1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 0-7265
ENERGY VENTURES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 04-2515019
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Post Oak Park, Houston, Texas 77027-3415
(Address of principal executive offices) (Zip Code)
(713) 297-8400
(Registrant's telephone number, include area code)
NONE
(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 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
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Title of Class Outstanding at August 6, 1996
Common Stock, $1.00 Par Value 22,251,287
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1996 1995
--------- ------------
ASSETS (in thousands)
CURRENT ASSETS:
Cash and Cash Equivalents .............................. $ 11,103 $ 4,517
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $864,000 at June 30, 1996 and $615,000
at December 31, 1995 ............................. 105,533 102,763
Inventories ............................................ 130,118 117,936
Materials and Supplies ................................. 10,815 10,042
Prepaid Expenses and Other ............................. 19,897 14,316
--------- ---------
277,466 249,574
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST,
NET OF ACCUMULATED DEPRECIATION ........................ 205,215 192,702
EXCESS OF COST OVER FAIR VALUE OF NET TANGIBLE
ASSETS OF BUSINESSES ACQUIRED, NET ..................... 47,913 37,398
OTHER ASSETS ....................................................... 20,108 11,386
--------- ---------
$ 550,702 $ 491,060
========= =========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-Term Borrowings, Primarily Under Revolving Lines
of Credit ........................................ $ 44,180 $ 4,826
Current Maturities of Long-Term Debt ................... 4,156 5,894
Accounts Payable ....................................... 53,592 53,703
Other Accrued Liabilities .............................. 39,400 32,693
--------- ---------
141,328 97,116
--------- ---------
LONG-TERM DEBT ..................................................... 123,751 126,849
DEFERRED INCOME TAXES, NET ......................................... 34,708 32,926
OTHER LIABILITIES .................................................. 5,478 6,103
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Common Stock ........................................... 18,868 18,522
Capital in Excess of Par Value ......................... 167,493 157,953
Retained Earnings ...................................... 69,577 60,167
Cumulative Foreign Currency Translation Adjustment ..... (8,335) (6,915)
Treasury Stock, at Cost ................................ (2,166) (1,661)
--------- ---------
245,437 228,066
--------- ---------
$ 550,702 $ 491,060
========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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ENERGY VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ---------- -----------
(In thousands, except per share amounts)
REVENUES ................................................ $ 119,886 $ 79,747 $ 229,928 $ 152,407
--------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of Sales .................................. 90,403 59,651 173,943 112,806
Selling, General and Administrative Attributable
to Segments ........................... 14,818 11,861 29,186 23,456
Corporate General and Administrative ........... 1,674 1,348 3,038 2,604
--------- -------- --------- ---------
OPERATING INCOME ........................................ 12,991 6,887 23,761 13,541
--------- -------- --------- ---------
OTHER INCOME (EXPENSE):
Interest Expense, Net .......................... (4,409) (4,196) (8,382) (8,161)
Other, Net ..................................... 334 52 223 (7)
--------- -------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE .................. 8,916 2,743 15,602 5,373
PROVISION FOR INCOME TAXES .............................. 3,122 990 5,461 1,989
--------- -------- --------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ...................... 5,794 1,753 10,141 3,384
EXTRAORDINARY CHARGE, NET OF TAXES ...................... (731) -- (731) --
--------- -------- --------- ---------
NET INCOME .............................................. $ 5,063 $ 1,753 $ 9,410 $ 3,384
========= ======== ========= =========
EARNINGS PER SHARE:
Income Before Extraordinary Charge ............. $ 0.31 $ 0.14 $ 0.55 $ 0.27
Extraordinary Charge ........................... (0.04) -- (0.04) --
--------- -------- --------- ---------
Net Income Per Share ........................... $ 0.27 $ 0.14 $ 0.51 $ 0.27
========= ======== ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING ..................... 18,628 12,684 18,525 12,672
========= ======== ========= =========
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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ENERGY VENTURES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
1996 1995
------------ ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................................ $ 9,410 $ 3,384
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Depreciation and Amortization ............................ 12,808 8,697
Oil Country Tubular Ltd. Deposit ......................... (8,000) --
Deferred Income Tax Provision ............................ 732 309
Extraordinary Charge, Net ................................ 731 --
Gain on Sale of Assets ................................... (192) (39)
Provision for Uncollectible Accounts Receivable .......... 420 170
Change in Operating Assets and Liabilities, Net of Effects
of Businesses Acquired ............................ (19,145) (13,227)
-------- --------
Net Cash Used by Operating Activities ........................... (3,236) (706)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of Cash Acquired ....................... (3,740) (4,336)
Capital Expenditures for Property, Plant and Equipment ................ (17,251) (11,739)
Other, Net ............................................................ 1,249 701
-------- --------
Net Cash Used by Investing Activities ........................... (19,742) (15,374)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings Under Revolving Lines of Credit, Net ....................... 39,354 16,751
Repayments on Term Debt ............................................... (7,047) (1,830)
Line of Credit Termination Costs ...................................... (1,125) --
Line of Credit Issuance Costs ......................................... (1,472) --
Other, Net ............................................................ 168 196
-------- --------
Net Cash Provided by Financing Activities ....................... 29,878 15,117
-------- --------
EFFECT OF TRANSLATION ADJUSTMENT ON CASH .......................................... (314) 128
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ...................................................... 6,586 (835)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 4,517 3,144
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 11,103 $ 2,309
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid, Net of Amounts Capitalized ............................. $ 8,242 $ 7,740
Income Taxes Paid, Net of Refunds ..................................... $ 1,531 $ 1,127
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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5
ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
The unaudited consolidated condensed financial statements included
herein have been prepared by Energy Ventures, Inc. (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission. Although
the Company believes that the disclosures in these financial statements are
adequate to make the interim information presented not misleading, certain
information relating to the Company's organization and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles has been condensed or omitted in this Form 10-Q
pursuant to such rules and regulations. These financial statements should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995. The results of operations for the three and six months ended June 30,
1996 are not necessarily indicative of the results expected for the full year.
(2) Inventories
Inventories by category are as follows:
June 30, December 31,
1996 1995
--------- -----------
(in thousands)
Raw materials and components $ 63,727 $ 61,578
Work in process ............ 20,055 17,167
Finished goods ............. 46,336 39,191
-------- --------
$130,118 $117,936
======== ========
Work in process and finished goods inventories include the cost of
materials, labor and plant overhead.
(3) Acquisitions
On May 3, 1996, the Company acquired ENERPRO International, Inc.
("ENERPRO"), a manufacturer of premium threads and thread connections, for
312,714 shares of Common Stock and the assumption of approximately $3.1 million
in indebtedness. The operations of ENERPRO are being combined with the premium
thread operations of the Company's tubular division.
In April 1996, the Company acquired Production Specialties, Inc.
("Production Specialties"), a manufacturer of gas lift equipment, for
approximately $3.1 million.
On June 30, 1995, the Company acquired Prideco, Inc. ("Prideco") in a
transaction which involved the issuance of approximately 2.25 million shares of
Common Stock.
The acquisitions discussed above were accounted for using the purchase
method of accounting, and their results of operations are included in the
Consolidated Condensed Statements of Income from the respective dates of
acquisition.
The allocations of the purchase price to the fair market values of the
net assets acquired in the 1996 acquisitions are based on preliminary estimates
of the fair market value and may be revised when additional information
concerning asset and liability valuations is obtained. The results of operations
related to the acquisitions of Production Specialties and ENERPRO are not
material; therefore, pro forma information is not presented.
5
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ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The following table presents selected unaudited consolidated
financial information for the Company on a pro forma basis assuming the Prideco
acquisition had occurred on January 1, 1995. The pro forma information set forth
below is not necessarily indicative of the results that actually would have been
achieved had the transaction been consummated as of January 1, 1995, or that may
be achieved in the future.
Six Months
Ended June 30, 1995
-------------------
(in thousands, except per
share amount)
Revenues ................................ $181,955
Net Income .............................. $ 4,343
Net Income Per Common Share $ 0.29
(4) Short-Term Borrowings and Lines of Credit
On June 26, 1996, the Company entered into a new $120 million
working capital facility, of which $90 million is designated as a borrowing base
revolving line of credit and up to $30 million is available for working capital
borrowings through December 31, 1996. Borrowings under the revolving line of
credit are subject to certain borrowing base requirements relating to the
Company's accounts receivable and inventory securing the borrowings. The
revolving line of credit extends through June 30, 1999, and borrowings under the
$30 million portion of the facility are amortized over a three year period
beginning June 30, 1997. Borrowings under the facility bear interest at a
variable rate based on a LIBOR option and base rate option dependent on certain
ratios and are secured by the Company's domestic accounts receivables, inventory
and stock of various of the Company's domestic and foreign subsidiaries. The
facility contains customary affirmative and negative covenants relating to
working capital, earnings and net worth. The facility also imposes limitations
on the Company and its subsidiaries' use of funds for future acquisitions, the
incurrence of additional debt and other operational matters and certain
expenditures, as well as prohibitions on the declaration and payment of
dividends by the Company. The Company's new facility replaced the Company's
prior U.S. working capital line of credit, which had higher borrowing costs and
more restrictive operational covenants. In the second quarter of 1996, the
Company incurred an extraordinary charge of $731,000, net of taxes of $394,000,
or $.04 per share, relating to the termination of its prior working capital
facility.
(5) Long-Term Debt
On March 24, 1994, the Company sold pursuant to a private placement
$120 million of 10.25% Senior Notes due 2004. In July 1994, substantially all of
these notes were exchanged for a substantially identical series of 10.25% Senior
Notes due 2004 with semi-annual interest payments in March and September. Both
issues of Senior Notes were issued pursuant to the terms of an Indenture dated
as of March 15, 1994. Certain subsidiaries of the Company have unconditionally
guaranteed the Company's obligations under the Senior Notes. See Note 9.
(6) Contingencies
In August of 1994, the Company received a letter from the United
States Internal Revenue Service ("IRS") proposing to increase the gain
recognized by the Company upon the dissolution in October 1990 of a joint
venture ("COLEVE") with Columbia Gas Development Corporation. In general, the
IRS' proposal seeks payment of a tax liability of approximately $14.1 million
plus accrued interest thereon, and includes $3.4 million of taxes relating to
the proposed disallowance of certain interest deductions taken by the Company
with respect to COLEVE that was the subject of a similar letter received by the
Company in the fourth quarter of 1993. The tax liability with respect to these
matters has been previously provided for as a deferred tax liability in the
Company's consolidated financial statements. The Company disagrees with the IRS'
position and is currently pursuing its rights of administrative review and
appeal and intends to vigorously contest this matter. Although the resolution of
these remaining issues could affect the timing of the payment of previously
accrued tax liabilities and require the use of a portion of its
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ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
available capital, the Company does not believe that the results of the audit or
the ultimate resolution of the IRS' proposed adjustments will have a material
impact on its consolidated results of operations or financial position.
(7) Subsequent Events
In July 1996, the Company completed a public offering of 3,000,000
shares of its Common Stock. The net proceeds of this offering were approximately
$88.4 million. A portion of the funds from the offering were used to finance the
Tubular Corporation of America, Inc. ("TCA") acquisition, including the payment
of approximately $30 million cash for the acquisition and the repayment of debt
of TCA. The remaining proceeds are proposed to be used to (i) acquire the two
barge rigs from Noble Drilling Corporation ("Noble") that are currently
operating in Nigeria for approximately $24.5 million in cash and a $7.5 million
drill pipe credit, (ii) retrofit a barge rig for deployment to Nigeria to work
under a proposed contract with Chevron Nigeria Limited ("Chevron") at a cost of
approximately $9 million and (iii) for general corporate purposes.
On August 5, 1996, the Company acquired TCA for 500,000 shares of
Common Stock, approximately $14.3 million cash, a $650,000 note due January 1997
and assumed debt of approximately $15 million. TCA manufactures premium casing,
which expands the range of the Company's premium tubular products line to add a
broader line of premium casing.
(8) Reclassifications
Certain reclassifications of prior period balances have been made to
conform such amounts to corresponding June 30, 1996 classifications.
7
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ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements
The $120 million Senior Notes which are described in Note 5 are
unconditionally guaranteed on a joint and several basis by certain subsidiaries
of the Company. Accordingly, the following condensed consolidating balance
sheets as of June 30, 1996 and December 31, 1995, and the related condensed
consolidating statements of income for the three and six month periods ended
June 30, 1996 and 1995, and cash flows for the six month periods ended June 30,
1996 and 1995, have been provided. The condensed consolidating financial
statements herein are followed by notes which are an integral part of these
statements.
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 1996
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents .......... $ 6,556 $ 3,733 $ 814 $ -- $ 11,103
Other Current Assets ............... 1,592 215,611 49,160 -- 266,363
--------- --------- --------- --------- --------
8,148 219,344 49,974 -- 277,466
--------- --------- --------- --------- --------
PROPERTY, PLANT AND EQUIPMENT,
AT COST, NET OF ACCUMULATED
DEPRECIATION ....................... 1,052 184,522 19,641 -- 205,215
INTERCOMPANY AND INVESTMENT
IN SUBSIDIARIES, NET ............... 395,150 (179,747) (5,684) (209,719) --
OTHER ASSETS ............................ 4,981 50,699 12,341 -- 68,021
--------- --------- --------- --------- --------
$ 409,331 $ 274,818 $ 76,272 $(209,719) $550,702
========= ========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
CURRENT LIABILITIES:
Short-Term Borrowings .............. $ 40,000 $ -- $ 4,180 $ -- $ 44,180
Current Maturities of Long-Term Debt -- 3,875 281 -- 4,156
Accounts Payable and Other Accrued
Liabilities .................... 4,451 76,367 12,174 -- 92,992
--------- --------- --------- --------- --------
44,451 80,242 16,635 -- 141,328
--------- --------- --------- --------- --------
LONG-TERM DEBT .......................... 120,000 3,199 552 -- 123,751
OTHER LIABILITIES ....................... (557) 19,442 21,301 -- 40,186
--------- --------- --------- --------- --------
STOCKHOLDERS' INVESTMENT ................ 245,437 171,935 37,784 (209,719) 245,437
--------- --------- --------- --------- --------
$ 409,331 $ 274,818 $ 76,272 $(209,719) $550,702
========= ========= ========= ========= ========
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9
ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1995
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents .......... $ 532 $ 2,985 $ 1,000 $ -- $ 4,517
Other Current Assets ............... 1,564 208,342 35,151 -- 245,057
--------- --------- --------- --------- --------
2,096 211,327 36,151 -- 249,574
--------- --------- --------- --------- --------
PROPERTY, PLANT AND EQUIPMENT,
AT COST, NET OF ACCUMULATED
DEPRECIATION ....................... 159 177,945 14,598 -- 192,702
INTERCOMPANY AND INVESTMENT
IN SUBSIDIARIES, NET ............... 342,844 (169,154) 18,417 (192,107) --
OTHER ASSETS ............................ 4,969 47,079 (3,264) -- 48,784
--------- --------- --------- --------- --------
$ 350,068 $ 267,197 $ 65,902 $(192,107) $491,060
========= ========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS'
INVESTMENT
CURRENT LIABILITIES:
Short-Term Borrowings .............. $ -- $ 795 $ 4,031 $ -- $ 4,826
Current Maturities of Long-Term Debt -- 5,484 410 -- 5,894
Accounts Payable and Other Accrued
Liabilities ..................... 4,055 72,451 9,890 -- 86,396
--------- --------- --------- --------- --------
4,055 78,730 14,331 -- 97,116
--------- --------- --------- --------- --------
LONG-TERM DEBT .......................... 120,000 6,262 587 -- 126,849
OTHER LIABILITIES ....................... (2,053) 22,394 18,688 -- 39,029
--------- --------- --------- --------- --------
STOCKHOLDERS' INVESTMENT ................ 228,066 159,811 32,296 (192,107) 228,066
--------- --------- --------- --------- --------
$ 350,068 $ 267,197 $ 65,902 $(192,107) $491,060
========= ========= ========= ========= ========
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10
ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
REVENUES ................................... $ -- $ 185,087 $ 44,841 $ -- $ 229,928
COSTS AND EXPENSES ......................... 3,038 168,927 34,202 -- 206,167
------- --------- -------- ------- ---------
OPERATING INCOME (LOSS) .................... (3,038) 16,160 10,639 -- 23,761
------- --------- -------- ------- ---------
OTHER INCOME (EXPENSE)
Interest Expense, Net ................. 1,431 (9,993) 180 -- (8,382)
Equity in Subsidiaries, Net of Taxes... 9,820 -- -- (9,820) --
Other, Net ............................ 7 219 (3) -- 223
------- --------- -------- ------- ---------
INCOME BEFORE INCOME TAXES ................. 8,220 6,386 10,816 (9,820) 15,602
PROVISION (BENEFIT) FOR INCOME TAXES ....... (1,190) 2,795 3,856 -- 5,461
------- --------- -------- ------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ......... 9,410 3,591 6,960 (9,820)
10,141
EXTRAORDINARY CHARGE, NET OF TAXES ......... -- (731) -- -- (731)
------- --------- -------- ------- ---------
NET INCOME ................................. $ 9,410 $ 2,860 $ 6,960 $(9,820) $ 9,410
======= ========= ======== ======= =========
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
REVENUES ....................................... $ -- $ 126,450 $ 25,957 $ -- $ 152,407
COSTS AND EXPENSES ............................. 2,604 114,763 21,499 -- 138,866
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) ........................ (2,604) 11,687 4,458 -- 13,541
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest Expense, Net ................. (4,231) (3,954) 24 -- (8,161)
Equity in Subsidiaries, Net of Taxes... 8,113 -- -- (8,113) --
Other, Net ....................... 33 298 (338) -- (7)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ..................... 1,311 8,031 4,144 (8,113) 5,373
PROVISION (BENEFIT) FOR INCOME TAXES ........... (2,073) 2,307 1,755 -- 1,989
--------- --------- --------- --------- ---------
NET INCOME ..................................... $ 3,384 $ 5,724 $ 2,389 $ (8,113) $ 3,384
========= ========= ========= ========= =========
10
11
ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
REVENUES ................................ $ -- $ 94,782 $ 25,104 $ -- $ 119,886
COSTS AND EXPENSES ...................... 1,674 86,160 19,061 -- 106,895
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) ................. (1,674) 8,622 6,043 -- 12,991
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE)
Interest Expense, Net .............. 4,760 (9,347) 178 -- (4,409)
Equity in Subsidiaries, Net of Taxes 2,383 -- -- (2,383) --
Other, net ......................... (2) 243 93 -- 334
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES .............. 5,467 (482) 6,314 (2,383) 8,916
PROVISION (BENEFIT) FOR INCOME TAXES .... 404 493 2,225 -- 3,122
--------- --------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY CHARGE ...... 5,063 (975) 4,089 (2,383) 5,794
EXTRAORDINARY CHARGE, NET OF TAXES ...... -- (731) -- -- (731)
--------- --------- --------- --------- ---------
NET INCOME (LOSS) ....................... $ 5,063 $ (1,706) $ 4,089 $ (2,383) $ 5,063
========= ========= ========= ========= =========
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
REVENUES .................................... $ -- $ 66,037 $ 13,710 $ -- $ 79,747
COSTS AND EXPENSES .......................... 1,348 60,226 11,286 -- 72,860
------- -------- -------- ------- --------
OPERATING INCOME (LOSS) ..................... (1,348) 5,811 2,424 -- 6,887
------- -------- -------- ------- --------
OTHER INCOME (EXPENSE)
Interest Expense, Net .............. (2,098) (2,027) (71) -- (4,196)
Equity in Subsidiaries, Net of Taxes 4,031 -- -- (4,031) --
Other, Net ......................... 30 140 (118) -- 52
------- -------- -------- ------- --------
INCOME BEFORE INCOME TAXES .................. 615 3,924 2,235 (4,031) 2,743
PROVISION (BENEFIT) FOR INCOME TAXES ........ (1,138) 836 1,292 -- 990
------- -------- -------- ------- --------
NET INCOME .................................. $ 1,753 $ 3,088 $ 943 $(4,031) $ 1,753
======= ======== ======== ======= ========
11
12
ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income ............................... $ 9,410 $ 2,860 $ 6,960 $(9,820) $ 9,410
Equity in Earnings of Subsidiaries ....... (9,820) -- -- 9,820 --
Other Adjustments and Changes ............ (1,539) 7,985 (19,092) -- (12,646)
-------- -------- -------- ------- --------
Net Cash Provided (Used) by Operations (1,949) 10,845 (12,132) -- (3,236)
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisitions of Businesses, Net of Cash
Acquired ............................. -- (627) (3,113) -- (3,740)
Capital Expenditures for Property, Plant
and Equipment ........................ (39) (11,926) (5,286) -- (17,251)
Other, Net ............................... -- 618 631 -- 1,249
-------- -------- -------- ------- --------
Net Cash Used by Investing Activities (39) (11,935) (7,768) -- (19,742)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings Under Revolving
Lines of Credit, Net ................. 40,000 (793) 147 -- 39,354
Repayments on Term Debt .................. -- (6,839) (208) -- (7,047)
(Increase) Decrease in amounts due to and
from Subsidiaries, Net .......... (33,592) 10,595 22,997 -- --
Other, Net ............................... 1,604 (1,125) (2,908) -- (2,429)
-------- -------- -------- ------- --------
Net Cash Provided by Financing
Activities ...................... 8,012 1,838 20,028 -- 29,878
-------- -------- -------- ------- --------
Effect of Translation Adjustment on Cash ...... -- -- (314) -- (314)
-------- -------- -------- ------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents .............................. 6,024 748 (186) -- 6,586
Cash and Cash Equivalents at Beginning of
Period ................................... 532 2,985 1,000 -- 4,517
-------- -------- -------- ------- --------
Cash and Cash Equivalents at End of Period .... $ 6,556 $ 3,733 $ 814 $ -- $ 11,103
======== ======== ======== ======= ========
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ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements - (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS)
NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income ................................... $ 3,384 $ 5,724 $ 2,389 $ (8,113) $ 3,384
Equity in Earnings of Subsidiaries ........... (8,113) -- -- 8,113 --
Other Adjustments and Changes ................ (2,932) (1,035) (123) -- (4,090)
------- -------- ------- -------- --------
Net Cash Provided (Used) by Operations ... (7,661) 4,689 2,266 -- (706)
------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of Businesses, Net of Cash
Acquired ................................. -- (4,336) -- -- (4,336)
Proceeds from Sale of Business and Assets .... -- 626 75 -- 701
Capital Expenditures for Property, Plant
and Equipment ............................ (5) (9,552) (2,182) -- (11,739)
------- -------- ------- -------- --------
Net Cash Used by Investing Activities (5) (13,262) (2,107) -- (15,374)
------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Short-Term Borrowings, Net ................... -- 16,235 516 -- 16,751
Repayments on Term Debt, Net ................. -- (1,483) (347) -- (1,830)
(Increase) Decrease in amounts due to and
from Subsidiaries, Net .................. 7,460 (7,004) (456) -- --
Other, Net ................................... 196 -- -- -- 196
------- -------- ------- -------- --------
Net Cash Provided (Used) by Financing
Activities .......................... 7,656 7,748 (287) -- 15,117
------- -------- ------- -------- --------
Effect of Translation Adjustment on Cash .......... -- 40 88 -- 128
------- -------- ------- -------- --------
Net Decrease in Cash and Cash Equivalents ......... (10) (785) (40) -- (835)
Cash and Cash Equivalents at Beginning of
Period ....................................... 166 1,593 1,385 -- 3,144
------- -------- ------- -------- --------
Cash and Cash Equivalents at End of Period ....... $ 156 $ 808 $ 1,345 $ -- $ 2,309
======= ======== ======= ======== ========
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ENERGY VENTURES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(9) Condensed Consolidating Financial Statements - (Continued)
A. SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications of prior year balances have been made to
conform such amounts to corresponding June 30, 1996 classifications.
Elimination Entries
Revenues and related Cost of Sales by individual category have been
presented net of intercompany transactions.
B. OTHER
Notes 1 through 8 should be read in conjunction with the Condensed
Consolidating Financial Statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is an international manufacturer and supplier of
oilfield equipment and contract drilling services. The Company manufactures and
markets drill pipe and premium tubular products and production equipment through
its oilfield equipment segment and provides contract drilling and workover
services through its contract drilling segment. In recent periods, the Company
has benefited from the continuing consolidation in the markets in which it
competes, as well as from increased demand for tubular products due to a decline
in excess inventories of used drill pipe.
The demand for the Company's tubular products and contract
drilling services are particularly affected by the price of natural gas and the
level of oil and gas exploration activity, while the demand for the Company's
artificial lift equipment is directly dependent on oil production activity.
Sales of the Company's artificial lift products are currently concentrated in
North America and are affected by the level of oil production from older wells
in addition to oil prices. The Company's international contract drilling
services are affected by the level of exploration activity in the countries in
which it provides those services, while its domestic drilling operations are
materially dependent on the level of exploration activity in the U.S. Gulf Coast
and domestic natural gas prices. Exploration and production activity is also
affected by worldwide economic conditions, supply and demand for oil and natural
gas, seasonal trends and the political stability of oil producing countries.
Income before extraordinary charge for the second quarter of
1996 was $5.8 million, or $.31 per share, on revenues of $119.9 million compared
to income before extraordinary charge for the second quarter of 1995 of $1.8
million, or $.14 per share, on revenues of $79.7 million. Income before
extraordinary charge for the six months ended June 30, 1996 was $10.1 million,
or $.55 per share, on revenues of $229.9 million compared to income before
extraordinary charge for the six months ended June 30, 1995 of $3.4 million, or
$.27 per share, on revenues of $152.4 million. The increase in income before
extraordinary charge for the 1996 periods is primarily attributable to increased
sales and margins of drill pipe and other tubular products. These increases in
the tubular markets were partially offset by transitional costs associated with
the Company's decision to concentrate on product design and manufacturing in its
artificial lift and production equipment division and the related sale of its
United States retail distribution system in February 1996. Improved results also
reflect the Company's acquisition of Prideco, Inc. ("Prideco") on June 30, 1995.
During the second quarter of 1996, the Company replaced its
existing $60 million credit facility with a three year $120 million working
capital line of credit. The interest rates under the new facility are currently
approximately 2.5% lower than rates under the prior facility. See "Liquidity and
Capital Resources". The termination of the Company's prior facility resulted in
the Company incurring an extraordinary after tax charge of $731,000, or $.04 per
share.
The Company's overall domestic rig utilization was up for the
second quarter of 1996. The Company's contract drilling segment experienced
higher domestic demand and utilization for its workover rigs and reduced
utilization of its drilling rigs in the first six months of 1996 as compared to
the first six months of 1995. The decline in the number of drilling rigs
operating resulted in a decrease in average margins for services performed in
this segment. This segment was also affected by the high costs relating to its
Argentina operations and lower operating income in Peru due to the curtailment
of operations by the Company's customer in Peru. The Company is taking action to
improve the results of its operations in Argentina through the addition of
Company owned rig mobilization equipment in Argentina. In addition, the Company
is currently proposing to add three barge rigs in Nigeria, which is expected to
increase revenue and income in the contract drilling segment in the latter part
of 1996.
The Company currently expects that 1996 results will continue
to benefit from strong tubular sales, cost reductions at its artificial lift and
production equipment division and from the recent acquisitions. Results,
however, will be dependent on market conditions, in particular the level of
drilling activity in the U.S. Gulf Coast and demand for drill pipe and other
tubular products. Accordingly, there can be no assurance as to future results or
profitability.
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16
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Oilfield Equipment Segment
Sales of tubular products in the second quarter of 1996 were
$69.5 million compared to $31.5 million in 1995. Operating income associated
with the tubular products division in the second quarter of 1996 was $10 million
as compared to $2.7 million in 1995. Second quarter 1996 results reflected an
89% increase in sales of drill pipe and a 147% increase in sales of premium
tubulars. The increase in drill pipe sales reflected the Company's June 1995
acquisition of Prideco and an overall increase in demand for drill pipe. The
increase in demand for drill pipe reflected moderately increased drilling
activity and the continuing decline in the supply of used drill pipe inventory,
against which the Company has historically competed. The increase in sales of
premium tubulars reflected the acquisition of ENERPRO International, Inc.
("ENERPRO"), and an increase in demand associated with increased natural gas and
offshore exploration and production activity. The improvement in operating
income reflected the effects of increased sales, lower average costs and
improved pricing. Price improvements, however, were partially offset by
increases in the price of raw materials, particularly "green" tubing, the
primary material used by the Company in the production of its tubular goods.
Revenues in the second quarter of 1996 from sales of drill
pipe manufactured at the Oil Company Tubular Limited ("OCTL") facility in India
under the Company's manufacturing arrangement with OCTL did not materially
contribute to the tubular products division. Sales of products manufactured at
this facility on behalf of the Company began on May 1, 1996, and the Company
expects that its sales of tubular products from this facility will gradually
increase through the remainder of the year as the utilization of this facility
increases. The Company, however, expects some production inefficiencies to occur
during the initial stages of this arrangement.
The Company is currently in the process of implementing
various manufacturing changes at its tubular division in light of recent
acquisitions and to reduce costs and improve efficiencies. These changes include
the closing of the Company's Bastrop, Texas facility and the relocation of
various equipment and personnel to other facilities. The Company currently
expects to incur between $3 million and $4 million in expenses associated with
these changes during the remainder of 1996.
Backlog for tubular products at June 30, 1996, including
backlog of approximately $50 million at the OCTL facility, was approximately
$150 million compared to $78.4 million at December 31, 1995. The Company expects
that all of this backlog will be shipped within the next twelve months.
Revenues and operating income at the Company's artificial lift
and production equipment division were $29.5 million and $2 million,
respectively, for the quarter ended June 30, 1996, compared to $29.7 million and
$1.9 million, respectively, for the quarter ended June 30, 1995. Canadian and
international sales in this division were strong during the second quarter of
1996, increasing by approximately 41% from 1995 levels. However, the improved
Canadian and international sales were offset by costs associated with the
Company's decision to focus the operations of this division on product
development and manufacturing. The Company is currently in the process of
reorganizing the internal management structure at this division with the
objective of increasing margins and reducing selling, general and administrative
expenses.
Contract Drilling Segment
Revenues and operating income for the contract drilling
segment were $20.9 million and $2.7 million, respectively, for the quarter ended
June 30, 1996, as compared to $18.5 million and $3.7 million, respectively, for
the quarter ended June 30, 1995.
The average number of domestic barge rigs working during the
second quarter of 1996 improved by 26% from the second quarter of 1995,
resulting in an increase in domestic revenues from $13.1 million in the
second quarter of 1995 to $14.8 million in the second quarter of 1996. During
the second quarter of 1996, the Company had more workover rigs and fewer
drilling rigs operating as compared to the second quarter of 1995. The decline
in the number of drilling rigs operating resulted in a decrease in average
margins for services performed in this division. Price competition for workover
and drilling rigs also affected results in this segment.
16
17
The contract drilling segment's foreign operations in Nigeria,
Peru and Argentina contributed $6.1 million in revenues for the quarter ended
June 30, 1996 compared to $5.4 million in the second quarter of 1995. The
Company's Nigerian rig continued to operate profitably during the quarter and
represented approximately 39% of the international revenues for this division
during the quarter. Operating income from foreign operations in this segment
declined from approximately $1.1 million for the second quarter of 1995 to a
$0.1 million loss for the second quarter of 1996. This decline in operating
income was primarily attributable to the high costs associated with the
Company's Argentina operations and to the Company's Peruvian operations, which
had one of two rigs operating during the second quarter of 1996 as compared to
two rigs operating during 1995.
The Company has entered into an agreement to acquire two barge
rigs from Noble Drilling Corporation ("Noble") located in Nigeria for $32
million, including a $7.5 million drill pipe credit. This acquisition is subject
to various conditions, including the execution of two drilling contracts with
The Shell Petroleum Development Company of Nigeria Ltd. ("Shell Nigeria") and
certain governmental documentation relating to the rigs. The cash purchase price
of these rigs will be financed with a portion of the net proceeds of the
Company's recent public offering. Although there can be no assurance that the
Noble transaction will close, the Company currently anticipates that the
acquisition will be consummated sometime in August 1996. The Company has also
entered into a letter of intent with Chevron Nigeria Limited ("Chevron") for the
deployment of one of the Company's rigs in the United States to Nigeria to
operate for Chevron under a three year contract. Demand for the Company's
domestic contract drilling and workover services will continue to be materially
dependent on levels of exploration and development in the Gulf of Mexico. The
price of natural gas will also be a material factor affecting that demand.
General
Selling, general and administrative expenses increased
approximately 25% to approximately $16.5 million in the second quarter of 1996
from approximately $13.2 million in the second quarter of 1995. The increase in
1996 was primarily attributable to the Prideco acquisition completed in June
1995 as well as the costs associated with contract drilling services in
Argentina, which became operational in June 1995.
The Company's effective tax rate for the quarter ended June
30, 1996 was approximately 35% as compared to 36% for the quarter ended June 30,
1995. The decline in such rate primarily reflected the impact of an increase in
the Company's ability to utilize foreign tax credits.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
For the first six months of 1996, income before extraordinary
charge was $10.1 million, or $.55 per share, on revenues of $229.9 million
compared to income before extraordinary charge of $3.4 million, or $.27 per
share, on revenues of $152.4 million for the first six months of 1995. Operating
income for the first six months of 1996 was $23.8 million compared to $13.5
million for the first six months in 1995. The increase in income before
extraordinary charge for the 1996 periods was primarily attributable to
increased sales and margins of drill pipe and other tubular products.
Oilfield Equipment Segment
Revenues and operating income for the oilfield equipment
segment were $189.3 million and $21.5 million, respectively, for the six months
ended June 30, 1996, as compared to $114.5 million and $8.6 million,
respectively, for the six months ended June 30, 1995. The increase in revenues
and operating income was primarily attributable to increased sales and margins
for drill pipe and other tubular products. The increase attributable to the
improvement in tubular market was partially offset by transitional costs
associated with the Company's decision to concentrate on product design and
manufacturing in its artificial lift and production equipment division and the
related sale of its United States retail distribution system to Continental
Emsco in February 1996.
Sales of tubular products in the first six months of 1996 were
$129.5 million as compared to $56.3 million in the first six months of 1995. The
Company believes the second half of 1996 will benefit from the ENERPRO and TCA
acquisitions. Revenues and operating income associated with the Company's
artificial lift and production equipment division were $59.8 million and $3.7
million, respectively, for the six months ended June 30, 1996, compared to $58.2
million and $4.5 million, respectively, for the six months ended June 30, 1995.
The 1996 increase was primarily attributable to the same factors affecting the
increase in the second quarter of 1996.
17
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Contract Drilling Segment
Revenues and operating income for the contract drilling
segment were $40.6 million and $5.3 million, respectively, for the six months
ended June 30, 1996, as compared to $37.9 million and $7.6 million,
respectively, for the six months ended June 30, 1995. The decline in operating
income resulted primarily from the high costs associated with the Company's
Argentina operations and because only one of two rigs was operating in Peru
during the second quarter of 1996 as compared to two rigs operating during 1995.
General
Selling, general and administrative expenses increased
approximately 24% to approximately $32.2 million in the six months ended June
30, 1996 from approximately $26.1 million in the first six months of 1995. The
increase in 1996 was principally attributable to the Prideco acquisition and the
contract drilling services in Argentina which became operational in June 1995.
The Company's effective tax rate for the six months ended June
30, 1996 was approximately 35% as compared to 37% for the six months ended June
30, 1995. The decline in such rate primarily reflected the impact of an increase
in the Company's ability to utilize foreign tax credits.
CHANGE IN ACCOUNTING
The Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", effective January 1, 1996.
SFAS 121 establishes accounting standards for the impairment of long-lived
assets and certain identifiable intangibles related to those assets to be held
and used, and for long-lived assets and certain identifiable intangibles to be
disposed of. The effect of adoption of SFAS 121 did not affect the Company's
consolidated financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In July 1996, the Company completed a public offering of
3,000,000 shares of its Common Stock. The net proceeds of this offering were
approximately $88.4 million. A portion of the funds from the offering were used
to finance the TCA acquisition, including the payment of approximately $30
million cash for the acquisition and the repayment of debt of TCA. The remaining
proceeds are proposed to be used to (i) acquire the two barge rigs from Noble
that are currently operating in Nigeria for approximately $24.5 million in cash
and a $7.5 million drill pipe credit, (ii) retrofit a barge rig for deployment
to Nigeria to work under a proposed contract with Chevron at a cost of
approximately $9 million and (iii) for general corporate purposes.
At June 30, 1996, the Company had cash and cash equivalents of
approximately $11.1 million compared to approximately $4.5 million at December
31, 1995. At June 30, 1996, the Company's working capital was approximately $136
million compared to approximately $152 million at December 31, 1995. At June 30,
1996, the Company's debt to total capitalization ratio was approximately 41%.
This rate has been reduced as a result of the Company's recent public offering.
At June 30, 1996 and December 31, 1995, the Company had in
place various working capital lines of credit secured by the inventory and
receivables of the Company's subsidiaries. At June 30, 1996 and December 31,
1995, approximately $44.2 million and $4.8 million, respectively, had been
borrowed under the Company's revolving lines of credit and approximately $8.2
million and $5.1 million, respectively, had been used to support outstanding
letters of credit. At June 30, 1996 and December 31, 1995, $73.1 million and
$55.6 million, respectively, was available for additional borrowing under these
credit facilities. The average interest rate under these facilities was 10.22%
for fiscal 1995 and 8.57% for the first six months of 1996.
On June 26, 1996, the Company entered into a new $120 million
working capital facility, of which $90 million is designated as a borrowing base
revolving line of credit and up to $30 million is available for working capital
borrowings through December 31, 1996. Borrowings under the revolving line of
credit are subject to certain borrowing base requirements relating to the
Company's accounts receivable and inventory securing the borrowings. The
revolving line of credit extends through June 30, 1999, and borrowings under the
$30 million portion of the facility are amortized over a three year period
beginning June 30, 1997. Borrowings under the facility bear interest at a
variable rate based on a LIBOR option and base rate option dependent on certain
ratios and are secured by the Company's domestic accounts receivables, inventory
and stock of various of the Company's domestic and foreign
18
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subsidiaries. The interest rate payable under this facility at June 30, 1996,
was 7.0%. The facility contains customary affirmative and negative covenants
relating to working capital, earnings and net worth. The facility also imposes
limitations on the Company and its subsidiaries' use of funds for future
acquisitions, the incurrence of additional debt and other operational matters
and certain expenditures, as well as prohibitions on the declaration and payment
of dividends by the Company. At June 30, 1996, the Company was limited under
this facility in the amount of dividends, distributions and other restricted
payments that could be made by it to $10 million. The Company's new facility
replaced the Company's prior U.S. working capital line of credit, which had
higher borrowing costs and more restrictive operational covenants. In the second
quarter of 1996, the Company incurred an extraordinary charge of $731,000, net
of taxes of $394,000, relating to the termination of its prior working capital
facility.
The Company currently has outstanding $120 million of 10-1/4
Senior Notes due 2004 (the "Senior Notes") with semi-annual interest payments in
March and September. The Senior Notes were issued pursuant to the terms of an
Indenture dated as of March 15, 1994. Certain subsidiaries of the Company have
unconditionally guaranteed the Company's obligations under the Senior Notes. The
Indenture relating to the Senior Notes contains various customary affirmative
and negative covenants that, among other things, limit the ability of the
Company and certain of its subsidiaries to: (i) incur certain additional
indebtedness unless the Company's Consolidated Fixed Charge Coverage Ratio (as
defined in the Indenture) is at least 2.0 to 1.0, (ii) make dividends,
distributions and certain other restricted payments, (iii) create certain liens,
(iv) engage in certain transactions with its affiliates, (v) engage in sale and
leaseback transactions, (vi) make certain asset dispositions and (vii) merge or
consolidate with, or transfer all or substantially all of its assets to another
person. The Indenture also limits the ability of the Company and certain of its
subsidiaries to pay dividends and make other distributions. At July 31, 1996,
the Company was limited under the Indenture in the amount of dividends,
distributions and other restricted payments that could be made by it to
approximately $240 million.
In August 1994, the Company received a letter from the United
States Internal Revenue Service (the "IRS") proposing to increase the gain
recognized by the Company upon the dissolution in October 1990 of a joint
venture ("COLEVE") with Columbia Gas Development Corporation. In general, the
IRS' proposal seeks payment of a tax liability of approximately $14.1 million
plus accrued interest thereon, and includes $3.4 million of taxes relating to
the proposed disallowance of certain interest deductions taken by the Company
with respect to COLEVE that was the subject of a similar letter received by the
Company in the fourth quarter of 1993. The tax liability with respect to these
matters has been previously provided for as a deferred tax liability in the
Company's financial statements. The Company disagrees with the IRS' position and
is currently pursuing its rights of administrative review and appeal and intends
to vigorously contest this matter. Although the resolution of these remaining
issues could affect the timing of the payment of previously accrued tax
liabilities and require the use of a portion of its available capital, the
Company does not believe that the results of the audit or the ultimate
resolution of the IRS' proposed adjustments will have a material impact on its
results of operations or financial position.
CAPITAL EXPENDITURES, ACQUISITIONS AND DISPOSITIONS
In January 1996, the Company entered into a long-term
manufacturing and sales agreement with OCTL pursuant to which OCTL will
manufacture drill pipe and premium tubulars for the Company on an exclusive
basis at OCTL's plant in India. The OCTL arrangement is being used by the
Company to pursue a strategic expansion of its sales and operations in the
Eastern Hemisphere. The Company currently expects that its arrangement with OCTL
will require an investment between $20 million and $25 million in 1996,
including an $8 million deposit made by the Company to OCTL in the first
quarter. The remainder of such funds will be used for the purchase of inventory
and other working capital requirements.
In February 1996, the Company completed the sale of its United
States retail store distribution system for approximately $7.5 million. The
Company received $3 million in cash, a $4 million vendor credit with Continental
Emsco for future equipment needs of the Company and a $0.5 million note
receivable. The consideration received in the sale approximated the net book
value of the assets sold, resulting in no material gain or loss.
In April 1996, the Company acquired Production Specialties,
Inc. ("Production Specialties"), a manufacturer of gas lift equipment, for
approximately $3.1 million.
On May 3, 1996, the Company acquired ENERPRO, a manufacturer
of premium threads and thread connections, for 312,714 shares of Common Stock
and the assumption of approximately $3.1 million in indebtedness. The operations
of ENERPRO are being combined with the premium thread operations of the
Company's tubular division.
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20
On August 5, 1996, the Company acquired Tubular Corporation of
America, Inc. ("TCA") for 500,000 shares of Common Stock, approximately $14.3
million cash, a $650,000 note due January 1997 and assumed debt of approximately
$15 million. TCA manufactures premium casing which expands the range of the
Company's premium tubular products line to add a broader line of premium casing.
The Company has recently entered into a letter of intent with
Chevron for the deployment of one of the Company' rigs in the United States to
Nigeria to operate for Chevron under a three year contract. The cost to prepare
and enhance this rig for international operations is expected to be
approximately $9 million. Such costs will be financed with the proceeds from the
Company's July 1996 public offering of Common Stock.
Capital expenditures by the Company during the six months
ended June 30, 1996, totaled approximately $17.3 million. During the six months
ended June 30, 1996, capital expenditures included approximately $4.8 million
for refurbishment of three domestic barge rigs, upgrading of platform rig and
the acquisition of rig moving equipment for Argentina. The Company incurred
capital expenditures of approximately $4.1 million relating to plant expansions.
Ongoing routine capital expenditures for the last two quarters of 1996 are
budgeted at approximately $6.5 million. Capital expenditures are expected to be
funded with available cash, cash flow from operations and borrowings under lines
of credit and other facilities.
The allocations of the purchase price to the fair market
values of the net assets acquired in the 1996 acquisitions are based on
preliminary estimates of the fair market value and may be revised when
additional information concerning asset and liability valuations is obtained.
The Company's current sources of capital are cash generated
from operations and borrowings under its working capital lines of credit. The
Company believes that current reserves of cash and short-term investments,
access to existing credit lines and internally generated cash from operations
are sufficient to finance the projected cash requirements of its current and
future operations.
The Company is continually evaluating new acquisitions with a
focus on proprietary technology and under-utilized fixed assets to enhance
operations. Future acquisitions may be funded through cash flow from operations,
borrowings under lines of credit and other facilities, and equity issuances if
desirable.
OTHER MATTERS
From time to time, the Company may make certain statements
that contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995) and that involve risk and uncertainty. These
forward-looking statements may include, but are not limited to, future sales,
earnings, margins, production levels and costs, product deliveries, market
trends in the oil and gas industry and the oilfield service sector thereof,
research and development, environmental and other expenditures, currency
fluctuations and various business trends. Forward-looking statements may be made
by management orally or in writing, including, but not limited to, the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section and other sections of the Company's filings with the
Securities and Exchange Commission under the Securities Act of 1933 and the
Securities Exchange Act of 1934.
Actual results and trends in the future may differ materially
depending on a variety of factors including, but not limited to, changes in the
price of oil and gas, changes in the domestic and international rig count,
global trade policies, domestic and international drilling activities,
world-wide political stability and economic growth, including currency
fluctuations, government export and import policies, technological advances
involving the Company's products, the Company's successful execution of internal
operating plans, performance issues with key suppliers and subcontractors,
collective bargaining labor disputes, regulatory uncertainties and legal
proceedings.
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21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 8, 1996,
the stockholders of the Company approved: (i) the election of eight directors to
serve until the next Annual Meeting of Stockholders, (ii) the amendment of the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock $1.00 par value, from 20,000,000 shares to
40,000,000 shares, and (iii) an amendment to the Company's 1992 Employee Stock
Option Plan to increase the number of shares of the Company's Common Stock that
may be subject to options granted under the plan from 600,000 shares to
1,000,000 shares. The following sets forth the results of the voting with
respect to each such matter. There were no broker non-votes.
Item
Withheld/
ELECTION OF DIRECTORS For Against Abstained
--- ------- ---------
David J. Butters 15,542,126 110,428
Bernard J. Duroc-Danner 15,542,126 110,428
Uriel E. Dutton 15,542,094 110,460
Eliot M. Fried 15,542,126 110,428
Sheldon S. Gordon 15,643,294 9,260
Sheldon B. Lubar 15,643,326 9,228
Robert B. Millard 15,542,110 110,444
Robert A. Rayne 15,643,294 9,260
Amendment to the Company's Certificate of Incorporation 15,498,993 146,652 6,909
Amendment to the Company's 1992 Employee
Stock Option Plan 15,516,005 127,692 8,357
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
Page
----
4.1 Credit Agreement among the Company, the Subsidiary
Guarantors, the Lenders defined therein and The Chase
Manhattan Bank, N.A. dated as of June 26, 1996, including
the form of Notes (incorporated by reference to Exhibit
No. 4.5 to the Registration Statement on Form S-3;
Registration No. 333-06715)
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . 23
(b) Reports on Form 8-K:
(1) Amendment No. 2 to Current Report on Form 8-K dated June 30, 1995
on Form 8-K/A as filed on May 8, 1996, containing the consent of
independent public accountants with respect to the financial
statements of Prideco, Inc.
(2) Current Report on Form 8-K dated June 24, 1996, reporting (i) the
execution of an agreement by the Company to acquire Tubular
Corporation of America ("TCA"), (ii) the execution of an agreement
by the Company to acquire two drilling rigs from Noble Drilling
Corporation and (iii) the redeployment of a drilling rig to Nigeria
to work under contract for Chevron Nigeria Limited, and containing
the financial statements of TCA.
21
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENERGY VENTURES, INC.
By: /s/ James G. Kiley
-------------------------------------
James G. Kiley
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Frances R. Powell
-------------------------------------
Frances R. Powell
Vice President, Accounting and Controller
(Principal Accounting Officer)
Date: August 14, 1996
22
23
INDEX TO EXHIBITS
4.1 Credit Agreement among the Company, the Subsidiary
Guarantors, the Lenders defined therein and The Chase
Manhattan Bank, N.A. dated as of June 26, 1996, including
the form of Notes (incorporated by reference to Exhibit
No. 4.5 to the Registration Statement on Form S-3;
Registration No. 333-06715)
27 Financial Data Schedule