<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-18437
--------------------
POOL ENERGY SERVICES CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0263755
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 954-3000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 31, 1998: Common Stock, no par value - 21,030,293 shares
================================================================================
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
POOL ENERGY SERVICES CO.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Revenues ....................................................................... $ 117,712 $ 98,384
Earnings (Loss) Attributable to Unconsolidated Affiliates ...................... (71) 1,004
------------- --------------
Total ................................................................. 117,641 99,388
------------- --------------
Costs and Expenses:
Operating expenses ........................................................ 83,363 74,716
Selling, general and administrative expenses .............................. 13,175 12,761
Depreciation and amortization ............................................. 7,510 5,703
------------- --------------
Total ................................................................. 104,048 93,180
------------- --------------
Other Income (Expense) - Net ................................................... 403 558
Interest Expense ............................................................... 1,763 785
------------- --------------
Income Before Income Taxes and Minority Interest ............................... 12,233 5,981
Income Tax Provision ........................................................... 4,780 2,272
Minority Interest in Loss of Consolidated Subsidiary ........................... -- (96)
------------- --------------
Net Income ..................................................................... $ 7,453 $ 3,805
============= ==============
Earnings Per Share of Common Stock ............................................. $ .38 $ .20
============= ==============
Earnings Per Share of Common Stock-assuming dilution ........................... $ .38 $ .20
============= ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 3
POOL ENERGY SERVICES CO.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
-------------------------------
1998 1997
----------- -----------
Operating Activities:
<S> <C> <C>
Net income ................................................................ $ 7,453 $ 3,805
Noncash items included above:
Depreciation and amortization ......................................... 7,510 5,703
Deferred income taxes ................................................. 2,299 2,023
Undistributed (earnings) loss of unconsolidated affiliates ............ 147 (963)
Other - net ........................................................... 379 (564)
Payment for lease of manufacturing facility ............................... (537) (537)
Proceeds from rig mobilization ............................................ 8,611 --
Other - net ............................................................... (2,060) (318)
Net effect of changes in operating working capital ........................ (6,720) (8,305)
----------- -----------
Net Cash Flows Provided by Operating Activities .................. 17,082 844
----------- -----------
Investing Activities:
Property additions ........................................................ (25,918) (6,999)
Expenditures for acquisition, including acquisition costs, less cash
acquired .............................................................. (50,374) --
Proceeds from disposition of property, plant and equipment ................ 438 947
Other - net ............................................................... 36 617
----------- -----------
Net Cash Flows Used for Investing Activities ..................... (75,818) (5,435)
----------- -----------
Financing Activities:
Proceeds from long-term debt .............................................. 170,000 --
Principal payments on long-term debt ...................................... (80,800) (2,525)
Repayment of debt assumed in acquisition .................................. (15,672) --
Payment of debt financing costs ........................................... (4,691) (14)
Proceeds from exercise of stock options ................................... 257 532
----------- -----------
Net Cash Flows Provided by (Used for) Financing Activities ....... 69,094 (2,007)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ........................... 10,358 (6,598)
Cash and Cash Equivalents at January 1, ........................................ 18,993 21,837
----------- -----------
Cash and Cash Equivalents at March 31, ........................................ $ 29,351 $ 15,239
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
POOL ENERGY SERVICES CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
---------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................. $ 29,351 $ 18,993
Restricted cash ........................................................ 10 10
Accounts and notes receivable (net of allowance for doubtful accounts of
$1,269 and $1,272) ................................................... 104,667 97,283
Inventories ............................................................ 17,703 19,500
Deferred income tax asset ............................................. 8,068 8,594
Other current assets ................................................... 12,641 8,295
---------- -----------
Total current assets ................................................. 172,440 152,675
Property, Plant and Equipment - Net ....................................... 381,364 259,793
Vessel Construction Deposits .............................................. 18,275 --
Investment in and Noncurrent Receivables from Unconsolidated Affiliates ... 28,527 20,515
Goodwill, net ............................................................. 61,947 42,395
Deferred Costs ............................................................ 10,275 1,270
Noncurrent Receivables (net of allowance for doubtful accounts of $1,092
and $1,113) and Other Assets ........................................... 2,769 2,547
---------- -----------
Total ................................................................ $ 675,597 $ 479,195
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ...................................... $ 1,025 $ 1,025
Accounts payable ....................................................... 49,473 41,305
Accrued Sea Mar purchase price adjustment .............................. 14,700 --
Other current liabilities .............................................. 53,114 51,275
---------- -----------
Total current liabilities ............................................ 118,312 93,605
Long-Term Debt ............................................................ 168,522 79,322
Deferred Income Taxes ..................................................... 62,905 21,575
Other Liabilities ......................................................... 49,544 46,995
Minority Interest ......................................................... -- 3,960
Shareholders' Equity :
Common stock, no par value:
40,000,000 shares authorized; 21,030,293 and 19,448,946 shares
issued and outstanding ............................................. 231,561 196,532
Retained earnings ...................................................... 45,682 38,229
Unearned compensation - restricted stock ............................... (607) (701)
Cumulative foreign currency translation adjustments .................... (322) (322)
---------- -----------
Total shareholders' equity ........................................... 276,314 233,738
---------- -----------
Total ................................................................ $ 675,597 $ 479,195
========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included in this report are
unaudited but in the opinion of management include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods indicated. All dollar amounts in the
tabulations in the notes to the financial statements are stated in thousands
unless otherwise indicated. Certain reclassifications have been made in the 1997
financial statements to conform with the 1998 presentation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the financial
statements of Pool Energy Services Co. (the "Company") and all subsidiaries in
which a controlling interest is held. The Company uses the equity method to
account for affiliates in which it does not have control. In 1997, the Emerging
Issues Task Force of the Financial Accounting Standards Board (the "FASB")
reached a consensus on Issue 96-16 "Investor's Accounting for an Investee When
the Investor has a Majority of the Voting Interest but the Minority Shareholder
or Shareholders Have Certain Approval or Veto Rights" ("EITF 96-16"). EITF 96-16
sets forth new criteria for evaluating whether or not the rights of the minority
shareholder are sufficient to overcome the presumption that all majority-owned
investees should be consolidated. Effective January 1, 1998, the Company adopted
EITF 96-16 and changed its method of accounting for its 51% interest in Pool
International Argentina S.A. ("PIASA") to the equity method. Prior to January 1,
1998, 100% of PIASA's assets, liabilities, results of operations and cash flows
were included in the Company's respective consolidated totals. The change in
method of accounting had no effect on the Company's consolidated net income for
the three months ended March 31, 1998. The following table summarizes the effect
of adopting EITF 96-16 on the Company's balance sheet at January 1, 1998:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
------------
<S> <C>
Total Current Assets ..................................................... $ (4,465)
Property, Plant and Equipment - Net ...................................... (11,583)
Investment in and Noncurrent Receivables from
Unconsolidated Affiliates .............................................. 8,161
Goodwill, net ............................................................ (1,542)
-----------
Total .................................................................. $ (9,429)
===========
Total Current Liabilities ................................................ $ (6,455)
Deferred Income Taxes .................................................... 986
Minority Interest ........................................................ (3,960)
-----------
Total .................................................................. $ (9,429)
===========
</TABLE>
5
<PAGE> 6
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Deferred Costs
Deferred costs consist primarily of drydocking expenses incurred in
conjunction with marine inspections of offshore support vessels and debt
financing costs. Drydocking expenses are capitalized and amortized on a
straight-line basis over a period normally not to exceed 30 months. Debt
financing costs are amortized over the terms of the related borrowings. The
major components of deferred costs are unamortized deferred drydocking expenses
of $5.3 million at March 31, 1998 and unamortized debt financing costs of $4.9
million and $0.9 million at March 31, 1998 and December 31, 1997, respectively.
3. EARNINGS PER SHARE
The following tables set forth the amounts used in computing earnings per
share ("EPS") and the weighted average number of shares of dilutive potential
common stock for the quarters ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -----------
(In thousands except number of shares
and per share amounts)
<S> <C> <C> <C>
Earnings per Share of Common Stock
Net Income ............................................ $ 7,453 19,483,801 $ .38
===========
Dilutive Effect of Potential Common Stock
Stock Options ......................................... -- 285,301
------------- -------------
Earnings per Share of Common Stock - Assuming Dilution
Net Income ............................................ $ 7,453 19,769,102 $ .38
============= ============= ===========
</TABLE>
Options to purchase approximately 52,000 shares of common stock at an
exercise price of $31.8125 per share that were outstanding during the first
quarter of 1998 were not included in the computation of diluted EPS because such
options were antidilutive.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------
(In thousands except number of shares
and per share amounts)
<S> <C> <C> <C>
Earnings per Share of Common Stock
Net Income ............................................ $ 3,805 19,140,119 $ .20
===========
Dilutive Effect of Potential Common Stock
Stock Options ......................................... -- 263,880
------------- -------------
Earnings per Share of Common Stock - Assuming Dilution
Net Income ............................................ $ 3,805 19,403,999 $ .20
============= ============= ===========
</TABLE>
6
<PAGE> 7
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. LONG-TERM DEBT AND LINE OF CREDIT
Senior Subordinated Notes
On March 31, 1998, the Company completed a private placement of 8 5/8%
senior subordinated notes due 2008 in the aggregate principal amount of $150
million (the "Notes"). The net proceeds from the sale of the Notes were used to
fund the cash portion of the purchase price for Sea Mar, Inc. ("Sea Mar") (see
Note 5), to repay the existing debt of Sea Mar and to reduce the outstanding
balance under the Company's three-year $180 million syndicated bank credit
agreement (the "Credit Agreement"). The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after April 1, 2003 at a
redemption price equal to 104.313% of the principal amount thereof, plus accrued
interest, declining ratably to par on April 1, 2006. The Company may also redeem
up to 35% of the aggregate principal amount of the Notes at its option, from
time to time on or prior to April 1, 2001, at a redemption price equal to
108.625% of the principal amount thereof, plus accrued interest, with the net
proceeds of one or more equity offerings of the Company's common stock.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company
and are unconditionally guaranteed, jointly and severally, by all of the
Company's wholly-owned subsidiaries that are incorporated or organized in the
United States (the "Subsidiary Guarantors"). The Notes contain certain covenants
that, among other things, limit the ability of the Company and the Subsidiary
Guarantors to incur additional indebtedness, issue capital stock of Subsidiary
Guarantors, pay dividends or make other restricted payments, incur liens, enter
into certain transactions with affiliates, enter into certain mergers or
consolidations or sell all or substantially all of the assets of the Company and
its subsidiaries.
Credit Agreement
In March 1998, simultaneously with the issuance of the Notes and the
closing of the Sea Mar Acquisition, the Company executed an amendment to the
Credit Agreement to increase maximum availability thereunder from $130 million
to $180 million, including up to $15 million that may be used to support letters
of credit. At March 31, 1998 the Company had drawn $5.0 million in cash under
the Credit Agreement, and an additional $11.6 million was being utilized to
support the issuance of letters of credit, primarily related to insurance
obligations.
Borrowings under the Credit Agreement bear interest, at the Company's
option, at either (i) the Base Rate (defined as the higher of the administrative
agent bank's prime lending rate or 1/2 of 1% in excess of the federal funds
rate) plus a margin ranging from zero to .50%, or (ii) the Eurodollar Rate
(equivalent to the London Interbank Offered Rate plus a margin ranging from 1%
to 1.75% with the Company's option of a one-, two-, three- or six-month interest
period). The applicable margin for each interest option depends on the Company's
leverage ratio for the fiscal quarter preceding the interest period; however,
through September 1998, the applicable Eurodollar margin shall not be less than
1.50%. Based upon the Company's leverage ratio at March 31, 1998, the applicable
Eurodollar margin would have been 1.00%. The Credit Agreement will mature on
October 2, 2000 and is subject to one-year extensions at the discretion of the
lenders. Revolving loans issued under the Credit Agreement are prepayable at any
time and are due at expiration on October 2, 2000. The Credit Agreement imposes
certain financial covenants, including ones requiring the maintenance of a
minimum net worth, a minimum interest coverage ratio, a minimum fixed charge
coverage ratio, a maximum leverage ratio and a maximum debt-to-equity ratio. It
also imposes certain other restrictions, including ones related to liens, other
indebtedness, asset sales, investments, acquisitions or mergers and the payment
of dividends. Advances under the Credit Agreement are secured by a pledge of 66%
of the capital stock of certain of the Company's foreign subsidiaries.
7
<PAGE> 8
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Company incurred $4.2 million and $0.5 million of debt financing costs
during the first three months of 1998 in connection with the Notes offering and
the Credit Agreement, respectively.
5. ACQUISITION OF SEA MAR, INC.
On March 31, 1998, the Company acquired all of the outstanding capital
stock of Sea Mar, a privately owned Louisiana-based offshore support vessel
company with operations primarily in the Gulf of Mexico, for approximately $75.9
million in cash (including an estimated $14.7 million in post-closing purchase
price adjustments) and 1,538,462 shares of the Company's common stock (the "Sea
Mar Acquisition"). In addition, the Company agreed to pay additional cash
consideration contingent upon Sea Mar exceeding certain financial targets for
the fiscal years ending December 31, 1998 and 1999, up to a maximum of $10
million in each year.
The acquisition was accounted for under the purchase method, and Sea Mar's
results of operations will be included in the Company's consolidated financial
statements from the date of the acquisition. The purchase price was allocated
based on preliminary estimates of the fair market value of the assets acquired
and the liabilities assumed at the date of acquisition. The purchase price
allocation is subject to adjustment as additional information becomes available
and is evaluated. The primary items that may be subject to further adjustment
are fair value assessments of property, plant and equipment and reserves for
income taxes. This preliminary purchase price allocation resulted in goodwill of
approximately $21.5 million, which is being amortized on a straight-line basis
over 25 years.
Expenditures for the acquisition, including acquisition costs, less cash
acquired were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired (including goodwill) ........... $ 176,987
Company's common stock issued ................................ (34,327)
Liability for post-closing purchase price adjustment ......... (14,700)
Liabilities assumed .......................................... (66,755)
-----------
Cash paid, including acquisition related expenditures ........ 61,205
Less: cash acquired .......................................... 10,831
-----------
Net cash used for the acquisition ............................ $ 50,374
===========
</TABLE>
Sea Mar has a contract with a marine shipbuilder for the construction of
ten offshore support vessels at an estimated aggregate cost of $77.6 million,
net of deposits. These new vessels are scheduled to be delivered between late
1998 and early 2000.
The following unaudited pro forma summary of financial information presents
the Company's consolidated results of operations as if the Sea Mar Acquisition
had occurred at the beginning of the periods indicated, after including the
impact of certain adjustments, such as: additional depreciation expense,
amortization of goodwill, amortization of the portion of the purchase price
allocated to a noncompete agreement, reduction of gains on sales due to the
purchase price allocation, increased interest expense and amortization of the
related debt financing costs associated with the $150 million Notes, reduction
of interest expense for the repayment of existing Sea Mar debt and repayments on
the Credit Agreement and related income tax effects thereon.
8
<PAGE> 9
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------------------------------------
1998 1997
--------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
(In thousands except earnings per share)
<S> <C> <C> <C> <C>
Revenues ................................... $ 117,712 $ 131,245 $ 98,384 $ 108,883
=========== =========== =========== ===========
Net Income ................................. $ 7,453 $ 9,750 $ 3,805 $ 4,313
=========== =========== =========== ===========
Earnings Per Share of Common Stock ......... $ .38 $ .46 $ .20 $ .21
=========== =========== =========== ===========
Weighted Average Shares Outstanding ........ 19,484 21,005 19,140 20,679
=========== =========== =========== ===========
Earnings Per Share of Common Stock -
assuming dilution ..................... $ .38 $ .46 $ .20 $ .21
=========== =========== =========== ===========
Weighted Average Shares Outstanding ........ 19,769 21,290 19,404 20,942
=========== =========== =========== ===========
</TABLE>
The above pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred if the Sea Mar Acquisition had taken place at the beginning
of the periods presented, nor is it necessarily indicative of future operating
results.
6. UNCONSOLIDATED AFFILIATES
The following table sets forth certain summarized financial information of
the Company's unconsolidated affiliates as derived from the unaudited condensed
financial statements of the affiliates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
1998 1997
--------- --------
Revenues:
<S> <C> <C>
Pool Arabia, Ltd. ........................ $ 11,457 $ 8,584
Pool International Argentina S.A. ........ 3,179 (b) --
Intairdril Oman L.L.C. ................... 10 65
--------- --------
Total .............................. $ 14,646 $ 8,649
========= ========
Gross Profit (Loss) (a):
Pool Arabia, Ltd. ........................ $ 3,890 $ 3,465
Pool International Argentina S.A. ........ (1,336)(b) --
Intairdril Oman L.L.C. ................... 4 56
--------- --------
Total .............................. $ 2,558 $ 3,521
========= ========
Net Income (Loss):
Pool Arabia, Ltd. ........................ $ 373 $ 448
Pool International Argentina S.A. ........ (1,570)(b) --
Intairdril Oman L.L.C. ................... (9) (23)
--------- --------
Total .............................. $ (1,206) $ 425
========= ========
</TABLE>
(a) Gross profit is computed as revenues less operating expenses (which
excludes depreciation and amortization and selling, general and
administrative expenses).
(b) Effective January 1, 1998, the Company began accounting for its 51%
interest in PIASA under the equity method. See Note 2.
9
<PAGE> 10
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Earnings (loss) attributable to unconsolidated affiliates is summarized
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1998 1997
-------- -------
<S> <C> <C>
The Company's portion of net income (loss) .................................. $ (615) $ 217
Adjustment to reconcile differences between affiliates' bases and
Company's carrying value ............................................... 468 746
-------- -------
Equity in income (loss)...................................................... (147) 963
Other income (expense) ...................................................... 76 41
-------- -------
Total .................................................................. $ (71) $ 1,004
======== =======
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets and eliminates certain disclosures no
longer considered useful. The Company plans to adopt this statement in the
fourth quarter of 1998. Its adoption is not expected to have a material effect
on the Company's financial position or results of operations, and any effect
will be limited to the form and content of the disclosure it requires.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company adopted this statement in
the first quarter of 1998, and there was no effect on the Company's financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in interim and annual financial statements. The Company plans to adopt
this statement in the fourth quarter of 1998. Its adoption is not expected to
have a material effect on the Company's financial statements, and any effect
will be limited to the form and content of the disclosure it requires.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTES OFFERING
On March 31, 1998, the Company completed a private placement of 8 5/8%
senior subordinated notes due 2008 in the aggregate principal amount of $150
million. The net proceeds from the sale of the Notes were used to fund the cash
portion of the purchase price for the Sea Mar Acquisition, to repay the existing
debt of Sea Mar and to reduce the outstanding balance under the Credit
Agreement. The Notes are general unsecured obligations of the Company
subordinated in right of payment to all existing and future senior indebtedness
of the Company and are unconditionally guaranteed, jointly and severally, by
each of the Subsidiary Guarantors. The Notes contain certain covenants that,
among other things, limit the ability of the Company and its Subsidiary
Guarantors to incur additional indebtedness, issue capital stock of Subsidiary
Guarantors, pay dividends or make other restricted payments, incur liens, enter
into certain transactions with affiliates, enter into certain mergers or
consolidations or sell all or substantially all of the assets of the Company and
its subsidiaries.
1998 ACQUISITION
Sea Mar, Inc. On March 31, 1998, the Company acquired all of the
outstanding capital stock of Sea Mar, a privately owned Louisiana-based offshore
support vessel company with operations primarily in the Gulf of Mexico, for
approximately $75.9 million in cash (including an estimated $14.7 million in
post-closing purchase price adjustments) and 1,538,462 shares of the Company's
common stock. In addition, the Company agreed to pay additional cash
consideration contingent upon Sea Mar exceeding certain financial targets for
the fiscal years ended December 31, 1998 and 1999, up to a maximum $10 million
in each year.
As a result of the Sea Mar Acquisition, the Company now operates a
diversified fleet of 23 offshore support vessels in the Gulf of Mexico. In
addition, Sea Mar has a contract with a marine shipbuilder for the construction
of ten offshore support vessels at an estimated aggregate cost of $77.6 million,
net of deposits. These new vessels are scheduled to be delivered between late
1998 and early 2000. The Company anticipates that these expenditures will be
financed by internally generated funds and borrowings under the Credit Agreement
as needed.
1997 ACQUISITIONS
A.A. Oilfield Service, Inc. ("A.A.") In November 1997, the Company acquired
A.A. for $4.1 million in cash. This acquisition included 18 oilfield trucks, one
salt water disposal well and related equipment based in Hobbs, New Mexico.
Trey Services, Inc. ("Trey") In October 1997, the Company acquired all of
the outstanding capital stock of Trey and certain associated operating assets
for $31.3 million in cash. Prior to the acquisition, Trey, through its
wholly-owned subsidiary, R&H Well Service, Inc. ("R&H"), operated a fleet of
approximately 67 land well-servicing rigs, 104 oilfield trucks, 430 fluid
storage tanks and five brine and disposal wells in the Permian Basin of West
Texas.
D A & S Oil Well Servicing, Incorporated ("DA&S") In June 1997, the Company
acquired all of the outstanding capital stock of DA&S for $10.5 million. Prior
to the acquisition, DA&S operated a fleet of 37 land well-servicing rigs from
yards in Hobbs and Eunice, New Mexico and Andrews, Texas.
11
<PAGE> 12
RESULTS OF OPERATIONS - QUARTERS ENDED MARCH 31, 1998 AND 1997
The Company generated net income of $7.5 million in the first quarter of
1998, compared with $3.8 million in the first quarter of 1997, despite the fact
that the average price of crude oil was approximately 30% lower in the first
quarter of 1998 than in the first quarter of 1997, and average domestic natural
gas prices decreased approximately 16% comparing the same periods. Results from
the Company's domestic operations improved primarily due to (i) higher land
drilling activity in Alaska, including the operation of Rig 8, a recently
upgraded drilling rig which commenced a five-year contract in February 1998,
(ii) inclusion of results from the land well-servicing rigs acquired in the
October 1997 Trey acquisition and in the June 1997 DA&S acquisition (see "- 1997
Acquisitions"), and (iii) increased activity and rates for the Company's jackup
workover rigs and platform drilling rigs in the Gulf of Mexico, including newly
constructed Rig 16 which was placed in service in February 1998. Rig hours for
the Company's domestic onshore operation were 14% higher in the first quarter of
1998 than in the corresponding quarter of 1997. The Company's offshore rig fleet
in the Gulf of Mexico experienced rig utilization of 59% in the first quarter of
1998, compared to 65% in the comparable period of 1997, but average rig rates
were 26% higher in the 1998 period. Results from the Company's international
operations improved due to increased land drilling rig activity in Ecuador,
Pakistan and Guatemala.
Revenues. Revenues were $117.7 million in the first quarter of 1998, a 20%
increase over revenues of $98.4 million in the first quarter of 1997. This
increase was attributable to (i) the inclusion of revenues from the 67 land
well-servicing rigs acquired in the October 1997 Trey acquisition and the 37
land well-servicing rigs acquired in the June 1997 DA&S acquisition (see "- 1997
Acquisitions"), (ii) higher land drilling activity in Alaska, including
operation of Rig 8, (iii) increased activity and rates for the Company's jackup
workover rigs and platform drilling rigs in the Gulf of Mexico, including Rig
16, and (iv) increased land drilling activity in Ecuador, Guatemala and
Pakistan. These revenue increases were offset partly by lower revenues from
operations in Oman due to the transfer of a land drilling rig to Saudi Arabia
where the rig is being leased to Pool Arabia, Ltd., the Company's Saudi Arabia
affiliate, and reduced platform workover rig activity in the Gulf of Mexico. In
addition, the Company's revenues in the first quarter of 1998 did not include
revenues related to PIASA, the Company's Argentina affiliate, as a result of
changing its accounting for its 51% investment in PIASA to the equity method due
to the adoption of EITF 96-16, compared to the inclusion of $3.6 million of
revenues for PIASA in the first quarter of 1997 (see Note 2 to the Condensed
Consolidated Financial Statements and "- Earnings Attributable to Unconsolidated
Affiliates"). Domestic onshore well-servicing and production services revenues
increased $14.6 million or 25% in the first quarter of 1998 from the
corresponding quarter of 1997, chiefly as a result of the inclusion of results
from rigs acquired from the Trey and DA&S acquisitions. Domestic onshore rig
utilization was 54% in the first quarter of 1998, compared to 55% in the first
quarter of 1997. Domestic onshore well-servicing rig hours increased from
approximately 291,000 in the first quarter of 1997 to approximately 330,000 in
the first quarter of 1998. Gulf of Mexico offshore workover and drilling
revenues increased $2.1 million or 13%, international operations revenues
decreased $2.2 million or 13% (however, excluding the $3.6 million of revenues
from PIASA in the first quarter of 1997, international operations revenues
increased $1.5 million or 12%), and Alaska operations revenues increased $4.8
million or 78%, compared to the first quarter of 1997.
Earnings Attributable to Unconsolidated Affiliates. The loss attributable
to unconsolidated affiliates was $0.1 million in the first quarter of 1998,
compared to earnings of $1.0 million in the first quarter of 1997. This decrease
was due to a $0.9 million loss attributable to PIASA in the first quarter of
1998. In August 1996, the Company acquired a 51% interest in PIASA, a newly
formed Argentina corporation. Prior to 1998, for financial reporting purposes,
100% of the assets, liabilities, results of operations and cash flows of PIASA
were consolidated with those of the Company. The minority shareholder's interest
in PIASA and the earnings or losses therefrom were reflected as "minority
interest" in the Company's financial statements. Beginning in 1998, as a result
of the adoption of EITF 96-16, PIASA no longer qualifies for full consolidation
and is now accounted for under the equity method (see Note 2 to the Condensed
Consolidated Financial Statements).
Earnings attributable to Pool Arabia, Ltd. were $0.8 million in the first
quarter of 1998, a $0.2 million decrease from the comparable period of 1997 due
to a non-recurring income item in the first quarter of 1997.
12
<PAGE> 13
Costs and Expenses. The Company's costs and expenses were $104.0 million in
the first quarter of 1998, a 12% increase compared to costs and expenses of
$93.2 million in the corresponding quarter of 1997; however, operating expenses
declined to 71% of revenues in the first quarter of 1998 from 76% of revenues in
the first quarter of 1997. The increase in costs and expenses was primarily due
to the inclusion of costs and expenses related to operating the land
well-servicing rigs acquired in the acquisition of Trey in October 1997 and DA&S
in June 1997 and increased land drilling activity in Alaska. The increase was
partly offset by decreased costs and expenses in Oman due to the transfer of a
land drilling rig to Saudi Arabia where the rig is being leased to Pool Arabia,
Ltd. In addition, the Company's costs and expenses in the first quarter of 1997
included $4.0 million of costs and expenses related to PIASA (see "- Earnings
Attributable to Unconsolidated Affiliates").
Other Income - Net. Other income - net was $0.2 million lower in the first
quarter of 1998 than in the corresponding quarter of 1997, primarily due to
lower gains on dispositions of equipment.
Interest Expense. Interest expense was $1.0 million higher in the first
quarter of 1998 than in the corresponding quarter of 1997, primarily due to
interest expense under the Credit Agreement and the $10.1 million in long-term
notes issued in connection with the DA&S acquisition in June 1997, partially
offset by a reduction in interest expense due to certain term loans being paid
off in October 1997 with borrowings under the Credit Agreement and a reduction
in the outstanding principal amount of certain 10% notes issued in connection
with the 1995 purchase of Golden Pacific Corp.
Income Taxes. The Company recorded income tax expense of $4.8 million
(which included $2.3 million of deferred taxes) on income before income taxes of
$12.2 million in the first quarter of 1998, compared to income tax expense of
$2.3 million (which included $2.0 million of deferred taxes) on income before
income taxes and minority interest of $6.0 million in the first quarter of 1997.
The increase in income tax expense in the first quarter of 1998 compared to the
first quarter of 1997 was primarily due to an increase in pre-tax income in the
first quarter of 1998, as a result of the factors described above. The Company's
interim period tax expense is determined by utilizing the aggregate of estimated
annual effective tax rates for each of the Company's domestic and foreign
locations.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows. The Company had cash and cash equivalents of $29.4 million at
March 31, 1998 compared to $19.0 million at December 31, 1997. Working capital
was $54.1 million and $59.1 million at March 31, 1998 and December 31, 1997,
respectively. The Company used a net $75.8 million for investing activities in
the first quarter of 1998, primarily for capital expenditures of $25.9 million
and $50.4 million, net of cash acquired, for the purchase of Sea Mar. The
Company used a net $5.4 million for investing activities in the first quarter of
1997, primarily for capital expenditures of $7.0 million, partially offset by
$0.9 million of proceeds from dispositions of equipment.
Long-Term Debt. In March 1998, simultaneously with the issuance of the
Notes and the closing of the Sea Mar Acquisition, the Company executed an
amendment to the Credit Agreement to increase maximum availability thereunder
from $130 million to $180 million, including up to $15 million that may be used
to support letters of credit. At March 31, 1998 the Company had drawn $5.0
million in cash under the Credit Agreement, and an additional $11.6 million was
being utilized to support the issuance of letters of credit, primarily related
to insurance obligations.
Borrowings under the Credit Agreement bear interest, at the Company's
option, at either (i) the Base Rate (defined as the higher of the administrative
agent bank's prime lending rate or 1/2 of 1% in excess of the federal funds
rate) plus a margin ranging from zero to .50%, or (ii) the Eurodollar Rate
(equivalent to the London Interbank Offered Rate plus a margin ranging from 1%
to 1.75% with the Company's option of a one-, two-, three- or six-month interest
period). The applicable margin for each interest option depends on the Company's
leverage
13
<PAGE> 14
ratio for the fiscal quarter preceding the interest period; however, through
September 1998, the applicable Eurodollar margin shall not be less than 1.50%.
Based upon the Company's leverage ratio at March 31, 1998, the applicable
Eurodollar margin would have been 1.00%. The Credit Agreement will mature on
October 2, 2000 and is subject to one-year extensions at the discretion of the
lenders. Revolving loans issued under the Credit Agreement are prepayable at any
time and are due at expiration on October 2, 2000. The Credit Agreement imposes
certain financial covenants, including ones requiring the maintenance of a
minimum net worth, a minimum interest coverage ratio, a minimum fixed charge
coverage ratio, a maximum leverage ratio and a maximum debt-to-equity ratio. It
also imposes certain other restrictions, including ones related to liens, other
indebtedness, asset sales, investments, acquisitions or mergers and the payment
of dividends. Advances under the Credit Agreement are secured by a pledge of 66%
of the capital stock of certain of the Company's foreign subsidiaries.
On March 31, 1998, the Company completed a private placement of 8 5/8%
Notes in the aggregate principal amount of $150 million (see Note 4 to the
Condensed Consolidated Financial Statements and "- Notes Offering").
During the first quarter of 1998, the Company made payments of $80.8
million to reduce the borrowings under the Credit Agreement and repaid Sea Mar's
existing debt of $15.7 million. During the first quarter of 1997, the Company
made scheduled principal payments of $2.5 million on long-term debt.
Capital Expenditures. The Company anticipates that 1998 capital
expenditures, excluding business acquisitions, will consist of (i) approximately
$50 million for additions and improvements to its existing rig fleet, (ii)
approximately $10 million toward the upgrade of an Arctic land drilling rig,
(iii) approximately $14 million toward the construction of a new Arctic land
drilling rig, (iv) approximately $4.5 million for the electrification and
upgrade of a platform rig located in the Gulf of Mexico, and (v) $2.3 million
for the purchase of two jack-up workover rigs located in the Gulf of Mexico that
the Company currently leases.
In addition, the Company expects to make capital expenditures in 1998 of
approximately $17 million with respect to Sea Mar's vessel fleet, including
approximately $16 million for payment of the balance of the purchase price for
two vessels currently under construction which are scheduled for delivery in
late 1998.
The Company anticipates that these expenditures will be financed by
internally generated funds and borrowings under the Credit Agreement as needed.
Acquisitions of additional assets and businesses are expected to continue to be
an important part of the Company's strategy for growth. The Company would, under
certain circumstances, need to obtain additional debt and/or equity financing to
fund such acquisitions.
OTHER MATTERS
Accounting Standards. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
and eliminates certain disclosures no longer considered useful. The Company
plans to adopt this statement in the fourth quarter of 1998. Its adoption is not
expected to have a material effect on the Company's financial position or
results of operations and any effect will be limited to the form and content of
the disclosure it requires.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company adopted this statement in
the first quarter of 1998 and there was no effect on the Company's financial
statements.
14
<PAGE> 15
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information about
operating segments in interim and annual financial statements. The Company plans
to adopt this statement in the fourth quarter of 1998. Its adoption is not
expected to have a material effect on the Company's financial statements, and
any effect will be limited to the form and content of the disclosure it
requires.
FORWARD-LOOKING INFORMATION
The statements included in this report on Form 10-Q regarding future
financial performance and results of operations and other statements that are
not historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements to the effect that the
Company or management "anticipates," "believes," "estimates," "expects,"
"predicts," or "projects" a particular result or course of events, or that such
result or course of events "should" occur, and similar expressions, are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to
uncertainties relating to industry and market conditions, prices of crude oil
and natural gas, foreign exchange and currency fluctuations, political
instability in foreign jurisdictions, the ability of the Company to integrate
newly acquired operations and other factors discussed in this quarterly report
and in the Company's other filings with the Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those stated.
15
<PAGE> 16
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sale of Unregistered Securities
On March 31, 1998, the Company issued 1,538,462 shares of the Company's
common stock as partial consideration for the acquisition of all the capital
stock of Sea Mar, Inc. The securities issued in this transaction were not
registered under the Securities Act of 1933, as amended, pursuant to the
exemption provided under Section 4(2) thereof for transactions not involving a
public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 1998, the Company held its Annual Meeting of Shareholders. At
such meeting the following matters were voted upon:
(i) The following persons were elected to serve as directors of the
Company, each for a term of three years or until a successor is elected and
qualified:
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
---------- ---------
<S> <C> <C>
William H. Mobley 17,334,416 258,635
Joseph R. Musolino 17,333,347 259,704
</TABLE>
(ii) A proposal to ratify the appointment of Deloitte and Touche LLP as
independent auditors of the Company for the year 1998 was approved. Such
proposal received 17,573,505 affirmative votes, 2,860 negative votes, and there
were 16,686 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<S> <C>
27(*) -- Financial Data Schedule
</TABLE>
- --------
(*) Filed herewith
(b) Reports on Form 8-K - The Registrant filed a Current Report on Form 8-K
dated March 11, 1998 (Date of event: March 9, 1998) in respect of the
agreement by the Registrant to purchase all the outstanding capital stock
of Sea Mar, Inc. The items reported in such Current Report were (i) Item 2,
Acquisition or Disposition of Assets, (ii) Item 5, Other Events, and (iii)
Item 7, Financial Statements and Exhibits.
The Registrant filed a Current Report on Form 8-K dated April 6, 1998 (Date
of event: March 31, 1998) in respect of (i) the consummation of the
purchase of all the outstanding capital stock of Sea Mar, Inc. and (ii) the
private placement of 8 5/8% senior subordinated notes due 2008 in the
aggregate principal amount $150 million. The items reported in such Current
Report were (i) Item 5, Other Events, and (ii) Item 7, Financial Statements
and Exhibits.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POOL ENERGY SERVICES CO.
(Registrant)
MAY 14, 1998 /s/ E. J. SPILLARD
- ----------------- --------------------------------
(Date) E. J. Spillard
Senior Vice President, Finance
(principal financial officer)
MAY 14, 1998 /s/ B. G. GORDON
- ----------------- --------------------------------
(Date) B. G. Gordon
Controller
(principal accounting officer)
17
<PAGE> 18
POOL ENERGY SERVICES CO.
INDEX TO EXHIBITS
EXHIBIT NO. DOCUMENT
- ----------- --------
27(*) - Financial Data Schedule
- ---------
(*) Filed herewith
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 29,351
<SECURITIES> 0
<RECEIVABLES> 94,844
<ALLOWANCES> 1,269
<INVENTORY> 17,703
<CURRENT-ASSETS> 172,440
<PP&E> 498,026
<DEPRECIATION> 116,662
<TOTAL-ASSETS> 675,597
<CURRENT-LIABILITIES> 118,312
<BONDS> 168,522
0
0
<COMMON> 231,561
<OTHER-SE> 44,753
<TOTAL-LIABILITY-AND-EQUITY> 675,597
<SALES> 0
<TOTAL-REVENUES> 117,712
<CGS> 0
<TOTAL-COSTS> 83,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 58
<INTEREST-EXPENSE> 1,763
<INCOME-PRETAX> 12,233
<INCOME-TAX> 4,780
<INCOME-CONTINUING> 7,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,453
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
