<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, 1999
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, 1999: Common Stock, no par value - 21,304,012 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
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues .................................................. $ 82,530 $ 115,187
Earnings Attributable to Unconsolidated Affiliates ........ 1,958 1,644
---------- ----------
Total ............................................ 84,488 116,831
---------- ----------
Costs and Expenses:
Operating expenses ................................... 59,840 78,777
Selling, general and administrative expenses ......... 13,020 13,954
Depreciation and amortization ........................ 11,559 10,816
---------- ----------
Total ............................................ 84,419 103,547
---------- ----------
Other Income (Expense) - Net .............................. 885 594
Interest Expense .......................................... 4,612 4,350
---------- ----------
Income (Loss) Before Income Taxes ......................... (3,658) 9,528
Income Tax Provision (Credit) ............................. (1,282) 4,175
---------- ----------
Net Income (Loss) ......................................... $ (2,376) $ 5,353
========== ==========
Earnings (Loss) Per Share of Common Stock ................. $ (.11) $ .25
========== ==========
Earnings (Loss) Per Share of Common Stock-assuming dilution $ (.11) $ .25
========== ==========
</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
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues .................................................. $ 236,637 $ 360,898
Earnings Attributable to Unconsolidated Affiliates ........ 7,029 2,752
---------- ----------
Total ............................................ 243,666 363,650
---------- ----------
Costs and Expenses:
Operating expenses ................................... 170,147 248,909
Selling, general and administrative expenses ......... 39,674 41,998
Depreciation and amortization ........................ 34,337 28,815
---------- ----------
Total ............................................ 244,158 319,722
---------- ----------
Other Income (Expense) - Net .............................. 5,862 1,203
Interest Expense .......................................... 13,397 10,404
---------- ----------
Income (Loss) Before Income Taxes ......................... (8,027) 34,727
Income Tax Provision (Credit) ............................. (4,306) 14,316
---------- ----------
Net Income (Loss) ......................................... $ (3,721) $ 20,411
========== ==========
Earnings (Loss) Per Share of Common Stock ................. $ (.18) $ .99
========== ==========
Earnings (Loss) Per Share of Common Stock-assuming dilution $ (.18) $ .98
========== ==========
</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
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Operating Activities:
Net Income (Loss) .................................................. $ (3,721) $ 20,411
Noncash items included above:
Depreciation and amortization .................................. 34,337 28,815
Amortization of deferred drydocking costs ...................... 2,410 1,642
Amortization of deferred rig mobilization ...................... (5,571) (4,844)
Amortization of deferred gain on sale and leaseback ............ (2,050) --
Settlement of employee benefit liability in company common stock 1,954 --
Deferred income taxes (credit) ................................. (5,060) 5,471
Undistributed earnings of unconsolidated affiliates ............ (3,461) (570)
Other - net .................................................... 1,164 862
Payment for lease of manufacturing facility ........................ (3,269) (2,715)
Proceeds from rig mobilization ..................................... -- 8,424
Other - net ........................................................ (575) (850)
Provision for (payment of) prior years personal injury and property
damage claims - net ............................................ 1,479 (3,425)
Net effect of changes in operating working capital ................. (11,035) 11,382
---------- ----------
Net Cash Flows Provided by Operating Activities ........... 6,602 64,603
---------- ----------
Investing Activities:
Property additions ................................................. (54,513) (70,731)
Expenditures for acquisition, including acquisition costs, less cash
acquired ....................................................... (2,881) (65,161)
Expenditures for drydocking costs .................................. (465) (1,994)
Proceeds from disposition of property, plant and equipment ......... 1,440 1,551
Other - net ........................................................ (133) 28
---------- ----------
Net Cash Flows Used for Investing Activities .............. (56,552) (136,307)
---------- ----------
Financing Activities:
Proceeds from long-term debt ....................................... 50,000 190,000
Principal payments on long-term debt ............................... (15,625) (91,875)
Repayment of debt assumed in acquisition ........................... -- (15,672)
Payment of debt financing costs .................................... (105) (5,398)
Proceeds from exercise of stock options ............................ 248 379
---------- ----------
Net Cash Flows Provided by Financing Activities ........... 34,518 77,434
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents .................... (15,432) 5,730
Cash and Cash Equivalents at January 1, ................................. 33,330 18,993
---------- ----------
Cash and Cash Equivalents at September 30, .............................. $ 17,898 $ 24,723
========== ==========
</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
1999 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 17,898 $ 33,330
Restricted cash ............................................................. 1,500 1,500
Accounts and notes receivable (net of allowance for doubtful accounts of $911
and $742) ................................................................. 71,956 70,850
Inventories ................................................................. 14,453 15,842
Deferred income tax asset ................................................... 8,655 8,579
Other current assets ........................................................ 12,737 9,896
---------- ----------
Total current assets .................................................... 127,199 139,997
Property, Plant and Equipment - Net ............................................ 426,199 405,740
Vessel Construction Deposits ................................................... 10,965 18,275
Investment in and Noncurrent Receivables from Unconsolidated Affiliates ........ 31,428 28,027
Goodwill, net .................................................................. 59,058 60,124
Deferred Costs ................................................................. 7,287 9,674
Noncurrent Receivables (net of allowance for doubtful accounts of $1,076 and
$1,027) and Other Assets .................................................... 1,534 2,302
---------- ----------
Total ................................................................... $ 663,670 $ 664,139
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ........................................... $ 625 $ 625
Accounts payable ............................................................ 14,187 25,263
Other current liabilities ................................................... 52,348 63,932
---------- ----------
Total current liabilities ............................................... 67,160 89,820
Long-Term Debt ................................................................. 207,222 172,847
Deferred Income Taxes .......................................................... 56,883 61,320
Other Liabilities .............................................................. 40,687 48,704
Shareholders' Equity:
Common stock, no par value:
40,000,000 shares authorized; 21,304,012 and 21,043,898 shares issued
and outstanding ......................................................... 235,836 232,023
Retained earnings .............................................................. 56,316 60,037
Unearned compensation - restricted stock ....................................... (112) (290)
Cumulative foreign currency translation adjustments ............................ (322) (322)
---------- ----------
Total shareholders' equity .............................................. 291,718 291,448
---------- ----------
Total ................................................................... $ 663,670 $ 664,139
========== ==========
</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 1998
financial statements to conform with the 1999 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. MERGER AGREEMENT
On January 10, 1999, the Company entered into a definitive agreement and
plan of merger (the "Merger Agreement") among the Company, Nabors Industries,
Inc. ("Nabors") and Starry Acquisition Corp., a wholly owned subsidiary of
Nabors ("Merger Sub"). The Merger Agreement provides, subject to certain
conditions set forth therein, that Merger Sub will be merged (the "Merger") with
and into the Company, with the Company continuing as the surviving corporation
and a wholly owned subsidiary of Nabors. At the effective time of the Merger,
each share of common stock, without par value, of the Company (the "Pool Common
Stock") issued and outstanding (excluding any treasury shares held by the
Company and shares held by Nabors or any of its subsidiaries), including the
associated common stock purchase rights, if any, outstanding at the effective
time of the Merger, will be converted into the right to receive 1.025 shares of
common stock, par value $.10 per share, of Nabors (the "Nabors Common Stock").
The Merger Agreement provides for certain conditions to the closing of the
Merger, including, among other things, the approval of the holders of at least
two-thirds of the Pool Common Stock, the registration with the Securities and
Exchange Commission of the shares of Nabors Common Stock to be issued in
connection with the Merger, the expiration or termination of the applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act") and the reaching of an agreement with the Company's
Saudi Arabian joint venture partner with respect to the post-merger operations
of the Company's Saudi Arabian joint venture and Nabors' existing Saudi Arabian
business (the "Saudi Agreement"). The applicable waiting period under the HSR
Act has expired, the registration statement with respect to the Nabors shares
became effective on August 9, 1999 and the Merger was approved by the holders of
more than the requisite two-thirds of the Pool Common Stock on September 28,
1999. Final agreement has not been reached with regard to the Saudi Agreement,
but the Company expects this condition to be satisfied. Although the Merger
Agreement provides that it can be terminated by either party if closing of the
Merger did not occur by October 1, 1999, both parties are continuing to use
their best efforts to effect satisfaction of the conditions and close as
promptly as practicable. However, there can be no assurances as to whether or
when the transaction will be completed.
6
<PAGE> 7
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. EARNINGS PER SHARE
The reconciliation of the numerator and denominator used for the
computation of basic and diluted earnings (loss) per share ("EPS") is as
follows:
<TABLE>
<CAPTION>
FOR THE QUARTER
ENDED SEPTEMBER 30
----------------------
1999 1998
-------- --------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) for basic and diluted earnings per share ...... $ (2,376) $ 5,353
======== ========
Weighted-average shares for basic earnings per share ............ 21,288 21,044
======== ========
Effect of dilutive securities:
Employee stock options ........................................ -- 41
-------- --------
Adjusted weighted-average shares and assumed conversions for
diluted earnings (loss) per share ............................. 21,288 21,085
======== ========
Basic earnings (loss) per share ................................. (.11) .25
======== ========
Diluted earnings (loss) per share ............................... (.11) .25
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
----------------------
1999 1998
-------- --------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) for basic and diluted earnings per share ...... $ (3,721) $ 20,411
======== ========
Weighted-average shares for basic earnings per share ............ 21,230 20,529
======== ========
Effect of dilutive securities:
Employee stock options ........................................ -- 203
-------- --------
Adjusted weighted-average shares and assumed conversions for
diluted earnings (loss) per share ............................. 21,230 20,732
======== ========
Basic earnings (loss) per share ................................. (.18) .99
======== ========
Diluted earnings (loss) per share ............................... (.18) .98
======== ========
</TABLE>
The 1999 EPS calculations exclude options to purchase approximately
1,412,000 shares of common stock that were outstanding during the third quarter
of 1999 because the inclusion of such options would have been antidilutive due
to the net loss during the period.
The 1998 EPS calculations exclude options to purchase approximately 926,000
shares of common stock at exercise prices ranging from $10.00 per share to
$35.50 per share because the inclusion of such options would have been
antidilutive.
7
<PAGE> 8
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. 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
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Pool Arabia, Ltd. .................. $ 32,853 $ 40,235
Pool International Argentina S.A. .. 8,234 9,461
Intairdril Oman L.L.C. ............. 582 36
---------- ----------
Total ......................... $ 41,669 $ 49,732
========== ==========
Gross Profit (Loss)(a):
Pool Arabia, Ltd. .................. $ 10,857 $ 12,530
Pool International Argentina S.A. .. 1,152 (787)
Intairdril Oman L.L.C. ............. 192 19
---------- ----------
Total ......................... $ 12,201 $ 11,762
========== ==========
Net Income (Loss):
Pool Arabia, Ltd. .................. $ 1,038 $ 1,079
Pool International Argentina S.A. .. (1,233) (2,649)
Intairdril Oman L.L.C. ............. 119 32
---------- ----------
Total ......................... $ (76) $ (1,538)
========== ==========
</TABLE>
(a) Gross profit is computed as revenues less operating expenses (which
excludes depreciation and amortization and selling, general and
administrative expenses).
Earnings (loss) attributable to unconsolidated affiliates is summarized
below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
The Company's portion of net loss ................................ $ (41) $ (785)
Adjustments to reconcile differences between affiliates' bases
and Company's carrying value ................................ 3,502 1,355
---------- ----------
Undistributed earnings of unconsolidated affiliates .............. 3,461 570
Lease income (expense) - net ..................................... 3,476 2,103
Other income (expense) - net ..................................... 92 79
---------- ----------
Total ....................................................... $ 7,029 $ 2,752
========== ==========
</TABLE>
8
<PAGE> 9
5. LONG-TERM DEBT AND CREDIT AGREEMENT
SENIOR SUBORDINATED NOTES
In March 1998, the Company issued 8 5/8% Senior Subordinated Notes due 2008
(the "Notes") in the aggregate principal amount of $150 million and used the net
proceeds from the sale thereof to fund the cash portion of the Sea Mar, Inc.
("Sea Mar") purchase, to repay the existing debt of Sea Mar and to reduce the
outstanding balance under the Company's Credit Agreement.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company
and are unconditionally guaranteed, jointly and severally, by each of the
Company's wholly-owned subsidiaries that are incorporated or organized in the
United States (the "Subsidiary Guarantors"). The other subsidiaries of the
Company are not guarantors of the Notes (the "Non-Guarantor Subsidiaries"). The
Notes contain certain covenants that, among other things, limit the ability of
the Company and the Subsidiary Guarantors to incur additional indebtedness,
issue capital stock of Subsidiary Guarantors, pay dividends or make other
restricted payments, incur liens, enter into certain transactions with
affiliates, enter into certain mergers or consolidations or sell all or
substantially all of the assets of the Company and its subsidiaries.
CREDIT AGREEMENT
In March 1998, simultaneously with the issuance of the Notes and the
acquisition of Sea Mar, the Company executed an amendment to its three-year
$130 million three-year syndicated bank credit agreement (the "Credit
Agreement") to provide for maximum borrowings of up to $180 million, of which
amount up to $25 million may be used to support letters of credit. At September
30, 1999, the Company had drawn $45.0 million in cash under the Credit
Agreement, and an additional $6.6 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 1995 acquisition of Golden
Pacific Corp.
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 l.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. Based upon the
Company's leverage ratio at September 30, 1999, the applicable Eurodollar margin
will be 1.75% for borrowings during the fourth quarter of 1999. 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. The lenders
under the Credit Agreement have agreed to waive compliance with the maximum
leverage ratio provided for in the Credit Agreement for the quarter ended
September 30, 1999. The Credit Agreement is guaranteed on an unsecured basis by
substantially all of the Company's domestic subsidiaries. Advances under the
Credit Agreement are secured by a pledge of 66% of the capital stock of certain
of the Company's foreign subsidiaries.
9
<PAGE> 10
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. OPERATING SEGMENTS
The Company operates in only one business segment - the oilfield services
industry. Within this segment, the Company conducts business in the following
distinct geographic markets or reportable operating segments: domestic onshore,
divided into two separate geographic divisions - the Central division
(principally Texas and Oklahoma) and the California division; Gulf of Mexico
offshore; Offshore support vessels; International and Alaska. The following
table presents certain financial information of the Company for the nine months
ended September 30, 1999 and 1998 by operating segment.
<TABLE>
<CAPTION>
DOMESTIC ONSHORE GULF OFFSHORE
---------------------- OF MEXICO SUPPORT
CENTRAL CALIFORNIA OFFSHORE VESSELS(a) INTERNATIONAL ALASKA CORPORATE TOTAL
--------- ---------- --------- ---------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
- -----------------------
Revenues .............. $ 78,502 $ 63,158 $ 26,455 $ 15,891 $ 29,594 $ 23,037 $ -- $ 236,637
Net income (loss) ..... (4,052) 2,688 (1,049) (3,013) 12,078 5,491 (15,864) (3,721)
Total assets .......... 96,513 44,828 79,445 176,679 138,738 72,523 54,944 663,670
1998
- -----------------------
Revenues .............. $ 132,058 $ 70,634 $ 59,915 $ 27,694 $ 44,983 $ 25,614 $ -- $ 360,898
Net income (loss) ..... 3,754 2,893 6,575 6,749 8,619 3,298 (11,477) 20,411
Total assets .......... 118,291 53,381 89,840 162,186 139,565 61,544 40,347 665,154
</TABLE>
- -------------
(a) On March 31, 1998, the Company acquired all of the outstanding capital
stock of Sea Mar, Inc. ("Sea Mar"), a privately-owned Louisiana-based
offshore support vessel company with operations primarily in the Gulf of
Mexico.
7. ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which will delay the effective date of SFAS 133 to fiscal
years beginning after June 15, 2000. The Company is still in the process of
evaluating what effect, if any, SFAS 133 will have on the Company's financial
statements. The Company will adopt this statement no later than January 1, 2001.
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.
10
<PAGE> 11
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, 1999
-----------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .............................. $ -- $ 73,949 $ 8,581 $ -- $ 82,530
Earnings Attributable to Unconsolidated
Affiliates ......................... -- 782 1,176 -- 1,958
------------ ------------ ------------ ------------ ------------
Total ........................ -- 74,731 9,757 -- 84,488
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Operating expenses ................. -- 55,986 3,854 -- 59,840
Selling, general and administrative
expenses ......................... 1,281 10,844 895 -- 13,020
Depreciation and amortization ...... -- 9,495 2,071 (7) 11,559
------------ ------------ ------------ ------------ ------------
Total ........................ 1,281 76,325 6,820 (7) 84,419
------------ ------------ ------------ ------------ ------------
Other Income (Expense) - Net .......... -- 600 285 -- 885
Interest Expense ...................... 3,359 1,201 52 -- 4,612
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes and
Equity in Earnings of Consolidated
Subsidiaries ....................... (4,640) (2,195) 3,170 7 (3,658)
Income Tax Provision (Credit) ......... (1,624) (425) 764 3 (1,282)
Equity in Earnings of Consolidated
Subsidiaries ....................... 640 2,406 -- (3,046) --
------------ ------------ ------------ ------------ ------------
Net Income (Loss) ..................... $ (2,376) $ 636 $ 2,406 $ (3,042) $ (2,376)
============ ============ ============ ============ ============
</TABLE>
11
<PAGE> 12
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, 1999
-----------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues .............................. $ -- $ 207,692 $ 28,945 $ -- $ 236,637
Earnings Attributable to Unconsolidated
Affiliates ......................... -- 3,553 3,476 -- 7,029
------------ ------------ ------------ ------------ ------------
Total ........................ -- 211,245 32,421 -- 243,666
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Operating expenses ................. -- 158,062 12,085 -- 170,147
Selling, general and administrative
expenses ......................... 3,423 34,148 2,103 -- 39,674
Depreciation and amortization ...... -- 28,149 6,209 (21) 34,337
------------ ------------ ------------ ------------ ------------
Total ........................ 3,423 220,359 20,397 (21) 244,158
------------ ------------ ------------ ------------ ------------
Other Income (Expense) - Net .......... -- 5,451 411 -- 5,862
Interest Expense ...................... 10,078 2,909 410 -- 13,397
------------ ------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes and
Equity in Earnings of Consolidated
Subsidiaries ....................... (13,501) (6,572) 12,025 21 (8,027)
Income Tax Provision (Credit) ......... (4,725) (1,463) 1,874 8 (4,306)
Equity in Earnings of Consolidated
Subsidiaries ....................... 5,055 10,151 -- (15,206) --
------------ ------------ ------------ ------------ ------------
Net Income (Loss) ..................... $ (3,721) $ 5,042 $ 10,151 $ (15,193) $ (3,721)
============ ============ ============ ============ ============
</TABLE>
12
<PAGE> 13
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, 1999
-----------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Cash Flows Provided by (Used for)
Operating Activities ..................... $ (10,108) $ 5,853 $ 10,858 $ (1) $ 6,602
------------ ------------ ------------ ------------ ------------
Investing Activities:
Property additions .......................... -- (52,990) (1,523) -- (54,513)
Expenditures for acquisition, including
acquisition costs, less cash acquired .... -- (2,881) -- -- (2,881)
Expenditures for drydocking costs ........... -- (465) -- -- (465)
Proceeds from disposition of property,
plant and equipment ...................... -- 1,415 25 -- 1,440
Other - net ................................. -- (152) 19 -- (133)
------------ ------------ ------------ ------------ ------------
Net Cash Flows Used for Investing
Activities ............................... -- (55,073) (1,479) -- (56,552)
------------ ------------ ------------ ------------ ------------
Financing Activities:
Proceeds from long-term debt ................ -- 50,000 -- -- 50,000
Principal payments on long-term debt ........ -- (15,625) -- -- (15,625)
Payment of debt financing costs ............. -- (105) -- -- (105)
Proceeds from exercise of stock options ..... 248 -- -- -- 248
Payments from (advances to) consolidated
subsidiaries, net ........................ 9,860 (1,033) (8,828) 1 --
------------ ------------ ------------ ------------ ------------
Net Cash Flows Provided by (Used for)
Financing Activities ..................... 10,108 33,237 (8,828) 1 34,518
------------ ------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents .............................. -- (15,983) 551 -- (15,432)
Cash and Cash Equivalents at January 1, ..... 70 31,774 1,486 -- 33,330
------------ ------------ ------------ ------------ ------------
Cash and Cash Equivalents at September 30,... $ 70 $ 15,791 $ 2,037 $ -- $ 17,898
============ ============ ============ ============ ============
</TABLE>
13
<PAGE> 14
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, 1999
----------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................ $ 70 $ 15,791 $ 2,037 $ -- $ 17,898
Restricted cash .......................... -- 1,500 -- -- 1,500
Accounts and notes receivable ............ 11,651 53,528 6,777 -- 71,956
Inventories .............................. -- 3,838 10,615 -- 14,453
Deferred income tax asset ................ 201 7,032 1,311 111 8,655
Other current assets ..................... 492 9,899 2,346 -- 12,737
------------ ------------ ------------- ------------ ------------
Total current assets ............... 12,414 91,588 23,086 111 127,199
Property, Plant and Equipment - Net ......... -- 354,945 71,561 (307) 426,199
Investment in Consolidated Subsidiaries ..... 88,121 54,510 -- (142,631) --
Investment in and Noncurrent Receivables
from Unconsolidated Affiliates ........... -- 31,428 -- -- 31,428
Goodwill, net ............................... -- 59,058 -- -- 59,058
Vessel Construction Deposits ................ -- 10,965 -- -- 10,965
Deferred Costs .............................. 3,633 3,654 -- -- 7,287
Noncurrent Receivables and Other Assets ..... -- 1,524 10 -- 1,534
------------ ------------ ------------- ------------ ------------
Total .............................. $ 104,168 $ 607,672 $ 94,657 $ (142,827) $ 663,670
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ........ $ -- $ 625 $ -- $ -- $ 625
Accounts payable ......................... -- 13,242 945 -- 14,187
Payable (receivable) to (from)
Consolidated Subsidiaries .............. (229,922) 208,459 21,694 (231) --
Other current liabilities ................ 8,432 37,722 6,198 (4) 52,348
------------ ------------ ------------- ------------ ------------
Total current liabilities .......... (221,490) 260,048 28,837 (235) 67,160
Long-Term Debt .............................. 150,000 57,222 -- -- 207,222
Long-Term Payable (Receivable) to (from)
Consolidated Subsidiaries ................ (111,595) 108,967 2,628 -- --
Deferred Income Taxes ....................... (4,787) 54,506 7,156 8 56,883
Other Liabilities ........................... -- 39,162 1,525 -- 40,687
Shareholders' Equity:
Common stock ............................. 235,836 1 500 (501) 235,836
Paid-in capital .......................... -- 12,399 18,619 (31,018) --
Retained earnings ........................ 56,316 75,689 35,392 (111,081) 56,316
Unearned compensation - restricted stock . (112) -- -- -- (112)
Cumulative foreign currency translation
adjustments ............................ -- (322) -- -- (322)
------------ ------------ ------------- ------------ ------------
Total shareholders' equity ......... 292,040 87,767 54,511 (142,600) 291,718
------------ ------------ ------------- ------------ ------------
Total .............................. $ 104,168 $ 607,672 $ 94,657 $ (142,827) $ 663,670
============ ============ ============ ============ ============
</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>
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>
15
<PAGE> 16
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>
16
<PAGE> 17
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 acquisition, 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)
Payment 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 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>
17
<PAGE> 18
POOL ENERGY SERVICES CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
POOL ENERGY SERVICES CO.
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PESCO GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................. $ 70 $ 31,774 $ 1,486 $ -- $ 33,330
Restricted cash ........................... -- 1,500 -- -- 1,500
Accounts and notes receivable ............. -- 59,239 11,611 -- 70,850
Inventories ............................... -- 4,552 11,290 -- 15,842
Deferred income tax asset ................. 131 7,004 1,311 133 8,579
Other current assets ...................... 511 8,424 961 -- 9,896
------------ ------------ ------------- ------------ ------------
Total current assets ................ 712 112,493 26,659 133 139,997
Property, Plant and Equipment - Net .......... -- 328,760 77,308 (328) 405,740
Vessel Construction Deposits ................. -- 18,275 -- -- 18,275
Investment in Consolidated Subsidiaries ...... 83,066 44,360 -- (127,426) --
Investment in and Noncurrent Receivables
from Unconsolidated Affiliates ............ -- 28,027 -- -- 28,027
Goodwill, net ................................ -- 60,124 -- -- 60,124
Deferred Costs ............................... 3,990 5,684 -- -- 9,674
Noncurrent Receivables and Other Assets ...... -- 2,284 18 -- 2,302
------------ ------------ ------------- ------------ ------------
Total ............................... $ 87,768 $ 600,007 $ 103,985 $ (127,621) $ 664,139
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ......... $ -- $ 625 $ -- $ -- $ 625
Accounts payable .......................... -- 22,782 2,481 -- 25,263
Payable (receivable) to (from)
consolidated subsidiaries ............... (236,391) 210,662 25,961 (232) --
Other current liabilities ................. (4,384) 51,758 16,544 14 63,932
------------ ------------ ------------- ------------ ------------
Total current liabilities ........... (240,775) 285,827 44,986 (218) 89,820
Long-Term Debt ............................... 150,000 22,847 -- -- 172,847
Long-Term Payable (Receivable) to (from)
Consolidated Subsidiaries ................. (111,595) 104,406 7,189 -- --
Deferred Income Taxes ........................ (1,632) 57,129 5,819 4 61,320
Other Liabilities ............................ -- 47,073 1,631 -- 48,704
Shareholders' Equity:
Common stock .............................. 232,023 1 500 (501) 232,023
Paid-in capital ........................... -- 12,399 18,619 (31,018) --
Retained earnings ......................... 60,037 70,647 25,241 (95,888) 60,037
Unearned compensation - restricted stock... (290) -- -- -- (290)
Cumulative foreign currency translation
adjustments ............................. -- (322) -- -- (322)
------------ ------------ ------------- ------------ ------------
Total shareholders' equity .......... 291,770 82,725 44,360 (127,407) 291,448
------------ ------------ ------------- ------------ ------------
Total ............................... $ 87,768 $ 600,007 $ 103,985 $ (127,621) $ 664,139
============ ============ ============ ============ ============
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MERGER AGREEMENT
The Merger Agreement entered into on January 10, 1999 among the Company,
Nabors and Merger Sub provides, subject to certain conditions set forth therein,
that Merger Sub will be merged with and into the Company, with the Company
continuing as the surviving corporation and a wholly owned subsidiary of Nabors.
At the effective time of the Merger, each share of Pool Common Stock issued and
outstanding (excluding any treasury shares held by the Company and shares held
by Nabors or any of it subsidiaries), including the associated common stock
purchase rights, if any, outstanding at the effective time of the Merger, is to
be converted into the right to receive 1.025 shares of Nabors Common Stock. The
Merger Agreement provides for certain conditions to the closing of the Merger,
including, among other things, the approval of the holders of at least
two-thirds of the Pool Common Stock, the registration with the Securities and
Exchange Commission of the shares of Nabors Common Stock to be issued in
connection with the Merger, the expiration or termination of the applicable
waiting period under the HSR Act and the reaching of an agreement with the
Company's Saudi Arabian joint venture partner with respect to the post-merger
operations of the Company's Saudi Arabian joint venture and Nabors' existing
Saudi Arabian business. The applicable waiting period under the HSR Act has
expired, the registration statement with respect to the Nabors shares became
effective on August 9, 1999 and the Merger was approved by the holders of more
than the requisite two-thirds of the Pool Common Stock on September 28, 1999.
Final agreement has not yet been reached with regard to the Saudi Agreement, but
the Company expects this condition to be satisfied. Although the Merger
Agreement provides that it can be terminated by either party if closing of the
Merger did not occur by October 1, 1999, both parties are continuing to use
their best efforts to effect satisfaction of the conditions and close as
promptly as practicable. However, there can be no assurances as to whether or
when the transaction will be completed.
SEA MAR ACQUISITION
The Company's acquisition on March 31, 1998 of 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, involved
purchase consideration at closing of approximately $76.0 million in cash and
1,538,462 shares of the Company's common stock. During the first quarter of
1999, the Company paid additional cash consideration of approximately $2.9
million as a result of Sea Mar's financial performance for the fiscal year ended
December 31, 1998. The Company is also obligated to pay additional cash
consideration contingent upon Sea Mar's financial performance for the fiscal
year ending December 31, 1999, up to a maximum of $10 million, although the
latest projection of Sea Mar's 1999 financial performance indicates that no
additional payment should be due.
As a result of the acquisition of Sea Mar, the Company operates a
diversified fleet of offshore support vessels in the Gulf of Mexico. At the time
of its acquisition, Sea Mar had a contract with a marine shipbuilder for the
construction of ten offshore support vessels at an estimated aggregate cost of
$78.5 million, net of deposits. Four of these new vessels were delivered during
the first nine months of 1999. The remaining six vessels are scheduled to be
delivered between the last quarter of 1999 and late 2000. The Company
anticipates that the expenditures for these vessels will be financed by
internally generated funds and other financing arrangements as needed.
19
<PAGE> 20
RESULTS OF OPERATIONS - QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
The Company incurred a net loss of $2.4 million in the third quarter of
1999, including after tax Merger-related expenses of $0.8 million, compared to
net income of $5.4 million generated in the third quarter of 1998. The average
crude oil price for the third quarter of 1999 was approximately 53% higher than
in the third quarter of 1998 and the average domestic natural gas price was 29%
higher comparing the same periods. Results from each of the Company's operating
segments for the third quarter 1999 were unfavorable to reported results for the
same period in 1998 despite the higher product prices, except in Alaska where
third quarter earnings in 1999 approximated third quarter earnings in 1998.
Overall, the Company's utilization and rates were down for the period due to the
lingering effect on the demand for the Company's services resulting from
depressed oil prices in 1998 and early 1999.
Revenues. Revenues were $82.5 million in the third quarter of 1999, a 28%
decrease from revenues of $115.2 million in the third quarter of 1998. Each of
the Company's operating segments contributed to the $32.7 million decline.
Domestic onshore well-servicing and production services revenues declined
$10.1 million or 17% in the third quarter of 1999 from the corresponding quarter
of 1998. Domestic onshore rig utilization dropped from 44% in 1998 to 39% in
1999 and rig hours declined approximately 39,000, from 268,000 in the third
quarter of 1998 to 229,000 in 1999. Rig rates also decreased by about 1% period
over period. The Company's truck and frac tank activity levels each declined by
approximately 23%. In the Gulf of Mexico, revenue of $11.4 million for the third
quarter of 1999 was 33% lower than that in the comparable period of 1998 with
rig utilization of 39% in 1999 compared to 55% in 1998. Average rates for the
offshore rigs in the third quarter of 1999 were 10% below the rates in the
comparable 1998 period. The Company's offshore support vessel operation, Sea
Mar, had revenue of $5.4 million during the third quarter of 1999 compared to
$13.9 million during third quarter of 1998. Vessel utilization was approximately
49% and 85% for the respective periods. Average day rates for the vessels
dropped approximately 42% comparing quarter to quarter.
Internationally, revenues were down from $16.4 million for the quarter
ended 1998 to $8.7 million for the same period in 1999. Rig utilization in the
third quarter of 1999 was 42% compared to 55% in the third quarter of 1998.
Lower revenues resulted from reduced mobilization revenue generated by the
platform workover rig operating offshore Australia, completion of the contract
for the platform drilling rig offshore Australia and decreased utilization in
most of the Company's other international operating locations except in Pakistan
where the three rigs in country were fully utilized during the third quarter of
1999. In Alaska, quarterly revenue of $5.8 million in 1999 represented a 13%
decline from revenue of the comparable period in 1998. The decline resulted
primarily from lower rig utilization, 33% in 1999 compared to 50% in 1998, as
well as from reduced revenues from labor contracts.
Earnings Attributable to Unconsolidated Affiliates. Earnings attributable
to unconsolidated affiliates were $2.0 million in the third quarter of 1999
compared to earnings of $1.6 million in the third quarter of 1998. The $0.4
million improvement in 1999 resulted from a $0.1 million increase by Pool
Arabia, Ltd. ("Pool Arabia"), a $0.2 million improvement by Pool International
Argentina S.A. ("PIASA") and a $0.1 million increase by the Company's joint
venture in Oman. The increase in earnings from Pool Arabia was due primarily to
higher income earned from Pool Arabia's operation of two rigs leased from the
Company. The loss attributable to the Company's 51% share of PIASA was less in
the third quarter of 1999 than in the comparable period of 1998 due to the
implementation of a cost reduction program in Argentina.
Costs and Expenses. The Company's costs and expenses were $84.4 million in
the third quarter of 1999, a 19% reduction compared to costs and expenses of
$103.5 million in the corresponding quarter of 1998. Generally, costs and
expenses declined due to the company-wide drop in equipment utilization
experienced in 1999, however, the third quarter of 1999 included approximately
$1.3 million of Merger-related expenses. Depreciation expense increased in 1999
primarily due to the additional offshore support vessels delivered this year as
well as the 1998 rig upgrade in Alaska.
Other Income - Net. Other income - net was $0.9 million in the third
quarter of 1999 and includes a $0.4 million gain from an insurance recovery
related to the loss of a ball mill in Alaska.
20
<PAGE> 21
Interest Expense. Interest expense in the third quarter of 1999 was $4.6
million, $0.3 million higher than in the corresponding period of 1998, primarily
due to higher borrowings under the Company's Credit Agreement during the 1999
period.
Income Taxes. The Company recorded an income tax credit of $1.3 million on
a loss before income taxes of $3.7 million in the third quarter of 1999,
compared to income tax expense of $4.2 million on income before income taxes of
$9.5 million in the third quarter of 1998. The decrease in income tax expense in
the third quarter of 1999, compared to the third quarter of 1998, was primarily
due to lower pre-tax income in the third quarter of 1999, 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 tax jurisdictions.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The Company incurred a net loss of $3.7 million in the first nine months of
1999, including after tax Merger-related expenses of $1.9 million, compared with
net income of $20.4 million generated during the first nine months of 1998.
Except for International and Alaska operations, results from each of the
Company's operating segments for the nine month period in 1999 were unfavorable
to reported results for the same period in 1998. Results from international
operations were improved primarily due to higher earnings attributable to Pool
Arabia and from Alaska operations due to the receipt of a payment related to the
early termination of a drilling contract. Overall the Company's utilization and
rates were down due to the effect on the demand for the Company's services
resulting from depressed oil prices which bottomed out in the last quarter of
1998 and, although steadily rising throughout the first nine months of 1999,
have negatively impacted the Company's earnings for the period.
Revenues. Revenues were $236.6 million in the first nine months of 1999, a
34% decrease compared to revenues of $360.9 million in the first nine months of
1998. Each of the Company's operating segments contributed to the $124.3 million
decline.
Domestic onshore well-servicing and production services revenues decreased
$61.0 million or 30% in the first nine months of 1999 from the corresponding
period of 1998 due to the lingering negative effect of low oil and gas prices.
Domestic onshore rig utilization was 37% in the first nine months of 1999,
compared to 49% in the first nine months of 1998. Domestic onshore rig hours
decreased from approximately 896,000 in 1998 to 648,000 in 1999 although rates
remained relatively flat. Utilization of the Company's trucks and frac tanks
also declined by approximately 27% and 52%, respectively. Gulf of Mexico
workover and drilling revenues decreased from $59.9 million in 1998 to $26.5
million in 1999. Rig utilization for the offshore rig fleet declined from 63% in
the first nine months of 1998 to 35% in the comparable period of 1999, while
average day rates decreased 25% comparing the same periods. Sea Mar, acquired on
March 31, 1998, had revenues of $15.9 million for the first nine months of 1999
versus $27.7 million for the period from acquisition to September 30, 1998.
International operations revenues decreased to $29.6 million for the first
nine months of 1999 compared to $45.0 million in the 1998 period. The $15.4
million revenue decline was attributable to a reduction in utilization of rigs
in Ecuador, Guatemala, Oman, and Pakistan, reduced mobilization revenue
generated by the platform workover rig operating offshore Australia and the
completion of the contract for the platform drilling rig offshore Australia. In
Alaska, revenue of $23.0 million for the first nine months of 1999 represented a
$2.6 million reduction from revenues earned in the 1998 period. Revenues in
Alaska declined due to lower utilization of its rigs and fewer revenues from
labor contracts, but these decreases were partially offset by revenue received
during the first quarter of 1999 related to the early termination of a drilling
contract.
Earnings Attributable to Unconsolidated Affiliates. Earnings attributable
to unconsolidated affiliates were $7.0 million in the first nine months of 1999,
compared to $2.8 million in the first nine months of 1998. Earnings attributable
to Pool Arabia increased $3.5 million from the first nine months of 1998 to $7.7
million in the first nine months of 1999, primarily due to income earned from
Pool Arabia's operation of two rigs leased from the Company and the reversal of
$2.2 million of excess deferred foreign income tax reserves related to the 1996
tax year, which has now been audited by the relevant foreign tax authorities.
The loss attributable to PIASA was $0.7 million less in the first nine months of
1999 than in the comparable period of 1998 due to the implementation of a cost
reduction program in Argentina.
21
<PAGE> 22
Costs and Expenses. The Company's costs and expenses were $244.2 million in
the first nine months of 1999, a 24% decrease compared to costs and expenses of
$319.7 million in the corresponding period of 1998. Generally, costs and
expenses declined due to the Company-wide drop in equipment utilization
experienced in 1999. However, the decline in 1999 was partially offset by
approximately $2.9 million of Merger-related expenses and the inclusion of a
full nine months of Sea Mar expenses compared to the 1998 period that included
only six months of Sea Mar costs.
Other Income - Net. Other income - net was $5.9 million during the first
nine months of 1999 chiefly due to a $4.0 million settlement related to the 1997
loss of a rig in the Gulf of Mexico and a $0.4 million gain from an insurance
recovery related to the loss of a ball mill in Alaska.
Interest Expense. Interest expense for the first nine months of 1999 was
$13.4 million. The $3.0 million increase over the comparable period of 1998
primarily resulted from interest expense related to the $150 million Notes
issued in March 1998 but was also due to higher borrowings under the Company's
Credit Agreement in the 1999 period.
Income Taxes. The Company recorded an income tax credit of $4.3 million in
1999 on a loss before income taxes of $8.0 million in the first nine months of
1999, compared to income tax expense of $14.3 million on income before income
taxes of $34.7 million in the first nine months of 1998. The decrease in income
tax expense in the first nine months of 1999, compared to the first nine months
of 1998, was primarily due to lower pre-tax income in the first nine months of
1999, as a result of the factors described above, and the $1.3 million reversal
of overaccrued deferred foreign income tax liabilities. 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 tax
jurisdictions.
FINANCIAL CONDITION AND LIQUIDITY
Cash Flows. The Company had cash and cash equivalents of $17.9 million at
September 30, 1999 compared to $33.3 million at December 31, 1998. Working
capital was $60.0 million and $50.2 million at September 30, 1999 and December
31, 1998, respectively. The Company used a net $56.6 million for investing
activities in the first nine months of 1999, primarily for capital expenditures
of $54.5 million, including $32.5 million for the balance of the purchase of
four newly-constructed offshore support vessels, as well as $2.9 million of
additional cash consideration paid as a result of Sea Mar's financial
performance for the fiscal year ended December 31, 1998. 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 and $65.2 million, net of
cash acquired, for the purchase of Sea Mar.
$150 Million Senior Subordinated Notes. In March 1998, the Company issued
8 5/8% Notes in the aggregate principal amount of $150 million and used the net
proceeds from the sale thereof to fund the cash portion of the Sea Mar purchase,
to repay the existing debt of Sea Mar and to reduce the outstanding balance
under the Company's Credit Agreement.
The Notes are general unsecured obligations of the Company subordinated in
right of payment to all existing and future senior indebtedness of the Company
and are unconditionally guaranteed, jointly and severally, by each of the
Subsidiary Guarantors. The Notes contain certain covenants that, among other
things, limit the ability of the Company and 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.
$180 Million Credit Agreement. In March 1998, simultaneously with the
issuance of the Notes and the acquisition of Sea Mar, the Company executed an
amendment to its three-year $130 million Credit Agreement to provide for maximum
borrowings of up to $180 million, of which amount up to $25 million may be used
to support letters of credit. At September 30, 1999, the Company had drawn $45.0
million in cash under the Credit Agreement, and an additional $6.6 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 1995
acquisition of Golden Pacific Corp.
22
<PAGE> 23
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. Based upon the
Company's leverage ratio at September 30, 1999, the applicable Eurodollar margin
will be 1.75% for borrowings during the fourth quarter of 1999. 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. The lenders
under the Credit Agreement have agreed to waive compliance with the maximum
leverage ratio provided for in the Credit Agreement for the quarter ended
September 30, 1999. The Credit Agreement is guaranteed on an unsecured basis by
substantially all of the Company's domestic subsidiaries. Advances under the
Credit Agreement are secured by a pledge of 66% of the capital stock of certain
of the Company's foreign subsidiaries. During the first nine months of 1999, the
Company drew $50.0 million in cash and made payments of $15.0 million to reduce
borrowings under the Credit Agreement and made a $0.6 million scheduled
principal payment on long-term debt. During the first nine months of 1998, the
Company made payments of $90.8 million to reduce borrowings under the Credit
Agreement, repaid Sea Mar's existing debt of $15.7 million and made $1.1 million
of scheduled principal payments on long-term debt.
Sale and Leaseback. In December 1998, the Company entered into sale and
leaseback agreements with a leasing company with respect to two offshore jackup
rigs. These rigs had been leased by the Company for the previous five years and
were purchased by the Company for $2.3 million in December 1998 through the
exercise of a purchase option. The rigs were sold to the new leasing company for
$20.0 million in cash. The current leases for the two rigs provide for an
aggregate annual lease rate of approximately $2.7 million through December 2004.
Capital Expenditures. The Company anticipates that 1999 capital
expenditures will consist of (i) approximately $12 million for maintenance of
its existing rig and offshore support vessel fleet, (ii) approximately $6
million to complete construction of a new Arctic drilling rig, Rig 9, in Alaska
and (iii) approximately $41 million for the payment of the balance of the
purchase price of five newly constructed offshore support vessels for the Sea
Mar operation. The Company anticipates that these expenditures will be financed
by internally generated funds, borrowings under the Credit Agreement and other
financing arrangements as needed. Except for the foregoing, the Company's
capital spending generally has been suspended pending consummation of the
Merger.
OTHER MATTERS
Market Outlook. Historically, the demand for the Company's services has had
a strong correlation with the fluctuations in oil and natural gas prices.
Falling oil and gas prices, which began in late 1997 and bottomed out in
December 1998, have negatively affected the activity levels and financial
results of the Company, particularly since mid-1998. With the 1999 upward trend
of oil and gas prices, the Company is optimistic about a recovery of the demand
for its services and improvements in its rates, especially as we enter the year
2000. The Company remains confident that market conditions will improve over the
long term as demand and supply become more in balance and is optimistic about
its long-term outlook.
Accounting Standards. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. In June 1999, the FASB issued SFAS 137, "Accounting for
Derivative Investments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" which will delay the effective date of SFAS 133 to
fiscal years beginning after June 15, 2000. The Company is still in the process
of evaluating what effect, if any, SFAS 133 will have on the Company's financial
statements. The Company will adopt this statement no later than January 1, 2001.
23
<PAGE> 24
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 or Y2K 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 Y2K issue. An assessment of the critical financial and
operational systems has been made and the remediation of these systems is
approximately 95% complete. The testing phase of the critical systems is 90%
complete, and these systems are expected to be Year 2000 compliant by November
30, 1999. The inventory, assessment, modification and testing of the smaller
less critical financial and operational systems, many located internationally,
have been substantially completed. The assessment of systems embedded in the
Company's buildings, equipment and other infrastructures has been completed. To
date, there has been no discovery of a significant non-compliant embedded
system. As of September 30, 1999, the Company has spent approximately $0.5
million, exclusive of internal costs, on its Y2K initiatives, primarily for
incremental software purchases and outside consulting. The Company does not
separately track internal Y2K costs, which are largely salaries and benefits of
Company personnel working on the project. The Company expects the incremental
cost of full implementation of its Year 2000 plan to be approximately $0.6
million, exclusive of internal costs.
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 any possible 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 parties are expected to be complete by November 30, 1999.
Development of contingency plans to protect the Company from Year
2000-related interruptions are in process and are expected to be complete by
November 30, 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 November
30, 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 disruptions, 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 related 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.
24
<PAGE> 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion of the Company's market sensitive financial
instruments contains "forward-looking statements." All items described are
non-trading.
INTEREST RATE RISK
There have been no material changes in the Company's market risk during the
nine months ended September 30, 1999. The Company currently has minimal interest
rate risk since a majority of the Company's long-term debt is fixed-rate and,
therefore, does not expose the Company to risk of earnings loss due to changes
in market interest rates. The Company is, however, subject to the risk of
fluctuating interest rates with respect to borrowings under the Credit
Agreement, since it provides for interest at variable rates.
<TABLE>
<CAPTION>
FAIR VALUE
09/30/99
-------------
(IN MILLIONS)
LONG-TERM DEBT
<S> <C>
8 5/8% Senior Subordinated Notes Due 2008, Series B
Fixed interest rate - 8 5/8% .................................................... $148.5
9% Notes (DA&S)
Fixed interest rate - 9% ........................................................ $10.2
10% Notes (GPC)
Fixed interest rate - 10% ....................................................... $3.5
Revolving Credit Agreement Loans
Variable interest rate - 8.25% at September 30, 1999 ............................ $45.0
</TABLE>
FOREIGN EXCHANGE RISK
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates to the extent that transactions are
not denominated in U.S. dollars. Wherever possible, the Company denominates its
contracts in U.S. dollars to mitigate the exposure to fluctuations in foreign
currencies. The Company uses forward exchange contracts as economic hedges of
exposed net investments in foreign entities in which that exposure exceeds $0.2
million and for which contracts in the appropriate currency are available. The
Company's foreign exchange contracts do not subject the Company to the risk of
changing rate movements because gains and losses on these contracts offset gains
and losses on the exposed investments being hedged. The forward exchange
contracts generally have maturities which do not exceed 31 days.
25
<PAGE> 26
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS
On September 28, 1999, the Company held a Special Meeting of Shareholders
at which shareholders were given the opportunity to approve the Merger. The
Merger received 17,050,283 affirmative votes, 65,806 negative votes (including
zero Broker non-votes), and there were 16,374 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DOCUMENT
- ---------- --------
27(*) - Financial Data Schedule
- ------
(*) Filed herewith
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during the
quarter ended September 30, 1999.
26
<PAGE> 27
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, 1999 /s/ E. J. SPILLARD
------------------------------- -------------------------------------
(Date) E. J. Spillard
Senior Vice President, Finance
(principal financial officer)
NOVEMBER 12, 1999 /s/ B. G. GORDON
------------------------------- -------------------------------------
(Date) B. G. Gordon
Controller
(principal accounting officer)
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,898
<SECURITIES> 0
<RECEIVABLES> 56,807
<ALLOWANCES> 911
<INVENTORY> 14,453
<CURRENT-ASSETS> 127,199
<PP&E> 597,095
<DEPRECIATION> 170,896
<TOTAL-ASSETS> 663,670
<CURRENT-LIABILITIES> 67,160
<BONDS> 207,222
0
0
<COMMON> 235,836
<OTHER-SE> 55,882
<TOTAL-LIABILITY-AND-EQUITY> 663,670
<SALES> 0
<TOTAL-REVENUES> 236,637
<CGS> 0
<TOTAL-COSTS> 170,147
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 323
<INTEREST-EXPENSE> 13,397
<INCOME-PRETAX> (8,027)
<INCOME-TAX> (4,306)
<INCOME-CONTINUING> (3,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,721)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
