Key Energy asks noteholders for more time to file financials with SEC

By Jeff Pines

Washington, July 6 - Key Energy Services, Inc. announced a consent solicitation from noteholders to give it more time to prepare its 10-K for 2003 and 2004 10-Q reports, it said.

On June 1, the company received a notice from the indenture trustee that it had 90 days to file the reports or face default.

Key Energy said it believes the notice may be invalid because it does not meet certain requirements for giving notice as required by the indentures. Contrary to the letter from the trustee, the indentures actually would require the company to cure the deficiency within 60 days of the receipt of a notice, it said.

In any event, the Midland, Texas-based oil well services firm is asking for consents from holders of its 6 3/8% senior notes due 2013 and 8 3/8% senior notes due 2008.

The consent solicitation expires at 5 p.m. ET on July 15. Holders who provide their consents will get a payment of $2.50 per $1,000 of notes.

A majority of both series must give their consents.

Lehman Brothers (800 438-3242 or 212 528-7581) is the solicitation agent and D.F. King & Co., Inc. at (800 848-2998 or 212 269-5550) is the information agent and tabulation agent for the offering.

Key Energy's lenders for its revolver have already agreed to give the company waivers.

The company has already inventoried 20,000 pieces of equipment as it continues with its restatement. Key Energy is trying to match the equipment that has been physically counted with the book values for the equipment recorded in its accounting system.

It also is trying to determine the fiscal period in which any write-downs or impairments should be recorded. A major problem, Key Energy said, is the accounting records for equipment acquired in 2000 and before. Key Energy cautioned users of its financial records not to rely on them.

The company's workers' compensation insurer gave the company an extension until Sept. 30 to provide it with the financials. After the company agreed to the extension, Standard & Poor's downgraded Key Energy's long-term corporate and senior unsecured debt rating to B from B+. Moody's downgraded Key's senior unsecured issuer rating to B2 from B1.

This means the company must replace its promissory note and bond with letters of credit within 30 days of the downgrade. The period was supposed to have expired July 8 but Key Energy obtained an extension until July 22 to obtain a letter of credit for the $6 million promissory note. Key Energy said it has arranged for a letter of credit.

The board's audit committee hired special outside counsel, Sidley Austin Brown & Wood LLP, to review its internal investigation of the South Texas division. The committee also authorized an independent investigation with the help of special outside counsel of the company's public disclosure procedures, its internal controls and other matters.

As part of this investigation, outside counsel for the audit committee examined, among other things, matters related to public disclosures and financial forecasts made by Key Energy's executive officers, certain transactions involving executive officers, accounting policies and procedures and corporate governance matters. In the course of that investigation, they interviewed many of the company's current and former employees.

Sidley Austin Brown & Wood has largely completed its factual inquiries. Counsel has given reports on its preliminary factual findings to the Audit Committee and the Company's Board of Directors. The audit committee has not yet reached any conclusions as to what corrective actions it will recommend based on counsel's factual findings, the company said.

The audit committee expects to complete its investigation and make recommendations on corrective actions to the board by the end of July.

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