SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): April 10, 2003
(January 31, 2003)
KEY ENERGY SERVICES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 1-8038 04-2648081
(State of Incorporation) (Commission File Number) (IRS Employer Identification No.)
6 DESTA DRIVE
MIDLAND, TEXAS 79705
(Address of Principal Executive Offices)
915/620-0300
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
On July 19, 2002, Key Energy Services, Inc., a Maryland corporation
("Key"), through its wholly-owned subsidiary Key Merger Sub, Inc., a Texas
corporation, acquired Q Services, Inc., a Texas corporation ("QSI"). QSI
operates and conducts field production, pressure pumping and other service
operations in Louisiana, New Mexico, Oklahoma, Texas and the Gulf of Mexico.
Key has previously filed a Form 8-K reporting this acquisition under Item 2
and is filing this Form 8-K solely for the purpose of providing updated
historical financial statements of QSI and updated pro forma financial
information.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements
INDEX TO
Q SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets--
December 31, 2001 and 2000................................ F-3
Consolidated Statements of Operations--
Years Ended December 31, 2001 and 2000.................... F-4
Consolidated Statements of Shareholders' Equity--
Years Ended December 31, 2001 and 2000.................... F-5
Consolidated Statements of Cash Flows--
Years Ended December 31, 2001 and 2000.................... F-6
Notes to Consolidated Financial Statements--December 31,
2001 and 2000............................................. F-7
Condensed Consolidated Balance Sheets--
June 30, 2002 (unaudited) and December 31, 2001........... F-21
Unaudited Condensed Consolidated Statements of Operations--
for the Quarters Ended June 30, 2002 and 2001............. F-22
Unaudited Condensed Consolidated Statements of Operations--
for the Six Months Ended June 30, 2002 and 2001........... F-23
Unaudited Condensed Consolidated Statements of Cash Flows--
for the Six Months Ended June 30, 2002 and 2001........... F-24
Notes to Unaudited Condensed Consolidated Financial
Statements--June 30, 2002................................. F-25
F-1
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
IN CONNECTION WITH THEIR AUDIT OF THE FINANCIAL STATEMENTS OF Q SERVICES,
INC. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN
CONNECTION WITH THIS FILING ON FORM 8-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Q Services, Inc., and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Q
Services, Inc., a Texas corporation, and subsidiaries (collectively, the
"Company") as of December 31, 2001 and 2000, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Q Services, Inc., and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
April 17, 2002
F-2
Q SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,963 $ 4,668
Accounts receivable--
Trade, net of allowance for doubtful accounts of $1,948
and $707, respectively................................ 23,751 15,100
Unbilled................................................ 3,939 1,106
Other, including amounts receivable from affiliates of
$83 and $242, respectively............................ 255 363
Prepaid expenses and other current assets................. 8,471 1,213
-------- --------
Total current assets................................ 42,379 22,450
PROPERTY, PLANT AND EQUIPMENT, net.......................... 95,966 42,103
INTANGIBLE ASSETS, net of accumulated amortization of $4,145
and $2,038, respectively.................................. 58,571 12,396
DEFERRED FINANCING COSTS.................................... 3,243 1,532
OTHER ASSETS, including amounts receivable from affiliates
of $574 and $0, respectively.............................. 962 364
-------- --------
Total assets........................................ $201,121 $ 78,845
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 13,812 $ 5,375
Current maturities of capital leases...................... 25 1,122
Accounts payable.......................................... 9,689 4,411
Accrued expenses.......................................... 9,832 6,262
Other current liabilities................................. 1,822 279
-------- --------
Total current liabilities........................... 35,180 17,449
LONG-TERM DEBT, net of current maturities................... 66,777 31,015
LONG-TERM PORTION OF CAPITAL LEASES, net of current
maturities................................................ 78 1,556
DEFERRED INCOME TAX LIABILITY, net.......................... 5,929 --
OTHER LONG-TERM LIABILITIES................................. 999 1,465
-------- --------
Total liabilities................................... 108,963 51,485
MANDATORILY REDEEMABLE PREFERRED STOCK...................... 7,460 --
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 40,000,000 shares authorized,
15,083,747 shares and 7,562,722 shares issued,
respectively............................................ 80,379 35,253
Warrants, 682,766 and 632,766 shares issued and
outstanding in 2001 and 2000............................ 4,196 3,991
Treasury stock, at cost; 50,000 shares in 2000............ -- (250)
Retained earnings (accumulated deficit)................... 123 (11,634)
-------- --------
Total shareholders' equity.......................... 84,698 27,360
-------- --------
Total liabilities and shareholders' equity.......... $201,121 $ 78,845
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Q SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS)
2001 2000
-------- --------
REVENUES:
Field production services................................. $110,697 $50,790
Pressure pumping services................................. 27,833 --
Fishing and rental tools.................................. 40,585 28,139
-------- -------
Total Revenues........................................ 179,115 78,929
COSTS AND EXPENSES:
Field production services................................. 62,344 27,614
Pressure pumping services................................. 16,897 --
Fishing and rental tools.................................. 20,211 13,497
Selling, general and administrative expenses.............. 37,928 22,127
Depreciation and amortization............................. 11,319 4,881
-------- -------
Operating income...................................... 30,416 10,810
OTHER INCOME (EXPENSE):
Interest income........................................... 119 47
Interest expense.......................................... (6,589) (6,221)
Gain (loss) on sale of assets............................. (1,535) 598
-------- -------
Income before income taxes and extraordinary loss..... 22,411 5,234
INCOME TAX PROVISION........................................ 8,046 263
-------- -------
Net income before extraordinary loss.................. 14,365 4,971
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of
income tax benefit of $1,277.............................. 2,365 --
-------- -------
Net income............................................ 12,000 4,971
PREFERRED STOCK DIVIDENDS................................... 243 --
-------- -------
Net income applicable to common shareholders.......... $ 11,757 $ 4,971
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Q SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
COMMON STOCK WARRANTS TREASURY STOCK RETAINED TOTAL
--------------------- ------------------- ------------------- EARNINGS SHAREHOLDERS'
SHARES AMOUNT WARRANTS AMOUNT SHARES AMOUNT (DEFICIT) EQUITY
---------- -------- -------- -------- -------- -------- --------- -------------
BALANCE, December 31,
1999...................... 2,883,199 $13,779 338,252 $2,998 -- $ -- $(16,605) $ 172
Net income................ -- -- -- -- -- -- 4,971 4,971
Common stock issuances--
Share offering, net of
expenses.............. 4,000,000 19,100 -- -- -- -- -- 19,100
Acquisitions............ 679,523 2,374 -- -- -- -- -- 2,374
Warrants issued........... -- -- 294,514 993 -- -- -- 993
Treasury stock acquired... -- -- -- -- (50,000) (250) -- (250)
---------- ------- ------- ------ ------- ---- -------- -------
BALANCE, December 31,
2000...................... 7,562,722 35,253 632,766 3,991 (50,000) (250) (11,634) 27,360
Net income................ -- -- -- -- -- -- 12,000 12,000
Preferred stock
dividends............... -- -- -- -- -- -- (243) (243)
Common stock issuances--
Share offering, net of
expenses.............. 5,021,025 30,126 -- -- -- -- -- 30,126
Acquisitions............ 2,500,000 15,000 -- -- -- -- -- 15,000
Warrants issued........... -- -- 50,000 205 -- -- -- 205
Treasury stock issuance... -- -- -- -- 50,000 250 -- 250
---------- ------- ------- ------ ------- ---- -------- -------
BALANCE, December 31,
2001...................... 15,083,747 $80,379 682,766 $4,196 -- $ -- $ 123 $84,698
========== ======= ======= ====== ======= ==== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Q SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS)
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 12,000 $ 4,971
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization........................... 11,319 4,881
Provision for doubtful accounts......................... 1,602 69
(Gain) loss on sale of assets........................... 1,535 (598)
Provision for impaired or damaged tools................. 984 --
Extraordinary loss on early extinguishment of debt...... 3,642 --
Deferred income tax (benefit) expense................... 2,139 (49)
Amortization of debt discount and deferred financing
costs................................................. 785 1,476
Changes in assets and liabilities, net of businesses
acquired--
Accounts receivable................................... 867 (4,505)
Accounts payable...................................... (2,723) (1,483)
Accrued expenses...................................... (2,864) 4,064
Other, net............................................ (6,197) (1,607)
-------- --------
Net cash provided by operating activities......... 23,089 7,219
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired.............. (36,183) (2,800)
Purchase of property, plant and equipment................. (30,964) (7,090)
Proceeds from sale of assets.............................. 2,121 1,253
-------- --------
Net cash used in investing activities............. (65,026) (8,637)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of offering costs....... 30,126 19,100
Borrowings on long-term debt and capital leases........... 98,069 1,898
Payments on long-term debt and capital leases............. (81,299) (14,465)
Issuance (purchase) of treasury stock..................... 250 (250)
Payments of penalties and other charges related to the
early extinguishment of debt............................ (379) --
Payments of deferred financing costs...................... (3,535) (783)
-------- --------
Net cash provided by financing activities......... 43,232 5,500
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 1,295 4,082
CASH AND CASH EQUIVALENTS, beginning of year................ 4,668 586
-------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 5,963 $ 4,668
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest................................................ $ 5,978 $ 4,592
======== ========
Income taxes............................................ $ 8,597 $ --
======== ========
Noncash investing and financing activities--
Rollover of accrued interest into long-term debt........ $ -- $ 343
======== ========
Acquisition consideration and deferred financing costs
paid via issuance of warrants......................... $ 205 $ 993
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Q SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
Q Services, Inc., and subsidiaries (collectively, the Company) is engaged in
services used to enhance and maintain the production of oil and natural gas
wells. The Company offers a variety of production-related services including
fluid transportation; frac tank rental; pressure pumping used for well
stimulation, enhancement and completion; and fishing and rental tools used in
workover and drilling operations. The Company operates principally in Texas,
Louisiana, Oklahoma, New Mexico and the inland and offshore waters of the Gulf
of Mexico.
The Company was formed October 1, 1997, and incorporated in the state of Texas
to act as a holding company for its predecessor, Quality Tubular
Services, Inc., and to acquire several affiliated entities. The Company is now
organized into six operating units that support its service lines and regionally
focused operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Q
Services, Inc., and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term deposits with
original maturities of three months or less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation on property,
plant and equipment is calculated using the straight-line method over the
estimated useful lives of the assets. Plant and equipment held under capital
leases and leasehold improvements are amortized to depreciation expense using
the straight-line method over the shorter of the lease term or estimated useful
life of the asset. Depreciation expense in 2001 and 2000 totaled $9.3 million
and $4.5 million, respectively.
Routine maintenance and repairs are included in expense as incurred while costs
of betterments and renewals are capitalized and depreciated over the remaining
lives of the related assets. When an asset is retired or sold, its cost and
accumulated depreciation are removed from the accounts and the difference
between the net book value of the asset and the proceeds from disposition is
recognized as a gain or loss.
Effective January 1, 2000, the Company revised the estimated useful lives of its
property, plant and equipment, and management estimates that these changes
increased 2000 net income by $3.6 million. These revisions to the estimated
useful lives were made to better reflect the expected usage of the assets over
time and to be consistent with prevalent industry practice.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
F-7
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted cash flows
expected to be generated by the asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or the expected net
realizable value. The Company did not record any such impairment during the
years ended December 31, 2001 or 2000.
INTANGIBLE ASSETS
Goodwill, which represents the excess of the purchase price over the fair value
of net assets acquired, is generally amortized on a straight-line basis over the
expected periods to be benefited, up to 30 years. The Company's goodwill at
December 31, 2001 and 2000, was $56.5 million and $12.5 million, respectively,
and related accumulated amortization was $1.8 million and $0.9 million,
respectively. See Note 2 for further discussion.
Other intangible assets, consisting mainly of noncompetition agreements, are
amortized on a straight-line basis over the life of the related asset or the
term of the related agreement. The related obligations for the Company's
noncompetition agreements, included in other current and long-term liabilities,
are classified based on the expected payment dates. The original liability was
discounted using the incremental borrowing rate of the Company at the time the
agreements were executed.
DEFERRED FINANCING COSTS
The Company capitalizes certain costs in connection with obtaining its
borrowings, such as lender's fees and related attorney's fees. These costs are
being amortized to interest expense over the term of the related debt. As of
December 31, 2001 and 2000, the amount of unamortized deferred financing costs
included in the accompanying consolidated balance sheets totaled approximately
$3.2 million and $1.5 million, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and for operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments of the Company are stated at cost, which management
believes approximates fair value.
REVENUE RECOGNITION
Revenues from rental agreements are recognized over the rental period, and
revenues from service agreements are recognized when services have been
rendered. The associated costs and expenses are recognized as incurred. Revenues
from fixed-price construction contracts are recognized on the completed-contract
method in accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts," due to the relatively
short duration of such contracts. Under the completed-contract method, income is
recognized only when the contract is completed or substantially
F-8
completed. The Company generally considers contracts to be substantially
complete upon its departure from the work site and acceptance by the customer.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined, and the effects of revisions to estimated losses are recognized in
the period in which the revisions, if any, are determined.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration risk
consist primarily of temporary cash investments and trade receivables. The
Company restricts investment of temporary cash investments to financial
institutions with high credit standing. The Company's customer base consists
primarily of multinational and independent oil and natural gas producers. The
Company performs ongoing credit evaluations of its customers but generally does
not require collateral on its trade receivables. Credit risk is considered by
management to be limited due to the large number of customers comprising the
Company's customer base. The Company maintains reserves for potential credit
losses, and such losses have historically been within management's expectations.
During 2001 and 2000, sales to one customer accounted for 14.5 percent and
18.0 percent, respectively, of total sales for the Company. No other customer
accounted for more than 10.0 percent of sales during either year.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with accounting principles generally accepted in the
United States. Actual results could differ from those estimates. The Company's
significant estimates include the estimated useful lives and recoverability of
its long-lived assets, purchase price allocations for its acquisitions,
self-insurance accruals, potential legal and environmental exposures, and the
allowance for doubtful accounts.
SELF-INSURANCE
The Company retains the risk for workers' compensation, auto liability, general
liability and employee group health claims, subject to certain defined stop-loss
limits per occurrence. Losses up to the stop-loss amounts are accrued based upon
the Company's known claims incurred and an estimate of claims incurred but not
reported. The accruals are based upon known facts and historical trends, and
management believes such accruals to be adequate.
ENVIRONMENTAL CONTINGENCIES
The Company is subject to various federal, state and local environmental laws
and regulations which establish standards and requirements for protection of the
environment. The Company cannot predict the future impact of such standards and
requirements, which are subject to change and can have retroactive
effectiveness. The Company continues to monitor the status of these laws and
regulations. Currently, the Company has not been fined or cited for, or notified
of, any environmental violations which would have a material adverse effect upon
the consolidated financial position, liquidity or capital resources of the
Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangibles." Among other things, SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and
F-9
requires that all business combinations consummated after June 30, 2001, be
accounted for under the purchase method of accounting. Additionally, SFAS
No. 141 requires that intangible assets other than goodwill, if present, be
assigned separate values in business combinations. The Company adopted SFAS
No. 141 effective July 1, 2001. Such adoption did not have a material impact on
the Company's consolidated financial position or results of operations.
SFAS No. 142 eliminates the requirement to amortize goodwill and requires that
companies annually assess the carrying value of its goodwill for impairment by
applying a fair value-based test. Intangible assets other than goodwill will
continue to be amortized over their estimated remaining useful lives. The
Company is in the process of assessing the potential impact of SFAS No. 142 on
its consolidated financial position and results of operations and will adopt the
statement in 2002.
In June 2001, the FASB issued SFAS No. 143, "Asset Retirement Obligations." SFAS
No. 143 requires that companies recognize a liability for the estimated costs
associated with the retirement of a long-lived asset in the period in which a
liability exists and a reasonable estimate of the fair value of such liability
can be made. Such statement is effective for fiscal years beginning after
June 15, 2002, and the Company plans to adopt the statement in 2003. Management
does not believe that the adoption of SFAS No. 143 will have a material impact
on its consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 and
resolves significant implementation issues encountered with SFAS No. 121. SFAS
No. 144 also establishes a single accounting model for long-lived assets to be
disposed of by sale and requires that those assets be measured at the lower of
carrying amount or fair value less cost to sell. Such statement is effective for
fiscal years beginning after December 31, 2001, and the Company plans to adopt
the statement in 2002. Management does not believe that the adoption of SFAS
No. 144 will have a material impact on its consolidated financial position or
results of operations.
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS Nos. 137 and 138, effective January 1,
2001. The adoption of such statement did not have a material impact on the
Company's consolidated financial position or results of operations. SFAS
No. 133 requires a company to recognize all derivative instruments as assets or
liabilities in its balance sheet and measure them at fair value. Any changes in
the derivative's fair value must be recognized currently in earnings unless
specific hedging criteria are met. The Company did not engage in activities or
enter into arrangements normally associated with derivative instruments in the
years ended December 31, 2001 and 2000. However, subsequent to December 31,
2001, the Company entered into an interest rate hedge transaction related to the
variable-rate debt under its new term loan facility (see Note 5).
RECLASSIFICATIONS
Certain 2000 amounts have been reclassified to conform to the 2001 presentation.
2. ACQUISITIONS:
During 2001, the Company consummated three significant acquisitions, all of
which were recorded using the purchase method of accounting. Accordingly, the
results of operations of the acquired companies have been included in the
accompanying consolidated financial statements from their respective acquisition
dates.
On January 3, 2001, the Company acquired all of the outstanding common stock of
Goetz Services, Inc. (Goetz), for approximately $10.3 million in cash, net of
cash acquired, and the assumption of certain liabilities. Goetz is a provider of
fluid handling and related services to oil and gas producers operating
F-10
in south-central Texas. The Company recorded approximately $8.0 million in
goodwill associated with this transaction.
On May 1, 2001, the Company acquired certain assets and assumed certain
liabilities of Palestine Contractors, Limited, Palestine Contracting Services,
Limited, and Dew Disposal, Limited (collectively Palestine), for approximately
$9.8 million in cash, net of cash acquired, $5.9 million in seller-financed debt
and $0.2 million associated with the issuance of 50,000 warrants. The warrants
provide the holders with the opportunity to purchase the Company's common stock
at a price of $6.00 per share (see Note 10). Palestine provides fluid handling,
site construction and lease crew services to oil and gas producers operating in
east-central Texas. The Company recorded approximately $9.8 million in goodwill
associated with this transaction.
On July 16, 2001, the Company acquired all of the outstanding common stock of
Niewoehner, Inc., d.b.a. American Energy Services (AES), for approximately
$35.4 million. Such consideration was comprised of approximately $12.9 million
in cash, net of cash acquired, $15.0 million associated with the issuance of
2.5 million of the Company's common shares, and $7.5 million associated with the
issuance of 74,600 shares of mandatorily redeemable preferred stock of the
Company (see Note 6). AES provides high-pressure fractionation and stimulation
services to oil and gas producers operating in Texas, Oklahoma and New Mexico.
The acquisition of AES significantly increases the Company's presence in this
particular segment of the industry. The Company allocated its purchase price to
the following assets and liabilities of AES upon acquisition (in thousands):
Working capital........................................... $ (3,897)
Property, plant and equipment............................. 23,870
Noncompete agreements and other intangible assets......... 2,200
Goodwill.................................................. 25,675
Borrowings................................................ (12,498)
--------
Total purchase price...................................... $ 35,350
========
Noncompete agreements and other intangible assets are being amortized on a
straight-line basis over a period of approximately three to five years.
For the year ended December 31, 2001, goodwill associated with the Goetz and
Palestine acquisitions was being amortized on a straight-line basis over a
period of 30 years. Goodwill generated from the AES acquisition, which was
consummated after July 1, 2001, is not subject to amortization, in accordance
with SFAS No. 142.
In addition to the above transactions, the Company acquired the assets of
certain other entities during the year for approximately $3.2 million. These
acquisitions were also recorded using the purchase method of accounting.
The accompanying December 31, 2001, consolidated balance sheet includes
preliminary allocations of the purchase price to the fair value of assets
acquired and liabilities assumed for each of the aforementioned transactions.
Accordingly, such allocations are subject to final adjustments. Management does
not believe that such adjustments will have a material impact on the Company's
consolidated financial position or results of operations.
In 2000, the Company completed three acquisitions for an aggregate total cost of
$5.2 million in cash and common stock. Goodwill associated with these
acquisitions totaled approximately $5.5 million.
F-11
The following unaudited pro forma consolidated results of operations are
presented as if the above-mentioned acquisitions had taken place at the
beginning of the period presented (in thousands):
DECEMBER 31
-------------------
2001 2000
-------- --------
(UNAUDITED)
Net sales............................................... $217,377 $150,763
Net income before extraordinary loss.................... 18,760 7,969
Net income.............................................. 16,395 7,969
These pro forma consolidated results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
consolidated results of operations which actually would have resulted had the
acquisitions occurred at the beginning of the period presented or indicative of
the consolidated future results of operations.
3. PROPERTY, PLANT AND EQUIPMENT:
Major classifications of property, plant and equipment and estimated depreciable
lives are as follows (in thousands):
DECEMBER 31
ESTIMATED LIFE -------------------
(NOTE 1) 2001 2000
-------------- -------- --------
Autos, trucks, trailers and related equipment...... 5-10 years $ 87,204 $ 36,401
Tubing, rental and fishing equipment............... 4-12 years 22,247 20,576
Buildings, facilities and wells.................... 5-30 years 14,943 8,332
Furniture and equipment............................ 3-10 years 2,172 1,244
Construction in progress........................... N/A 2,027 --
Land............................................... N/A 1,531 746
-------- --------
130,124 67,299
Less- Accumulated depreciation..................... (34,158) (25,196)
-------- --------
$ 95,966 $ 42,103
======== ========
Construction in progress includes amounts expended for certain types of assets
that are not ready for service. Depreciation for such assets does not begin
until the assets are completely equipped and placed in service.
In 2001, the Company recorded a $984,000 provision to account for potentially
impaired or damaged tools associated with its fishing and rental tools business.
Such provision represents management's best estimate of the potential exposure
associated with impaired or damaged tools associated with this segment of its
business. The charge has been reflected as a direct reduction of tubing, rental
and fishing equipment.
4. CAPITAL LEASES:
The Company is obligated under various capital leases for certain machinery and
equipment that expire at various dates during the next five years. As part of
the term loan financing closed in December 2001 (see Note 5), the Company paid
off the majority of its capital lease obligations at the end of 2001. As of
December 31, 2001, the Company's future minimum capital lease payments totaled
approximately $110,000, including interest, of which approximately $33,000 is
payable during 2002.
F-12
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
DECEMBER 31
-------------------
2001 2000
-------- --------
Term Loan Facility.......................................... $ 80,000 $ --
Southwest Bank of Texas, N.A., credit facility.............. -- 15,250
CIT Group/Business Credit, Inc., credit facility............ -- 6,609
Subordinated Debt, net of discount of $-- and $2,126,
respectively.............................................. 100 9,929
Other....................................................... 489 4,602
-------- -------
Total long-term debt.................................. 80,589 36,390
Less--Current maturities.................................... (13,812) (5,375)
-------- -------
Long-term debt, net of current maturities............. $ 66,777 $31,015
======== =======
The aggregate maturities of long-term debt at December 31, 2001, are as follows
(in thousands):
Year ending December 31,
2002..................................................... $13,812
2003..................................................... 13,344
2004..................................................... 53,333
2005..................................................... 100
-------
Total................................................ $80,589
=======
The Company executed a $100.0 million term loan and credit facility (the
Facility) in December 2001 with a number of banks, including Lehman Brothers,
who acted as the lead syndication agent. The Facility included an $80.0 million
term loan (the Term Loan Facility) and up to $20.0 million in borrowing capacity
under a revolving credit facility (the Revolving Credit Facility). Additionally,
the Facility provides up to $5.0 million for the issuance of letters of credit
on behalf of the Company. However, any outstanding letters of credit reduce the
borrowing capacity under the Revolving Credit Facility. Borrowings under the
Facility are secured by substantially all of the assets of the Company.
In connection with the execution of the Facility, the Company retired its
existing credit facilities with Southwest Bank of Texas, N.A., and CIT
Group/Business Credit, Inc., and the majority of its existing subordinated and
other debt obligations. The Company recognized an extraordinary loss of
$2.4 million, net of an income tax benefit of $1.3 million, in conjunction with
these early debt extinguishments related to the payment of certain penalties and
costs and the write-off of related unamortized deferred financing costs.
THE TERM LOAN FACILITY
The Term Loan Facility was provided to the Company in the amount of
$80.0 million ($76.7 million net of related debt issuance costs) upon closing of
the Facility on December 17, 2001 (the Funding Date). The Term Loan Facility has
a term of three years from the initial Funding Date. Eleven quarterly principal
payments of $3.33 million are required under the Term Loan Facility beginning on
March 31, 2002. The twelfth and final principal payment of $43.33 million is due
on December 17, 2004, the three-year anniversary of the Funding Date.
The Company must designate the types of borrowings it wishes to make under the
Term Loan Facility. Such borrowings, or tranches, can be made for periods
ranging from one to six months and can be comprised of either base rate loans or
Eurodollar loans, as defined in the Facility. Base rate loans accrue interest at
(a) the prime rate, (b) the base CD rate or (c) the federal funds effective
rate,
F-13
whichever is higher, in effect at the time of the borrowing request, plus an
applicable margin of 3.50 percent. Eurodollar loans accrue interest based on the
three-month LIBOR in effect at the time of the borrowing request, plus an
applicable margin of 4.50 percent. Interest accrues daily and is payable at the
end of each quarter, regardless of the type of loan. As of December 31, 2001,
the $80.0 million Term Loan Facility was split between two borrowing tranches:
(a) a $10.0 million three-month Eurodollar loan accruing interest at
approximately 6.41percent annually and (b) a $70.0 million six-month Eurodollar
loan accruing interest at 6.50 percent annually.
In February 2002, the Company entered into an interest rate swap agreement with
three banks to fix the LIBOR interest rate on $48.0 million of the
$80.0 million Term Loan Facility. The interest rate swap agreement effectively
fixes the floating rate component of the Term Loan Facility at 3.75 percent and
expires in December 2004, consistent with the maturity date of the Term Loan
Facility. The notional amount of the swap will amortize down over the three-year
term to match the principal amortization of the Term Loan Facility.
THE REVOLVING CREDIT FACILITY
The Facility provides for a $20.0 million Revolving Credit Facility for a period
of three years from the Funding Date. Borrowings under the Revolving Credit
Facility, and their related interest charges, are made in the same manner as the
Term Loan Facility based on whether the borrowing is a base rate loan or a
Eurodollar loan. Furthermore, the Company must pay a commitment fee equal to
0.5 percent per annum on the average daily amount of the available revolving
credit commitment.
Borrowings available to the Company under the Revolving Credit Facility are
reduced by any letters of credit outstanding under the Facility. Additionally,
the amount available to the Company under the Revolving Credit Facility may be
limited based the amount of eligible accounts receivable and tangible property
of the Company, as defined in the Facility (hereinafter referred to as the
Borrowing Base Calculation). If the total outstanding borrowings under the
Facility, including term loans, revolving credit commitments and outstanding
letters of credit, exceed the applicable Borrowing Base Calculation, the Company
must immediately repay any outstanding loans under the Revolving Credit Facility
(including any outstanding letters of credit) and the Term Loan Facility, in
that order, until the amount of outstanding loans is less than the applicable
Borrowing Base Calculation.
As of December 31, 2001, the amount available for borrowing under the Revolving
Credit Facility, after taking into consideration outstanding letters of credit
and the aforementioned Borrowing Base Calculation, totaled approximately
$8.8 million. No amounts were outstanding under the Revolving Credit Facility at
December 31, 2001.
LETTERS OF CREDIT
The Facility initially provided the Company with up to $5.0 million for the
issuance of letters of credit for a period of three years from the Funding Date.
In April 2002, the Company amended the Facility to increase the amount of
issuable letters of credit to $8.0 million. The Company is required to pay a fee
of 4.50 percent per annum on any outstanding letters of credit. As of
December 31, 2001, approximately $1.45 million in letters of credit were
outstanding under the Facility.
FINANCIAL COVENANTS
Under the terms of the Facility, the Company is required to meet certain
financial covenants on a quarterly reporting basis. Among other restrictions,
such covenants include the maintenance of specified debt-to-capitalization
ratios and minimum net worth and liquidity requirements, as well as the
maintenance of sufficient levels of earnings to meet the Company's required
fixed charges and debt servicing obligations. If the Company violates any of the
covenants included in the Facility, and is unable to cure such violations within
the applicable time periods provided for in the Facility, all of the
F-14
related debt obligations outstanding under the Facility could become immediately
due and payable. In April 2002, the Company revised certain of its financial
covenants. As of December 31, 2001, the Company was in compliance with all of
the related covenants, as amended, included under the Facility.
SUBORDINATED DEBT
In 1997, the Company entered into a subordinated credit agreement (the
Subordinated Debt) with a shareholder, RSTW Partners III, L.P., in the amount of
$10.0 million at a discount of $3.0 million. The Subordinated Debt was amended
in 2000 and 2001, providing for the addition of unpaid interest totaling
$2.1 million to the principal balance and for the amendment of certain
covenants. In conjunction with the amendment, the Company issued 257,014 common
stock warrants with an exercise price of $0.01 per share. In connection with the
closing of the Facility in December 2001, all but $100,000 of the outstanding
Subordinated Debt was paid off. The remaining balance of the Subordinated Debt
bears interest at an effective rate of 13.7 percent and is due in full in 2005.
OTHER
The Company has approximately $0.5 million in other notes payable outstanding as
of December 31, 2001. Such notes bear interest at rates ranging from
7.0 percent to 12.0 percent. The majority of the principal balance outstanding
as of December 31, 2001, is scheduled to be retired during 2002.
6. MANDATORILY REDEEMABLE PREFERRED STOCK:
In connection with the Company's acquisition of AES in July 2001, the Company
issued 72,000 shares of Series A preferred stock and 2,600 shares of Series B
preferred stock (collectively the Preferred Shares) to certain former
shareholders of AES. The Preferred Shares were issued with a liquidation
preference of $100 per share and are mandatorily redeemable by the Company on or
before July 16, 2006 (the Final Redemption Date). The Preferred Shares must be
redeemed prior to the Final Redemption Date for $100 per share in the event the
Company (a) completes an initial public offering of common stock with net
proceeds in excess of $75.0 million or (b) the Company closes a debt financing
which generates net proceeds of at least $75.0 million. However, the Company may
not redeem any of the Preferred Shares so long as the Subordinated Debt, and any
amounts related thereto including accrued interest, remains outstanding. The
preferred shareholders are entitled to the equivalent of one common share vote
for every 10 Preferred Shares owned with respect to any matters upon which the
common shareholders have the right to vote.
The Preferred Shares accrue dividends initially at the rate of 5 percent per
annum. Such rate increases by one percentage point per year on each anniversary
of the original issuance date until such time as the Preferred Shares are
redeemed by the Company. Accrued but unpaid dividends are cumulative and accrue
additional dividends until paid by the Company. As of December 31, 2001, the
amount of accrued and unpaid dividends included in accrued expenses in the
accompanying December 31, 2001, consolidated balance sheet totaled approximately
$0.2 million.
F-15
7. INCOME TAXES:
Income tax expense attributable to income from continuing operations consists of
the following (in thousands):
DECEMBER 31
-------------------
2001 2000
-------- --------
Current--
U.S. federal....................................... $4,173 $ 62
State and local.................................... 1,734 250
------ ----
5,907 312
Deferred--
U.S. federal....................................... 2,139 (62)
State and local.................................... -- 13
------ ----
2,139 (49)
------ ----
$8,046 $263
====== ====
Income tax expense differed from the amounts computed by applying the U.S.
federal statutory income tax rate to income before income tax as follows (in
thousands). A 35 percent rate was utilized for the year ended December 31, 2001,
and a 34 percent rate was utilized for the year ended December 31, 2000.
DECEMBER 31
-------------------
2001 2000
-------- --------
Federal income tax expense at statutory rate............... $ 7,844 $1,780
Change in valuation allowance.............................. (1,506) (991)
State income tax, net of federal income tax effect......... 1,127 174
Nondeductible expenses..................................... 787 288
Rate differential.......................................... (206) --
Other...................................................... -- (988)
------- ------
$ 8,046 $ 263
======= ======
F-16
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
DECEMBER 31
-------------------
2001 2000
-------- --------
Deferred tax assets--
Net operating loss carryforward......................... $ 4,248 $ 4,409
Intangible assets and accounts receivable............... 814 613
Accrued bonuses......................................... 353 280
Credit carryforward..................................... 62 62
------- -------
5,477 5,364
Less--Valuation allowance................................. -- (1,506)
------- -------
Net deferred tax assets............................. 5,477 3,858
------- -------
Deferred tax liabilities--
Property and equipment, primarily due to differences in
depreciation.......................................... 9,763 3,853
Other................................................... 162 --
------- -------
Gross deferred tax liabilities...................... 9,925 3,853
------- -------
Net deferred tax asset (liability).................. $(4,448) $ 5
======= =======
A valuation allowance is established when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The valuation
allowance is then adjusted when the realization of deferred tax assets becomes
more likely than not. In 2001, the Company eliminated its valuation allowance
based on the presumption that the Company will have sufficient taxable income in
future periods to fully utilize its remaining deferred tax assets.
The Company has a net operating loss carryforward for federal income tax
purposes of approximately $12.1 million that will expire from 2012 to 2019.
Internal Revenue Service regulations restrict the utilization of net operating
loss carryforwards for any company in which an "ownership change" (as defined in
Section 382 of the Internal Revenue Code) has occurred. The Company has
concluded that an ownership change occurred during the year ended December 31,
2000, in conjunction with the private placement of 4.0 million common shares, as
discussed in Note 10. The effect of the ownership change limits the Company's
utilization of its net operating loss carryforwards existing prior to the
ownership change to approximately $1.2 million per year.
The Company currently estimates that it will receive a refund of approximately
$4.1 million related to the overpayment of its 2001 federal income taxes. This
amount is included in prepaid expenses and other current assets as of
December 31, 2001.
8. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan covering substantially all of its employees.
Eligibility requirements provide for 90 days of service, with entry into the
plan quarterly. Discretionary employer contributions are available to be made
annually. Beginning in the second year, the employer contributions vest
proportionally over six years. For the years ended December 31, 2001 and 2000,
contributions to the plan by the Company were $309,000 and $53,000,
respectively.
F-17
9. COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
OPERATING LEASES
The Company has entered into certain noncancelable operating leases that expire
over the next five years. Rental expense for operating leases (except those with
lease terms of one month or less that were not renewed) during 2001 and 2000
were $1.2 million and $1.1 million, respectively.
The Company has entered into various operating leases with related parties for
certain real estate and equipment. Related-party lease payments approximate
$15,000 per month.
Minimum future annual lease payments under these operating leases are as follows
(in thousands):
Year ending December 31,
2002...................................................... $1,915
2003...................................................... 1,814
2004...................................................... 943
2005...................................................... 302
2006...................................................... 2
Thereafter................................................ --
------
$4,976
======
10. SHAREHOLDERS' EQUITY:
During 2001, the Company sold 5,021,025 shares of its common stock in a series
of private placements, resulting in net proceeds to the Company of approximately
$30.1 million. As previously discussed, the majority of the proceeds received
from these placements were used to finance the Palestine and AES acquisitions
consummated during 2001. The remaining proceeds were used to finance capital
expenditures and for working capital and general corporate purposes.
In October 2000, the Company sold 4,000,000 shares of its common stock in a
private placement, resulting in proceeds (net of issuance costs of approximately
$0.9 million) of $19.1 million. These net proceeds were used for working capital
and general corporate purposes and to support strategic acquisition
opportunities.
On November 16, 2000, the Company's board of directors approved an increase in
the number of authorized common shares from 20,000,000 shares to 40,000,000
shares.
At December 31, 2000, treasury stock consisted of 50,000 common shares which
were purchased by the Company at $5 per share. The treasury shares were reissued
for cash in February 2001 at cost to certain existing shareholders of the
Company.
STOCK OPTIONS
The Company maintains two stock incentive compensation plans under which the
Company may grant incentive stock options and nonqualified stock options to
employees, consultants and nonemployee directors. The options generally vest
over a period of one to four years and have lives of up to 10 years. As of
December 31, 2001, 1.6 million options were authorized under the Company's stock
incentive compensation plans.
F-18
The following table summarizes the stock option activity:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
Balance, January 1, 2000.......................... 169,549 $4.92
Granted......................................... 389,544 4.61
Canceled, exercised, forfeited.................. -- --
--------- -----
Balance, December 31, 2000........................ 559,093 4.70
Granted......................................... 784,565 8.20
Canceled, exercised, forfeited.................. (10,000) 6.00
--------- -----
Balance, December 31, 2001........................ 1,333,658 $6.75
========= =====
The Company had 251,820 and 126,200 exercisable options as of December 31, 2001
and 2000, respectively. The following table summarizes information about stock
options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
---------------------- --------- --------- -------- -------- --------
$2.50 -- $ 3.72....... 183,894 4.62 $3.40 63,475 $3.25
$5.00 -- $ 5.50....... 375,199 4.97 5.34 165,562 5.07
$5.51 -- $ 6.50....... 343,065 9.03 6.00 22,783 6.00
$8.50 -- $10.00....... 431,500 9.54 10.00 -- --
--------- -------
1,333,658 7.45 $6.75 251,820 $4.70
========= =======
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock options as all options have been granted with strike prices equal
to or greater than the fair market value of the Company's common stock at the
date of issuance. The weighted average grant-date fair values of options granted
in 2001 and 2000 were $5.88 per share and $2.80 per share, respectively. Options
issued in 2001 with a strike price greater than the market price of the stock on
the grant date have a weighted average exercise price and a weighted average
fair value of $10.00 per option and $3.74 per option, respectively. Had
compensation cost for the stock options been based on the estimated fair value
at the award dates, as prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma unaudited net income would have been
$11.7 million and $4.7 million in 2001 and 2000, respectively.
The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts. For purposes of this disclosure, the Company
estimated the fair value of each option grant on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
DECEMBER 31
---------------------------------------------
2001 2000
--------------------- ---------------------
Expected dividend yield.................... 0.0% 0.0%
Expected stock price volatility............ 55.6% -- 59.0% 58.5% -- 62.8%
Risk-free interest rate.................... 4.72% -- 5.50% 5.25% -- 6.50%
Expected life of options................... 5-7 years 5-7 years
F-19
WARRANTS
In May 2001, the Company issued 50,000 warrants with an exercise price of $7.50
per share in connection with the Palestine acquisition. The Company determined
that such warrants had a fair market value of approximately $4.11 per share
based on the Black-Scholes option pricing model and similar assumptions as those
previously disclosed for options issued. Such warrants, which contain an
antidilution feature, were subsequently amended to provide for a $6.00 per share
exercise price. This amendment to the exercise price did not cause a material
change to the fair market value of the warrants. The issuance of these warrants
was treated as a component of the consideration paid in connection with the
Palestine acquisition.
In May 2000, the Company issued 257,014 detachable warrants with an exercise
price of $0.01 per share in connection with amendments made to the Subordinated
Debt. In June 2000, the Company issued 37,500 detachable warrants with an
exercise price of $0.01 per share in connection with amendments made to the
Company's former credit facilities. At the time that all warrants were issued in
2000, the Company's stock was valued at $3.38 per share. The issuance of the
warrants was recorded as an increase in the Company's deferred financing costs
of approximately $1.0 million. Total warrants outstanding as of December 31,
2001 and 2000, totaled 682,766 and 632,766, respectively. As of December 31,
2001, 50,000 outstanding warrants had an exercise price of $6.00 per warrant,
48,319 warrants had an exercise price of $11.38 per warrant and all other
warrants outstanding had an exercise price of $0.01 per warrant. No warrants
were exercised or canceled during either of the years ended December 31, 2001 or
2000.
11. RELATED-PARTY TRANSACTIONS:
The Company leased rental equipment from a related party, Q2 Rentals LLC. Rent
for 2001 and 2000 amounted to $0.2 million and $0.3 million, respectively.
Additionally, the Company has a note receivable from Q2 Rentals LLC in the
amount of $0.2 million as of December 31, 2001. Such note, which bears interest
at 7 percent per annum, has no scheduled maturity date. As management believes
that this amount will not be collected in 2002, such amount has been classified
as a component of other noncurrent assets in the accompanying December 31, 2001,
consolidated balance sheet.
Amounts receivable from officers and employees of $83,000 and $193,000 are
included in other receivables in the accompanying consolidated balance sheets as
of December 31, 2001 and 2000, respectively. Other current receivables as of
December 31, 2000, also includes a $49,000 receivable due from a related party.
An additional $172,000 in officer and employee advances are included in other
noncurrent assets in the accompanying December 31, 2001, consolidated balance
sheet.
In October 2001, the Company entered into a long-term note receivable with one
of the Company's executive officers. Under the terms of the note, the officer
may borrow up to $500,000 from the Company for a period of three years in
increments of $100,000. Such borrowings accrue interest at 5 percent per annum
and are repayable on the earlier of the Company's initial public offering date
or ratably over a period of 10 years beginning in 2003. As of December 31, 2001,
approximately $202,000 in principal and accrued interest was outstanding under
the note agreement. Such amount has been reflected in other noncurrent assets in
the accompanying December 31, 2001, consolidated balance sheet.
F-20
Q SERVICES, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--JUNE 30, 2002 AND DECEMBER 31, 2001
(In Thousands, Except for Share Amounts)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,472 $ 5,963
Accounts receivable-
Trade, net of allowance for doubtful accounts of $1,000 and $1,948,
respectively 24,032 23,751
Unbilled 2,865 3,939
Other 41 255
Prepaid expenses and other current assets 9,377 8,471
---------- ----------
Total current assets 39,787 42,379
PROPERTY, PLANT AND EQUIPMENT, net 94,541 95,966
INTANGIBLE ASSETS, net of accumulated amortization
of $4,980 and $4,145, respectively 59,141 58,571
DEFERRED FINANCING COSTS 3,046 3,243
OTHER ASSETS 1,594 962
---------- ----------
Total assets $ 198,109 $ 201,121
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 15,035 $ 13,812
Current maturities of capital leases 12 25
Accounts payable 6,881 9,689
Accrued expenses 9,095 9,832
Other current liabilities 1,358 1,822
---------- ----------
Total current liabilities 32,381 35,180
LONG-TERM DEBT, net of current maturities 69,123 66,777
LONG-TERM PORTION OF CAPITAL LEASES,
net of current maturities 49 78
DEFERRED INCOME TAX LIABILITY, net 1,708 5,929
OTHER LONG-TERM LIABILITIES 14,881 999
---------- ----------
Total liabilities 118,142 108,963
MANDATORILY REDEEMABLE PREFERRED STOCK 7,460 7,460
SHAREHOLDERS' EQUITY:
Common stock, no par value; 40,000,000 shares authorized,
15,630,762 shares and 15,083,747 shares issued and outstanding,
respectively, at June 30, 2002 and December 31, 2001, respectively 80,385 80,379
Warrants, 135,819 shares and 682,766 shares issued and outstanding,
respectively, at June 30, 2002 and December 31, 2001, respectively 4,196 4,196
Retained earnings (accumulated deficit) (11,911) 123
Accumulated other comprehensive income (loss) (163) -
---------- ----------
Total shareholders' equity 72,507 84,698
---------- ----------
Total liabilities and shareholders' equity $ 198,109 $ 201,121
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-21
Q SERVICES, INC., AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001
(In Thousands)
2002 2001
---------- ----------
SALES:
Field production services $ 22,878 $ 30,590
Pressure pumping services 9,545 -
Fishing and rental tools 6,879 11,545
---------- ----------
Total sales 39,302 42,135
COSTS AND EXPENSES:
Field production services 30,476 16,183
Pressure pumping services 7,934 -
Fishing and rental tools 3,798 5,194
Selling, general and administrative expenses 9,122 8,460
Depreciation and amortization 3,517 2,412
---------- ----------
Operating income (loss) (15,545) 9,886
OTHER INCOME (EXPENSE):
Interest income 33 61
Interest expense (1,960) (1,487)
Gain (loss) on sale of assets (430) 52
---------- ----------
Income (loss) before income taxes (17,902) 8,782
INCOME TAX PROVISION (BENEFIT) (5,710) 3,353
---------- ----------
Net income (loss) (12,192) 5,159
PREFERRED STOCK DIVIDENDS 137 -
---------- ----------
Net income (loss) applicable to common shareholders $ (12,329) $ 5,159
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-22
Q SERVICES, INC., AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(In Thousands)
2002 2001
---------- ----------
SALES:
Field production services $ 46,122 $ 52,567
Pressure pumping services 19,129 -
Fishing and rental tools 12,663 21,368
---------- ----------
Total sales 77,914 73,935
COSTS AND EXPENSES:
Field production services 44,253 28,110
Pressure pumping services 14,705 -
Fishing and rental tools 6,894 9,981
Selling, general and administrative expenses 18,478 15,424
Depreciation and amortization 7,066 4,034
---------- ----------
Operating income (loss) (13,482) 16,386
OTHER INCOME (EXPENSE):
Interest income 59 61
Interest expense (3,750) (2,943)
Gain (loss) on sale of assets (41) 77
---------- ----------
Income (loss) before income taxes (17,214) 13,581
INCOME TAX PROVISION (BENEFIT) (5,450) 5,424
---------- ----------
Net income (loss) (11,764) 8,157
PREFERRED STOCK DIVIDENDS 270 -
---------- ----------
Net income (loss) applicable to common shareholders $ (12,034) $ 8,157
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-23
Q SERVICES, INC., AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(In Thousands)
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,764) $ 8,157
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 7,066 4,035
Loss (gain) on sale of assets 41 (77)
Amortization of debt discount and deferred financing costs 479 327
Changes in assets and liabilities, net of businesses acquired-
Accounts receivable (281) (8,267)
Accounts payable (2,808) 3,274
Accrued expenses (737) 5,032
Other, net 8,520 (4,206)
---------- ----------
Net cash provided by (used in) operating activities 516 8,275
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired - (24,652)
Purchase of property, plant and equipment (7,776) (9,352)
Proceeds from sale of assets 1,524 464
---------- ----------
Net cash used in investing activities (6,252) (33,540)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance, net of offering costs - 16,897
Borrowings on long-term debt and capital leases 9,000 14,878
Payments on long-term debt and capital leases (5,755) (7,943)
Issuance of treasury stock - 250
---------- ----------
Net cash provided by financing activities 3,245 24,082
---------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (2,491) (1,183)
CASH AND CASH EQUIVALENTS, beginning of period 5,963 4,668
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 3,472 $ 3,485
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-24
Q SERVICES, INC., AND SUBSIDiARiES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements of Q Services, Inc.
and subsidiaries ("the Company") for the three month and six month periods ended
June 30, 2002 should be read in conjunction with the Company's audited annual
financial statements for the year ended December 31, 2001. The accompanying
unaudited interim financial statements reflect all adjustments (which include
only normal, recurring adjustments) that are, in the opinion of management,
necessary to state fairly the results for the period presented. The results of
operations for the three month and six month periods ended June 30, 2002, are
not necessarily indicative of the results to be expected for the Company's
entire fiscal year.
2. COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) for the six months ended
June 30, 2002, are as follows (in thousands):
Net loss applicable to common shareholders $ (11,764)
Unrealized loss on interest rate hedge, net of taxes (163)
----------
Comprehensive loss $ (11,927)
==========
3. LONG-TERM DEBT:
The Company closed a $100.0 million term loan and revolving credit facility with
a number of banks in December 2001 ("the Facility"). The Company is required to
repay $3.33 million per quarter in principal payments under the term loan
portion of the Facility. As of June 30, 2002, the Company had paid $6.66 million
in quarterly principal payments to the lenders under the Facility.
During the six month period ended June 30, 2002, the Company borrowed
approximately $9.0 million under the revolving credit portion of the Facility.
Such amount is not due until the final maturity date of the Facility, which is
December 17, 2004. Accordingly, such borrowing has been reflected as a long-term
debt obligation in the accompanying condensed consolidated balance sheet as of
June 30, 2002. Additionally, during the six month period ended June 30, 2002,
the Company issued approximately $2.9 million in letters of credit under the
Facility bringing the total amount of outstanding letters of credit as of
June 30, 2002 to approximately $4.4 million.
F-25
In February 2002, the Company entered into an interest rate swap agreement with
three banks to fix the floating interest rate on $48.0 million of the $80.0
million term loan portion of the Facility. The interest rate swap effectively
fixes the rate at 3.75 percent, plus the applicable margin, on the amount hedged
and expires in December 2004, consistent with the maturity date of the
underlying term loan. Pursuant to Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended ("SFAS No. 133"), the swap is reflected at fair value in the Company's
condensed consolidated balance sheet in other long-term liabilities with a
corresponding amount being reflected as other accumulated comprehensive loss,
net of taxes, in shareholders' equity. The net effect of this accounting on the
Company's operating results is that interest expense on the portion of the
variable-rate term loan being hedged is recorded based on a fixed rate of 3.75
percent plus the applicable margin. The Company has designated the swap as a
perfectly effective cash flow hedge under SFAS No. 133, and accordingly, the
change in fair value of the swap is recognized entirely as other comprehensive
income, net of taxes.
4. ENVIRONMENTAL LIABILITY
Pursuant to the Company's merger with Key, an environmental assessment was made
and new information regarding environmental contamination at certain of the
Company's facilities became known to management during the quarter ended June
30, 2002. As a result, the Company recorded a $14,109,000 charge to field
production services during the quarter ended June 30, 2002 to increase an
environmental liability.
5. SUBSEQUENT EVENTS
On July 19, 2002, Key Energy Services, Inc. ("Key") acquired all of the
outstanding common stock of the Company pursuant to an Agreement and Plan of
Merger dated May 13, 2002, as amended. As consideration for the merger, the
Company's common stockholders received approximately 17.1 million shares of
Key's common stock. Additionally, Key paid approximately $94.2 million in cash
upon closing of the transaction to retire certain debt, preferred stock, and
other obligations of the Company.
F-26
(b) Pro Forma Information
Key Energy Services, Inc.
Unaudited Pro Forma Combined Financial Statements
The Unaudited Pro Forma Combined Financial Statements of Key have been prepared
to give effect to the acquisition of Q Services, Inc. On July 19, 2002, the
Company consumated a merger agreement with Q Services, Inc. whereby the Company
acquired all of the capital stock of Q Services, Inc. The Unaudited Pro Forma
Combined Statements of Operations give effect to the acquisition as if such
transaction had taken place on July 1, 2001.
The pro forma adjustments are based on available information and upon certain
assumptions that Key believes are reasonable under the circumstances. The
unaudited pro forma combined financial statements and accompanying notes should
be read in conjunction with Key's historical consolidated financial statements,
including the notes thereto, incorporated herein by reference and the financial
statements of Q Services, Inc., including the notes thereto, included within
this filing.
THESE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS ARE PROVIDED FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE
FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF KEY HAD THE TRANSACTIONS
DESCRIBED THEREIN BEEN CONSUMMATED ON THE RESPECTIVE DATES INDICATED AND ARE NOT
INTENDED TO BE PREDICTIVE OF THE FINANCIAL CONDITION OR RESULTS OF OPERATIONS OF
KEY AT ANY FUTURE DATE OR FOR ANY FUTURE PERIOD.
Key Energy Services, Inc. Unaudited Pro Forma Combined Statement of Operations
for the Three Months Ended September 30, 2002
Q SERVICES FOR THE
PERIOD FROM
JULY 1, 2002 TO PRO FORMA PRO FORMA
KEY JULY 19, 2002 ENTRIES COMBINED
--------------- ------------------ --------------- ---------------
(THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------------------------- ---------------
REVENUES:
Well servicing ............................ $ 184,887 $ 7,686 - $ 192,573
Contract drilling ......................... 15,479 - - 15,479
Other ..................................... 1,701 17 - 1,718
--------------- --------------- ---------------
202,067 7,703 209,770
--------------- --------------- ---------------
COSTS AND EXPENSES:
Well servicing ............................ 131,271 6,190 - 137,461
Contract drilling ......................... 10,957 - - 10,957
Depreciation, depletion and amortization .. 25,802 712 361 (b) 26,875
General and administrative ................ 26,008 7,069 (5,171)(d) 27,906
Interest .................................. 11,262 1,560 (1,345)(a) 11,477
Other expenses ............................ 1,030 - 1,030
(Gain) loss on retirement of debt ......... (10) 2,982 (2,982)(d) (10)
--------------- --------------- ---------------
206,320 18,513 215,696
--------------- --------------- ---------------
Income (loss) before income taxes ......... (4,253) (10,810) (5,926)
Income tax (expense) benefit .............. 1,616 4,085 (3,472)(c) 2,229
--------------- --------------- ---------------
Net income (loss) ......................... $ (2,637) $ (6,725) $ (3,697)
=============== =============== ===============
EARNINGS (LOSS) PER SHARE:
Basic ..................................... $ (0.02) $ (0.03)
Diluted ................................... $ (0.02) $ (0.03)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ..................................... 122,475 126,014
Diluted ................................... 122,475 126,014
SEE THE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.
Key Energy Services, Inc. Unaudited Pro Forma Combined Statement of Operations
for the Year Ended June 30, 2002
PRO FORMA PRO FORMA
KEY Q SERVICES ENTRIES COMBINED
--------------- --------------- --------------- ---------------
(THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------------------------------- ---------------
REVENUES:
Well servicing ................................ $ 706,629 $ 183,094 - $ 889,723
Contract drilling ............................. 87,077 - - 87,077
Other ......................................... 8,858 (1,537) - 7,321
--------------- --------------- ---------------
802,564 181,557 984,121
--------------- --------------- ---------------
COSTS AND EXPENSES:
Well servicing ................................ 489,681 127,208 - 616,889
Contract drilling ............................. 60,561 - - 60,561
Depreciation, depletion and amortization ...... 78,265 14,350 $ (333)(b) 92,282
General and administrative .................... 59,494 40,984 - 100,478
Interest ...................................... 43,332 7,395 (3,389)(a) 47,761
423 (a)
Other expenses ................................ 4,531 - - 4,531
Foreign currency transaction loss, Argentina .. 1,443 - 1,443
--------------- --------------- ---------------
737,307 189,937 923,945
--------------- --------------- ---------------
Income before income taxes .................... 65,257 (8,380) 60,176
Income tax (expense) benefit .................. (24,074) 3,167 (732)(c) (21,639)
--------------- --------------- ---------------
Net income (loss) ............................. $ 41,183 $ (5,213) $ 38,537
=============== =============== ===============
EARNINGS (LOSS) PER SHARE:
Basic ......................................... $ 0.39 $ 0.31
Diluted ....................................... $ 0.38 $ 0.31
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ......................................... 105,766 122,903
Diluted ....................................... 107,462 124,599
SEE THE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.
Key Energy Services, Inc.
Notes to Unaudited Pro Forma Combined Financial Statements
September 30, 2002
1. Basis of Presentation
The Unaudited Pro Forma Combined Financial Statements of Key have been prepared
to give effect to the acquisition of Q Services. On July 19, 2002, the Company
consummated a merger agreement with Q Services, Inc. whereby the Company
acquired all of the capital stock of Q Services, Inc.. The Unaudited Pro Forma
Combined Statements of Operations give effect to the acquisition as if such
transaction had taken place on July 1, 2001.
Key - Means the consolidated statements of operations of Key for the three
months ended September 30, 2002 and the year ended June 30, 2002.
Q Services - Means the consolidated statements of operations of Q Services for
the period from July 1, 2002 to July 19, 2002 and the year ended June 30, 2002.
The historical statement of operations column for Q Services for the year ended
June 30, 2002 was obtained by adding the unaudited results for the six months
ended December 31, 2002 to the unaudited operating results for the six months
ended June 30, 2002.
2. Pro Forma Entries
(a) To record the effects on interest expense of the elimination of Q
Services' debt and mandatorily redeemable preferred stock through borrowings
under Key's existing credit agreement.
For the period from July 1, 2002 to July 19, 2002, a decrease in interest
expense of $1.3 million was recorded based on Q Services' average debt balance
of $84.2 million and additional borrowings of $8.0 million at Key's average
effective rate of 4.5% less Q Service's recorded interest expense of $1.6
million.
For the year ended June 30, 2002, a decrease in interest expense of $3.0 million
was recorded based on Q Services' average debt balance of $75.6 million and
additional borrowings of $8.0 million at Key's average effective rate of 5.3%
less Q Service's recorded interest expense of $7.4 million.
(b) To record the estimated change in depreciation for the property, plant
and equipment acquired due to differences between historical cost and the fair
value assigned using the purchase method of accounting and the elimination of
amortization of goodwill as required by Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
(c) To adjust pro forma income tax expense, excluding effects of
nondeductible goodwill.
(d) To adjust for nonrecurring costs associated with the merger. These
costs primarily consisted of $5.2 million in merger costs and $3.0 million
relating to the retirement of Q Services long term debt at closing.
(c) Exhibits
None.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant duly caused this report to be signed by the undersigned hereunto
duly authorized.
Date: April 10, 2003 KEY ENERGY SERVICES, INC.
By: /s/ ROYCE W. MITCHELL
----------------------------------
Royce W. Mitchell
Executive Vice President,
Chief Financial Officer
and Chief Accounting Officer