<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 SEPTEMBER 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 September 30, 1998: Common Stock, no par value - 21,043,898 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 SEPTEMBER 30
--------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues ....................................................... $ 115,187 $ 118,636
Earnings Attributable to Unconsolidated Affiliates ............. 1,644 629
---------- ----------
Total ................................................. 116,831 119,265
---------- ----------
Costs and Expenses:
Operating expenses ........................................ 78,777 87,283
Selling, general and administrative expenses .............. 13,954 13,299
Depreciation and amortization ............................. 10,816 6,207
---------- ----------
Total ................................................. 103,547 106,789
---------- ----------
Other Income (Expense) - Net ................................... 594 2,448
Interest Expense ............................................... 4,350 1,052
---------- ----------
Income Before Income Taxes and Minority Interest ............... 9,528 13,872
Income Tax Provision ........................................... 4,175 5,626
Minority Interest in Loss of Consolidated Subsidiary ........... -- (123)
---------- ----------
Net Income ..................................................... $ 5,353 $ 8,369
========== ==========
Earnings Per Share of Common Stock ............................. $ .25 $ .43
========== ==========
Earnings Per Share of Common Stock - assuming dilution ......... $ .25 $ .43
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 3
POOL ENERGY SERVICES CO.
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues ......................................................... $ 360,898 $ 326,775
Earnings Attributable to Unconsolidated Affiliates ............... 2,752 2,267
---------- ----------
Total ................................................... 363,650 329,042
---------- ----------
Costs and Expenses:
Operating expenses .......................................... 248,909 243,798
Selling, general and administrative expenses ................ 41,998 39,492
Depreciation and amortization ............................... 28,815 17,784
---------- ----------
Total ................................................... 319,722 301,074
---------- ----------
Other Income (Expense) - Net ..................................... 1,203 4,431
Interest Expense ................................................. 10,404 2,609
---------- ----------
Income Before Income Taxes and Minority Interest ................. 34,727 29,790
Income Tax Provision ............................................. 14,316 11,651
Minority Interest in Earnings of Consolidated Subsidiary ......... -- 13
---------- ----------
Net Income ....................................................... $ 20,411 $ 18,126
========== ==========
Earnings Per Share of Common Stock ............................... $ .99 $ .94
========== ==========
Earnings Per Share of Common Stock - assuming dilution ........... $ .98 $ .93
========== ==========
</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>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net Income ..................................................................... $ 20,411 $ 18,126
Noncash items included above:
Depreciation and amortization .............................................. 28,815 17,784
Amortization of deferred drydocking costs .................................. 1,642 --
Amortization of deferred rig mobilization .................................. (4,844) (2,195)
Deferred income taxes ...................................................... 5,471 9,959
Undistributed earnings of unconsolidated affiliates ........................ (570) (2,216)
Other - net ................................................................ 862 (1,587)
Payment for lease of manufacturing facility, net of sublease ................... (2,715) (1,236)
Proceeds from rig mobilization ................................................. 8,424 --
Other - net .................................................................... (850) (287)
Provision for (payment of) prior years personal injury and property damage
claims - net .............................................................. (3,425) 693
Net effect of changes in operating working capital ............................. 11,382 (18,223)
---------- ----------
Net Cash Flows Provided by Operating Activities ....................... 64,603 20,818
---------- ----------
Investing Activities:
Property additions ............................................................. (70,731) (33,037)
Expenditures for acquisitions, including acquisition costs, less cash
acquired ................................................................... (65,161) (431)
Expenditures for drydocking costs .............................................. (1,994) --
Proceeds from disposition of property, plant and equipment ..................... 1,551 6,561
Other - net .................................................................... 28 1,371
---------- ----------
Net Cash Flows Used for Investing Activities .......................... (136,307) (25,536)
---------- ----------
Financing Activities:
Proceeds from long-term debt ................................................... 190,000 --
Principal payments on long-term debt ........................................... (91,875) (8,766)
Repayment of debt assumed in acquisitions ...................................... (15,672) (775)
Payments of debt financing costs ............................................... (5,398) (1,393)
Proceeds from exercise of stock options ........................................ 379 2,849
---------- ----------
Net Cash Flows Provided by (Used for) Financing Activities ............ 77,434 (8,085)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents ................................ 5,730 (12,803)
Cash and Cash Equivalents at January 1, ............................................. 18,993 21,837
---------- ----------
Cash and Cash Equivalents at September 30, .......................................... $ 24,723 $ 9,034
========== ==========
</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>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................................................ $ 24,723 $ 18,993
Restricted cash .................................................................. -- 10
Accounts and notes receivable (net of allowance for doubtful accounts of
$1,195 and $1,272) ............................................................. 83,324 97,283
Inventories ...................................................................... 14,267 19,500
Deferred income tax asset ........................................................ 9,542 8,594
Other current assets ............................................................. 11,479 8,295
------------ ------------
Total current assets ........................................................... 143,335 152,675
Property, Plant and Equipment - Net ................................................. 400,900 259,793
Vessel Construction Deposits ........................................................ 18,275 --
Investment in and Noncurrent Receivables from Unconsolidated Affiliates ............. 29,372 20,515
Goodwill, net ....................................................................... 60,256 42,395
Deferred Costs ...................................................................... 10,494 1,270
Noncurrent Receivables (net of allowance for doubtful accounts of $1,118
and $1,113) and Other Assets ..................................................... 2,522 2,547
------------ ------------
Total .......................................................................... $ 665,154 $ 479,195
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ................................................ $ 625 $ 1,025
Accounts payable ................................................................. 31,484 41,305
Other current liabilities ........................................................ 60,914 51,275
------------ ------------
Total current liabilities ...................................................... 93,023 93,605
Long-Term Debt ...................................................................... 177,847 79,322
Deferred Income Taxes ............................................................... 67,533 21,575
Other Liabilities ................................................................... 36,918 46,995
Minority Interest ................................................................... -- 3,960
Shareholders' Equity :
Common stock, no par value:
40,000,000 shares authorized; 21,043,898 and 19,448,946 shares
issued and outstanding ....................................................... 231,927 196,532
Retained earnings ................................................................ 58,640 38,229
Unearned compensation - restricted stock ......................................... (412) (701)
Cumulative foreign currency translation adjustments .............................. (322) (322)
------------ ------------
Total shareholders' equity ..................................................... 289,833 233,738
------------ ------------
Total .......................................................................... $ 665,154 $ 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 nine months ended September 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
$5.6 million at September 30, 1998 and unamortized debt financing costs, current
and non-current portions, of $6.1 million and $1.5 million at September 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 nine months ended September 30, 1998 and 1997,
respectively.
7
<PAGE> 8
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 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 ................................................. $ 5,353 21,043,898 $ .25
======
Dilutive Effect of Potential Common Stock:
Stock Options .............................................. -- 41,456
---------- ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................. $ 5,353 21,085,354 $ .25
========== ========== ======
</TABLE>
Options to purchase approximately 858,000 shares of common stock at
exercise prices ranging from $10.00 per share to $35.50 per share (weighted
average exercise price of $14.43 per share) that were outstanding during the
third quarter of 1998 were not included in the computation of diluted EPS
because such options were antidilutive.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 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 ................................................. $ 8,369 19,280,888 $ .43
======
Dilutive Effect of Potential Common Stock:
Stock Options .............................................. -- 410,212
---------- ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................. $ 8,369 19,691,100 $ .43
========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ................................................. $ 20,411 20,528,724 $ .99
======
Dilutive Effect of Potential Common Stock:
Stock Options .............................................. -- 203,741
---------- ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................. $ 20,411 20,732,465 $ .98
========== ========== ======
</TABLE>
In addition to the 858,000 options outstanding during the third quarter of
1998 which were antidilutive, the computation of diluted EPS for the nine months
ended September 30, 1998 excludes options to purchase approximately 52,000
shares of common stock at an exercise price of $31.8125 per share and 16,000
shares of common stock at an exercise price of $24.00 per share that were
outstanding during the first six months and second quarter of 1998,
respectively, because such options were antidilutive.
8
<PAGE> 9
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 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 ................................................. $ 18,126 19,194,928 $ .94
======
Dilutive Effect of Potential Common Stock:
Stock Options .............................................. -- 305,904
---------- ----------
Earnings per Share of Common Stock - Assuming Dilution:
Net Income ................................................. $ 18,126 19,500,832 $ .93
========== ========== ======
</TABLE>
4. LONG-TERM DEBT AND CREDIT AGREEMENT
Senior Subordinated Notes
On March 31, 1998, the Company issued 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 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 September 30, 1998 the Company had drawn $15.0 million in cash
under the Credit Agreement, and an additional $10.5 million was being utilized
to support the issuance of letters of credit, primarily related to insurance
obligations and long-term notes issued in connection with the acquisition of
Golden Pacific Corp. in 1995 (the "GPC Acquisition").
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, per the terms of the Credit Agreement, the applicable
Eurodollar margin through September 1998 could not be less than 1.50%. Based
upon the Company's leverage ratio at September 30, 1998, the applicable
Eurodollar margin would be 1.00% for borrowings during the fourth quarter of
1998. The Credit Agreement will mature on October 2, 2000 and is subject to
being extended on a year-to-year basis 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 $4.8 million and $0.6 million of debt financing costs
during the first nine 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, which was paid in
full by the end of the third quarter of 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. This 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) ............... $176,487
Company's common stock issued .................................... (34,258)
Liabilities assumed .............................................. (66,203)
--------
Cash paid, including acquisition related expenditures ............ 76,026
Less: cash acquired ............................................. 10,831
--------
Net cash used for the acquisition ................................ $ 65,195
========
</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 early
1999 and late 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>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------
1998 1997
----------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ---------
(In thousands except earnings per share)
<S> <C> <C> <C> <C>
Revenues ..................................... $ 360,898 $ 374,431 $ 326,775 $360,554
=========== =========== =========== ========
Net Income ................................... $ 20,411 $ 22,708 $ 18,126 $ 19,426
=========== =========== =========== ========
Earnings Per Share of Common Stock ........... $ .99 $ 1.08 $ .94 $ .94
=========== =========== =========== ========
Weighted Average Shares Outstanding .......... 20,529 21,030 19,195 20,733
=========== =========== =========== ========
Earnings Per Share of Common Stock -
assuming dilution ....................... $ .98 $ 1.07 $ .93 $ .92
=========== =========== =========== ========
Weighted Average Shares Outstanding .......... 20,732 21,234 19,501 21,039
=========== =========== =========== ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
1998 1997
--------- --------
<S> <C> <C>
Revenues:
Pool Arabia, Ltd. ........................ $ 40,235 $ 26,129
Pool International Argentina S.A. ........ 9,461 (b) -
Intairdril Oman L.L.C. ................... 36 174
--------- --------
Total .............................. $ 49,732 $ 26,303
========= ========
Gross Profit (Loss) (a):
Pool Arabia, Ltd. ........................ $ 12,530 $ 9,220
Pool International Argentina S.A. ........ (787) (b) -
Intairdril Oman L.L.C. ................... 19 146
--------- --------
Total .............................. $ 11,762 $ 9,366
========= ========
Net Income (Loss):
Pool Arabia, Ltd. ........................ $ 1,079 $ 760
Pool International Argentina S.A. ........ (2,649) (b) -
Intairdril Oman L.L.C. ................... 32 (34)
--------- --------
Total .............................. $ (1,538) $ 726
========= ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1998 1997
-------- ---------
<S> <C> <C>
The Company's portion of net income (loss) .................................. $ (785) $ 371
Adjustment to reconcile differences between affiliates' bases and
Company's carrying value ............................................... 1,355 1,845
-------- ---------
Equity in income ............................................................ 570 2,216
Lease income (expense) - net ................................................ 2,103 (45)
Other income (expense) - net ................................................ 79 96
-------- ---------
Total .................................................................. $ 2,752 $ 2,267
======== =========
</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 the 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 SEPTEMBER 30, 1998
----------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ....................................... $ -- $ 99,015 $ 16,172 $ -- $115,187
Earnings Attributable to Unconsolidated
Affiliates .................................. -- 543 1,101 -- 1,644
-------- -------- -------- -------- --------
Total ................................. -- 99,558 17,273 -- 116,831
-------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses .......................... -- 70,397 8,380 -- 78,777
Selling, general and administrative
expenses .................................. 250 12,303 1,401 -- 13,954
Depreciation and amortization ............... -- 8,827 1,996 (7) 10,816
-------- -------- -------- -------- --------
Total ................................. 250 91,527 11,777 (7) 103,547
-------- -------- -------- -------- --------
Other Income (Expense) - Net ................... -- 465 129 -- 594
Interest Expense ............................... 3,355 642 353 -- 4,350
-------- -------- -------- -------- --------
Income (Loss) Before Income Taxes .............. (3,605) 7,854 5,272 7 9,528
Income Tax Provision (Credit) .................. (1,261) 3,872 1,561 3 4,175
Equity in Earnings of Consolidated
Subsidiaries ................................ 7,697 3,711 -- (11,408) --
-------- -------- -------- -------- --------
Net Income ..................................... $ 5,353 $ 7,693 $ 3,711 $(11,404) $ 5,353
======== ======== ======== ======== =========
</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>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ................................... $ -- $316,859 $ 44,039 $ -- $360,898
Earnings Attributable to Unconsolidated
Affiliates .............................. -- 672 2,080 -- 2,752
-------- -------- -------- -------- --------
Total ............................. -- 317,531 46,119 -- 363,650
-------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses ...................... -- 224,950 23,959 -- 248,909
Selling, general and administrative
expenses .............................. 624 37,367 4,007 -- 41,998
Depreciation and amortization ........... -- 23,888 4,948 (21) 28,815
-------- -------- -------- -------- --------
Total ............................. 624 286,205 32,914 (21) 319,722
-------- -------- -------- -------- --------
Other Income (Expense) - Net ............... -- 891 312 -- 1,203
Interest Expense ........................... 6,702 2,475 1,227 -- 10,404
-------- -------- -------- -------- --------
Income (Loss) Before Income Taxes .......... (7,326) 29,742 12,290 21 34,727
Income Tax Provision (Credit) .............. (2,186) 12,521 3,973 8 14,316
Equity in Earnings of Consolidated
Subsidiaries ............................ 25,551 8,317 -- (33,868) --
-------- -------- -------- -------- --------
Net Income ................................. $ 20,411 $ 25,538 $ 8,317 $(33,855) $ 20,411
======== ======== ======== ======== ========
</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>
NINE MONTHS ENDED SEPTEMBER 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 ..................... $ (5,038) $ 49,007 $ 20,637 $ (3) $ 64,603
--------- --------- --------- --------- ---------
Investing Activities:
Property additions .......................... -- (52,977) (18,196) 442 (70,731)
Expenditures for acquisitions, including
acquisition costs, less cash acquired .... -- (65,161) -- -- (65,161)
Expenditures for drydocking costs ........... -- (1,994) -- -- (1,994)
Proceeds from disposition of property,
plant and equipment ...................... -- 1,804 189 (442) 1,551
Other - net ................................. 1 21 3 3 28
--------- --------- --------- --------- ---------
Net Cash Flows Provided by (Used for)
Investing Activities ..................... 1 (118,307) (18,004) 3 (136,307)
--------- --------- --------- --------- ---------
Financing Activities:
Proceeds from long-term debt ................ 150,000 40,000 -- -- 190,000
Principal payments on long-term debt ........ -- (91,875) -- -- (91,875)
Repayment of debt assumed in acquisition .... -- (15,672) -- -- (15,672)
Payments of debt financing costs ............ (4,824) (574) -- -- (5,398)
Proceeds from exercise of stock options ..... 379 -- -- -- 379
Payments from (advances to) consolidated
subsidiaries, net ........................ (140,695) 144,524 (3,829) -- --
--------- --------- --------- --------- ---------
Net Cash Flows Provided by (Used for)
Financing Activities ..................... 4,860 76,403 (3,829) -- 77,434
--------- --------- --------- --------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents .............................. (177) 7,103 (1,196) -- 5,730
Cash and Cash Equivalents at January 1, ..... 210 16,395 2,388 -- 18,993
--------- --------- --------- --------- ---------
Cash and Cash Equivalents at September 30, .. $ 33 $ 23,498 $ 1,192 $ -- $ 24,723
========= ========= ========= ========= =========
</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>
SEPTEMBER 30, 1998
------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................... $ 33 $ 23,498 $ 1,192 $ -- $ 24,723
Accounts and notes receivable ............... -- 71,391 11,933 -- 83,324
Inventories ................................. -- 3,765 10,502 -- 14,267
Deferred income tax asset ................... 20 9,400 -- 122 9,542
Other current assets ........................ 530 9,502 1,447 -- 11,479
--------- --------- --------- --------- ---------
Total current assets .................. 583 117,556 25,074 122 143,335
Property, Plant and Equipment - Net ............ -- 325,090 76,145 (335) 400,900
Vessel Construction Deposits ................... -- 18,275 -- -- 18,275
Investment in Consolidated Subsidiaries ........ 78,625 40,471 -- (119,096) --
Investment in and Noncurrent Receivables
from Unconsolidated Affiliates .............. -- 29,372 -- -- 29,372
Goodwill, net .................................. -- 60,256 -- -- 60,256
Deferred Costs ................................. 4,108 6,386 -- -- 10,494
Noncurrent Receivables and Other Assets ........ -- 2,502 20 -- 2,522
--------- --------- --------- --------- ---------
Total ................................. $ 83,316 $ 599,908 $ 101,239 $(119,309) $ 665,154
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ........... $ -- $ 625 $ -- $ -- $ 625
Accounts payable ............................ -- 29,459 2,025 -- 31,484
Payable (receivable) to (from)
consolidated subsidiaries ................. (243,168) 218,690 24,706 (228) --
Other current liabilities ................... (947) 44,032 17,828 1 60,914
--------- --------- --------- --------- ---------
Total current liabilities ............. (244,115) 292,806 44,559 (227) 93,023
Long-Term Debt ................................. 150,000 27,847 -- -- 177,847
Long-Term Payable (Receivable) to (from)
Consolidated Subsidiaries ................... (111,595) 101,782 9,813 -- --
Deferred Income Taxes .......................... (1,129) 63,917 4,741 4 67,533
Other Liabilities .............................. -- 35,262 1,656 -- 36,918
Shareholders' Equity:
Common stock ................................ 231,927 1 500 (501) 231,927
Paid-in capital ............................. -- 12,399 18,619 (31,018) --
Retained earnings ........................... 58,640 66,216 21,351 (87,567) 58,640
Unearned compensation - restricted stock .... (412) -- -- -- (412)
Cumulative foreign currency translation
adjustments ............................... -- (322) -- -- (322)
--------- --------- --------- --------- ---------
Total shareholders' equity ............ 290,155 78,294 40,470 (119,086) 289,833
--------- --------- --------- --------- ---------
Total ................................. $ 83,316 $ 599,908 $ 101,239 $(119,309) $ 665,154
========= ========= ========= ========= =========
</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 SEPTEMBER 30, 1997
------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ -- $ 99,712 $ 18,924 $ -- $ 118,636
Earnings (Loss) Attributable to
Unconsolidated Affiliates ............. -- 644 (15) -- 629
--------- --------- --------- --------- ---------
Total ........................... -- 100,356 18,909 -- 119,265
--------- --------- --------- --------- ---------
Costs and Expenses:
Operating expenses .................... -- 74,175 13,108 -- 87,283
Selling, general and administrative
expenses ............................ 164 11,404 1,731 -- 13,299
Depreciation and amortization ......... -- 4,608 1,606 (7) 6,207
--------- --------- --------- --------- ---------
Total ........................... 164 90,187 16,445 (7) 106,789
--------- --------- --------- --------- ---------
Other Income (Expense) - Net ............. -- 2,201 247 -- 2,448
Interest Expense ......................... -- 614 438 -- 1,052
--------- --------- --------- --------- ---------
Income (Loss) Before Income Taxes and
Minority Interest ..................... (164) 11,756 2,273 7 13,872
Income Tax Provision (Credit) ............ (57) 4,426 1,254 3 5,626
Equity in Earnings of Consolidated
Subsidiaries .......................... 8,476 1,142 -- (9,618) --
Minority Interest in Loss of
Consolidated Subsidiary ............... -- -- -- (123) (123)
--------- --------- --------- --------- ---------
Net Income ............................... $ 8,369 $ 8,472 $ 1,019 $ (9,491) $ 8,369
========= ========= ========= ========= =========
</TABLE>
18
<PAGE> 19
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
UNAUDITED CONDENSED STATEMENT OF CONSOLIDATING OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ -- $272,038 $ 54,737 $ -- $326,775
Earnings (Loss) Attributable to
Unconsolidated Affiliates ............. -- 2,312 (45) -- 2,267
-------- -------- -------- -------- --------
Total ........................... -- 274,350 54,692 -- 329,042
-------- -------- -------- -------- --------
Costs and Expenses:
Operating expenses .................... -- 206,435 37,363 -- 243,798
Selling, general and administrative
expenses ............................ 488 33,785 5,219 -- 39,492
Depreciation and amortization ......... -- 13,055 4,750 (21) 17,784
-------- -------- -------- -------- --------
Total ........................... 488 253,275 47,332 (21) 301,074
-------- -------- -------- -------- --------
Other Income (Expense) - Net ............. -- 3,979 452 -- 4,431
Interest Expense ......................... -- 1,518 1,091 -- 2,609
-------- -------- -------- -------- --------
Income (Loss) Before Income Taxes and
Minority Interest ..................... (488) 23,536 6,721 21 29,790
Income Tax Provision (Credit) ............ (170) 8,846 2,967 8 11,651
Equity in Earnings of Consolidated
Subsidiaries .......................... 18,444 3,741 -- (22,185) --
Minority Interest in Earnings of
Consolidated Subsidiary ............... -- -- -- 13 13
-------- -------- -------- -------- --------
Net Income ............................... $ 18,126 $ 18,431 $ 3,754 $(22,185) $ 18,126
======== ======== ======== ======== ========
</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>
NINE MONTHS ENDED SEPTEMBER 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 ........................ $ (89) $ 15,950 $ 4,957 $ -- $ 20,818
-------- -------- -------- -------- --------
Investing Activities:
Property additions ............................. -- (28,566) (9,755) 5,284 (33,037)
Expenditures for acquisitions, including
acquisition costs, less cash acquired ....... -- (418) (13) -- (431)
Proceeds from disposition of property,
plant and equipment ......................... -- 10,075 1,770 (5,284) 6,561
Other - net .................................... -- 1,354 17 -- 1,371
-------- -------- -------- -------- --------
Net Cash Flows Used for Investing Activities ... -- (17,555) (7,981) -- (25,536)
-------- -------- -------- -------- --------
Financing Activities:
Principal payments on long-term debt ........... -- (3,659) (5,107) -- (8,766)
Repayment of debt assumed in acquisitions ...... -- (775) -- -- (775)
Payments of debt financing costs ............... -- (1,393) -- -- (1,393)
Proceeds from exercise of stock options ........ 2,849 -- -- -- 2,849
Payments from (advances to) consolidated
subsidiaries, net ........................... (3,440) (3,356) 6,796 -- --
-------- -------- -------- -------- --------
Net Cash Flows Provided by (Used for)
Financing Activities ........................ (591) (9,183) 1,689 -- (8,085)
-------- -------- -------- -------- --------
Net Decrease in Cash and Cash Equivalents ...... (680) (10,788) (1,335) -- (12,803)
Cash and Cash Equivalents at January 1, ........ 987 16,368 4,482 -- 21,837
-------- -------- -------- -------- --------
Cash and Cash Equivalents at September 30, ..... $ 307 $ 5,580 $ 3,147 $ -- $ 9,034
======== ======== ======== ======== ========
</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 the Old Notes and used the net
proceeds from the sale thereof 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 the New Notes 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, which was paid in full by the end of the third
quarter of 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 early
1999 and late 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 SEPTEMBER 30, 1998 AND 1997
The Company generated net income of $5.4 million in the third quarter of
1998, compared with $8.4 million in the third quarter of 1997. The average price
of crude oil was approximately 28% lower in the third quarter of 1998 than in
the third quarter of 1997, and average domestic natural gas prices decreased
approximately 19% comparing the same periods. Lower crude oil and natural gas
prices were the primary influence for the decline in results from the Company's
domestic operations, particularly from its domestic land well-servicing rig
fleet and offshore rigs located in the Gulf of Mexico. This decrease was
partially offset by (i) the inclusion of results from offshore support vessels
acquired in the March 1998 acquisition of Sea Mar (see "- 1998 Acquisition"),
(ii) the inclusion of results from Rig 8, a recently upgraded drilling rig in
Alaska which commenced a five-year contract in February 1998, and (iii) the
inclusion of results from newly constructed Rig 16 which was placed in service
in the Gulf of Mexico in February 1998. Rig hours for the Company's domestic
onshore operation were 18% lower in the third quarter of 1998 than in the
corresponding quarter of 1997 despite the inclusion of rig hours from land
well-servicing rigs acquired in the October 1997 Trey acquisition (see "- 1997
Acquisitions - Trey"). The Company's offshore rig fleet in the Gulf of Mexico
experienced utilization of 55% in the third quarter of 1998, compared to 84% in
the comparable period of 1997, but average rig rates were 4% higher in the 1998
period. Results from the Company's international operations improved due to (i)
higher revenues for Rig 453, a platform drilling rig located in Australia which
was recently converted from a platform workover rig, (ii) higher earnings
attributable to Pool Arabia, Ltd. ("Pool Arabia"), the Company's Saudi Arabia
affiliate, and (iii) higher land drilling activity in Ecuador.
Revenues. Revenues were $115.2 million in the third quarter of 1998, a 3%
decrease from revenues of $118.6 million in the third quarter of 1997. This
decrease was attributable to (i) lower activity for the Company's land
well-servicing rigs located in Texas, New Mexico and California and offshore
rigs located in the Gulf of Mexico in response to lower crude oil and natural
gas prices, (ii) reduced land drilling activity in Guatemala and Pakistan, and
(iii) lower revenues from wholly-owned operations in the Middle East resulting
from the transfer of a land drilling rig to Saudi Arabia, where it is being
leased to Pool Arabia. In addition, the Company's revenues in the third 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 $4.3
million of revenues for PIASA in the third quarter of 1997 (see Note 2 to the
Condensed Consolidated Financial Statements and "- Earnings Attributable to
Unconsolidated Affiliates"). These revenue decreases were partially offset by
(i) the inclusion of revenues from offshore support vessels acquired in the
March 1998 acquisition of Sea Mar (see "- 1998 Acquisition"), (ii) the inclusion
of revenues from rigs acquired in the Trey acquisition (see "- 1997 Acquisitions
- - Trey"), (iii) higher revenues associated with Rig 453 in Australia, (iv)
higher land drilling activity in Ecuador, (v) the inclusion of revenues from
recently upgraded Rig 8 in Alaska, and (vi) the inclusion of revenues from Rig
16, a newly constructed platform drilling rig located in the Gulf of Mexico.
Domestic onshore well-servicing and production services revenues decreased
$7.7 million or 11% in the third quarter of 1998 from the corresponding quarter
of 1997, chiefly as a result of the reduced activity levels. Domestic onshore
well-servicing rig utilization was 44% in the third quarter of 1998, compared to
57% in the third quarter of 1997. Domestic onshore well-servicing rig hours
decreased from approximately 326,000 hours in the third quarter of 1997 to
approximately 268,000 in the third quarter of 1998. Gulf of Mexico offshore
workover and drilling revenues decreased $6.1 million or 27%, Alaska operations
revenues decreased $0.3 million or 4%, and international operations revenues
decreased $3.2 million or 16% (however, excluding the $4.3 million of revenues
from PIASA in the third quarter of 1997, international operations revenues
increased $1.1 million or 7%), compared to the third quarter of 1997. Revenues
from Sea Mar's fleet of offshore support vessels were $13.9 million in the third
quarter of 1998.
23
<PAGE> 24
Earnings Attributable to Unconsolidated Affiliates. Earnings attributable
to unconsolidated affiliates were $1.6 million in the third quarter of 1998,
compared to $0.6 million in the third quarter of 1997. Earnings attributable to
Pool Arabia increased $1.2 million from the third quarter of 1997 to $1.9
million in the third 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 was $0.2 million in the third 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 by the equity method (see Note 2 to the
Condensed Consolidated Financial Statements).
Costs and Expenses. The Company's costs and expenses were $103.5 million in
the third quarter of 1998, a 3% decrease compared to costs and expenses of
$106.8 million in the corresponding quarter of 1997. In addition, operating
expenses declined to 68% of revenues in the third quarter of 1998 from 74% of
revenues in the third quarter of 1997; the improvement in operating margins was
primarily attributable to rate increases for the Company's offshore rig fleet
and the inclusion of results from offshore support vessels acquired in the Sea
Mar Acquisition. The decrease in total costs and expenses was primarily due to
decreased costs and expenses for the Company's domestic land well-servicing rigs
and offshore rigs located in the Gulf of Mexico due to reduced activity levels.
In addition, the Company's costs and expenses in the third quarter of 1997
included $4.7 million of costs and expenses related to PIASA (see "- Earnings
Attributable to Unconsolidated Affiliates"). The decrease was partly offset by
the inclusion of costs and expenses related to operating offshore support
vessels acquired in March 1998 and land well-servicing rigs acquired in the Trey
acquisition.
Other Income - Net. Other income - net was $1.9 million lower in the third
quarter of 1998 than in the corresponding quarter of 1997, primarily due to
lower gains on dispositions of equipment in 1998 and a $0.9 million pre-tax gain
from an insurance settlement in the third quarter of 1997.
Interest Expense. Interest expense was $3.3 million higher in the third
quarter of 1998 than in the corresponding quarter of 1997, primarily due to
interest expense related to the $150 million Notes issued in March 1998 and
increased borrowings under the Credit Agreement. 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 $4.2 million on
income before income taxes of $9.5 million in the third quarter of 1998,
compared to income tax expense of $5.6 million on income before income taxes and
minority interest of $13.9 million in the third quarter of 1997. The decrease in
income tax expense in the third quarter of 1998, compared to the third quarter
of 1997, was primarily due to a decrease in pre-tax income in the third 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 - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
The Company generated net income of $20.4 million in the first nine months
of 1998, compared with $18.1 million in the first nine months of 1997. Results
from the Company's domestic operations improved primarily due to (i) inclusion
of results from offshore support vessels acquired in the March 1998 acquisition
of Sea Mar, (ii) higher land drilling and labor contract activity in Alaska,
including operation of the recently upgraded Rig 8, (iii) increased rates for
the Company's jackup workover rigs in the Gulf of Mexico, and (iv) the inclusion
of results for newly constructed platform drilling Rig 16 which was placed in
service in the Gulf of Mexico in February 1998. However, results from the
Company's domestic land well-servicing rigs and platform drilling rigs in the
Gulf of Mexico decreased due to reduced activity in response to lower crude oil
and natural gas prices. Rig hours for the Company's domestic onshore operation
were 2% lower in the first nine months of 1998 than in the corresponding period
of 1997 despite the addition of land well-servicing rigs acquired in 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 utilization of 63% in the first nine
months of 1998, compared to 77% in the comparable period of 1997, but average
rates for these rigs were 19% higher in the 1998 period. Results from the
Company's international operations improved due to (i) higher revenues for Rig
453, a platform drilling rig located in Australia which was recently converted
from a platform workover rig, (ii) lower operating expenses in Australia, (iii)
higher earnings attributable to Pool Arabia and (iv) increased land drilling rig
activity in Ecuador.
Revenues. Revenues were $360.9 million in the first nine months of 1998,
a 10% increase over revenues of $326.8 million in the first nine months of
1997. This increase was attributable to (i) the inclusion of revenues from
offshore support vessels acquired in the March 1998 acquisition of Sea Mar (see
"- 1998 Acquisition"), (ii) the inclusion of revenues from rigs acquired in the
October 1997 Trey acquisition and June 1997 DA&S acquisition (see "- 1997
Acquisitions"), (iii) increased rates for the Company's domestic onshore
well-servicing rigs and production services fleet, (iv) higher land drilling
activity in Alaska, including operation of the recently upgraded Rig 8, (v)
increased rates for the Company's jackup workover rigs in the Gulf of Mexico and
the inclusion of revenues from newly constructed platform drilling Rig 16, (vi)
higher revenues associated with Rig 453 in Australia, and (vii) increased land
drilling activity in Ecuador. 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
overall utilization of the Company's land well-servicing rigs located in Texas,
New Mexico and California due to reduced activity in response to lower crude oil
prices. In addition, the Company's revenues in the first nine 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 such entity to the equity method,
compared to the inclusion of $13.2 million of revenues from PIASA in the first
nine 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 $10.5 million or 5% in the first nine months of 1998 from the
corresponding period of 1997, chiefly as a result of the addition of revenues
from the rigs acquired in the Trey and DA&S acquisitions and increased rates for
the Company's domestic onshore well-servicing rigs and production services
fleet, which more than offset the effect of overall reduced activity levels in
response to lower crude oil and natural gas prices. Domestic onshore rig
utilization was 49% in the first nine months of 1998, compared to 56% in the
first nine months of 1997. Domestic onshore well-servicing rig hours decreased
from approximately 914,000 in the first nine months of 1997 to approximately
896,000 in the first nine months of 1998. Gulf of Mexico offshore workover and
drilling revenues increased $0.9 million or 2%, Alaska operations revenues
increased $6.7 million or 36%, and international operations revenues decreased
$11.7 million or 21% (however, excluding the $13.2 million of revenues from
PIASA in the first nine months of 1997, international operations revenues
increased $1.4 million or 3%), compared to the first nine months of 1997.
Revenues from Sea Mar's fleet of offshore support vessels for the period from
March 31, 1998 (date of acquisition) through September 30, 1998 were $27.7
million.
25
<PAGE> 26
Earnings Attributable to Unconsolidated Affiliates. Earnings attributable
to unconsolidated affiliates were $2.8 million in the first nine months of 1998,
compared to $2.3 million in the first nine months of 1997. Earnings attributable
to Pool Arabia increased $2.0 million from the first nine months of 1997 to $4.3
million for the nine months ended September 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 $1.5 million in the first nine 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 $319.7 million in
the first nine months of 1998, a 6% increase compared to costs and expenses of
$301.1 million in the corresponding period of 1997. However, operating expenses
declined to 69% of revenues in the first nine months of 1998 from 75% of
revenues in the first nine months of 1997; the improvement in operating
margins was primarily attributable to rate increases for the Company's
offshore rig fleet and domestic onshore well-servicing rigs and production
services fleet and the inclusion of results from offshore support vessels
acquired in the Sea Mar Acquisition. The increase in total costs and expenses
was primarily due to the inclusion of costs and expenses related to operating
offshore support vessels acquired in March 1998 and land well-servicing rigs
acquired in the DA&S and Trey acquisitions and additional costs and expenses
associated with 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 and lower operating expenses in Australia where
the weakened Australian dollar resulted in reduced local expenses. In addition,
the Company's costs and expenses in the first nine months of 1997 included
$13.4 million of costs and expenses related to PIASA (see "Earnings
Attributable to Unconsolidated Affiliates").
Other Income - Net. Other income - net was $3.2 million lower in the first
nine months of 1998 than in the corresponding period of 1997, primarily due to
lower gains on dispositions of equipment in 1998 and $1.9 million in pre-tax
gains from insurance settlements in the first nine months of 1997.
Interest Expense. Interest expense was $7.8 million higher in the first
nine 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 $14.3 million on
income before income taxes of $34.7 million in the first nine months of 1998,
compared to income tax expense of $11.7 million on income before income taxes
and minority interest of $29.8 million in the first nine months of 1997. The
increase in income tax expense in the first nine months of 1998, compared to the
same period in 1997, was primarily due to an increase in pre-tax income in the
first nine 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 $24.7 million at
September 30, 1998 compared to $19.0 million at December 31, 1997. Working
capital was $50.3 million and $59.1 million at September 30, 1998 and December
31, 1997, respectively. The Company used a net $136.3 million for investing
activities in the first nine months of 1998, primarily for capital expenditures
of $70.7 million, $65.2 million, net of cash acquired, for the purchase of Sea
Mar and $2.0 million for drydockings of offshore support vessels, offset by $1.6
million of proceeds from dispositions of equipment. The Company used a net $25.5
million for investing activities in the first
26
<PAGE> 27
nine months of 1997, primarily for capital expenditures of $33.0 million. Cash
used for investing activities for this period also included $0.4 million, net of
cash acquired, for the purchase of DA&S, offset by $6.6 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 sale and leaseback
arrangement.
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 September 30, 1998 the Company had drawn $15.0
million in cash under the Credit Agreement, and an additional $10.5 million was
being utilized to support the issuance of letters of credit, primarily related
to insurance obligations and long-term notes issued in connection with the GPC
Acquisition.
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,
per the terms of the Credit Agreement, the applicable Eurodollar margin through
September 1998 could not be less than 1.50%. Based upon the Company's leverage
ratio at September 30, 1998, the applicable Eurodollar margin would be 1.00% for
borrowings during the fourth quarter of 1998. The Credit Agreement will mature
on October 2, 2000 and is subject to being extended on a year-to-year basis 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 nine months of 1998, the Company made payments of $90.8
million to reduce the borrowings under the Credit Agreement, repaid Sea Mar's
existing debt of $15.7 million and made $1.1 million of principal payments on
long-term debt. During the first nine months of 1997, the Company made scheduled
principal payments of $8.8 million on long-term debt.
Capital Expenditures. The Company anticipates that 1998 capital
expenditures, excluding business acquisitions, will consist of (i) approximately
$44 million for additions and improvements to its existing rig and offshore
support vessel fleet, (ii) approximately $15 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 $6.4 million
for the purchase, upgrade and mobilization of a land drilling rig for operation
in Oman, (v) approximately $4.5 million for the electrification and upgrade of a
platform rig located in the Gulf of Mexico, and (vi) $2.3 million for the
purchase of two jack-up workover rigs located in the Gulf of Mexico that the
Company currently leases and has the option to purchase.
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
Historically, the demand for the Company's services has had a strong
correlation with the fluctuations in oil and natural gas prices. During the past
twelve months, crude oil prices have decreased from an average of approximately
$19.79 per barrel in September of 1997 to an average of approximately $15.03 per
barrel in September of 1998, and prices for domestic natural gas have also
declined during this twelve month period. These declines have been attributed
to, among other things, an excess supply of oil in the world markets, reduced
domestic demand associated with an unseasonably warm winter and the potential
for lower worldwide demand due to the impact of the economic downturn in
Southeast Asia. As a result, the Company is experiencing lower utilization and
rates in the Gulf of Mexico, as well as a 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 December 1998 and February 1999, respectively. Even
though the Company is experiencing a profitable 1998, in terms of earnings and
earnings per share, continued low oil prices may continue to negatively affect
the Company's operating performance. In order to minimize the effects of such
low oil prices, the Company is reviewing the cost structure within each of its
operating units to assure that it is appropriate given current market
conditions. Despite the current low oil prices and the resulting softening
market conditions, the Company remains optimistic about its long-term outlook
and believes that market conditions in the industry should improve over the long
term as demand and supply become more in balance.
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.
IMPACT OF THE YEAR 2000 ISSUE
Some of the Company's older computer programs were written using a two
digit year. As a result, those computer programs may be unable to process
date-sensitive information beyond the year 2000. This situation, which is not
uncommon, is frequently referred to as the Year 2000 issue and can cause a
temporary disruption of the ordinary course of business. The Company has
developed a plan to address its exposure to the impact of the
28
<PAGE> 29
Year 2000 issue. An assessment of the critical financial and operational systems
has been made and the remediation of these systems is approximately 50%
complete. The testing phase of the critical systems has begun, and these systems
are expected to be Year 2000 compliant by the end of the first quarter of 1999.
The inventory and assessment of the smaller less critical financial and
operational systems, many located internationally, have been completed. The
modification of several of these smaller systems has been accomplished, and the
testing of these systems is expected to occur in the last quarter of 1998. For
the remaining small systems, modifications or replacements are in process, and a
target date of March 1999 has been set for completion, with testing of these
systems to follow. The assessment of systems embedded in the Company's
buildings, equipment and other infrastructures is in process and is expected to
be complete by the end of 1998. To date, there has been no discovery of a
non-compliant embedded system. As of September 30, 1998, the Company has spent
approximately $0.2 million on its Year 2000 initiatives, primarily for
incremental software purchases and outside consulting. The Company expects the
incremental cost of full implementation of its Year 2000 plan to be
approximately $0.6 million.
The Company has formally communicated with the suppliers, customers and
financial institutions that it considers to be material third parties and is
evaluating its risks related to the failure of such third parties to be Year
2000 compliant. The effect, if any, on the Company's results of operations
arising from the failure of these third parties to be Year 2000 compliant is not
reasonably estimable at this time. Risk assessment and contingency plans related
to these third parties are expected to be complete by March 1999.
Contingency plans to protect the Company from Year 2000-related
interruptions are being developed and are expected to be complete by March 1999.
The dates on which the Company plans to become Year 2000 compliant and the
costs associated with the related modifications are based on management's best
estimates, which were derived utilizing numerous assumptions regarding future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no assurance that these time
or cost estimates will be achieved, and the actual results could be materially
different. Although the Company expects to be Year 2000 compliant by mid-1999
and believes that in a "most reasonably likely worst case scenario" it will not
be materially impacted by any third party non-compliance, failure by the Company
or by material third parties to fully implement appropriate Year 2000 plans
could have a material adverse effect on the Company's results of operations.
Adverse effects on the Company could include, among other things, business
disruption, increased costs, loss of business and other similar risks.
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, the success of the Company and material
third party business partners or suppliers in implementing their Year 2000
compliance plans 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.
29
<PAGE> 30
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DOCUMENT
- ----------- --------
10.1(*) - Form of Indemnification Agreement between the Company and each of
its Directors
27.1(*) - Financial Data Schedule for the Nine Months Ended September 30, 1998
27.2(*) - Restated Financial Data Schedule for the Nine Months Ended September
30, 1997
- --------
(*) Filed herewith
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during the
quarter ended September 30, 1998.
30
<PAGE> 31
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)
NOVEMBER 12, 1998 /s/ E. J. SPILLARD
------------------------------- ---------------------------------------
(Date) E. J. Spillard
Senior Vice President, Finance
(principal financial officer)
NOVEMBER 12, 1998 /s/ B. G. GORDON
------------------------------- ---------------------------------------
(Date) B. G. Gordon
Controller
(principal accounting officer)
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<S> <C>
10.1(*) - Form of Indemnification Agreement between the Company and each of
its Directors
27.1(*) - Financial Data Schedule for the Nine Months Ended September 30, 1998
27.2(*) - Restated Financial Data Schedule for the Nine Months Ended September
30, 1997
</TABLE>
- --------
(*) Filed herewith
<PAGE> 1
EXHIBIT 10.1
DIRECTOR
INDEMNIFICATION AGREEMENT
The Company has entered into an Indemnification Agreement in the form
attached hereto, effective October 28, 1998, with each of its directors. It is
anticipated that any new directors elected or appointed to the Company's Board
of Directors will enter into the same agreement, effective as of the date of
such election or appointment.
<PAGE> 2
INDEMNIFICATION AGREEMENT
This AGREEMENT is made and entered into as of the 28th day of
October, 1998, by and between Pool Energy Services Co., a Texas corporation (the
"Company"), and [name of director] "Indemnitee").
WHEREAS, it is essential to the Company and its mission to
retain and attract as directors the most capable persons available;
WHEREAS, Indemnitee is a director of the Company;
WHEREAS, both the Company and Indemnitee recognize the
omnipresent risk of litigation and other claims that are routinely asserted
against directors of companies operating in the public arena in today's
environment, and the attendant costs of defending even wholly frivolous claims;
WHEREAS, it has become increasingly difficult to obtain
insurance against the risk of personal liability of directors on terms providing
reasonable protection to the individual at reasonable cost to the companies;
WHEREAS, the Bylaws of the Company provide certain
indemnification rights to the directors of the Company, and its directors have
relied on this assurance of indemnification, as provided by Texas law;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's continued
service to the Company in an effective manner, the increasing difficulty in
obtaining and maintaining satisfactory insurance coverage, and Indemnitee's
reliance on assurance of indemnification, the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the fullest extent permitted by law (whether partial or complete) and as set
forth in this Agreement, and, to the extent insurance is maintained, for the
continued coverage of Indemnitee under the Company's directors' and officers'
liability insurance policies;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and agreements contained herein and Indemnitee's continuing to serve
as a director of the Company, the parties hereto agree as follows:
1. Certain Definitions:
(a) Change in Control: shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended), other
than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under such Act),
directly or indirectly, of securities of the Company representing 20%
or more of the
<PAGE> 3
total voting power represented by the Company's then outstanding Voting
Securities (other than any such person or any affiliate thereof that is
such a 20% beneficial owner as of the date hereof), or (ii) during any
period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the Company and any
new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of
the Company approve a merger or consolidation of the Company with any
other corporation, other than a merger or consolidation which would
result in the Voting Securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding
or by being converted into Voting Securities of the surviving entity)
at least 80% of the total voting power represented by the Voting
Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all the
Company's assets.
(b) Claim: any threatened, pending or completed
action, suit or proceeding, whether instituted by the Company or any
other party, or any inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit
or proceeding, whether civil (including intentional and unintentional
tort claims), criminal, administrative, investigative or other.
(c) Expenses: include attorneys' fees and all other
costs, expenses and obligations paid or incurred in connection with
investigating, defending, being a witness in or participating in
(including on appeal), or preparing to defend, be a witness in or
participate in any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence
related to the fact that Indemnitee is or was a director, officer,
employee, agent or fiduciary of the Company, or is or was serving at
the request of the Company as a director, officer, employee, trustee,
agent or fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or by reason of
anything done or not done by Indemnitee in any such capacity.
(e) Independent Legal Counsel: an attorney or firm of
attorneys, selected in accordance with the provisions of Section 3, who
shall not have otherwise performed services for the Company or
Indemnitee within the last five years (other than with respect to
matters concerning the rights of Indemnitee under this Agreement, or of
other indemnitees under similar indemnification agreements).
(f) Reviewing Party: any appropriate person or body
consisting of a member or members of the Company's Board of Directors
or any other person or body appointed by the Company's Board of
Directors who is not a party to the particular Claim for which
Indemnitee is seeking indemnification, or Independent Legal Counsel.
-2-
<PAGE> 4
(g) Voting Securities: any securities of the Company
which vote generally in the election of directors.
2. Basic Indemnification Arrangement.
(a) In the event Indemnitee was, is or becomes a
party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason
of (or arising in part out of) an Indemnifiable Event, the Company
shall indemnify Indemnitee to the fullest extent permitted by law as
soon as practicable but in any event no later than thirty days after
written demand is presented to the Company, against any and all
Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable
in connection with or in respect of such Expenses, judgments, fines,
penalties or amounts paid in settlement) of such Claim. If so requested
by Indemnitee, the Company shall advance (within two business days of
such request) any and all Expenses to Indemnitee (an "Expense
Advance").
(b) Notwithstanding the foregoing, (i) the
obligations of the Company under Section 2(a) shall be subject to the
condition that the Reviewing Party shall not have determined (in a
written opinion, in any case in which the Independent Legal Counsel
referred to in Section 3 hereof is involved) that Indemnitee would not
be permitted to be indemnified under applicable law, and (ii) the
obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to
the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company
shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided,
however, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable
law, any determination made by the Reviewing Party that Indemnitee
would not be permitted to be indemnified under applicable law shall not
be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is
made with respect thereto (as to which all rights of appeal therefrom
have been exhausted or lapsed). If there has not been a Change in
Control, the Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a
Change in Control which has been approved by a majority of the
Company's Board of Directors who were directors immediately prior to
such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referred to in Section 3 hereof. If there has been no
determination by the Reviewing Party or if the Reviewing Party
determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall
have the right to commence litigation in any court in Texas having
subject matter jurisdiction thereof and in which venue is proper
seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including
the legal or factual bases therefor, and the Company hereby consents to
service of process and agrees to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and
binding on the Company and Indemnitee.
-3-
<PAGE> 5
3. Change in Control. The Company agrees that if there is a
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to indemnity payments and
Expense Advances under this Agreement or any other agreement or Company Bylaw
now or hereafter in effect relating to Claims for Indemnifiable Events, the
Company shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees),
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
4. Indemnification for Additional Expenses. The Company shall
indemnify Indemnitee against any and all expenses (including attorneys' fees)
and, if requested by Indemnitee, shall (within two business days of such
request) advance such expenses to Indemnitee, which are incurred by Indemnitee
in connection with any action brought by Indemnitee (whether pursuant to Section
17 of this Agreement or otherwise) for (i) indemnification or advance payment of
Expenses by the Company under this Agreement or any other agreement or Company
Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events or
(ii) recovery under any directors' and officers' liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advance expense payment or
insurance recovery, as the case may be.
5. Partial Indemnity. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the Expenses, judgments, fines, penalties and amounts paid in
settlement of a Claim but not, however, for all of the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Claims relating in whole or in part to an
Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.
6. Burden of Proof. In connection with any determination by
the Reviewing Party or otherwise as to whether Indemnitee is entitled to be
indemnified hereunder, the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the
termination of any claim, action, suit or proceeding, by judgment, order,
settlement (whether with or without court approval) or conviction, or upon a
plea of nolo contendere, or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law. In addition, neither the failure of the Reviewing
Party to have made a determination as to whether Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
-4-
<PAGE> 6
determination by the Reviewing Party that Indemnitee has not met such standard
of conduct or did not have such belief, prior to the commencement of legal
proceedings by Indemnitee to secure a judicial determination that Indemnitee
should be indemnified under applicable law shall be a defense to Indemnitee's
claim or create a presumption that Indemnitee has not met any particular
standard of conduct or did not have any particular belief.
8. Nonexclusivity; Subsequent Change in Law. The rights of the
Indemnitee hereunder shall be in addition to any other rights Indemnitee may
have under the Company's Bylaws or under Texas law, or otherwise. To the extent
that a change in Texas law (whether by statute or judicial decision) permits
greater indemnification by agreement than would be afforded currently under the
Company's Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change.
9. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in accordance
with its or their terms, to the maximum extent of the coverage available for any
Company director or officer.
10. Amendments; Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
11. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
12. No Duplication of Payments. The Company shall not be
liable under this Agreement to make any payment in connection with any Claim
made against Indemnitee to the extent Indemnitee has otherwise actually received
payment (under any insurance policy, Bylaw or otherwise) of the amounts
otherwise indemnifiable hereunder.
13. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
or assets of the Company), assigns, spouses, heirs, executors and personal and
legal representatives. This Agreement shall continue in effect regardless of
whether Indemnitee continues to serve as a director of the Company or of any
other enterprise at the Company's request.
14. Severability. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of
-5-
<PAGE> 7
the remaining provisions hereof shall not be in any way impaired and shall
remain enforceable to the fullest extent permitted by law.
15. Effective Date. This Agreement shall be effective as of
the date hereof and shall apply to any claim for indemnification by the
Indemnitee on or after such date.
16. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas
applicable to contracts made and to be performed in such state without giving
effect to the principles of conflicts of laws.
17. Injunctive Relief. The parties hereto agree that
Indemnitee may enforce this Agreement by seeking specific performance hereof,
without any necessity of showing irreparable harm or posting a bond, which
requirements are hereby waived, and that by seeking specific performance,
Indemnitee shall not be precluded from seeking or obtaining any other relief to
which he may be entitled.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth above.
POOL ENERGY SERVICES CO.
By:
---------------------------------------
Title:
------------------------------------------
[Name of Director]
-6-
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