<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-11051
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------
NATIONAL-OILWELL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-047581
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5084
(Primary Standard Industrial
Classification Code Number)
5555 SAN FELIPE
HOUSTON, TEXAS 77056
(713) 960-5100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
PAUL M. NATION
VICE PRESIDENT AND GENERAL COUNSEL
NATIONAL-OILWELL, INC.
5555 SAN FELIPE
HOUSTON, TEXAS 77056
(713) 960-5100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JOHN S. WATSON JAMES M. PRINCE
VINSON & ELKINS L.L.P. ANDREWS & KURTH L.L.P.
2300 FIRST CITY TOWER, 1001 FANNIN 4200 TEXAS COMMERCE TOWER, 600 TRAVIS
HOUSTON, TEXAS 77002-6760 HOUSTON, TEXAS 77002
(713) 758-2222 (713) 220-4200
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01........... $82,800,000 $28,552
====================================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any state in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* state. *
* *
***************************************************************************
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 4, 1996
PROSPECTUS
4,000,000 SHARES
[LOGO]
NATIONAL-OILWELL, INC.
COMMON STOCK
------------------------
All 4,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by National-Oilwell,
Inc. (the "Company"). The initial public offering price is expected to be
between $15.00 and $17.00 per share.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange under the symbol "NOI."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $720,000.
(3) The Company has granted to the several Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
additional 600,000 shares of Common Stock at the Price to Public, less
Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on or
about , 1996.
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
SIMMONS & COMPANY
INTERNATIONAL
------------------------
The date of this Prospectus is , 1996.
<PAGE> 3
[Drawing of drilling rig and supporting equipment with certain components
thereof manufactured by National-Oilwell highlighted with enlarged pictures.]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes (i) exercise of
the Warrant to purchase 282,392 shares of Common Stock and, assuming an initial
public offering price of $16.00 per share, (ii) all outstanding shares of the
Company's Class A Common Stock are converted into 2,021,452 shares of Common
Stock on the effective date of the Registration Statement of which this
Prospectus is a part and (iii) the issuance of 343,986 shares of Common Stock in
connection with the Company's Value Appreciation Plans. Prospective purchasers
of the Common Stock should carefully read this entire Prospectus and should
consider, among other things, the matters set forth under "Risk Factors." Unless
otherwise indicated, all information relating to the Company contained in this
Prospectus assumes the over-allotment option described under "Underwriting" is
not exercised. Certain capitalized terms which are used but not defined in this
summary are defined elsewhere in this Prospectus.
THE COMPANY
National-Oilwell, Inc. (the "Company") is a worldwide leader in the design,
manufacture and sale of machinery and equipment and in the distribution of
maintenance, repair and operating ("MRO") products used in oil and gas drilling
and production. The Company designs, manufactures and sells drawworks, mud pumps
and power swivels (also known as "top drives"), which are the major mechanical
components of rigs used to drill oil and gas wells. Many of these components are
designed specifically for applications in offshore, extended reach and deep land
drilling. These components are installed on new drilling rigs and used in the
upgrade, refurbishment and repair of existing drilling rigs. A significant
portion of the Company's business includes the sale of replacement parts for its
own manufactured machinery and equipment. The Company estimates that
approximately 65% of the mobile offshore rig fleet and the majority of the
world's larger land rigs (2,000 horsepower and greater) manufactured in the last
twenty years utilize certain drilling machinery components manufactured by the
Company. In addition, the Company manufactures and sells a complete line of
centrifugal and reciprocating pumps used in oilfield and industrial
applications.
The Company provides distribution services through its network of 121
distribution service centers located near major drilling and production activity
worldwide, but principally in the United States and Canada. These distribution
service centers have historically provided MRO products, including valves,
fittings, flanges, replacement parts and miscellaneous expendable items. As oil
and gas companies and drilling contractors have refocused on their core
competencies and emphasized efficiency initiatives to reduce costs and capital
requirements, the Company's distribution services have evolved to offer
outsourcing and alliance arrangements that include comprehensive procurement,
inventory management and logistics support. These arrangements have resulted in
the Company working more closely with its customers in return for a more
exclusive oilfield distribution arrangement.
The Company's business is dependent on and affected by the level of
worldwide oil and gas drilling and production activity, the aging worldwide rig
fleet which was generally constructed prior to 1982, and the profitability and
cash flow of oil and gas companies and drilling contractors. Drilling activity
has recently increased in the offshore and deeper land markets both of which are
particularly well served by the drilling machinery and equipment manufactured by
the Company. As of June 30, 1996, the worldwide offshore mobile drilling rig
utilization rate was over 90% and the number of active U.S. land rigs had
increased approximately 15% compared to June 30, 1995. As drilling activity has
increased, the Company has experienced increased demand for its manufactured
products and distribution services as existing rigs are upgraded, refurbished
and repaired, new rigs are constructed and expendable parts are used.
The Company's oilfield equipment business and distribution services
business accounted for 56% and 44%, respectively, of the combined earnings
before interest, taxes, depreciation and amortization ("EBITDA") for the six
months ended June 30, 1996.
3
<PAGE> 5
BUSINESS STRATEGY
Beginning in 1993, a new executive and operating team was assembled to
manage the Company's business. In January 1996, that new management team,
together with an investor group led by The Inverness Group Incorporated and
First Reserve Corporation, purchased the business of the Company from its former
owners, USX Corporation and Armco Inc. Since 1993, the business strategy of the
Company has been to enhance its operating performance and build a platform for
growth by focusing on markets in which its product lines are market leaders and
which are believed by management to provide the most significant growth
potential. As part of that strategy, the Company disposed of certain of its
non-core equipment manufacturing businesses and product lines and reengineered
its distribution business during the years 1993 through 1995. See "The Company."
The completion of the redirection of the Company's business in 1995, combined
with the increase in the level of worldwide oil and gas drilling activity, has
resulted in a substantial improvement in the Company's performance, with EBITDA
before special items increasing from $6.2 million for the six months ended June
30, 1995 to $15.3 million for the six months ended June 30, 1996. See "The
Company."
The Company's current business strategy is to enhance its leading market
positions and operating performance by:
Leveraging Its Market Leading Installed Base. The Company estimates that
approximately 65% of the mobile offshore drilling rigs and the majority of the
world's larger land drilling rigs operating today use certain drilling machinery
components manufactured by the Company. The Company believes this installed base
and its reputation for performance and reliability present substantial
opportunities to capture a significant portion of the increased level of
expenditures by its customers for the construction of new drilling rigs as well
as the upgrade and refurbishment of existing drilling rigs.
Capitalizing on Increasing Demand for Higher Horsepower Drilling Machinery.
The Company believes the advanced age of the existing fleet of drilling rigs,
coupled with increasing drilling activity involving greater water depths and
extended reach, will increase the demand for new drilling rig construction and
the upgrading and capacity enhancement of existing rigs. The Company's higher
horsepower drawworks, mud pumps and power swivels provide, in many cases, the
largest capacities currently available in the industry.
Building on Distribution Strengths. The Company has developed and
implemented integrated information and process systems that are designed for
more effective procurement, inventory management and logistics activities. A
critical element of the Company's strategy has been to regionally centralize its
procurement, inventory and logistics operations, thus gaining cost and inventory
utilization efficiencies while retaining its responsiveness to local markets. In
addition, the strategic integration of the Company's distribution expertise,
extensive distribution network and growing base of customer alliances provides
an increased opportunity for cost effective marketing of the Company's
manufactured equipment.
Capitalizing on Alliance/Outsourcing Trends. As a result of efficiency
initiatives, oil and gas companies and drilling contractors are frequently
seeking alliances with suppliers, manufacturers and service providers, or
outsourcing their procurement, inventory management and logistics requirements
for equipment and supplies in order to achieve cost and capital improvements.
The Company has entered into and is seeking alliance arrangements to better
serve its customers, to better manage its own inventory, to increase the volume
and scope of products sold to the customer without significantly increasing the
Company's overhead costs, and to expand marketing opportunities to sell
equipment manufactured by the Company. The Company believes that it is well
positioned to provide broad procurement, inventory management and other services
as a result of the Company's (i) large and geographically diverse network of
distribution service centers in major oil and gas producing areas, (ii)
purchasing leverage due to the volume of products sold, (iii) breadth of
available product lines and (iv) information systems that offer customers
enhanced online and onsite services.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 4,000,000 shares
Common Stock to be Outstanding After the
Offering................................... 17,712,378 shares(1)
Use of Proceeds.............................. To repay certain outstanding indebtedness,
essentially all of which was incurred to fund
the acquisition of the Company, and for other
general corporate purposes. See "Use of
Proceeds."
New York Stock Exchange Symbol............... "NOI"
</TABLE>
- ---------------
(1) Subject to adjustment based on the initial public offering price as
described in "Management -- Employee Benefit Plans and Arrangements" and
"Description of Capital Stock -- Common Stock."
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
factors set forth under the caption "Risk Factors." In particular, prospective
purchasers should be aware of the Company's dependence on the oil and gas
industry, the volatility of oil and gas prices and the effect of competition in
the oilfield products and services industry.
5
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OTHER DATA
The summary historical consolidated financial data presented below for the
three years ended December 31, 1995 is derived from the audited consolidated
financial statements of the Company. The summary consolidated financial
information as of June 30, 1996 and for the six months ended June 30, 1996 and
1995 is derived from the Company's unaudited consolidated financial statements
which, in the opinion of management, include all adjustments, consisting only of
normal recurring accruals and adjustments, necessary for the fair presentation
of the financial data for such periods.
The summary unaudited pro forma consolidated financial information is
derived from the Unaudited Pro Forma Condensed Consolidated Financial Statements
of the Company included elsewhere in this Prospectus. The unaudited pro forma
consolidated financial data give effect to (i) the pro forma effect of
completion of the Acquisition and (ii) the adjusted pro forma effect of
completion of the Offering and the application of the estimated net proceeds
therefrom as described elsewhere in this Prospectus. The pro forma financial
data is not necessarily indicative of actual results of operations that would
have occurred during those periods and is not necessarily indicative of future
results of operations. The summary consolidated financial information set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the Consolidated Financial
Statements of the Company and related Notes thereto and the Unaudited Pro Forma
Condensed Consolidated Financial Statements and related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- ------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------------------------------------------
JUNE 30, PRO FORMA PRO FORMA
-------------------- FOR OFFERING FOR ACQUISITION
1996 1995 1995 1995 1995 1994 1993
--------- -------- ------------ --------------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 294,643 $266,443 $545,803 $ 545,803 $545,803 $562,053 $627,281
Cost of revenues............... 254,556 231,556 474,791 474,791 474,791 482,423 547,401
--------- -------- ------------ --------------- -------- -------- --------
Gross profit................. 40,087 34,887 71,012 71,012 71,012 79,630 79,880
Selling, general and
administrative............... 26,681 30,903 57,231 58,231 57,231 64,422 79,391
Special charges (credits)(1)... -- (7,500) (8,458) (8,458) (8,458) (13,916) 8,565
--------- -------- ------------ --------------- -------- -------- --------
Operating income (loss)...... 13,406 11,484 22,239 21,239 22,239 29,124 (8,076)
Interest expense -- net........ (6,418) (1,063) (5,935) (12,817) (1,261) (4,731) (7,276)
Other income (expense)......... (321) 161 (1,563) (1,563) (1,401) 528 (240)
--------- -------- ------------ --------------- -------- -------- --------
Income (loss) before taxes... 6,667 10,582 14,741 6,859 19,577 24,921 (15,592)
Provision for income
taxes(2)..................... 2,667 1,204 5,408 2,413 1,937 1,041 1,871
--------- -------- ------------ --------------- -------- -------- --------
Net income (loss)....... $ 4,000 $ 9,378 $ 9,333 $ 4,446 $ 17,640 $ 23,880 $(17,463)
========= ========= ========== ============= ========= ========= =========
Net income per share(3)........ $ .30 $ .53 $ .33
========= ========== =============
Common shares
outstanding(3)(4)............ 13,368 17,712 13,368
========= ========== =============
OTHER DATA:
EBITDA before special
items(5)..................... $ 15,309 $ 6,156 $ 17,376 $ 16,376 $ 17,376 $ 21,235 $ 11,210
Summary cash flow information
Net cash provided (used) by
operating activities....... (10,552) (3,816) 41,670 37,551 (14,489)
Net cash provided (used) by
investing activities....... (107,175) 8,580 8,827 68,199 2,872
Net cash provided (used) by
financing activities....... 122,239 (1,918) 7,210 (101,753) 12,338
Depreciation and
amortization................. 1,903 2,172 3,595 3,595 3,595 6,027 10,721
Capital expenditures........... 849 2,031 4,764 4,764 4,764 3,604 1,967
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
----------------------------
HISTORICAL AS ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $125,580 $130,321
Total assets.......................................... 259,481 258,732
Long-term debt, less current maturities............... 118,688 65,836
Stockholders' equity.................................. 33,982 84,259
</TABLE>
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(1) In 1995 and 1994, the Company recorded gains from the sales of certain
non-core equipment manufacturing businesses, product lines and assets, net
of other costs. In 1993, the Company recorded charges primarily related to
the disposal of a product line. See Note 10 to the Consolidated Financial
Statements included elsewhere in this Prospectus.
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<PAGE> 8
(2) Prior to January 1, 1996, the Company was a general partnership and
therefore not subject to U.S. federal and state income taxes. See Note 9 to
the Consolidated Financial Statements included elsewhere in this Prospectus.
(3) Historical net income (loss) per share and common shares outstanding are not
presented for periods prior to January 1, 1996 because the Company was a
general partnership during these periods.
(4) Common shares outstanding assumes all outstanding shares of Class A Common
Stock are converted into 2,021,452 shares of Common Stock (assuming an
initial public offering price of $16.00 per share) in connection with the
Offering. In addition, the 1995 Pro Forma for Offering shares outstanding
includes an additional 343,986 shares (assuming an initial public offering
price of $16.00 per share) issuable under the Value Appreciation Plans and
4,000,000 shares sold in connection with the Offering.
(5) EBITDA before special items means operating income (loss) plus depreciation
and amortization plus special charges (credits). The Company uses EBITDA
along with a measurement of capital employed in the calculation of its
annual bonus plan and in the evaluation of acquisition candidates. EBITDA is
frequently used by security analysts in the evaluation of companies and is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
EBITDA before special items is not intended as an alternative to cash flow
from operating activities as a measure of liquidity, an alternative to net
income as an indicator of the Company's operating performance or any other
measure of performance in accordance with generally accepted accounting
principles.
(6) Gives effect to the Offering and application of the assumed net proceeds
described under "Use of Proceeds." Also reflects the Offering related
adjustments described on the Unaudited Pro Forma Condensed Consolidated
Balance Sheet.
7
<PAGE> 9
RISK FACTORS
The following risk factors should be considered carefully in evaluating the
Company and its business before purchasing shares of the Common Stock offered
hereby in addition to the other information in this Prospectus.
DEPENDENCE ON OIL AND GAS INDUSTRY
The Company's business is substantially dependent upon the condition of the
oil and gas industry and the industry's willingness to explore for and produce
oil and gas. The degree of such willingness is generally dependent upon the
prevailing view of future product prices, which are influenced by numerous
factors affecting the supply and demand for oil and gas, including the level of
drilling activity, worldwide economic activity, interest rates and the cost of
capital, environmental regulation, tax policies, political requirements of
national governments, coordination by the Organization of Petroleum Exporting
Countries ("OPEC") and the cost of producing oil and gas. Similarly, any
significant reduction in demand for drilling services, in cash flows of drilling
contractors or in rig utilization rates below current levels could result in a
drop in demand for products manufactured and sold by the Company. See
"Business -- General."
VOLATILITY OF OIL AND GAS PRICES
Oil and gas prices and activity have been characterized by significant
volatility over the last twenty years. Since 1986, domestic spot oil prices
(West Texas Intermediate) have ranged from a low of approximately $11 per barrel
in July 1986 to a high of approximately $40 per barrel in October 1991; domestic
spot gas prices (Henry Hub) have ranged from a low of approximately $0.90 per
mcf of gas in January 1992 to a high of approximately $2.69 per mcf in June
1996. These price changes have caused numerous shifts in the strategies of oil
and gas companies and drilling contractors and their expenditure levels and
patterns, particularly with respect to decisions to purchase major capital
equipment of the type manufactured by the Company. No assurance can be given as
to the future price levels of oil and gas or the volatility thereof or that the
future price of oil and gas will be sufficient to support current levels of
exploration and production-related activities.
HIGHLY COMPETITIVE INDUSTRY
The oilfield products and services industry is highly competitive. The
Company's revenues and earnings can be affected by competitive actions such as
price changes, introduction of new products or improved availability and
delivery. Over the last several years the market for oilfield services and
equipment has experienced overcapacity which has resulted in increased price
competition in many areas of the Company's business. The Company competes with a
large number of companies, some of which may offer certain more technologically
advanced products or possess greater financial resources than the Company. See
"Business -- Oilfield Equipment" and "Business -- Distribution Services."
POTENTIAL PRODUCT LIABILITY AND WARRANTY CLAIMS
Certain products of the Company are used in potentially hazardous drilling,
completion and production applications that can cause personal injury or loss of
life, damage to property, equipment or the environment and suspension of
operations. The Company maintains insurance coverage in such amounts and against
such risks as it believes to be in accordance with normal industry practice.
Such insurance does not, however, provide coverage for all liabilities
(including liabilities for certain events involving pollution), and there can be
no assurance that such insurance will be adequate to cover all losses or
liabilities that may be incurred by the Company in its operations. Moreover, no
assurance can be given that the Company will, in the future, be able to maintain
insurance at levels it deems adequate and at rates it considers reasonable or
that any particular types of coverage will be available. Litigation arising from
a catastrophic occurrence at a location where the Company's equipment and
services are used may in the future result in the Company's being named as a
defendant in product liability or other lawsuits asserting potentially large
claims. The Company is a party to various legal and administrative proceedings
which have arisen from ongoing and discontinued operations. No
8
<PAGE> 10
assurance can be given with respect to the outcome of these or any other pending
legal and administrative proceedings and the effect such outcomes may have on
the Company. See "Business -- Operating Risks and Insurance" and
"Business -- Legal Proceedings."
IMPACT OF GOVERNMENTAL REGULATIONS
Many aspects of the Company's operations are affected by political
developments and are subject to both domestic and foreign governmental
regulation, including those relating to oilfield operations, worker safety and
the protection of the environment. In addition, the Company depends on the
demand for its services from the oil and gas industry and, therefore, is
affected by changing taxes, price controls and other laws and regulations
relating to the oil and gas industry generally. The adoption of laws and
regulations curtailing exploration for or production of oil and gas for economic
or other policy reasons could adversely affect the Company's operations. The
Company cannot determine the extent to which its future operations and earnings
may be affected by new legislation, new regulations or changes in existing
regulations. See "Business -- Governmental Regulation and Environmental
Matters."
IMPACT OF ENVIRONMENTAL REGULATIONS
The Company's operations are affected by numerous foreign, federal, state
and local environmental laws and regulations. The technical requirements of
these laws and regulations are becoming increasingly expensive, complex and
stringent. These laws may impose penalties or sanctions for damages to natural
resources or threats to public health and safety. Such laws and regulations may
also expose the Company to liability for the conduct of or conditions caused by
others, or for acts of the Company that were in compliance with all applicable
laws at the time such acts were performed. Sanctions for noncompliance may
include revocation of permits, corrective action orders, administrative or civil
penalties and criminal prosecution. Certain environmental laws provide for joint
and several liability for remediation of spills and releases of hazardous
substances. In addition, companies may be subject to claims alleging personal
injury or property damage as a result of alleged exposure to hazardous
substances, as well as damage to natural resources. See
"Business -- Governmental Regulation and Environmental Matters."
RISK OF CERTAIN FOREIGN MARKETS
Certain of the Company's revenues result from the sale of products to
customers for ultimate destinations in the Middle East, Africa and other
international markets and are subject to risks of instability of foreign
economies and governments. Furthermore, the Company's sales can be affected by
laws and regulations limiting exports to particular countries. Management
estimates that during the first half of 1996 approximately 20% of its revenues
were from products sold for delivery to destinations outside North America.
The Company attempts to limit its exposure to foreign currency fluctuations
by limiting the amount of sales denominated in currencies other than United
States dollars, Canadian dollars and British pounds. The Company has not engaged
in and does not currently intend to engage in any significant hedging or
currency trading transactions designed to compensate for adverse currency
fluctuations among those or any other foreign currencies. See
"Business -- Oilfield Equipment" and "Business -- Distribution Services."
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering there has been no public market for the Common Stock.
There can be no assurance that an active public market for the Common Stock will
develop upon completion of the Offering or, if developed, that such market will
be sustained. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the representatives of
the Underwriters and may bear no relationship to the market prices of the Common
Stock after the Offering. Prices for the Common Stock after the Offering may be
influenced by a number of factors, including the liquidity of the market for the
Common Stock, investor perceptions of the Company and the oil and gas industry
and general economic and other conditions. Sales of substantial amounts of
Common Stock in the public market subsequent to the
9
<PAGE> 11
Offering could adversely affect the market price of the Common Stock. For
information relating to the factors to be considered in determining the initial
public offering price, see "Underwriting."
POTENTIAL FUTURE SALE OF SHARES COULD AFFECT MARKET PRICE
Upon consummation of the Offering, the 4,000,000 shares of Common Stock
offered hereby will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for shares sold by persons deemed to be "affiliates" of the
Company or acting as "underwriters," as those terms are defined in the
Securities Act. The 1,168,310 shares of Common Stock owned by two limited
partnerships (the "Inverness Investors") for which Inverness/Phoenix LLC serves
as managing general partner which were issued on July 15, 1995 are restricted
from resale pursuant to Rule 144 under the Securities Act until after July 15,
1997. The remaining shares of Common Stock held by the Company's existing
stockholders were issued in 1996 and are restricted from resale pursuant to Rule
144 until various dates in 1998. The parties to the Stockholders Agreement have
waived their registration rights with respect to a Registration Statement filed
by the Company with respect to the Offering. See "Certain
Transactions -- Stockholders Agreement." The Company, its executive officers and
directors and all existing stockholders of the Company have agreed not to offer,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
pledge, or otherwise dispose of or transfer any shares of Common Stock, with
certain exceptions, for a period of 180 days commencing on the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") as representative of the Underwriters. The
holders of approximately 9,378,001 shares of Common Stock (assuming an initial
public offering price of $16.00 per share) will have demand registration rights
following the expiration of 180 days after the completion of the Offering.
Future sales of shares of Common Stock by existing stockholders and future
option holders could adversely affect the market price of the Common Stock. See
"Shares Eligible for Future Sale" and "Underwriting."
CREDIT FACILITY RESTRICTIONS; ASSET ENCUMBRANCES
The Company will enter into a new five-year Senior Secured Revolving Credit
Facility (the "New Credit Facility") with General Electric Capital Corporation
("GE Capital") effective as of the closing of the Offering. The New Credit
Facility provides for a $120 million revolving loan ("the Revolver"), of which
$25 million may be used for letters of credit. The Revolver is subject to a
borrowing base limitation of 60% of eligible inventory plus 85% of eligible
accounts receivable plus various percentages of the book value of certain fixed
assets, all of which would have totaled $118.8 million as of June 30, 1996. The
New Credit Facility is secured by substantially all of the Company's assets and
contains certain financial covenants and ratios as well as a limitation on
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CONTROL BY CERTAIN STOCKHOLDERS
Following completion of the Offering, the Company's existing stockholders,
including the Inverness Investors, the First Reserve Investors, GE Capital and
members of the Company's management, will collectively own an aggregate of
12,972,196 shares of Common Stock, representing 73.2% of the then outstanding
shares (70.8% if the Underwriters' over-allotment option is exercised in full).
As a result of such ownership, such stockholders could individually or
collectively have the power to control the outcome of certain matters submitted
to a vote of the Company's stockholders, including the election of the Board of
Directors, and their interests may not reflect the interests of other
stockholders. See "Principal Stockholders."
NO ANTICIPATED DIVIDENDS
The Company's board of directors does not currently anticipate authorizing
the payment of dividends in the foreseeable future. In addition, the payment of
dividends is limited by the terms of the Company's New Credit Facility. See
"Dividend Policy."
10
<PAGE> 12
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The existing stockholders of the Company, including management, will
realize certain benefits as a result of the Offering, including the creation of
a public market for the Common Stock. This may result in an increase in the
value of shares held by existing stockholders. See "Certain Transactions."
DILUTION TO NEW STOCKHOLDERS
Investors in the Common Stock offered hereby will experience immediate and
substantial dilution in net tangible book value per share of $11.67 (assuming an
initial public offering price of $16.00 per share). See "Dilution."
CERTAIN ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE UNSOLICITED ACQUISITION
PROPOSALS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
contain certain provisions which may have the effect of delaying, deferring or
preventing a change in control of the Company, including a classified board of
directors, the removal of directors from office only for cause, the prohibition
of stockholder action by written consent, advance notice requirements respecting
stockholder nominations for director or any other matter, the number of
directors being set by the board of directors, super majority voting provisions
respecting amendments to the Company's Amended and Restated Certificate of
Incorporation and limitation of persons who may call special stockholders'
meetings. The Delaware General Corporation Law requires super majority voting
thresholds to approve certain "business combinations" between interested
stockholders and the Company which may render more difficult or tend to
discourage attempts to acquire the Company. In addition, the Company's board of
directors has the authority to issue shares of preferred stock ("Preferred
Stock") in one or more series and to fix the rights and preferences of the
shares of any such series without stockholder approval. Any series of Preferred
Stock is likely to be senior to the Common Stock with respect to dividends,
liquidation rights and, possibly, voting rights. The ability to issue Preferred
Stock could also have the effect of discouraging unsolicited acquisition
proposals, thus affecting the market price of the Common Stock and preventing
stockholders from obtaining any premium offered by the potential buyer. See
"Description of Capital Stock -- Preferred Stock" and "-- Certain Anti-Takeover
and Other Provisions of the Amended and Restated Certificate of Incorporation."
11
<PAGE> 13
THE COMPANY
In April 1987, Armco Inc., an Ohio corporation ("Armco") and USX
Corporation, a Delaware corporation ("USX"), formed National-Oilwell, a Delaware
partnership (the "Partnership"), to consolidate the oilfield equipment
manufacturing and distribution operations of Armco and USX. The Partnership was
owned 50% each by Armco and USX and was managed through a Management Committee
composed of one representative each of Armco and USX. Prior to such
consolidation, each of Armco's and USX's business operations had been a leader
in the oilfield equipment and distribution businesses since the late 1800's.
Beginning in 1993, a new executive and operating team, led by the Company's
President and Chief Executive Officer, Joel V. Staff, was assembled to manage
the Partnership's business. As a result of this change in management and a
redirection of the Company's strategy, the Company sold various product lines,
consolidated certain manufacturing facilities and concentrated its operations
within two business segments: Oilfield Equipment and Distribution Services. In
1995, the new management team, together with an investor group led by The
Inverness Group Incorporated and First Reserve Corporation, negotiated and
entered into an agreement (the "Purchase Agreement") with Armco and USX to
acquire the Partnership (the "Acquisition"), which acquisition was completed in
January 1996. Prior to the Acquisition, The Inverness Group Incorporated and
First Reserve Corporation were not affiliated with the Company or the
Partnership. Pursuant to the terms of the Purchase Agreement the Company agreed
to purchase the Partnership from USX and Armco for a consideration of $180
million. The purchase price and related expenses were funded by new equity,
existing Partnership cash, a new credit facility, a subordinated note, and
promissory notes to Armco and USX totaling $20 million (the "Seller Notes"). The
new equity was provided by the Inverness Investors, the First Reserve Investors,
GE Capital, and each of the executive officers of the Company. See
"Capitalization" and "Business -- Distribution Services."
In connection with the Acquisition, the Company entered into a $120 million
revolving credit facility with GE Capital, borrowed $30 million pursuant to term
loans and issued a $5 million subordinated note to GE Capital. In addition, GE
Capital received a warrant to purchase 282,392 shares of Common Stock from the
Company for a nominal price. Concurrent with the Offering, GE Capital will
exercise its warrant, and the Company will enter into a new five-year senior
secured revolving credit facility with GE Capital.
In connection with the Acquisition, the Company entered into a five year
tubular distribution agreement with USX on generally the same terms that existed
prior to the Acquisition. Other than the tubular distribution agreement, the
Seller Notes and certain indemnification provisions of the Purchase Agreement,
the Company has no continuing material relationship with the prior owners. See
"Business -- Agreement with Previous Owners."
The Company is a Delaware corporation whose principal executive offices are
located at 5555 San Felipe, Houston, Texas 77056, and its telephone number is
(713) 960-5100. References herein to the Company refer to the predecessor
partnership for periods prior to January 1, 1996 and to National-Oilwell, Inc.
for subsequent periods.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $58.8 million (approximately
$67.7 million if the Underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $16.00 per share, after deducting
the estimated underwriting discount and offering expenses. The Company will use
the net proceeds of the Offering to repay borrowings incurred to provide funds
for the acquisition of the Company in January 1996 under the credit agreement
dated as of December 29, 1995 (the "Credit Facility") and under a $5 million
subordinated note (the "Subordinated Note"), both with GE Capital. The Company
will use approximately $25.2 million of the estimated net proceeds to repay the
entire remaining principal balance on the term notes portion of the Credit
Facility and approximately $5.1 million to repay the Subordinated Note and its
deferred interest, and the remaining net proceeds of approximately $28.5 million
will be used to repay a portion of the revolving credit portion of the Credit
Facility.
As of June 30, 1996, the outstanding indebtedness under the Credit Facility
was $96.1 million, consisting of $70.9 million under a $120 million revolving
credit and letter of credit facility (the "Revolving Credit Facility") and $12.4
million under Term Loan A and $12.8 million under Term Loan B. Borrowings under
the Revolving Credit Facility and Term Loans A and B generally bear interest at
a London Interbank Offered Rate ("LIBOR") plus a margin of 2.75% on the
Revolving Credit Facility, 3.0% on Term Loan A and 3.5% on Term Loan B, or GE
Capital's prime rate plus a margin of 1.5% on the Revolving Credit Facility,
1.75% on Term Loan A and 2.25% on Term Loan B. At June 30, 1996, the effective
interest rates applicable to borrowings under the Revolving Credit Facility and
the Term Loans were 8.54%, 8.72% and 9.28%, respectively. Term Loan A requires
quarterly principal payments of approximately $500,000, with final maturity on
December 31, 2000. Term Loan B requires quarterly principal payments of
approximately $62,500, with final maturity on December 31, 2001. Certain
prepayments of the Term Loans from excess cash flow are also required. The
Revolving Credit Facility has a term that expires on December 31, 2000. The
Subordinated Note bears interest at GE Capital's prime rate plus a margin of
3.0% (11.25% at June 30, 1996) and is due December 31, 2002. Interest payments
are deferred until Term Loans A and B are repaid and certain other operating
performance requirements are satisfied. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." At the closing of the Offering, the Credit Facility will be
replaced with the New Credit Facility.
DIVIDEND POLICY
The Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying a cash dividend on
the Common Stock in the foreseeable future. Any future change in the Company's
dividend policy will be made at the discretion of the board of directors of the
Company and will depend upon the Company's operating results, financial
condition, capital requirements, general business conditions and such other
factors as the board of directors deem relevant. Under certain circumstances,
the New Credit Facility will require the consent of the lenders prior to any
payment of cash dividends on the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Capital Stock."
13
<PAGE> 15
DILUTION
After giving effect to the conversion of all of the outstanding shares of
Class A Common Stock into shares of Common Stock, exercise of the Warrant, the
expense related to and the issuance of Common Stock in connection with the
Company's Value Appreciation Plans, the write-off of deferred financing costs
and the cost of termination of the Management Services Agreement, and assuming
an initial public offering price of $16.00 per share (the midpoint of the
estimated initial public offering price range), the pro forma net tangible book
value (total assets less goodwill and other intangibles less liabilities) of the
Company at June 30, 1996 was $1.30 per share of Common Stock. See "Description
of Capital Stock" and "Management -- Employee Benefit Plans and Arrangements."
After giving effect to the receipt of an assumed $58.8 million of net proceeds
from the Offering (based on the sale of Common Stock pursuant to the Offering at
an assumed initial public offering price of $16.00 per share and net of
estimated underwriting discounts and commissions and offering expenses), pro
forma net tangible book value per share would have been $4.33 per share of
Common Stock outstanding after the Offering, representing an immediate increase
in net tangible book value of $3.03 per share of Common Stock to the existing
stockholders and an immediate dilution of $11.67 per share to the new investors
purchasing Common Stock in the Offering. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $16.00
Net tangible book value per share before adjustments.............. $1.55
Decrease in net tangible book value per share due to:
-- write-off of deferred financing costs and the cost of
termination of the Management Services Agreement............... (.08)
-- effect of Value Appreciation Plans............................. (.17)
-----
Net tangible book value per share before the Offering............. 1.30
Increase in net tangible book value per share attributable to sale
of Common Stock by the Company in the Offering................. 3.03
-----
Pro forma net tangible book value per share after the Offering............. 4.33
------
Dilution in pro forma net tangible book value per share to new investors... $11.67
======
</TABLE>
The following table sets forth, as of June 30, 1996, the number of shares
of Common Stock purchased or to be purchased from the Company, the total
consideration paid or to be paid to the Company and the average price per share
paid or to be paid by existing stockholders, by Value Appreciation Plans
recipients and by the public investors pursuant to the Offering, based on the
assumed initial public offering price:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 13,368,392 75.5% $ 30,178,860 30.3% $ 2.26
Value Appreciation Plans
recipients...................... 343,986 1.9 5,503,776 5.5 16.00
---------- ------ ------------ ------
13,712,378 77.4 35,682,636 35.8 2.60
Public investors.................. 4,000,000 22.6 64,000,000 64.2 16.00
---------- ------ ------------ ------
Total................... 17,712,378 100.0% $ 99,682,636 100.0%
========== ====== ============ ======
</TABLE>
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the unaudited consolidated short-term debt
and capitalization of the Company as of June 30, 1996, and as adjusted to give
effect (assuming an initial public offering price of $16.00 per share) to the
conversion of the Class A Common Stock into 2,021,452 shares of Common Stock,
the exercise of the Warrant, the expense related to and the issuance of Common
Stock in connection with the Company's Value Appreciation Plans, the write-off
of deferred financing costs and the cost of termination of the Management
Services Agreement and the Offering and the application of the net proceeds to
the Company therefrom (assumed to be $58.8 million) as described under "Use of
Proceeds." The actual number of shares of Common Stock to be outstanding after
the Offering is dependent upon the per share initial public offering price due
to the terms of conversion of the Class A Common Stock and the issuance of
Common Stock pursuant to the Value Appreciation Plans. See "Description of
Capital Stock" and "Management -- Employee Benefit Plans and Arrangements." This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and related Notes thereto, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the Unaudited Pro Forma
Condensed Consolidated Financial Statements and related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current maturities of long-term debt............................. $ 2,500 $ --
======== =========
Long-term debt (less current maturities):
Revolving Credit Facility........................................ $ 70,865 $ 45,836
Term Notes....................................................... 22,705 --
Subordinated debt................................................ 5,118 --
Seller Notes..................................................... 20,000 20,000
---------- -----------
Total long-term debt..................................... 118,688 65,836
Stockholders' equity:
Class A Common Stock -- par value $.01; 13,288 shares outstanding
(historical), no shares outstanding (as adjusted)............. -- --
Common Stock -- par value $.01; 11,064,548 shares outstanding
(historical), 17,712,378 shares outstanding (as adjusted)..... 111 177
Additional paid-in capital....................................... 30,068 94,309
Notes receivable from officers................................... (500) --
Cumulative translation adjustment................................ 303 303
Retained earnings................................................ 4,000 (10,530)
---------- -----------
Total stockholders' equity.................................. 33,982 84,259
---------- -----------
Total capitalization..................................... $ 152,670 $ 150,095
======== =========
</TABLE>
15
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company. The selected consolidated financial data as of and for
each of the five years ended December 31, 1995 have been derived from the
audited consolidated financial statements of the Company. The selected
consolidated financial data as of and for each of the six months ended June 30,
1996 and 1995 have been derived from the Company's unaudited consolidated
financial statements which, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals and adjustments,
necessary for the fair presentation of the financial data for such periods. The
results of operations for the six months ended June 30, 1996 should not be
regarded as indicative of the results that may be expected for the full fiscal
year. The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- ---------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ 294,643 $266,443 $545,803 $ 562,053 $627,281 $569,911 $802,862
Cost of revenues........................... 254,556 231,556 474,791 482,423 547,401 508,006 697,144
-------- -------- -------- -------- -------- -------- --------
Gross profit............................. 40,087 34,887 71,012 79,630 79,880 61,905 105,718
Selling, general and administrative........ 26,681 30,903 57,231 64,422 79,391 86,943 102,581
Special charges (credits)(1)............... -- (7,500) (8,458) (13,916) 8,565 6,500 24,500
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).................. 13,406 11,484 22,239 29,124 (8,076) (31,538) (21,363)
Interest expense -- net.................... (6,418) (1,063) (1,261) (4,731) (7,276) (4,790) (8,153)
Other income (expense)..................... (321) 161 (1,401) 528 (240) 941 (277)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes............... 6,667 10,582 19,577 24,921 (15,592) (35,387) (29,793)
Provision for income taxes(2).............. 2,667 1,204 1,937 1,041 1,871 876 677
-------- -------- -------- -------- -------- -------- --------
4,000 9,378 17,640 23,880 (17,643) (36,263) (30,470)
Cumulative benefit of net changes in
accounting principles(3)................. -- -- -- -- -- 1,136 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................... $ 4,000 $ 9,378 $ 17,640 $ 23,880 $(17,463) $(35,127) $(30,470)
======== ======== ======== ======== ======== ======== ========
Common shares outstanding.................. 13,368
========
Net income per share....................... $ .30
========
OTHER DATA:
EBITDA before special items(4)............. $ 15,309 $ 6,156 $ 17,376 $ 21,235 $ 11,210 $(12,805) $ 16,157
Summary cash flow information
Net cash provided (used) by operating
activities............................. (10,552) (3,816) 41,670 37,551 (14,489) 32,635 82,366
Net cash provided (used) by investing
activities............................. (107,175) 8,580 8,827 68,199 2,872 (4,924) (18,391)
Net cash provided (used) by financing
activities............................. 122,239 (1,918) 7,210 (101,753) 12,338 (38,683) (51,489)
Depreciation and amortization.............. 1,903 2,172 3,595 6,027 10,721 12,233 13,020
Capital expenditures....................... 849 2,031 4,764 3,604 1,967 4,941 19,153
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, JANUARY 1, JUNE 30, ---------------------------------------------------------
1996 1996 1995 1995 1994 1993 1992 1991
-------- ---------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $125,580 $121,272 $143,026 $177,365 $ 151,810 $171,632 $179,407 $239,369
Total assets.................... 259,481 259,639 262,216 288,578 268,304 343,479 371,883 453,610
Long-term debt, less current
maturities.................... 118,688 121,128 -- 9,128 -- 69,816 56,467 94,850
Owners' equity.................. 33,982 29,369 171,242 178,012 161,888 170,676 192,546 235,754
</TABLE>
- ---------------
(1) In 1995 and 1994, the Company recorded gains from the sales of certain
non-core equipment manufacturing businesses, product lines and assets, net
of other costs. In 1993, 1992 and 1991, the Company recorded charges
primarily related to the disposal of manufacturing facilities and a product
line. See Note 10 to the Consolidated Financial Statements included
elsewhere in this Prospectus.
(2) Prior to January 1, 1996, the Company was a general partnership and
therefore not subject to U.S. federal and state income taxes. See Note 9 to
the Consolidated Financial Statements included elsewhere in this Prospectus.
(3) The Company changed its methods of accounting for income taxes and
post-retirement benefits other than pensions effective January 1, 1992.
(4) EBITDA before special items means operating income (loss) plus depreciation
and amortization plus special charges (credits). The Company uses EBITDA
along with a measurement of capital employed in the calculation of its
annual bonus plan and in the evaluation of acquisition candidates. EBITDA is
frequently used by security analysts in the evaluation of companies and is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
EBITDA before special items is not intended as an alternative to cash flow
from operating activities as a measure of liquidity, an alternative to net
income as an indicator of the Company's operating performance or any other
measure of performance in accordance with generally accepted accounting
principles.
16
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet as
of June 30, 1996 and unaudited pro forma condensed consolidated statements of
operations for the six months ended June 30, 1996 and for the year ended
December 31, 1995 give effect to (i) the Pro Forma effect of completion of the
Acquisition and (ii) the Adjusted Pro Forma effect of completion of the Offering
and the application of the estimated net proceeds therefrom as described
elsewhere in this Prospectus, as if each had occurred, in the case of the
balance sheet data, on June 30, 1996, and in the case of the statement of
operations data, on January 1, 1995. The June 30, 1996 balance sheet data has
been adjusted only for the effect of completion of the Offering as the
Acquisition adjustments are already reflected therein.
The following unaudited pro forma condensed consolidated financial data
does not necessarily reflect the actual results that would have been achieved
nor is such data necessarily indicative of future results for the Company. The
following unaudited pro forma condensed consolidated information should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in the Prospectus.
The number of shares of Common Stock outstanding on a pro forma basis is
dependent upon the per share initial public offering price due to the terms of
conversion of the Class A Common Stock and the issuance of Common Stock pursuant
to the Value Appreciation Plans. See "Description of Capital Stock -- Common
Stock" and "Management -- Employee Benefit Plans and Arrangements."
17
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
ADJUSTED
PRO
HISTORICAL OFFERING FORMA
---------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash................................................... $ 4,512 $ $ 4,512
Receivables............................................ 86,282 86,282
Inventories............................................ 121,907 121,907
Other.................................................. 7,073 7,073
---------- -------- --------
Total current assets........................... 219,774 219,774
Property, plant and equipment, net....................... 17,916 17,916
Goodwill................................................. 6,408 6,408
Deferred financing costs................................. 6,916 (6,916)(C) 1,200
1,200(C)
Other assets............................................. 8,467 1,815(B) 13,434
3,152(D)
---------- -------- --------
Total assets................................... $ 259,481 $ (749) $258,732
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ 2,500 $ (2,500)(A) $ --
Accounts payable....................................... 67,576 67,576
Other accrued liabilities.............................. 24,118 1,000(B) 21,877
(2,628)(C)
(613)(D)
---------- -------- --------
Total current liabilities...................... 94,194 (4,741) 89,453
Long-term debt........................................... 118,688 (56,300)(A) 65,836
1,200(C)
2,751(D)
(500)(E)
(3)(F)
Other liabilities........................................ 12,617 3,775(B) 19,184
2,792(D)
---------- -------- --------
Total liabilities.............................. 225,499 (51,026) 174,473
Stockholders' equity:
Common stock........................................... 111 40(A) 177
4(D)
22(F)
Additional paid-in capital............................. 30,068 58,760(A) 94,309
5,500(D)
(19)(F)
Notes receivable from officers......................... (500) 500(E) --
Cumulative translation adjustment...................... 303 303
Retained earnings...................................... 4,000 (2,960)(B) (10,530)
(4,288)(C)
(7,282)(D)
---------- -------- --------
Total stockholders' equity..................... 33,982 50,277 84,259
---------- -------- --------
Total liabilities and stockholders' equity..... $ 259,481 $ (749) $258,732
======== ======== ========
</TABLE>
18
<PAGE> 20
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS,
EXCEPT PER SHARE AMOUNTS, IN THOUSANDS):
A -- To record the issuance of shares of Common Stock pursuant to the Offering
and the application of the assumed net proceeds of $58,800 (4,000,000
shares at $16.00 per share less underwriting discount and expenses
estimated at $5,200) to repay debt as described under "Use of Proceeds."
B -- To record the expense of $4,775 (after tax cost of $2,960) due to the
termination of the Management Services Agreement as described under
"Certain Transactions" which will be paid in quarterly payments of $250
through March 31, 2001, subject to certain accelerating events.
C -- To record the write-off of $6,916 in deferred financing costs (after tax
cost of $4,288) associated with the Credit Facility that will be replaced
at the time of the Offering and the incurrence of an estimated $1,200 of
deferred financing costs that will result from the New Credit Facility.
D -- To record the effect of the Company's Value Appreciation Plans, based on
the assumed $16.00 per share initial public offering price, of an expense
of $11,745 (after tax cost of $7,282), payable by a cash payment of $2,751,
liability for future cash payments of $3,490 and the issuance of 343,986
shares of restricted Common Stock valued at $5,504 as follows:
<TABLE>
<S> <C> <C>
Retained earnings.................................... $7,282
Deferred tax asset................................... 3,152
Taxes payable........................................ 1,311
Long-term debt.................................. $2,751
Current liability............................... 698
Long-term liability............................. 2,792
Common stock.................................... 4
Paid-in capital................................. 5,500
</TABLE>
E -- To record the mandatory repayment of promissory notes to the Company.
F -- To record the exercise of the Warrant and the conversion of the Class A
Common Stock.
19
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR ADJUSTED
HISTORICAL ACQUISITION ACQUISITION OFFERING PRO FORMA
---------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................ $294,643 $ $ 294,643 $ $294,643
Cost of revenues.................... 254,556 254,556 254,556
-------- ---- -------- ------ --------
Gross profit........................ 40,087 40,087 40,087
Selling, general and
administrative.................... 26,681 26,681 (500)(B) 26,181
Special charges (credits)........... --
-------- ---- -------- ------ --------
Operating income (loss)............. 13,406 13,406 500 13,906
Interest and financial costs, net... (6,418) (650)(A) (7,068) 3,268(C) (3,800 )
Other income (expense).............. (321) (321) (321 )
-------- ---- -------- ------ --------
Income (loss) before income taxes... 6,667 (650) 6,017 3,768 9,785
Provision for income taxes.......... 2,667 (247)(D) 2,420 1,431(D) 3,851
-------- ---- -------- ------ --------
Net income (loss)................... $ 4,000 $(403) $ 3,597 $2,337 $ 5,934
======== ==== ======== ====== ========
Average shares outstanding.......... 13,368(E) 13,368(E) 17,712 (F)
======== ======== ========
Net income per share................ $ .30 $ .27 $ .34
======== ======== ========
</TABLE>
- ---------------
A -- To record the estimated increase in interest expense that would have been
incurred related to the Acquisition had the funding of the loans occurred
on January 1, 1996.
B -- To record elimination of management fees as a result of the termination of
the Management Services Agreement in connection with the Offering.
C -- To eliminate interest expense and adjust amortization of deferred
financing costs related to debt that will be repaid with proceeds from the
Offering.
D -- To reflect the income tax expense associated with the above adjustments.
E -- Reflects 11,346,940 shares of Common Stock after exercise of the Warrant
and 2,021,452 shares of Common Stock issuable upon the conversion of the
Class A Common Stock at the assumed $16.00 per share initial public
offering price.
F -- Reflects an additional 343,986 shares of Common Stock issuable under the
Value Appreciation Plans based upon the assumed $16.00 per share initial
public offering price plus the issuance of 4,000,000 shares pursuant to the
Offering.
Note -- The above adjustments do not consider the one-time expenses described at
footnotes B, C and D on the Unaudited Pro Forma Condensed Consolidated Balance
Sheet related to the expense to terminate the Management Services Agreement, the
write-off of financing costs or the expense associated with the Value
Appreciation Plans.
20
<PAGE> 22
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR ADJUSTED
HISTORICAL ACQUISITION ACQUISITION OFFERING PRO FORMA
---------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.............................. $545,803 $ $ 545,803 $ $545,803
Cost of revenues...................... 474,791 474,791 474,791
-------- -------- -------- ------- --------
Gross profit.......................... 71,012 71,012 71,012
Selling, general and administrative... 57,231 1,000(A) 58,231 (1,000)(D) 57,231
Special charges (credits)............. (8,458) (8,458) (8,458)
-------- -------- -------- ------- --------
Operating income (loss)............... 22,239 (1,000) 21,239 1,000 22,239
Interest and financial costs, net..... (1,261) (11,556)(B) (12,817) 6,882(E) (5,935)
Other income (expense)................ (1,401) (162)(C) (1,563) (1,563)
-------- -------- -------- ------- --------
Income (loss) before income taxes..... 19,577 (12,718) 6,859 7,882 14,741
Provision for income taxes............ 1,937 476(F) 2,413 2,995(F) 5,408
-------- -------- -------- ------- --------
Net income (loss)..................... $ 17,640 $ (13,194) $ 4,446 $ 4,887 $ 9,333
======== ======== ======== ======= ========
Average shares outstanding............ 13,368(G) 13,368(G) 17,712 (H)
======== ======== ========
Net income per share.................. $ 1.32 $ .33 $ .53
======== ======== ========
</TABLE>
- ---------------
A -- To record management fees incurred as a result of the Acquisition.
B -- To record the estimated increase in interest expense and amortization of
deferred financing costs related to the long-term debt that would have
been incurred because of the Acquisition.
C -- To record amortization of goodwill.
D -- To record elimination of management fees as a result of the termination of
the Management Services Agreement in connection with the Offering.
E -- To eliminate interest expense and adjust amortization of deferred
financing costs related to debt that will be repaid with proceeds from the
Offering.
F -- To reflect the income tax expense associated with the above adjustments
and to record the increase in tax expense that would have resulted had the
Company been subject to U.S. federal and state income tax during 1995.
G -- Reflects 11,346,940 shares of Common Stock after exercise of Warrant and
2,021,452 shares of Common Stock issuable upon the conversion of the Class
A Common Stock at the assumed $16.00 per share initial public offering
price.
H -- Reflects an additional 343,986 shares of Common Stock issuable under the
Value Appreciation Plans based upon the assumed $16.00 per share initial
public offering price plus the issuance of 4,000,000 shares pursuant to the
Offering.
Note -- The above adjustments do not consider the one-time expenses
described at footnotes B, C and D on the Unaudited Pro Forma Condensed
Consolidated Balance Sheet related to the expense to terminate the
Management Services Agreement, the write-off of deferred financing costs or
the expense associated with the Value Appreciation Plans.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Effective as of January 1, 1996, all of the Company's operations were
acquired from subsidiaries of Armco Inc. and USX Corporation for $180 million
plus approximately $12 million in transaction costs (the "Acquisition"). The
Acquisition was funded from the sale of $30 million in equity, incurrence of
$114 million of debt and the use of $48 million of acquired cash. In connection
with the Acquisition, all assets and liabilities were recorded at their fair
market values, resulting in no significant change from the historical net
carrying values. The Acquisition resulted in deferred financing costs of $7.7
million and goodwill of $6.5 million. References herein to the Company refer to
the predecessor partnership for periods prior to January 1, 1996 and to
National-Oilwell, Inc. for subsequent periods.
The Company's revenues are directly related to the level of worldwide oil
and gas drilling and production activities and the profitability and cash flow
of oil and gas companies and drilling contractors, which in turn are affected by
current and anticipated prices of oil and gas. While the price of oil and gas is
generally a function of supply and demand, additional influences include costs
of exploration and production, worldwide political and economic influences,
environmental factors and governmental regulation.
As a result of a change in management and a redirection of the Company's
strategy which began in 1993, the Company sold various product lines,
consolidated certain manufacturing facilities and concentrated its operations
within two business segments: Oilfield Equipment and Distribution Services.
RESULTS OF OPERATIONS
The following table and the financial information in the discussion of the
Oilfield Equipment and Distribution Services segments provide certain
information that segregates the results of operations of previously sold product
lines and businesses in order to focus on ongoing operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Revenues
Oilfield Equipment.................. $ 81.0 $ 78.9 $146.5 $187.9 $179.7
Distribution Services............... 237.3 203.5 432.3 415.7 450.4
Eliminations........................ (23.7) (16.0) (33.0) (60.0) (67.7)
------ ------ ------ ------ ------
Ongoing Operations............... 294.6 266.4 545.8 543.6 562.4
Disposed Businesses................. -- -- -- 18.5 64.9
------ ------ ------ ------ ------
Total....................... $294.6 $266.4 $545.8 $562.1 $627.3
====== ====== ====== ====== ======
Operating Income
Oilfield Equipment.................. $ 8.1 $ 3.1 $ 7.2 $ 7.0 $ .1
Distribution Services............... 7.3 2.5 9.4 9.0 13.9
Corporate........................... (2.0) (1.6) (2.9) (2.9) (2.3)
------ ------ ------ ------ ------
Ongoing Operations............... 13.4 4.0 13.7 13.1 11.7
Disposed Businesses................. -- -- -- 2.1 (11.2)
Special Charges (Credits)........... -- (7.5) (8.5) (13.9) 8.6
------ ------ ------ ------ ------
Total....................... $ 13.4 $ 11.5 $ 22.2 $ 29.1 $ (8.1)
====== ====== ====== ====== ======
</TABLE>
Oilfield Equipment
The Oilfield Equipment segment designs and manufactures a large line of
proprietary products, including drawworks, mud pumps, power swivels and
reciprocating pumps. A substantial installed base of these products
22
<PAGE> 24
results in a recurring replacement parts and maintenance business. In addition,
a full line of drilling pump expendable products are sold for maintenance of the
Company's and other manufacturers' equipment.
Sales of new equipment manufactured by the Company can result in large
fluctuations in volume between periods depending on the size and timing of the
shipment of orders. Individual orders of machinery and equipment by foreign
national oil companies can be particularly large (in excess of $10 million
each). The Company recorded large sales of this nature in each of 1993 and 1994
but has not made similar sales in 1995 or in the first half of 1996.
Revenues and operating profits have been negatively impacted over the last
several years by excess industry capacity that has prevented or reduced price
increases. Accordingly, the Company has concentrated on controlling and reducing
its costs by consolidating operations and streamlining selling and
administrative functions. The Company believes it will benefit from any
increased industry demand as additional activity can be achieved through its
existing facilities.
During the second quarter of 1996, the Company experienced a significant
increase in demand for its capital equipment, especially from offshore drilling
contractors. Sales from orders already received will result in increased capital
equipment revenues in the second half of 1996 as compared to the first six
months. The Company believes that offshore drillers have begun to experience
higher demand for and cash flows from their services that allow them to upgrade
and repair machinery and equipment on existing rigs. Improvements to the
existing fleet have been deferred for many years due to low cash flows caused by
an excess supply of rigs relative to demand, and the need for such upgrades and
repairs may be large. If utilization rates of the offshore mobile rig fleet
remain above 90%, new demand for the construction of rigs could result in a
further increase in demand for machinery and equipment manufactured by the
Company.
Revenues during the first six months of 1996 increased $2.1 million (3%)
over the comparable 1995 period as the increased demand for expendable and
replacement parts more than offset the lack of sales to foreign national oil
companies similar to the total of $9.5 million of such revenues recorded during
the first six months of 1995. Revenues in 1995 were down $41.4 million (22%)
from 1994, in large part due to the absence of $33 million in revenues
associated with an international rig package that was sold in 1994. As compared
to 1993, revenues in 1994 increased $8.2 million (5%) due to increased sales of
drilling capital equipment and related spare parts.
Operating income for the Oilfield Equipment segment increased $5.0 million
in the first half of 1996 as compared to the prior year as a result of higher
revenues, improved product mix and the consolidation in late 1995 of the
Company's United Kingdom manufacturing facility into its Houston location,
thereby resulting in lower costs and a more efficient manufacturing process.
Operating income increased slightly in 1995 in spite of the revenue decline
primarily as a result of the consolidation of facilities and other cost
reduction initiatives. In 1994, operating income increased substantially as
compared to the prior year due to the increase in revenues and the cost
reduction efforts initiated by new management.
Distribution Services
Distribution Services revenues result primarily from the sale of MRO
products from the Company's network of 121 distribution service centers and from
the sale of well casing and production tubing. These products are purchased from
numerous manufacturers and vendors, including the Company's Oilfield Equipment
segment. While the Company has increased revenues and improved its operating
income by entering into alliances and outsourcing arrangements, improvements in
operating results remain primarily dependent on attaining increased volumes of
activity through its distribution service centers while controlling the fixed
costs associated with numerous points of sale. Pricing is a lesser consideration
on operating income from distribution services as most cost increases or
reductions from the Company's suppliers are passed on to the customer.
Revenues for the six months ended June 30, 1996 increased by $33.8 million
(17%) over the comparable 1995 period due to an overall increase in market
activity, including a $16.0 million increase in tubular products sales and a
$12.7 million increase in MRO products sales. Distribution Services' revenues in
1995 were ahead
23
<PAGE> 25
of the 1994 level by $16.6 million (4%) due to improved general market
conditions in North America. As compared to 1993, revenues in 1994 decreased
$34.7 million (8%), primarily due to significantly lower revenues from tubular
products.
Operating income increased $4.8 million during the first six months of 1996
as compared to the same period in 1995 due to the higher revenue levels.
Operating income increased in 1995 as compared to 1994 by only $0.4 million due
to a change in product mix, as revenues from lower margin tubular products
increased as a percentage of segment revenues. A decrease in operating income of
$4.9 million occurred in 1994 from 1993 as a result of the lower revenues.
Corporate
Corporate charges represent the unallocated portion of centralized and
executive management costs. These costs were $2.9 million in each of 1995 and
1994, up from the 1993 level due to the addition of new executive personnel and
costs necessary to refocus the direction of the Company. Corporate costs were up
$0.5 million during the first six months of 1996 as compared to the first six
months of 1995 due to the expense of the management fee paid pursuant to the
Management Services Agreement that will be terminated in connection with the
Offering.
Special Charges (Credits)
Special charges (credits) primarily relate to the sale of businesses and
product lines in connection with a major restructuring and redirection of the
Company that was completed in 1995. During 1995, the Company recorded gains of
$8.5 million ($7.5 million of which were recorded in the first half of the year)
from the sale of a non-oilfield centrifugal pump and switch valve product line
and from the sale of excess property and equipment of closed manufacturing
facilities in the United Kingdom and Canada. A net gain of $13.9 million was
recorded in 1994 from the sales of several production equipment product lines
offset in part by costs associated with the closure of the United Kingdom
facility. In 1993 the Company recorded a net loss of $8.6 million primarily
representing the loss on the sale of its wellhead business and related assets.
Interest Expense
Interest expense increased substantially during the first half of 1996 due
to debt incurred in connection with the Acquisition. Prior to 1996, interest
expense had declined in each of 1995 and 1994 as compared to the prior year due
to reductions in debt made possible by operating profits and proceeds from the
dispositions of various businesses, product lines and assets that generated over
$75 million in cash.
Income Taxes
Due to its partnership status, the Company was not subject to U.S. federal
or state income taxes prior to 1996 and accordingly the tax provision during
such periods relates to foreign income taxes as computed under Statement of
Financial Accounting Standard ("SFAS") No. 109. Beginning in 1996, the Company
is subject to U.S. federal and state taxes and currently estimates the combined
U.S. federal, state and foreign tax rate will approximate 40% of income before
taxes for 1996 although actual taxes paid may be lower as a result of
realization of deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $126 million, a
decrease of $52 million from December 31, 1995, primarily due to the use of cash
in connection with the Acquisition. Working capital had increased by $26 million
at December 31, 1995 from the prior year end primarily due to the retention of
income from operations and proceeds of $6.9 million from the sale of a
non-oilfield pumping product line.
Due to the size of the Company's distribution services business,
significant components of the Company's assets are accounts receivable and
inventories. Accounts receivable increased during the first six months of 1996
due to higher revenues during the period. Inventories also increased due to
higher activity levels. Since
24
<PAGE> 26
1993, the Company has focused significant internal attention and emphasis on
accelerating the collection of accounts receivable and improving the Company's
return on capital employed.
The Company's business has not required large expenditures for capital
equipment. Total capital expenditures were $0.8 million during the first six
months of 1996, $4.8 million in 1995, $3.6 million in 1994 and $2.0 million in
1993. Enhancements to data processing and inventory control systems represent a
large portion of recent capital expenditures. Increases in capital expenditures
of as much as an aggregate of $6 million are anticipated over the next three
years to further enhance the Company's information systems. The Company believes
it has sufficient existing manufacturing capacity to meet current and
anticipated demand for its products and services. Significant increases in
demand for oilfield equipment products, to the extent qualified subcontracting
and outsourcing are not available, could result in increases in capital
expenditures.
The Company believes that cash generated from operations and amounts
available under the New Credit Facility will be sufficient to fund operations,
working capital needs, capital expenditure requirements and financing
obligations. The Company also believes any significant increase in capital
expenditures caused by any need to increase manufacturing capacity can be funded
from operations or debt financing.
In connection with the Acquisition, the Company entered into a fully
secured, five-year credit agreement (the "Credit Facility") with GE Capital
which provides for revolving credit borrowings of up to $120 million and
long-term debt of $30 million. At June 30, 1996, borrowings under the revolving
portion of the Credit Facility were $70.9 million, plus the Company had incurred
additional usage of $12.6 million for outstanding letters of credit, leaving
$25.3 million of borrowing availability. The long-term portion of the Credit
Facility was reduced from $30 million to $25.2 million at June 30, 1996,
primarily due to the collection of proceeds from an insurance claim that existed
at the time of the Acquisition. Long-term debt at June 30, 1996 also included a
$5.1 million subordinated note and $20 million of debt financed by the sellers
in connection with the Acquisition, neither of which requires current cash
payments of principal or interest. In connection with the Credit Agreement, GE
Capital received a warrant to purchase 282,392 shares of Common Stock from the
Company for a nominal price (the "Warrant"). Concurrent with the Offering, the
Warrant will be exercised. Debt obligations are more fully described in Note 5
to the Consolidated Financial Statements.
The Company plans to use the net proceeds from the Offering to repay the
$25.2 million in term loans under the Credit Facility and the $5.1 million
subordinated note. The remaining net proceeds of $28.5 million will be used to
reduce the revolving credit facility. The Company does not currently plan to
repay the $20 million in seller notes from the net proceeds of the Offering. The
seller notes bear interest at 9%, and at the Company's option, interest payments
through January 16, 2003 may be deferred. One-half of the sum of the principal
and any deferred interest is payable on January 16, 2004, and the balance is
payable on January 16, 2005. The notes are subject to prepayment in certain
events, including the sale of significant assets by the Company or the sale by
the stockholders at the time of the Acquisition of more than 50% of their
aggregate shares. Partial prepayments are also required in connection with
certain sales of the Company's stock owned by the Inverness Investors or the
First Reserve Investors.
Effective as of the closing of the Offering, the Company will enter into a
new five-year senior secured revolving credit facility (the "New Credit
Facility") with GE Capital that will be available for acquisitions and general
corporate purposes. The New Credit Facility provides for a $120 million
revolving loan ("the Revolver"), of which $25 million may be used for letters of
credit. The Revolver is subject to a borrowing base limitation of 60% of
eligible inventory plus 85% of eligible accounts receivable plus various
percentages of the book value of certain fixed assets, all of which would have
totaled $118.8 million as of June 30, 1996.
The Revolver will bear interest at prime plus .75% or LIBOR plus 2.0%,
subject to adjustment based on the Company's total funded debt and operating
profit. Depending on the Company's financial performance, the interest rate
could be prime plus .25%, .75% or 1.25% or LIBOR plus 1.5%, 2.0% or 2.5%. The
New Credit Facility is secured by substantially all of the Company's assets and
contains certain financial covenants and ratios as well as a limitation on
dividends.
25
<PAGE> 27
The Company will pay GE Capital a fee of $900,000 on the closing of the New
Credit Facility and is obligated to pay an unused facility fee of .375% per
annum. The unused facility fee will be adjusted to .25% or .50% based upon the
ratio of funded debt to operating profit.
Although the Company is not currently pursuing any specific acquisition
candidates, from time to time the Company may identify acquisition candidates
for investigation and may in the future pursue such acquisition opportunities.
The timing, size or success of any acquisition effort and the related potential
capital commitments cannot be predicted. The Company expects to fund future
acquisitions primarily through cash flow from operations and borrowings,
including the unborrowed portion of the New Credit Facility, as well as
issuances of additional equity. There can be no assurance that additional
financing for acquisitions will be available at terms acceptable to the Company.
Inflation has not had a significant effect on the Company's operating
results or financial condition in recent years.
OFFERING RELATED EXPENSES
The Company will incur certain one-time expenses in connection with the
Offering, as follows: (i) the Management Services Agreement will be terminated
at a cost of $4.8 million ($3.0 million after tax) and will be paid in quarterly
installments of $250,000 through March 31, 2001, subject to certain accelerating
events; (ii) the Credit Facility will be replaced by the New Credit Facility,
resulting in the write-off of $6.9 million in deferred financing costs related
to the existing agreement (after tax cost of $4.3 million) and the incurrence of
approximately $1.2 million in deferred financing costs related to the New Credit
Facility; and (iii) expenses and payout under the Company's Value Appreciation
Plans. The Value Appreciation Plans are affected by the final offering price,
and assuming an initial public offering price of $16.00 per share, the Company
would incur an expense of $11.7 million ($7.3 million after tax) and would make
a cash payment at the time of closing of $2.8 million, make future annual cash
payments of $.7 million for five years beginning January 17, 1997 and issue
343,986 shares of restricted Common Stock valued at $5.5 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The methodology required by SFAS No. 121 is not materially
different from the Company's past practice and its adoption on January 1, 1996
did not have a material impact on the Company's consolidated financial
statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 establishes alternative methods of accounting and
disclosure for employee stock-based compensation arrangements. The Company has
elected to continue the use of the intrinsic value based method of accounting
for its employee stock option plan which does not result in the recognition of
compensation expense when employee stock options are granted if the exercise
price of the option equals or exceeds the fair market value of the stock at the
date of grant. The Company will provide pro forma disclosure of net income and
earnings per share in the notes to the consolidated financial statements as if
the fair value based method of accounting had been applied.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Such forward-looking
statements include, without limitation, the statements regarding the trends in
the industry set forth in the Prospectus Summary and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's anticipated future financial results and
position. Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's expectations are
disclosed in this Prospectus, including but not limited to the matters described
in "Risk Factors."
26
<PAGE> 28
BUSINESS
GENERAL
The Company is a worldwide leader in the design, manufacture and sale of
machinery and equipment and in the distribution of MRO products used in oil and
gas drilling and production. The Company designs, manufactures and sells
drawworks, mud pumps and power swivels (also known as "top drives"), which are
the major mechanical components of rigs used to drill oil and gas wells. Many of
these components are designed specifically for applications in offshore,
extended reach and deep land drilling. These components are installed on new
drilling rigs and used in the upgrade, refurbishment and repair of existing
drilling rigs. A significant portion of the Company's business includes the sale
of replacement parts for its own manufactured machinery and equipment. The
Company estimates that approximately 65% of the mobile offshore rig fleet and
the majority of the world's larger land rigs (2,000 horsepower and greater)
manufactured in the last twenty years utilize certain drilling machinery
components manufactured by the Company. In addition, the Company manufactures
and sells a complete line of centrifugal and reciprocating pumps used in
oilfield and industrial applications.
The Company provides distribution services through its network of 121
distribution service centers located near major drilling and production activity
worldwide, but principally in the United States and Canada. These distribution
service centers have historically provided MRO products, including valves,
fittings, flanges, replacement parts and miscellaneous expendable items. As oil
and gas companies and drilling contractors have refocused on their core
competencies and emphasized efficiency initiatives to reduce costs and capital
requirements, the Company's distribution services have evolved to offer
outsourcing and alliance arrangements that include comprehensive procurement,
inventory management and logistics support. These arrangements have resulted in
the Company working more closely with its customers in return for a more
exclusive oilfield distribution arrangement.
The Company's business is dependent on and affected by the level of
worldwide oil and gas drilling and production activity, the aging worldwide rig
fleet which was generally constructed prior to 1982, and the profitability and
cash flow of oil and gas companies and drilling contractors. Drilling activity
has recently increased in the offshore and deeper land markets both of which are
particularly well served by the drilling machinery and equipment manufactured by
the Company. As of June 30, 1996, the worldwide offshore mobile drilling rig
utilization rate was over 90% and the number of active U.S. land rigs had
increased approximately 15% compared to June 30, 1995. As drilling activity has
increased, the Company has experienced increased demand for its manufactured
products and distribution services as existing rigs are upgraded, refurbished
and repaired, new rigs are constructed and expendable parts are used.
The Company's oilfield equipment business and distribution services
business accounted for 56% and 44%, respectively, of the Company's combined
EBITDA for the six months ended June 30, 1996.
BUSINESS STRATEGY
Beginning in 1993, a new executive and operating team was assembled to
manage the Company's business. In January 1996, that new management team,
together with an investor group led by The Inverness Group Incorporated and
First Reserve Corporation, purchased the business of the Company from its former
owners, USX Corporation and Armco Inc. Since 1993, the business strategy of the
Company has been to enhance its operating performance and build a platform for
growth by focusing on markets in which its product lines are market leaders and
which are believed by management to provide the most significant growth
potential. As part of that strategy, the Company disposed of certain of its
non-core equipment manufacturing businesses and product lines and reengineered
its distribution business during the years 1993 through 1995. The completion of
the redirection of the Company's business in 1995, combined with the increase in
the level of worldwide oil and gas drilling activity, has resulted in a
substantial improvement in the Company's performance, with EBITDA before special
items increasing from $6.2 million for the six months ended June 30, 1995 to
$15.3 million for the six months ended June 30, 1996.
27
<PAGE> 29
The Company's current business strategy is to enhance its leading market
positions and operating performance by:
Leveraging Its Market Leading Installed Base. The Company estimates that
approximately 65% of the mobile offshore drilling rigs and the majority of the
world's larger land drilling rigs manufactured in the last twenty years use
drilling machinery manufactured by the Company. The Company believes this
installed base and its reputation for performance and reliability present
substantial opportunities to capture a significant portion of the increased
level of expenditures by its customers for the construction of new drilling rigs
as well as the upgrade and refurbishment of existing drilling rigs.
Capitalizing on Increasing Demand for Higher Horsepower Drilling Machinery.
The Company believes the advanced age of the existing fleet of drilling rigs,
coupled with increasing drilling activity involving greater water depths and
extended reach, will increase the demand for new drilling rig construction and
the upgrading and capacity enhancement of existing rigs. The Company's higher
horsepower drawworks, mud pumps and power swivels provide, in many cases, the
largest capacities currently available in the industry.
Building on Distribution Strengths. The Company has developed and
implemented integrated information and process systems that are designed for
more effective procurement, inventory management and logistics activities. A
critical element of the Company's strategy has been to regionally centralize its
procurement, inventory and logistics operations, thus gaining cost and inventory
utilization efficiencies while retaining its responsiveness to local markets. In
addition, the strategic integration of the Company's distribution expertise,
extensive distribution network and growing base of customer alliances provides
an increased opportunity for cost effective marketing of the Company's
manufactured equipment.
Capitalizing on Alliance/Outsourcing Trends. As a result of efficiency
initiatives, oil and gas companies and drilling contractors are frequently
seeking alliances with suppliers, manufacturers and service providers, or
outsourcing their procurement, inventory management and logistics requirements
for equipment and supplies in order to achieve cost and capital improvements.
The Company has entered into and is seeking alliance arrangements to better
serve its customers, to better manage its own inventory, to increase the volume
and scope of products sold to the customer without significantly increasing the
Company's overhead costs, and to expand marketing opportunities to sell
equipment manufactured by the Company. The Company believes that it is well
positioned to provide broad procurement, inventory management and other services
as a result of the Company's (i) large and geographically diverse network of
distribution service centers in major oil and gas producing areas, (ii)
purchasing leverage due to the volume of products sold, (iii) breadth of
available product lines and (iv) information systems that offer customers
enhanced online and onsite services.
OILFIELD EQUIPMENT
The Company's oilfield equipment business consists of the design,
manufacture, sale and service of drilling and pumping products.
Products
The Company's line of drilling machinery and equipment includes drawworks,
mud pumps, power swivels (also known as "top drives"), traveling equipment and
rotary tables. This machinery constitutes the majority of the components
involved in the primary functions of the drilling of oil and gas wells which
consist of pumping fluids and hoisting, supporting and rotating the drill
string. In addition to the manufacture of new drilling equipment and related
spare parts, the Company also refurbishes used drilling machinery and equipment.
The Company also services, refurbishes and manufactures spare parts for a line
of proprietary marine equipment products.
Drilling machinery and equipment can be purchased as individual components
or as a complete drilling rig package. The Company utilizes subcontractors for
certain machine shop and fabrication work.
The Company is also a major designer and manufacturer of centrifugal and
reciprocating pumps and pumping systems, as well as a wide variety of fluid-end
accessories and expendable pump parts for oil and gas
28
<PAGE> 30
drilling and oil production. The Company estimates that over 20,000
reciprocating pumps manufactured by the Company have been installed throughout
the world.
Mission-Fluid King(R) centrifugal pumps are utilized in various oil and gas
drilling applications including drilling mud mixing, low pressure fluid
transport and charging reciprocating pumps. The Company also manufactures and
sells a wide variety of fluid-end accessories for all major manufacturers' pumps
under its Mission-Fluid King(R) brand name. Fluid-end accessories are
expendables consumed on reciprocating mud pumps during the drilling and
production process and include replacement parts such as liners, valves, seats,
pistons, piston rods and packing accessories. These products are typically
replaced at regular intervals and are essential to drilling and production
operations.
Reciprocating pumps are used in a variety of artificial lift, oil transfer
and industrial applications. A sizable aftermarket for repair parts for these
pumps exists and the Company also provides fluid-end expendables under the
Mission-Fluid King(R) name to this market. Most of the pumps sold are
incorporated into systems (which generally consist of a reciprocating pump, a
power source, piping, valves, meters and other fabricated parts installed on a
skid) thereby providing the Company with an opportunity to offer the customer a
complete turnkey package. The Company also sells reciprocating pumps to the
refining, petrochemical, mining and steel industries.
Marketing of Company Products
Substantially all of the Company's drilling machinery, equipment and spare
parts sales, and a large portion of the Company's pumps and parts, are sold
through the Company's direct sales force and through the Company's distribution
service centers. The Company also markets its pumps and parts through
distribution networks not owned by the Company. Sales to foreign state-owned oil
companies are typically made in conjunction with agent or representative
arrangements. During the first half of 1996, management estimates that
approximately 40% of oilfield equipment revenues was from products sold for
delivery to destinations located outside North America.
The Company believes it is able to leverage its position as a manufacturer
of market-leading oilfield products by marketing those products through the
Company's distribution services business. During 1995, approximately 25% of
oilfield equipment revenues was from products sold through the Company's
established network of distribution service centers. Management believes that
the Company has an advantage over its competitors in the oilfield equipment
markets by virtue of its extensive distribution network making such products
readily available from numerous locations.
Competition
The oilfield equipment industry is highly competitive and the Company's
revenues and earnings can be affected by price changes, introduction of new
products and improved availability and delivery. Over the last several years the
market for oilfield services and equipment has experienced overcapacity in some
services and products provided by the Company, which has resulted in increased
price competition in certain areas of the Company's business. The Company
competes with a large number of companies some of which may offer certain more
technologically advanced products or possess greater financial resources than
the Company. Competition for drilling systems and machinery comes from
Continental Emsco Company, Maritime Hydraulics U.S. Inc., Varco International,
Inc. and Dreco Energy Services Ltd. The principal competitors with the Company's
Mission-Fluid King(R) product line are Harrisburg/Woolley, Inc. and Southwest
Oilfield Products, Inc. Competition for the Company's reciprocating pumps comes
primarily from Wheatley-Gaso Inc. and Gardner Denver Machinery Inc.
Manufacturing and Backlog
Sales of the Company's products are made on the basis of written orders and
oral commitments. In accordance with industry practice, such orders and
commitments may not be considered firm backlog because they may generally be
cancelled without significant penalty to the customer. The Company estimates
that the value of its orders for new oilfield equipment (excluding spare parts
orders) was approximately $26 million as
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<PAGE> 31
of June 30, 1996 as compared to orders of $8 million as of June 30, 1995. Of the
$26 million of unfilled orders at June 30, 1996, the Company expects
approximately one-half will be shipped during the remainder of 1996 and the
balance during 1997. The total level of orders varies from time to time as work
is completed and orders are received.
The Company's principal manufacturing facilities are located in Houston,
Texas and McAlester, Oklahoma. See "-- Facilities." The Company also outsources
the manufacture of parts or purchases components in finished form from qualified
subcontractors.
The Company's manufacturing operations require a variety of components,
parts and raw materials which the Company purchases from multiple commercial
sources. The Company has not experienced nor expects any significant delays in
obtaining deliveries of essential components, parts and raw materials.
Engineering
The Company maintains a staff of engineers and technicians to (i) design
and test new products, components and systems for use in drilling and pumping
applications, (ii) enhance the capabilities of existing products and (iii)
assist the Company's sales organization and customers with special projects. The
Company's product engineering efforts focus on developing technology to improve
the economics and safety of drilling and pumping processes. The Company has
recently developed a 750 ton capacity power swivel to complement its existing
650 ton, 500 ton and 350 ton capacity models. The Company has also introduced a
4,000 horsepower drawworks to increase customer efficiencies when drilling at
extended depths and during horizontal drilling. A disc brake system for
drawworks has been developed which can be operated remotely and provides higher
braking torque capabilities than previous systems. The disc brake system can be
adapted to upgrade drawworks previously sold by the Company.
Patents and Trademarks
The Company owns or has a license to use a number of patents covering a
variety of products. Although in the aggregate these patents are of importance
to the Company, the Company does not consider any single patent to be of a
critical or essential nature. In general, the Company depends on technological
capabilities, manufacturing quality control and application of its expertise
rather than patented technology in the conduct of its business. The Company
enjoys product name brand recognition, principally through its National-
Oilwell(R), National(R), Oilwell(R) and Mission-Fluid King(R) trademarks, and
considers such trademarks to be important to its business.
DISTRIBUTION SERVICES
The Company is a market leader in providing comprehensive services for the
procurement, inventory management and logistics support of oilfield products to
the oil and gas industry. The Company markets and distributes its products and
services through several channels, including its network of oilfield
distribution service centers, a direct sales force and sales representatives and
agents. The Company's distribution services network includes 114 facilities
located throughout the major oil and gas producing regions of the United States
and Canada. In addition, the Company has international distribution service
points in seven locations in the United Kingdom, South America and the Pacific
Rim. The Company's distribution services customers are primarily major and large
independent oil companies and drilling contractors. Since January 1, 1995, the
Company's distribution services business has sold products to approximately
5,000 customers. Due to the nature of its distribution services business, the
Company does not maintain a backlog for such operations.
The Company is able to leverage its position as a leading provider of
distribution services by marketing products manufactured by the Company. For the
twelve month period ended December 31, 1995, approximately $43 million of the
Company's distribution services revenues resulted from the sale of the Company's
oilfield equipment products. Management believes that the Company has a
competitive advantage in the distribution services business by virtue of its
ability to distribute leading products manufactured by the Company's oilfield
equipment business.
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<PAGE> 32
Products
Maintenance, Repair and Operating Supplies and Equipment. The maintenance,
repair and operating ("MRO") supplies and equipment stocked by the Company's
distribution service centers vary by location. Each distribution point generally
offers a complete line of oilfield products including valves, fittings, flanges,
spare parts for oilfield equipment and miscellaneous expendable items. Most
drilling contractors and oil and gas companies typically buy such supplies and
equipment pursuant to non-exclusive contracts, which normally specify a discount
from the Company's list price for each product or product category for a
one-year period. As of June 30, 1996, the Company had approximately 1,300 active
contracts for maintenance, repair and operating supplies and equipment with
customers primarily located in North America. The sales volume of an individual
distribution service center is dependent principally upon the level of oil and
gas exploration and production activity in the area. Because of the strong
service orientation of the distribution services business, Company personnel at
distribution service centers generally provide customers with 24-hour per day
availability.
As a result of efficiency initiatives that are taking place in the oil and
gas industry, drilling contractors and oil and gas companies are more frequently
seeking strategic alliances and outsourcing their procurement and inventory
management requirements. These strategic alliances constitute a growing
percentage of the Company's business and differ from standard agreements for MRO
supplies and equipment in that the Company becomes the customer's primary
supplier of those items. In addition, the Company may assume responsibility for
procurement, inventory management and product delivery for the customer, in some
cases by working directly out of the customer's facilities.
Oil Country Tubular Goods. The Company's tubular business is focused on the
procurement, inventory management and delivery of oil country tubular goods
manufactured by third parties. Tubular goods primarily consist of well casing
and production tubing used in the drilling, completion and production of oil and
gas wells. Well casing is used to line the walls of a wellbore to provide
structural support. Production tubing provides the conduit through which the oil
or gas will be brought to the surface upon completion of the well. Historically,
sales of tubular goods have been concentrated in North America, although the
Company makes occasional sales for shipment to foreign destinations.
Substantially all of the Company's sales of tubular goods are made through the
Company's direct sales force.
In response to customer demands for improved efficiency in tubular
procurement and distribution, the Company has developed strategic alliances
between the Company and its customers. These strategic alliances enable the
Company to more efficiently source tubular goods for its customers, while
decreasing the capital and personnel requirements of the customer. These
alliance relationships currently constitute a majority of the Company's tubular
sales. Since alliances provide additional consistency and predictability to the
procurement process, the Company has also benefitted from improved utilization
of its assets and from an increase in the turnover rate of its tubular
inventory.
Competition
The oilfield distribution services business is highly competitive. The
Company's revenues and earnings can be affected by competitive actions such as
price changes, improved delivery and other actions by competitors. In addition,
there are few barriers to entry for competitors to enter the distribution
services business. The Company's principal competitors in the United States
distribution services business include Continental Emsco Company, Wilson Supply
Company, Red Man Pipe & Supply Co. and McJunkin Corporation. CE Franklin Ltd.
and DOSCO Supply are major competitors of the Company's distribution services
business in the Canadian market. The Company also competes with a number of
regional or local oilfield supply stores in each geographic market. In the
international markets, the Company's distribution services business competes
with some of the above-named competitors as well as a number of regional or
local suppliers. The Company's North American tubular goods distribution
business competes with Vinson Supply Company, Sooner Pipe & Supply Corporation,
Red Man Pipe & Supply Co., Continental Emsco Company and Wilson Supply Company
as well as a number of regional distributors.
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<PAGE> 33
Suppliers
The Company obtains the MRO products it distributes from a number of
suppliers. The Company does not believe that any one supplier of MRO products is
material to the Company. For the year ended December 31, 1995 and for the six
months ended June 30, 1996, the Company purchased approximately 36% and 28%,
respectively, of its tubular requirements from the U.S. Steel Group of USX
Corporation, and its remaining requirements from various suppliers. In
connection with the Acquisition, in January 1996 the Company entered into a five
year distribution agreement with the U.S. Steel Group on an arms length basis on
generally the same terms that existed prior to the Acquisition. The Company is
not obligated to purchase any minimum amount of tubular goods under the
agreement with the U.S. Steel Group. The Company has not experienced and does
not foresee experiencing a shortage in MRO products or tubular goods sold by the
Company.
FACILITIES
The Company owned or leased 129 facilities worldwide as of August 25, 1996,
of which the following are its principal manufacturing and administrative
facilities:
<TABLE>
<CAPTION>
APPROXIMATE
BUILDING SPACE
LOCATION (SQ. FT.) DESCRIPTION STATUS
----------------------------- -------------- ----------------------------------- -------
<S> <C> <C> <C>
Houston, Texas............... 217,000 Manufactures drilling machinery Leased
and equipment
McAlester, Oklahoma.......... 117,000 Manufactures pumps and expendable Owned
parts
Houston, Texas............... 116,000 Administrative offices Leased
</TABLE>
The manufacturing facilities listed above are used in the Company's
oilfield equipment business. The Company also has five satellite repair and
manufacturing facilities that refurbish and manufacture new equipment and parts.
These facilities are strategically located to meet customer needs in Houston,
Texas; Odessa, Texas; New Iberia, Louisiana; Aberdeen, Scotland and Singapore.
The Company believes that the capacity of its manufacturing and repair
facilities is suitable to meet demand for the foreseeable future.
The Company owns or leases approximately 121 distribution service centers
worldwide to operate its distribution services business. No individual facility
is significant to the distribution services business. The Company also leases
space at a number of tubular storage locations for use in its tubular goods
distribution business.
EMPLOYEES
As of August 31, 1996, the Company had a total of 1,384 employees, 1,158 of
whom were salaried and 226 of whom were paid on an hourly basis. Of the
Company's workforce, 316 of the employees are employed by the Company's foreign
subsidiaries and are located outside the United States. As of August 31, 1996,
the Company was a party to one collective bargaining agreement which applied to
six employees located in Singapore. The Company considers its relationship with
its employees to be good.
OPERATING RISKS AND INSURANCE
The Company's operations are subject to the usual hazards inherent in
manufacturing products and providing services for the oil and gas industry.
These hazards can cause personal injury and loss of life, business
interruptions, property and equipment damage and pollution or environmental
damage. The Company maintains comprehensive insurance covering its assets and
operations at levels which management believes to be appropriate and in
accordance with industry practice. However, no assurance can be given that
insurance coverage will be adequate in all circumstances or against all hazards,
or that the Company will be able to maintain adequate insurance coverage in the
future at commercially reasonable rates or on acceptable terms.
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<PAGE> 34
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to regulations by federal, state and
local authorities in the United States and regulatory authorities with
jurisdiction over its foreign operations. Environmental laws and regulations
have changed substantially and rapidly over the last 20 years, placing more
restrictions and limitations on activities that may impact the environment, such
as emissions of pollutants, generation and disposal of wastes and use and
handling of chemical substances. Although compliance with various governmental
laws and regulations has not materially adversely affected the Company's
financial condition or results of operations, no assurance can be given that
compliance with such laws or regulations will not have a material adverse impact
on the Company's business in the future.
The Company has conducted a number of environmental audits of its major
facilities to identify and categorize potential environmental exposures and to
ensure compliance with applicable environmental laws, regulations and permit
requirements. This effort has required and may continue to require operational
modifications to the Company's facilities, including installation of pollution
control devices and cleanups. The costs incurred to date by the Company in
connection with the performance of environmental audits and operational
modifications to its facilities have not been material, although the Company can
provide no assurance that such costs may not increase in the future.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes liability, without regard to fault or the legality of the
original conduct, on certain classes of persons with respect to the release of a
hazardous substance into the environment. These persons include the owner and
operator of the disposal site or sites where the release occurred and companies
that disposed or arranged for the disposal of the hazardous substances found at
such site. Persons who are or were responsible for releases of hazardous
substances under CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the manufacture and
storage of products and equipment containing or requiring oil and/or hazardous
substances. Although the Company has utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes may
have been disposed of or released on or under the properties owned or leased by
the Company or on or under other locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and the wastes disposed
thereon may be subject to CERCLA, the Resource Conservation and Recovery Act and
analogous state laws. Under such laws, the Company would be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators), property contamination (including
groundwater contamination) or to perform remedial operations to prevent future
contamination.
The Company and approximately 250 other potentially responsible parties
("PRPs") have received notices from the Environmental Protection Agency (the
"EPA") that each is a PRP under CERCLA in connection with a waste oil recycling
facility operated in the State of Texas by Voda Petroleum. It is alleged that
the Company and its predecessors generated waste which was transported to a site
operated by Voda Petroleum and that Voda Petroleum improperly disposed of the
waste. The EPA has conducted a preliminary assessment of the site and determined
that the contamination consists primarily of oil that is subject to the
requirements of Oil Pollution Act of 1990 ("OPA") which subjects owners of
facilities to strict joint and several liability for all containment and cleanup
costs and certain other damages arising from an oil spill including, but not
limited to, the costs of responding to a release of oil to surface waters.
Liability under OPA is generally limited to the party responsible for the
facility from which the spill or release actually occurred. The EPA also has
determined that a portion of the contamination at the site consists of hazardous
substances that are subject to the provisions of CERCLA. The EPA has indicated
that it intends to remediate the Voda site and has established an initial site
cleanup estimate of approximately $2 million. Management of the
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<PAGE> 35
Company believes that the Company's liability, if any, to the extent not
otherwise provided for, should not have a material adverse effect on the
Company's consolidated financial statements.
Although the Company believes that it is in substantial compliance with
existing laws and regulations, there can be no assurance that substantial costs
for compliance will not be incurred in the future. Moreover, it is possible that
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional, presently
unquantifiable, costs or liabilities to the Company.
AGREEMENT WITH PREVIOUS OWNERS
The Purchase Agreement entered into among the Company, USX Corporation and
Armco Inc. in connection with the Acquisition of the Partnership from them
provides that the Company will be responsible for (i) all of the liabilities,
including environmental costs, disclosed and undisclosed, created after April 1,
1987 with respect to the business operations of the predecessor partnership as
they were being conducted on the closing date ("Continuing Operations"), (ii)
disclosed liabilities created after April 1, 1987 with respect to operations of
the Partnership discontinued or sold prior to the closing date ("Discontinued
Operations"), (iii) disclosed liabilities for environmental costs for conditions
in existence as of April 1, 1987 ("Pre-1987 Environmental Costs"), (iv) fifty
percent of the first $8.0 million of the aggregate of undisclosed Pre-1987
Environmental Costs and undisclosed liabilities related to Discontinued
Operations and (v) taxes other than United States federal income taxes. While
there can be no assurance as to undisclosed liabilities, the Company's financial
statements reflect appropriate reserves for all material liabilities under items
(i), (ii), (iii) and (v) which were disclosed prior to the acquisition of the
Partnership or identified subsequently by the Company. It is not possible to
estimate the aggregate liability of the Company for undisclosed liabilities
under items (i), (iv) and (v), but the Company's exposure under item (iv) is
limited to a maximum of $4 million.
LEGAL PROCEEDINGS
There are pending or threatened against the Company various claims,
lawsuits and administrative proceedings, all arising from the ordinary course of
business, with respect to commercial, product liability and employee matters
which seek remedies or damages. Although no assurance can be given with respect
to the outcome of these or any other pending legal and administrative
proceedings and the effect such outcomes may have on the Company, management
believes that any ultimate liability resulting from the outcome of such
proceedings, to the extent not otherwise provided for, will not have a material
adverse effect on the Company's consolidated financial statements.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the Company's executive officers and directors,
together with their positions and ages.
<TABLE>
<CAPTION>
DIRECTOR'S
NAME AGE POSITION WITH THE COMPANY TERM EXPIRING
- --------------------------------- --- -------------------------------- -------------
<S> <C> <C> <C>
Joel V. Staff(1)................. 52 Chairman of the Board, President 1999
and Chief Executive Officer
C. R. Bearden.................... 50 Executive Vice President, 1998
President of Distribution
Services and Director
Lynn L. Leigh.................... 71 Senior Vice --
President -- Marketing
Steven W. Krablin................ 46 Vice President and Chief --
Financial Officer
James J. Fasnacht................ 41 Vice President and General --
Manager of Pumping Systems
Merrill A. Miller, Jr............ 46 Vice President and General --
Manager of Drilling Systems
Jerry N. Gauche.................. 48 Vice President -- Organizational --
Effectiveness
Paul M. Nation................... 42 Vice President, Secretary and --
General Counsel
W. McComb Dunwoody(1)............ 51 Director 1999
William E. Macaulay(1)(3)........ 51 Director 1999
Howard I. Bull(2)(3)............. 56 Director 1998
James T. Dresher(2).............. 77 Director 1997
James C. Comis III............... 32 Director 1998
Bruce M. Rothstein............... 44 Director 1997
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
The Amended and Restated Certificate of Incorporation of the Company
classifies the board of directors into three classes having staggered terms of
three years each. The number of directors is fixed from time to time by
resolution of the board of directors and consists of not less than three
directors. The board of directors is currently set at eight members. The
executive officers named above were elected to serve in such capacities until
the next annual meeting of the board of directors, or until their respective
successors have been duly elected and qualified, or until their earlier death,
resignation, disqualification or removal from office.
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
Joel V. Staff has served as the President and Chief Executive Officer of
the Company since July 1993 and Chairman of the Board since January 1996. Prior
to joining the Company, Mr. Staff served as a Senior Vice President of Baker
Hughes Incorporated, a worldwide diversified oil services company, from October
1983 to May 1993. Mr. Staff also serves as a director of Destec Energy Inc., an
independent power company.
C. R. Bearden has served as Executive Vice President of the Company and
President of Distribution Services since January 1995 and as a Director since
January 1996. Mr. Bearden served in various executive capacities including
President and Chief Executive Officer of Chiles Offshore Corporation from 1979
until that company's 1994 acquisition by a subsidiary of Noble Drilling
Corporation, an offshore drilling contractor, where he served as President and
Chief Operating Officer until joining the Company.
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<PAGE> 37
Lynn L. Leigh has served as a Senior Vice President since October 1993.
Prior to joining the Company, Mr. Leigh served as the President and Chief
Executive Officer of Hydril Company, a manufacturer of oilfield drilling
equipment, from January 1992 to July 1993. Prior thereto, he provided consulting
and project management support services to Grasso Oilfield Services, Inc. from
March 1989 to December 1991 and served as President of Unit Rig and Equipment
Company from November 1987 to February 1989. Mr. Leigh also serves as a director
of Global Marine, Inc., a marine drilling contractor.
Steven W. Krablin has served as Vice President and Chief Financial Officer
since January 1996. Mr. Krablin served in various capacities including Vice
President-Finance and Chief Financial Officer of Enterra Corporation, a
NYSE-listed, international oilfield service company, from 1986 to January 1996.
James J. Fasnacht has served as Vice President and General Manager of
Pumping Systems since November 1993, as Human Resources Manager from 1991 to
November 1993 and in various other capacities since joining the Company in 1979.
Merrill A. Miller, Jr. has served as Vice President and General Manager of
Drilling Systems since July 1996 and as Vice President of Marketing, Drilling
Systems from February 1996 to July 1996. Prior thereto, Mr. Miller was President
of Anadarko Drilling Company, a drilling contractor, from January 1995 to
February 1996. From May 1980 to January 1995, Mr. Miller served in various
capacities including Vice President/U.S. Operations of Helmerich & Payne
International Drilling Co., a drilling contractor.
Jerry N. Gauche has served as Vice President -- Organizational
Effectiveness since joining the Company in January 1994. Prior thereto, Mr.
Gauche was employed by BP Exploration, Inc., an oil and gas exploration and
production company, where he served as General Manager of Central Services from
January 1990 to September 1992 and Director of Public Affairs and Executive
Coordination from May 1988 to December 1989.
Paul M. Nation has served as Secretary and General Counsel of the Company
since 1987 and Vice President since 1994.
W. McComb Dunwoody has served as a Director of the Company since January
1996. Mr. Dunwoody has been Chief Executive Officer since 1981 of The Inverness
Group Incorporated, which sponsors and invests in private equity transactions.
Additionally, he has served as President and Chief Executive Officer of
Inverness/Phoenix LLC since 1994.
William E. Macaulay has served as a Director of the Company since January
1996. Mr. Macaulay has been the President and Chief Executive Officer of First
Reserve Corporation, a corporate manager of private investments focusing on the
energy and energy-related sectors, since 1983. Mr. Macaulay serves as a director
of Weatherford Enterra, Inc., an oilfield service company, Maverick Tube
Corporation, a manufacturer of steel pipe and casing, Transmontaigne Oil
Company, an oil products distribution and refining company, Hugoton Energy
Corporation, an independent oil and gas exploration and production company, and
Cal Dive International, Inc., a provider of subsea services in the Gulf of
Mexico.
Howard I. Bull has served as a Director of the Company since January 1996.
Since April 1994, Mr. Bull has been President, Chief Executive Officer and a
director of Dal-Tile International, Inc. which is the largest tile manufacturer
and distributor in North America. Prior to joining Dal-Tile International, Inc.,
Mr. Bull spent 10 years with Baker Hughes Incorporated, a worldwide diversified
oil services company, where he became Chief Executive Officer for Baker Hughes
Drilling Equipment Company. Additionally, he served York International
Corporation, a worldwide manufacturer and distributor of air conditioner and
refrigeration equipment, as President of its Applied Systems Division and Air
Conditioning Business Group. Mr. Bull also serves as a director of Marine
Drilling Companies, Inc., an offshore drilling contractor.
James T. Dresher has served as a Director of the Company since January
1996. Mr. Dresher has been Chairman/Chief Executive Officer and principal owner
of Unidata, Inc., a Denver-based software company, since December 1991 and has
been Chairman and owner of Glenangus, a residential real estate development
company, since 1972. In addition, Mr. Dresher served as Chairman/CEO of York
International Corporation
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<PAGE> 38
from 1988 to 1993. Prior thereto, Mr. Dresher served as a director, Chief
Financial Officer and Executive Vice President of Baker International
Corporation.
James C. Comis III has served as a Director of the Company since January
1996. Mr. Comis has served as Managing Director of Inverness/Phoenix LLC since
August 1994. From August 1990 to August 1994, Mr. Comis was engaged in
sponsoring and investing in private equity transactions with Mr. Dunwoody.
Bruce M. Rothstein has served as a Director of the Company since May 1996.
Mr. Rothstein is Vice President of First Reserve Corporation, which he joined in
1991. Prior to joining First Reserve, he served as Treasurer and Chief
Accounting Officer of Computer Factory, Inc.
APPOINTMENT OF DIRECTORS
All of the existing members of the Company's board of directors were
designated and elected pursuant to the terms of the Stockholders Agreement.
Messrs. Staff and Bearden were designated to serve as directors pursuant to the
Stockholders Agreement because they serve as the Company's Chief Executive
Officer and Executive Vice President, respectively. Messrs. Dunwoody, Bull,
Dresher and Comis were designated to serve as directors pursuant to the
Stockholders Agreement by DPI Oil Service Partners Limited Partnership for which
Inverness/Phoenix LLC serves as the managing general partner. Messrs. Macaulay
and Rothstein were designated to serve as directors pursuant to the Stockholders
Agreement by the partnerships for which First Reserve Corporation serves as the
managing general partner. The terms of the Stockholders Agreement concerning
rights to designate members of the board of directors will terminate
automatically upon the completion of the Offering and will not be replaced by
any agreement among the stockholders.
COMMITTEES
The Company has the following standing committees of the board of
directors:
Executive Committee. The Executive Committee consists of Messrs. Dunwoody,
Staff and Macaulay, with Mr. Dunwoody serving as Chairman. The Executive
Committee has the full power and authority to exercise all the powers of the
board of directors in the management of the business except the power to fill
vacancies in the board of directors and the power to amend the Bylaws.
Audit Committee. The Audit Committee consists of Messrs. Dresher and Bull,
with Mr. Dresher serving as Chairman. The Audit Committee has responsibility
for, among other things, (i) recommending the selection of the Company's
independent accountants, (ii) reviewing and approving the scope of the
independent accountants' audit activity and extent of non-audit services, (iii)
reviewing with Management and the independent accountants the adequacy of the
Company's basic accounting systems and the effectiveness of the Company's
internal audit plan and activities, (iv) reviewing with Management and the
independent accountants the Company's financial statements and exercising
general oversight of the Company's financial reporting process and (v) reviewing
the Company's litigation and other legal matters that may affect the Company's
financial condition and monitoring compliance with the Company's business ethics
and other policies.
Compensation Committee. The Compensation Committee consists of Messrs. Bull
and Macaulay, with Mr. Bull serving as Chairman. This committee has general
supervisory power over, and the power to grant options under, the Stock Award
and Long-Term Incentive Plan and the Value Appreciation Plans. The Compensation
Committee has responsibility for, among other things, (i) reviewing the
recommendations of the Chief Executive Officer as to appropriate compensation of
the Company's principal executive officers and certain other key personnel and
establishing the compensation of such key personnel and the Chief Executive
Officer, (ii) examining periodically the general compensation structure of the
Company and (iii) supervising the welfare and pension plans and compensation
plans of the Company.
DIRECTOR COMPENSATION
Directors who are full-time employees of the Company do not receive a
retainer or fees for service on the board of directors or on committees of the
board. Members of the board of directors who are not full-time
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<PAGE> 39
employees of the Company receive an annual fee of $15,000, a fee of $1,000 for
attendance at each meeting of the board of directors and at each meeting of its
committees or any special committee established by the board, and a fee of
$1,000 per day for any special assignments. The chairmen of the audit and
compensation committees receive a fee of $1,250 for attendance at each meeting
of the committee they chair. In addition, directors of the Company (including
directors who are not full-time employees of the Company) are eligible for
grants of stock options and other awards, although no grants have been made,
pursuant to the Stock Award and Long-Term Incentive Plan.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation payable by the Company to its Chief Executive
Officer and its other most highly compensated executive officers for the year
ended December 31, 1995 and includes executive officers who joined the Company
in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND --------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION
------------------------------------------------- -------- -------- ------------
<S> <C> <C> <C>
Joel V. Staff.................................... $275,016 -- --
Chairman, President and Chief Executive Officer
C. R. Bearden.................................... 215,625 -- --
Executive Vice President
Lynn L. Leigh.................................... 195,000 -- --
Senior Vice President
Steven W. Krablin(1)............................. -- -- --
Vice President and Chief Financial Officer
Merrill A. Miller, Jr.(1) ....................... -- -- --
Vice President
</TABLE>
- ---------------
(1) Messrs. Krablin and Miller joined the Company in January 1996 and February
1996, respectively.
EMPLOYMENT AND COMPENSATION ARRANGEMENTS
Effective as of January 1, 1996, the Company entered into an employment
agreement with each of the executive officers providing for a base salary,
participation in the Company's Incentive Plan and employee benefits as generally
provided to all employees for a continuing term of two years for Mr. Staff and
one year for each of the other executive officers. The Company is not obligated
to pay any amounts pursuant to the employment agreements upon (i) voluntary
termination; (ii) termination for cause (as defined); (iii) death; (iv)
long-term disability; or (v) employee's refusal to accept comparable employment
with a successor corporation. If the employment relationship is terminated by
the Company for any other reason, or by the employee due to an uncorrected
material breach of the employment agreement by the Company, the employee is
entitled to receive his base salary and current year targeted bonus amount
either as a lump sum payment or over the one or two year term, as applicable, as
determined by the employment agreement under the circumstances. The employment
agreements with executive officers provide for the following base salaries for
1996: Joel V. Staff -- $300,000; C. R. Bearden -- $240,000; Lynn L.
Leigh -- $195,000; Steven W. Krablin -- $150,000; and Merrill A. Miller,
Jr. -- $150,000. The executive officers are entitled to bonuses as provided in
the Company's 1996 Employee Incentive Plan. See "-- Employee Benefit Plans and
Arrangements -- Employee Incentive Plan." The named executive officers are also
entitled to certain benefits upon termination pursuant to the Stock Incentive
Plan and Value Appreciation Plans, as described herein. Termination payments to
each of the named executive officers would be as follows: Joel V.
Staff -- $727,500; C. R. Bearden -- $324,000; Lynn L. Leigh -- $263,250; Steven
W. Krablin -- $202,500; and Merrill A. Miller, Jr. -- $202,500. During the
period of employment and for a period after termination of two years for Mr.
Staff and one year for each of the other executive officers, the employees are
generally prohibited from
38
<PAGE> 40
competing or assisting others to compete with the Company in its existing or
recent business, or inducing any other employee to terminate employment with the
Company.
LONG-TERM STOCK INCENTIVE PLAN
In 1996, the Company adopted a Stock Award and Long-Term Incentive Plan
("Stock Incentive Plan"), which provides for the award of restricted stock,
incentive stock options, stock appreciation rights, performance share awards,
stock value equivalent awards or any combination of the above, to certain key
employees of the Company (the "Employee Plan Participants"). Awards are granted
to Employee Plan Participants by the Compensation Committee of the board of
directors of the Company. The Stock Incentive Plan authorizes the issuance of up
to an aggregate of 1,941,303 shares of Common Stock of the Company to the
Employee Plan Participants. As of August 31, 1996, 941,303 shares of Common
Stock of the Company had been awarded as restricted stock to seven recipients,
each of whom is an executive officer of the Company, pursuant to Restricted
Stock Agreements. Those Restricted Stock Agreements provide for the purchase of
Common Stock of the Company for $.001 per share (the "Restricted Stock"). Any of
the 941,303 shares of Restricted Stock which are forfeited can be reawarded to
new participants by the Company. The Restricted Stock is subject to forfeiture
restrictions, which prohibit the stock from being sold, assigned, pledged,
exchanged or otherwise transferred until the forfeiture restrictions have
lapsed. The Restricted Stock Agreements also provide that the Restricted Stock
must be resold to the Company for $.001 per share if the recipients' employment
with the Company is terminated for any reason prior to the lapse of the
forfeiture restrictions. The forfeiture restrictions lapse each year on 20% of
the total number of shares of Restricted Stock awarded to each Employee Plan
Participant and on an additional twenty percent of the Restricted Stock awarded
to an Employee Plan Participant upon an involuntary termination of employment
without cause. The Stock Incentive Plan is administered by the Compensation
Committee.
Under certain circumstances, the accelerated lapsing of the forfeiture
provisions of the Restricted Stock might be deemed an "excess parachute payment"
for purposes of the golden parachute tax provisions of Section 280G of the
Internal Revenue Code. To the extent it is so considered, the Company may be
denied a tax deduction. In addition, the Restricted Stock Agreements provide for
the Company to pay the Employee Plan Participants a bonus which is equal to
two-thirds of the amount of any excess parachute tax payments which may be made
by the Employee Plan Participants (the "Parachute Bonuses"), plus an additional
amount equal to the additional income taxes to be paid by the participants
related to the Parachute Bonuses.
EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS
The following are descriptions of certain of the Company's employee benefit
plans and arrangements under which employees, officers and directors of the
Company may participate.
Employee Incentive Plan. In 1996, the Company established the 1996
National-Oilwell Employee Incentive Plan (the "Employee Incentive Plan") in
which all employees, including executive officers, are eligible to receive cash
bonus payments. The amount of the bonus payment is determined by the Company's
performance objectives based on measures of EBITDA and the ratio of EBITDA to
capital employed. A minimum performance level must be achieved by the Company
before any bonus is earned, and higher levels of achievement are rewarded with
increasing bonus payments based upon an established progression. A participant's
bonus opportunity varies depending upon the level of his or her position. The
maximum bonus opportunity for the President is approximately 65% of annual base
salary and for the other executive officers is approximately 50%. The board of
directors may adjust the award by as much as 25% of the target award.
Value Appreciation and Incentive Plan A. The Company has adopted an
incentive plan, the Value Appreciation and Incentive Plan A ("VAP A"), which
provides for certain key employees of the Company ("VAP A Participants") to
qualify for an award upon the occurrence of certain events, including an initial
public offering. The Company grants VAP A Participants awards in the form of
Value Appreciation Units ("VAUs"), of which a maximum of 80 can be awarded under
VAP A. As of August 31, 1996 there were 27 key employees and managers (of whom
only Mr. Leigh is an executive officer of the Company) participating in VAP A,
and 63 of the 80 VAUs available had been awarded to those VAP A Participants. In
the event of
39
<PAGE> 41
an initial public offering, the maximum amount to be awarded to VAP A
Participants (the "Maximum VAP A Award"), which assumes all 80 VAUs have been
awarded, is calculated by multiplying the value of the total number of issued
and outstanding shares of Common Stock of the Company immediately prior to the
Offering (valued at the initial public offering price, less underwriters'
discount) times 0.04.
The amount of the award to be distributed to an individual VAP A
Participant (an "Individual Distribution Award") is calculated by multiplying
the Maximum VAP A Award by a fraction, the numerator of which is the number of
VAUs awarded to the individual VAP A Participant, and the denominator of which
is 80. At the time of an initial public offering participants will receive
one-third of their Individual Distribution Amount in cash and the remaining
two-thirds in restricted Common Stock of the Company (the "VAP A Stock"), valued
at the initial public offering price. The VAP A Stock is subject to forfeiture
restrictions, which prohibit the stock from being sold, assigned, pledged,
exchanged or otherwise transferred until the forfeiture restrictions have
lapsed. The forfeiture restrictions lapse on one-half of the VAP A Stock on the
first anniversary date of the initial public offering, and on the other one-half
of the VAP A Stock on January 17, 1999 (the "VAP A Restriction Lapse Dates").
The right of a participant to retain the stock can not be forfeited unless the
participant is terminated for cause before the VAP A Restriction Lapse Dates.
Under certain circumstances, the amounts payable under VAP A might be
deemed an "excess parachute payment" for purposes of the golden parachute tax
provisions of Section 280G of the Internal Revenue Code. To the extent it is so
considered, the Company may be denied a tax deduction. In addition, VAP A
provides for the Company to pay the VAP A Participants a bonus which is equal to
two-thirds of the amount of any excess parachute tax payments which may be made
by the VAP A Participants (the "VAP A Parachute Bonuses"), plus an additional
amount equal to the additional income taxes to be paid by the VAP A Participants
related to the VAP A Parachute Bonuses.
Value Appreciation and Incentive Plan B. The Company has adopted another
incentive plan, the Value Appreciation and Incentive Plan B ("VAP B", and
collectively with VAP A, the "Value Appreciation Plans"), which provides for
certain executive officers of the Company to qualify for an award upon the
occurrence of certain events, including an initial public offering. Only
executive officers who have received an award of restricted stock under the
Company's Stock Incentive Plan as of the date of an initial public offering
("VAP B Participants") participate in VAP B. As of August 31, 1996 there were
seven participants in VAP B. Awards to VAP B Participants consist of a Pool A
Award and a Pool B Award. The total Pool A Award is calculated by multiplying
the value of the total number of issued and outstanding shares of Common Stock
of the Company immediately prior to the public offering (valued at the initial
public offering price, less underwriters' discount) times 0.01. The total Pool B
Award is $3,490,000.
The portion of the Pool A Award to be distributed to an individual VAP B
Participant is calculated by multiplying the Pool A Award by a fraction, the
numerator of which is the number of shares of stock of the Company awarded to
the individual VAP B Participant, and the denominator of which is the total
number of shares of stock of the Company awarded to all VAP B Participants. At
the time of an initial public offering, VAP B Participants will receive
one-third of the Pool A Award in cash and the remaining two-thirds in restricted
Common Stock of the Company (the "VAP B Stock"), valued at the initial public
offering price. The VAP B Stock is subject to forfeiture restrictions, which
prohibit the stock from being sold, assigned, pledged, exchanged or otherwise
transferred until the forfeiture restrictions have lapsed. The forfeiture
restrictions lapse on one-half of the VAP B Stock on the first anniversary date
of the initial public offering, and on the other one-half of the VAP B Stock on
January 17, 1999 (the "VAP B Restriction Lapse Dates"). The right of a
participant to retain the stock can not be forfeited unless the participant is
terminated for cause before the VAP B Restriction Lapse Dates.
The portion of the Pool B Award to be distributed to an individual VAP B
Participant is calculated by multiplying the Pool B Award by a fraction, the
numerator of which is the number of shares of restricted stock of the Company
awarded to the individual VAP B Participant under the Company's Stock Incentive
Plan, and the denominator of which is the total number of shares of restricted
stock of the Company awarded to all VAP B Participants under the Company's Stock
Incentive Plan. The timing of the distribution of the Pool B Awards is tied to
the date upon which an initial public offering occurs, but if such event occurs
prior to
40
<PAGE> 42
January 1, 1997, the Pool B Award will be paid in five equal installments on
January 17 in 1997, 1998, 1999, 2000 and 2001. Pool B Awards are payable in
cash. The right of a participant to receive the Pool B Award of VAP B can not be
forfeited unless the participant is terminated for cause before the receipt of
the Pool B Award.
Under certain circumstances, the amounts payable under VAP B might be
deemed an "excess parachute payment" for purposes of the golden parachute tax
provisions of Section 280G of the Internal Revenue Code. To the extent it is so
considered, the Company may be denied a tax deduction. In addition, VAP B
provides for the Company to pay the VAP B Participants a bonus which is equal to
two-thirds of the amount of any excess parachute tax payments which may be made
by the VAP B Participants (the "VAP B Parachute Bonuses"), plus an additional
amount equal to the additional income taxes to be paid by the VAP B Participants
related to the VAP B Parachute Bonuses.
Supplemental Savings Plan. The Supplemental Savings Plan is a non-qualified
deferred compensation plan, which permits certain employees (31 as of June 30,
1996) to defer receipt of regular and/or incentive compensation. Participants
are not entitled to receive any deferred amounts prior to termination of
employment, at which time payments will be made in a lump sum or in monthly
payments over a prespecified period not to exceed 10 years.
The Supplemental Savings Plan also provides for the Company to make
contributions on behalf of the participants whose contributions to the Company's
Retirement and Thrift Plan are limited by various Internal Revenue Code
regulations. The Supplemental Savings Plan assets are held in a trust whose
assets may be reached by creditors, but which are unavailable to the Company.
Shares of the Company's Common Stock held in trust pursuant to this plan are
voted by a party unaffiliated with the Company or the trustee of the plan.
CERTAIN TRANSACTIONS
STOCKHOLDERS AGREEMENT
The Company and the holders of 100% of the Company's Class A Common Stock
and Common Stock outstanding prior to the Offering have entered into a
Stockholders Agreement dated January 16, 1996, as amended (the "Stockholders
Agreement"). The Stockholders Agreement contains provisions for management of
the Company, voting of shares, election of directors and restrictions on
transfer of shares. Among other things, the Stockholders Agreement provides that
four members of the Company's board of directors would be designated by DPI Oil
Service Partners Limited Partnership (of which Inverness/Phoenix LLC serves as
the managing general partner), two members of the board would be designated by
partnerships of which First Reserve Corporation serves as the managing general
partner, and the Chief Executive Officer and Executive Vice President would
serve as the remaining two directors of the Company's eight member board of
directors. All of the existing members of the Company's board of directors were
designated and elected pursuant to the terms of the Stockholders Agreement. The
terms of the Stockholders Agreement concerning rights to designate members of
the board of directors, management of the Company, and restrictions on transfer
of shares all will terminate automatically upon the completion of the Offering.
In addition, the Stockholders Agreement provides the Inverness Investors and the
First Reserve Investors, after the Offering, the right on four occasions to
require the Company to register all or part of their registerable shares under
the Securities Act, and the Company is required to use its best efforts to
effect such registration, subject to certain conditions and limitations. The
Stockholders Agreement also provides all the parties to the Stockholders
Agreement with piggyback registration rights on any offering by the Company of
any of its securities to the public except a registration on Forms S-4 or S-8.
The Company will bear the expenses of all registrations under the Stockholders
Agreement. The parties to the Stockholders Agreement have waived their
registration rights with respect to a Registration Statement filed by the
Company with respect to the Offering.
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<PAGE> 43
FEE AGREEMENTS
The Company entered into a Management Services Agreement dated January 16,
1996 (the "Management Services Agreement") with Inverness/Phoenix LLC, a
Connecticut limited liability company. This agreement will be terminated and
replaced with a Deferred Fee Agreement immediately prior to the Offering.
The Management Services Agreement provides that Inverness/Phoenix LLC
perform management services as directed by the Company's board of directors,
including (i) assisting executive management; (ii) identifying and negotiating
acquisitions and dispositions for the Company; (iii) negotiating and analyzing
financing alternatives in connection with acquisitions, capital expenditures,
and refinancings; (iv) financial modeling and analysis; (v) assisting in
executive searches and (vi) other services as agreed with the Company's board of
directors.
The Management Services Agreement provides that Inverness/Phoenix LLC
receive fees of $1,000,000 per year, payable quarterly commencing in January
1996 and a transaction fee in connection with each acquisition or disposition by
the Company of an existing business of 1% of the aggregate transaction value of
each such transaction.
Prior to the Offering, the Management Services Agreement will be terminated
and replaced by a Deferred Fee Agreement with Inverness/Phoenix LLC and First
Reserve Corporation. Under the terms of the Deferred Fee Agreement,
Inverness/Phoenix LLC will be paid $250,000 in advance quarterly beginning on
the first day of the calendar quarter following the Offering through December
31, 1999. In addition, Inverness/Phoenix LLC and First Reserve Corporation will
be paid fees aggregating $1,050,000 and $225,000, respectively, on the first
date and to the extent such payment would not be an event of default under the
Seller Notes. The Seller Notes provide that an event of default would occur if
aggregate management or similar fees are paid to Inverness/Phoenix LLC and First
Reserve Corporation in any calendar year in excess of $1,000,000, or if
transaction fees in excess of 1% of the aggregate transaction value of any
merger, acquisition, consolidation or divesture involving the Company (a
"transaction") are paid to Inverness/Phoenix LLC and/or First Reserve
Corporation. If a transaction occurs prior to January 1, 2000, a portion of the
$1,275,000 shall be considered, and paid as, a transaction fee to the extent
that such payment does not cause an event of default under the Seller Notes with
respect to the $1,275,000, all amounts remaining unpaid as of January 1, 2000,
shall be considered as a management or similar fee and shall be payable
quarterly in advance in the aggregate amount of $250,000 (proportionally to
Inverness/Phoenix LLC and First Reserve Corporation) beginning on January 1,
2000, until the remaining unpaid portion of the $1,275,000 has been paid.
For its assistance in the Acquisition of the Partnership in January 1996,
Inverness/Phoenix LLC was paid a transaction fee of $1,800,000. In connection
with the Acquisition of the Partnership in January 1996, the Company paid First
Reserve Corporation a $1,200,000 transaction fee. In connection with the
Acquisition of the Partnership, GE Capital provided the Credit Facility,
Subordinated Note and equity capital and received transaction fees totalling
$4.7 million.
MANAGEMENT NOTES
In connection with the Acquisition, four of the Company's executive
officers issued promissory notes (the "Officer Notes") to the Company in an
aggregate amount of approximately $500,000 in exchange for Class A Common Stock
of the Company. The Officer Notes bear interest until maturity at 1.5% above the
prime interest rate, payable annually, and the principal is due on January 15,
2001 unless extended at the option of the Company. The Officer Notes were issued
by the following executive officers: James J. Fasnacht -- $150,000; Paul M.
Nation -- $199,999; C. R. Bearden -- $100,000; and Lynn L. Leigh -- $49,999. In
accordance with their terms, the Officer Notes will be prepaid immediately prior
to the Offering.
RECENT SALES OF COMMON STOCK
On July 15, 1995, the Company sold an aggregate of 1,168,310 shares of
Common Stock at $.001 per share to DPI Oil Service Partners Limited Partnership
and DPI Partners II, two limited partnerships for which Inverness/Phoenix LLC
serves as managing general partner, in connection with the initial capitaliza-
42
<PAGE> 44
tion of the Company. On January 16, 1996, the Company sold an aggregate of
8,806,479 shares of Common Stock at $.011 per share, 753,049 shares of Common
Stock at $.001 per share, an aggregate of 13,085.6 shares of Class A Common
Stock at $2,264 per share to the Inverness Investors, the First Reserve
Investors, GE Capital and members of management, including Messrs. Staff,
Bearden, Leigh, Nation and Gauche, in connection with the closing of the
Acquisition, and the Company issued a warrant to GE Capital to purchase 282,392
shares of Common Stock for $.011 per share in connection with the Credit
Facility. On July 24, 1996, the Company received the funds for and completed the
previously committed sale of an aggregate of 148,456 shares of Common Stock at
$.011 per share, 282,381 shares of Common Stock at $.001 per share and an
aggregate of 202.4 shares of Class A Common Stock at $2,264 per share to Messrs.
Fasnacht, Krablin and Miller in connection with the Acquisition which occurred
in January 1996.
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock by
(i) each beneficial owner of more than five percent of the Company's Common
Stock, (ii) each director of the Company, (iii) each of the executive officers
of the Company named in the Summary Compensation Table and (iv) all executive
officers and directors of the Company as a group. At June 30, 1996, there were
13,368,392 shares of Common Stock outstanding, after giving effect to the
issuance of 282,392 shares upon the exercise of the Warrant.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING AFTER OFFERING(1)
------------------------- -------------------------
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE SHARES PERCENTAGE
------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
The Inverness Investors(2)........... 5,150,033 38.5% 5,150,033 29.1%
666 Steamboat Road
Greenwich, Connecticut 06830
The First Reserve Investors(3)....... 4,227,968 31.6 4,227,968 23.9
475 Steamboat Road
Greenwich, Connecticut 06830
GE Capital........................... 1,607,289 12.0 1,607,289 9.1
105 W. Madison Street, Suite 1600
Chicago, Illinois 60602
Joel V. Staff........................ 369,296 2.7 394,162 2.2
Staff Trust(4)....................... 528,814 4.0 528,814 3.0
C. R. Bearden........................ 422,059 3.2 438,637 2.5
Steven W. Krablin.................... 172,062 1.3 180,351 1.0
Lynn L. Leigh........................ 155,870 1.2 205,601 1.2
Merrill A. Miller, Jr................ 94,127 * 102,416 *
W. McComb Dunwoody................... 5,150,033(5) 38.5 5,150,033(5) 29.1
William E. Macaulay.................. 4,227,968(6) 31.6 4,227,968(6) 23.9
Howard I. Bull....................... -- -- -- --
James T. Dresher..................... -- -- -- --
James C. Comis III................... 5,150,033(7) 38.5 5,150,033 29.1
Bruce M. Rothstein................... -- -- -- --
All directors and executive officers
as a group (14 persons)(5)(6)(7)... 11,232,289 84.0 11,364,907 64.2
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares of Common Stock issued pursuant to the Company's Value
Appreciation Plans (343,986 shares of Common Stock based on an assumed
initial public offering price of $16.00 per share).
(2) The "Inverness Investors" consist of two limited partnerships, DPI Oil
Service Partners Limited Partnership and DPI Partners II, of which
Inverness/Phoenix LLC, is, in each case, the managing general partner.
43
<PAGE> 45
(3) The "First Reserve Investors" consist of three limited partnerships, First
Reserve Fund V, Limited Partnership, First Reserve Fund V-2 and First
Reserve Fund VI, Limited Partnership, of which First Reserve Corporation
is, in each case, the managing general partner.
(4) These shares are owned by the trust created by that certain Trust Agreement
dated April 12, 1989 by and among Joel V. Staff and Mary Martha Staff, as
Trustors, and Richard Staff, as Trustee. Mr. Staff does not vote nor
exercise investment power over these shares.
(5) Represents shares owned by the Inverness Investors. Mr. Dunwoody serves on
the investment committee of Inverness/Phoenix LLC, which is the managing
general partner of the partnerships that are the record owners of the
shares owned by the Inverness Investors. The investment committee has sole
power to vote and dispose of the investments of Inverness/Phoenix LLC.
(6) This figure equals all shares beneficially owned by the First Reserve
Investors. First Reserve Corporation, of which Mr. Macaulay is the
President and Chief Executive Officer, is the managing general partner of
the limited partnerships comprising the First Reserve Investors. Mr.
Macaulay disclaims beneficial ownership as to all such shares.
(7) Represents shares owned by the Inverness Investors. Mr. Comis serves on the
investment committee of Inverness/Phoenix LLC, which is the managing
general partner of the partnerships that are the record owners of the
shares owned by the Inverness Investors. The investment committee has sole
power to vote and dispose of the investments of Inverness/Phoenix LLC.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of common stock and 10,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock").
COMMON STOCK
As of June 30, 1996, the Company's outstanding Common Stock consisted of
11,064,548 shares of Common Stock and 13,288 shares of the Company's Class A
Common Stock. All outstanding shares of Class A Common Stock will have been
automatically converted into shares of Common Stock on the effective date of the
Registration Statement of which this Prospectus is a part. Upon completion of
the Offering, 17,712,378 shares of Common Stock will be outstanding after giving
effect to (i) the mandatory conversion of all outstanding shares of Class A
Common Stock into 2,021,452 shares of Common Stock, (ii) the exercise of the
Warrant to purchase 282,392 shares of Common Stock and (iii) the issuance of
343,986 shares of Common Stock under the Company's Value Appreciation Plans
(assuming an initial public offering price of $16.00 per share).
The holders of Common Stock are entitled to one vote per share on all
matters voted on by the stockholders, including the election of directors.
Holders of Common Stock are not entitled to cumulate their votes in elections of
directors. Common stockholders have no preemptive rights or other rights to
subscribe for additional shares.
Upon the effectiveness of the Registration Statement of which this
Prospectus is a part, each share of Class A Common Stock will be automatically
converted into shares of Common Stock pursuant to the Company's Charter. Each
holder of Class A Common Stock will be entitled to receive the number of shares
of Common Stock equal to the Original Cost divided by the net public offering
price per share of the Common Stock being sold in the Offering (152.13 shares
for each share of Class A Common Stock, based on an assumed initial public
offering price of $16.00 per share). Pursuant to the Charter, the number of
shares of Common Stock issuable upon conversion of the Class A Common Stock is
determined by dividing $30,079,200 by the initial public offering price per
share, less underwriting discount. Based on the range of the estimated initial
public offering price of $15.00 per share to $17.00 per share (less estimated
underwriting discount), the total number of shares of Common Stock which will be
issued upon conversion of Class A Common Stock will range from 2,156,215 shares
of Common Stock to 1,902,543 shares of Common Stock. At the conclusion of the
Offering no shares of Class A Common Stock will remain outstanding.
44
<PAGE> 46
After retirement of the Class A Common Stock upon consummation of the
Offering, holders of Common Stock will have an equal and ratable right to
receive dividends when, as and if declared by the board of directors out of
funds legally available therefor subject only to any payment requirements or
other restrictions imposed by any series of Preferred Stock that may be issued
in the future. See "Dividend Policy."
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
The board of directors of the Company, without any action by the
stockholders of the Company, is authorized to issue up to 10,000,000 shares of
Preferred Stock, in one or more series and to determine the voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and in liquidation and the conversion and other rights of each such
series. There are no shares of Preferred Stock outstanding. See "Certain
Anti-Takeover and Other Provisions of the Amended and Restated Certificate of
Incorporation -- Preferred Stock."
CERTAIN ANTI-TAKEOVER AND OTHER PROVISIONS OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
The Amended and Restated Certificate of Incorporation (the "Charter") and
the Bylaws of the Company contain provisions that could have an anti-takeover
effect. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the board of directors of the Company and in
the policies formulated by the board of directors and to discourage certain
types of transactions which may involve an actual or threatened change of
control of the Company. The provisions are designed to reduce the vulnerability
of the Company to an unsolicited proposal for a takeover of the Company that
does not contemplate the acquisition of all of its outstanding shares or an
unsolicited proposal for the restructuring or sale of all or part of the
Company. The provisions are also intended to discourage certain tactics that may
be used in proxy fights. The board of directors believes that, as a general
rule, such takeover proposals would not be in the best interest of the Company
and its stockholders. Set forth below is a description of such provisions in the
Charter and the Bylaws. The description of such provisions set forth below
discloses, in the opinion of the Company's management, all material elements of
such provisions, is intended only as a summary and is qualified in its entirety
by reference to the pertinent sections of the Charter and the Bylaws, forms of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The board of directors has no current plans to
formulate or effect additional measures that could have an anti-takeover effect.
Classified Board of Directors. The classification of directors will have
the effect of making it more difficult for stockholders to change the
composition of the board of directors. At least two annual meetings of
stockholders generally will be required to effect a change in a majority of the
board of directors. Such a delay may help ensure that the Company's directors,
if confronted by a stockholder attempting to force a proxy contest, a tender or
exchange offer or an extraordinary corporate transaction, would have sufficient
time to review the proposal as well as any available alternatives to the
proposal and to act in what they believe to be the best interests of the
stockholders. The classification provisions will apply to every election of
directors, however, regardless of whether a change in the composition of the
board of directors would be beneficial to the Company and its stockholders and
whether a majority of the Company's stockholders believes that such a change
would be desirable. Pursuant to the Charter, the provisions relating to the
classification of directors may only be amended by the affirmative vote of
eighty percent of the then outstanding shares of capital stock entitled to vote
thereon ("Voting Stock").
Removal of Directors Only for Cause. Pursuant to the Charter, directors can
be removed from office, only for cause (as defined therein), by the affirmative
vote of eighty percent of the Voting Stock, other than at the expiration of
their term of office. Vacancies on the board of directors may be filled only by
the remaining directors and not by the stockholders.
Number of Directors. The Charter provides that the entire board of
directors will consist of not less than three members, the exact number to be
set from time to time by resolution of the board of directors. Accordingly, the
board of directors, and not the stockholders, has the authority to determine the
number of directors and could delay any stockholder from obtaining majority
representation on the board of directors by
45
<PAGE> 47
enlarging the board of directors and filling the new vacancies with its own
nominees until the next stockholder election.
No Written Consent of Stockholders. The Charter also provides that any
action required or permitted to be taken by the stockholders of the Company must
be taken at a duly called annual or special meeting of stockholders and may not
be taken by written consent. In addition, special meetings may only be called by
(i) the Chairman of the Board, (ii) the President or (iii) the board of
directors pursuant to a resolution adopted by a majority of the then-authorized
number of directors.
Charter and Bylaws. The Charter provides that the board of directors, by a
majority vote, may adopt, alter, amend or repeal provisions of the Bylaws.
Business Combinations under Delaware Law. The Company is subject to section
203 of the Delaware General Corporation Law ("DGCL"), which prohibits certain
transactions between a Delaware corporation and an "interested stockholder,"
which is defined as a person who, together with any affiliates and/or associates
of such person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock, unless (i) the business combination is approved
by the corporation's board of directors prior to the date the interested
stockholder acquired shares; (ii) the interested stockholder acquired at least
85% of the voting stock of the corporation in the transaction in which it became
an interested stockholder; or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of two-thirds of
the votes entitled to be cast by disinterested stockholders at an annual or
special meeting.
Preferred Stock. The Charter authorizes the board of directors of the
Company, without any action by the stockholders of the Company, to issue up to
10,000,000 shares of Preferred Stock, in one or more series and to determine the
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and in liquidation and the conversion and other
rights of each such series. Because the terms of the preferred stock may be
fixed by the board of directors of the Company without stockholder action, the
preferred stock could be issued quickly with terms designed to make more
difficult a proposed takeover of the Company or the removal of its management,
thus affecting the market price of the Common Stock and preventing stockholders
from obtaining any premium offered by the potential buyer. The board of
directors will make any determination to issue such shares based on its judgment
as to the best interests of the Company and its stockholders.
LIABILITY OF OFFICERS AND DIRECTORS -- INDEMNIFICATION
Delaware law authorizes corporations to limit or eliminate the personal
liability of officers and directors to corporations and their stockholders for
monetary damages for breach of officers' and directors' fiduciary duty of care.
The duty of care requires that, when acting on behalf of the corporation,
officers and directors must exercise an informed business judgment based on all
material information reasonably available to them. Absent the limitations
authorized by Delaware law, officers and directors are accountable to
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables corporations to limit available relief to equitable remedies such as
injunction or rescission. The Charter limits the liability of officers and
directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. Specifically, officers and directors of the
Company will not be personally liable for monetary damages for breach of an
officer's or director's fiduciary duty in such capacity, except for liability
(i) for any breach of the officers and directors duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the officer
and director derived an improper personal benefit.
46
<PAGE> 48
The inclusion of this provision in the Charter may have the effect of
reducing the likelihood of derivative litigation against officers and directors,
and may discourage or deter stockholders or management from bringing a lawsuit
against officers and directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefitted the Company and
its stockholders. Both the Company's Charter and Bylaws provide indemnification
to the Company's officers and directors and certain other persons with respect
to certain matters to the maximum extent allowed by Delaware law as it exists
now or may hereafter be amended. These provisions do not alter the liability of
officers and directors under federal securities laws.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 17,712,378 shares of Common Stock will be
outstanding. The shares of Common Stock sold in the Offering will be freely
tradeable without restriction or further registration under the Securities Act,
except for any shares purchased by an "affiliate" of the Company (as that term
is defined under the Securities Act), which will be subject to the resale
limitations of Rule 144 under the Securities Act. The remaining shares of Common
Stock, which are held by the Company's current stockholders, will be "restricted
securities" (within the meaning of Rule 144) and, therefore, will not be
eligible for sale to the public unless they are sold in transactions registered
under the Securities Act or pursuant to an exemption from registration,
including pursuant to Rule 144 or an offshore transaction pursuant to Regulation
S under the Securities Act. The 1,168,310 shares of Common Stock beneficially
owned by the Inverness Investors that were issued on July 15, 1995 are
restricted from resale pursuant to Rule 144 under the Securities Act until July
15, 1997. The remaining shares of Common Stock, held by the Company's existing
stockholders, were issued in 1996 and are restricted from resale under Rule 144
until various dates in 1998. The Stockholders Agreement provides the Inverness
Investors and the First Reserve Investors four demand registrations after the
Offering and provides the parties to the Stockholders Agreement with piggyback
registration rights. Such stockholders have waived their registration rights
with respect to a Registration Statement filed by the Company with respect to
the Offering. See "Certain Transactions -- Stockholders Agreement."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Stock Incentive Plan. Shares of Common
Stock issued pursuant to such plan generally will be available for sale in the
open market by holders who are not affiliates of the Company and, subject to the
volume and other limitations of Rule 144, by holders who are affiliates of the
Company.
In general, under Rule 144 as currently in effect, if a minimum of two
years has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who may
be deemed "affiliates" of the Company, would be entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock (i.e., 177,100
shares immediately after consummation of the Offering) and (ii) the average
weekly trading volume during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain provisions as to the manner of sale, notice requirements, and
the availability of current public information about the Company. In addition,
under Rule 144(k), if a period of at least three years has elapsed since the
later of the date restricted securities were acquired from the Company or the
date they were acquired from an affiliate of the Company, a stockholder who is
not an affiliate of the Company at the time of sale and has not been an
affiliate for at least three months prior to the sale would be entitled to sell
shares of Common Stock in the public market immediately without compliance with
the foregoing requirements under Rule 144. Rule 144 does not require the same
person to have held the securities for the applicable periods. The foregoing
summary of Rule 144 is not intended to be a complete description thereof. The
Commission has proposed an amendment to Rule 144 that would shorten the three-
and two-year holding periods described above to two years and one year,
respectively.
The Company, each of its directors and executive officers and all existing
stockholders have agreed with the Underwriters that they will not offer, sell,
contract to sell, sell any option or contract to purchase any
47
<PAGE> 49
option or contract to sell, grant any option, right or warrant for the sale of,
pledge, or otherwise dispose of or transfer any shares of Common Stock, with
certain exceptions, for a period of 180 days after the date of this Prospectus
without the prior written consent of Merrill Lynch, as representative of the
Underwriters. See "Underwriting."
Prior to the Offering, there has been no public market for the Common
Stock, and no prediction can be made of the effect, if any, that sales of Common
Stock or the availability of shares for sale will have on the market price
prevailing from time to time. Following the Offering, sales of substantial
amounts of Common Stock in the public market or otherwise, or the perception
that such sales could occur, could adversely affect the prevailing market price
for the Common Stock.
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company and each of the underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters, for whom Merrill Lynch, Goldman,
Sachs & Co. and Simmons & Company International are acting as representatives
(the "Representatives"), has severally agreed to purchase from the Company the
number of shares of Common Stock set forth below opposite their respective
names. The Underwriters are committed to purchase all of such shares if any are
purchased. Under certain circumstances, the commitments of non-defaulting
Underwriters may be increased as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Goldman, Sachs & Co. .....................................................
Simmons & Company International...........................................
---------
Total........................................................
========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Company has granted the Underwriters an option, exercisable by the
Representatives, to purchase up to 600,000 additional shares of Common Stock at
the initial public offering price, less the underwriting discount. Such option,
which expires 30 days after the date of this Prospectus, may be exercised solely
to cover over-allotments. To the extent that the Representatives exercise such
option, each of the Underwriters will be obligated, subject to certain
conditions, to purchase approximately the same percentage of the option shares
that the number of shares to be purchased initially by that Underwriter bears to
the total number of shares to be purchased initially by the Underwriters.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
through negotiations between the Company and the Representatives and may bear no
relationship to the market prices of the Common Stock after this offering. Among
the factors considered in determining the initial public offering price of the
Common Stock, in
48
<PAGE> 50
addition to prevailing market conditions, will be current and historical
conditions in the supply and demand for the Company's products (which conditions
may be influenced by oil and gas prices), business prospects of the Company and
the prospects in general for the industries in which the Company operates,
management of the Company, the earnings and cash flow multiples of the market
prices of common stock of other publicly traded companies in industries in which
the Company operates and the Company's cash flow and earnings prospects. There
can be no assurance that an active market for the Common Stock will develop upon
completion of the Offering or, if developed, that such market will be sustained.
Prices for the Common Stock after the Offering may be influenced by a number of
factors, including the depth and liquidity of the market for the Common Stock,
investor perceptions of the Company and the oil and gas industry in general, and
general economic and other conditions.
At the request of the Company, the Underwriters have reserved 200,000
shares of Common Stock for sale at the initial public offering price to
employees of the Company. The number of shares of Common Stock available for
sale to the general public will be reduced to the extent such employees purchase
such reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the other
shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
In connection with the Offering, the Company's directors and officers and
certain of its stockholders have agreed that, during a period of 180 days from
the date of this Prospectus, such holders will not, without the prior written
consent of the Representatives, offer, sell, contract to sell, sell any option
or contract to purchase any option or contract to sell, grant any option, right
or warrant for the sale of, pledge, or otherwise dispose of or transfer any
shares of Common Stock. In addition, the Company will not, without the prior
written consent of Merrill Lynch, as representative of the Underwriters,
directly or indirectly, offer, contract to sell, sell, grant any option with
respect to, pledge, hypothecate or otherwise dispose of any shares of Common
Stock except for (i) sales of the shares of Common Stock offered hereby, (ii)
issuances pursuant to the exercise of outstanding warrants, stock options and
convertible securities, (iii) grants of options or shares of Common Stock
pursuant to the Stock Incentive Plan, (iv) bona fide gifts by stockholders to
certain donees who agree to be bound by a similar agreement, (v) certain
transfers in private transactions to affiliates of such stockholder who agree to
be bound by a similar agreement and (vi) pledges by certain officers in
connection with loans for the repayment of the Officer Notes to the Company.
Goldman, Sachs & Co. was paid ordinary and customary fees by the Company
for its services as syndication agent under the Credit Facility.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Vinson & Elkins L.L.P., Houston, Texas.
Certain legal matters relating to the Common Stock offered hereby will be passed
upon for the Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated balance sheet of National-Oilwell, Inc. as of January 1,
1996 and the consolidated financial statements of National-Oilwell and
subsidiaries, the predecessor, at December 31, 1995 and 1994 and for each of the
three years in the period ended December 31, 1995, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
49
<PAGE> 51
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act, with respect to the offer and sale of Common Stock pursuant to
this Prospectus. This Prospectus, filed as a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
or the exhibits and schedules thereto in accordance with the rules and
regulations of the Commission and reference is hereby made to such omitted
information. Statements in this Prospectus as to the contents of any contract,
agreement or other document filed as an exhibit to the Registration Statement
are summaries of the terms of such contracts, agreements or documents and are
not necessarily complete but, in the opinion of the Company's management,
contain all material elements of such contracts, agreements or documents.
Reference is made to each such exhibit for a more complete description of the
matters involved and such statements shall be deemed qualified in their entirety
by such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected, without charge, and copies may be obtained at
prescribed rates, at the public reference facilities maintained by the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048. The Registration Statement and other information filed by the Company
with the Commission are also available at the web site of the Commission at
http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
50
<PAGE> 52
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors....................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 (unaudited), January 1, 1996 and as of
December 31, 1995 and 1994.......................................................... F-3
Consolidated Statements of Operations for the Six Months Ended June 30, 1996 and June
30, 1995 (unaudited) and for the Three Years in the Period Ended December 31,
1995................................................................................ F-4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and June
30, 1995 (unaudited) and for the Three Years in the Period Ended December 31,
1995................................................................................ F-5
Consolidated Statements of Owners' Equity for the Six Months Ended June 30, 1996
(unaudited) and for the Three Years in the Period Ended December 31, 1995........... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 53
REPORTS OF INDEPENDENT AUDITORS
Board of Directors
National-Oilwell, Inc.
We have audited the accompanying consolidated balance sheet of
National-Oilwell, Inc. and subsidiaries as of January 1, 1996. This balance
sheet is the responsibility of the Company's management. Our responsibility is
to express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of National-Oilwell, Inc. and
subsidiaries at January 1, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Houston, Texas
August 29, 1996
Partners
National-Oilwell
We have audited the accompanying consolidated balance sheets of
National-Oilwell, a general partnership, and subsidiaries, the Partnership, as
of December 31, 1995 and 1994, and the related consolidated statements of
operations, owners' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
National-Oilwell, a general partnership, and subsidiaries at December 31, 1995
and 1994, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
January 31, 1996
F-2
<PAGE> 54
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR --------------------
------------------------- DECEMBER 31,
JUNE 30, JANUARY 1, --------------------
1996 1996 1995 1994
---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 4,512 $ 17,371 $ 65,452 $ 9,418
Receivables, less allowance of $3,369, $4,015,
$4,015 and $1,023............................ 86,282 77,767 74,986 102,368
Inventories..................................... 121,907 116,107 120,686 124,096
Prepaids and other current assets............... 7,073 6,033 4,543 4,119
-------- -------- -------- --------
Total current assets.................... 219,774 217,278 265,667 240,001
Property, plant and equipment, net................ 17,916 18,936 18,877 22,397
Deferred taxes.................................... 7,759 8,464 1,450 1,959
Goodwill.......................................... 6,408 6,489 -- --
Deferred financing costs.......................... 6,916 7,684 1,089 730
Other assets...................................... 708 788 1,495 3,217
-------- -------- -------- --------
$ 259,481 $ 259,639 $288,578 $268,304
======== ======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 2,500 $ 2,250 $ -- $ --
Accounts payable................................ 67,576 67,008 66,665 60,340
Customer prepayments............................ 1,181 7,500 7,500 1,506
Accrued compensation............................ 4,319 3,071 3,071 4,492
Other accrued liabilities....................... 18,618 16,177 11,066 21,853
-------- -------- -------- --------
Total current liabilities............... 94,194 96,006 88,302 88,191
Long-term debt.................................... 118,688 121,128 9,128 --
Insurance reserves................................ 6,456 6,201 6,201 8,524
Other liabilities................................. 6,161 6,935 6,935 9,701
-------- -------- -------- --------
Total liabilities....................... 225,499 230,270 110,566 106,416
Commitments and contingencies
Owners' equity:
Class A common stock -- par value $.01; 13,288
shares issued and outstanding................ -- -- -- --
Common stock -- par value $.01; 11,064,548
shares issued and outstanding................ 111 111 -- --
Additional paid-in capital...................... 30,068 29,608 -- --
Notes receivable from officers.................. (500) (350) -- --
Partners' capital............................... -- -- 185,506 169,784
Cumulative translation adjustment............... 303 -- (7,494) (7,896)
Retained earnings............................... 4,000 -- -- --
-------- -------- -------- --------
Total owners' equity.................... 33,982 29,369 178,012 161,888
-------- -------- -------- --------
$ 259,481 $ 259,639 $288,578 $268,304
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 55
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------- --------------------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $294,643 $266,443 $545,803 $562,053 $627,281
Cost of revenues........................ 254,556 231,556 474,791 482,423 547,401
-------- -------- -------- -------- --------
Gross profit............................ 40,087 34,887 71,012 79,630 79,880
Selling, general, and administrative.... 26,681 30,903 57,231 64,422 79,391
Special charges (credits)............... -- (7,500) (8,458) (13,916) 8,565
-------- -------- -------- -------- --------
Operating income (loss)................. 13,406 11,484 22,239 29,124 (8,076)
Interest and financial costs............ (6,738) (1,437) (2,358) (5,777) (8,277)
Interest income......................... 320 374 1,097 1,046 1,001
Other income (expense).................. (321) 161 (1,401) 528 (240)
-------- -------- -------- -------- --------
Income (loss) before income taxes....... 6,667 10,582 19,577 24,921 (15,592)
Provision for income taxes.............. 2,667 1,204 1,937 1,041 1,871
-------- -------- -------- -------- --------
Net income (loss)....................... $ 4,000 $ 9,378 $ 17,640 $ 23,880 $(17,463)
======== ======== ======== ======== ========
Weighted average shares outstanding..... 13,368
========
Net income per share.................... $ 0.30
========
Pro forma -- unaudited
Historical income before income
taxes.............................. $ 19,577
Pro forma adjustments other than
income taxes....................... (12,718)
--------
Pro forma income before income
taxes.............................. 6,859
Pro forma provision for income
taxes.............................. 2,413
--------
Pro forma net income.................. $ 4,446
========
Pro forma common shares outstanding... 13,368
========
Pro forma net income per share........ $ 0.33
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 56
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
--------- -----------------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
--------- -------- ------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)....................................... $ 4,000 $ 9,378 $17,640 $ 23,880 $(17,463)
Adjustments to reconcile net income(loss) to net cash
provided (used) by operating activities:
Depreciation and amortization........................ 1,903 2,172 3,595 6,027 10,721
Provision for losses on receivables.................. 304 2,401 2,855 545 1,237
Provision for deferred income taxes.................. 705 316 509 909 893
Gain on sale of assets............................... (192) (513) (662) (910) (867)
Foreign currency transaction (gain) loss............. (57) 102 1,170 54 160
Special charges (credits)............................ -- (7,500) (8,458) (13,916) 8,565
Changes in operating assets and liabilities:
Decrease (increase) in receivables................... (8,795) 9,445 24,583 491 (5,245)
Decrease (increase) in inventories................... (5,804) (2,610) 2,205 12,483 19,558
Decrease (increase) in prepaids and other current
assets............................................. (1,046) (7,877) (4,730) 4,287 (3,453)
Increase (decrease) in accounts payable.............. 582 (12,185) 6,959 7,614 (21,423)
Increase (decrease) in other assets/liabilities,
net................................................ (2,152) 3,055 (3,996) (3,913) (7,172)
--------- -------- ------- --------- --------
Net cash provided (used) by operating
activities.................................... (10,552) (3,816) 41,670 37,551 (14,489)
--------- -------- ------- --------- --------
Cash flow from investing activities:
Purchases of property, plant and equipment.............. (849) (2,031) (4,764) (3,604) (1,967)
Proceeds from sale of assets............................ 272 3,885 6,865 1,731 4,947
Proceeds from disposition of businesses................. -- 6,944 6,944 69,821 --
Acquisition of predecessor company, net of cash
acquired............................................. (106,248) -- -- -- --
Other................................................... (350) (218) (218) 251 (108)
--------- -------- ------- --------- --------
Net cash provided (used) by investing
activities.................................... (107,175) 8,580 8,827 68,199 2,872
--------- -------- ------- --------- --------
Cash flow from financing activities:
Principal (payments) on long-term debt.................. (11,318) -- 9,128 (69,842) 13,334
Proceeds from issuance of common stock.................. 30,179 -- -- -- --
Borrowings proceeds from Acquisition debt............... 103,378 -- -- -- --
Principal payments under capital lease obligations...... -- -- -- (911) (996)
Cash distribution to partners........................... -- (1,918) (1,918) (31,000) --
--------- -------- ------- --------- --------
Net cash provided (used) by financing
activities.................................... 122,239 (1,918) 7,210 (101,753) 12,338
--------- -------- ------- --------- --------
Effect of exchange rate losses on cash.................... -- -- (1,673) (595) (154)
Increase in cash and equivalents.......................... 4,512 2,846 56,034 3,402 567
Cash and cash equivalents, beginning of period............ -- 9,418 9,418 6,016 5,449
--------- -------- ------- --------- --------
Cash and cash equivalents, end of period.................. $ 4,512 $ 12,264 $65,452 $ 9,418 $ 6,016
========= ======== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 57
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
CLASS A ADDITIONAL RECEIVABLE CUMULATIVE
COMMON COMMON PAID-IN FROM PARTNERS' TRANSLATION RETAINED
STOCK STOCK CAPITAL OFFICERS CAPITAL ADJUSTMENT EARNINGS TOTAL
------- ------ ---------- ---------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Predecessor:
Balance at December 31,
1992........................ $ 194,367 $(1,821) $ 192,546
Net loss.................... (17,463) -- (17,463)
Translation adjustment...... -- (4,407) (4,407)
--------- ------- ---------
Balance at December 31,
1993........................ 176,904 (6,228) 170,676
Net income.................. 23,880 -- 23,880
Translation adjustment...... -- (1,668) (1,668)
Distribution................ (31,000) -- (31,000)
--------- ------- ---------
Balance at December 31,
1994........................ 169,784 (7,896) 161,888
Net income.................. 17,640 -- 17,640
Translation adjustment...... -- 402 402
Distribution................ (1,918) -- (1,918)
--------- ------- ---------
Balance at December 31,
1995........................ 185,506 (7,494) 178,012
Successor:
Issuance of 13,288 shares... -- $ 30,068 $ (500) 29,568
Issuance of 11,064,548
shares.................... $111 -- 111
Elimination of partners'
interests................. (185,506) 7,494 (178,012)
Net income.................. $4,000 4,000
Translation adjustment...... 303 303
------- ---- ------- ----- --------- ------- ------ ---------
Balance at June 30, 1996
(Unaudited)................. -- $111 $ 30,068 $ (500) $ -- $ 303 $4,000 $ 33,982
======= ==== ======= ===== ========= ======= ====== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 58
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
National-Oilwell, Inc. was formed to acquire National-Oilwell, a general
partnership between National Supply Company, Inc., a subsidiary of Armco Inc.,
and Oilwell, Inc., a subsidiary of USX Corporation, and subsidiaries, (the
"Partnership"). The consolidated financial information of the Partnership, as
predecessor, has been included with the consolidated financial information of
National-Oilwell, Inc. and subsidiaries for purposes of comparability.
References herein to the "Company" refer to the Partnership for periods prior to
January 1, 1996 and to National-Oilwell, Inc. for subsequent periods. Effective
as of January 1, 1996, National-Oilwell, Inc. acquired the Partnership for a
purchase price of $180 million, which approximated book value (the
"Acquisition"). The closing date of the transaction was January 17, 1996, with
an effective date of January 1, 1996. The accompanying consolidated balance
sheet as of January 1, 1996 reflects the accounts of National-Oilwell, Inc. as
if the acquisition of the Partnership had occurred on that date. The transaction
was accounted for under the purchase method of accounting and accordingly all
assets and liabilities of the Partnership were recorded at their fair values
resulting in only minimal basis adjustments. The purchase price and related
expenses were financed by new equity, existing cash, a new credit facility
consisting of a revolving credit line totaling $120 million and term debt of $30
million, a $5 million subordinated note and seller notes of $20 million.
Approximately $67 million of the revolving credit line was utilized to
consummate the transaction. A summary of the transaction is as follows (in
thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, other than cash.................... $242,268
Cash paid to acquire Partnership.................................. 106,248
Purchase price financed by seller notes........................... 20,000
--------
Liabilities assumed..................................... $116,020
========
</TABLE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end. Actual results could differ from those
estimates.
In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial position as of
June 30, 1996, and the results of operations and cash flows for each of the
six-month periods ended June 30, 1996 and 1995. Although management believes the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in annual audited financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
results of operations and the cash flows for the six-month period ended June 30,
1996 are not necessarily indicative of the results to be expected for the full
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, receivables, payables, and debt instruments. Cash equivalents
include only those investments having a maturity of three
F-7
<PAGE> 59
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months or less at the time of purchase. The carrying values of these financial
instruments approximate their respective fair values.
Inventories
Inventories consist of (a) oilfield products and oil country tubular goods,
(b) manufactured equipment and (c) spare parts for manufactured equipment.
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) or average cost methods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major
improvements which extend the lives of property and equipment are capitalized
while minor replacements, maintenance and repairs are charged to operations as
incurred. Disposals are removed at cost less accumulated depreciation with any
resulting gain or loss reflected in operations. Depreciation is provided using
the straight-line method over the estimated useful lives of individual items.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the
five year life of the related debt security and accumulated amortization was
$768,000 at June 30, 1996. Goodwill is amortized on a straight-line basis over
its estimated life of 40 years. The Company's policy is to periodically evaluate
goodwill and all long-lived assets to determine whether there has been any
impairment in value. Accumulated amortization was $81,000 at June 30, 1996.
Foreign Currency
The functional currency for the Company's Canadian, United Kingdom and
Australian subsidiaries is the local currency. The cumulative effects of
translating the balance sheet accounts from the functional currency into the
U.S. dollar at current exchange rates are included in cumulative foreign
currency translation adjustments. The U.S. dollar is used as the functional
currency for the Singapore and Venezuelan subsidiaries. For all operations,
gains or losses from remeasuring foreign currency transactions into the
functional currency are included in income.
Revenue Recognition
Revenue from the sale of products is recognized upon passage of title to
the customer.
Income Taxes
The Company provides for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax
reporting basis of assets and liabilities.
Net Income Per Share
Average shares outstanding includes 11,064,548 issued shares of common
stock, 282,392 shares of common stock pursuant to exercisable warrants and
2,021,452 shares of common stock associated with the conversion of Class A
common stock at an assumed initial public offering price of $16.00 as discussed
at Note 8.
F-8
<PAGE> 60
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
The Company grants credit to its customers which operate primarily in the
oil and gas industry. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Receivables are generally due within 30 days. The Company maintains reserves for
potential losses and such losses have historically been within management's
expectations.
Long-Lived Assets
In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, was issued which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and estimated future undiscounted cash
flows indicate the carrying value of those assets may not be recoverable. The
Company implemented SFAS No. 121 on January 1, 1996 and the adoption did not
have a material effect on the financial statements.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, JANUARY 1, --------------------
1996 1996 1995 1994
---------- ---------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Raw materials and supplies................ $ 10,092 $ 11,528 $ 11,528 $ 12,486
Work in process........................... 5,195 4,842 4,842 5,112
Finished goods and purchased products..... 106,620 99,737 104,316 106,498
-------- -------- --------
$ 121,907 $ 116,107 $120,686 $124,096
======== ======== ========
</TABLE>
Foreign inventories were approximately 18%, 17%, 21% and 20% of total
inventories at June 30, 1996, January 1, 1996, December 31, 1995 and December
31, 1994, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED JUNE 30, JANUARY 1, --------------------
USEFUL LIVES 1996 1996 1995 1994
------------ ----------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Land and improvements........... 2-20 Years $ 2,017 $ 2,022 $ 2,509 $ 5,718
Buildings....................... 5-31 Years 4,920 4,940 10,404 10,772
Machinery and equipment......... 5-12 Years 7,262 6,902 31,139 53,886
Computer and office equipment... 3-10 Years 5,620 5,072 19,079 21,366
------- -------- --------
19,819 18,936 63,131 91,742
Less accumulated
depreciation............... (1,903) -- (44,254) (69,345)
------- -------- --------
$17,916 $ 18,936 $ 18,877 $ 22,397
======= ======== ========
</TABLE>
F-9
<PAGE> 61
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
JUNE 30, JANUARY 1, DECEMBER 31,
1996 1996 1995
----------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Credit Agreement
Revolving Credit Facilities................... $ 70,865 $ 68,378 $ --
Term Loan A................................... 12,415 15,000 --
Term Loan B................................... 12,790 15,000 --
Previous credit agreement....................... -- -- 9,128
Subordinated Note............................... 5,118 5,000 --
Seller Notes.................................... 20,000 20,000 --
-------- ------
121,188 123,378 9,128
Less current portion............................ 2,500 2,250 --
-------- ------
$ 118,688 $ 121,128 $9,128
======== ======
</TABLE>
Credit Agreement
The Credit Agreement provides for Revolving Credit Facilities totaling
$120,000,000 in the United States, Canada and United Kingdom through December
31, 2000 and replaced the Company's previous credit agreement. In addition to
borrowings, the Revolving Credit Facilities provide for the issuance of letters
of credit, of which $12,600,000 were outstanding at June 30, 1996. Borrowing
availability is determined based on a percentage of eligible accounts receivable
and inventory. The interest rate on the Revolving Credit Facility is prime plus
1.5% or LIBOR plus 2.75% (9.75% and 8.19% at June 30, 1996). A commitment fee of
0.5% is charged on the unused portion.
The Credit Agreement also provides for Term Loan A, payable quarterly
through December 31, 2000 and Term Loan B, payable quarterly through December
31, 2001. Interest rates on the term loans are at prime plus 1.75% and 2.25%,
respectively, or at LIBOR plus 3.0% and 3.5%, respectively. The term loans
require prepayments from certain asset disposal proceeds and from up to 80% of
excess cash flow (as defined).
The Credit Agreement is secured by essentially all assets of the Company
and contains financial covenants regarding minimum net worth, maximum capital
expenditures, minimum current ratio, minimum interest and fixed charge coverage
ratios and a maximum funded debt coverage ratio. The Credit Agreement also
restricts the Company's ability to, among other things, pay dividends, make
acquisitions and investments, incur debt and liens, and change its capital
structure or business.
Subordinated Note
The Subordinated Note bears interest at prime plus 3.0%, is due December
31, 2002 and is secured by a lien on essentially all assets of the Company.
Interest payments are deferred until the aggregate balance outstanding under
Term Loans A and B is $15,000,000 or less and certain other conditions are met.
Mandatory prepayments must be made from 50% of excess cash flow (as defined)
after Term Loans A and B are repaid.
Seller Notes
The Company owes $10,000,000 to each of the two Sellers in connection with
the Acquisition. The notes are subordinate to other existing debt and bear
interest at the rate of 9.0%. At its option, the Company may defer payment of
interest due prior to January 16, 2003. One-half of the sum of the principal and
any deferred interest is payable on January 16, 2004, and the balance is payable
on January 16, 2005. The notes are subject
F-10
<PAGE> 62
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to prepayment in certain events, including the sale of significant assets by the
Company or the sale by the stockholders at the time of the Acquisition of more
than 50% of their aggregate shares. Partial prepayments are also required in
connection with certain sales of the Company's stock owned by Duff &
Phelps/Inverness LLC or First Reserve Corporation.
Scheduled maturities of long-term debt outstanding at June 30, 1996 are as
follows: six months ending December 31, 1996 -- $1,125,000; years ending
December 31, 1997 -- $3,000,000; 1998 -- $3,250,000; 1999 -- $3,250,000;
2000 -- $75,865,000; 2001 -- $9,130,000.
6. PENSION PLANS
The Company and its consolidated subsidiaries have several pension plans
covering substantially all of its employees. Defined-contribution pension plans
cover most of the U.S. and Canadian employees and are based on years of service
and a percentage of current earnings. For the years ended December 31, 1995,
1994 and 1993, pension expense for defined-contribution plans was $1,512,000,
$1,914,000 and $2,005,000, respectively, and the funding is current.
The Company's subsidiary in the United Kingdom has a defined-benefit
pension plan whose participants are primarily retired and terminated employees
who are no longer accruing benefits. The pension plan assets are invested
primarily in equity securities, United Kingdom government securities, overseas
bonds and cash deposits. The plan assets at fair market value were $32,104,000
at December 31, 1995 and $27,389,000 at December 31, 1994. The projected benefit
obligation was $23,131,000 at December 31, 1995 and $20,630,000 at December 31,
1994. Net periodic pension cost (benefit) recognized as expense (income) for the
years ended December 31, 1995, 1994 and 1993 was $379,000, ($69,000) and
$699,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases land, buildings and storage facilities, vehicles and
data processing equipment under operating leases extending through various dates
up to the year 2004. Rent expense for the years ended December 31, 1995, 1994
and 1993 was $9,714,000, $8,691,000 and $10,372,000, respectively. The Company's
minimum rental commitments for operating leases at December 31, 1995 were as
follows (in thousands): 1996 -- $6,372; 1997 -- $4,046; 1998 -- $1,796;
1999 -- $1,312; 2000 -- $1,159; thereafter -- $6,096.
Contingencies
The Company is involved in various claims, regulatory agency audits and
pending or threatened legal actions involving a variety of matters. The total
liability on these matters at December 31, 1995 cannot be determined; however,
in the opinion of management, any ultimate liability, to the extent not
otherwise provided for, should not materially affect the financial position,
liquidity or results of operations of the Company.
Environmental
The Company's business is affected both directly and indirectly by
governmental laws and regulations relating to the oilfield service industry in
general, as well as by environmental and safety regulations that specifically
apply to the Company's business. Laws and regulations protecting the environment
have generally become more expansive and stringent in recent years and the
Company believes the trend will continue. Although the Company has not incurred
material costs in connection with its compliance with such laws, there can be no
assurance that other developments, such as stricter environmental laws,
regulations and enforcement policies thereunder, could not result in additional,
presently unquantifiable, costs or liabilities to the Company.
F-11
<PAGE> 63
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMON STOCK
The Company has authorized 40,000,000 shares, $.01 par value, common stock
and 13,288 shares, $.01 par value, Class A common stock. The Class A common
stock has preference over common stock to receive dividends or any other
distribution until the holders of Class A common stock have received in the
aggregate the original cost of $30,079,200 paid for the Class A shares. Upon the
occurrence of an initial public offering, the Class A common stock converts into
the number of shares of common stock determined by dividing the unreturned
original cost of the Class A common stock by the net public offering price. The
Company has also authorized 10,000,000 shares of $.01 par value preferred stock,
none of which is issued or outstanding.
Seven executive officers of the Company participated in the Acquisition by
acquiring common stock and Class A common stock at fair market value. In
connection therewith, four of the executives issued promissory notes to the
Company for an aggregate of $500,000. Interest on the notes is at 1.5% over
prime and is paid annually. The notes are due on January, 15, 2001 unless
extended at the option of the Company, and are secured by shares of common stock
and Class A common stock. The notes must be prepaid under certain conditions
including the occurrence of a public offering or from cash proceeds from
dividends, distributions or sale of any of the shares. The promissory notes are
reflected in the accompanying balance sheet as a reduction of owners' equity.
The Stock Award and Long-Term Incentive Plan allows grants of incentive
options, nonqualified options, restricted stock, stock appreciation rights,
performance share awards, stock value equivalent awards or any combination of
the above. In connection with the Acquisition, 941,303 shares of restricted
common stock were purchased by executive officers for $.001 per share under this
plan. These shares are subject to restriction on transferability and are not
entitled to receive dividends or distributions. Restrictions lapse annually
regarding 20% of these shares beginning one year from acquisition or in their
entirety upon the occurrence of (i) a merger or consolidation of the Company,
(ii) a sale of all or substantially all the assets of the Company, or (iii) a
sale of all the outstanding Class A common stock and common stock of the
Company. Restrictions will lapse on an additional 20% of those shares upon an
involuntary termination of employment without cause. Any restricted shares may
be repurchased by the Company for $.001 per share upon termination of the
executive officers' employment. On August 27, 1996, the Company's board of
directors approved the amendment and restatement of the plan to authorize the
issuance of up to 1,000,000 additional shares of common stock pursuant to awards
made thereunder. The Company has not made any additional awards pursuant this
plan.
In connection with the Acquisition, the Company entered into a warrant
agreement granting a significant debt holder and stockholder the right to
purchase 282,392 shares of common stock at an exercise price of $.01 per share.
The warrants may be exercised at any time through January 16, 2006. The warrant
agreement also provides for an additional 196,438, 100,815 and 102,586 shares to
be issued on the fifth, sixth and seventh anniversary of the Acquisition date in
the event the $5 million subordinated note has not been repaid on or prior to
such dates.
In January 1996, the Company established Value Appreciation Plans that are
intended to reward participants for enhancing the value of the Company common
stock. If target internal rates of return are achieved as of a triggering event
such as a qualified public offering, the 34 participants will be paid in cash or
common stock over time a percentage of the equity value as of such occurrence.
Based upon an initial public offering price of $16.00 (the midpoint of the range
of offering prices), the Value Appreciation Plans would result in a one-time
charge before taxes of $11.7 million. The Company currently expects to pay $2.8
million of this amount in cash at the time of the Offering, $3.5 million in cash
in five annual installments beginning January 17, 1997 and issue 343,986 shares
of restricted stock. The restrictions will be removed on one-half of the shares
one year after the Offering and on the remaining one-half on January 17, 1999.
F-12
<PAGE> 64
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Prior to 1996, the Company was a partnership for U.S. federal tax purposes
and provided for foreign taxes but did not provide for U.S. federal or state
taxes on its income.
The domestic and foreign components of income before income taxes were as
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1995 1995 1994 1993
------ ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Domestic............................. $4,702 $ 7,235 $14,194 $22,840 $(16,446)
Foreign.............................. 1,965 3,347 5,383 2,081 854
------ ------- ------- ------- --------
$6,667 $10,582 $19,577 $24,921 $(15,592)
====== ======= ======= ======= ========
</TABLE>
The components of the provision for income taxes consisted of (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1995 1995 1994 1993
------ ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................ $1,090 $ -- $ -- $ -- $ --
State.............................. 99 -- -- -- --
Foreign............................ 773 888 1,428 132 978
------ ------- ------- ------- --------
1,962 888 1,428 132 978
------ ------- ------- ------- --------
Deferred:
Federal............................ 507 -- -- -- --
State.............................. 112 -- -- -- --
Foreign............................ 86 316 509 909 893
------ ------- ------- ------- --------
705 316 509 909 893
------ ------- ------- ------- --------
$2,667 $ 1,204 $ 1,937 $ 1,041 $ 1,871
====== ======= ======= ======= ========
</TABLE>
The difference between the effective tax rate reflected in the provision
for income taxes and the U.S. federal statutory rate was as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1995 1995 1994 1993
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax at statutory
rate................................ $2,333 $ 3,704 $ 6,852 $ 8,722 $(5,457)
Foreign income tax rate
differential........................ 26 12 184 368 338
U.S. partnership income for which no
tax is provided..................... -- (2,532) (4,968) (7,994) 5,756
Nondeductible expenses................ 341 247 398 293 157
Foreign operating loss for which no
benefit is recognized............... -- 412 1,037 278 2,211
Change in deferred tax valuation
allowance........................... -- (639) (1,577) (809) (1,303)
Other................................. (33) -- 11 183 169
------ ------- ------- ------- -------
$2,667 $ 1,204 $ 1,937 $ 1,041 $ 1,871
====== ======= ======= ======= =======
</TABLE>
F-13
<PAGE> 65
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, JANUARY 1, ------------------
1996 1996 1995 1994
----------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Book over tax depreciation................ $ 288 $ 44 $ 1,153 $ 1,729
Accrued liabilities....................... 9,201 9,639 1,205 2,887
Net operating loss carryforwards.......... 6,738 7,143 6,780 7,268
Other..................................... 6,620 7,159 1,070 508
----------- ---------- ------- -------
Total deferred tax assets......... 22,847 23,985 10,208 12,392
Valuation allowance for deferred
tax assets...................... (13,277) (13,277) (8,310) (9,887)
----------- ---------- ------- -------
9,570 10,708 1,898 2,505
----------- ---------- ------- -------
Deferred tax liabilities:
Tax over book depreciation................ 1,569 1,891 448 346
Other..................................... 242 353 -- 200
----------- ---------- ------- -------
Total deferred tax liabilities.... 1,811 2,244 448 546
----------- ---------- ------- -------
Net deferred tax assets........... $ 7,759 $ 8,464 $ 1,450 $ 1,959
========= ========= ======= =======
</TABLE>
In connection with the Acquisition, the Company restated its deferred tax
assets and liabilities as of January 1, 1996. The deferred tax valuation
allowance increased (decreased) ($1,577) and $4,967 for the periods ending
December 31, 1995 and June 30, 1996, respectively. The decrease in the valuation
allowance is related to the realization of foreign net operating losses that
were previously deferred. The increase in the valuation allowance is related to
the Company's current estimate of deferred tax assets that may not be realized.
Any future decrease in the valuation allowance recorded at January 1, 1996 will
reduce goodwill. The Company's deferred tax assets are expected to be realized
principally through future earnings.
Undistributed earnings of the Company's foreign subsidiaries amounted to
$9,898,000 at June 30, 1996 and $9,125,000 at December 31, 1995. Those earnings
are considered to be permanently reinvested and, accordingly, no provision for
U.S. federal and state income taxes has been made. Distribution of these
earnings in the form of dividends or otherwise would result in both U.S. federal
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable in various foreign countries. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable; however,
unrecognized foreign tax credit carryforwards would be available to reduce some
portion of the U.S. liability. Withholding taxes of approximately $910,000 would
be payable upon remittance of all previously unremitted earnings at December 31,
1995.
The Company made income tax payments of $332,000, $557,000 and $392,000
during the years ended December 31, 1995, 1994 and 1993, respectively.
F-14
<PAGE> 66
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SPECIAL CHARGES (CREDITS)
Special charges (credits) consist of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Sale of product lines and assets....................... $(8,458) $(15,648) $10,000
Employee terminations and other costs.................. -- 3,817 --
Reversal of reserves................................... -- (2,085) (1,435)
------- -------- -------
Total........................................ $(8,458) $(13,916) $ 8,565
======= ======== =======
</TABLE>
Sale of Product Lines and Assets. During the second quarter of 1995 the
Company completed the sale of the Wilson-Snyder centrifugal pump and switch
valve product line. Proceeds of approximately $6.9 million from that sale
resulted in a gain of $5.5 million. In addition, the Company recorded a net gain
of approximately $3.0 million related to the final closure of a facility in the
United Kingdom and the sale of related property and equipment.
During 1994, the Company completed the sales of certain production
equipment product lines not considered part of its core businesses resulting in
a gain of $15.6 million. Proceeds received in 1994 totaled $41.0 million and
were used to reduce debt.
During 1993, the Company implemented a business strategy to focus on its
core businesses and divest marginal or unprofitable product lines. In the fourth
quarter of 1993, the Company recorded a $10.0 million charge for the estimated
loss on the sale of its wellhead business under an asset sales agreement signed
in December 1993. This charge included an $8.5 million writedown of inventories
and property, plant and equipment to estimated net realizable values and $1.5
million for transition and other direct costs of disposal. Proceeds from the
wellhead business sale of $28.7 million were used to reduce debt.
Employee Terminations and Other Costs. In conjunction with the formal
announced shutdown of a manufacturing facility in the United Kingdom, the
Company expensed approximately $3.2 million in 1994 relating to employee
termination benefits. These benefits are calculated pursuant to the terms of the
United Kingdom preexisting employee benefit plan and were paid in the fourth
quarter of 1994 and in 1995. The consolidation of the Company's Houston, Texas
manufacturing operations resulted in lease termination and other costs of $0.6
million which were paid in 1994.
Reversal of Reserves. The reversal of reserves in 1994 and 1993 primarily
relate to an $18.5 million reserve initially recorded in 1991 to accrue for the
estimated loss on the shutdown and disposition of a manufacturing facility and
related machinery and equipment at Garland, Texas. The $1.4 million reversal in
1993 primarily related to excess machinery, equipment and inventory relocation
accruals no longer needed after movement to the Company's other facilities was
completed in 1993. The $2.1 million reversal in 1994 primarily related to excess
accruals for potential demolition and environmental cleanup not required after
the facility was sold.
11. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, the Company entered into a five year
Management Services Agreement with the Company's largest stockholder,
Inverness/Phoenix LLC, whereby the Company would pay $1,000,000 per year for
senior management assistance and other services as agreed. The agreement also
provides that Inverness/Phoenix LLC will receive 1% of the aggregate transaction
value in connection with each acquisition or disposition completed during the
five year period. A management fee of $500,000 was recorded during the first
half of 1996 of which $200,000 was unpaid at June 30, 1996. The Company and
Inverness/Phoenix LLC have agreed to terminate this agreement upon the date of
execution of a definitive underwriting agreement relating to the anticipated
public offering discussed in Note 13 for future cash payments totalling
$4,775,000.
F-15
<PAGE> 67
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid and recorded as a cost of the Acquisition transaction fees
of $1,800,000 to the Inverness Group, Inc. and $1,200,000 to First Reserve
Corporation, the Company's second largest stockholder. Fees of $4,700,000 were
also paid to General Electric Capital Corporation in connection with the
provision of the Credit Agreement entered into in connection with the
Acquisition.
12. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations consist of the Oilfield Equipment segment and the
Distribution Services segment. The Oilfield Equipment segment designs and
manufactures a variety of oilfield equipment for use in oil and gas drilling,
completion and production activities. The Distribution Services segment
distributes an extensive line of oilfield supplies, oilfield equipment and
tubular products. The Disposed Businesses information includes the results of
operations disposed of in prior years. Intersegment sales and transfers are
accounted for at commercial prices.
Summarized financial information with respect to business segments and
geographic areas is as follows:
Business Segments (in thousands)
<TABLE>
<CAPTION>
OILFIELD DISTRIBUTION DISPOSED
EQUIPMENT(1) SERVICES CORPORATE(2) ELIMINATIONS BUSINESSES(3) TOTAL
------------ ------------ ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
1995
Revenues from:
Unaffiliated customers...... $113,511 $432,292 $ -- $ -- $ -- $545,803
Intersegment sales.......... 33,006 -- -- (33,006) -- --
-------- -------- ------- -------- -------- --------
Total revenues....... 146,517 432,292 -- (33,006) -- 545,803
Operating income (loss)....... 10,443 9,435 (2,866) -- 5,227 22,239
Capital expenditures.......... 3,540 1,157 67 -- -- 4,764
Depreciation and
amortization................ 1,899 1,662 34 -- -- 3,595
Identifiable assets........... 93,287 128,321 69,761 (2,791) -- 288,578
1994
Revenues from:
Unaffiliated customers...... $127,854 $415,722 $ -- $ -- $ 18,477 $562,053
Intersegment sales.......... 60,041 -- -- (60,041) -- --
-------- -------- ------- -------- -------- --------
Total revenues....... 187,895 415,722 -- (60,041) 18,477 562,053
Operating income (loss)....... 5,314 9,036 (2,898) -- 17,672 29,124
Capital expenditures.......... 1,690 1,832 44 -- 38 3,604
Depreciation and
amortization................ 1,922 2,564 8 -- 1,533 6,027
Identifiable assets........... 99,298 162,170 12,150 (5,314) -- 268,304
1993
Revenues from:
Unaffiliated customers...... $111,948 $450,455 $ -- $ -- $ 64,878 $627,281
Intersegment sales.......... 67,780 -- -- (67,780) -- --
-------- -------- ------- -------- -------- --------
Total revenues....... 179,728 450,455 -- (67,780) 64,878 627,281
Operating income (loss)....... 1,482 13,955 (2,308) -- (21,205) (8,076)
Capital expenditures.......... 899 455 21 -- 592 1,967
Depreciation and
amortization................ 4,380 2,370 2 -- 3,969 10,721
Identifiable assets........... 99,371 188,312 12,402 (10,265) 53,659 343,479
</TABLE>
F-16
<PAGE> 68
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Operating income/(loss) of the oilfield equipment segment includes special
charges (credits) of $(3,231), $1,732 and $(1,435) for 1995, 1994 and 1993,
respectively.
(2) Corporate identifiable assets in 1995 included $65.5 million of cash and
cash equivalents.
(3) Operating income/(loss) of the disposed businesses includes special charges
(credits) of $(5,227), $(15,648) and $10,000 for 1995, 1994 and 1993,
respectively. Operating results prior to the disposal date for the business
sold in 1995 were immaterial.
Geographic Areas (in thousands)
<TABLE>
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM OTHER ELIMINATIONS TOTAL
-------- ------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
1995
Revenues from:
Unaffiliated
customers........... $430,671 $59,390 $35,776 $ 19,966 $ -- $545,803
Interarea sales........ 34,416 878 16,285 233 (51,812) --
-------- ------- ------- -------- -------- --------
Total
revenues..... 465,087 60,268 52,061 20,199 (51,812) 545,803
-------- ------- ------- -------- -------- --------
Operating income
(loss)................. 18,707 2,003 (1,383) 2,912 -- 22,239
Export sales of U.S...... -- 1,700 1,539 80,075 -- 83,314
Identifiable assets...... 228,817 23,851 17,789 18,121 -- 288,578
1994
Revenues from:
Unaffiliated
customers........... $442,555 $73,052 $29,708 $ 16,738 $ -- $562,053
Interarea sales........ 26,144 579 9,726 106 (36,555) --
-------- ------- ------- -------- -------- --------
Total
revenues..... 468,699 73,631 39,434 16,844 (36,555) 562,053
-------- ------- ------- -------- -------- --------
Operating income
(loss)................. 27,166 1,872 (314) 400 -- 29,124
Export sales of U.S...... -- 1,436 635 102,265 -- 104,336
Identifiable assets...... 186,634 34,567 32,136 14,967 -- 268,304
1993
Revenues from:
Unaffiliated
customers........... $485,988 $68,766 $49,419 $ 23,108 $ -- $627,281
Interarea sales........ 33,750 552 8,395 961 (43,658) --
-------- ------- ------- -------- -------- --------
Total
revenues..... 519,738 69,318 57,814 24,069 (43,658) 627,281
-------- ------- ------- -------- -------- --------
Operating income
(loss)................. (4,865) (321) (3,980) 1,090 -- (8,076)
Export sales of U.S...... -- 1,386 389 115,464 -- 117,239
Identifiable assets...... 257,597 29,662 39,391 16,829 -- 343,479
</TABLE>
F-17
<PAGE> 69
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PRO FORMA NET INCOME AND NET INCOME PER SHARE (UNAUDITED)
The following table sets forth for the year ended December 31, 1995: (a)
summarized historical consolidated income statement data and (b) summarized pro
forma consolidated income statement data reflecting the acquisition of the
Partnership as if such had occurred on January 1, 1995 (in thousands).
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Revenues....................................................... $ 545,803 $ 545,803
======= =======
Operating income............................................... $ 22,239 $ 21,239(A)
Interest and financial costs, net.............................. 1,261 12,817(B)
Other (income) expense......................................... 1,401 1,563(C)
------- -------
Income (loss) before income taxes.............................. 19,577 6,859
Provision for income taxes..................................... 1,937 2,413(D)
------- -------
Net income..................................................... $ 17,640 $ 4,446
======= =======
Earnings per share............................................. $ 0.33
=======
Average shares outstanding..................................... 13,368
=======
</TABLE>
- ---------------
(A) Decrease in operating income reflects the management fees discussed in Note
11 which would have been recorded if the acquisition of the Partnership had
occurred on January 1, 1995.
(B) Increase in interest costs reflects the incremental interest expense
associated with the debt incurred with the acquisition of the Partnership at
the Company's 1995 effective interest rate of 9.5%, adjusted for the
difference in the amortization of deferred financing fees associated with
the credit facilities.
(C) Increase in other (income) expense reflects the amortization of goodwill
incurred in connection with the acquisition of the Partnership.
(D) Increase in income taxes reflects the provision for U.S. federal and state
income taxes that were previously not recorded because of the partnership
status and as a result of the above pro forma adjustments.
Average shares outstanding reflects 11,346,940 shares of common stock and
common stock equivalents currently outstanding and 2,021,452 shares of common
stock issuable upon the conversion of the shares of Class A common stock at the
assumed initial offering price of $16 per share.
F-18
<PAGE> 70
[Map of North America with National-Oilwell distribution centers
illustrated with colored circles. Boxes below the map showing
the number of distribution centers in the United States,
Canada and outside of the United States and Canada.]
<PAGE> 71
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION
WHERE, OR TO ANY PERSONS TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 13
Dividend Policy....................... 13
Dilution.............................. 14
Capitalization........................ 15
Selected Historical Financial Data.... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 27
Management............................ 35
Certain Transactions.................. 41
Principal Stockholders................ 43
Description of Capital Stock.......... 44
Shares Eligible for Future Sale....... 47
Underwriting.......................... 48
Legal Matters......................... 49
Experts............................... 49
Available Information................. 50
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
================================================================================
4,000,000 SHARES
[LOGO]
NATIONAL-OILWELL, INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
SIMMONS & COMPANY
INTERNATIONAL
, 1996
================================================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the Offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 28,552
NASD filing fee........................................................... 8,780
New York Stock Exchange listing fee....................................... 130,000
Blue Sky fees and expenses................................................ 10,000
Printing expenses......................................................... 135,000
Legal fees and expenses................................................... 200,000
Accounting fees and expenses.............................................. 150,000
Transfer Agent fees....................................................... 3,000
Miscellaneous............................................................. 54,668
--------
Total........................................................... $720,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Sixth, Part II, Section 1 of the Company's Charter, a copy of which
is filed as Exhibit 3.1, and Article VI of the Company's Bylaws, a copy of which
is filed as Exhibit 3.2 to this Registration Statement, each provide that
directors, officers, employees and agents shall be indemnified to the fullest
extent permitted by Section 145 of the DGCL.
Section 145 of the DGCL authorizes, inter alia, a corporation to indemnify
any person ("indemnitee") who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that such person
is or was an officer or director of such corporation, or is or was serving at
the request of such corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
Delaware corporation may indemnify past or present officers and directors of
such corporation or of another corporation or other enterprise at the former
corporation's request, in an action by or in the right of the corporation to
procure a judgment in its favor under the same conditions, except that no
indemnification is permitted without judicial approval if such person is
adjudged to be liable to the corporation. Where an officer or director is
successful on the merits or otherwise in defense of any action referred to
above, or in defense of any claim, issue or matter therein, the corporation must
indemnify him against the expenses (including attorney's fees) which he actually
and reasonably incurred in connection therewith. Section 145 further provides
that any indemnification shall be made by the corporation only as authorized in
each specific case upon a determination by the (i) stockholders, (ii) board of
directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding or (iii) independent counsel if a
quorum of disinterested directors so directs. Section 145 provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.
Section 145 of the DGCL also empowers the Company to purchase and maintain
insurance on behalf of any person who is or was an officer or director of the
Company against liability asserted against or incurred by him in any such
capacity, whether or not the Company would have the power to indemnify such
officer or director against such liability under the provisions of Section 145.
The Company intends to purchase and maintain a directors' and officers'
liability policy for such purposes.
II-1
<PAGE> 73
The form of Purchase Agreement filed as Exhibit 1.1 to this Registration
Statement contains certain provisions for indemnification of directors and
officers of the Company and the Underwriters against civil liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The shares of Class A Common Stock which have been sold by the Company in
the following transactions will be converted into shares of Common Stock.
On July 15, 1995, the Company sold an aggregate of 1,168,310 shares of
Common Stock at $.001 per share to DPI Oil Service Partners Limited Partnership
and DPI Partners II, two limited partnerships for which Inverness/Phoenix LLC
serves as managing general partner, in connection with the initial
capitalization of the Company. The Company relied on an exemption under Section
4(2) of the Securities Act in effecting these transactions.
On January 16, 1996, the Company sold an aggregate of 8,806,479 shares of
Common Stock at $.011 per share, 753,049 shares of Common Stock at $.001 per
share, an aggregate of 13,085.6 shares of Class A Common Stock at $2,264 per
share to the Inverness Investors, the First Reserve Investors, GE Capital and
members of management, including Messrs. Staff, Bearden, Leigh, Nation and
Gauche, in connection with the closing of the Acquisition, and the Company
issued a warrant to GE Capital to purchase 282,392 shares of Common Stock for
$.011 per share in connection with the Credit Facility. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting these
transactions.
On July 24, 1996, the Company received the funds for and completed the
previously committed sale of an aggregate of 148,456 shares of Common Stock at
$.011 per share, 282,381 shares of Common Stock at $.001 per share and an
aggregate of 202.4 shares of Class A Common Stock at $2,264 per share to Messrs.
Fasnacht, Krablin and Miller in connection with the Acquisition which occurred
in January 1996. The Company relied on an exemption under Section 4(2) of the
Securities Act in effecting these transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
**1.1 -- Form of Purchase Agreement.
2.1 -- Purchase Agreement by and among Oilwell, Inc., National Supply
Company, Inc., USX Corporation, Armco Inc. and the Company dated
September 22, 1995, as amended.
3.1 -- Amended and Restated Certificate of Incorporation of the Company.
3.2 -- Bylaws of the Company.
*4.1 -- Specimen Common Stock certificate.
*5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Employment Agreement dated as of January 16, 1996 between Joel V.
Staff and the Company.
10.2 -- Employment Agreement effective as of January 17, 1996 between C. R.
Bearden and the Company, with similar agreements with Lynn L. Leigh,
Jerry N. Gauche, Paul M. Nation, James J. Fasnacht and Steven W.
Krablin, a similar agreement effective as of February 5, 1996 between
and Merrill A. Miller, Jr. and the Company.
10.3 -- Stockholders Agreement among the Company and its stockholders dated
as of January 16, 1996.
10.4 -- Waiver and First Amendment to Stockholders Agreement dated as of July
24, 1996.
10.5 -- Employee Incentive Plan.
10.6 -- Stock Award and Long-Term Stock Incentive Plan.
10.7 -- First Amendment to Stock Award and Long-Term Stock Incentive Plan.
</TABLE>
II-2
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.8 -- Value Appreciation and Incentive Plan A.
10.9 -- Value Appreciation and Incentive Plan B.
10.10 -- Restricted Stock Agreement between the Company and Joel V. Staff,
with similar agreements with C. R. Bearden, Jerry N. Gauche, Steven
W. Krablin, Merrill A. Miller, Jr., James J. Fasnacht and Paul M.
Nation.
10.11 -- Management Services Agreement.
10.12 -- Supplemental Savings Plan.
**10.13 -- New Credit Facility.
**10.14 -- Deferred Fee Agreement.
21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1 hereto).
24.1 -- Powers of Attorney (included in the signature pages of the
Registration Statement).
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
All other exhibits have been previously filed.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not applicable or the required
information has been provided in the consolidated financial statements or the
notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registration pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contained a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, State of Texas, on the 3rd day of October, 1996.
NATIONAL-OILWELL, INC.
By: /s/ STEVEN W. KRABLIN
-------------------------------
Steven W. Krablin
Vice President and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Steven W. Krablin and Paul M. Nation, or either
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any additional registration statement
pursuant to Rule 462(b), and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -------------------------------- -----------------
<C> <S> <C>
* Chairman of the Board, President October 3, 1996
- ---------------------------------------- and Chief Executive Officer
Joel V. Staff (Principal Executive Officer)
/s/ Steven W. Krablin Vice President and Chief October 3, 1996
- ---------------------------------------- Financial Officer (Principal
Steven W. Krablin Financial and Accounting
Officer)
* Director October 3, 1996
- ----------------------------------------
C. R. Bearden
* Director October 3, 1996
- ----------------------------------------
James C. Comis III
* Director October 3, 1996
- ----------------------------------------
W. McComb Dunwoody
* Director October 3, 1996
- ----------------------------------------
Howard I. Bull
* Director October 3, 1996
- ----------------------------------------
James T. Dresher
* Director October 3, 1996
- ----------------------------------------
William E. Macaulay
* Director October 3, 1996
- ----------------------------------------
Bruce M. Rothstein
* By /s/ Paul M. Nation
-------------------------
Paul M. Nation
as attorney-in-fact
</TABLE>
II-4
<PAGE> 76
INDEX TO EXHIBITS
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EXHIBIT
NUMBER DESCRIPTION
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**1.1 -- Form of Purchase Agreement.
2.1 -- Purchase Agreement by and among Oilwell, Inc., National Supply
Company, Inc., USX Corporation, Armco Inc. and the Company dated
September 22, 1995.
3.1 -- Restated Certificate of Incorporation of the Company.
3.2 -- Bylaws of the Company.
*4.1 -- Specimen Common Stock certificate.
*5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Employment Agreement dated as of January 16, 1996 between Joel V.
Staff and the Company.
10.2 -- Employment Agreement effective as of January 17, 1996 between C.R.
Bearden and the Company, with similar agreements with Lynn L. Leigh,
Jerry N. Gauche, Paul M. Nation, James J. Fasnacht and Steven W.
Krablin, a similar agreement effective as of February 5, 1996 between
and Merrill A. Miller, Jr. and the Company.
10.3 -- Stockholders Agreement among the Company and its stockholders dated
as of January 16, 1996.
10.4 -- Waiver and First Amendment to Stockholders Agreement dated as of July
24, 1996.
10.5 -- Employee Incentive Plan.
10.6 -- Stock Award and Long-Term Stock Incentive Plan.
10.7 -- First Amendment to Stock Award and Long-Term Stock Incentive Plan.
10.8 -- Value Appreciation and Incentive Plan A.
10.9 -- Value Appreciation and Incentive Plan B.
10.10 -- Restricted Stock Agreement between the Company and Joel V. Staff,
with similar agreements with C.R. Bearden, Jerry N. Gauche, Steven W.
Krablin, Merrill A. Miller, Jr., James J. Fasnacht and Paul M.
Nation.
10.11 -- Management Services Agreement.
10.12 -- Supplemental Savings Plan
**10.13 -- New Credit Facility.
**10.14 -- Deferred Fee Agreement
21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 5.1 hereto).
24.1 -- Powers of Attorney (included in the signature pages of the
Registration Statement).
27.1 -- Financial Data Schedule.
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* Filed herewith.
** To be filed by amendment.
All other exhibits have been previously filed.
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INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE SHARES
NUMBER
NATIONAL CUSIP 637071 10 1
OILWELL SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE
IN NEW YORK, NEW YORK
NATIONAL-OILWELL, INC.
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01, OF
NATIONAL-OILWELL National-Oilwell, Inc. (hereinafter referred to as the "Corporation") transferable on the books of the
INC. Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this
CORPORATE Certificate properly endorsed. This Certificate and the shares which it represents are issued and shall
be held subject to all the provisions of the Amended and Restated Certificate of Incorporation and
SEAL Bylaws of the Corporation (copies of which are on file with the Transfer Agent) to all of which the
holder of this Certificate assents by acceptance hereof.
DELAWARE This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized
officers.
CERTIFICATE OF STOCK
Dated
PAUL NATION JOEL V. STAFF
----------------------- --------------------
American Bank Note Company SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT
AND REGISTRAR
BY_____________________________________
AUTHORIZED SIGNATURE
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NATIONAL-OILWELL, INC.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof of
the Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
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TEN COM --as tenants in common UNIF GIFT MIN ACT --___________Custodian____________
(Cust) (Minor)
TEN ENT --as tenants by the entireties under Uniform Gifts to Minors
Act ________________
JT TEN --as joint tenants with right of (State)
survivorship and not as tenants
in common
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Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________________________ hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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(Please print or typewrite name and address of assignee)
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- -------------------------------------------------------------------------------
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of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
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to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises
Dated Signature
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Notice: The signature to this
assignment must correspond
with the name as written upon
the face of the Certificate,
in every particular, without
alteration or enlargement, or
any change whatever.
Signature(s) Guaranteed:
- -------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
[Vinson & Elkins L.L.P. Letterhead]
October 3, 1996
National-Oilwell, Inc.
5555 San Felipe
Houston, Texas 77056
Gentlemen:
We are acting as counsel for National-Oilwell, Inc., a Delaware
corporation (the "Company"), in connection with the proposed offer and sale by
the Company to the Underwriters (the "Underwriters"), pursuant to the
prospectus forming a part of a Registration Statement on Form S-1, File No.
333-11051, originally filed with the Securities and Exchange Commission (the
"S.E.C.") on August 29, 1996 (such Registration Statement, as amended at the
effective date thereof, being referred to herein as the "Registration
Statement"), of an aggregate of 4,000,000 shares of Common Stock, par value
$.01 per share ("Common Stock"), of the Company, together with a maximum of
600,000 shares of Common Stock which may be sold to the Underwriters pursuant
to the over-allotment option provided in the Purchase Agreement and such
additional shares of Common Stock, representing up to 20% of the maximum
aggregate offering price set forth in the Registration Statement, which may be
sold to the Underwriters and which would be registered with the S.E.C. pursuant
to Rule 462(b) promulgated under the Securities Act of 1933, as amended (the
"Securities Act") (collectively, said shares of Common Stock are referred to
herein as the "Shares"). Capitalized terms used but not defined herein have
the meanings set forth in the Registration Statement.
We are rendering this opinion as of the time the Registration
Statement becomes effective in accordance with Section 8(a) of the Securities
Act.
In connection with the opinion expressed herein, we have examined,
among other things, the Amended and Restated Certificate of Incorporation and
the Bylaws of the Company, the records of corporate proceedings that have
occurred prior to the date hereof with respect to such offering, the
Registration Statement and the form of Purchase Agreement to be executed among
the Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs
& Co. and Simmons & Company International, as Representatives of the several
Underwriters. We have also reviewed such questions of law as we have deemed
necessary or appropriate.
<PAGE> 2
National-Oilwell, Inc.
Page 2
October 3, 1996
Based upon the foregoing, we are of the opinion that the Shares
proposed to be sold by the Company to the Underwriters have been validly
authorized for issuance and, upon the issuance and delivery thereof in
accordance with the provisions of the Purchase Agreement (assuming that it is
executed in the form reviewed by us), and as set forth in the Registration
Statement, will be validly issued, fully paid and nonassessable.
This opinion is limited in all respects to the General Corporation Law
of the State of Delaware.
We hereby consent to the statements with respect to us under the
heading "Legal Matters" in the prospectus forming a part of the Registration
Statement and to the filing of this opinion as an exhibit to the Registration
Statement and the incorporation by reference of this opinion and consent in a
registration statement filed to register additional shares of Common Stock
pursuant to Rule 462(b) promulgated under the Securities Act, but we do not
thereby admit that we are within the class of persons whose consent is required
under the provisions of the Securities Act or the rules and regulations of the
S.E.C. issued thereunder.
Very truly yours,
/s/ Vinson & Elkins L.L.P.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 29, 1996 related to the consolidated balance
sheet of National-Oilwell, Inc. and subsidiaries, and to the use of our report
dated January 31, 1996 related to the consolidated financial statements of
National-Oilwell, a general partnership, and subsidiaries in the Registration
Statement (Form S-1 No. 333-11051) and related Prospectus for the registration
of 4,000,000 shares of common stock.
ERNST & YOUNG LLP
Houston, Texas
October 2, 1996
