<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 7, 1997
----------------
NATIONAL-OILWELL, INC.
--------------------------------------------------------------
(Exact Name of Registrant Specified in Charter)
DELAWARE 1-12317 76-0475815
- -------------------------------- ------------------- ---------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File No.) Identification No.)
5555 SAN FELIPE
HOUSTON, TEXAS 77056
- -------------------------------- --------------------
(Address of Principal (Zip Code)
Executive Offices)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (713) 960-5100
-------------------------
------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
5. OTHER EVENTS
On September 25, 1997, National-Oilwell, Inc., a Delaware corporation (the
"Company"), completed its previously announced combination (the "Combination")
with Dreco Energy Services Ltd., an Alberta corporation ("Dreco"), pursuant to a
Combination Agreement, dated as of May 14, 1997, as amended (the "Combination
Agreement"), by and between the Company and Dreco. The Company is accounting for
the Combination as a pooling-of-interests. This Current Report provides a
revised Management's Discussion and Analysis of Financial Condition and Results
of Operations and the Company's Restated Consolidated Financial Statements on
that basis.
1
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
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'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.
Effective September 25, 1997, National-Oilwell completed a combination (the
"Combination") with Dreco Energy Services Ltd. ("Dreco"). As a result of the
Combination, each Dreco Class "A" common share ("Dreco Common Share")
outstanding was converted into a Dreco Exchangeable Share at an exchange ratio
of .9159 of an Exchangeable Share for each Dreco Common Share outstanding at
September 25, 1997 and, accordingly, approximately 7.2 million Exchangeable
Shares were issued. Each Exchangeable Share is intended to have substantially
identical economic and legal rights as, and will ultimately be exchanged on a
one-for-one basis for, a share of National-Oilwell common stock.
The Combination has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements of National-Oilwell and Dreco
have been combined and all prior periods have been restated to give effect to
the Combination. Information concerning common stock and per share data has been
restated on an equivalent share basis and assumes the exchange of all
Exchangeable Shares.
National-Oilwell has a year end of December 31 and, prior to the Combination,
Dreco had a year end of August 31. The restated Consolidated Balance Sheet
combines the December 31, 1996 balance sheet of National-Oilwell with the
November 30, 1996 balance sheet of Dreco. The Consolidated Statement of
Operations for 1996 combines the operating results of National-Oilwell for the
year ended December 31, 1996 and the operating results of Dreco for the twelve
months ended November 30, 1996. Prior to 1996, the financial statements reflect
only the operations of Dreco as the Acquisition as recorded by National-Oilwell
had not occurred and generally accepted accounting principles do not allow
combination with the predecessor partnership. As a result of changing Dreco's
reporting period from August 31 to November 30 for combination with 1996 results
of National-Oilwell, the operating results for the three months ended November
30, 1995 were included in the Consolidated Statements of Stockholders' Equity.
For the three month period, Dreco recorded revenues of $33.4 million, net income
of $3.2 million and net income per share of $0.55.
During 1996 and 1997, the capital structure of the Company changed
significantly. In January 1996, the Company acquired the operations of
National-Oilwell, its predecessor partnership (the "Acquisition"), resulting in
the incurrence of significant amounts of debt and related interest expense. On
October 29, 1996, the Company sold 4.6 million shares of its common stock
through an initial public offering (the "IPO"). Net proceeds from the IPO of
approximately $72 million were used to repay debt incurred in connection with
the Acquisition. On December 10, 1996, the Company sold 1,053,000 Dreco Common
Shares (as adjusted for the exchange ratio in the Combination) for proceeds of
$39.2 million. This latter transaction is reflected in the financial statements
as a 1997 occurrence due to the combination of differing balance sheet dates.
2
<PAGE> 4
RESULTS OF OPERATIONS
Operating results by segment are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Products and Technology $ 266.5 $ 62.2 $ 61.1
Downhole Products 28.6 25.0 19.1
Distribution Services 518.7 -- --
Eliminations (52.0) (0.3) (0.5)
------------ ------------ ------------
Total $ 761.8 $ 86.9 $ 79.7
============ ============ ============
Operating Income:
Products and Technology $ 25.9 $ 3.9 $ (12.2)
Downhole Products 8.9 8.6 5.9
Distribution Services 17.5 -- --
Corporate (8.2) (2.4) (3.0)
------------ ------------ ------------
44.1 10.1 (9.3)
Special Charge 16.6 -- --
------------ ------------ ------------
Total $ 27.5 $ 10.1 $ (9.3)
============ ============ ============
</TABLE>
Products and Technology
The Products and Technology segment designs and manufactures a large line of
proprietary products, including drawworks, mud pumps, power swivels, electrical
control systems and reciprocating pumps, as well as complete land drilling and
well servicing rigs and structural components such as masts, derricks and
substructures. A substantial installed base of these products results in a
recurring replacement parts and maintenance business. Sales of new capital
equipment can result in large fluctuations in volume between periods depending
on the size and timing of the shipment of orders. This segment also provides
drilling pump expendable products for maintenance of the Company's and other
manufacturers' equipment.
During the second quarter of 1996, the Company began to experience an increase
in demand for its capital equipment, especially from offshore drilling
contractors. The Company believes that offshore drillers have begun to
experience higher demand for and cash flows from their services that allow the
upgrade and repair of machinery and equipment that has been deferred for many
years. If utilization rates of the offshore mobile rig fleet remain above 90%,
management believes demand for the construction of new rigs could result in a
further increase in demand for machinery and equipment of the type manufactured
by the Company. Similarly, toward the end of 1996, the Company began to receive
a significant increase in the number of inquiries for the purchase of equipment
for land rigs. The Company believes the excess supply of large land drilling
rigs and equipment that has existed since 1981 may have reduced to the point
that future demand for land rigs and related equipment will increase.
Revenues during 1996 increased $204.3 million over 1995 primarily due to the
combination of results from the Acquisition recorded by National-Oilwell. In
addition, international sales of new equipment increased for Dreco. Revenue
levels in 1995 were only slightly higher than those in 1994. Operating income
for the Products and Technology segment increased $22.0 million in 1996 as
compared to the prior year as a result of the combination of results from the
Acquisition recorded by National-Oilwell. Operating income in 1995 increased
$16.1 million over 1994 due to a $12.4 million loss recorded in 1994 from the
Company's Norwegian investee. Excluding this loss, 1995 operating income
increased $3.7 million over 1994, primarily as a result of higher revenues and
product mix.
3
<PAGE> 5
Downhole Products
National-Oilwell designs and manufactures drilling motors and specialized
drilling tools for rent and sale. Rentals generally involve products that are
not economical for a customer to own or maintain because of the broad range of
equipment required for the diverse hole sizes and depths encountered in drilling
for oil and gas. Sales generally involve products that require infrequent
service, are disposable or are sold in countries where National-Oilwell does not
provide repair and maintenance services. Effective December 1, 1996, Dreco
acquired Vector Oil Tool Ltd., a downhole motor designer and manufacturer, with
revenues of $19.9 million in its most recent fiscal year ended July 31, 1996.
This acquisition is not reflected in the combined Consolidated Balance Sheet
since it occurred after November 30, 1996, nor is it included in any of the
operating results included herewith.
Revenues increased $3.6 million in 1996 due to higher worldwide rental activity,
as sales to non-rental territories was comparable to the prior year. Revenues in
1995 increased $5.9 million over 1994 primarily due to two sales contracts for
downhole motors and tools totaling $4.3 million. Operating income increased in
1996 by $0.3 million over 1995 levels due to the higher revenues offset by
changes in product mix. Operating income increased $2.7 million in 1995 over
1994 due to the revenue increases.
Distribution Services
Distribution Services revenues result primarily from the sale of MRO products
from the Company's network of 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 Products and Technology
segment.
This segment is not included in the combined statements prior to 1996 as it was
part of the Acquisition recorded by National-Oilwell.
Corporate
Corporate charges represent the unallocated portion of centralized and executive
management costs. Corporate charges in 1996 increased substantially over the
1995 amount due to the inclusion of the Acquisition recorded by
National-Oilwell. In 1995 corporate charges decreased $0.6 million from 1994.
Special Charge
During 1996, National-Oilwell incurred certain one-time expenses in connection
with its initial public offering of common stock, as follows: (i) the Management
Services Agreement was terminated at a cost of $4.4 million ($2.8 million after
tax) and will be paid in quarterly installments of $250,000, subject to certain
accelerating events, and (ii) expenses and payout under the Company's Value
Appreciation Plans. The Value Appreciation Plans resulted in the Company
recording an expense of $12.2 million ($7.6 million after tax) and making a cash
payment of $2.9 million at the time of the IPO closing and incurring an
obligation to make future annual cash payments of $.7 million for five years
beginning January 17, 1997 and future issuances of 340,926 shares of Common
Stock.
Interest Expense
Interest expense increased substantially during 1996 due to debt incurred in
connection with the Acquisition as recorded by National-Oilwell. A substantial
portion of the debt was repaid in late 1996 with proceeds from the IPO.
Income Taxes
The Company is subject to U.S. federal, state, and foreign taxes and in 1996
recorded a combined tax rate of 39%. The Company has investment tax credits of
approximately $1.0 million in Canada and net operating tax loss carryforwards of
$22.7 million in the United States that may be available to reduce future taxes.
Due to the uncertainty of future utilization, the potential benefits have not
been recorded.
4
<PAGE> 6
Extraordinary Loss
In the fourth quarter of 1996, the credit facility established in connection
with the Acquisition was replaced, resulting in the write-off of $6.4 million
($4.0 million after tax) in deferred financing costs related to the replaced
agreement.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had working capital of $168.9 million, an
increase of $135.9 million from August 31, 1995, primarily due to the inclusion
of the Acquisition as recorded by National-Oilwell. Significant components of
the Company's assets are accounts receivable and inventories. Principally as a
result of the Acquisition, accounts receivable, including unbilled revenues,
increased by $121.2 million and inventories increased $118.4 million during
1996. These amounts were partially offset by increases in accounts payable of
$77.3 million and other accrued liabilities of $14.0 million as a result of the
Acquisition.
Total capital expenditures were $15.2 million during 1996, $6.4 million in 1995
and $5.9 million in 1994. Additions and enhancements to the downhole rental tool
fleet and information and inventory control systems represent a large portion of
these capital expenditures. Increased annual capital expenditures are
anticipated as the company further enhances its rental tool fleet, facilities
and information systems. The Company believes it has sufficient existing
manufacturing capacity to meet currently anticipated demand through 1998 for its
products and services. Any significantly greater increases in demand for
oilfield equipment products, to the extent qualified subcontracting and
outsourcing are not available, could result in further increases in capital
expenditures.
On September 25, 1997, the Company entered into a new five-year unsecured $125
million revolving credit facility (the "New Credit Facility") that was used in
part to repay in full amounts outstanding under the previous credit facility as
well as the seller notes payable, together with deferred interest, incurred in
connection with the Acquisition. The balance of the New Credit Facility will be
available for acquisitions and general corporate purposes. The New Credit
Facility provides for interest at prime or LIBOR plus 0.5%, subject to
adjustment based on the Company's Capitalization Ratio, as defined. The New
Credit Facility contains financial covenants and ratios regarding minimum
tangible net worth, maximum debt to capital and minimum interest coverage.
The Company believes that cash generated from operations and amounts available
under its revolving 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 through debt financing.
The Company intends to pursue acquisition candidates, but the timing, size or
success of any acquisition effort and the related potential capital commitments
cannot be predicted. The Company expects to fund future cash acquisitions
primarily with cash flow from operations and borrowings, including the
unborrowed portion of the New Credit Facility or new debt issuances, but may
also issue additional equity either directly or in connection with acquisitions.
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 impact on the Company's operating results or
financial condition in recent years.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share. SFAS No. 128 is effective for financial statements for periods ending
after December 15, 1997 and earlier adoption is not permitted. Initial adoption
of this standard in not expected to have a material impact on National-Oilwell's
consolidated financial statements.
5
<PAGE> 7
FORWARD-LOOKING STATEMENTS
This document, other than historical financial information, may contain
forward-looking statements that involve risks and uncertainties. Readers are
referred to documents filed by the Company with the Securities and Exchange
Commission which identify significant risk factors which could cause actual
results to differ from those contained in the forward-looking statements,
including "Risk Factors" at Item 1 of the Company's Annual Report on Form 10-K
in the fiscal year ended December 31, 1996, as amended.
6
<PAGE> 8
RESTATED CONSOLIDATED FINANCIAL STATEMENTS OF NATIONAL-OILWELL, INC.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
National-Oilwell, Inc.
We have audited the accompanying consolidated balance sheet of
National-Oilwell, Inc., as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Dreco Energy Services, Ltd., a wholly-owned subsidiary, which statements reflect
total assets of $85,775,000 as of November 30, 1996, and total revenues of
$113,195,000 for the year then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Dreco Energy Services, Ltd., is based solely on the
report of the other auditors.
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 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 audit provides 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, Inc., at December 31, 1996, and the consolidated results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
October 31, 1997
7
<PAGE> 9
REPORT OF INDEPENDENT AUDITORS
Board of Directors
National-Oilwell, Inc.
We have audited the consolidated balance sheet of National-Oilwell, Inc.
(as defined in Note 1) as at August 31, 1995, and the consolidated statements of
operations, stockholders' equity, and cash flows for the years ended August 31,
1995 and August 31, 1994. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of National-Oilwell, Inc. (as
defined in Note 1) as at August 31, 1995 and the results of its operations and
its cash flows for the years ended August 31, 1995 and August 31, 1994 in
accordance with generally accepted accounting principles in the United States.
COOPERS & LYBRAND
Chartered Accountants
Edmonton, Alberta
November 3, 1995, except as to Note 1
which is as of September 25, 1997
8
<PAGE> 10
NATIONAL-OILWELL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,611 $ 16,266
Restricted cash -- 5,125
Receivables, less allowance of $3,165 and $390 125,306 14,538
Unbilled revenues 13,880 3,408
Inventories 128,611 10,175
Deferred taxes 4,028 1,549
Prepaid and other current assets 7,963 1,421
------------ ------------
Total current assets 293,399 52,482
Property, plant and equipment, net 44,446 19,873
Deferred taxes 6,847 --
Goodwill 6,327 --
Other assets 1,499 --
------------ ------------
$ 352,518 $ 72,355
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,100 $ --
Accounts payable 87,461 10,140
Customer prepayments 5,889 6,951
Accrued compensation 9,778 1,082
Other accrued liabilities 15,274 1,317
------------ ------------
Total current liabilities 124,502 19,490
Long-term debt 39,136 1,987
Deferred taxes 1,913 1,921
Insurance reserves 6,599 --
Other liabilities 11,352 --
------------ ------------
Total liabilities 183,502 23,398
Commitments and contingencies
Stockholders' equity:
Common stock - par value $.01; 23,543,717 and 5,636,538 shares
issued and outstanding at December 31, 1996 and August 31, 1995 235 56
Additional paid-in capital 149,497 39,867
Cumulative translation adjustment (2,302) (3,239)
Retained earnings 21,586 12,273
------------ ------------
169,016 48,957
------------ ------------
$ 352,518 $ 72,355
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE> 11
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED AUGUST 31,
DECEMBER 31, ----------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 761,816 $ 86,875 $ 79,663
Cost of revenues 639,433 61,252 59,377
------------ ------------ ------------
Gross profit 122,383 25,623 20,286
Selling, general, and administrative 78,273 15,564 17,182
Equity loss -- -- 12,357
Special charge 16,611 -- --
------------ ------------ ------------
Operating income (loss) 27,499 10,059 (9,253)
Interest and financial costs (12,241) (64) (215)
Interest income 1,301 1,505 628
Other income, net 159 696 2,131
------------ ------------ ------------
Income (loss) before income taxes 16,718 12,196 (6,709)
Provision (benefit) for income taxes 6,571 4,407 (27)
------------ ------------ ------------
Net income (loss) before extraordinary loss 10,147 7,789 (6,682)
Extraordinary loss, net of tax benefit 4,000 -- --
------------ ------------ ------------
Net income (loss) $ 6,147 $ 7,789 $ (6,682)
============ ============ ============
Weighted average shares outstanding 20,276 5,711 5,623
============ ============ ============
Income per share:
Before extraordinary loss $ 0.50 $ 1.36 $ (1.19)
Extraordinary loss 0.20 -- --
------------ ------------ ------------
Net income (loss) $ 0.30 $ 1.36 $ (1.19)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE> 12
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 6,147 $ 7,789 $ (6,682)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 8,775 4,558 4,926
Provision for losses on receivables 526 87 278
Provision for deferred income taxes (2,433) 2,924 (255)
Gain on sale of assets (2,727) (1,304) (919)
Foreign currency transaction gain (157) -- (89)
Special charge 16,611 -- --
Extraordinary loss 6,400 -- --
Equity loss -- -- 12,357
Changes in assets and liabilities, net of Acquisition:
Increase in receivables (25,682) (820) (7,455)
Decrease (increase) in unbilled revenues (8,151) (1,046) 596
Decrease (increase) in inventories (2,410) (2,572) 181
Decrease (increase) in prepaid and other current assets (889) 245 306
Increase (decrease) in accounts payable 5,555 (202) (1,040)
Increase (decrease) in other assets/liabilities, net (8,177) (7,591) 6,949
------------ ------------ ------------
Net cash provided (used) by operating activities (6,612) 2,068 9,153
------------ ------------ ------------
Cash flow from investing activities:
Purchases of property, plant and equipment (15,166) (6,435) (5,932)
Proceeds from sale of assets 3,995 3,234 1,609
Acquisition of partnership, net of cash acquired (106,248) -- --
Other (350) -- (776)
------------ ------------ ------------
Net cash used by investing activities (117,769) (3,201) (5,099)
------------ ------------ ------------
Cash flow from financing activities:
Borrowings (payments) on long-term debt, net (89,259) (1,308) (1,655)
Proceeds from issuance of common stock 108,288 161 --
Proceeds from Acquisition debt 103,378 -- --
Restricted cash 5,125 (1,470) (3,655)
------------ ------------ ------------
Net cash provided (used) by financing activities 127,532 (2,617) (5,310)
------------ ------------ ------------
Effect of exchange rate losses on cash (180) -- --
------------ ------------ ------------
Increase (decrease) in cash and equivalents 2,971 (3,750) (1,256)
Cash and cash equivalents, beginning of year 16,266 20,016 21,272
Change in cash to conform fiscal year end (5,626) -- --
------------ ------------ ------------
Cash and cash equivalents, end of year $ 13,611 $ 16,266 $ 20,016
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE> 13
NATIONAL-OILWELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON PAID-IN TRANSLATION RETAINED
STOCK CAPITAL ADJUSTMENT EARNINGS TOTAL
--------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1993 $ 56 $ 38,022 $ (2,618) $ 11,166 $ 46,626
Net income (loss) (6,682) (6,682)
Translation adjustment (1,469) (1,469)
Tax recovery 215 215
--------- --------- --------- --------- ---------
Balance at August 31, 1994 56 38,237 (4,087) 4,484 38,690
Net income 7,789 7,789
Translation adjustment 848 848
Tax recovery 1,469 1,469
Stock options exercised -- 161 161
--------- --------- --------- --------- ---------
Balance at August 31, 1995 56 39,867 (3,239) 12,273 48,957
Change in fiscal year end 271 (491) 3,166 2,946
--------- --------- --------- --------- ---------
Balance at November 30, 1995 56 40,138 (3,730) 15,439 51,903
Net income 6,147 6,147
Stock options exercised -- 341 341
Issuance of 17,857,698 shares 179 107,497 107,676
Translation adjustment 1,428 1,428
Tax recovery 1,521 1,521
--------- --------- --------- --------- ---------
Balance at December 31, 1996 $ 235 $ 149,497 $ (2,302) $ 21,586 $ 169,016
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE> 14
NATIONAL-OILWELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Effective January 1, 1996, National-Oilwell, Inc. acquired National-Oilwell, a
general partnership (the "Partnership") between National Supply Company, Inc., a
subsidiary of Armco Inc., and Oilwell, Inc., a subsidiary of USX Corporation,
and subsidiaries (the "Acquisition"). National-Oilwell, Inc. acquired the
Partnership for a purchase price of $180 million, which approximated book value.
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 and seller notes. 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>
Effective September 25, 1997, National-Oilwell completed a combination
("Combination") with Dreco Energy Services Ltd. ("Dreco"). As a result of the
Combination, each Dreco common share ("Dreco Common Share") outstanding was
converted into a Dreco Exchangeable Share at an exchange ratio of .9159 of an
Exchangeable Share for each Dreco Common Share outstanding at September 25, 1997
and, accordingly, approximately 7.2 million Exchangeable Shares were issued.
Each Exchangeable Share is intended to have substantially identical economic and
legal rights as, and will ultimately be exchanged on a one-for-one basis for, a
share of National-Oilwell common stock.
The Combination has been accounted for as a pooling-of-interests and,
accordingly, the consolidated financial statements of National-Oilwell and Dreco
have been combined and all prior periods have been restated to give effect to
the Combination. On a separate company basis in 1996, National-Oilwell recorded
revenues of $648.6 million, net income before special charges and extraordinary
loss of $14.6 million and net income of $0.2 million, and Dreco recorded
revenues of $113.2 million and net income of $5.9 million. Information
concerning common stock and per share data has been restated on an equivalent
share basis and assumes the exchange of all Exchangeable Shares.
National-Oilwell has a year end of December 31 and, prior to the Combination,
Dreco had a year end of August 31. The restated Consolidated Balance Sheet
combines the December 31, 1996 balance sheet of National-Oilwell with the
November 30, 1996 balance sheet of Dreco. The Consolidated Statement of
Operations for 1996 combines the operating results of National-Oilwell for the
year ended December 31, 1996 and the operating results of Dreco for the twelve
months ended November 30, 1996. Prior to 1996, the financial statements reflect
only the operations of Dreco, as the Acquisition of National-Oilwell had not
occurred and generally accepted accounting principles do not allow combination
with the predecessor partnership. As a result of changing Dreco's reporting
period from August 31 to November 30 for combination with 1996 results of
National-Oilwell, the operating results for the three months ended November 30,
1995 were included in the Consolidated Statements of Stockholders' Equity. For
the three months ended November 30, 1995, Dreco recorded revenues of $33.4
million, net income of $3.2 million and net income per share of $0.55.
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 material
contingent assets and liabilities as of the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
13
<PAGE> 15
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. The Company's investment in its
inactive Norwegian investee is accounted for by the equity method.
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 months or less at the
time of purchase. The carrying values of these financial instruments approximate
their respective fair values. Restricted cash represents cash deposits
collateralizing letters of credit, that are released upon the performance of the
Company's contractual obligation.
Inventories
Inventories consist of oilfield products and oil country tubular goods,
manufactured equipment, manufactured specialized drilling products and spare
parts for manufactured equipment and drilling products. Inventories are stated
at the lower of cost or market using the first-in, first-out 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 or declining balance method over the estimated useful
lives of individual items. Depreciation is classified with selling, general and
administrative expenses in the statement of operations.
Intangible Assets
Deferred financing costs are amortized on a straight-line basis over the life of
the related debt security and accumulated amortization was $40,000 at December
31, 1996. Goodwill is amortized on a straight-line basis over its estimated life
of up to 40 years. Accumulated amortization was $162,000 at December 31, 1996.
Foreign Currency
The functional currency for the Company's Canadian, United Kingdom, German and
Australian operations 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 operations. 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 and rental of products and delivery of services is
recognized upon passage of title, incurrence of rental charges or delivery of
services to the customer. Revenue is recognized on certain significant contracts
in the Products and Technology segment using the percentage of completion method
based on the percentage of total costs incurred to total costs expected.
Provision for estimated losses, if any, is made in the period such losses are
estimable.
14
<PAGE> 16
Income Taxes
Deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax reporting basis of assets and liabilities.
Investment tax credits are accounted for using the cost reduction approach at
the time of the qualifying expenditures, provided there is reasonable assurance
that the credits will be realized.
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, but
may require letters of credit for certain international sales. The Company
maintains reserves for potential credit losses and such credit losses have
historically been within management's expectations.
Long-Lived Assets
Effective January 1, 1996, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was adopted.
SFAS No. 121 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 adoption did not have a material effect on the financial
statements.
Stock-Based Compensation
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," and elected to continue to use the intrinsic value
method in accounting for its stock-based employee compensation plans.
Net Income Per Share
Average shares outstanding is the weighted average of issued shares of common
stock outstanding during the year. Shares issued pursuant to the Acquisition and
shares associated with the Value Appreciation Plans are deemed to be outstanding
for the entire year of 1996.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials and supplies $ 12,854 $ 3,479
Work in process 8,367 2,103
Finished goods and purchased products 107,390 4,593
------------ ------------
Total $ 128,611 $ 10,175
============ ============
</TABLE>
4. STATEMENTS OF CASH FLOWS
The following information is provided to supplement the Consolidated
Statements of Cash Flows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, ----------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest and financial costs $ 8,819 $ 64 $ 215
Income taxes 4,252 53 56
</TABLE>
15
<PAGE> 17
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
Estimated December 31, August 31,
USEFUL LIVES 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
Land and improvements 2-20 Years $ 2,906 $ 853
Buildings and improvements 5-31 Years 11,360 5,040
Machinery and equipment 5-12 Years 17,324 7,801
Computer and office equipment 3-10 Years 11,219 3,486
Rental equipment 1-7 Years 27,956 23,393
---------- ----------
70,765 40,573
Less accumulated depreciation (26,319) (20,700)
---------- ----------
$ 44,446 $ 19,873
========== ==========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1996 1995
------------ ------------
<S> <C> <C>
Revolving credit facilities $ 22,492 $ --
Seller notes 20,000 --
Other loans 2,744 1,987
------------ ------------
45,236 1,987
Less current portion (6,100) --
------------ ------------
$ 39,136 $ 1,987
============ ============
</TABLE>
On September 25, 1997, the Company entered into a new five-year unsecured $125
million revolving credit facility (the "New Credit Facility") that was used in
part to repay in full amounts outstanding under the previous revolving credit
facilities as well as the seller notes payable, together with deferred interest,
incurred in connection with the Acquisition. The balance of the New Credit
Facility will be available for acquisitions and general corporate purposes. The
New Credit Facility provides for interest at prime or LIBOR plus 0.5%, subject
to adjustment based on the Company's Capitalization Ratio, as defined. The New
Credit Facility contains financial covenants and ratios regarding minimum
tangible net worth, maximum debt to capital and minimum interest coverage.
7. 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,
a percentage of current earnings or matching of employee contributions. For the
years ended December 31, 1996, August 31, 1995 and August 31, 1994, pension
expense for defined-contribution plans was $1.8 million, $0.1 million, and $0.1
million and the funding is current.
One of the Company's subsidiaries 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 $36.8 million
at December 31, 1996. The projected benefit obligation was $25.8 million at
December 31, 1996.
16
<PAGE> 18
8. COMMITMENTS AND CONTINGENCIES
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 year ended December 31, 1996 was $10.5
million. Rent expense for the years ended August 31, 1995 and 1994 was $0.8
million and $0.8 million. The Company's minimum rental commitments for operating
leases at December 31, 1996 were as follows: 1997 - $6.7 million; 1998 - $5.6
million; 1999 - $3.1 million; 2000 - $2.3 million; 2001 - $2.1 million;
thereafter - $6.4 million.
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, 1996 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.
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.
9. COMMON STOCK
At the Special Meeting of Stockholders on September 23, 1997, the number of
authorized shares was increased to 75 million from 40 million. The Company has
also authorized 10 million shares of $.01 par value preferred stock, none of
which is issued or outstanding.
On October 29, 1996, the Company sold 4.6 million shares of its common stock
through an initial public offering (the "IPO"). Net proceeds from the IPO of
approximately $72 million were used to repay debt incurred in connection with
the Acquisition. On December 10, 1996, the Company, by virtue of the Combination
described in Note 1, also sold 1,053,000 shares of common stock for proceeds of
$39.2 million. This latter transaction is reflected in the 1997 financial
statements due to the combination of differing balance sheet dates as also
discussed in Note 1.
The Company's stock option plans collectively authorize the grant of options to
purchase up to 1,893,000 shares of the Company's common stock to officers, key
employees and non-employee directors. Options granted are generally exercisable
between 3 and 5 years starting one year from the date of grant and generally
expiring 5 to 10 years from the date of grant.
Pursuant to the Company's Stock Award and Long-Term Incentive Plan, 941,303
shares of restricted common stock were purchased by executive officers. These
shares are subject to restriction on transferability and are not entitled to
participate in dividends or distributions. Restrictions lapse annually regarding
20% of these shares beginning on January 17, 1997 or in their entirety upon the
occurrence of (i) a merger or consolidation of the Company into another company,
(ii) a sale of all or substantially all the assets of the Company, or (iii) a
sale of all the common stock of the Company. Restrictions also lapse in their
entirety upon a participant's disability, death or involuntary termination of
employment without cause. The plan was subsequently amended and restated to
authorize the issuance of up to 1,000,000 additional shares of common stock
pursuant to awards made thereunder, all of which remained available for issuance
as of December 31, 1996.
17
<PAGE> 19
In January 1996, the Company established Value Appreciation Plans (the "Plans")
intended to reward participants for enhancing the value of the Company's common
stock. The IPO represented a triggering event under these Plans. Based upon the
offering price of $17.00, the Plans resulted in a one-time charge before taxes
of $12.2 million ($7.6 million after tax). The Company paid $2.9 million of this
amount in cash at the time of the IPO, $3.5 million in cash will be paid in five
annual installments beginning January 17, 1997. In addition, 170,472 shares of
common stock will be issued on November 3, 1997 and another 170,454 shares of
common stock will be issued on or about January 17, 1999, subject to earlier
issuance to terminated employees in certain circumstances.
The Dreco Energy Services Ltd. Amended and Restated 1989 Employee Incentive
Option Plan, (the "Incentive Plan"), and private stock option agreements, (the
"Private Agreements"), remain in effect after the Combination and the options in
the Incentive Plan are converted at a rate of .9159 National-Oilwell common
share for one Dreco Class "A" common share. Substantially all of the options
under the Incentive Plan have exercise prices between $11.25 and $17.95 per
Share, and expire at various dates from December 15, 2003 to January 17, 2006.
The weighted average exercise price on the 331,557 outstanding options is
$12.01. The options under the Private Agreements to purchase 100,749 shares have
an average exercise price of $14.06 per share and expire at various dates from
November 19, 2002 to January 13, 2007.
The following summarizes option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARE PRICE
------------------------
INCENTIVE PRIVATE INCENTIVE PRIVATE TOTAL
PLAN AGREEMENTS PLAN AGREEMENTS OPTIONS
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING:
Balance at August 31, 1994 $ 11.30 $ 14.06 201,498 109,908 311,406
Granted 11.25 -- 146,544 -- 146,544
Exercised 11.84 -- (13,738) -- (13,738)
Cancelled 11.84 -- (4,579) -- (4,579)
---------- ---------- ----------
Balance at August 31, 1995 11.25 14.06 329,725 109,908 439,633
Granted 17.95 -- 42,131 -- 42,131
Exercised 11.92 14.06 (36,636) (9,159) (45,795)
---------- ---------- ----------
Balance at August 31, 1996 12.02 14.06 335,220 100,749 435,969
Exercised 11.25 -- (3,663) -- (3,663)
---------- ---------- ----------
Balance at December 31, 1996 12.03 14.06 331,557 100,749 432,306
========== ========== ==========
OPTIONS EXERCISABLE:
Balance at August 31, 1994 11.41 14.06 64,113 109,908 174,021
Became exercisable 11.25 -- 75,103 -- 75,103
Exercised 11.84 -- (13,738) -- (13,738)
Cancelled 11.84 -- (4,579) -- (4,579)
---------- ---------- ----------
Balance at August 31, 1995 11.25 14.06 120,899 109,908 230,807
Became exercisable 11.92 -- 83,530 -- 83,530
Exercised 11.92 14.06 (36,636) (9,159) (45,795)
---------- ---------- ----------
Balance at August 31, 1996 11.44 14.06 167,793 100,749 268,542
Exercised 11.25 -- (3,663) -- (3,663)
---------- ---------- ----------
Balance at December 31, 1996 $ 11.43 $ 14.06 164,129 100,749 264,878
========== ========== ==========
</TABLE>
The weighted average fair value of options granted during 1996 was approximately
$11.22 per share. The fair value of these options was determined using the
Black-Scholes option pricing model. Assuming that the Company had accounted for
its stock-based compensation using the alternative fair value method of
accounting under FAS No. 123 and amortized the fair value to expense over the
options vesting period, net income and earnings per share would not have been
materially different from those reported. These pro forma results may not be
indicative of future effects.
18
<PAGE> 20
10. INCOME TAXES
The domestic and foreign components of income before income taxes were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Domestic $ 1,096 $ 4,363 $ 670
Foreign 15,622 7,833 (7,379)
------------ ------------ ------------
$ 16,718 $ 12,196 $ (6,709)
============ ============ ============
</TABLE>
The components of the provision for income taxes consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Federal $ 4,435 $ 1,316 $ 203
State 561 167 25
Foreign 4,008 -- --
------------ ------------ ------------
9,004 1,483 228
------------ ------------ ------------
Deferred:
Federal (3,898) -- --
State (864) -- --
Foreign 2,329 2,924 (255)
------------ ------------ ------------
(2,433) 2,924 (255)
------------ ------------ ------------
$ 6,571 $ 4,407 $ (27)
============ ============ ============
</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>
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 5,851 $ 4,269 $ (2,348)
Foreign income tax rate differential 173 138 (154)
Nondeductible expenses 1,170 -- --
Unutilized foreign operating loss -- -- 2,730
Change in deferred tax valuation allowance (462) -- --
Previously unrecognized tax benefits (355) -- (255)
Other 194 -- --
------------ ------------ ------------
$ 6,571 $ 4,407 $ (27)
============ ============ ============
</TABLE>
19
<PAGE> 21
Significant components of the Company's deferred tax assets and liabilities were
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued liabilities $ 12,876 $ -- $ --
Net operating loss carryforwards 16,305 11,258 15,253
Other 6,104 1,811 1,382
------------ ------------ ------------
Total deferred tax assets 35,285 13,069 16,635
Valuation allowance for deferred tax assets (22,923) (11,520) (12,888)
------------ ------------ ------------
12,362 1,549 3,747
------------ ------------ ------------
Deferred tax liabilities:
Tax over book depreciation 2,968 1,671 945
Other 432 250 196
------------ ------------ ------------
Total deferred tax liabilities 3,400 1,921 1,141
------------ ------------ ------------
Net deferred tax assets $ 8,962 $ (372) $ 2,606
============ ============ ============
</TABLE>
In the United States, net operating tax loss carryforwards estimated to be
available are $22.7 million and will expire at various dates between 2000 and
2009. The related potential benefit available of $7.7 million has been recorded
with a full valuation allowance. The recoveries of income taxes through the
utilization of $1.3 million of tax loss carryforwards that occurred prior to the
reorganization of Dreco will, if realized, be credited directly to additional
paid in capital. These net operating tax loss carryforwards were acquired in the
Combination, and therefore, the availability of these loss carryforwards to
reduce future United States federal taxable income may become subject to various
limitations under the Internal Revenue Code of 1986, as amended. In particular,
the utilization of such carryforwards would be limited upon the occurrence of
certain events during a three year period resulting in a more than 50% aggregate
change in the beneficial ownership of Dreco.
In Europe, net operating tax loss carryforwards estimated to be available are
$25.7 million and are available indefinitely. The related potential benefit
available of approximately $8.6 million has been recorded with a full valuation
allowance.
In Canada, unrecorded investment tax credits estimated to be available are
$992,000 and will expire at various dates between 1997 and 2002.
The deferred tax valuation allowance decreased $1.7 and $1.4 million for the
periods ending December 31, 1996 and August 31, 1995, respectively. The decrease
in the valuation allowance in both years is related to the realization of
foreign net operating losses that were previously deferred. The increase in the
valuation allowance in 1996 is related to the Company's estimate of restated
deferred tax assets that may not be realized. Any future decrease in the
valuation allowance will reduce goodwill if recorded in connection with the
Acquisition and will reduce income tax expense if recorded in connection with
post-reorganization losses of Dreco. 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 $22.5
million at December 31, 1996 and were immaterial at August 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 $1.8 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 1996.
20
<PAGE> 22
11. SPECIAL CHARGE
In connection with the IPO, the Company incurred certain one-time expenses,
including the termination of the Management Services Agreement at a cost of $4.4
million ($2.8 million after tax) as discussed in Note 13, and the triggering of
the Company's Value Appreciation Plans, resulting in awards to certain
executives and key employees totaling $12.2 million ($7.6 million after tax) as
discussed in Note 9.
12. EXTRAORDINARY LOSS
In the fourth quarter of 1996, the revolving credit facility established in
connection with the Acquisition was replaced, resulting in the write-off of $6.4
million ($4.0 million after tax) in deferred financing costs related to the
replaced agreement.
13. 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 million per year for
senior management assistance and other services as agreed. The agreement also
provided that Inverness/Phoenix LLC receive 1% of the aggregate transaction
value in connection with each acquisition or disposition completed during the
five-year period and that First Reserve Corporation, the Company's second
largest stockholder, receive certain fees in connection with specific
acquisitions. In connection with the IPO, this agreement was terminated pursuant
to a Deferred Fee Agreement, which requires quarterly payments of $250,000, up
to a maximum of $4.4 million, subject to acceleration if an acquisition
transaction occurs. Due to the acquisitions completed in 1997, cash payments
aggregating $1,275,000 were made to Inverness/Phoenix LLC and First Reserve
Corporation. No additional accelerated payments will occur in the future and
quarterly payments of $250,000 will continue to be made to Inverness/Phoenix LLC
through December 31, 1999.
The Company paid transaction fees of $1.8 million to the Inverness/Phoenix LLC
and $1.2 million to First Reserve Corporation in connection with the
Acquisition. Fees of $4.7 million were also paid to General Electric Capital
Corporation, the Company's third largest stockholder, in connection with the
provision of the credit agreements entered into in connection with the
Acquisition.
14. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations consist of three segments: Products and Technology,
Downhole Products and Distribution Services. The Products and Technology segment
designs and manufactures a variety of oilfield equipment for use in oil and gas
drilling, completion and production activities. The Downhole Products segment
designs and manufactures drilling motors and specialized drilling tools for rent
and sale. The Distribution Services segment distributes an extensive line of
oilfield supplies, oilfield equipment and tubular products. Intersegment sales
and transfers are accounted for at commercial prices and eliminated in
consolidation.
No single customer accounted for 10% or more of consolidated revenues during the
years ended December 31, 1996. In 1995, sales of $17,365,000 and $13,720,000
were made to two separate customers by the Products and Technology segment. In
1994, sales of $9,913,000 and $9,533,000 were made to two separate customers by
the Products and Technology segment.
21
<PAGE> 23
Summarized financial information is as follows (in thousands):
Business Segments
<TABLE>
<CAPTION>
PRODUCTS AND DOWNHOLE DISTRIBUTION
TECHNOLOGY PRODUCTS SERVICES CORPORATE ELIMINATION TOTAL
------------ ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
-----------------
Revenues from:
Unaffiliated customers $ 214,802 $ 28,329 $ 518,685 $ -- $ -- $ 761,816
Intersegment sales 51,732 275 -- -- (52,007) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 266,534 28,604 518,685 -- (52,007) 761,816
Operating income (loss) 25,902 8,858 17,483 (24,744) -- 27,499
Capital expenditures 3,126 10,959 1,050 31 -- 15,166
Depreciation and amortization 2,766 4,304 1,650 55 -- 8,775
Identifiable assets 123,680 43,338 154,985 33,303 (2,788) 352,518
AUGUST 31, 1995
---------------
Revenues from:
Unaffiliated customers $ 62,027 $ 24,848 $ -- $ -- $ -- $ 86,875
Intersegment sales 140 198 -- -- (338) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 62,167 25,046 -- -- (338) 86,875
Operating income (loss) 3,907 8,587 -- (2,435) -- 10,059
Capital expenditures 1,006 5,429 -- -- -- 6,435
Depreciation and amortization 919 3,639 -- -- -- 4,558
Identifiable assets 20,523 28,404 -- 23,428 -- 72,355
AUGUST 31, 1994
---------------
Revenues from:
Unaffiliated customers $ 60,932 $ 18,731 $ -- $ -- $ -- $ 79,663
Intersegment sales 159 358 -- -- (517) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 61,091 19,089 -- -- (517) 79,663
Operating income (loss) (12,143) 5,909 -- (3,019) -- (9,253)
Capital expenditures 884 4,914 -- 134 -- 5,932
Depreciation and amortization 966 3,960 -- -- -- 4,926
Identifiable assets 21,012 23,510 -- 24,801 -- 69,323
</TABLE>
- ---------------
(1) Operating loss of Corporate includes a special charge of $16,611 for 1996.
(2) Operating loss of Products & Technology in 1994 includes the equity loss of
$12,357 from the Norwegian joint venture.
(3) Products & Technology revenues from unaffiliated customers include sales to
an equity investee of $984 and $9,533 in 1995 and 1994.
22
<PAGE> 24
Geographic Areas:
<TABLE>
<CAPTION>
UNITED UNITED
STATES CANADA KINGDOM OTHER ELIMINATION TOTAL
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31,1996
----------------
Revenues from:
Unaffiliated customers $ 554,686 $ 146,067 $ 29,152 $ 31,911 $ -- $ 761,816
Interarea sales 34,252 10,028 1,912 504 (46,696) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 588,938 156,095 31,064 32,415 (46,696) 761,816
Operating income 14,643 6,036 970 5,850 -- 27,499
Export sales of U.S. -- 1,845 3,815 90,183 -- 95,843
Identifiable assets 228,881 66,129 21,632 35,876 -- 352,518
AUGUST 31,1995
--------------
Revenues from:
Unaffiliated customers $ 21,226 $ 58,758 $ 727 $ 6,164 $ -- $ 86,875
Interarea sales 6,331 4,785 -- 363 (11,479) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 27,557 63,543 727 6,527 (11,479) 86,875
Operating income (loss) 4,545 4,210 (952) 2,256 -- 10,059
Export sales of U.S. -- -- -- 9,011 -- 9,011
Identifiable assets 15,422 41,596 1,252 14,085 -- 72,355
AUGUST 31,1994
--------------
Revenues from:
Unaffiliated customers $ 18,631 $ 53,332 $ 1,740 $ 5,960 $ -- $ 79,663
Interarea sales 2,535 2,837 145 -- (5,517) --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues 21,166 56,169 1,885 5,960 (5,517) 79,663
Operating income (loss) 802 2,565 (644) (11,976) -- (9,253)
Export sales of U.S. -- -- -- 7,835 -- 7,835
Identifiable assets 10,953 47,098 1,647 9,625 -- 69,323
</TABLE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly results were as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
- ----------------------------
Revenues $ 169,333 $ 190,917 $ 200,773 $ 200,793 $ 761,816
Gross profit 27,242 26,215 34,758 34,168 122,383
Special charge -- -- -- 16,611 16,611
Income (loss) before taxes 7,374 4,112 10,815 (5,583) 16,718
Net income before extraordinary loss 4,614 1,577 6,867 (2,911) 10,147
Net income 4,614 1,577 6,867 (6,911) 6,147
Net income per share, before extraordinary loss 0.24 0.08 0.35 (0.13) 0.50
Net income per share 0.24 0.08 0.35 (0.31) 0.30
YEAR ENDED AUGUST 31, 1995
- --------------------------
Revenues $ 24,827 $ 21,577 $ 18,401 $ 22,070 $ 86,875
Gross profit 7,994 6,298 5,333 5,998 25,623
Income before taxes 5,216 3,806 2,054 1,120 12,196
Net income 3,131 2,023 1,038 1,597 7,789
Net income per share 0.52 0.33 0.16 0.35 1.36
</TABLE>
23
<PAGE> 25
16. SUBSEQUENT EVENTS
On December 2, 1996, Dreco acquired 100% of the issued and outstanding shares of
Vector Oil Tool Ltd. ("Vector") for consideration of 389,000 Dreco Common Shares
(as adjusted for the exchange ratio in the Combination) and cash consideration
of $1,481,000. This business involves the manufacture, sale, rental and service
of downhole motors and other products. The transaction was accounted for using
the purchase method and did not have a material effect on the Company's
consolidated financial statements. Results of operations for Vector are included
in the Company's financial statements for reporting periods beginning in 1997.
On April 25, 1997, the Company purchased the drilling controls business of Ross
Hill Controls and its affiliate, Hill Graham Controls Limited for $20 million in
cash. This business involves the manufacture, sale and service of electrical
control systems used in conjunction with drilling operations. The transaction
was accounted for under the purchase method of accounting and did not have a
material effect on the Company's financial statements.
On May 15, 1997, the Company acquired by merger 100% of the common stock of PEP,
Inc., a manufacturer of petroleum expendable pump products. The Company issued
400,000 shares of common stock pursuant to the transaction which was recorded in
accordance with the pooling-of-interests method of accounting. The transaction
did not have a material effect on the Company's historical financial statements
and financial statements prior to April 1, 1997 were not restated.
On October 10, 1997 the Company's Board of Directors declared a 2-for-1 stock
split in the form of a one-for-one stock dividend payable on November 18, 1997
to stockholders of record November 10, 1997. The financial statements included
herein have not been restated to reflect the stock split.
24
<PAGE> 26
17. SUMMARIZED JOINT VENTURE FINANCIAL INFORMATION
(a) The Company's 75% investment in its Norwegian joint venture, Hitec Dreco
A.S., is accounted for by the equity method. The joint venture has not been
consolidated with the Company on the basis that the Company, along with the
other joint venture partner, jointly controls the operations of the Norwegian
joint venture. The following summarized financial information of the joint
venture has been adjusted to reflect the financial effects after consolidating
adjustments of the joint venture had it been consolidated with the Company.
<TABLE>
<CAPTION>
1995 (*) 1994 (*)
-------- --------
<S> <C> <C>
Statement of Operations:
Revenue $ 29,102 $ 69,872
Income (loss) before other
operating expenses 264 (7,474)
Other operating expenses 1,388 3,846
Minority interest in income -- (718)
Operating loss (1,124) (10,602)
Financing income 81 622
Revaluation of assets -- (2,280)
Gain on sale of subsidiary's
net assets 1,026 --
Income taxes (recovery) (17) 97
Loss -- (12,357)
Balance Sheet:
Current assets 1,297 10,281
Non-current assets -- (2,710)
Current liabilities 1,297 9,829
Non-current liabilities -- 3,743
Minority interest -- (581)
Shareholders' equity -- --
Translation adjustments -- --
Statement of Changes in Cash:
Cash used in operations (976) (11,881)
Cash used in investing activities (1,209) (371)
Cash provided by (used in)
financing activities (280) 2,738
Net decrease in cash and
cash equivalents (2,465) (9,514)
Cash and cash equivalents
at beginning of year 2,516 12,030
Cash and cash equivalents
at end of year 51 2,516
</TABLE>
(*) The summarized financial information has been translated from Norwegian
Kroner to United States Dollars using the following equivalent value of a
Norwegian Kroner in United States Dollars as reported by the Federal Reserve
Bank of New York:
<TABLE>
<CAPTION>
Year Ended August 31, Period End
--------------------- ----------
<S> <C>
1995..........................0.1558
1994..........................0.1443
</TABLE>
25
<PAGE> 27
Other than activities associated with servicing warranty claims with respect to
its contract for a drilling facility to be used in the Troll field (the "Troll
Project"), the Norwegian joint venture had no significant contracts or
activities and is inactive at December 31, 1996. Summarized financial
information for the year ended December 31, 1996 has not been provided as such
amounts are not material.
At August 31, 1995, a letter of credit in the amount of $11,168,000 had been
issued by the Norwegian joint venture in connection with the Troll Project. On
June 12, 1996, a claim by A.S. Norske Shell against the Company's Norwegian
joint venture was discontinued and the Company agreed to pay A.S. Norske Shell
$5,200,000 to resolve the outstanding issues between all parties. This payment
was charged to cost of revenue, with a related reduction to current income taxes
of $1,950,000. At December 31, 1996 the letter of credit had been reduced to
$1,409,000 in support of remaining warranty obligations. The letter of credit is
guaranteed by a Canadian Government Agency who is then indemnified by Dreco.
This letter of credit is to be released upon the expiration of the warranty
period, but in no event later than December 31, 1997. The Company believes it
has adequately provided for warranty claims.
26
<PAGE> 28
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
None.
(b) Pro Forma Financial Information (unaudited).
None.
(c) Exhibits.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand
27.1 Financial Data Schedule
Restated Financial Data Schedule, Exhibit 27.1 on Form
10-Q for the Quarter Ended September 30, 1996 filed
December 12, 1996
Restated Financial Data Schedule, Exhibit 27.1 on Form
S-1 filed August 29, 1996
27
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: /s/ Steven W. Krablin
------------------------------------
Steven W. Krablin
Vice President and
Chief Financial Officer
Dated: November 7, 1997
28
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP
23.2 Consent of Coopers & Lybrand
27.1 Financial Data Schedule
Restated Financial Data Schedule, Exhibit 27.1 on Form
10-Q for the Quarter Ended September 30, 1996 filed December 12, 1996
Restated Financial Data Schedule, Exhibit 27.1 on Form S-1 filed
August 29, 1996
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of National-Oilwell, Inc., of our report dated October 31, 1997
with respect to the consolidated financial statements of National-Oilwell, Inc.
included in this Current Report (Form 8-K).
<TABLE>
<CAPTION>
Form Description
- ---- -----------
<S> <C>
S-8 Stock Award and Long Term Incentive Plan, Value Appreciation and Incentive Plan A and
Value Appreciation and Incentive Plan B
S-8 Dreco Energy Services Ltd. Amended and Restated 1989 Employee Incentive Stock Option Plan, as
amended and Employment and Compensation Arrangements Pursuant to Private Stock Option Agreements
</TABLE>
ERNST & YOUNG LLP
Houston, Texas
November 4, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated November 3, 1995, except as to
Note 1, which is as of September 25, 1997, with respect to the restated
consolidated financial statements of National-Oilwell, Inc. included in this
Current Report on Form 8-K of National-Oilwell, Inc.
COOPERS & LYBRAND
Chartered Accountants
Edmonton, Alberta
November 7, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 13,611 9,585 19,728
<SECURITIES> 0 0 0
<RECEIVABLES> 142,351 142,333 123,772
<ALLOWANCES> 3,165 3,598 3,914
<INVENTORY> 128,611 128,205 133,855
<CURRENT-ASSETS> 293,399 284,329 281,321
<PP&E> 70,765 68,422 64,472
<DEPRECIATION> 26,319 25,721 24,107
<TOTAL-ASSETS> 352,518 346,650 343,477
<CURRENT-LIABILITIES> 124,502 113,695 118,930
<BONDS> 39,136 122,884 121,389
0 0 0
0 0 0
<COMMON> 236 193 192
<OTHER-SE> 168,780 96,370 88,466
<TOTAL-LIABILITY-AND-EQUITY> 352,518 346,650 343,477
<SALES> 761,816 561,123 360,250
<TOTAL-REVENUES> 761,816 561,123 360,250
<CGS> 639,433 472,808 306,793
<TOTAL-COSTS> 639,433 472,808 306,793
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 526 466 340
<INTEREST-EXPENSE> 12,241 10,167 6,753
<INCOME-PRETAX> 16,718 22,301 11,486
<INCOME-TAX> 6,571 9,243 5,295
<INCOME-CONTINUING> 10,147 13,058 6,191
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 4,000 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,147 13,058 6,191
<EPS-PRIMARY> .30 .67 .32
<EPS-DILUTED> .30 .67 .32
</TABLE>
