<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 JUNE 30, 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 June 30, 1998: Common Stock, no par value - 21,046,898
shares.
================================================================================
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
POOL ENERGY SERVICES CO.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues ................................................... $ 127,999 $ 109,755
Earnings Attributable to Unconsolidated Affiliates ......... 1,179 634
------------ ------------
Total .......................................... 129,178 110,389
------------ ------------
Costs and Expenses:
Operating expenses ................................... 86,769 81,799
Selling, general and administrative expenses ......... 14,869 13,432
Depreciation and amortization ........................ 10,489 5,874
------------ ------------
Total .......................................... 112,127 101,105
------------ ------------
Other Income (Expense) - Net ............................... 206 1,425
Interest Expense ........................................... 4,291 772
------------ ------------
Income Before Income Taxes and Minority Interest ........... 12,966 9,937
Income Tax Provision ....................................... 5,361 3,753
Minority Interest in Earnings of Consolidated Subsidiary ... -- 232
------------ ------------
Net Income ................................................. $ 7,605 $ 5,952
============ ============
Earnings Per Share of Common Stock ......................... $ .36 $ .31
============ ============
Earnings Per Share of Common Stock - assuming dilution ..... $ .36 $ .31
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 3
POOL ENERGY SERVICES CO.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues ................................................... $ 245,711 $ 208,139
Earnings Attributable to Unconsolidated Affiliates ......... 1,108 1,638
---------- ----------
Total .......................................... 246,819 209,777
---------- ----------
Costs and Expenses:
Operating expenses ................................... 170,132 156,515
Selling, general and administrative expenses ......... 28,044 26,193
Depreciation and amortization ........................ 17,999 11,577
---------- ----------
Total .......................................... 216,175 194,285
---------- ----------
Other Income (Expense) - Net ............................... 609 1,983
Interest Expense ........................................... 6,054 1,557
---------- ----------
Income Before Income Taxes and Minority Interest ........... 25,199 15,918
Income Tax Provision ....................................... 10,141 6,025
Minority Interest in Earnings of Consolidated Subsidiary ... -- 136
---------- ----------
Net Income ................................................. $ 15,058 $ 9,757
========== ==========
Earnings Per Share of Common Stock ......................... $ .74 $ .51
========== ==========
Earnings Per Share of Common Stock - assuming dilution ..... $ .73 $ .50
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
POOL ENERGY SERVICES CO.
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating Activities:
Net Income ..................................................... $ 15,058 $ 9,757
Noncash items included above:
Depreciation and amortization ............................ 17,999 11,577
Deferred income taxes .................................... 3,956 5,181
Undistributed earnings of unconsolidated affiliates ...... (65) (1,588)
Other - net .............................................. 1,617 (976)
Payment for lease of manufacturing facility .................... (1,626) (1,074)
Proceeds from rig mobilization ................................. 6,921 --
Other - net .................................................... (4,036) (551)
Net effect of changes in operating working capital ............. (10,316) (11,353)
------------ ------------
Net Cash Flows Provided by Operating Activities .... 29,508 10,973
------------ ------------
Investing Activities:
Property additions ............................................. (50,781) (14,358)
Expenditures for acquisitions, including acquisition costs,
less cash acquired ....................................... (51,688) (431)
Expenditures for drydocking costs .............................. (817) --
Proceeds from disposition of property, plant and equipment ..... 654 2,446
Other - net .................................................... (98) 1,398
------------ ------------
Net Cash Flows Used for Investing Activities ....... (102,730) (10,945)
------------ ------------
Financing Activities:
Proceeds from long-term debt ................................... 180,000 --
Principal payments on long-term debt ........................... (81,825) (6,655)
Repayment of debt assumed in acquisitions ...................... (15,672) (775)
Payments of debt financing costs ............................... (5,185) (14)
Proceeds from exercise of stock options ........................ 379 612
------------ ------------
Net Cash Flows Provided by (Used for)
Financing Activities ......................... 77,697 (6,832)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ................. 4,475 (6,804)
Cash and Cash Equivalents at January 1, .............................. 18,993 21,837
------------ ------------
Cash and Cash Equivalents at June 30, ................................ $ 23,468 $ 15,033
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
POOL ENERGY SERVICES CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ......................................... $ 23,468 $ 18,993
Restricted cash ................................................... 10 10
Accounts and notes receivable (net of allowance for
doubtful accounts of $1,219 and $1,272) ........................ 102,340 97,283
Inventories ....................................................... 15,460 19,500
Deferred income tax asset ......................................... 8,121 8,594
Other current assets .............................................. 12,468 8,295
------------ ------------
Total current assets ........................................... 161,867 152,675
Property, Plant and Equipment - Net .................................. 393,242 259,793
Vessel Construction Deposits ......................................... 18,275 --
Investment in and Noncurrent Receivables from
Unconsolidated Affiliates ......................................... 28,866 20,515
Goodwill, net ........................................................ 60,906 42,395
Deferred Costs ....................................................... 10,297 1,270
Noncurrent Receivables (net of allowance for
doubtful accounts of $1,162 and $1,113) and Other Assets .......... 2,800 2,547
------------ ------------
Total .......................................................... $ 676,253 $ 479,195
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ................................. $ 625 $ 1,025
Accounts payable .................................................. 40,342 41,305
Accrued Sea Mar purchase price adjustment ......................... 13,416 --
Other current liabilities ......................................... 48,184 51,275
------------ ------------
Total current liabilities ...................................... 102,567 93,605
Long-Term Debt ....................................................... 177,897 79,322
Deferred Income Taxes ................................................ 64,588 21,575
Other Liabilities .................................................... 46,908 46,995
Minority Interest .................................................... -- 3,960
Shareholders' Equity:
Common stock, no par value:
40,000,000 shares authorized; 21,046,898 and
19,448,946 shares issued and outstanding ....................... 231,902 196,532
Retained earnings ................................................. 53,287 38,229
Unearned compensation - restricted stock .......................... (574) (701)
Cumulative foreign currency translation adjustments ............... (322) (322)
------------ ------------
Total shareholders' equity ..................................... 284,293 233,738
------------ ------------
Total .......................................................... $ 676,253 $ 479,195
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
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 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, which is effective for
fiscal years ending after December 15, 1998, 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. After reviewing the guidance provided by EITF 96-16 with respect
to what constitutes "control," together with the specific rights of the minority
shareholder of Pool International Argentina S.A. ("PIASA") in the shareholders'
agreement, the Company concluded that it could not clearly overcome the
presumption that certain of the rights of the minority shareholder were
substantive participating rights. Specific reasons for such conclusion are as
follows: (i) the shareholders' agreement between the Company and the minority
shareholder of PIASA requires the unanimous approval by PIASA's Board of
Directors of the annual capital and operating budgets of PIASA and the making of
any significant revisions to such budgets (two of the five Directors of PIASA
are appointed by the minority shareholder) and (ii) the shareholders' agreement
requires the unanimous approval by PIASA's Board of Directors of the purchase,
leasing, chartering or other acquisition of property or assets, not already
approved in the annual capital budget, which exceed $50,000. The minority rights
identified above as participating rights are significant in the ordinary course
of PIASA's business. Based on the foregoing, the Company concluded that it
should change from consolidation accounting to the equity method for its 51%
investment in PIASA, which it did effective January 1, 1998. 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 six months ended June 30, 1998. The following table summarizes the effect of
adopting EITF 96-16 on the Company's balance sheet at January 1, 1998.
6
<PAGE> 7
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<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>
Deferred Rig Mobilization
In connection with its rig contracts, the Company may receive lump sum
fees for the mobilization of equipment. The net amount of the lump sum fees
received and the mobilization expenses incurred are deferred and amortized over
the term of the contract.
Deferred Costs
Deferred costs consist primarily of drydocking costs incurred in
conjunction with marine inspections of offshore support vessels and debt
financing costs. Drydocking costs 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 costs of
$5.3 million at June 30, 1998 and unamortized debt financing costs of $5.0
million and $0.9 million at June 30, 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 and six months ended June 30, 1998 and 1997.
7
<PAGE> 8
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 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 ................................................ $ 7,605 21,041,329 $ .36
============
Dilutive Effect of Potential Common Stock:
Stock Options ............................................. -- 282,758
------------ ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................ $ 7,605 21,324,087 $ .36
============ ========== ============
</TABLE>
Options to purchase approximately 52,000 shares of common stock at an
exercise price of $31.8125 per share, 2,000 shares of common stock at an
exercise price of $35.50 per share and 16,000 shares of common stock at an
exercise price of $24.00 per share that were outstanding during the second
quarter of 1998 were not included in the computation of diluted EPS because such
options were antidilutive.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 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 ................................................ $ 5,952 19,162,772 $ .31
============
Dilutive Effect of Potential Common Stock:
Stock Options ............................................. -- 243,620
------------ ------------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................ $ 5,952 19,406,392 $ .31
============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 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 ................................................ $ 15,058 20,266,867 $ .74
============
Dilutive Effect of Potential Common Stock:
Stock Options ............................................. -- 284,029
------------ ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................ $ 15,058 20,550,896 $ .73
============ ========== ============
</TABLE>
Options to purchase approximately 52,000 shares of common stock at an
exercise price of $31.8125 per share and 2,000 shares of common stock at an
exercise price of $35.50 per share that were outstanding during the first six
months of 1998 were not included in the computation of diluted EPS because such
options were antidilutive. In addition, options to purchase 16,000 shares of
common stock at an exercise price of $24.00 per share that were issued during
the second quarter of 1998 were not included in the computation of diluted EPS
because such options were antidilutive.
8
<PAGE> 9
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 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 ................................................ $ 9,757 19,151,509 $ .51
============
Dilutive Effect of Potential Common Stock:
Stock Options ............................................. -- 253,750
------------ ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................ $ 9,757 19,405,259 $ .50
============ ========== ============
</TABLE>
4. LONG-TERM DEBT AND CREDIT AGREEMENT
Senior Subordinated Notes
On March 31, 1998, the Company issued its 8 5/8% Senior Subordinated Notes
Due 2008, Series A in the aggregate principal amount of $150 million (the "Old
Notes"). The net proceeds from the sale of the Old 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"). In June 1998, the Company offered to exchange its
8 5/8% Senior Subordinated Notes Due 2008, Series B (the "New Notes," and
together with the Old Notes, the "Notes"), which have been registered under the
Securities Act of 1933, as amended, (the "Securities Act") for any and all of
the outstanding Old Notes (the "Exchange Offer"). The terms of the New Notes are
identical in all material respects to the terms of the Old Notes, except that
the New Notes have been registered under the Securities Act and are generally
freely transferable by holders thereof and are issued without any covenant by
the Company regarding registration under the Securities Act. The Exchange Offer
was completed on July 15, 1998, whereupon all of the Old Notes were tendered and
exchanged for New Notes.
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. See Note 8 for the condensed consolidating financial
information for Pool Energy Services Co., the Subsidiary Guarantors and the
other subsidiaries of the Company that are not guarantors of the Notes (the
"Non-Guarantor Subsidiaries").
9
<PAGE> 10
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Credit Agreement
In March 1998, simultaneously with the issuance of the Old 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 June 30, 1998 the Company had drawn $15.0 million in cash under
the Credit Agreement, and an additional $13.2 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
June 30, 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.
The Company incurred $4.6 million and $0.6 million of debt financing
costs during the first six 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 a fleet of 23 vessels operating primarily in the Gulf of Mexico,
for approximately $76.0 million in cash, including a $14.7 million post-closing
purchase price adjustment, and 1,538,462 shares of the Company's common stock
(the "Sea Mar Acquisition"). The purchase price adjustment, expected to be paid
in full in August 1998, was based on the amount by which the shareholders'
equity in Sea Mar at March 31, 1998 exceeded the amount that existed at August
31, 1997. In addition, the Company is obligated 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 are 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 as of 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. The preliminary purchase price allocation resulted in goodwill of
approximately $21 million, which is being amortized on a straight-line basis
over 25 years.
10
<PAGE> 11
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Expenditures for the acquisition, including acquisition costs, less cash
acquired were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired (including goodwill) .............. $176,493
Company's common stock issued ................................... (34,327)
Liability for post-closing purchase price adjustment ............ (13,416)
Liabilities assumed ............................................. (66,203)
--------
Cash paid, including acquisition related expenditures ........... 62,547
Less: cash acquired ............................................ 10,831
--------
Net cash used for the acquisition ............................... $ 51,716
========
</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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------------------------------
1998 1997
---------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(In thousands except earnings per share)
<S> <C> <C> <C> <C>
Revenues .................................. $245,711 $259,244 $208,139 $230,122
======== ======== ======== ========
Net Income ................................ $ 15,058 $ 17,355 $ 9,757 $ 10,444
======== ======== ======== ========
Earnings Per Share of Common Stock ........ $ .74 $ .83 $ .51 $ .50
======== ======== ======== ========
Weighted Average Shares Outstanding ....... 20,267 21,023 19,152 20,690
======== ======== ======== ========
Earnings Per Share of Common Stock -
assuming dilution ................... $ .73 $ .81 $ .50 $ .50
======== ======== ======== ========
Weighted Average Shares Outstanding ....... 20,551 21,307 19,405 20,943
======== ======== ======== ========
</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.
11
<PAGE> 12
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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>
SIX MONTHS ENDED
JUNE 30
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Pool Arabia, Ltd. .................................... $ 25,962 $ 17,257
Pool International Argentina S.A. .................... 5,411(b) --
Intairdril Oman L.L.C. ............................... 40 133
------------ ------------
Total ........................................ $ 31,413 $ 17,390
============ ============
Gross Profit (Loss) (a):
Pool Arabia, Ltd. .................................... $ 8,236 $ 6,358
Pool International Argentina S.A. .................... (2,018)(b) --
Intairdril Oman L.L.C. ............................... 28 114
------------ ------------
Total ........................................ $ 6,246 $ 6,472
============ ============
Net Income (Loss):
Pool Arabia, Ltd. .................................... $ 668 $ 658
Pool International Argentina S.A. .................... (2,361)(b) --
Intairdril Oman L.L.C. ............................... 3 (47)
------------ ------------
Total ........................................ $ (1,690) $ 611
============ ============
</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.
Earnings attributable to unconsolidated affiliates is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
The Company's portion of net income (loss) ........................... $ (862) $ 313
Adjustment to reconcile differences between affiliates' bases and
Company's carrying value ....................................... 927 1,275
------------ ------------
Equity in income ..................................................... 65 1,588
Lease income (expense) - net ......................................... 1,001 (30)
Other income (expense) - net ......................................... 42 80
------------ ------------
Total .......................................................... $ 1,108 $ 1,638
============ ============
</TABLE>
12
<PAGE> 13
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which is effective for fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Company is currently evaluating what
effect, if any, the statement will have on the Company's financial statements.
The Company will adopt this statement no later than January 1, 2000.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirements 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 statements, and any effect will be
limited to the form and content of the disclosure it requires.
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.
Also 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.
8. CONSOLIDATING FINANCIAL STATEMENTS
Presented below is condensed consolidating financial information for Pool
Energy Services Co. (on a stand-alone basis) ("PESCO"), the Subsidiary
Guarantors (on a combined basis), and the Non-Guarantor Subsidiaries (on a
combined basis). Separate financial information of each Subsidiary Guarantor is
not presented because the Company has concluded that such financial information
is not material to investors.
13
<PAGE> 14
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ -- $ 114,207 $ 13,792 $ -- $ 127,999
Earnings Attributable to Unconsolidated
Affiliates ............................... -- 235 944 -- 1,179
---------- ---------- ---------- ---------- ----------
Total ........................... -- 114,442 14,736 -- 129,178
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses ....................... -- 79,134 7,635 -- 86,769
Selling, general and administrative
expenses .............................. 227 13,021 1,621 -- 14,869
Depreciation and amortization ............ -- 8,868 1,628 (7) 10,489
---------- ---------- ---------- ---------- ----------
Total ........................... 227 101,023 10,884 (7) 112,127
---------- ---------- ---------- ---------- ----------
Other Income (Expense) - Net ................ -- 110 96 -- 206
Interest Expense ............................ 3,347 478 466 -- 4,291
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes ........... (3,574) 13,051 3,482 7 12,966
Income Tax Provision (Credit) ............... (873) 4,908 1,324 2 5,361
Equity in Earnings of Consolidated
Subsidiaries ............................. 10,306 2,158 -- (12,464) --
---------- ---------- ---------- ---------- ----------
Net Income .................................. $ 7,605 $ 10,301 $ 2,158 $ (12,459) $ 7,605
========== ========== ========== ========== ==========
</TABLE>
14
<PAGE> 15
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................... $ -- $ 217,844 $ 27,867 $ -- $ 245,711
Earnings Attributable to Unconsolidated
Affiliates ............................... -- 129 979 -- 1,108
------------ ------------ ------------ ------------ ------------
Total ........................... -- 217,973 28,846 -- 246,819
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Operating expenses ....................... -- 154,553 15,579 -- 170,132
Selling, general and administrative
expenses .............................. 374 25,064 2,606 -- 28,044
Depreciation and amortization ............ -- 15,061 2,952 (14) 17,999
------------ ------------ ------------ ------------ ------------
Total ........................... 374 194,678 21,137 (14) 216,175
------------ ------------ ------------ ------------ ------------
Other Income (Expense) - Net ................ -- 426 183 -- 609
Interest Expense ............................ 3,347 1,833 874 -- 6,054
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes ........... (3,721) 21,888 7,018 14 25,199
Income Tax Provision (Credit) ............... (925) 8,649 2,412 5 10,141
Equity in Earnings of Consolidated
Subsidiaries ............................. 17,854 4,606 -- (22,460) --
------------ ------------ ------------ ------------ ------------
Net Income .................................. $ 15,058 $ 17,845 $ 4,606 $ (22,451) $ 15,058
============ ============ ============ ============ ============
</TABLE>
15
<PAGE> 16
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Flows Provided by (Used for)
Operating Activities ...................... $ (5,059) $ 21,654 $ 12,917 $ (4) $ 29,508
---------- ------------ ------------ ---------- ------------
Investing Activities:
Property additions ........................... -- (37,242) (13,986) 447 (50,781)
Expenditures for acquisitions, including
acquisition costs, less cash acquired ..... -- (51,688) -- -- (51,688)
Expenditures for drydocking costs ............ -- (817) -- -- (817)
Proceeds from disposition of property,
plant and equipment ....................... -- 942 159 (447) 654
Other - net .................................. 1 (106) 3 4 (98)
---------- ------------ ------------ ---------- ------------
Net Cash Flows Provided by (Used for)
Investing Activities ...................... 1 (88,911) (13,824) 4 (102,730)
---------- ------------ ------------ ---------- ------------
Financing Activities:
Proceeds from long-term debt ................. 150,000 30,000 -- -- 180,000
Principal payments on long-term debt ......... -- (81,825) -- -- (81,825)
Repayment of debt assumed in acquisition ..... -- (15,672) -- -- (15,672)
Payments of debt financing costs ............. (4,610) (575) -- -- (5,185)
Proceeds from exercise of stock options ...... 379 -- -- -- 379
Payments from (advances to) consolidated
subsidiaries, net ......................... (140,858) 139,770 1,088 -- --
---------- ------------ ------------ ---------- ------------
Net Cash Flows Provided by Financing
Activities ................................ 4,911 71,698 1,088 -- 77,697
---------- ------------ ------------ ---------- ------------
Net Increase (Decrease) in Cash and Cash
Equivalents ............................... (147) 4,441 181 -- 4,475
Cash and Cash Equivalents at January 1, ...... 210 16,395 2,388 -- 18,993
---------- ------------ ------------ ---------- ------------
Cash and Cash Equivalents at June 30, ........ $ 63 $ 20,836 $ 2,569 $ -- $ 23,468
========== ============ ============ ========== ============
</TABLE>
16
<PAGE> 17
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................ $ 63 $ 20,836 $ 2,569 $ -- $ 23,468
Restricted cash .......................... -- 10 -- -- 10
Accounts and notes receivable ............ -- 88,873 13,467 -- 102,340
Inventories .............................. -- 5,092 10,368 -- 15,460
Deferred income tax asset ................ 20 7,979 -- 122 8,121
Other current assets ..................... 506 10,144 1,818 -- 12,468
---------- ---------- ---------- ---------- ----------
Total current assets ............ 589 132,934 28,222 122 161,867
Property, Plant and Equipment - Net ......... -- 319,611 73,973 (342) 393,242
Vessel Construction Deposits ................ -- 18,275 -- -- 18,275
Investment in Consolidated Subsidiaries ..... 70,928 36,759 -- (107,687) --
Investment in and Noncurrent Receivables
from Unconsolidated Affiliates ........... -- 28,866 -- -- 28,866
Goodwill, net ............................... -- 60,906 -- -- 60,906
Deferred Costs .............................. 4,036 6,261 -- -- 10,297
Noncurrent Receivables and Other Assets ..... -- 2,777 23 -- 2,800
---------- ---------- ---------- ---------- ----------
Total ........................... $ 75,553 $ 606,389 $ 102,218 $ (107,907) $ 676,253
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ........ $ -- $ 625 $ -- $ -- $ 625
Accounts payable ......................... -- 38,905 1,437 -- 40,342
Payable (receivable) to (from)
consolidated subsidiaries ............. (243,401) 217,907 25,721 (227) --
Accrued Sea Mar purchase price
adjustment ............................ -- 13,416 -- -- 13,416
Other current liabilities ................ (3,387) 37,004 14,568 (1) 48,184
---------- ---------- ---------- ---------- ----------
Total current liabilities ....... (246,788) 307,857 41,726 (228) 102,567
Long-Term Debt .............................. 150,000 27,897 -- -- 177,897
Long-Term Payable (Receivable) to (from)
Consolidated Subsidiaries ................ (111,595) 97,880 13,715 -- --
Deferred Income Taxes ....................... (679) 61,332 3,933 2 64,588
Other Liabilities ........................... -- 40,823 6,085 -- 46,908
Shareholders' Equity:
Common stock ............................. 231,902 1 500 (501) 231,902
Paid-in capital .......................... -- 12,399 18,619 (31,018) --
Retained earnings ........................ 53,287 58,522 17,640 (76,162) 53,287
Unearned compensation - restricted stock.. (574) -- -- -- (574)
Cumulative foreign currency translation
adjustments ........................... -- (322) -- -- (322)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity ...... 284,615 70,600 36,759 (107,681) 284,293
---------- ---------- ---------- ---------- ----------
Total ........................... $ 75,553 $ 606,389 $ 102,218 $ (107,907) $ 676,253
=========== ========== ========== ========== ==========
</TABLE>
17
<PAGE> 18
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
----------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ -- $ 89,806 $ 19,949 $ -- $ 109,755
Earnings (Loss) Attributable to
Unconsolidated Affiliates ................... -- 649 (15) -- 634
------------ ------------ ------------ ------------ ------------
Total .............................. -- 90,455 19,934 -- 110,389
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Operating expenses .......................... -- 67,927 13,872 -- 81,799
Selling, general and administrative
expenses ................................. 170 11,802 1,460 -- 13,432
Depreciation and amortization ............... -- 4,280 1,601 (7) 5,874
------------ ------------ ------------ ------------ ------------
Total .............................. 170 84,009 16,933 (7) 101,105
------------ ------------ ------------ ------------ ------------
Other Income (Expense) - Net ................... -- 1,300 125 -- 1,425
Interest Expense ............................... -- 437 335 -- 772
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes and
Minority Interest ........................... (170) 7,309 2,791 7 9,937
Income Tax Provision (Credit) .................. (59) 2,737 1,073 2 3,753
Equity in Earnings of Consolidated
Subsidiaries ................................ 6,063 1,463 -- (7,526) --
Minority Interest in Earnings of
Consolidated Subsidiary ..................... -- -- -- 232 232
------------ ------------ ------------ ------------ ------------
Net Income ..................................... $ 5,952 $ 6,035 $ 1,718 $ (7,753) $ 5,952
============ ============ ============ ============ ============
</TABLE>
18
<PAGE> 19
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ -- $ 172,326 $ 35,813 $ -- $ 208,139
Earnings (Loss) Attributable to
Unconsolidated Affiliates ............. -- 1,668 (30) -- 1,638
---------- ---------- ---------- ---------- ----------
Total ........................ -- 173,994 35,783 -- 209,777
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses .................... -- 132,260 24,255 -- 156,515
Selling, general and administrative
expenses ........................... 324 22,381 3,488 -- 26,193
Depreciation and amortization ......... -- 8,447 3,144 (14) 11,577
---------- ---------- ---------- ---------- ----------
Total ........................ 324 163,088 30,887 (14) 194,285
---------- ---------- ---------- ---------- ----------
Other Income (Expense) - Net ............. -- 1,778 205 -- 1,983
Interest Expense ......................... -- 904 653 -- 1,557
---------- ---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes and
Minority Interest ..................... (324) 11,780 4,448 14 15,918
Income Tax Provision (Credit) ............ (113) 4,420 1,713 5 6,025
Equity in Earnings of Consolidated
Subsidiaries .......................... 9,968 2,575 -- (12,543) --
Minority Interest in Earnings of
Consolidated Subsidiary ............... -- -- -- 136 136
---------- ---------- ---------- ---------- ----------
Net Income ............................... $ 9,757 $ 9,935 $ 2,735 $ (12,670) $ 9,757
========== ========== ========== ========== ==========
</TABLE>
19
<PAGE> 20
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATING CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
----------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Flows Provided by (Used for)
Operating Activities ........................ $ (76) $ 6,011 $ 5,038 $ -- $ 10,973
---------- ---------- ---------- ---------- ----------
Investing Activities:
Property additions ............................. -- (11,990) (2,838) 470 (14,358)
Expenditures for acquisitions, including
acquisition costs, less cash acquired ....... -- (418) (13) -- (431)
Proceeds from disposition of property,
plant and equipment ......................... -- 2,016 900 (470) 2,446
Other - net .................................... (1) 1,384 15 -- 1,398
---------- ---------- ---------- ---------- ----------
Net Cash Flows Used for Investing Activities ... (1) (9,008) (1,936) -- (10,945)
---------- ---------- ---------- ---------- ----------
Financing Activities:
Principal payments on long-term debt ........... -- (2,871) (3,784) -- (6,655)
Repayment of debt assumed in acquisitions ...... -- (775) -- -- (775)
Payments of debt financing costs ............... -- (14) -- -- (14)
Proceeds from exercise of stock options ........ 612 -- -- -- 612
Payments from (advances to) consolidated
subsidiaries, net ........................... (1,332) 1,999 (667) -- --
---------- ---------- ---------- ---------- ----------
Net Cash Flows Used for Financing Activities ... (720) (1,661) (4,451) -- (6,832)
---------- ---------- ---------- ---------- ----------
Net Decrease in Cash and Cash Equivalents ...... (797) (4,658) (1,349) -- (6,804)
Cash and Cash Equivalents at January 1, ........ 987 16,368 4,482 -- 21,837
---------- ---------- ---------- ---------- ----------
Cash and Cash Equivalents at June 30, .......... $ 190 $ 11,710 $ 3,133 $ -- $ 15,033
========== ========== ========== ========== ==========
</TABLE>
20
<PAGE> 21
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 210 $ 16,395 $ 2,388 $ -- $ 18,993
Restricted cash ............................... -- 10 -- -- 10
Accounts and notes receivable ................. -- 78,076 19,207 -- 97,283
Inventories ................................... -- 7,168 12,332 -- 19,500
Deferred income tax asset ..................... 20 8,450 -- 124 8,594
Other current assets .......................... 49 6,601 1,645 -- 8,295
---------- ---------- ---------- ---------- ----------
Total current assets ................. 279 116,700 35,572 124 152,675
Property, Plant and Equipment - Net .............. -- 181,641 78,508 (356) 259,793
Investment in Consolidated Subsidiaries .......... 53,074 40,313 -- (93,387) --
Investment in and Noncurrent Receivables
from Unconsolidated Affiliates ................ -- 20,515 -- -- 20,515
Goodwill, net .................................... -- 40,853 1,542 -- 42,395
Deferred Costs ................................... -- 1,270 -- -- 1,270
Noncurrent Receivables and Other Assets .......... -- 2,519 28 -- 2,547
---------- ---------- ---------- ---------- ----------
Total ................................ $ 53,353 $ 403,811 $ 115,650 $ (93,619) $ 479,195
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ............. $ -- $ 1,025 $ -- $ -- $ 1,025
Accounts payable .............................. -- 35,610 5,695 -- 41,305
Payable (receivable) to (from)
consolidated subsidiaries .................. (67,981) 40,714 27,257 10 --
Other current liabilities ..................... (1,131) 35,451 16,955 -- 51,275
---------- ---------- ---------- ---------- ----------
Total current liabilities ............ (69,112) 112,800 49,907 10 93,605
Long-Term Debt ................................... -- 79,322 -- -- 79,322
Long-Term Payable (Receivable) to (from)
Consolidated Subsidiaries ..................... (111,595) 97,131 14,464 -- --
Deferred Income Taxes ............................ -- 18,877 2,698 -- 21,575
Other Liabilities ................................ -- 42,687 4,308 -- 46,995
Minority Interest ................................ -- -- -- 3,960 3,960
Shareholders' Equity:
Common stock .................................. 196,532 1 8,970 (8,971) 196,532
Paid-in capital ............................... -- 12,400 23,109 (35,509) --
Retained earnings ............................. 38,229 40,915 12,194 (53,109) 38,229
Unearned compensation - restricted stock ...... (701) -- -- -- (701)
Cumulative foreign currency translation
adjustments ................................ -- (322) -- -- (322)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity ........... 234,060 52,994 44,273 (97,589) 233,738
---------- ---------- ---------- ---------- ----------
Total ................................ $ 53,353 $ 403,811 $ 115,650 $ (93,619) $ 479,195
========== ========== ========== ========== ==========
</TABLE>
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTES OFFERING
On March 31, 1998, the Company issued its 8 5/8% Senior Subordinated Notes
Due 2008, Series A in the aggregate principal amount of $150 million. The net
proceeds from the sale of the Old 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. In
June 1998, the Company offered to exchange its 8 5/8% Senior Subordinated Notes
Due 2008, Series B, which have been registered under the Securities Act of 1933,
as amended, for any and all of the outstanding Old Notes. The terms of the New
Notes are identical in all material respects to the terms of the Old Notes,
except that the New Notes have been registered under the Securities Act and are
generally freely transferable by holders thereof and are issued without any
covenant by the Company regarding registration under the Securities Act. The
Exchange Offer was completed on July 15, 1998, whereupon all of the Old Notes
were tendered and exchanged for New Notes.
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 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.
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 $76.0 million in cash, including a $14.7 million post-closing
purchase price adjustment, and 1,538,462 shares of the Company's common stock.
The purchase price adjustment, expected to be paid in full in August 1998,
was based on the amount by which the shareholders' equity in Sea Mar at
March 31, 1998 exceeded the amount that existed at August 31, 1997. In addition,
the Company is obligated 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.
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 the expenditures for these
vessels 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.
22
<PAGE> 23
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.
RESULTS OF OPERATIONS - QUARTERS ENDED JUNE 30, 1998 AND 1997
The Company generated net income of $7.6 million in the second quarter of
1998, compared with $6.0 million in the second quarter of 1997, despite the fact
that the average price of crude oil was approximately 27% lower in the second
quarter of 1998 than in the second quarter of 1997; however, average domestic
natural gas prices increased approximately 6% comparing the same periods.
Results from the Company's domestic operations improved primarily due to (i)
inclusion of results from the 23 offshore support vessels acquired in the March
1998 acquisition of Sea Mar (see "- 1998 Acquisition"), (ii) higher land
drilling and labor contract activity in Alaska, including the operation of Rig
8, a recently upgraded drilling rig which commenced a five-year contract in
February 1998, 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. Results from
the Company's domestic land well-servicing rigs decreased due to reduced
activity resulting from lower crude oil prices. Rig hours for the Company's
domestic onshore operation were virtually unchanged for the second quarter of
1998 compared to the corresponding quarter of 1997 despite the inclusion of rig
hours from the 104 land well-servicing rigs added as a result of the June 1997
DA&S acquisition (see "- 1997 Acquisitions - DA&S") and the October 1997 Trey
acquisition (see "- 1997 Acquisitions - Trey"). The Company's offshore rig fleet
in the Gulf of Mexico experienced rig utilization of 74% in the second quarter
of 1998, compared to 82% in the comparable period of 1997, but average rig rates
were 29% higher in the 1998 period. Results from the Company's international
operations improved due to higher earnings attributable to Pool Arabia, Ltd.,
lower operating expenses in Australia and increased land drilling rig activity
in Guatemala.
Revenues. Revenues were $128.0 million in the second quarter of 1998, a
17% increase over revenues of $109.8 million in the second quarter of 1997. This
increase was attributable to (i) the inclusion of revenues from the offshore
support vessels acquired in the March 1998 acquisition of Sea Mar (see "- 1998
Acquisition"), (ii) increased activity and rates for the Company's jackup
workover rigs and platform drilling rigs in the Gulf of Mexico, including Rig
16, (iii) the inclusion of revenues from the rigs acquired in the DA&S and Trey
acquisitions (see "- 1997 Acquisitions") and (iv) higher land drilling and labor
contract activity in Alaska, including the operation of Rig 8. These revenue
increases were offset partly by lower revenues from the Company's land
well-servicing rigs located in California, Texas and New Mexico due to reduced
activity resulting from lower crude oil prices and by lower revenues from
wholly-owned operations in the Middle East due to the transfer of a land
drilling rig to Saudi Arabia, where it is being leased to Pool Arabia, Ltd.
("Pool Arabia"), the Company's Saudi Arabia affiliate. In addition, the
Company's revenues in the second quarter of 1998 did not include revenues
related to PIASA, the Company's Argentina affiliate, as a result of a change in
the Company's method of accounting for its 51% investment in PIASA to the equity
method, compared to the inclusion of $5.2 million of revenues for PIASA in the
second 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
$3.6 million or 6% in the second quarter of 1998 from the corresponding quarter
of 1997, chiefly as a result of the inclusion of results from rigs acquired in
the Trey and DA&S acquisitions. Domestic onshore well-servicing rig utilization
was 50% in the second quarter of 1998, compared to 55% in the second quarter of
1997. Domestic onshore well-servicing rig hours were approximately 298,000 in
the second quarter of 1998, virtually unchanged from the comparable period in
1997. Gulf of Mexico offshore workover and drilling revenues increased $4.9
million or 25%, Alaska operations revenues increased $2.3 million or 39% and
international operations revenues decreased $6.4 million or 31% (however,
excluding the $5.2 million of revenues from PIASA in the second quarter of 1997,
international operations revenues decreased $1.1 million or 7%), compared to the
second quarter of 1997. Revenues from Sea Mar's fleet of offshore support
vessels were $13.8 million in the second quarter of 1998.
23
<PAGE> 24
Earnings Attributable to Unconsolidated Affiliates. Earnings attributable
to unconsolidated affiliates were $1.2 million in the second quarter of 1998,
compared to $0.6 million in the second quarter of 1997. Earnings attributable to
Pool Arabia increased $1.0 million from the second quarter of 1997, to $1.6
million in the second quarter of 1998, primarily due to income earned from Pool
Arabia's operation of two rigs leased from the Company. The loss attributable to
the Company's 51% interest in PIASA, which the Company acquired in August 1996,
was $0.5 million in the second quarter of 1998. 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 an accounting change due to 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).
Costs and Expenses. The Company's costs and expenses were $112.1 million
in the second quarter of 1998, an 11% increase compared to costs and expenses of
$101.1 million in the corresponding quarter of 1997; however, operating expenses
declined to 68% of revenues in the second quarter of 1998 from 75% of revenues
in the second quarter of 1997. The increase in costs and expenses was primarily
due to the inclusion of costs and expenses related to operating the offshore
support vessels acquired in the acquisition of Sea Mar, the inclusion of costs
and expenses related to operating the land well-servicing rigs acquired in the
DA&S and Trey acquisitions, increased activity for the Company's jackup workover
rigs and platform drillings rigs in the Gulf of Mexico and increased land
drilling and labor contract activity in Alaska. The increase was partly offset
by decreased costs and expenses in the Middle East due to the transfer of a land
drilling rig to Saudi Arabia where it is being leased to Pool Arabia, Ltd. and
lower operating expenses in Australia where the weakening Australian dollar
resulted in reduced local expenses. In addition, the Company's costs and
expenses in the second quarter of 1997 included $4.7 million of costs and
expenses related to PIASA (see "- Earnings Attributable to Unconsolidated
Affiliates").
Other Income - Net. Other income - net was $1.2 million lower in the
second quarter of 1998 than in the corresponding quarter of 1997, primarily due
to lower gains on dispositions of equipment.
Interest Expense. Interest expense was $3.5 million higher in the second
quarter of 1998 than in the corresponding quarter of 1997, primarily due to (i)
interest expense related to the $150 million Notes issued in March 1998, (ii)
increased borrowings under the Credit Agreement, and (iii) the $10.1 million in
long-term notes issued in connection with the DA&S acquisition in June 1997.
These increases were 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 $5.4 million on
income before income taxes of $13.0 million in the second quarter of 1998,
compared to income tax expense of $3.8 million on income before income taxes and
minority interest of $9.9 million in the second quarter of 1997. The increase in
income tax expense in the second quarter of 1998 compared to the second quarter
of 1997 was primarily due to an increase in pre-tax income in the second 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.
24
<PAGE> 25
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The Company generated net income of $15.1 million in the first six months
of 1998, compared with $9.8 million in the first six months of 1997. Results
from the Company's domestic operations improved primarily due to (i) inclusion
of results from the offshore support vessels acquired in the March 1998
acquisition of Sea Mar , (ii) higher land drilling and labor contract activity
in Alaska, including the operation of Rig 8, 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. Results from the Company's domestic land well-servicing rigs
decreased due to reduced activity resulting from lower crude oil prices. Rig
hours for the Company's domestic onshore operation were only 7% higher in the
first six months of 1998 than in the corresponding period of 1997 despite the
inclusion of rig hours from 104 land well-servicing rigs added as a result of
the June 1997 DA&S acquisition (see "- 1997 Acquisitions - DA&S) and the October
1997 Trey acquisition (see "- 1997 Acquisitions -Trey). The Company's offshore
rig fleet in the Gulf of Mexico experienced rig utilization of 66% in the first
six months of 1998, compared to 74% in the comparable period of 1997, but
average rig rates were 28% higher in the 1998 period. Results from the Company's
international operations improved due to lower operating expenses in Australia,
higher earnings attributable to Pool Arabia, Ltd. and increased land drilling
rig activity in Ecuador and Guatemala.
Revenues. Revenues were $245.7 million in the first six months of 1998, an
18% increase over revenues of $208.1 million in the first six months of 1997.
This increase was attributable to (i) the inclusion of revenues from the
offshore support vessels acquired in the March 1998 acquisition of Sea Mar (see
"-1998 Acquisition"), (ii) the inclusion of revenues from the rigs acquired in
the October 1997 Trey acquisition and June 1997 DA&S acquisition (see "- 1997
Acquisitions"), (iii) higher land drilling activity in Alaska, including
operation of Rig 8, (iv) increased activity and rates for the Company's jackup
workover rigs and platform drilling rigs in the Gulf of Mexico, including Rig
16, and (v) increased land drilling activity in Ecuador and Guatemala. These
revenue increases were offset partly by lower revenues from wholly-owned
operations in the Middle East due to the transfer of a land drilling rig to
Saudi Arabia where it is being leased to Pool Arabia, reduced platform workover
rig activity in the Gulf of Mexico and lower revenues from the Company's land
well-servicing rigs located in California, Texas and New Mexico due to reduced
activity resulting from lower crude oil prices. In addition, the Company's
revenues in the first six months of 1998 did not include revenues related to
PIASA as a result of a change in the Company's method of accounting for its 51%
investment in PIASA to the equity method, compared to the inclusion of $8.9
million of revenues for PIASA in the first six months 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
$18.2 million or 15% in the first six months of 1998 from the corresponding
period of 1997, chiefly as a result of the inclusion of results from rigs
acquired in the Trey and DA&S acquisitions. Domestic onshore rig utilization was
52% in the first six months of 1998, compared to 55% in the first six months of
1997. Domestic onshore well-servicing rig hours increased from approximately
588,000 in the first six months of 1997 to approximately 628,000 in the first
six months of 1998. Gulf of Mexico offshore workover and drilling revenues
increased $7.0 million or 19%, Alaska operations revenues increased $7.0 million
or 59% and international operations revenues decreased $8.5 million or 23%
(however, excluding the $8.9 million of revenues from PIASA in the first six
months of 1997, international operations revenues increased $0.4 million or 1%),
compared to the first six months of 1997. Revenues from Sea Mar's fleet of
offshore support vessels for the period April 1, 1998 through June 30, 1998 were
$13.8 million.
25
<PAGE> 26
Earnings Attributable to Unconsolidated Affiliates. Earnings attributable
to unconsolidated affiliates were $1.1 million in the first six months of 1998,
compared to $1.6 million in the first six months of 1997. Earnings attributable
to Pool Arabia increased $0.8 million from the first six months of 1997 to $2.4
million for the six months ended June 30, 1998, primarily due to income earned
from Pool Arabia's operation of two rigs leased from the Company. The loss
attributable to PIASA was $1.3 million in the first six months of 1998.
Effective January 1, 1998, the Company adopted EITF 96-16 and changed its method
of accounting for PIASA to the equity method since PIASA no longer qualified for
full consolidation (see Note 2 to the Condensed Consolidated Financial
Statements).
Costs and Expenses. The Company's costs and expenses were $216.2 million
in the first six months of 1998, an 11% increase compared to costs and expenses
of $194.3 million in the corresponding period of 1997; however, operating
expenses declined to 69% of revenues in the first six months of 1998 from 75% of
revenues in the first six months of 1997. The increase in costs and expenses was
primarily due to the inclusion of costs and expenses related to the offshore
support vessels acquired in the Sea Mar acquisition , the inclusion of costs and
expenses related to operating the land well-servicing rigs acquired in the DA&S
and Trey acquisitions, increased land drilling and labor contract activity in
Alaska and increased activity for the Company's jackup workover rigs and
platform drilling rigs in the Gulf of Mexico. The increase was partly offset by
decreased costs and expenses in the Middle East due to the transfer of a land
drilling rig to Saudi Arabia where it is being leased to Pool Arabia, Ltd. and
lower operating expenses in Australia where the weakening Australian dollar has
resulted in reduced local expenses. In addition, the Company's costs and
expenses in the first six months of 1997 included $8.7 million of costs and
expenses related to PIASA (see "- Earnings Attributable to Unconsolidated
Affiliates").
Other Income - Net. Other income - net was $1.4 million lower in the
first six months of 1998 than in the corresponding period of 1997, primarily due
to lower gains on dispositions of equipment.
Interest Expense. Interest expense was $4.5 million higher in the first
six months of 1998 than in the corresponding period of 1997, primarily due to
(i) interest expense related to the $150 million Notes issued in March 1998,
(ii) increased borrowings under the Credit Agreement, and (iii) the $10.1
million in long-term notes issued in connection with the DA&S acquisition in
June 1997. These increases were 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 $10.1 million on
income before income taxes of $25.2 million in the first six months of 1998,
compared to income tax expense of $6.0 million on income before income taxes and
minority interest of $15.9 million in the first six months of 1997. The increase
in income tax expense in the first six months of 1998 compared to the first six
months of 1997 was primarily due to an increase in pre-tax income in the first
six months 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 $23.5 million at
June 30, 1998 compared to $19.0 million at December 31, 1997. Working capital
was $59.3 million and $59.1 million at June 30, 1998 and December 31, 1997,
respectively. The Company used a net $102.7 million for investing activities in
the first six months of 1998, primarily for capital expenditures of $50.8
million and $51.7 million, net of cash acquired, for the purchase of Sea Mar.
The Company used a net $10.9 million for investing activities in the first six
months of 1997, including capital expenditures of $14.4 million. Cash used for
investing activities for this period also included $2.4 million of proceeds from
dispositions of equipment and the return of $1.0 million of cash that had been
placed in escrow as collateral in connection with a leaseback arrangement.
26
<PAGE> 27
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 June 30, 1998 the Company had drawn $15 million
in cash under the Credit Agreement, and an additional $13.2 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 June 30, 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 issued 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 six months of 1998, the Company made payments of $80.8
million to reduce the borrowings under the Credit Agreement, repaid Sea Mar's
existing debt of $15.7 million and made $1.0 million of scheduled principal
payments on long-term debt. During the first six months of 1997, the Company
made scheduled principal payments of $6.7 million on long-term debt.
Capital Expenditures. The Company anticipates that 1998 capital
expenditures, excluding business acquisitions, will consist of (i) approximately
$45 million for additions and improvements to its existing rig and offshore
support vessel 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 $6 million
for the purchase, upgrade and mobilization of a land drilling rig for operation
in Oman, (v) approximately $8 million for payment of the balance of the purchase
price for one offshore support vessel for operation in the Gulf of Mexico, (vi)
approximately $4.5 million for the electrification and upgrade of a platform rig
located in the Gulf of Mexico, and (vii) $2.3 million for the purchase of two
jack-up workover rigs located in the Gulf of Mexico that the Company currently
leases.
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.
27
<PAGE> 28
MARKET OUTLOOK
As a result of low oil prices, demand in the Gulf of Mexico is beginning
to soften and the Company anticipates near term pressure on utilization and
rates in that market as well as a continuation of reduced demand for its
domestic onshore well-servicing services. The Company expects that these
reductions may be partially offset by increased activity from its Alaska
operations as two rigs, one significantly upgraded and one newly built, commence
operations under three-year contracts in October 1998 and January 1999,
respectively. The Company is reviewing the cost structure within each of its
operating units in an effort to assure that the Company is appropriately
structured given the current market conditions. Despite the current low oil
prices and the resulting softening market conditions, the Company remains
optimistic about its long-term outlook.
OTHER MATTERS
Accounting Standards. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company is currently evaluating what effect, if any,
this statement will have on the Company's financial statements. The Company will
adopt this statement no later than January 1, 2000.
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 statements and any effect will be
limited to the form and content of the disclosure it requires.
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.
Also 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.
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. In connection with such
statements, it should be noted that the Company's operations and financial
results 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.
28
<PAGE> 29
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<S> <C>
27.1(*) - Financial Data Schedule for the Six Months Ended June 30, 1998
27.2(*) Restated Financial Data Schedule for the Six Months Ended June 30, 1997
</TABLE>
- ----------
(*) Filed herewith
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during the
quarter ended June 30, 1998.
29
<PAGE> 30
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)
AUGUST 12, 1998 /s/ E. J. SPILLARD
------------------------ ------------------------------
(Date) E. J. Spillard
Senior Vice President, Finance
(principal financial officer)
AUGUST 12, 1998 /s/ B. G. GORDON
------------------------ ------------------------------
(Date) B. G. Gordon
Controller
(principal accounting officer)
30
<PAGE> 31
POOL ENERGY SERVICES CO.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<S> <C>
27.1(*) - Financial Data Schedule for the Six Months Ended June 30, 1998
27.2(*) Restated Financial Data Schedule for the Six Months Ended June 30, 1997
</TABLE>
- ----------
(*) Filed herewith
31
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 23,468
<SECURITIES> 0
<RECEIVABLES> 93,632
<ALLOWANCES> 1,219
<INVENTORY> 15,460
<CURRENT-ASSETS> 161,867
<PP&E> 518,892
<DEPRECIATION> 125,650
<TOTAL-ASSETS> 676,253
<CURRENT-LIABILITIES> 102,567
<BONDS> 177,897
0
0
<COMMON> 231,902
<OTHER-SE> 52,391
<TOTAL-LIABILITY-AND-EQUITY> 676,253
<SALES> 0
<TOTAL-REVENUES> 245,711
<CGS> 0
<TOTAL-COSTS> 170,132
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 98
<INTEREST-EXPENSE> 6,054
<INCOME-PRETAX> 25,199
<INCOME-TAX> 10,141
<INCOME-CONTINUING> 15,058
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,058
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,033
<SECURITIES> 0
<RECEIVABLES> 76,764
<ALLOWANCES> 1,191
<INVENTORY> 15,733
<CURRENT-ASSETS> 127,593
<PP&E> 298,990
<DEPRECIATION> 100,936
<TOTAL-ASSETS> 367,933
<CURRENT-LIABILITIES> 72,935
<BONDS> 27,258
0
0
<COMMON> 187,717
<OTHER-SE> 20,204
<TOTAL-LIABILITY-AND-EQUITY> 367,933
<SALES> 0
<TOTAL-REVENUES> 208,139
<CGS> 0
<TOTAL-COSTS> 156,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,087
<INTEREST-EXPENSE> 1,557
<INCOME-PRETAX> 15,918
<INCOME-TAX> 6,025
<INCOME-CONTINUING> 9,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,757
<EPS-PRIMARY> .51
<EPS-DILUTED> .50
</TABLE>
