SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): February 20, 2002
KEY ENERGY SERVICES, INC.
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(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
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(Address of Principal Executive Offices)
915/620-0300
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(Registrant's telephone number, including area code)
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(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
RECENT DEVELOPMENTS
Most of our foreign revenues are derived from our operations in
Argentina. For fiscal 2001, revenues from operations in Argentina were $48.5
million, which accounted for 5.5% of our total revenues for such period. For
fiscal 2001, net income from operations in Argentina was $4.5 million. For
the six months ended December 31, 2001, revenues from operations in Argentina
were $21.3 million, which accounted for 4.6% our total revenue for such
period. We incurred a net loss of $1.3 million from our operations in
Argentina for the same six-month period. Recently, Argentina has been
negatively affected by volatile economic and political conditions. In
December 2001, the Argentine government announced that it would restrict bank
account withdrawals and would not service its public sector debt. In
addition, in January 2002, the Argentine government abandoned its decade-old
fixed peso-dollar exchange rate and created a dual exchange rate system. As a
result of this abandonment of the fixed peso-dollar exchange rate system, at
December 31, 2001 we recorded a $1.8 million foreign currency transaction
loss on our dollar-denominated accounts receivable and reduced our
stockholders' equity by an additional $24.2 million due to foreign currency
translation related to our net investment in our Argentine subsidiary. The
Argentine government has also recently announced its intent to impose a 20%
tax on oil exports effective March 1, 2002 or other taxes on production that
would produce comparable tax revenues.
We believe that all of these events will negatively affect oil production in
Argentina, and accordingly will have a negative effect on demand for our
services. The economic conditions in Argentina continue to be unstable and
further devaluation of the Argentine peso may occur. We continue to evaluate the
structure of our operations in Argentina, but we are currently unable to predict
the effects that further instability in Argentina will have on our financial
position.
RISK FACTORS
YOUR INVESTMENT IN THE NOTES WILL INVOLVE RISK. YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS BEFORE DECIDING TO PURCHASE ANY NOTES.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS IS DEPENDENT ON CONDITIONS IN THE OIL AND NATURAL GAS INDUSTRY,
ESPECIALLY THE CAPITAL EXPENDITURES OF OIL AND NATURAL GAS COMPANIES.
The demand for our services is primarily influenced by current and
anticipated oil and natural gas prices. Prices for oil and natural gas
historically have been extremely volatile and have reacted to changes in the
supply of and demand for oil and natural gas (including changes resulting from
the ability of the Organization of Petroleum Exporting Countries to establish
and maintain production quotas for oil prices), domestic and worldwide economic
conditions and political instability in oil producing countries. Weakness in oil
and natural gas prices may cause lower equipment rates and lower utilization of
available well service equipment. In addition, when oil and natural gas prices
are weak, fewer wells are drilled, resulting in less drilling and less
maintenance work for us. Additional factors that affect demand for our services
include:
- the level of development, exploration and production activity of, and
corresponding spending by, oil and natural gas companies;
- oil and natural gas production costs;
- government regulation; and
- conditions in the worldwide oil and natural gas industry.
In addition, we anticipate that prices for oil and natural gas will continue
to be volatile and affect the demand for and pricing of our services. Reductions
in oil and natural gas prices can result in a reduction in the trading prices
and value of our securities, even if the reduction in oil and natural gas prices
does not affect our business generally. However, a material decline in oil or
natural gas prices or exploration activities over a sustained period of time
could materially adversely affect the demand for our services and, therefore,
our results of operations and financial condition.
Periods of diminished or weakened demand for our services have occurred in
the past. Since the end of the first quarter of fiscal 2002 and continuing
through the third quarter, we have experienced a decrease in the demand for our
services. We believe this trend is due to an overall weakening of demand for
onshore well services, which is attributable to lower prices for oil and natural
gas and general economic uncertainty. If these conditions continue, or worsen,
they could have a material adverse effect on our financial condition and results
of operations. In light of these and other factors relating to the oil and
natural gas industry, our historical operating results may not be indicative of
future performance.
AN ECONOMIC DOWNTURN MAY ADVERSELY AFFECT OUR BUSINESS.
The United States economy is currently believed to be in a recession. An
economic downturn may cause reduced demand for petroleum-based products and
natural gas. In addition, many oil and natural gas production companies often
reduce or delay expenditures to reduce costs, which in turn may cause a
reduction in the demand for our services during these periods. According to
industry data, in July 2001, there were approximately 1,293 active drilling rigs
in North America. As of December 2001, the number of active drilling rigs had
been reduced to 928. The number of active drilling rigs may be indicative of
demands for services such as those we provide. If the economic environment
worsens, our business may be further adversely impacted.
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WE HAVE PURSUED, AND WILL CONTINUE TO PURSUE, STRATEGIC ACQUISITIONS. OUR
BUSINESS MAY BE ADVERSELY AFFECTED IF WE CANNOT EFFECTIVELY INTEGRATE ACQUIRED
OPERATIONS.
A component of our strategy includes acquiring complementary businesses.
Acquisitions, including recent acquisitions and any acquisitions we make in the
future, involve a number of risks and challenges including:
- our ability to integrate acquired operations;
- the potential loss of key employees and customers of the acquired
companies; and
- an increase in our expenses and working capital requirements.
Any of these factors could adversely affect our ability to achieve
anticipated levels of earnings and cash flows from our recent or future
acquisitions or realize other anticipated benefits. Furthermore, competition
from other potential buyers could reduce our acquisition opportunities or cause
us to pay a higher price than we otherwise might pay.
OUR BUSINESS INVOLVES CERTAIN OPERATING RISKS, WE ARE PARTIALLY SELF-INSURED AND
THE INSURANCE WE DO HAVE MAY NOT BE ADEQUATE TO COVER ALL LOSSES OR LIABILITIES
WE MIGHT INCUR IN OUR OPERATIONS.
Our operations are subject to many hazards and risks, including the
following:
- blow-outs;
- reservoir damage;
- loss of well control;
- cratering;
- fires;
- damage to the environment; and
- liabilities from accident or damage by our fleet of trucks.
If these hazards occur they could result in suspensions of operations,
damage to or destruction of our equipment and the property of others and injury
or death to personnel.
We self-insure to cover a portion of these liabilities. For losses in excess
of our self-insurance limits, we maintain insurance from unrelated commercial
carriers. However, our insurance may not be adequate to cover all losses or
liabilities that we might incur in our operations. There can be no assurance
that our insurance will adequately protect us against liability from all of the
hazards of our business. Moreover, we also are subject to the risk that we may
not be able to maintain or obtain insurance of the type and amount we desire at
a reasonable cost. If we were to incur a significant liability for which we were
not fully insured it could have a material adverse effect on our financial
position and results of operations.
RISKS RELATING TO THE NOTES
WE MAY NOT BE ABLE TO GENERATE ENOUGH CASH FLOW TO MEET OUR DEBT SERVICE
OBLIGATIONS.
Our ability to make payments on and to refinance our indebtedness, including
the notes, and to fund planned capital expenditures will depend on our ability
to generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control.
We cannot assure you that we will generate sufficient cash flow from
operations, that currently anticipated operating improvements will be realized
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness, including the notes, or to fund our other
liquidity needs. We may need to refinance all or a portion of our indebtedness,
including the notes, on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness, including our senior credit facility
and the notes, on commercially reasonable terms or at all.
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WE ARE A HOLDING COMPANY AND CONDUCT A SUBSTANTIAL PORTION OF OUR OPERATIONS
THROUGH OUR SUBSIDIARIES, WHICH MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON THE
NOTES.
We conduct a substantial portion of our operations through our subsidiaries.
As a result, our cash flow and our ability to service our debt, including the
notes, is dependent upon the earnings of our subsidiaries. In addition, we are
dependent on the distribution of earnings, loans or other payments from our
subsidiaries to us. Any payment of dividends, distributions, loans or other
payments from our subsidiaries to us could be subject to statutory or
contractual restrictions. Payments to us by our subsidiaries also will be
contingent upon the profitability of our subsidiaries. If we are unable to
obtain funds from our subsidiaries we may not be able to pay interest or
principal on the notes when due, or to redeem the notes upon a change of
control, and we cannot assure you that we will be able to obtain the necessary
funds from other sources.
FOLLOWING THIS OFFERING, WE COULD INCUR A SUBSTANTIAL AMOUNT OF DEBT, WHICH
COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND BUSINESS PROSPECTS AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
NOTES.
On an as adjusted basis giving effect to this offering and the application
of the proceeds as anticipated, we would have had $446.9 million of indebtedness
outstanding at December 31, 2001. However, we will be permitted under our senior
credit facility and the indenture governing the notes to incur additional debt,
subject to certain limitations. If we incur additional debt following this
offering, our increased leverage could, for example:
- make it more difficult for us to satisfy our obligations under the notes
or other indebtedness and, if we fail to comply with the requirements of
the other indebtedness, could result in an event of default on the notes
or such other indebtedness;
- require us to dedicate a substantial portion of our cash flow from
operations to required payments on indebtedness, thereby reducing the
availability of cash flow to fund working capital, capital expenditures
and other general business activities;
- limit our ability to obtain additional financing in the future for working
capital, capital expenditures and other general corporate activities;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- detract from our ability to successfully withstand a downturn in our
business or the economy generally; and
- place us at a competitive disadvantage against less leveraged competitors.
OUR DEBT INSTRUMENTS IMPOSE RESTRICTIONS ON US THAT MAY AFFECT OUR ABILITY TO
SUCCESSFULLY OPERATE OUR BUSINESS.
Our senior credit facility restricts us, and the terms of the indenture will
restrict us, from taking various actions, such as:
- incurring additional indebtedness;
- paying dividends;
- repurchasing junior indebtedness;
- making investments;
- entering into transactions with affiliates;
- merging or consolidating with other entities; and
- selling all or substantially all of our assets.
In addition, our senior credit facility requires us to maintain certain
financial ratios and satisfy certain financial condition tests, several of which
become more restrictive over time and may require us
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to take action to reduce our debt or take some other action in order to comply
with them. These restrictions also could limit our ability to obtain future
financings, make needed capital expenditures, withstand a future downturn in our
business or the economy in general, or otherwise conduct necessary corporate
activities. We also may be prevented from taking advantage of business
opportunities that arise because of the limitations imposed on us by the
restrictive covenants under our senior credit facility and the indenture. A
breach of any of these provisions will likely result in a default under the
indenture governing the notes and under our senior credit facility that would
allow those lenders to declare that indebtedness immediately due and payable. If
we were unable to pay those amounts because we do not have sufficient cash on
hand or are unable to obtain alternative financing on acceptable terms, the
lenders could initiate a bankruptcy or liquidation proceeding or proceed against
any assets that serve as collateral to secure that indebtedness. Our assets may
not be sufficient to repay that amount and the amounts due under the notes in
full.
THE HOLDERS OF OUR SERIES B NOTES MAY OR MAY NOT ELECT TO EXCHANGE THEIR
SERIES B NOTES FOR SERIES C NOTES.
Although we are obligated to make an offer to exchange all of our
outstanding Series B Notes for additional Series C Notes, we will not provide
any incentive to the holders of our Series B Notes to exchange their notes for
new Series C Notes. Accordingly, we cannot assure you that any of the holders of
our Series B Notes will exchange their Series B Notes for Series C Notes. If the
holders of the Series B Notes do not exchange their Series B Notes for Series C
Notes, you may not experience the increased liquidity that could be associated
with owning notes of a larger series. On the other hand, if all or substantially
all of the holders of our Series B Notes do elect to exchange their Series B
Notes for our Series C Notes, the former holders of Series B Notes will hold a
majority of the outstanding principal amount of the Series C Notes. Therefore,
these former holders of the Series B Notes will have the controlling vote with
regard to all matters requiring the consent of holders owning a majority in
aggregate principal amount of the Series C Notes. In addition, if we issue
any other Series C Notes, the voting power of the Series B Note holders will
be further diluted by such issuance.
IN THE EVENT OF OUR BANKRUPTCY OR LIQUIDATION, HOLDERS OF THE NOTES WILL BE PAID
FROM ANY ASSETS REMAINING AFTER PAYMENTS TO ANY HOLDERS OF SECURED DEBT AND DEBT
OF OUR NON-GUARANTOR SUBSIDIARIES.
The notes will be general unsecured senior obligations of us and our
subsidiary guarantors, and effectively subordinated to any secured debt that we
may have in the future to the extent of the value of the assets securing that
debt. As of December 31, 2001, as adjusted for the offering of the notes, our
total secured indebtedness was approximately $24.3 million. The indenture
permits us to incur additional secured indebtedness provided certain conditions
are met. In addition, not all of our subsidiaries will guarantee the notes,
which will be effectively subordinated to the liabilities of any of these
non-guarantor subsidiaries. Specifically, none of our foreign subsidiaries will
guarantee the notes.
If we are declared bankrupt or insolvent, or are liquidated, the holders of
our secured debt and any debt of our non-guarantor subsidiaries will be entitled
to be paid from our assets before any payment may be made with respect to the
notes. If any of the foregoing events occur, we cannot assure you that we will
have sufficient assets to pay amounts due on our secured debt, the debt of our
non-guarantor subsidiaries and the notes. As a result, holders of the notes may
receive less, ratably, than the holders of secured debt or the debt of our
non-guarantor subsidiaries in the event of our bankruptcy or liquidation.
WE MAY NOT BE ABLE TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL.
If a change of control, as defined in the indenture, occurs we will be
required to make an offer to purchase all the outstanding notes at a premium,
plus any accrued interest to the date of purchase. In such a situation, we
cannot assure you that we will have enough funds to pay for all of the notes
that are tendered under the offer to purchase. If a significant amount of notes
are tendered, we will almost certainly have to obtain financing to pay for the
tendered notes; however, we cannot be sure we will be able to obtain such
financing on acceptable terms, if at all. A change of control also may result in
an event of default under our senior credit facility and agreements governing
our future indebtedness and
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may result in the acceleration of that indebtedness, in which case we will be
required to repay that indebtedness at the time of acceleration rather than at
scheduled maturity. If that indebtedness is secured debt, we will be required to
repay that debt to the extent of the value of the assets securing the debt
before repurchasing the notes.
THE SUBSIDIARY GUARANTEES COULD BE DEEMED FRAUDULENT CONVEYANCES UNDER CERTAIN
CIRCUMSTANCES, AND A COURT MAY TRY TO SUBORDINATE OR VOID THE SUBSIDIARY
GUARANTEES.
Under the federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of such guarantee; and
- was insolvent or rendered insolvent by reason of such incurrence; or
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor, or to a fund for the
benefit of the creditors of the guarantor. The measures of insolvency for
purposes of these fraudulent transfer laws will vary depending upon the law
applied in any proceeding to determine whether a fraudulent transfer has
occurred. Generally, however, a guarantor would be considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability, including contingent
liabilities, on its existing debts, as they become absolute and mature; or
- it could not pay its debts as they become due.
YOUR ABILITY TO TRANSFER THE NOTES MAY BE LIMITED BY THE ABSENCE OF AN ACTIVE
TRADING MARKET AND THERE IS NO ASSURANCE THAT ANY ACTIVE TRADING MARKET WILL
DEVELOP FOR THE NOTES.
The notes are a new issue of securities for which there is no established
public market. Lehman Brothers has informed us that they intend to make a market
in the notes, as permitted by applicable laws and regulations; however, Lehman
Brothers is not obligated to make a market in the notes, and they may
discontinue their market-making activities at any time without notice.
Therefore, we cannot assure you that an active market for the notes will develop
or, if developed, that it will continue. Historically, the market for
noninvestment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the notes. We
cannot assure you that the market, if any, for the notes will be free from
similar disruptions. Any disruptions in the market may adversely affect the
prices at which you may sell your notes. In addition, after their initial
issuance, the notes may trade at a discount from their initial offering price,
depending upon prevailing interest rates, the market for similar notes, our
performance and other factors.
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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: February 19, 2002 KEY ENERGY SERVICES, INC.
By: /s/ Francis D. John
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Francis D. John
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
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