONG-TERM DEBT
Other than capital lease obligations and miscellaneous notes payable, as of ~~March 31,~~September 30, 2003, the ~~Company's~~Company’s long-term debt was comprised of (i) a senior credit facility, (ii) a series of 6³/8% Senior Notes Due 2013, (iii) a series of 8³/8% Senior Notes Due 2008, ~~(iii)~~(iv) a series of 14% Senior Subordinated Notes Due 2009, and ~~(iv)~~(v) a series of 5% Convertible Subordinated Notes Due 2004.
Senior Credit Facility

On ~~July 15, 2002,~~November 10, 2003, the Company entered into a ~~Third~~Fourth Amended and Restated Credit Agreement ~~as subsequently amended~~ (the ~~"Senior~~“New Senior Credit ~~Facility"~~Facility”). The New Senior Credit Facility consists of a ~~$150,000,000~~$175 million revolving loan facility with ~~a $75,000,000 sublimit~~the entire revolving credit facility available for letters of credit. The ~~loans are~~
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~~secured by most of~~Company has the ~~tangible and intangible assets of~~right, subject to certain conditions, to increase the ~~Company.~~total commitment under the New Senior Credit Facility from $175 million to up to $225 million if it is able to obtain additional lending commitments. The revolving loan ~~commitment~~commitments will terminate on ~~July 15, 2005~~November 10, 2007 and all revolving loans must be paid on or before that date. The revolving loans bear interest based upon, at the ~~Company's~~Company’s option, the ~~prime~~agent’s base rate for loans or the agent’s reserve adjusted LIBOR rate for loans plus, in either case, a ~~variable~~ margin which will fluctuate based upon the Company’s consolidated total leverage ratio and in either case, according to the pricing grid set forth in the New Senior Credit Facility.
                The New Senior Credit Facility contains various financial covenants based on applicable periods, including: (i) a maximum consolidated total leverage ratio, (ii) a minimum consolidated interest coverage ratio, and (iii) a minimum net worth. The New Senior Credit Facility subjects the Company to other restrictions, including restrictions upon the Company’s ability to incur additional debt, liens and guarantee obligations, to merge or consolidate with other persons, to make acquisitions, to sell assets, to make dividends, purchases of ~~0.00%~~the Company’s stock or subordinated debt, or to ~~1.00%~~make investments, loans
34

and advances or changes to debt instruments and organizational documents. All obligations under the New Senior Credit Facility are guaranteed by most of the Company’s subsidiaries and are secured by most of the Company’s assets, including the Company’s accounts receivable, inventory and most equipment.
The New Senior Credit Facility amended and restated the Company’s Third Amended and Restated Credit Agreement (the “Senior Credit Facility”) dated July 15, 2002, which provided for a ~~Eurodollar rate plus~~$150,000,000 revolving loan facility with a ~~variable margin~~$75,000,000 sublimit for letters of ~~1.75% to 3.00%.~~credit. The loans were secured by most of the tangible and intangible assets of the Company. The Senior Credit Facility ~~has~~had customary affirmative and negative covenants including a maximum leverage ratio, a minimum fixed charge coverage ratio and a minimum net worth, as well as limitations on liens and indebtedness and restrictions on dividends, acquisitions and dispositions. As of ~~March 31,~~September 30, 2003, the Company was in compliance with all covenants contained in the Senior Credit Facility.

As of ~~March 31,~~September 30, 2003, ~~approximately $59,000,000 was~~no revolving loans were outstanding under the revolving loan facility and approximately ~~$38,823,000~~$53,290,000 of letters of credit related to ~~workers'~~workers’ compensation insurance was outstanding. A portion of the net cash proceeds from the debt offering of the 6³/8% Senior Notes completed in May 2003 were used to repay the balance of the revolving loan facility then outstanding under the Senior Credit Facility.
6³/8% Senior Notes
On May 14, 2003, the Company completed a public offering of $150,000,000 of 6³/8% Senior Notes due 2013 (the “6³/8% Senior Notes”). The net cash proceeds from the public offering, net of fees and expenses, were used to repay the balance of the revolving loan facility then outstanding under the Senior Credit Facility, with the remainder to be used for general corporate purposes, including further debt retirement. The 6³/8% Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed by substantially all of the Company’s subsidiaries. The 6³/8% Senior Notes are effectively subordinated to Key’s secured indebtedness, which includes borrowings under the Senior Credit Facility.
At any time and from time to time, the Company may, at its option, redeem all or a portion of the 6³/8% Senior Notes, upon not less than 30 and not more than 60 days prior notice, at the make-whole-price, plus accrued and unpaid interest to the redemption date. The make-whole-price is the sum of the outstanding principal amount of the notes to be redeemed plus an amount equal to the excess, if any, of (i) the present value of the remaining interest (excluding payments of interest accrued as of the redemption date), premium and principal payments due on the notes to be redeemed, computed at a discount rate equal to the treasury rate plus 50 basis points, over (ii) the outstanding principal amount of such notes.
At September 30, 2003, $150,000,000 principal amount of the 6³/8% Senior Notes remained outstanding. The 6³/8% Senior Notes require semi-annual interest payments on May 1 and November 1 of each year. As of September 30, 2003, the Company ~~drew down approximately $53 million on July 19, 2002~~was in ~~connection~~compliance with all covenants contained in the ~~acquisition of QSI.~~6³/8% Senior Notes indenture.
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8³/8% Senior Notes
On March 6, 2001, the Company completed a private placement of $175,000,000 of 8³/8% Senior Notes due 2008 (the "8“8³/8% Senior ~~Notes"~~Notes”). The net cash proceeds from the private placement were used to repay all of the remaining balance of the original term loans under the ~~Company's~~Company’s then outstanding senior credit facility (the ~~"Prior~~“Prior Senior Credit ~~Facility"~~Facility”) and a portion of the revolving loan facility under the Prior Senior Credit Facility then outstanding. On March 1, 2002, the Company completed a public offering of an additional $100,000,000 of 8³/8% Senior Notes due 2008. The net cash proceeds from the public offering were used to repay all of the remaining balance of the revolving loan facility under the Prior Senior Credit Facility. The 8³/8% Senior Notes are senior unsecured obligations and are fully and unconditionally guaranteed by substantially all of the ~~Company's subsidiaries (except for its foreign subsidiaries operating in Argentina and Canada).~~Company’s subsidiaries. The 8³/8% Senior Notes are effectively subordinated to ~~Key's~~Key’s secured indebtedness, which includes borrowings under the Senior Credit Facility.
On and after March 1, 2005, the Company may redeem some or all of the 8³/8% Senior Notes at any time at varying redemption prices in excess of par, plus accrued interest. In addition, before March 1, 2004, the Company may redeem up to 35% of the aggregate principal amount of the 8³/8% Senior Notes with the proceeds of certain sales of equity at 108.375% of par plus accrued interest.
At ~~March 31,~~September 30, 2003, $275,000,000 principal amount of the 8³/8% Senior Notes remained outstanding. The 8³/8% Senior Notes require semi-annual interest payments on March 1 and September 1 of each year. Interest of approximately $11,516,000 was paid on ~~March~~September 1, 2003. As of ~~March 31,~~September 30, 2003, the Company was in compliance with all covenants contained in the 8³/8% Senior ~~Notes.~~Notes indenture.
14% Senior Subordinated Notes

On January 22, 1999, the Company completed the private placement of 150,000 units (the ~~"Units"~~“Units”) consisting of $150,000,000 of 14% Senior Subordinated Notes due 2009 (the ~~"14%~~“14% Senior Subordinated ~~Notes"~~Notes”) and 150,000 warrants to purchase 2,173,433 shares of the ~~Company's~~Company’s common stock at an exercise price of $4.88125 per share (the ~~"Unit Warrants"~~“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~~Company’s bridge loan facility arranged in connection with the acquisition of Dawson Production Services, Inc. ~~("Dawson"~~(“Dawson”).

On and after January 15, 2004, the Company may redeem some or all of the 14% Senior Subordinated Notes at any time at varying redemption prices in excess of par, which as of January 15, 2004 will be 107% of par, plus accrued interest. In addition, before January 15, 2002, the Company was allowed to redeem up to 35% of the aggregate principal amount of the 14% Senior Subordinated Notes at 114% of par plus accrued interest with the proceeds of certain sales of equity. During the fiscal year ended ~~June~~September 30, 2001, the Company exercised its
36

right of redemption for $10,313,000 principal amount of the 14% Senior Subordinated Notes at a price
22

of 114% of the principal amount plus accrued interest. This transaction resulted in a loss of approximately $2,561,000. On January 14, 2002, the Company exercised its right of redemption for $35,403,000 principal amount of the 14% Senior Subordinated Notes at a price of 114% of the principal amount plus accrued interest. This transaction resulted in a loss of approximately $8,468,000. Also, during the fiscal year ended ~~June~~September 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~~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~~Company’s senior indebtedness, which includes borrowings under the Senior Credit Facility, ~~and~~ the 8³/8% Senior Notes and the 6³/8% Senior Notes. The 14% Senior Subordinated Notes are fully and unconditionally guaranteed by substantially all of the ~~Company's subsidiaries (except for its foreign subsidiaries operating in Argentina and Canada).~~Company’s subsidiaries.

At ~~March 31,~~September 30, 2003, $97,500,000 principal amount of the 14% Senior Subordinated Notes remained outstanding. The Company intends to redeem the remaining 14% Senior Subordinated Notes on or before January 15, 2004 using the Company's available cash or other borrowings, including the Company's revolver. 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~~July 15, 2003. As of ~~March 31,~~September 30, 2003, 63,500 Unit Warrants had been exercised, producing approximately $4,173,000 of proceeds to the Company and leaving 86,500 Unit Warrants outstanding. As of ~~March 31,~~September 30, 2003, the Company was in compliance with all covenants contained in the 14% Senior Subordinated ~~Notes.~~Notes indenture.
5% Convertible Subordinated Notes
In 1997, the Company completed a private placement of $216,000,000 of 5% Convertible Subordinated Notes due 2004 (the ~~"5%~~“5% Convertible Subordinated ~~Notes"~~Notes”). The 5% Convertible Subordinated Notes are subordinate to the ~~Company's~~Company’s senior indebtedness which includes borrowings under the Senior Credit Facility, the 14% Senior Subordinated Notes, ~~and~~ the 8³/8% Senior Notes and the 6³/8% Senior Notes. The 5% Convertible Subordinated Notes are convertible, at the ~~holder's~~holder’s option, into shares of the ~~Company's~~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~~Company’s option, on and after September 15, 2000, in whole or part, together with accrued and unpaid interest. The initial redemption price is 102.86% for the year beginning September 15, 2000 and declines ratably thereafter on an annual basis.

        ~~During the three months ended March 31,~~At September 30, 2003, ~~the Company repurchased (and canceled) approximately $55,000~~$18,699,000 principal amount of the 5% Convertible Subordinated Notes ~~leaving $49,499,000 outstanding as of March 31, 2003. These repurchases resulted in a gain of approximately $2,000.~~remained outstanding. The 5% Convertible Subordinated Notes mature on September 15, 2004. The Company intends to use its available cash or other borrowings, including the Company’s revolver, to pay off the 5% Convertible Notes on or before maturity. Interest on the 5% Convertible Subordinated Notes is payable on March 15 and September 15 of each year. Interest of approximately ~~$1,237,000~~$487,000 was
37

paid on ~~March~~September 15, 2003. As of ~~March 31,~~September 30, 2003, the Company was in compliance with all covenants contained in the 5% Convertible Subordinated ~~Notes.~~Notes indenture.

CRITICAL ACCOUNTING POLICIES

The ~~Company follows certain significant~~preparation of financial statements requires the use of judgment and estimates. A critical accounting ~~policies when preparing its consolidated~~policy is one that requires difficult, subjective or complex estimates and assessments and is fundamental to the reported amounts of assets and liabilities at the date of the financial ~~statements.~~statements and revenues and expenses during the periods presented. A complete summary of ~~these~~the Company’s critical accounting policies is included in Note 1 to the consolidated financial statements included in the ~~Company's~~Company’s Transition Report on Form 10-K as of and for the six months ended December 31, 2002. The Company’s critical accounting policies are as follows.
~~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~~
Management makes estimates regarding the fair value of the ~~Company's~~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~~Company’s performance.

~~RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS~~
        ~~In January 2003, the FASB issued Interpretation~~The Company computes income taxes in accordance with Statement of Financial Accounting Standards No. ~~46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"~~109, Accounting for Income Taxes (“SFAS 109”). ~~FIN 46 addresses~~SFAS No. 109 requires an asset and liability approach which results in the ~~consolidation by business enterprises~~recognition 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,~~deferred tax liabilities and ~~to variable interests in variable interest entities obtained after January 31, 2003. The application~~assets for the expected future tax consequences of ~~FIN 46 is not expected to have~~temporary differences between the carrying amounts and the tax basis of those assets and liabilities. SFAS No. 109 also requires the recording of a ~~material effect on the Company's financial statements. FIN 46 requires certain disclosures in financial statements issued after January 31, 2003~~valuation allowance if it is ~~reasonably possible~~more likely than not that ~~the Company~~some portion or all of a deferred tax asset will ~~consolidate or disclose information about variable interest entities FIN 46 becomes effective.~~not be realized.

RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("(“SFAS ~~149"~~149”). SFAS 149 amendments require that contracts with comparable characteristics be accounted for similarly, clarifies when a contract with an initial investment meets the characteristic of a derivative and clarifies when a derivative requires special reporting in the statement of cash flows. SFAS 149 is effective for hedging relationships designated and for contracts entered into
38

or modified after ~~June~~September 30, 2003, except for
24

provisions that relate to SFAS 133 Statement Implementation Issues that have been effective for fiscal quarters prior to ~~June~~September 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~~September 30, 2003. The application of SFAS 149 is not expected to have a material effect on the ~~Company's~~Company’s consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS 150 as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The application of SFAS 150 is not expected to have a material effect on the Company’s consolidated financial statements. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003.

ITEM 3. 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Special Note: Certain statements set forth below under this caption constitute ~~"forward-looking statements"~~“forward-looking statements”. See ~~"Special~~“Special Note Regarding Forward-Looking ~~Statements"~~Statements” for additional factors relating to such statements.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about the ~~Keys's~~Key’s potential exposure to market risk. The term ~~"market risk"~~“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.

INTEREST RATE RISK

At ~~March 31,~~September 30, 2003, the Company had long-term debt and capital lease obligations outstanding of approximately ~~$499,069,000.~~$557,170,000. Of this amount, approximately ~~$420,365,000~~$539,587,000, or ~~84%~~97%, bears interest at fixed rates as follows:
39

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

As of
September 30, 2003

(thousands)

6³/8% Senior Notes Due 2013

$
150,000

8³/8% Senior Notes Due 2008

276,169

14% Senior Subordinated Notes Due 2009

94,668

5% Convertible Subordinated Notes Due 2004

18,699

Other at 8.0%

51

$
539,587

The remaining ~~$78,704,000~~$17,583,000 of long-term debt and capital lease obligations outstanding as of ~~March 31,~~September 30, 2003 bears interest at floating rates, which averaged approximately ~~4.1%~~2.8% at ~~March 31,~~September 30, 2003. A 10% increase in short-term interest rates on the floating-rate debt outstanding at ~~March 31,~~September 30, 2003 would equal approximately 4127 basis points. Such an increase in interest rates would increase ~~Key's~~Key’s 2003 annual interest expense by approximately ~~$300,000~~$50,000 assuming borrowed amounts remain outstanding.

The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments.

FOREIGN CURRENCY RISK

During the year ended ~~June~~September 30, 2002, the Argentine government suspended the law tying the Argentine peso to the U.S. dollar at the conversion ratio of 1:1 and created a dual currency system in Argentina. ~~Key's~~Key’s net assets of its Argentina subsidiaries are based on the U.S. dollar equivalent of such amounts measured in Argentine pesos as of ~~March 31,~~September 30, 2003 and December 31, 2002. Assets and liabilities of the Argentine operations were translated to U.S. dollars at ~~March 31,~~September 30, 2003 and December 31, 2002 using the applicable free market conversion ratio of ~~3.0:~~2.9:1 and 3.4:1, respectively, and will be translated at future dates using the applicable free market conversion ratio on such dates. ~~Key's~~Key’s net earnings and cash flows from its Argentina subsidiaries are based on the U.S. dollar
25

equivalent of such amounts measured in Argentine pesos. Revenues, expenses and cash flows will be translated using the average exchange rates.

The change in the Argentine peso to the U.S. dollar exchange rate since December 31, 2002 has increased ~~stockholders'~~stockholders’ equity by approximately ~~$3,179,000,~~$3,246,000, through a credit to other comprehensive loss through ~~March 31,~~September 30, 2003.
~~Key's~~
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.

40

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~~
Key’s net assets, net earnings and cash flows from its Egyptian subsidiary are based on the U.S. dollar. Foreign currency transactions are included in determination of net income for the period.

COMMODITY PRICE RISK
~~Key's~~
Key sold all of its oil and natural gas properties during August 2003. As a result of the sale, the Company terminated its remaining oil option contract. Key no longer has major market risk exposure, for its oil and natural gas production operations, ~~is in the~~from pricing applicable to its oil and natural gas sales. ~~Realized pricing is primarily driven by~~See Note 12 to the ~~prevailing worldwide price for crude oil and spot market prices for natural gas. Pricing for oil and natural gas production has been volatile and unpredictable for many years.~~Consolidated Financial Statements.
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 March 31, 2003, Key had an oil put option in place, as detailed in the following table. Hedged oil volumes as a percentage of actual production was 41%, for the three months ended March 31, 2003. A 10% variation in the market price of oil or natural gas from their levels at March 31, 2003 would have no material impact on the Company's net assets, net earnings or cash flows (as derived from commodity option contracts).41
        ~~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/MMbtu

Oil
(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.)~~
26

ITEM 4. 4.DISCLOSURE CONTROLS AND PROCEDURES
~~(a)~~
~~Evaluation of Disclosure Controls and Procedures~~
~~Within the 90-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~~
The Company’s principal executive officer and principal financial officer ~~performed~~undertook an evaluation of the ~~design and operation of the Company's~~Company’s disclosure controls and procedures (as defined in the Securities ~~and~~ Exchange Act ~~Rule 13a-14(c)~~of 1934 Rules 13a-15(e) and 15(d)-15(e))~~. Based on that evaluation,~~ as of the ~~Company's principal executive officer~~end of the period covered by this report and ~~principal financial officer~~ concluded that ~~such~~the Company’s 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.
~~(b)~~
~~Changes in Internal Controls~~
~~There~~ were no significant changes in the Company's internal controls during the three month period ended March 31, 2003 nor did any other factors exist that could significantly affect such controls through the date of this report.
27
effective.
42

PART ~~II—~~II – OTHER INFORMATION
Item 1.1. Legal Proceedings.

None.

Item 2.2. Changes in Securities and Use of ~~Proceeds.~~
Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4.4. Submission of Matters to a Vote of Security Holders.

None.

Item 5.5. Other Information

None.

Item 6.6. Exhibits and Reports on Form 8-K.
(a)Exhibits
~~(a)~~
~~Exhibits~~
4.1*Supplemental Indenture dated as of July 28, 2003, between the Company, the Guarantors (as defined therein) and The Bank of New York, as Trustee.
4.2*Third Supplemental Indenture dated as of July 28, 2003, among the Company, the Guarantors (as defined therein) and U.S. Bank National Association, as Trustee.
10.1Fourth Amended and Restated Credit Agreement, dated as of June 7, 1997, as amended and restated through November 10, 2003, among the Company, the several Lenders from time to time parties thereto, the Guarantors, 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 Branch, as Syndication Agent, Bank One N. A. and Comerica Bank, as Co-Documentation Agents (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K dated November 13, 2003, File No. 1-8038).
10.2*Purchase and Sale Agreement dated August 7, 2003 between Odessa Exploration Incorporated and Stallion Panhandle 2001, L.P.
31.1*Certification of CEO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
43

99.1*
31.2*Certification of CFO pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*
Filed herewith.

(b)
~~(b)~~
Reports on Form 8-K
The Company filed the following ~~reports~~report on Form 8-K during the quarter ended ~~March 31,~~September 30, 2003:
(i)
Current Report on Form 8-K dated ~~January 31,~~August 19, 2003 to report the execution of an agreement to dispose of the Company’s oil and gas properties.
TheCompany furnished the following report on Form 8-K during the quarter ended September 30, 2003:
(i)                                     Current Report on Form 8-K dated July 29, 2003 filed to ~~report~~furnish the ~~updated pro forma information with respect to~~Company’s operating results for the ~~acquisition of Q Services, Inc.~~
28

~~SIGNATURES~~
quarter ended June 30, 2003.

44

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEY ENERGY SERVICES, INC.

Dated: ~~May 15,~~November 14, 2003

By

By
/s/ ~~FRANCIS~~Francis D. ~~JOHN~~
John
Francis D. John
President and Chief Executive Officer

Dated: ~~May 15,~~November 14, 2003

By

By
/s/ ~~ROYCE~~Royce W. ~~MITCHELL~~
Mitchell
Royce W. Mitchell
Chief Financial Officer
29
45
~~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 the 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 have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the 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 the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the quarterly report (the "Evaluation Date"); and~~

c)
~~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 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 weakness in internal controls; and

b)
~~any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and~~

6.
The registrant's other certifying officers and I have indicated in the 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: May 15, 2003~~ By ~~/s/  FRANCIS D. JOHN~~
~~Chief Executive Officer~~
30
~~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 the 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 have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the 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 the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of the quarterly report (the "Evaluation Date"); and~~

c)
~~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 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 weakness in internal controls; and

b)
~~any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and~~

6.
The registrant's other certifying officers and I have indicated in the 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: May 15, 2003~~ By ~~/s/  ROYCE W. MITCHELL~~
~~Chief Financial Officer~~

*PART I. Financial Information*
~~Item 1.~~			~~Financial Statements~~
Item 1.	Financial Statements
		Consolidated Balance Sheets as of ~~March 31,~~September 30, 2003 (unaudited) and December 31, 2002

		Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended ~~March 31,~~September 30, 2003 and 2002
			~~Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002~~
			Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended ~~March 31,~~September 30, 2003 and 2002

		Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002

		Notes to Consolidated Financial Statements

Item 2.			~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.			Quantitative and Qualitative Disclosures about Market Risk

Item 4.			Disclosure Controls and Procedures

*PART II. Other Information*

Item 1.			Legal Proceedings

Item 2.			Changes in Securities and Use of Proceeds

Item 3.			Defaults Upon Senior Securities

Item 4.			Submission of Matters to a Vote of Security Holders

Item 5.			Other Information

Item 6.			Exhibits and Reports on Form 8-K

Signatures

		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

	September 30, 2003			December 31, 2002
	(Unaudited)
	(thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	89,427		$	9,044
Accounts receivable, net of allowance for doubtful accounts of $5,813 and $4,439, at September 30, 2003 and December 31, 2002, respectively	162,819			141,958
Inventories	14,022			10,243
Prepaid expenses and other current assets	12,446			14,329
Total current assets	278,714			175,574

Property and equipment:
Well servicing equipment	967,013			935,911
Contract drilling equipment	132,556			128,199
Motor vehicles	81,554			79,110
Oil and natural gas properties and other related equipment, successful efforts method	—			48,362
Furniture and equipment	61,937			51,349
Buildings and land	50,003			48,922
Total property and equipment	1,293,063			1,291,853
Accumulated depreciation and depletion	(389,329		)	(335,348		)
Net property and equipment	903,734			956,505
Goodwill, net	346,335			322,270
Deferred costs, net	14,182			13,503
Notes and accounts receivable - related parties	190			251
Other assets	24,446			33,899
Total assets	$	1,567,601		$	1,502,002

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,885		$	28,818
Other accrued liabilities	70,504			57,823
Accrued interest	8,841			15,226
Current portion of long-term debt and capital lease obligations	24,616			7,008
Total current liabilities	124,846			108,875
Long-term debt, less current portion	520,837			472,336
Capital lease obligations, less current portion	11,722			14,221
Deferred revenue	726			8,460
Non-current accrued expenses	36,919			40,477
Deferred tax liability	154,182			161,265
Commitments and contingencies	—			—
Stockholders’ equity:
Common stock, $0.10 par value; 200,000,000 shares authorized, 130,337,664 and 128,757,693 shares issued at September 30, 2003 and December 31, 2002, respectively	13,034			12,876
Additional paid-in capital	687,421			673,249
Treasury stock, at cost; 416,666 shares at September 30, 2003 and December 31, 2002	(9,682		)	(9,682		)
Accumulated other comprehensive loss	(41,082		)	(45,431		)
Retained earnings	68,678			65,356
Total stockholders’ equity	718,369			696,368
Total liabilities and stockholders’ equity	$	1,567,601		$	1,502,002

			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

			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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
	(thousands, except per share data)
*REVENUES:*
Well servicing	$	224,251		$	185,967		$	643,379		$	494,452
Contract drilling	18,819			14,399			51,925			41,491
Other	312			50			(174		)	1,093
Total revenues	243,382			200,416			695,130			537,036

*COSTS AND EXPENSES:*
Well servicing	154,565			131,630			455,645			365,953
Contract drilling	13,676			10,517			38,013			31,970
Depreciation, depletion and amortization	25,898			24,962			75,960			64,143
General and administrative.	24,974			25,808			70,248			56,103
Interest	12,726			11,262			35,940			31,548
Foreign currency transaction gain, Argentina	—			—			—			(401		)
(Gain) loss on retirement of debt	—			(10		)	(16		)	8,447
Total costs and expenses	231,839			204,169			675,790			557,763
Income (loss) from continuing operations before income taxes	11,543			(3,753		)	19,340			(20,727		)
Income tax benefit (expense)	(5,204		)	1,426			(8,152		)	8,251
INCOME (LOSS) FROM CONTINUING OPERATIONS	6,339			(2,327		)	11,188			(12,476		)
Discontinued operations including loss on sale of $7,804, net of tax	(7,396		)	(310		)	(7,866		)	(650		)
Cumulative effect on prior years of a change in accounting principle, net of tax	—			(2,873		)	—			(2,873		)
*NET INCOME (LOSS)*	$	(1,057	)	$	(5,510	)	$	3,322		$	(15,999	)

EARNINGS (LOSS) PER SHARE:
Net income (loss) before discontinued operations and cumulative effect of a change in accounting principle, net of tax:
Basic	$	0.05		$	(0.02	)	$	0.09		$	(0.11	)
Diluted	$	0.05		$	(0.02	)	$	0.09		$	(0.11	)

Discontinued operations
Basic	$	(0.06	)	$	—		$	(0.06	)	$	(0.01	)
Diluted	$	(0.06	)	$	—		$	(0.06	)	$	(0.01	)

Cumulative effect
Basic	$	—		$	(0.02	)	$	—		$	(0.03	)
Diluted	$	—		$	(0.02	)	$	—		$	(0.03	)

Net income (loss)
Basic	$	(0.01	)	$	(0.04	)	$	0.03		$	(0.15	)
Diluted	$	(0.01	)	$	(0.04	)	$	0.03		$	(0.15	)

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	129,744			122,475			129,095			113,668
Diluted	131,433			122,475			130,987			113,668

		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

	Net Assets Acquired
	(thousands)

Current assets	$	37,734
Property and equipment	114,519
Intangible assets	3,242
Other assets	344
Goodwill	136,640
Total assets aquired	292,479
Current liabilities	18,597
Capital lease obligations	77
Non-current accrued expenses	17,908
Deferred tax liablity	5,124
Total liabilities assumed	41,706
Net assets acquired	$	250,773

	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	)

	Nine Months Ended September 30, 2002
	(thousands, except per share data)

Revenues	$	622,799
Net income (loss)	(17,595		)
Basic earnings (loss) per share	$	(0.14	)

		Monthly Income			Strike Price Per Bbl/MMbtu
		Oil (Bbls)	Gas (MMbtu)		Strike Price Per Bbl/MMbtu
		Oil (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

	Well Servicing		Contract Drilling			Corporate / Other			Total
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

	Well Servicing		Contract Drilling			Corporate / Other			Total

Three Months Ended September 30, 2003
Operating revenues	$	224,251	$	18,819		$	312		$	243,382
Operating profit	69,686		5,143			312			75,141
Depreciation, depletion and amortization	21,473		2,642			1,783			25,898
Interest expense	137		—			12,589			12,726
Net income (loss) from continuing operations*	13,049		319			(7,029		)	6,339
Identifiable assets	815,190		88,531			317,545			1,221,266
Capital expenditures (excluding acquisitions)	15,883		1,060			4,891			21,834

Three Months Ended September 30, 2002
Operating revenues	$	185,967	$	14,399		$	50		$	200,416
Operating profit	54,337		3,882			50			58,269
Depreciation, depletion and amortization	21,876		2,392			694			24,962
Interest expense	276		—			10,986			11,262
Net income (loss) from continuing operations*	4,988		(227		)	(7,088		)	(2,327		)
Identifiable assets	828,845		88,742			253,053			1,170,640
Capital expenditures (excluding acquisitions)	12,115		191			4,286			16,592

		March 31, 2003
		Parent Company		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			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

CONDENSED CONSOLIDATING BALANCE SHEET

	September 30, 2003
	Parent Company		Guarantor A Subsidiaries		Guarantor B Subsidiary			Non- Guarantor Subsidiaries		Eliminations			Consolidated
	(thousands)

Assets:
Current assets	$	96,566	$	167,403	$	77		$	14,668	$	—		$	278,714
Net property and equipment	51,156		829,531		13			23,034		—			903,734
Goodwill, net	3,431		342,177		—			727		—			346,335
Deferred costs, net	14,182		—		—			—		—			14,182
Inter-company receivables	697,601		—		—			—		(697,601		)	—
Other assets	12,805		11,373		458			—		—			24,636
Total assets	$	875,741	$	1,350,484	$	548		$	38,429	$	(697,601	)	$	1,567,601

Liabilities and equity:
Current liabilities	$	50,275	$	68,757	$	342		$	5,472	$	—		$	124,846
Long-term debt	520,837		—		—			—		—			520,837
Capital lease obligations	1,403		10,319		—			—		—			11,722
Inter-company payables	—		674,899		3,753			18,949		(697,601		)	—
Deferred tax liability	154,182		—		—			—		—			154,182
Other long-term liabilities	33,346		4,299		—			—		—			37,645
Stockholders’ equity	115,698		592,210		(3,547		)	14,008		—			718,369
Total liabilities and stockholders’ equity	$	875,741	$	1,350,484	$	548		$	38,429	$	(697,601	)	$	1,567,601


CONDENSED CONSOLIDATING BALANCE SHEET

	December 31, 2002
	Parent Company		Guarantor A Subsidiaries		Guarantor B Subsidiary			Non- Guarantor Subsidiaries		Eliminations			Consolidated
	(thousands)
Assets:
Current assets	$	17,716	$	142,587	$	992		$	14,279	$	—		$	175,574
Net property and equipment	43,134		861,043		32,732			19,596		—			956,505
Goodwill, net	3,431		318,208		—			631		—			322,270
Deferred costs, net	13,503		—		—			—		—			13,503
Inter-company receivables	760,990		—		—			—		(760,990		)	—
Other assets	19,687		13,882		581			—		—			34,150
Total assets	$	858,461	$	1,335,720	$	34,305		$	34,506	$	(760,990	)	$	1,502,002

Liabilities and equity:
Current liabilities	$	43,701	$	59,410	$	2,061		$	3,703	$	—		$	108,875
Long-term debt	472,336		—		—			—		—			472,336
Capital lease obligations	1,648		12,573		—			—		—			14,221
Inter-company payables	—		724,341		15,501			21,148		(760,990		)	—
Deferred tax liability	161,265		—		—			—		—			161,265
Other long-term liabilities	31,222		4,735		12,887			93		—			48,937
Stockholders’ equity	148,289		534,661		3,856			9,562		—			696,368
Total liabilities and stockholders’ equity	$	858,461	$	1,335,720	$	34,305		$	34,506	$	(760,990	)	$	1,502,002

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

	Three Months Ended September 30, 2003
	Parent Company			Guarantor A Subsidiaries			Guarantor B Subsidiary			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(thousands)
Revenues	$	149		$	235,631		$	—		$	7,602		$	—	$	243,382
Costs and expenses:
Direct expenses	—			162,413			—			5,828			—		168,241
Depreciation, depletion and amortization expense	1,783			23,544			—			571			—		25,898
General and administrative expense	12,240			12,195			—			539			—		24,974
Interest	12,589			104			—			33			—		12,726
Gain on retirement of debt	—			—			—			—			—		—
Total costs and expenses	26,612			198,256			—			6,971			—		231,839
Income (loss) from continuing operations before income taxes	(26,463		)	37,375			—			631			—		11,543
Income tax (expense) benefit	13,063			(17,954		)	—			(313		)	—		(5,204		)
Income (loss) from continuing operations	(13,400		)	19,421			—			318			—		6,339
Discontinued operations	—			—			(7,396		)	—			—		(7,396		)
Net income (loss)	$	(13,400	)	$	19,421		$	(7,396	)	$	318		$	—	$	(1,057	)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

	Nine Months Ended September 30, 2003
	Parent Company			Guarantor A Subsidiaries			Guarantor B Subsidiary			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(thousands)
Revenues	$	256		$	674,184		$	—		$	20,690		$	—	$	695,130
Costs and expenses:
Direct expenses	—			477,880			—			15,778			—		493,658
Depreciation, depletion and amortization expense	3,799			70,472			—			1,689			—		75,960
General and administrative expense	31,446			37,380			—			1,422			—		70,248
Interest	35,463			385			—			92			—		35,940
Gain on retirement of debt	(16		)	—			—			—			—		(16		)
Total costs and expenses	70,692			586,117			—			18,981			—		675,790
Income (loss) from continuing operations before income taxes	(70,436		)	88,067			—			1,709			—		19,340
Income tax (expense) benefit	29,689			(37,121		)	—			(720		)	—		(8,152		)
Income (loss) from continuing operations	(40,747		)	50,946			—			989			—		11,188
Discontinued operations	—			—			(7,866		)	—			—		(7,866		)
Net income (loss)	$	(40,747	)	$	50,946		$	(7,866	)	$	989		$	—	$	3,322

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

	Nine Months Ended September 30, 2002
	Parent Company			Guarantor A Subsidiaries			Guarantor B Subsidiary			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(thousands)
Revenues	$	469		$	521,448		$	—		$	15,119		$	—	$	537,036
Costs and expenses:
Direct expenses	—			386,426			—			11,497			—		397,923
Depreciation, depletion and amortization expense	1,883			60,820			—			1,440			—		64,143
General and administrative expense	23,897			31,169			—			1,037			—		56,103
Interest	30,777			767			—			4			—		31,548
Foreign currency transaction (gain), Argentina	—			—			—			(401		)	—		(401		)
Gain on retirement of debt	8,447			—			—			—			—		8,447
Total costs and expenses	65,004			479,182			—			13,577			—		557,763
Income (loss) from continuing operations before income taxes	(64,535		)	42,266			—			1,542			—		(20,727		)
Income tax (expense) benefit	25,690			(16,825		)	—			(614		)	—		8,251
Income (loss) from continuing operations	(38,845		)	25,441			—			928			—		(12,476		)
Discontinued operations	—			—			(650		)	—			—		(650		)
Cumulative effect	—			(658		)	(2,215		)	—			—		(2,873		)
Net income (loss)	$	(38,845	)	$	24,783		$	(2,865	)	$	928		$	—	$	(15,999	)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

	Nine Months Ended September 30, 2003
	Parent Company			Guarantor A Subsidiaries			Guarantor B Subsidiary			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(thousands)
Net cash provided (used) by operating activities	$	35,927		$	51,996		$	(15,512	)	$	496		$	—	$	72,907
Net cash provided (used) in investing activities	(15,992		)	(49,460		)	19,698			(2,087		)	—		(47,841		)
Net cash provided (used) in financing activities	62,019			(2,250		)	(4,227		)	—			—		55,542
Effect of exchange rate changes on cash	—			—			—			(225		)	—		(225		)
Net increase (decrease) in cash	81,954			286			(41		)	(1,816		)	—		80,383
Cash at beginning of period	5,183			1,220			(258		)	2,899			—		9,044
Cash at end of period	$	87,137		$	1,506		$	(299	)	$	1,083		$	—	$	89,427

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

	Nine Months Ended September 30, 2002
	Parent Company			Guarantor A Subsidiaries			Guarantor B Subsidiary			Non- Guarantor Subsidiaries			Eliminations		Consolidated
	(thousands)
Net cash provided (used) by operating activities	$	29,327		$	48,746		$	(747	)	$	5,716		$	—	$	83,042
Net cash provided (used) in investing activities	(126,288		)	(42,859		)	23			(3,546		)	—		(172,670		)
Net cash provided (used) in financing activities	93,926			(6,976		)	—			—			—		86,950
Effect of exchange rate changes on cash	—			—			—			(1,460		)	—		(1,460		)
Net increase (decrease) in cash	(3,035		)	(1,089		)	(724		)	710			—		(4,138		)
Cash at beginning of period	2,507			2,983			793			1,683			—		7,966
Cash at end of period	$	(528	)	$	1,894		$	69		$	2,393		$	—	$	3,828

	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

	As of September 30, 2003
	(thousands)
6³/8% Senior Notes Due 2013	$	150,000
8³/8% Senior Notes Due 2008	276,169
14% Senior Subordinated Notes Due 2009	94,668
5% Convertible Subordinated Notes Due 2004	18,699
Other at 8.0%	51
	$	539,587

						KEY ENERGY SERVICES, INC.

Dated: ~~May 15,~~November 14, 2003	By	By			/s/ ~~FRANCIS~~Francis D. ~~JOHN~~ John
				Francis D. John
				President and Chief Executive Officer

Dated: ~~May 15,~~November 14, 2003	By	By			/s/ ~~ROYCE~~Royce W. ~~MITCHELL~~ Mitchell
			Royce W. Mitchell
			Chief Financial Officer