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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________________ to ______________________
Commission file number 1-8158
VARCO INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-0472620
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
743 NORTH ECKHOFF STREET, 92668
ORANGE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (714) 978-1900
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF NAME OF EACH EXCHANGE
EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
As of February 28, 1995, 33,385,870 shares of common stock were outstanding.
The aggregate market value of the common stock on such date (based upon the
closing price of such shares on the New York Stock Exchange) held by persons
other than affiliates of registrant was approximately $161.2 million; the basis
of this calculation does not constitute a determination by the registrant that
such persons are affiliates, as defined in Rule 405.
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 5, 6, 7 and 8 The Company's Annual Report to Shareholders
for the year ended December 31, 1994.
Part III, Items 10, 11, 12 and 13 The Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be
held on May 18, 1995 to be filed with the
Commission not later than April 30, 1995.
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ITEM 1. BUSINESS
INTRODUCTION
Varco was founded in 1908 and incorporated under the laws of the State of
California in 1911. Varco and its subsidiaries are engaged in the design,
manufacture, sale and rental of drilling tools, equipment and integrated
systems and rig instrumentation used for oil and gas drilling worldwide.
The Company's principal products are drilling equipment, drilling rig
instrumentation, pressure control equipment and solids control equipment.
Drilling equipment includes integrated systems for rotating and handling the
various sizes and types of pipe utilized on a drilling rig ("drilling systems")
and specific purpose pipe handling tools, hoisting equipment and rotary
equipment ("oil tools"). Drilling systems are manufactured and sold by the
Varco Drilling Systems Division while oil tools are manufactured and sold by
the Varco BJ Oil Tools Division. Drilling rig instrumentation products are
manufactured, sold and rented by the Martin-Decker/TOTCO Instrumentation
Division. Pressure control equipment is manufactured and sold by the Shaffer
Division. Solids control equipment and systems are products of the Thule
Rigtech Division.
The following table sets forth the contribution to the Company's total
revenues of its five Divisions:
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YEAR ENDED DECEMBER 31,
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1994 1993 1992
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(IN THOUSANDS)
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Varco Drilling Systems.............................. $74,405 $58,703 $57,687
Varco BJ Oil Tools.................................. 41,309 40,157 53,219
Martin-Decker/TOTCO Instrumentation................. 54,176 44,738 45,617
Shaffer............................................. 50,900 48,169 15,940
Thule Rigtech....................................... 653
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Sales of the Company's products depend on the level of construction of new
drilling rigs and the replacement and upgrading of equipment for existing rigs,
particularly intermediate to deep rigs (land rigs designed for drilling in
excess of 8,000 feet and rigs designed for offshore drilling). The level of
construction of drilling rigs and the rate at which equipment on existing rigs
is replaced or upgraded depends, in substantial part, on the level of worldwide
exploration and development drilling activity. Rental revenue, which is
generated predominately by the Martin-Decker/TOTCO Instrumentation Division, is
directly related to the level of drilling activity, particularly in the U.S.
and Canada. To a lesser extent, sales and rentals of the Company's products are
dependent upon the level of remedial ("workover") activity on wells previously
drilled. Sales of equipment and sales and rentals of instrumentation products
have also depended on the design, development and successful introduction of
new products for the drilling industry. Equipment and instrumentation are also
sold to existing rigs for use as spare or replacement parts.
The level of worldwide drilling activity can be influenced by numerous
factors, including economic and political conditions, the prices of oil and
gas, development of alternative energy sources, availability of equipment and
materials, availability of new onshore and offshore acreage or concessions, and
new and continued governmental regulations regarding environmental protection,
taxation, price controls and product allocations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
THE DRILLING PROCESS
An oil or gas well is drilled by a bit attached to the end of the drill stem
which is made up of 30-foot lengths of drill pipe joined by threaded
connections known as "tool joints." Heavy drill collars at the bottom of the
drill stem put weight on the bit. Using the conventional rotary drilling
method, the drill stem is turned from the rotary table in the floor of the
drilling rig by torque applied to the "kelly" (a square or hexagonal
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section of pipe located at the top of the drill stem) by means of the master
bushing and kelly bushing. During the drilling process heavy fluids ("drilling
mud") are pumped down through the drill stem and forced out through the bit.
The drilling mud returns to the surface through the hole area surrounding the
drill stem, carrying with it the cuttings drilled out by the bit. The cuttings
are removed from the mud by a filtering system and the mud is continuously
recirculated back into the hole. The drilling mud also serves to contain
pressure surges ("kicks") caused by natural gas that may intrude into the
formation.
As the hole depth increases, the kelly must be removed frequently so that
additional 30-foot sections of pipe can be added to the drill stem, which may
reach lengths in excess of five miles. When the bit becomes dull, the entire
drill stem is pulled out of the hole and disassembled, the disconnected
sections of pipe are set aside or "racked," the old bit is replaced and the
drill stem reassembled and lowered back into the hole (a process called
"tripping"). During drilling and tripping operations, tool joints must be
screwed together and tightened ("spun in" and "made up"), and loosened and
unscrewed ("broken out" and "spun out"). When the hole has reached certain
depths, all of the drill pipe is pulled out of the hole and larger diameter
pipe known as casing is lowered into the hole and cemented in place in order to
protect against collapse and contamination of the hole.
The raising and lowering of the drill stem while drilling or tripping, and
the lowering of casing into the well bore, are accomplished with the rig's
hoisting system. A conventional hoisting system is a block and tackle mechanism
and the derrick must have sufficient structural integrity to support the entire
weight of the drill stem or casing string.
During the drilling process it is possible for formation fluids, such as
natural gas, water or oil, to get into the wellbore creating additional
pressure which, if not controlled, could lead to a "blowout" of the well. To
prevent blowouts a series of high-pressure valves known as blowout preventers
("BOPs") are positioned at the top of the well and, when activated, form
pressure tight seals which prevent the escape of fluids. When closed, BOPs
prevent normal rig operations and are activated only if drilling mud and normal
well control procedures cannot safely contain the pressure. BOPs must be
designed to contain pressure of up to 15,000 psi.
After the well has reached its total depth and the final section of casing
has been set, the drilling rig is moved off of the well and the well is
prepared to begin producing oil or gas in a process known as "well completion."
A producing well may undergo workover procedures to extend its life and
increase its production rate.
The Top Drive Drilling System, originally introduced by Varco in 1982,
significantly alters the traditional drilling process. Using the Top Drive
Drilling System, the drill stem is rotated from its top by means of a large
electric motor. This motor is affixed to rails installed in the derrick and
traverses from near the top of the derrick to the rig floor as the drill stem
penetrates the earth. Therefore, the Top Drive eliminates the use of the rotary
table for drilling. Components of the Top Drive also are used to connect
additional lengths of pipe to the drill stem during drilling operations.
VARCO DRILLING SYSTEMS
The Varco Drilling Systems Division designs and manufactures products which
combine or integrate multiple functions and which enhance the safety and
productivity of the drilling rig through mechanization and automation.
The Varco Top Drive Drilling System combines elements of pipe handling tools,
as well as hoisting and rotary equipment in a single system. Torque to turn the
drill stem is imparted directly by means of a large electric motor which moves
up and down along rails installed in the derrick and into which the drill stem
is connected. During drilling operations, elements of the Top Drive Drilling
System perform functions such as
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spinning-in and making-up tool joints. It also incorporates a drill pipe
elevator, providing the capability to maneuver a stand of pipe into position to
be added to the drill string when drilling, or to hold and hoist the entire
drill stem.
Drilling with a Top Drive Drilling System provides several advantages over
conventional drilling. It enables drilling with three lengths of drill pipe,
reducing by two-thirds the time spent in making connections of drill pipe. In
addition it facilitates "horizontal" and "extended reach" drilling (the
practice of drilling wells which deviate substantially from the vertical) by
providing the ability to rotate the pipe as it is removed from, or replaced
into, the hole, thus reducing friction and the incidence of pipe sticking. The
Top Drive Drilling System also increases the safety of drilling operations.
The Top Drive Drilling System has demonstrated substantial economic
advantages. Users of the system generally report reductions in drilling time
ranging from 20% to 40%. By facilitating extended reach drilling, the Top Drive
Drilling System increases the area which can be drilled from a given location,
such as a fixed platform or man-made island. Thus, the production from a given
reservoir of oil can be increased and the number of costly fixed platforms
required to develop the field can be minimized.
The Top Drive Drilling System has evolved continuously since its initial
introduction. Today, the Top Drive product line includes several models, each
designed to satisfy specific customer requirements. The TDS-3 is the basic and
least expensive system and its use is the most widespread. The TDS-4,
introduced in 1990, is a two-speed model which permits a variation in speed and
torque that is desirable for differing drilling conditions. During 1991 the "S"
series Top Drive was first offered. By incorporating the swivel into the Top
Drive System, as opposed to connecting the Top Drive to the existing rig
swivel, the total required height of the system is reduced. This feature
permits installation without the need to extend the height of the derrick as
may have otherwise been necessary. Both the TDS-3 and the TDS-4 may be ordered
with the integrated swivel. The TDS-6S, also first delivered in 1991, is a dual
motor version which provides double the previously available power and torque.
In 1993 Drilling Systems delivered the first alternating current ("AC")
powered Top Drive, the TDS-7S. The primary advantages of AC motors are lower
maintenance cost (no carbon brushes), higher torque for longer periods and a
running speed of more than twice that of a direct current ("DC") motor. This
eliminates the need for a two speed gear box for those applications where AC
power can be used.
The Integrated Drilling System ("IDS") is an adaptation of the Top Drive
concept which uses an inline planetary gear box for a more compact design
primarily for use on smaller rigs or where portability is desirable. The IDS
introduced the idea of a portable torque tube which is suspended from the top
of the derrick and pinned just above the rig floor instead of a permanently
attached guide rails system. A land rig needs to be disassembled for
transportation from one location to another, and unlike the Top Drive, the IDS
design permits easy disassembly from the rig.
The Iron Roughneck(R), originally introduced by Varco in 1976, combines the
functions of the spinning wrench and torque wrench in a single tool and
contributes significantly to the safety and efficiency of pipe handling
operations. The Automated Roughneck, introduced in 1985, is a microprocessor
controlled version of the Iron Roughneck, designed to further enhance the
safety and productivity of drilling operations. The first Casing Roughneck, the
AR-3000C, was delivered in 1993. This adaptation of the standard AR-3000
handles casing as well as drill pipe, using industry standard casing tongs
modified to be installed in place of the roughneck's spinning wrench during
casing operation. In the future, most Iron Roughnecks will likely be ordered
with this option.
Pipe racking systems are used to move drill pipe casing and other tubulars
between the well and a storage ("racking") area on the rig floor. Power pipe
racking systems, developed by BJ Machinery, provide a mechanical means of
performing this function. The Pipe Handling Machine introduced by Varco in
1985, provides an automated mechanism for the handling and racking of drill
pipe and drill collars during drilling
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and tripping operations. It incorporates the spinning and torquing functions of
the Automated Roughneck with the automatic hoisting and racking of disconnected
sections of pipe. These functions are integrated via computer controlled
sequencing, and the Pipe Handling Machine is operated by a person enclosed in
an environmentally secure cabin. During 1990 the Company acquired the rights to
the "Star" Pipe Racking System. It is a semi-automated system that provides a
mid-range solution between the mechanical pipe racking line and the fully
automated Pipe Handling Machine. These pipe racking systems reduce or, in some
cases, eliminate entirely, the manual labor involved in this process, thereby
increasing productivity and enhancing safety. Pipe racking systems are used
predominantly on offshore rigs and are virtually mandatory on floating rigs
such as semisubmersibles.
The Pickup Laydown System ("PLS") was introduced by Varco in 1992. The PLS
provides a mechanized means of moving various types of pipe from a horizontal
position on the pipe deck to a vertical position on the rig floor. It is
designed to operate in conjunction with the Pipe Handling Machine. The PLS also
serves to eliminate a hazardous and labor intensive manual process.
Varco expanded the pickup laydown product line in 1993 with the design of
additional equipment designed to facilitate the transfer of pipe from the pipe
deck to the drilling rig floor. The additional products are the PLS-3 (Pickup
Laydown System), the Pipe Conveyor and the Pipe Deck Machine, known as the
"Pipemite". These three products can be used separately or in concert to form a
complete system ("PTS-3"). The PTS-3 manages pipe in the horizontal position on
the pipe deck with the Pipemite, delivers pipe from the pipe deck to the rig
floor with the Conveyor and raises the pipe from horizontal to vertical and
presents it to well center with the PLS-3.
VARCO BJ OIL TOOLS
The Varco BJ Oil Tools product line consists of a full complement of
conventional rig tools and equipment. It was formed by the combination of the
original Varco oil tool products and the related products acquired in the BJ
Machinery Division and the Martin-Decker Division acquisitions. These products
include pipe handling tools, hoisting equipment and rotary equipment.
Varco's pipe handling tools are designed to enhance the safety, efficiency
and reliability of pipe handling operations. Many of these tools have provided
innovative methods of performing the designated task through mechanization of
functions previously performed manually.
Varco BJ Oil Tools manufactures various tools used in the making up and
breaking out of drill pipe, including spinning wrenches, manual tongs, torque
wrenches and kelly spinners. The spinning wrench is a tool used to screw
together and unscrew sections of drill pipe. Powered pneumatically or
hydraulically, it replaces a hazardous device known as a spinning chain. Manual
tongs are used to make up or break out tool joints, while the torque wrench is
a hydraulically powered device which performs this function with enhanced
safety and precision. The kelly spinner is a pneumatically or hydraulically
powered tool used to connect and disconnect the kelly to and from the drill
stem as additional lengths of pipe are added while drilling.
The Company also manufactures other tools used in various pipe handling
functions. Slips are gripping devices which hold pipe or casing in suspension
while in the hole, and they may be either manual or spring operated. Other
products, which include safety clamps, casing bushings and casing bowls, are
used to hold and guide drill pipe or casing while in the hole.
When drilling, tripping or setting casing, lengths of pipe must be hoisted
into position above the hole, lowered into or lifted from the hole and held in
suspension while in the hole. Hoisting equipment includes
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devices used to grip and hold various types of pipe ("tubulars") while being
raised or lowered. Drill pipe elevators are used to hold lengths of drill pipe
as they are hoisted into position to be attached to the drill stem, and to hold
the entire drill stem as it is lowered into or lifted from the hole. Similarly,
casing elevators and spiders are gripping devices used to hold the casing as
additional lengths are added and lowered into the hole. Links are elongated
steel forgings from which the elevator is suspended and which, in turn, hangs
from beneath the hook which is connected to the hoisting mechanism of the
drilling rig. The Company manufactures elevators to accommodate a variety of
tubulars, as well as a complete line of links and hooks, together with casing
elevators and spiders, to handle a variety of casing sizes and accommodate
casing weighing up to 1,000 tons.
Varco BJ Oil Tools expanded its casing spider line in 1994 with the
introduction of the Flush Mounted Spider ("FMS 375"). The FMS 375 was
introduced to improve safety and efficiency during casing operations.
Conventional casing spiders mount above the rotary table and result in a
coupling connection height of 8 feet above the rig floor. This requires
scaffolding to be erected around the spider for the rig crew to operate the
casing tongs. This temporary scaffolding is generally considered a safety
hazard, but no alternative has been available previously. The FMS 375 mounts
inside the rotary table and flush with the rig floor, allowing the connection
to be lowered to a workable height from the rig floor. The safety advantages of
the FMS 375 have been readily recognized, and 22 units were ordered during
1994.
Rotary equipment products consist of kelly bushings and master bushings. The
kelly bushing applies torque to the kelly to rotate the drill stem and fits in
the master bushing which is turned by the rotary table on the floor of the rig.
Varco produces kelly bushings and master bushings for most sizes of kellys and
makes of rotary tables.
A substantial portion of the Company's sales in some of the Oil Tools
products is attributable to sales of replacement parts which are subject to
normal wear and to sales of spare parts. Replacement parts for kelly bushings,
rotary slips, casing tools and spinning wrenches are a material part of the
sales of those product lines.
MARTIN-DECKER/TOTCO INSTRUMENTATION
The Martin-Decker/TOTCO Instrumentation Division designs, manufactures and
sells or rents instrumentation, primarily for use in oil and gas well drilling
operations, including sensors, gauges, drift instruments, drilling recorders,
drilling chokes, data acquisition systems, electronic drilling consoles, mud
instrumentation systems and drilling control systems. To a lesser extent,
Martin-Decker/TOTCO Instrumentation provides instrumentation to certain general
industrial markets and for use in non-drilling related oilfield applications.
A drilling rig instrumentation package is generally comprised of four
elements: (1) sensors, which measure selected variables at the point of origin;
(2) a mechanical or electronic means of transmitting that data to the display
device; (3) a display, which may range in sophistication from a simple gauge to
a computer terminal; and (4) a method for permanently recording and/or
electronically transmitting the data for subsequent review and analysis. This
equipment must be sufficiently rugged to withstand the hostile environmental
conditions of a drilling rig.
The driller relies on certain instruments to provide information critical to
the operation of the drilling rig. At a minimum, this information includes the
status of such basic data as weight-on-bit, rotary RPM, rotary torque, hook
load, rate of penetration, mud pit volume, and mud flow. The indicators which
display this data are generally contained in a common housing called a drilling
console. A drilling console may range in sophistication from a collection of
gauges to a microprocessor based system such as the Martin-Decker/TOTCO
"Spectrum 1000."
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Computer based electronic data acquisition systems, such as the
Visulogger(R), first produced by TOTCO in 1978 provide real-time analysis and
display of the various drilling data at the driller's station as well as other
locations around the rig. In 1991 Martin-Decker/TOTCO introduced the TOTAL
system, a computer-based data acquisition system incorporating up to date
electronic technology and more comprehensive analytical capabilities. The
emphasis in TOTAL is on the analysis and interpretation of data via computer
software, so that the information displayed to the driller enables him to
operate the rig more safely and efficiently.
In October 1992, the Company licensed from the Sedco Forex Division of
Schlumberger Limited the rights to develop, manufacture and market the MDS(TM)
System, an advanced computer-based drilling information and alarm system which
is being integrated with TOTAL. MDS(TM) has been in development for more than
seven years and is currently installed on several rigs owned and operated by
Sedco Forex. Its computer programs incorporate the knowledge and experience of
drilling personnel and engineers to provide critical information in a user-
friendly format.
In addition to MDS(TM), a number of additional capabilities have been or are
in the process of being developed for the TOTAL System. Drill-Off, a
computerized drilling optimization program was jointly developed by Martin-
Decker/TOTCO and Exxon. A Dynamic Block Control System was developed jointly
with the Baylor Brake Company. An agreement with Schlumberger's Anadril
Division, authorizing MD/TOTCO to manufacture and market Kick-AlertSM was
finalized in 1993. A joint effort by Martin-Decker/TOTCO and British Petroleum
has resulted in a software program known as Early Kick Detection (EKD), which
is available on the TOTAL system. Pursuant to an exclusive worldwide marketing
agreement with Logware, Inc. a Windows(TM)-based drilling information system is
also available as part of the TOTAL system.
The TOTAL system is designed so that it may be scaled to the requirements of
a particular drilling operation. For relatively routine drilling requirements
it can represent a cost-effective means of providing basic information;
however, it can be expanded to encompass the full range of analytical
capability for complex and costly offshore drilling.
Other drilling related products of Martin-Decker/TOTCO Instrumentation
include drift indicators, which are used to measure and record the degree of
drift of the well from vertical; mechanical recorders, which produce a
permanent record in chart form when an electronic system is not being used;
drilling control systems (auto-drillers) which automatically maintain a
constant pressure on the drill bit, and drilling chokes which provide a
remotely actuated method of controlling "kicks."
Products of the Martin-Decker/TOTCO Instrumentation Division used outside the
drilling process include load and radius indicating systems for pedestal type
cranes, anchor tension monitoring systems for use in mooring and positioning
applications, and specialty scales for industrial use.
In August 1993, the Company acquired all the outstanding shares of Metrox,
Inc., a manufacturer of strain gauge systems. The strain gauge sensor is
considered a lower cost alternative to the standard hydraulic sensor. The
acquisition of strain gauge technology facilitates further penetration of the
industrial crane and weight monitoring markets and enhances the overall Martin-
Decker/TOTCO sensor technology.
Drilling consoles are typically sold as original equipment to the rig
manufacturer. However, electronic drilling consoles may be sold as upgrades to
existing rigs. In the United States and Canada, most other instrumentation
products are rented to the drilling contractor or oil company when necessary,
and are therefore not permanently installed on the rig. Internationally, nearly
all instrumentation equipment is sold to the rig owner and becomes a permanent
part of the drilling rig. A significant portion of the sales of some
instrumentation product lines is in spare and replacement parts.
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SHAFFER
The Shaffer Division designs, manufactures, sells and distributes pressure
control equipment, including ram blowout preventers, annular blowout preventers
and rotating blowout preventers; blowout preventer control systems; and motion
compensation systems, including riser tensioners, drillstring compensators and
crown mounted compensators.
Blowout preventers ("BOPs") are devices used to seal the space between the
drill string and the borehole to prevent an uncontrolled flow of formation
fluids and gases. Shaffer manufactures three types of BOPs. Ram and annular
BOPs are back-up devices and are activated only if other techniques for
controlling pressure in the well bore are inadequate. When closed, these
devices prevent normal rig operations. Ram BOPs seal the wellbore by
hydraulically closing rams against each other across the wellbore. Specially
designed packers seal around specific sizes of pipe in the wellbore, shear pipe
in the wellbore or close off an open hole. Annular BOPs seal the wellbore by
hydraulically closing a rubber packing unit around the drill pipe or kelly or
by sealing against itself if nothing is in the hole. The rotating BOP allows
operators to drill or strip into or out of the well at low pressures without
interrupting normal operations.
Shaffer sells BOP control systems under the registered trademark "Koomey."
The Koomey(R) control system reliably opens and closes BOPs and associated
valves for both land systems and offshore systems.
Shaffer sells motion compensation equipment under the registered trademark
"Rucker." Motion compensation equipment stabilizes the bit on the bottom of the
hole, increasing drilling effectiveness of floating offshore rigs by
compensating for wave and wind action. Shaffer also manufactures tensioners
which provide continuous reliable axial tension to the marine riser pipe and
guide lines on floating drilling rigs, tension leg platforms and jack-up rigs.
Shaffer manufactures and sells flowline devices, primarily Best chokes, used
in the production phase of the oil and gas industry. These chokes are designed
for both topside-platform and subsea production, for both standard service and
sulfur (H2S) service. Prior to 1993, these chokes were manufactured and sold by
Varco BJ Oil Tools.
THULE RIGTECH
The Thule Rigtech Division designs, sells and rents equipment for use in the
drilling fluid ("mud") used in the drilling process. This equipment includes
shale shakers, mud cleaners, hydrocyclones, fume extraction hoods, mud chemical
handling systems and automated mud system controls. Thule Rigtech products are
generally subcontracted to third parties for manufacturing.
In the drilling operation, mud is pumped down the drill pipe and through the
holes in the drill bit. The mud acts as a lubricant to the drill bit, as a
pressure equalizer and as a vehicle which carries the drilled cuttings back to
the surface. Shale shakers are the principal machines used to clean the
cuttings from the mud, enabling it to be reused. The VSM 100 is designed to
pass large volumes of mud over fine mesh screens to extract as many of the
cuttings as possible from the mud, thus avoiding the use of the other filtering
processes before the mud is recirculated.
Other equipment that may be employed to remove cuttings are the VSM 200 mud
cleaner and de-sander and de-silter hydrocyclones.
The AMS 2000 mud chemical handling system is designed to handle, store and
mix mud chemicals. The mud chemicals are provided to the rig in 1-ton bags
which are placed in a hopper fitted with a vibrating mechanism. A computer
controlled valve in the base of the bag is used to discharge the chemical
powder to the mud mixer at the desired rate.
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The AMS 1000 automated mud system is a computer controlled system which
oversees and controls the entire mud function. The aim of the system is to
release manpower from manual operations while continuously monitoring the
process to ensure that it is performing properly.
Thule Rigtech aims to offer high performance equipment that will minimize the
cost of drilling through lowering mud costs and improving operational
efficiency, while at the same time reducing the labor requirement and improving
the safety of the drilling operation.
RESEARCH AND NEW PRODUCT DEVELOPMENT
Varco believes that it is a leader in the development of new technology and
equipment to enhance the safety and productivity of the drilling process, and
that its sales and earnings have been dependent, in part, upon the successful
introduction of new or improved products. Varco's significant product
developments have included the safety spinning wrench, the torque wrench, the
spring slip, pneumatically operated casing elevators and spiders, the Automated
Roughneck, the Top Drive Drilling System, the Pipe Handling Machine and the
TOTAL system. At December 31, 1994 the Company employed 157 persons on its
engineering and design staffs who were principally engaged in research and
development. Total expenditures for research and development were $11.4 million
in 1994, $9.5 million in 1993 and $9.8 million in 1992.
As of December 31, 1994 the Company held 182 United States patents and had 18
patent applications pending. Expiration dates of such patents range from 1995
to 2008. As of such date the Company also had 254 foreign patents and 66 patent
applications pending relating to inventions covered by the United States
patents. The preceding include patent rights received in connection with the BJ
Machinery, Martin-Decker, TOTCO and Shaffer acquisitions. There are no
assurances that patents will be granted in response to pending applications.
Although the Company believes that its patents and applications have value,
competitive products with different designs have been successfully developed
and marketed by others. The Company considers the quality and timely delivery
of its products, the service it provides to its customers and the technical
knowledge and skills of its personnel to be more important than its patents in
its ability to compete. While the Company stresses the importance of its
research and development programs, the expense and market uncertainties
associated with the development and successful introduction of new products are
such that there can be no assurance that the Company will realize future
revenues from new products.
ACQUISITIONS
On May 22, 1990 Varco acquired substantially all of the assets and assumed
substantially all of the liabilities of the Martin-Decker Division of Cooper
Industries, Inc. an Ohio corporation, for an adjusted purchase price of
$29,325,000 million in cash. The Martin-Decker Division was principally engaged
in the design, manufacture, sale and rental of instruments which monitor and
display a variety of data relevant to drilling operations and which, to a
lesser extent, are used in other oilfield and industrial applications.
Additionally, the Martin-Decker Division designed, manufactured and sold a
variety of drilling rig equipment similar to that of Varco BJ Oil Tools.
Varco has continued the design, manufacture and sale of instrumentation
products through its Martin-Decker subsidiary, headquartered in Cedar Park,
Texas. The rig equipment products acquired with the Martin-Decker Division have
been integrated into the operations of the Company's Varco BJ Oil Tools
Division.
On November 28, 1990 Varco purchased the TOTCO Product Line from Baker Hughes
Incorporated. TOTCO was primarily engaged in the design, manufacture, sale and
rental of certain instrumentation and analytical equipment used principally on
drilling rigs in the oil and gas industry. The consideration for the
8
<PAGE>
acquisition consisted of 2,346,041 shares of Varco Common Stock valued at
$20,000,000 and $22,765,000 million in cash (as adjusted subsequent to the
closing).
The TOTCO Product Line has been combined with the Martin-Decker Division to
form the Martin-Decker/TOTCO Instrumentation Division of Varco, headquartered
in Cedar Park, Texas. Varco believes that it is the market leader in providing
rig instrumentation for drilling operations.
On July 17, 1992 Varco acquired substantially all of the assets and assumed
certain of the liabilities of the Shaffer Product Line ("Shaffer") of Baroid
Corporation for a cash consideration of approximately $36,000,000. Shaffer
designed, manufactured, and sold blowout prevention equipment and related
control systems and motion compensation systems used on drilling rigs in the
oil and gas industry. The Shaffer operations now comprise the Company's Shaffer
Division.
On August 17, 1993 the Company acquired all of the outstanding common stock
of Metrox, Inc. for a cash consideration of approximately $4,000,000. Metrox
designed and manufactured instrumentation used in the oil and gas industry, as
well as in general commercial and industrial applications. Metrox has been
combined with, and is reported within, the Company's Martin-Decker/TOTCO
Instrumentation Division.
On November 30, 1994 the Company acquired all of the outstanding shares of
Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland,
for a cost of approximately $8,954,000. Thule Rigtech provides equipment and
systems used in the handling, mixing, transport and conditioning of drilling
fluids and operates as the Company's Thule Rigtech Division.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
INTERNATIONAL OPERATIONS
The Company's products are sold for use in approximately 84 countries by
United States customers operating in the United States and abroad, as well as
by foreign customers such as privately-owned corporations and national oil
companies. The Company includes as an international sale any sale where the
product is designated for use other than in the United States. Revenues from
products sold for use outside the United States accounted for approximately
68%, 71%, and 72% of the Company's total revenues for the years ended December
31, 1994, 1993, and 1992, respectively. For further information regarding the
Company's worldwide operations and international sales and rentals, see Note K
of Notes to Consolidated Financial Statements.
The Company's international operations are subject to the usual risks of
changes in international conditions such as changes in governmental policies
affecting the oil industry ( e.g., environmental regulations or the
nationalization of the operations of the Company's customers). Most
international sales are payable in United States dollars.
The Company has a policy prohibiting the payment of any bribe, kickback or
similar gratuity to any person in order to facilitate the sale of the Company's
products or to secure favorable action by a government official. The Company
believes that this policy does not impede its competitive position in the sale
of its products abroad.
SALES AND DISTRIBUTION
To facilitate the distribution of its drilling equipment and pressure control
products, the Company maintains domestic sales and service facilities in
California, Louisiana, Oklahoma, Texas and Wyoming. The
9
<PAGE>
rental of drilling rig instrumentation requires local availability of
equipment, transportation of the equipment to the rig site and installation by
qualified personnel. To service this market, the Company maintains Martin-
Decker/TOTCO Instrumentation sales and service facilities in 13 states,
including those mentioned above, as well as 3 locations in Canada.
Internationally, the Company maintains sales and service facilities in Abu
Dhabi, Scotland, Moscow, Holland and Singapore. The Company employs independent
agents in Mexico, South America, Europe, the Middle East, the Far East and
Asia, the South Pacific and in parts of the United States.
The Company's customers include private and government-owned oil companies,
drilling contractors, drilling rig manufacturers, rental tool companies, and
supply companies which supply oilfield products to the end users of the
Company's products.
Drilling systems, such as the Automated Roughneck, Top Drive Drilling System
and pipe racking systems and pressure control and motion compensation
equipment, represent significant capital expenditures and are usually sold
directly to an oil company, drilling contractor or rig builder. Other drilling
equipment products may be sold through supply stores or directly to government-
owned oil companies or drilling contractors.
No customer accounted for more than 10% of annual sales during each of the
years during the period 1992 through 1994.
BACKLOG
Sales of the Company's products are made on the basis of written purchase
orders or contracts and, consistent with industry practice, by telex, letter or
oral commitment later confirmed by a written order. In accordance with industry
practice, orders and commitments generally can be canceled by customers at any
time. In addition, orders and commitments are sometimes modified before or
during manufacture of the products.
The backlog of unshipped orders was approximately as follows on the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Varco Drilling Systems.............................. $36,770 $13,131 $19,834
Varco BJ Oil Tools.................................. 6,558 6,666 8,544
Martin-Decker/TOTCO Instrumentation................. 4,581 4,416 2,432
Shaffer............................................. 3,882 8,074 9,620
Thule Rigtech....................................... 984
------- ------- -------
Total............................................. $52,775 $32,287 $40,430
======= ======= =======
</TABLE>
Most of the backlog at December 31, 1994 is scheduled to be shipped before
December 31, 1995.
COMPETITION
The products of the Company are sold in highly-competitive markets and its
sales and earnings can be affected by competitive actions such as price
changes, new product development or improved availability and delivery. The
Company competes with a large number of companies, some of which are larger
than the Company and have greater resources and more extensive and diversified
operations.
Varco's principal competitor with respect to most Drilling Systems products
is Maritime Hydraulics A/S, a Norwegian company. Other competitors with respect
to the Top Drive Drilling System include National-Oilwell, owned jointly by USX
Corporation and Armco Steel, and A/S Hydralift, another Norwegian company which
acquired the rights to the product previously marketed by ACB Offshore, a
French company. Since its introduction in 1982 and as of December 31, 1994,
Varco had sold and delivered
10
<PAGE>
401 Top Drive Drilling Systems, and the Company believes that its competitors
had sold and delivered less than 105 systems during the same time period.
Varco's most significant domestic competitors with respect to oil tools
include Woolley Tool and Manufacturing, a division of Enterra Corporation,
DenCon Oil Tools and Weatherford International, Inc. In foreign markets Varco
experiences competition from most of its domestic competitors and from foreign
companies as well.
Martin-Decker/TOTCO Instrumentation competes, in the domestic rental market,
with the Swaco Geolograph Division of Smith International, Inc., Petron Inc.
and Adair Supply Inc. In domestic product sales, the competition consists of
Wagner International Inc., Atlas Company and a number of smaller regional
companies. In the international market it competes with these same companies
along with such foreign competitors as Rigserv, a United Kingdom company, and
Hitec A/S, a Norwegian company.
Shaffer competes, in the BOP and related controls market, with the Cameron
Iron Works division of Cooper Industries and Hydril Company, a privately held
company. Shaffer's principal competitor with respect to motion compensation
equipment is Maritime Hydraulics A/S.
Thule Rigtech's principal competitors in the solids control equipment market
are Derrick Manufacturing Inc. and the Brandt Company.
Although accurate industry figures are not available, the Company believes
that it has a substantial share of the market for most of its equipment and
instrumentation products.
MANUFACTURING AND RAW MATERIALS
The manufacturing processes for the Company's drilling and pressure control
equipment products generally consist of machining, welding and fabrication,
heat treating, assembly of manufactured and purchased components, and testing.
The Company's drilling and pressure control equipment products are manufactured
primarily from alloy steel, and the availability of alloy steel castings,
forgings, purchased components and bar stock is critical to the production and
timing of shipments. The Company believes that there are currently adequate
sources of supply for alloy steel castings, forgings, purchased components and
bar stock. The primary manufacturing processes associated with instrumentation
and solids control products are fabrication, machining, assembly of
manufactured and purchased components, and testing. The Company believes that
adequate sources of supply exist for all such purchased components.
Thule Rigtech products are generally subcontracted to third parties for
manufacturing. The Company believes that an adequate number of subcontractors
exist for the manufacture of Thule Rigtech products.
EMPLOYEES
At December 31, 1994 the Company had a total of 1,410 employees (of which 179
were temporary employees). Of such employees, 415 employees were engaged in
sales and marketing, 157 employees were engaged in engineering and design, 111
employees were engaged in administrative or clerical capacities, and 727 were
engaged in manufacturing. The Company considers its relations with its
employees to be excellent and has never suffered a work stoppage or
interruption due to a labor dispute.
11
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Varco are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Walter B. Reinhold.................. 70 Chairman of the Board and Director
George Boyadjieff................... 56 President, Chief Executive Officer
and Director
Richard A. Kertson.................. 55 Vice President--Finance and Chief
Financial Officer
Donald L. Stichler.................. 51 Controller--Treasurer and Secretary
Robert J. Gondek.................... 51 Vice President and President--Martin-
Decker/TOTCO Instrumentation
Mark A. Merit....................... 37 Vice President and President--Shaffer
Roger D. Morgan..................... 51 Vice President and President--Varco
Drilling Systems
Michael W. Sutherlin................ 48 Vice President and President--Varco
BJ Oil Tools
</TABLE>
Officers are elected by, and serve at the pleasure of, the Board of
Directors.
Mr. Reinhold has been a director of the Company since 1970. He served as
Chief Executive Officer of the Company from 1970 until April 1991, and prior
thereto he served as Executive Vice President. He has been employed by the
Company since 1949. Mr. Reinhold is a director of Amdahl Corporation and Revco
Drug Stores, Inc.
Mr. Boyadjieff was elected President of the Company in May 1981 and Chief
Executive Officer in April 1991. Mr. Boyadjieff served as Chief Operating
Officer from June 1979 until April 1991. Prior to his election as President, he
was the Senior Vice President--Operations. He has been a director of the
Company since 1976 and joined the Company in 1969.
Mr. Kertson was elected Vice President--Finance and Chief Financial Officer
in May 1984. He had been Controller of Varco Oil Tools since January 1982. He
joined the Company in October 1975, as Director of Management Information
Services.
Mr. Stichler was elected Controller--Treasurer in May 1984 and Secretary in
May 1993. He served as Corporate Controller from December 1982 to May 1984. He
served as Manager of Accounting and Taxation from 1981, when he joined the
Company.
Mr. Gondek has served as President of Martin-Decker/TOTCO Instrumentation
Division since November 1990 and was elected Vice President of the Company in
April 1991. From September 1986 until November 1990 Mr. Gondek was the Vice
President and General Manager of the TOTCO operations of Baker Hughes
Incorporated. Prior to 1986 he held various positions with TOTCO International
Corporation including Vice President of Engineering, Vice President of
Manufacturing and Senior Vice President.
Mr. Merit was elected Vice President of the Company and President of Shaffer
in October 1992. He had been Vice President--Manufacturing of Varco Drilling
Systems since August 1991. Previously he was Operations Manager of Varco U.K.
Limited from March 1990 and prior to that he was Manager of Engineering
Software Development for Varco Drilling Systems since 1985. He has been
employed by the Company in various capacities since 1980.
Mr. Morgan was elected Vice President of the Company in May 1984 and
President of Varco Drilling Systems in May 1990. He had been Vice President--
Materials and Manufacturing of Varco Oil Tools since May 1981. Previously, he
was Vice President--Materials and Production of Varco Oil Tools. He has been
employed by the Company in various capacities since 1974.
12
<PAGE>
Mr. Sutherlin was elected Vice President of the Company in May 1984 and
President--Varco BJ Oil Tools in July 1988. Previously he served as Vice
President--Best Operations. He has been employed by the Company in various
capacities since 1975.
ITEM 2. PROPERTIES
The Company's principal manufacturing facilities are located in Orange,
California (the "Orange Facility"), Etten-Leur, The Netherlands (the "Etten-
Leur Facility"), Cedar Park, Texas (the "Cedar Park Facility") and Houston,
Texas (the "Shaffer Facility"). The Orange Facility and the Etten-Leur Facility
are used primarily for manufacturing the Company's drilling equipment, the
Cedar Park Facility manufactures primarily instrumentation products, and the
Shaffer Facility is used for manufacturing pressure control, motion
compensation and drilling equipment and flow line devices. Thule Rigtech
products are generally subcontracted to third parties for manufacturing.
The Orange Facility occupies approximately nine acres in Orange County,
California which are leased under a long-term lease. The Orange Facility
includes three manufacturing/warehouse buildings comprising a total of
approximately 135,000 square feet and a four-story high-rise facility with
automatic storage and retrieval capabilities. The Orange Facility is currently
leased from certain officers, shareholders, and directors of the Company and
affiliated trusts. This facility is the primary manufacturing location for the
Varco Drilling Systems Division, and the Company estimates that based upon
direct labor hours, utilization of this facility was approximately 70% of
utilization as compared to 45% of capacity in 1993 and 1992.
The Etten-Leur Facility consists of approximately 73,000 square feet of
manufacturing and warehousing space and approximately 12,900 square feet of
office space on approximately six acres of land. This facility is the primary
manufacturing location for the Varco BJ Oil Tools Division, and the Company
estimates that based upon direct labor hours, utilization of this facility was
approximately 75% of capacity in 1994 compared to 50% of capacity in 1993 and
90% of capacity in 1992.
The Martin-Decker/TOTCO Instrumentation products are manufactured at the
Cedar Park Facility. The Company has leased this facility from Cooper
Industries, Inc. under a net lease which expires in August of 1996 and has an
option to purchase. The monthly rental under the Cedar Park lease is $43,250,
and the Company is obligated to pay real estate taxes, insurance and other
expenses. The Cedar Park Facility consists of approximately 200,000 square feet
of manufacturing and warehousing space and approximately 33,000 square feet of
office space located on approximately 40 acres. The Company estimates that
based upon direct labor hours, utilization of this facility was approximately
95% of capacity during 1994 as compared to 70% of capacity during 1993 and
1992.
The Shaffer Division's products are manufactured at the Shaffer Facility,
which consists of approximately 270,000 square feet of manufacturing and
warehousing space and approximately 73,000 square feet of office space located
on approximately 34 acres. In addition, certain products of the Varco BJ Oil
Tools Division are manufactured at this facility. The Shaffer facility has been
operated by the Company since the acquisition of Shaffer on July 17, 1992. The
Company estimates that based upon direct labor hours utilization of this
facility for 1994 was approximately 70% as compared to 65% in 1993.
An additional manufacturing facility located in Houston (the "Houston BJ
Facility") was closed during the fourth quarter of 1992 and activities
previously performed at that plant have been moved to other Company locations,
principally the Shaffer Facility. The Houston BJ Facility, which consists of
approximately 135,000 square feet of manufacturing and office space, and the
32.2 acres of land on which it is located are owned by the Company. This
facility has been listed for sale.
The Drilling Systems Division's administration and Company's executive
offices are located in Orange, California adjacent to the Orange Facility. They
comprise approximately 26,000 square feet of office space and are leased from
certain officers, shareholders and directors of the Company and affiliated
trusts.
13
<PAGE>
The Company owns sales and service facilities in Oklahoma, Wyoming, Scotland
and Singapore and leases approximately such facilities throughout the United
States in addition to facilities in Canada and Mexico.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which Varco or any of its
subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1994.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information concerning the market for the Registrant's Common Stock and
related stockholder matters contained under the captions "Price Range of Varco
Common Stock," "Dividend Policy" and "Common Stock" on page 40 of the
Registrant's Annual Report to Shareholders for the year ended December 31,
1994, is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth under the caption "Five Year
Financial and Operating Highlights" on page 18 of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1994, is hereby
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 20 through 24 of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1994, is hereby incorporated by
reference.
In addition, as of March 22, 1995 the following is added to the end of
Management's Discussion and Analysis of Financial Condition and Results of
Operations as included in the Registrant's Annual Report to Shareholders for
the year ended December 31, 1994:
On March 22, 1995 the Company announced a "Dutch Auction" cash tender
offer for up to 5,300,000 shares of its Common Stock. The tender offer is
expected to commence on Friday, March 24, 1995, and to expire on Friday,
April 21, 1995, unless extended. Under the terms of the offer, the Company
will invite shareholders to tender shares at prices not greater than $8.00
nor less than $6.75 per share, as specified by the tendering shareholders.
The Company will fund the purchase of the shares with cash and cash
equivalents, short-term investments and borrowings under the Company's
amended credit facility with Citicorp, USA and Citibank, N.A. The Company
expects to have approximately $37 million of available cash and cash
equivalents and short-term investments to finance the share purchase. The
remaining funds will come from borrowings.
In anticipation of the offer, the Credit Agreement dated as of February
25, 1993 was amended (as so amended, the "Amended Credit Agreement") to (a)
extend the maturity date from March 31, 1996
14
<PAGE>
to October 31, 1998; (b) increase the total maximum facility from $20.0
million (consisting of a letter of credit facility of $10.0 million and a
loan facility $10.0 million) to $35.0 million (consisting of the same
letter of credit facility and a loan facility of $25.0 million); and (c)
amend certain covenants in order to permit the Offer to proceed and to take
into account the effect of the consummation of the Offer on certain
financial ratios.
The Company believes that its cash and cash equivalents, short-term
investments and the Amended Credit Agreement will be sufficient to
consummate the purchase of its shares and to meet its capital expenditures
and operating cash needs in 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is hereby incorporated by reference to
pages 25 through 38 of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1994.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference to
the information set forth under the sub caption "Nominees" under the caption
"ELECTION OF DIRECTORS" in the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 18, 1995, except that information
concerning the Executive Officers of the Registrant is contained in Item 1
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to
the information set forth under the subcaptions "Compensation and Stock Option
Information" and "Compensation Committee Interlocks and Insider Participation"
under the caption "EXECUTIVE COMPENSATION" and under the subcaption "Director
Compensation" under the caption "ELECTION OF DIRECTORS" in the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 18,
1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to
the information set forth under the caption "BENEFICIAL OWNERSHIP OF VARCO
SECURITIES" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 18, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to
the information set forth under the caption "CERTAIN TRANSACTIONS AND
RELATIONSHIPS" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 18, 1995.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of Varco International, Inc.
and subsidiaries, included in the Registrant's Annual Report to Shareholders
for the year ended December 31, 1994, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
PAGE IN
ANNUAL
REPORT
-------
<S> <C>
Consolidated Balance Sheets--as of December 31, 1994 and 1993....... 25
Consolidated Statements of Income--Years ended December 31, 1994,
1993 and 1992...................................................... 26
Consolidated Statements of Shareholders' Equity--Years ended Decem-
ber 31, 1994, 1993 and 1992........................................ 27
Consolidated Statements of Cash Flows--Years ended December 31,
1994, 1993 and 1992................................................ 28
Notes to Consolidated Financial Statements.......................... 29
The Report of Independent Auditors.................................. 39
The following consolidated financial statement schedule of Varco
International, Inc., and subsidiaries
is included in Item 14(d):
<CAPTION>
PAGE
-------
<S> <C>
Schedule VIII--Valuation and Qualifying Accounts.................... 21
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Individual financial statements of the registrant have been omitted as the
registrant is primarily an operating company and all subsidiaries included in
the consolidated financial statements filed, in the aggregate, do not have
minority equity interest and/or indebtedness to any person other than the
registrant or its consolidated subsidiaries in amounts which together
(excepting indebtedness incurred in the ordinary course of business which is
not overdue and matures within one year from the date of its creation, whether
or not evidenced by securities, and indebtedness of subsidiaries which is
collateralized by the registrant by guarantee, pledge, assignment or otherwise)
exceed 5 percent of the total assets as shown by the most recent year-end
consolidated balance sheet.
(B) REPORTS ON FORM 8-K
Varco filed no reports on Form 8-K during the three months ended December 31,
1994.
16
<PAGE>
(C) EXHIBITS
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Each management contract or compensation plan or
arrangement filed as an exhibit hereto is identified by a dagger.
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of Varco, incorporated by
reference to Exhibit 20.1 to Varco's quarterly report on Form
10-Q for the quarter ended March 31, 1981, as amended by Varco's
report on Form 8 filed on June 26, 1981.
3.2 Certificate of Amendment of Restated Articles of Incorporation
of Varco dated October 28, 1986, incorporated by reference to
Exhibit 3.5 to Amendment No. 3 to Varco's Registration Statement
on Form S-1, Registration No. 33-9341.
3.3 Certificate of Amendment of Restated Articles of Incorporation
of Varco dated May 11, 1988, incorporated by reference to
Exhibit 3.5 to Varco's annual report on Form 10-K for the year
ended December 31, 1988.
3.4 Certificate of Amendment of Restated Articles of Incorporation
of Varco dated May 15, 1990, incorporated by reference to
Exhibit 3 to Varco's Form 10-Q for the quarter ended June 30,
1990.
3.5 Bylaws of Varco, incorporated by reference to Exhibit 3.7 to
Amendment No. 1 to Varco's Registration Statement on Form S-1,
Registration No. 33-40191.
4.1 Note Agreement, dated as of July 1, 1992 between Varco
International, Inc. and the Purchasers named in Schedule 1
thereto, incorporated by reference to Exhibit 4.0 to Varco's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1992.
4.2 First Amendment to Note Agreement, dated as of November 12,
1992, to Note Agreement included as Exhibit 4.1 hereto,
incorporated by reference to Exhibit 4.3 to Varco's annual
report on Form 10-K for the year ended December 31, 1992.
4.3 Waiver and Second Amendment to Note Agreement, dated as of
February 25, 1993, to Note Agreement included as Exhibit 4.1
hereto, incorporated by reference to Exhibit 4.4 to Varco's
annual report on Form 10-K for the year ended December 31, 1992.
*4.4 Waiver, dated as of March 8, 1995, to Note Agreement included as
Exhibit 4.1 hereto.
4.5 Credit Agreement, dated as of February 25, 1993 among Varco
International, Inc., Citicorp USA, Inc. and Citibank, N.A.,
incorporated by reference to Exhibit 4.5 to Varco's annual
report on Form 10-K for the year ended December 31, 1992.
4.6 First Amendment dated as of August 3, 1993 to Credit Agreement
included as Exhibit 4.5 hereto, incorporated by reference to
Exhibit 4 to Varco's quarterly report on Form 10-Q for the
quarter ended September 30, 1993.
4.7 Second Amendment dated as of September 23, 1993 to Credit
Agreement included as Exhibit 4.5 hereto, incorporated by
reference to Exhibit 4.6 to Varco's annual report on Form 10-K
for the year ended December 31, 1993.
4.8 Third Amendment dated as of December 1, 1993 to Credit Agreement
included as Exhibit 4.5 hereto, incorporated by reference to
Exhibit 4.7 to Varco's annual report on Form 10-K for the year
ended December 31, 1993.
4.9 Fourth Amendment dated as of May 12, 1994 to Credit Agreement
included as Exhibit 4.5 hereto, incorporated by reference to
Exhibit 4 to Varco's quarterly report on Form 10-Q for the
quarter ended June 30, 1994.
*4.10 Fifth Amendment dated as of October 31, 1994 to Credit Agreement
included as Exhibit 4.5 hereto.
</TABLE>
17
<PAGE>
<TABLE>
<C> <S>
10.1+ The Varco 1980 Stock Option Plan, as amended, incorporated by
reference to Exhibit 4.5 to Post-Effective Amendment No. 4 to
Varco's Registration Statement on Form S-8, Registration No. 2-
66830.
10.2+ Amendment to Varco 1980 Stock Option Plan, incorporated by
reference to Exhibit 10.2 to Varco's quarterly report on Form
10-Q for the quarter ended September 30, 1984.
10.3+ The Varco 1982 Non-Employee Director Stock Option Plan,
incorporated by reference to Exhibit 19.3 to Varco's quarterly
report on Form 10-Q for the quarter ended June 30, 1982.
10.4+ Varco International, Inc. Supplemental Executive Retirement
Plan, incorporated by reference to Exhibit 10.6 to Varco's
annual report on Form 10-K for the year ended December 31, 1992.
10.5+ Varco International, Inc. Stock Bonus Plan, incorporated by
reference to Exhibit 10.8 to Varco's annual report on Form 10-K
for the year ended December 31, 1985.
10.6 Lease dated March 7, 1975, as amended, incorporated by reference
to Exhibit 10.7 to Varco's annual report on Form 10-K for the
year ended December 31, 1981, and agreement with respect thereto
dated as of January 1, 1982, incorporated by reference to
Exhibit 10.8 to Varco's annual report on Form 10-K for the year
ended December 31, 1982.
10.7 Agreement dated as of January 1, 1984, with respect to Lease
included as Exhibit 10.6 hereto, incorporated by reference to
Exhibit 10.13 to Varco's annual report on Form 10-K for the year
ended December 31, 1984.
10.8 Agreement dated as of February 8, 1985, with respect to Lease
included as Exhibit 10.6 hereto, incorporated by reference to
Exhibit 10.14 to Varco's annual report on Form 10-K for the year
ended December 31, 1984.
10.9 Agreement dated as of April 12, 1985 to Lease included as
Exhibit 10.6 hereto, incorporated by reference to Exhibit 10.2
to Varco's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1985.
10.10 Agreement dated as of June 11, 1981, among W.B. Reinhold, B.
Reinhold, Jr., Charlotte Reinhold Lorenz, Baldwin Terry Reinhold
and Leo J. Pircher, incorporated by reference to Exhibit 10.14
to Amendment No. 2 to Varco's Registration Statement on Form S-
1, Registration No. 33-9341.
10.11 Standard Industrial Lease--Net dated September 29, 1988 for the
premises at 743 N. Eckhoff, Orange, California, incorporated by
reference to Exhibit 10.14 to Varco's annual report on Form 10-K
for the year ended December 31, 1988.
10.12 Asset Purchase Agreement between Varco International, Inc. and
Baker Hughes Incorporated dated as of August 10, 1988,
incorporated by reference to Exhibit 2.0 to Varco's Form 8-K
dated September 29, 1988.
10.13+ The Varco International Inc. 1990 Stock Option Plan,
incorporated by reference to Exhibit 10.0 to Varco's Form 10-Q
for the quarter ended March 31, 1990.
10.14+ Varco 1980 Employee Stock Purchase Plan, as amended,
incorporated by reference to Exhibit 28 to Varco's Registration
Statement on Form S-8, Registration No. 33-36841.
10.15 Asset Sale Agreement dated as of May 17, 1990 by and between
Cooper Industries, Inc., Coopind (U.K.), Ltd., Cooper Industries
Canada Inc., and Martin-Decker Company (S) Private, limited and
Varco International Inc. incorporated by reference to Exhibit
2.0 to Varco's Form 8-K dated May 22, 1990.
10.16 Amended and Restated Asset Purchase Agreement, dated as of
August 1, 1990 by and between Varco and Baker Hughes
Incorporated, incorporated by reference to Exhibit 2 to Varco's
quarterly report on Form 10-Q for the quarter ended June 30,
1990.
</TABLE>
18
<PAGE>
<TABLE>
<C> <S>
10.17 Lease dated as of May 22, 1990 by and between Cooper Industries,
Inc. and Varco International Inc. for the Cedar Park Facility,
incorporated by reference to Exhibit 10.21 to Varco's annual
report on Form 10-K for the year ended December 31, 1990.
10.18+ Varco International Inc. Management Incentive Bonus Plan
incorporated by reference to Exhibit 10.22 to Varco's annual
report on Form 10-K for the year ended December 31, 1990.
10.19 Asset Purchase Agreement, dated as of April 10, 1992, by and
between Varco International, Inc. and Baroid Corporation,
incorporated by reference to Exhibit 2 to Varco's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1992.
10.20 Amendments dated May 28, 1992, June 30, 1992, July 15, 1992 and
two amendments dated July 16, 1992 to Asset Purchase Agreement
included as Exhibit 10.19 hereto, incorporated by reference to
Exhibit 2.1 to Varco's Current Report on Form 8-K dated July 17,
1992.
10.21 First Amendment dated as of August 31, 1993 to Lease included as
Exhibit 10.17 hereto, incorporated by reference to Exhibit 10.23
to Varco's annual report on Form 10-K for the year ended
December 31, 1993.
10.22+ The Varco International Inc. 1994 Directors' Stock Option Plan,
incorporated by reference to Exhibit 10 to Varco's quarterly
report on Form 10-Q for the quarter ended September 30, 1994.
*10.23+ The Varco International, Inc. Director Savings Plan.
*10.24+ The Varco International, Inc. Executive Management Savings Plan.
*11 Statement re computation of per share earnings.
*12 Statement re computation of ratios.
*13 1994 Annual Report to Shareholders, to the extent expressly
incorporated by reference in this Report on Form 10-K. Such
Annual Report, except for those portions so incorporated by
reference, is furnished only for information and is not to be
deemed filed herewith.
*21 Subsidiaries of Varco.
*23 Consents of Independent Auditors.
*27 Financial Data Schedule
</TABLE>
--------
* Filed herewith
+ Management contract, compensation plan or arrangement.
As to any security holder of the Registrant requesting a copy of this Form
10-K, the Registrant will furnish copies of any exhibits listed above as filed
with this Form 10-K upon payment to it of its reasonable expenses in furnishing
such exhibits.
(D) SCHEDULES
The Report of Independent Auditors and the schedule listed in the Index to
Financial Statements and Schedules (Item 14(a)) are filed as part of this
Annual Report on Form 10-K.
19
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Varco International, Inc. of our report dated February 17, 1995
included in the 1994 Annual Report to Shareholders of Varco International, Inc.
Our audits also included the financial statement schedule of Varco
International, Inc. listed in item 14(d). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Orange County, California
February 17, 1995
20
<PAGE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- ----------------------- ------------- --------
ADDITIONS
-----------------------
CHARGED CHARGED TO
BALANCE AT TO COSTS OTHER BALANCE AT
BEGINNING AND ACCOUNTS-- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- -------- -------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994:
Deducted from asset
accounts:
Allowance for doubt-
ful accounts........ $ 1,743 $ 34 $ 105 $ 302(1) $ 1,580
Allowance for excess
and obsolete
inventory........... 45,133 253 133 4,237(2) 41,282
Reserve for assets
held for sale....... 4,207 340 6 4,553
------- ------ ------- ------ -------
$51,083 $ 627 $ 244 $4,539 $47,415
======= ====== ======= ====== =======
Year ended December 31,
1993:
Deducted from asset
accounts:
Allowance for doubt-
ful accounts........ $ 1,703 $ 292 $ $ 252(1) $ 1,743
Allowance for excess
and obsolete
inventory........... 47,846 1,476 4,189(2) 45,133
Reserve for assets
held for sale....... 4,183 345 321 4,207
------- ------ ------- ------ -------
$53,732 $2,113 $ $4,762 $51,083
======= ====== ======= ====== =======
Year ended December 31,
1992:
Deducted from asset
accounts:
Allowance for doubt-
ful accounts........ $ 2,205 $ 32 $ 286(3) $ 820(1) $ 1,703
Allowance for excess
and obsolete
inventory........... 37,142 2,472 17,373(3) 9,141(2) 47,846
Reserve for assets
held for sale....... 325 3,837 (21) 4,183
------- ------ ------- ------ -------
$39,672 $6,341 $17,659 $9,940 $53,732
======= ====== ======= ====== =======
</TABLE>
--------
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventories written off.
(3) Valuation established at time of acquisition of Shaffer.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VARCO INTERNATIONAL, INC.
GEORGE I. BOYADJIEFF
By___________________________________
GEORGE I. BOYADJIEFF PRESIDENT AND
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Dated March 22, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Principal Executive Officer and Director:
GEORGE I. BOYADJIEFF President and Chief March 22, 1995
------------------------------------- Executive Officer
GEORGE I. BOYADJIEFF
Principal Financial Officer:
RICHARD A. KERTSON Vice President-- March 22, 1995
------------------------------------- Finance
RICHARD A. KERTSON
Principal Accounting Officer:
DONALD L. STICHLER Controller-- March 22, 1995
------------------------------------- Treasurer and
DONALD L. STICHLER Secretary
Other Directors
WALTER B. REINHOLD Director--Chairman March 22, 1995
-------------------------------------
WALTER B. REINHOLD
TALTON R. EMBRY Director March 22, 1995
-------------------------------------
TALTON R. EMBRY
ANDRE R. HORN Director March 22, 1995
-------------------------------------
ANDRE R. HORN
MAURICE E. JACQUES Director March 22, 1995
-------------------------------------
MAURICE E. JACQUES
JACK W. KNOWLTON Director March 22, 1995
-------------------------------------
JACK W. KNOWLTON
LEO J. PIRCHER Director March 22, 1995
-------------------------------------
LEO J. PIRCHER
CARROLL W. SUGGS Director March 22, 1995
-------------------------------------
CARROLL W. SUGGS
ROBERT A. TEITSWORTH Director March 22, 1995
-------------------------------------
ROBERT A. TEITSWORTH
EUGENE R. WHITE Director March 22, 1995
-------------------------------------
EUGENE R. WHITE
JAMES D. WOODS Director March 22, 1995
-------------------------------------
JAMES D. WOODS
22
<PAGE>
EXHIBIT 4.4
March 8, 1995
WAIVER
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92668
Attention: Chief Financial Officer
Ladies & Gentlemen:
Reference is made to (i) the Note Agreement dated as of July 1, 1992 (as
amended, modified or supplemented by amendment or waiver, the "Note Agreement")
between Varco International, Inc. (the "Company") and the Purchasers named in
Schedule 1 thereto and (ii) the Notice of Default, dated March 8, 1995 (the
"Notice of Default") from the Company to the undersigned. Capitalized terms used
and not otherwise defined herein shall have the meanings ascribed to such terms
in the Note Agreement.
The undersigned hereby (1) acknowledges receipt of the Notice of Default;
(2) waives the Events of Default under the Note Agreement described in the
Notice of Default and any right to accelerate or other right of the undersigned
attendant thereto; (3) confirms the Company's understanding that (a) the Subject
Investments (as such term is defined in the Notice of Default) will not be
included in any future determination of Restricted Payments for the purposes of
Section 7.8 of the Note Agreement and (b) the disposition of the Subject
Investments and any past or future disposition of short-term investments does
not constitute a Disposition of assets for the purposes of Section 7.11 of the
Note Agreement.
This Waiver shall become effective when executed and delivered by
Purchasers holding at least 66-2/3% in aggregate principal amount of the Notes
outstanding and, with respect to the waiver of the Event of Default under the
Note Agreement arising from the Event of Default under the Credit Agreement,
upon the waiver by Citicorp USA, Inc. and Citibank, N.A. of such Event of
Default.
<PAGE>
This Waiver may be executed in one or more counterparts, each of which when
so executed shall be deemed to be an original and all of which taken together
shall constitute one and the same instrument.
KEMPER INVESTORS LIFE INSURANCE
COMPANY
By: /s/
--------------------------------
Title: Authorized Signatory
By: /s/
--------------------------------
Title: Authorized Signatory
FEDERAL KEMPER LIFE ASSURANCE
COMPANY
By: /s/
--------------------------------
Title:
By: /s/
--------------------------------
Title: Authorized Signatory
FIDELITY LIFE ASSOCIATION
By: /s/
--------------------------------
Title: Authorized Signatory
By: /s/
--------------------------------
Title:
AMERICAN MANUFACTURERS MUTUAL
INSURANCE COMPANY
By: /s/
--------------------------------
Title: Authorized Signatory
By: /s/
--------------------------------
Title: Authorized Signatory
2
<PAGE>
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/
--------------------------------
Title: Investment Officer
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: /s/
--------------------------------
Title:
JOHN HANCOCK LIFE INSURANCE
COMPANY OF AMERICA
By: /s/
--------------------------------
Title:
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By: /s/
--------------------------------
Title: Vice President
CENTRAL LIFE ASSURANCE COMPANY
By: /s/
--------------------------------
Title: Vice President
3
<PAGE>
EXHITIB 4.10
FIFTH AMENDMENT AND WAIVER
Dated as of October 31, 1994
FIFTH AMENDMENT AND WAIVER dated as of October 31, 1994 (this "Amendment")
to CREDIT AGREEMENT dated as of February 25, 1993 (as amended by First Amendment
dated as of August 3, 1993, Second Amendment dated as of September 23, 1993,
Third Amendment dated as of December 1, 1993, and Fourth Amendment dated as of
May 12, 1994, the "Credit Agreement") among VARCO INTERNATIONAL, INC., a
California corporation, CITICORP USA, INC. and CITIBANK, N.A.
PRELIMINARY STATEMENTS. The parties to the Credit Agreement wish to amend
the Credit Agreement in certain respects and the Lender and the Issuing Bank are
amenable to waiving compliance by the Borrower with certain covenants contained
in the Credit Agreement, all as hereinafter set forth. Terms defined in the
Credit Agreement are used in this Amendment as defined in the Credit Agreement
and, except as otherwise indicated, all references to Sections and Articles
refer to the corresponding Sections and Articles of the Credit Agreement.
The parties hereto therefore agree as follows:
SECTION 1. Amendments. Effective as of the Amendment Effective Date (as
----------
defined in Section 3 hereof), and subject to the satisfaction of the conditions
precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended
as follows:
a. The definition of "Consolidated Fixed Charges" in Section 1.01 is
--------------------------
hereby deleted and restated in full as follows:
"Consolidated Fixed Charges" means, for any period, the sum of (a)
--------------------------
Consolidated Interest Expense for such period plus (b) the amount of any
principal payments on Debt (excluding the Subordinated Note, the
Subordinated Debentures, the Senior Notes and Debt included in clauses (c)
or (d) of the definition of "Debt") required to be paid during such period.
b. Section 5.03(e) is amended by deleting "$101,000,000" in line 3 and
substituting "$94,000,000".
c. Section 7.02 is amended by deleting the addresses for notices to the
Lender and the Issuing Bank and substituting the following:
If to the Lender at: Citicorp USA, Inc.
c/o Citicorp North America, Inc.
725 South Figueroa
Los Angeles, CA 90017
Attention: Zoya Lazar
Telecopy No.: (213) 683-1854
If to the Issuing Bank at: Citibank, N.A.
c/o Citicorp North America, Inc.
725 South Figueroa
Los Angeles, CA 90017
Attention: Zoya Lazar
Telecopy No.: (213) 683-1854
SECTION 2. Waivers. (a) The Borrower has advised the Lender that the
-------
Borrower proposes to acquire Rig Technology Limited, a corporation under the
Companies Act in Scotland ("Rig Technology"), as more fully described in the
letter from the Borrower to the Lender dated October 3, 1994. The Borrower has
requested that the Lender waive the provisions of Section 5.02(c) to permit such
acquisition. Effective as
<PAGE>
of the Amendment Effective Date, subject to the satisfaction of the conditions
precedent set forth in Section 3 hereof, the Lender and the Issuing Bank hereby
(i) consent and agree that the Borrower may commit to acquire and acquire Rig
Technology by purchase of all its outstanding share capital for a purchase price
in pounds sterling not to exceed the equivalent of US$10,000,000.00 and make and
maintain such investment and (ii) waive compliance by the Borrower with the
provisions of Section 5.02(c) to permit the Borrower to commit to and make such
acquisition and to make and maintain such investment and waive any Event of
Default or Incipient Default that would otherwise arise therefrom under Section
5.02(c).
(b) The Borrower has advised the Lender that the Borrower intends to cause
Martin-Decker Totco, Inc., a Texas corporation, to acquire all or substantially
all of the assets, and to assume all or substantially all of the liabilities, of
Metrox, Inc., a California corporation, as more fully described in the letter
from the Borrower to the Lender dated January 17, 1994. The Borrower has
requested that the Lender waive the provisions of Sections 5.01(b), 5.02(c) and
5.02(e) to permit such transaction. Effective as of the Amendment Effective
Date, subject to the satisfaction of the conditions precedent set forth in
Section 3 hereof, the Lender and the Issuing Bank hereby (i) consent to such
transaction and (ii) waive compliance by the Borrower with the provisions of
Sections 5.01(b), 5.02(c) and 5.02(e) to permit the Borrower to effect such
transaction and waive any Event of Default or Incipient Default that would
otherwise arise therefrom under Section 5.01(b), 5.02(c) or 5.02(e).
SECTION 3. Conditions to Effectiveness. This Amendment shall be effective
---------------------------
as of October 31, 1994 (the "Amendment Effective Date"), subject to the Lender's
receipt of: (i) a counterpart of this Amendment executed by the Borrower, (ii) a
certificate of the Secretary or an Assistant Secretary of the Borrower attaching
a copy of the resolutions of the Board of Directors of the Borrower authorizing
the execution and delivery of this Amendment and certifying the name and true
signature of each officer of the Borrower executing this Amendment on its
behalf, and (iii) counterparts of a Consent and Acknowledgement in the form
attached as Annex A hereto executed by each Guarantor.
SECTION 4. Representations and Warranties. The Borrower represents and
------------------------------
warrants as follows as of the date hereof and the Effective Date: (a) the
Borrower is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction indicated at the beginning of this Amendment;
(b) the execution, delivery and performance by the Borrower of this Amendment
are within the Borrower's corporate powers, have been duly authorized by all
necessary corporate action and do not contravene the Borrower's charter or by-
laws, or any law or any contractual restriction binding on or affecting the
Borrower; (c) no authorization, approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body is required for the
due execution and delivery by the Borrower of this Amendment or for the
performance by the Borrower of the Credit Agreement as hereby amended; (d) this
Amendment and the Credit Agreement as hereby amended constitute the legal, valid
and binding obligations of the Borrower enforceable against the Borrower in
accordance with their respective terms; (e) all representations and warranties
of the Borrower set forth in Article IV are true and correct, as if repeated and
restated in full herein (except to the extent that such representations and
warranties expressly relate solely to an earlier date and then are correct as of
such date); and (f) no Default or Event of Default has occurred and is
continuing.
SECTION 5. Reference to and Effect on the Credit Agreement. Upon the
-----------------------------------------------
effectiveness of Sections 1 and 2 hereof, on and after the Effective Date, each
reference in the Credit Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import, and each reference in the Note or the other
Loan Documents to "the Credit Agreement," shall mean and be a reference to the
Credit Agreement as amended by this Amendment. Except as specifically amended
above, the Credit Agreement shall continue to be in full force and effect and is
hereby in all respects ratified and confirmed.
SECTION 6. Execution in Counterparts. This Amendment may be executed in
-------------------------
any number of counterparts and by any combination of the parties hereto in
separate counterparts, each of which counterparts shall be an original and all
of which taken together shall constitute one and the same Amendment.
SECTION 7. Governing Law. This Amendment shall be governed by, and
-------------
construed in accordance with, the laws of the State of New York.
<PAGE>
SECTION 8. Expenses. Each party hereto shall bear its own costs and
--------
expenses (including counsel fees and expenses) in connection with the
preparation, execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
VARCO INTERNATIONAL, INC.
By: /s/ R. A. Keston
------------------------------
R.A. Keston
Title: Vice President
---------------------------
CITICORP USA, INC.
By:
------------------------------
Vice President
CITIBANK, N.A.
By:
------------------------------
Vice President
<PAGE>
EXHIBIT 10.23
VARCO INTERNATIONAL, INC.
DIRECTOR SAVINGS PLAN
<PAGE>
VARCO INTERNATIONAL, INC.
DIRECTOR SAVINGS PLAN
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
----
<S> <C> <C>
ARTICLE I
TITLE AND DEFINITIONS
1.1 - Title.............................................. 1
-----
1.2 - Definitions........................................ 1
-----------
ARTICLE II
PARTICIPATION
2.1 - Participation...................................... 5
-------------
ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation.................... 6
-------------------------------
3.2 - Investment Elections............................... 6
--------------------
ARTICLE IV
DEFERRAL ACCOUNT
4.1 - Deferral Account................................... 8
----------------
ARTICLE V
VESTING
5.1 - Deferral Account................................... 9
----------------
ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution of Deferred Compensation.............. 10
-------------------------------------
6.2 - Inability to Locate Participant.................... 10
-------------------------------
6.3 - Payment by Trust................................... 11
----------------
ARTICLE VII
ADMINISTRATION
7.1 - Committee.......................................... 12
---------
7.2 - Committee Action................................... 12
----------------
7.3 - Powers and Duties of the Committee................. 12
----------------------------------
7.4 - Construction and Interpretation.................... 13
-------------------------------
7.5 - Information........................................ 13
-----------
7.6 - Compensation, Expenses and Indemnity............... 13
------------------------------------
7.7 - Quarterly Statements............................... 14
--------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XIII
MISCELLANEOUS
8.1 - Unsecured General Creditor......................... 15
--------------------------
8.2 - Restriction Against Assignment..................... 15
------------------------------
8.3 - Withholding........................................ 15
-----------
8.4 - Amendment, Modification, Suspension or Termination. 16
--------------------------------------------------
8.5 - Governing, Law..................................... 16
--------------
8.6 - Receipt Or Release................................. 16
------------------
8.7 - Payments on Behalf of Persons Under Incapacity..... 16
----------------------------------------------
8.8 - Headings. etc. Not Part of Agreement............... 16
------------------------------------
ARTICLE IX
BENEFIT OFFSET
9.1 - Offset for Certain Benefits Payable Under
-----------------------------------------
Split-Dollar Life Insurance Policies............... 17
------------------------------------
</TABLE>
ii
<PAGE>
VARCO INTERNATIONAL, INC.
DIRECTOR SAVINGS PLAN
WHEREAS, Varco International, Inc. (the "Company") desires to establish a
deferred compensation plan to provide supplemental retirement income benefits to
its outside directors through deferrals of directors' fees effective as of
September 1, 1994; and
WHEREAS, it is believed that the adoption of this plan providing for
deferred compensation at the election of each outside director will be in the
best interests of the Company;
NOW, THEREFORE, it is hereby declared as follows:
ARTICLE I
TITLE AND DEFINITIONS
1.1 - Title.
------
This Plan shall be known as the Varco International, Inc. Director Savings
Plan.
1.2 - Definitions.
------------
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
"Account" shall mean a Participant's Deferral Account.
"Annual Retainer" shall mean the annual retainer fee to which a Director is
entitled for service as a member of the Board of Directors of the Company.
"Beneficiary" or "Beneficiaries" shall mean the person or persons,
including a trustee, personal representative or other fiduciary, last designated
in writing by a Participant in accordance with procedures established by the
Committee to receive the benefits specified hereunder in the event of the
Participant's death. No beneficiary designation shall become effective until it
is filed with the Committee. If there is no Beneficiary designation in effect,
or if there is no surviving designated Beneficiary, then the Participant's
surviving spouse shall
1
<PAGE>
be the Beneficiary. If there is no surviving spouse to receive any benefits
payable in accordance with the preceding sentence, the duly appointed and
currently acting personal representative of the participant's estate (which
shall include either the Participant's probate estate or living trust) shall be
the Beneficiary. In any case where there is no such personal representative of
the Participant's estate duly appointed and acting in that capacity within 90
days after the Participant's death (or such extended period as the Committee
determines is reasonably necessary to allow such personal representative to be
appointed, but not to exceed 180 days after the Participant's death), then
Beneficiary shall mean the person or persons who can verify by affidavit or
court order to the satisfaction of the Committee that they are legally entitled
to receive the benefits specified hereunder. In the event any amount is payable
under the Plan to a minor, payment shah not be made to the minor, but instead be
paid (a) to that person's living parent(s) to act as custodian, (b) if that
person's parents are then divorced, and one parent is the sole custodial parent,
to such custodial parent, or (c) if no parent of that person is then living, to
a custodian selected by the Committee to hold the funds for the minor under the
Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which
the minor resides. If no parent is living to select another custodian to hold
the funds for the minor, the duly appointed and currently acting guardian of the
and the Committee decides not then payment shall be made to estate for the minor
or, if no guardian of the estate for the minor is duly appointed and currently
acting within 60 days after the date the amount becomes payable, payment shall
be deposited with the court having jurisdiction over the estate of the minor.
"Board of Directors" or "Board" shall mean the Board of Directors of the
Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board to administer
the Plan in accordance with Article VII.
"Company" shall mean Varco International, Inc., any successor corporation
and each corporation which is a member of a controlled group of corporations
(within the meaning of Section 414(b) of the Code) of which Varco International,
Inc. is a component member.
"Compensation" shall mean the Participant's Annual Retainer and Meeting
Fees.
2
<PAGE>
"Deferral Account" shall mean the bookkeeping account maintained by the
Committee for each Participant that is credited with amounts equal to (1) the
portion of the Participant's Compensation that he or she elects to defer and (2)
interest pursuant to Section 4.1.
"Director" shall mean a member of the Board of Directors.
"Effective Date" shall mean September 1, 1994.
"Eligible Director" shall mean each Director who is not an employee of the
Company or any of its subsidiaries.
"Fund" or "Funds" shall mean one or more of the mutual funds or contracts
selected by the Committee pursuant to Section 3.2(b).
"Initial Election Period" for an Eligible Director shall mean the 30-day
period following the later of August 1, 1994 or the date the Eligible Director
becomes an Eligible Director.
"Interest Rate" shall mean, for each Fund, an amount equal to the net rate
of gain or loss on the assets of such Fund during each month reduced by one-
twelfth of one and one-half percentage points.
"Meeting Fees" shall mean the amounts to which a Director is entitled for
attending meetings of the Board or a committee of the Board.
"Participant" shall mean any Eligible Director who elects to defer
Compensation in accordance with Section 3.1.
"Payment Eligibility Date" shall mean the first day of the month following
the end of the calendar quarter following the calendar quarter in which a
Participant ceases to be a Director or dies.
"Plan" shall mean the Varco International, Inc. Director Savings Plan set
forth herein, now in effect, or as amended from time to time.
3
<PAGE>
"Plan Year" shall mean the 12 consecutive month period beginning on January
1; provided, however, that the first Plan Year shall be a short year beginning
on September 1, 1994, and ending on December 31, 1994.
"Tax Adjustment Factor" shah mean a number, determined by the Committee,
which is equal to one minus the sum of (1) the highest marginal federal personal
income tax rate then in effect and (2) the effective highest marginal state
income tax rate in the state in which the Participant resides, net after the
effect of the deduction for such state income tax for federal income tax
purposes.
4
<PAGE>
ARTICLE II
PARTICIPATION
2.1 - Participation.
--------------
An Eligible Director shall become a Participant in the Plan by electing to
defer all or a portion of his or her Compensation in accordance with Section
3.1.
5
<PAGE>
ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation.
--------------------------------
(a) Election. Each Eligible Director may elect to defer Compensation for
--------
the following Plan Year by filing with the Committee an election, on a form
provided by the Committee, no later than December 1 of the immediately preceding
Plan Year. With respect to the short Plan Year beginning September 1, 1994, an
election to defer Compensation must be filed with the Committee no later than
August 31, 1994. Any such election shall be irrevocable during the Plan Year to
which it applies.
(b) General Rule. An Eligible Director may elect to defer (1) all or any
------------
percentage of his or her Annual Retainer and (2) all or any percentage of his or
her Meeting Fees, provided, that for each year during which an Eligible Employee
is a Participant, the minimum amount that may be deferred is $5,000.
(c) Duration Of Deferral Election. Any election made under this Plan to
-----------------------------
defer Compensation shall remain in effect until changed or terminated by filing
a new election with the Committee in accordance with the terms of this Section
3.1, which new election shall be effective for Compensation earned in the
subsequent Plan Year. Notwithstanding the foregoing, a Participant's election to
defer Compensation under this Plan shall cease upon such Participant's ceasing
to be an Eligible Director.
3.2 - Investment Elections.
---------------------
(a) At the time of making the deferral elections described in Section 3.1,
the Participant shall designate, on a form provided by the Committee, which of
the following types of mutual funds or contracts the Participant's Account will
be deemed to be invested in for purposes of determining the amount of earnings
to be credited to that Account:
1) Money Market Fund
2) Real Estate Fund
3) Balanced Assets Fund
4) Capital Growth Fund
5) Emerging Growth Equity Fund
6) Common Stock Fund
6
<PAGE>
In making the designation pursuant to this Section 3.2, the Participant may
specify that all or any 10% multiple of his Deferral Account be deemed to be
invested in one or more of the types of mutual funds or contracts listed above.
Effective as of the end of any calendar quarter, a Participant may change the
designation made under this Section 3.2 by filing an election, on a form
provided by the Committee, at least 30 days prior to the end of such quarter. If
a Participant fails to elect a type of fund under this Section 3.2, he or she
shall be deemed to have elected the Money Market Fund.
(b) Although the Participant may designate the type of mutual funds or
----
contracts in paragraph (a) above, the Committee shall select from time to time,
in its sole discretion, a commercially available fund or contract of each of the
types described in paragraph (a) above to be the Funds. The Interest Rate of
each such commercially available fund or contract shall be used to determine the
amount of earnings or losses to be credited to Participants' Account under
Article IV.
7
<PAGE>
ARTICLE IV
DEFERRAL ACCOUNT
4.1 - Deferral Account.
-----------------
The Committee shall establish and maintain a Deferral Account for each
Participant under the Plan. Each Participant's Deferral Account shall be further
divided into separate subaccounts ("mutual fund subaccounts"), each of which
corresponds to a mutual fund or contract elected by the Participant pursuant to
Section 3.2(a). A Participant's Deferral Account shall be credited as follows:
(a) As of the last day of each month, the Committee shall credit the mutual
fund subaccounts of the Participant's Deferral Account with an amount equal to
the Compensation deferred by the Participant during each pay period ending in
that month in accordance with the Participant's election under Section 3.2(a);
that is, the portion of the Participant's deferred Compensation that the
Participant has elected to be deemed to be invested in a certain type of mutual
fund shall be credited to the mutual fund subaccount corresponding to that
mutual fund; and
(b) As of the last day of each month, each mutual fund subaccount of a
Participant's Deferral Account shall be credited with earnings or losses in an
amount equal to that determined by multiplying the balance credited to such
mutual fund subaccount as of the last day of the preceding month by the Interest
Rate for the corresponding Fund selected by the Company pursuant to Section
3.2(b).
8
<PAGE>
ARTICLE V
VESTING
5.1 - Deferral Account.
-----------------
A Participant's Deferral Account shall be 100% vested at all times.
9
<PAGE>
ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution of Deferred Compensation.
--------------------------------------
(a) The amount credited to a Participant's Deferral Account shall be paid
to the Participant (or, in the case of his or her death, Beneficiary) in the
form of a cash lump sum payment on his or her Payment Eligibility Date.
Notwithstanding the foregoing, a Participant may elect one of the following
optional forms of distribution provided that his or her election is filed with
the Committee at least two years prior to his or her Payment Eligibility Date
or, if later, August 31, 1994:
(1) A lump sum payment on the later of (A) the Participant's Payment
Eligibility Date or (B) a later date designated by the Participant in his
or her election,
(2) Substantially equal annual installments over five, ten, or fifteen
years beginning on the first day of the second month following the
Participant's termination of employment, retirement or death, and
(3) Substantially equal annual installments over a period of five,
ten, or fifteen years beginning on the later of (A) the first day of the
second month following the Participant's termination of employment,
retirement or death or (B) a later date designated by the Participant in
his or her election.
(b) The Participant's Accounts shall continue to be credited monthly with
earnings pursuant to Section 4.1 of the Plan until all amounts credited to his
or her Accounts under the Plan have been distributed.
6.2 - Inability to Locate Participant.
---------------------------------
In the event that the Committee is unable to locate a Participant or
Beneficiary within two years following the Participant's Payment Eligibility
Date, the amount allocated to the Participant's Deferrat Account shall be
forfeited. If, after such forfeiture, the Participant or Beneficiary later
claims such benefit, such benefit shall be reinstated without interest or
earnings.
10
<PAGE>
6.3 - Payment by Trust.
-----------------
The Company may cause the payment of benefits under this Plan to be made in
whole or in part by the Trustee of the Varco International, Inc. Supplemental
Executive Retirement Plan Rabbi Trust (the "Trust") in accordance with the
provisions of this Section 6.3. If the benefits are to be so paid from the
Trust, upon a Participant's termination of employment, the Company may
contribute to the Trust an amount equal to the balance then credited to the
Participant's Accounts, after reduction for any offset required pursuant to
Section 10.1 of the Plan, which amount shall be credited to the Participant
under the Trust. The Committee shall direct the Trustee to pay the Participant's
benefit at the time and in the amount described in Section 6.1 to the extent of
the amounts allocated to the Participant. In the event the amounts allocated to
the Participant are not sufficient to provide the full amount of benefit payable
to the Participant, the Company shall pay for the remainder of such benefit at
the time set forth in Section 6.1.
11
<PAGE>
ARTICLE VII
ADMINISTRATION
7.1 - Committee.
----------
A committee shall be appointed by, and serve at the pleasure of, the
Board of Directors. The number of members comprising the Committee shall be
determined by the Board which may from time to time vary the number of members.
A member of the Committee may resign by delivering a written notice of
resignation to the Board. The Board may remove any member by delivering a
certified copy of its resolution of removal to such member. Vacancies in the
membership of the Committee shall be filled promptly by the Board.
7.2 - Committee Action.
-----------------
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. The Chairman or any other member or members of the
Committee designated by the Chairman may execute any certificate or other
written direction on behalf of the Committee.
7.3 - Powers and Duties of the Committee.
-----------------------------------
(a) The Committee, on behalf of the Participants and their Beneficiaries,
shall enforce the Plan in accordance with its terms, shall be charged with the
general administration of the Plan, and shall have all powers necessary to
accomplish its purposes, including, but not by way of limitation, the following:
(1) To select the funds or contracts to be the Funds in accordance
with Section 3.2(b) hereof;
(2) To construe and interpret the terms and provisions of this Plan;
12
<PAGE>
(3) To compute and certify to the amount and kind of benefits payable
to Participants and their Beneficiaries;
(4) To maintain all records that may be necessary for the
administration of the Plan;
(5) To provide for the disclosure of all information and the filing or
provision of all reports and statements to Participants,
Beneficiaries or governmental agencies as shall be required by
law;
(6) To make and publish such rules for the regulation of the Plan and
procedures for the administration of the Plan as are not
inconsistent with the terms hereof; and
(7) To appoint a plan administrator or any other agent, and to
delegate to them such powers and duties in connection with the
administration of the Plan as the Committee may from
time to time prescribe.
7.4 - Construction and Interpretation.
--------------------------------
The Committee shall have full discretion to construe and interpret the
terms and provisions of this Plan, which interpretation or construction shall be
final and binding on all parties, including but not limited to the Company and
any Participant or Beneficiary. The Committee shall administer such terms and
provisions in a uniform and nondiscriminatory manner and in full accordance with
any and all laws applicable to the Plan.
7.5 - Information.
------------
To enable the Committee to perform its functions, the Company shall supply
full and timely information to the Committee on all matters relating to the
Compensation of all Participants, their death or other cause of termination, and
such other pertinent facts as the Committee may require.
7.6 - Compensation, Expenses and Indemnity.
-------------------------------------
(a) The members of the Committee shall serve without compensation for their
services hereunder.
(b) The Committee is authorized at the expense of the Company to employ
such legal counsel as it may deem advisable to assist in the performance of its
duties hereunder.
13
<PAGE>
Expenses and fees in connection with the administration of the Plan shall be
paid by the Company.
(c) To the extent permitted by applicable state law, the Company shall
indemnify and save harmless the Committee and each member thereof, the Board of
Directors and any delegate of the Committee who is an employee of the Company
against any and all expenses, liabilities and claims, including legal fees to
defend against such liabilities and claims arising out of their discharge in
good faith of responsibilities under or incident to the Plan, other than
expenses and liabilities arising out of willful misconduct. This indemnity shall
not preclude such further indemnities as may be available under insurance
purchased by the Company or provided by the Company under any bylaw, agreement
or otherwise, as such indemnities are permitted under state law.
7.7 - Quarterly Statements.
---------------------
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Account on a quarterly basis as
of each March 31, June 30, September 30 and December 31.
14
<PAGE>
ARTICLE XIII
MISCELLANEOUS
8.1 - Unsecured General Creditor.
---------------------------
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interest in any specific property
or assets of the Company. No assets of the Company shall be held under any
trust, or held in any way as collateral security for the fulfilling of the
obligations of the Company under this Plan. Any and all of the Company's assets
shall be, and remain, the general unpledged, unrestricted assets of the Company.
The Company's obligation under the Plan shall be merely that of an unfunded and
unsecured promise of the Company to pay money in the future, and the rights of
the Participants and Beneficiaries shall be no greater than those of unsecured
general creditors.
8.2 - Restriction Against Assignment.
-------------------------------
The Company shah pay all amounts payable hereunder only to the person or
persons designated by the Plan and not to any other person or corporation. No
part of a Participant's Account shall be liable for the debts, contracts, or
engagements of any Participant, his or her Beneficiary, or successors in
interest, nor shall a Participant's Account be subject to execution by levy,
attachment, or garnishment or by any other legal or equitable proceeding, nor
shall any such person have any fight to alienate, anticipate, commute, pledge,
encumber, or assign any benefits or payments hereunder in any manner whatsoever.
If any Participant, Beneficiary or successor in interest is adjudicated bankrupt
or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge any distribution or payment from the Plan, voluntarily or involuntarily,
the Committee, in its discretion, may cancel such distribution or payment (or
any part thereof) to or for the benefit of such Participant, Beneficiary or
successor in interest in such manner as the Committee shall direct.
8.3 - Withholding.
------------
There shall be deducted from each payment made under the Plan and any other
compensation payable to the Participant (or Beneficiary) all taxes which are
required to be withheld by the Company in respect to such payment or this Plan.
The Company shall have the right to reduce any payment (or compensation) by the
amount of cash sufficient to provide the amount of said taxes.
15
<PAGE>
8.4 - Amendment, Modification. Suspension or Termination.
---------------------------------------------------
The Company may amend, modify, suspend or terminate the Plan in whole or in
part, except that no amendment, modification, suspension or termination shall
have any retroactive effect to reduce any amounts allocated to a Participant's
Account. In the event that this Plan is terminated, the amounts credited to a
Participant's Deferral Account shall be distributed to the Participant or, in
the event of his or her death, his or her Beneficiary in a lump sum within
thirty (30) days following the date of termination.
8.5 - Governing Law.
--------------
This Plan shall be construed, governed and administered in accordance with
the laws of the State of California.
8.6 - Receipt or Release.
-------------------
Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Company. The Committee
may require such Participant or Beneficiary, as a condition precedent to such
payment, to execute a receipt and release to such effect.
8.7 - Payments on Behalf of Persons Under Incapacity.
-----------------------------------------------
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgement of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefore, the
Committee may direct that such payment be made to any person found by the
Committee, in its sole judgement, to have assumed the care of such person. Any
payment made pursuant to such determination shall constitute a full release and
discharge of the Committee and the Company.
8.8 - Headings, etc. Not Part of Agreement.
-------------------------------------
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
16
<PAGE>
ARTICLE IX
BENEFIT OFFSET
9.1 - Offset for Certain Benefits Payable Under Split-DOllar Life Insurance
---------------------------------------------------------------------
Policies.
---------
(a) Notwithstanding anything contained herein to the contrary, any benefits
payable under this Plan shall be offset by the value of benefits received by the
Participants under certain life insurance policies as set forth in this Section.
Participants in this Plan may own life insurance policies (the "Policies")
purchased on their behalf by the Company. The exercise of ownership rights under
such a Policy by a Participant is, however, subject to certain conditions (set
forth in a "Split-Dollar Life Insurance Agreement" between the Participant and
the Company, pursuant to which the Company holds a security interest on the
Policy) and, if the Participant fails to meet the conditions set forth in the
Split-Dollar Life Insurance Agreement, the Company may exercise its security
interest in the Policy and cause the Participant to lose certain benefits under
the Policy. In the event that a Participant satisfies the conditions specified
in Section 4 or 5 of the Split-Dollar Life Insurance Agreement, so that the
Participant or his or her beneficiary under the Policy becomes entitled to
exercise rights free from the Company's security interest under one of those
sections, or the Company's security interest in the Policy is otherwise
released, the value of those benefits shall constitute an offset to any benefits
otherwise payable under this Plan which accrued in years for which premiums were
paid on the Policy. As the case may be, this offset (the "Offset Value") shall
be equal to the value of benefits payable under the Split-Dollar Life Insurance
Agreement, that is, the cash surrender value of the Policy or, in the case of
Participant's death, the death benefit payable to the beneficiary under the
Policy. The Offset Value shall then be compared to the Participant's Account,
and the amounts credited to the Account shall be reduced, but not to less than
zero, by the Offset Value; provided, however, that any portion of the Account
which is attributable to Compensation deferred during Plan Years in which the
Company did not pay premiums on the Policy shall not be reduced by the Offset
Value, and the Committee shah maintain subaccounts of a Participant's Account to
the extent necessary to determine that portion of the Account which is subject
to offset and the portion which is not subject to offset.
(b) If the Policy in subsection (a) is not on the life of the Participant
and the insured dies prior to distribution of benefits under this Plan, then the
value of the benefits received by the participant under the Policy will offset
the Participant's Account under this Plan to the extent provided in this
subsection (b). This offset ("Offset Value") shall be equal
17
<PAGE>
to the amount of death benefit payable to the Participant divided by the Tax
Adjustment Factor. This Offset Value shall then be compared to the Participant's
Account, and the amounts credited to the Account shall be reduced, but not to be
less than zero, by the Offset Value; provided, however, that any portion of the
Account which is attributable to Compensation deferred during Plan Years in
which the Company did not pay premiums on the Policy shall not be reduced by the
Offset Value.
(c) The reduction described in Section 9.1(a) or 9.1(b) shall be made as of
the date on which the Participant or his or her beneficiary becomes entitled to
exercise rights under the Policy free of the Company's security interest.
(d) Any election to receive distribution of the amount credited to a
Participant's Account in the form of installments shall be deemed to be revoked,
and any benefits which are or become payable under this Plan after such offset
shall be paid in a lump sum on the later of the Participant's Payment
Eligibility Date or the later date designated by the Participant in any election
made in accordance with Section 6.1(a) of the Plan.
IN WITNESS WHEREOF, the Company has caused this document to be executed by
its duly authorized officer on this_______day of____________,1994.
VARCO INTERNATIONAL, INC.
By____________________
By____________________
<PAGE>
EXHIBIT 10.24
VARCO INTERNATIONAL, INC.
EXECUTIVE MANAGEMENT SAVINGS PLAN
<PAGE>
VARCO INTERNATIONAL, INC.
EXECUTIVE MANAGEMENT SAVINGS PLAN
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
ARTICLE I
TITLE AND DEFINITIONS
<S> <C>
1.1 - Title................................................................ 1
-----
1.2 - Definitions.......................................................... 1
-----------
ARTICLE II
PARTICIPATION
2.1 - Participation........................................................ 5
-------------
ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation...................................... 6
-------------------------------
3.2 - Investment Elections................................................. 7
--------------------
ARTICLE IV
ACCOUNTS
4.1 - Deferral Account..................................................... 9
----------------
4.2 - Company Contribution Account......................................... 10
----------------------------
ARTICLE V
VESTING
5.1 - Deferral Account..................................................... 11
----------------
5.2 - Company Contribution Account......................................... 11
----------------------------
ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution of Deferred Compensation................................ 12
-------------------------------------
6.2 - Forfeitures.......................................................... 12
-----------
6.3 - Inability to Locate Participant...................................... 13
-------------------------------
6.4 - Payment by Trust..................................................... 13
----------------
ADMINISTRATION
7.1 - Committee............................................................ 14
---------
7.2 - Committee Action..................................................... 14
----------------
7.3 - Powers and Duties of the Committee................................... 14
----------------------------------
7.4 - Construction and Interpretation...................................... 15
-------------------------------
7.5 - Information.......................................................... 15
-----------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
7.6 - Compensation, Expenses and Indemnity................................. 15
------------------------------------
7.7 - Quarterly Statements................................................. 16
--------------------
ARTICLE XIII
MISCELLANEOUS
8.1 - Unsecured General Creditor........................................... 17
--------------------------
8.2 - Restriction Against Assignment....................................... 17
------------------------------
8.3 - Withholding.......................................................... 17
-----------
8.4 - Amendment, Modification, Suspension or Termination................... 18
--------------------------------------------------
8.5 - Governing Law........................................................ 18
-------------
8.6 - Receipt or Release................................................... 18
------------------
8.7 - Payments on Behalf of Persons Under In Capacity...................... 18
-----------------------------------------------
8.8 - Headings, etc. Not Part of Agreement................................. 19
------------------------------------
ARTICLE IX
BENEFIT OFFSET
9.1 - Offset for Certain Benefits Payable Under Split-Dollar Life
-----------------------------------------------------------
Insurance Policies................................................... 20
------------------
</TABLE>
ii
<PAGE>
VARCO INTERNATIONAL, INC.
EXECUTIVE MANAGEMENT SAVINGS PLAN
WHEREAS, Varco International, Inc. (the "Company") desires to establish a
deferred compensation plan to provide supplemental retirement income benefits
for a select group of management and highly compensated employees through
deferrals of salary and bonuses, effective as of September 1, 1994; and
WHEREAS, it is believed that the adoption of this plan providing for
deferred compensation at the election of each executive will be in the best
interests of the Company;
NOW, THEREFORE, it is hereby declared as follows:
ARTICLE I
TITLE AND DEFINITIONS
1.1 - Title.
------
This Plan shall be known as the Varco International, Inc. Executive
Management Savings Plan.
1.2 - Definitions.
------------
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
"Account" or "Accounts" shall mean a Participant's Deferral Account and/or
Company Contribution Account.
"Beneficiary" or "Beneficiaries" shall mean the person or persons,
including a trustee, personal representative or other fiduciary, last designated
in writing by a Participant in accordance with procedures established by the
Committee to receive the benefits specified hereunder in the event of the
Participant's death. No beneficiary designation shall become effective until it
is filed with the Committee. If there is no Beneficiary designation in effect,
or if there is no surviving designated Beneficiary, then the Participant's
surviving spouse shall be the Beneficiary. If there is no surviving spouse to
receive any benefits payable in
-1-
<PAGE>
accordance with the preceding sentence, the duly appointed and currently acting
personal representative of the participant's estate (which shall include either
the Participant's probate estate or living trust) shall be the Beneficiary. In
any case where there is no such personal representative of the Participant's
estate duly appointed and acting in that capacity within 90 days after the
Participant's death (or such extended period as the Committee determines is
reasonably necessary to allow such personal representative to be appointed, but
not to exceed 180 days after the Participant's death), then Beneficiary shall
mean the person or persons who can verify by affidavit or court order to the
satisfaction of the Committee that they are legally entitled to receive the
benefits specified hereunder. In the event any amount is payable under the Plan
to a minor, payment shall not be made to the minor, but instead be paid (a) to
that person's living parent(s) to act as custodian, (b) if that person's parents
are then divorced, and one parent is the sole custodial parent, to such
custodial parent, or (c) if no parent of that person is then living, to a
custodian selected by the Committee to hold the funds for the minor under the
Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which
the minor resides. If no parent is 1Mng to select another custodian to hold the
funds for the minor, the duly appointed and currently acting guardian of the
and the Committee decides not then payment shall be made to estate for the minor
or, if no guardian of the estate for the minor is duly appointed and currently
acting within 60 days after the date the amount becomes payable, payment shall
be deposited with the court having jurisdiction over the estate of the minor.
"Board of Directors" or "Board" shall mean the Board of Directors of the
Company.
"Bonus" shall mean any cash incentive compensation payable to a Participant
in addition to the Participant's Salary after reduction for any salary deferral
contributions to a plan qualified under Section 125 or Section 401(k) of the
Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Committee appointed by the Board to administer
the Plan in accordance with Article VII.
"Company" shall mean Varco International, Inc., any successor corporation
and each corporation which is a member of a controlled group of corporations
(within the meaning of Section 414(b) of the Code) of which Varco International,
Inc. is a component member.
2
<PAGE>
"Company Contribution Account" shall mean the bookkeeping account
maintained by the Committee for each Participant that is credited with an amount
equal to the Company Contribution Amount, if any, and earnings or losses
pursuant to Section 4.2.
"Company Contribution Amount" shall mean a discretionary amount determined
by the Board of Directors for each Participant for a Plan Year; such amount may
differ from Participant to Participant (both in dollar amount and as a
percentage of compensation). In no event shall the Company Contribution Amount
for a Plan Year for a Participant exceed the excess of (A) the amount of Company
contribution (excluding any matching contribution) that would be allocated to
the Participant under the Profit Sharing Plan for that Plan Year if no
restriction under Sections 401(a)(4), 415 or 401(a)(17) of the Code applied,
over (B) the actual amount of Company contribution allocated to the Participant
under the Profit Sharing Plan for the Plan Year. By way of example, assume a
Participant earned $200,000 in 1995 and the Company contributes 6% of
compensation to the Profit Sharing Plan. Because Code Section 401(a)(17) limits
the Participant's compensation to $150,000, the Participant will receive a
$9,000 allocation under the Profit Sharing Plan. The maximum Company
Contribution Amount shall equal $3,000, which is the excess of (A) $12,000
($200,000 x 6%) over (B) $9,000.
"Compensation" shall mean the Salary and Bonus that the Participant is
entitled to for services rendered to the Company.
"Deferral Account" shall mean the bookkeeping account maintained by the
Committee for each Participant that is credited with amounts equal to (1) the
portion of the Participant's Salary that he or she elects to defer, (2) the
portion of the Participant's Bonus that he or she elects to defer, and (3)
interest pursuant to Section 4.1.
"Effective Date" shall mean September 1, 1994.
"Eligible Employee" shall mean (i) the Chairman of the Board of Directors
(unless he or she is not an employee of the Company), (ii) the chief executive
officer of the Company, and (iii) company and divisional officers and other
highly compensated employees of the Company who are selected by the Committee
to participate in the Plan.
3
<PAGE>
"Fund" or "Funds" shall mean one or more of the mutual funds or contracts
selected by the Committee pursuant to Section 3.2(b).
"Initial Election Period" for an Eligible Employee shall mean the 30-day
period following the later of August 1, 1994 or the Eligible Employee's date of
hire which became qualified.
"Interest Rate" shall mean, for each Fund, an amount equal to the net rate
of gain or loss on the assets of such Fund during each month, reduced by one-
twelfth of one and one-half percentage points.
"Participant" shall mean any Eligible Employee who elects to defer
Compensation in accordance with Section 3.1.
"Payment Eligibility Date" shall mean the first day of the month following
the one-year anniversary of the date on which a Participant terminates
employment or dies.
"Plan" shall mean the Varco International, Inc. Executive Management
Savings Plan set forth herein, now in effect, or as amended from time to time.
"Plan Year" shall mean the 12 consecutive month period beginning on January
1, provided, however, that the first Plan Year shall be a short year beginning
on September 1, 1994 and ending on December 31, 1994.
"Profit Sharing Plan" shall mean the Varco International, Inc. Profit
Sharing Retirement Plan.
"Salary" shall mean the Participant's base salary after reduction for any
salary deferral contributions to a plan qualified under Section 125 or Section
401(k) of the Code.
"Tax Adjustment Factor" shall mean a number, determined by the Committee,
which is equal to one minus the sum of (1) the highest marginal federal personal
income tax rate then in effect and (2) the effective highest marginal state
income tax rate in the state in which the Participant resides, net after the
effect of the deduction for such state income tax for federal income tax
purposes.
4
<PAGE>
ARTICLE II
PARTICIPATION
2.1 - Participation.
--------------
An Eligible Employee shall become a Participant in the Plan by electing to
defer all or a portion of his or her Compensation in accordance with Section
3.1.
5
<PAGE>
ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation.
--------------------------------
(a) Initial ElectiOn Period. Each Eligible Employee may elect to defer
------------------------
Compensation by filing with the Committee an election that conforms to the
requirements of this Section 3.1, on a form provided by the Committee, no later
than the last day of his or her Initial Election Period.
(b) General Rule. The amount of Compensation which an Eligible Employee may
-------------
elect to defer is as follows:
(1) Any percentage of Salary up to 50%; and/or
(2) Any percentage or dollar amount of Bonus up to 100%;
provided, however, that no election shall be effective to reduce the
Compensation paid to an Eligible Employee for a calendar year to an amount which
is less than the Social Security Wage Base for such calendar year.
(c) Minimum Deferrals. For each year during which an Eligible Employee is a
------------------
Participant, the minimum amount that may be elected under Section 3.1(b) is
$5,000.
(d) Effect of Initial Election. An election to defer Compensation during an
---------------------------
Initial Election Period shall be effective with respect to Salary earned during
the first pay period beginning after the Initial Election Period and to the
Bonus paid with respect to services performed in the Plan Year following the
Plan Year in which the election is made; provided that an election filed before
September 1, 1994 need not apply to any Bonus paid for services performed in
1995 (such election may be made by December 31, 1994 pursuant to Sections 3.1(f)
and (g)).
(e) Duration of Salary Deferral Election. Any Salary deferral election made
-------------------------------------
under paragraph (a) or paragraph (g) of this Section 3.1 shall remain in effect,
notwithstanding any change in the Participant's Salary, until changed or
terminated in accordance with the terms of this paragraph (e); provided,
however, that such election shall terminate for any Plan Year
6
<PAGE>
for which the Participant is not an Eligible Employee. Subject to the minimum
deferral requirement of Section 3.1(c) and the limitations of Section 3.1(b), a
Participant may increase, decrease or terminate his or her Salary deferral
election, effective for Salary earned during pay periods beginning after any
January 1, by filing a new election, in accordance with the terms of this
Section 3.1, with the Committee on or before the preceding December 1.
(f) Duration of Bonus Deferral Election. Any Bonus deferral election made
------------------------------------
under paragraph (a) or paragraph (g) of this Section 3.1 shall be irrevocable
and shall apply only to the Bonus payable with respect to services performed
during the Plan Year for which the election is made. For each subsequent Plan
Year, an Eligible Employee may make a new election, subject to the limitations
set forth in this Section 3.1, to defer a percentage of his or her Bonus. Such
election shall be on forms provided by the Committee and shall be made on or
before the December 1 preceding the Plan Year for which the election is to
apply. Notwithstanding anything in paragraphs (a), (d), (g) or this paragraph
(f) of this Section 3.1 to the contrary, for the first Plan Year only, an
Eligible Employee may elect, no later than August 31, 1994, to defer any Bonus
which is subsequently declared and paid for the Company's fiscal year ending on
December 31, 1994.
(g) Elections other than Elections during the Initial Election Period.
------------------------------------------------------------------
Subject to the limitations of paragraph (c) above, any Eligible Employee who
fails to elect to defer compensation during his or her Initial Election Period
may subsequently become a Participant, and any Eligible Employee who has
terminated a prior Salary deferral election may elect to again defer Salary, by
filing an election, on a form provided by the Committee, to defer Compensation
as described in paragraph (b) above. An election to defer Salary and/or Bonus
must be filed on or before December 1 and will be effective for Salary earned
during pay periods beginning after the following January 1 and the Bonus paid
with respect to services performed in the Plan Year beginning on the following
January 1.
3.2 - INVESTMENT ELECTIONS.
---------------------
(a) At the time of making the deferral elections described in Section 3.1,
the Participant shall designate, on a form provided by the Committee, which of
the following types of mutual funds or contracts the Participant's Account will
be deemed to be invested in for purposes of determining the amount of earnings
to be credited to that Account:
7
<PAGE>
1) MONEY MARKET FUND
2) REAL ESTATE FUND
3) BALANCED ASSETS FUND
4) CAPITAL GROWTH FUND
5) EMERGING GROWTH EQUITY FUND
6) COMMON STOCK FUND
In making the designation pursuant to this Section 3.2, the Participant may
specify that all or any 10% multiple of his Deferral Account be deemed to be
invested in one or more of the types of mutual funds or contracts listed above.
Effective as of the end of any calendar quarter, a Participant may change the
designation made under this Section 3.2 by filing an election, on a form
provided by the Committee, at least 30 days prior to the end of such quarter. If
a Participant fails to elect a type of fund under this Section 3.2, he or she
shall be deemed to have elected the Money Market Fund.
(b) Although the Participant may designate the type of mutual funds or
----
contracts in paragraph (a) above, the Committee shall select from time to time,
in its sole discretion, a commercially available fund or contract of each of the
types described in paragraph (a) above to be the Funds. The Interest Rate of
each such commercially available fund or contract shall be used to determine the
amount of earnings to be credited to Participants' Accounts under Article IV.
8
<PAGE>
ARTICLE IV
ACCOUNTS
4.1 - DEFERRAL ACCOUNT.
-----------------
The Committee shall establish and maintain a Deferral Account for each
Participant under the Plan. Each Participant's Deferral Account shall be further
divided into separate subaccounts ("mutual fund subaccounts"), each of which
corresponds to a mutual fund or contract elected by the Participant pursuant to
Section 3.2(a). A Participant's Deferral Account shall be credited as follows:
(a) As of the last day of each month, the Committee shall credit the mutual
fund subaccounts of the Participant's Deferral Account with an amount equal to
Salary deferred by the Participant during each pay period ending in that month
in accordance with the Participant's election under Section 3.2(a); that is, the
portion of the Participant's deferred Salary that the Participant has elected to
be deemed to be invested in a certain type of mutual fund shall be credited to
the mutual fund subaccount corresponding to that mutual fund;
(b) As of the last day of the month in which the Bonus or partial Bonus
would have been paid, the Committee shall credit the mutual fund subaccounts of
the Participant's Deferral Account with an amount equal to the portion of the
Bonus deferred by the Participant's election under Section 3.2(a); that is, the
portion of the Participant's deferred Bonus that the Participant has elected to
be deemed to be invested in a particular type of mutual fund shall be credited
to the mutual fund subaccount corresponding to that mutual fund; and
(c) As of the last day of each month, each mutual fund subaccount of a
Participant's Deferral Account shall be credited with earnings in an amount
equal to that determined by multiplying the balance credited to such mutual fund
subaccount as of the last day of the preceding month by the Interest Rate for
the corresponding Fund selected by the Company pursuant to Section 3.2(b).
9
<PAGE>
4.2 - COMPANY CONTRIBUTION ACCOUNT.
-----------------------------
The Committee shall establish and maintain a Company Contribution
Account for each Participant under the Plan. Each Participant's Company
Contribution Account shall be further divided into separate mutual fund
subaccounts corresponding to the mutual fund or contract elected by the
Participant pursuant to Section 3.2(a). A Participant's Company Contribution
Account shall be credited as follows:
(a) As of the last day of each Plan Year, the Committee shall credit the
mutual fund subaccounts of the Participant's Company Contribution Account with
an amount equal to the Company Contribution Amount, if any, applicable to that
Participant; that is, the portion of the Company Contribution Amount, if any,
which the Participant elected to be deemed to be invested in a certain type of
mutual fund shah be credited to the corresponding mutual fund subaccount; and
(b) As of the last day of each month, each mutual fund subaccount of a
Participant's Company Contribution Account shall be credited with earnings or
losses in an amount equal to that determined by multiplying the balance credited
to such mutual fund subaccount as of the last day of the preceding month by the
Interest Rate for the corresponding Fund selected by the Company pursuant to
Section 3.2(b).
10
<PAGE>
ARTICLE V
VESTING
5.1 - DEFERRAL ACCOUNT.
-----------------
A Participant's Deferral Account shall be 100% vested at all times.
5.2 - COMPANY CONTRIBUTION ACCOUNT.
-----------------------------
(a) A Participant's Company Contribution Account shall vest and become
nonforfeitable at the rate of 10% for each year of vesting service earned by the
Participant under the Profit Sharing Plan (including vesting service earned
prior to 1990). In addition, the Committee may, at its sole discretion, provide
for 100% vesting of one or more Participants at any time.
11
<PAGE>
ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution Of Deferred Compensation.
--------------------------------------
(a) The amount credited to a Participant's Deferral Account and the vested
portion of the amount credited to his or her Company Contribution Account shall
be paid to the Participant (or, in the case of his or her death, Beneficiary) in
the form of a cash lump sum payment on his or her Payment Eligibility Date.
Notwithstanding the foregoing, a Participant may elect one of the following
optional forms of distribution provided that his or her election is filed with
the Committee at least two years prior to his or her Payment Eligibility Date
or, if later, August 31, 1994:
(1) Substantially equal annual installments over a period of five,
ten, or fifteen years beginning on the later of (A) the first day of the
second month following the Participant's termination of employment,
retirement or death or (B) a later date designated by the Participant in
his or her election.
(2) A lump sum payment on the later of (A) the Participant's Payment
Eligibility Date or (B) a later date designated by the Participant in his
or her election,
(3) Substantially equal annual installments over five, ten, or fifteen
years beginning on the first day of the second month following the
Participant's termination of employment, retirement or death, and
(b) The Participant's Accounts shall continue to be credited monthly with
earnings pursuant to Section 4.1 of the Plan until all amounts credited to his
or her Accounts under the Plan have been distributed.
6.2 - Forfeitures.
------------
When a Participant (or, in the case of his or her death, the Participant's
Beneficiary) receives a distribution of benefits under this Plan, the portion of
his or her Company Contribution Account which is not vested shall be forfeited,
and the Company shall have no obligation to the Participant (or Beneficiary)
with respect to such forfeited amount.
12
<PAGE>
6.3 - Inability- to Locate Participant.
---------------------------------
In the event that the Committee is unable to locate a Participant or
Beneficiary within two years following the Participant's Payment Eligibility
Date, the amount allocated to the Participant's Deferral Account and Company
Contribution Account shall be forfeited. If, after such forfeiture, the
Participant or Beneficiary later claims such benefit, such benefit shall be
reinstated without interest or earnings, provided that Section 6.2 shall still
apply.
6.4 - Payment by Trust.
-----------------
The Company may cause the payment of benefits under this Plan to be made in
whole or in part by the Trustee of the Varco International, Inc. Supplemental
Executive Retirement Plan Rabbi Trust (the "Trust") in accordance with the
provisions of this Section 6.4. If the benefits are to be so paid from the
Trust, upon a Participant's termination of employment, the Company may
contribute to the Trust an amount equal to the balance then credited to the
Participant's Accounts, after reduction for any offset required pursuant to
Section 10.1 of the Plan, which amount shall be credited to the Participant
under the Trust. The Committee shall direct the Trustee to pay the Participant's
benefit at the time and in the amount described in Section 6.1 to the extent of
the amounts allocated to Participant. In the event the amounts allocated to the
Participant are not sufficient to provide the full amount of benefit payable to
the Participant, the Company shall pay for the remainder of such benefit at the
time set forth in Section 6.1.
13
<PAGE>
ARTICLE VII
ADMINISTRATION
7.1 - COMMITTEE.
----------
A committee shall be appointed by, and serve at the pleasure of, the
Board of Directors. The number of members comprising the Committee shall be
determined by the Board which may from time to time vary the number of members.
A member of the Committee may resign by delivering a written notice of
resignation to the Board. The Board may remove any member by delivering a
certified copy of its resolution of removal to such member. Vacancies in the
membership of the Committee shall be filled promptly by the Board.
7.2 - COMMITTEE ACTION.
-----------------
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. The Chairman or any other member or members of the
Committee designated by the Chairman may execute any certificate or other
written direction on behalf of the Committee.
7.3 - POWERS AND DUTIES OF THE COMMITTEE.
-----------------------------------
(a) The Committee, on behalf of the Participants and their Beneficiaries,
shall enforce the Plan in accordance with its terms, shall be charged with the
general administration of the Plan, and shall have all powers necessary to
accomplish its purposes, including, but not by way of limitation, the following:
(1) To select the funds or contracts to be the Funds in accordance with
Section 3.2(b) hereof;
(2) To construe and interpret the terms and provisions of this Plan;
14
<PAGE>
(3) To compute and certify to the amount and kind of benefits payable
to Participants and their Beneficiaries;
(4) To maintain all records that may be necessary for the
administration of the Plan;
(5) To provide for the disclosure of all information and the filing or
provision of all reports and statements to Participants,
Beneficiaries or governmental agencies as shall be required by law;
(6) To make and publish such rules for the regulation of the Plan and
procedures for the administration of the Plan as are not
inconsistent with the terms hereof; and
(7) To appoint a plan administrator or any other agent, and to delegate
to them such powers and duties in connection with the
administration of the Plan as the Committee may from time to time
prescribe.
7.4 - Construction and Interpretation.
--------------------------------
The Committee shall have full discretion to construe and interpret the
terms and provisions of this Plan, which interpretation or construction shall be
final and binding on all parties, including but not limited to the Company and
any Participant or Beneficiary. The Committee shall administer such terms and
provisions in a uniform and nondiscriminatory manner and in full accordance with
any and all laws applicable to the Plan.
7.5 - Information.
------------
To enable the Committee to perform its functions, the Company shall supply
full and timely information to the Committee on all matters relating to the
Compensation of all Participants, their death or other cause of termination, and
such other pertinent facts as the Committee may require.
7.6 - Compensation, Expenses and Indemnity.
-------------------------------------
(a) The members of the Committee shall serve without compensation for their
services hereunder.
(b) The Committee is authorized at the expense of the Company to employ
such legal counsel as it may deem advisable to assist in the performance of its
duties hereunder.
15
<PAGE>
Expenses and fees in connection with the administration of the Plan shall be
paid by the Company.
(c) To the extent permitted by applicable state law, the Company shall
indemnify and save harmless the Committee and each member thereof, the Board of
Directors and any delegate of the Committee who is an employee of the Company
against any and all expenses, liabilities and claims, including legal fees to
defend against such liabilities and claims arising out of their discharge in
good faith of responsibilities under or incident to the Plan, other than
expenses and liabilities arising out of willful misconduct. This indemnity shall
not preclude such further indemnities as may be available under insurance
purchased by the Company or provided by the Company under any bylaw, agreement
or otherwise, as such indemnities are permitted under state law.
7.7 - QUARTERLY STATEMENTS.
---------------------
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Accounts on a quarterly basis as
of each March 31, June 30, September 30 and December 31.
16
<PAGE>
ARTICLE XIII
MISCELLANEOUS
8.1 - UNSECURED GENERAL CREDITOR.
---------------------------
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interest in any specific property
or assets of the Company. No assets of the Company shall be held under any
trust, or held in any way as collateral security for the fulfilling of the
obligations of the Company under this Plan. Any and all of the Company's assets
shall be, and remain, the general unpledged, unrestricted assets of the Company.
The Company's obligation under the Plan shall be merely that of an unfunded and
unsecured promise of the Company to pay money in the future, and the rights of
the Participants and Beneficiaries shall be no greater than those of unsecured
general creditors.
8.2 - RESTRICTION AGAINST ASSIGNMENT.
-------------------------------
The Company shall pay all amounts payable hereunder only to the person or
persons designated by the Plan and not to any other person or corporation. No
part of a Participant's Accounts shall be liable for the debts, contracts, or
engagements of any Participant, his or her Beneficiary, or successors in
interest, nor shall a Participant's Accounts be subject to execution by levy,
attachment, or garnishment or by any other legal or equitable proceeding, nor
shall any such person have any right to alienate, anticipate, commute, pledge,
encumber, or assign any benefits or payments hereunder in any manner whatsoever.
If any Participant, Beneficiary or successor in interest is adjudicated bankrupt
or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge any distribution or payment from the Plan, voluntarily or involuntarily,
the Committee, in its discretion, may cancel such distribution or payment (or
any part thereof) to or for the benefit of such Participant, Beneficiary or
successor in interest in such manner as the Committee shall direct.
8.3 - WITHHOLDING.
------------
There shall be deducted from each payment made under the Plan or any other
compensation payable to the Participant (or Beneficiary) all taxes which are
required to be withheld by the Company in respect to such payment or this Plan.
The Company shall have the right to reduce any payment (or compensation) by the
amount of cash sufficient to provide the amount of said taxes.
17
<PAGE>
8.4 - Amendment, Modification, Suspension Or Termination.
---------------------------------------------------
The Company may amend, modify, suspend or terminate the Plan in whole or in
part, except that no amendment, modification, suspension or termination shall
have any retroactive effect to reduce any amounts allocated to a Participant's
Accounts. In the event that this Plan is terminated, the amounts credited to a
Participant's Accounts (regardless of whether such amounts had become vested)
shall be distributed to the Participant or, in the event of his or her death,
his or her Beneficiary in a lump sum within thirty (30) days following the date
of termination.
8.5 - Governing Law.
--------------
This Plan shall be construed, governed and administered in accordance with
the laws of the State of California.
8.6 - Receipt or Release.
-------------------
Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Company. The Committee
may require such Participant or Beneficiary, as a condition precedent to such
payment, to execute a receipt and release to such effect.
8.7 - Payments on Behalf of Persons Under Incapacity.
-----------------------------------------------
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgement of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefore, the
Committee may direct that such payment be made to any person found by the
Committee, in its sole judgement, to have assumed the care of such person. Any
payment made pursuant to such determination shall constitute a full release and
discharge of the Committee and the Company.
18
<PAGE>
8.8 - Headings, Etc. not Part of Agreement.
-------------------------------------
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
19
<PAGE>
ARTICLE IX
BENEFIT OFFSET
9.1 - Offset for Certain Benefits Payable under Split-Dollar Life Insurance
---------------------------------------------------------------------
Policies.
---------
(a) Notwithstanding anything contained herein to the contrary, any benefits
payable under this Plan shall be offset by the value of benefits received by the
Participants under certain life insurance policies as set forth in this Section.
Participants in this Plan may own life insurance policies (the "Policies")
purchased on their behalf by the Company. The exercise of ownership rights under
such a Policy by a Participant is, however, subject to certain conditions (set
forth in a "Split-Dollar Life Insurance Agreement" between the Participant and
the Company, pursuant to which the Company holds a security interest on the
Policy) and, if the Participant fails to meet the conditions set forth in the
Split-Dollar Life Insurance Agreement, the Company may exercise its security
interest in the Policy and cause the Participant to lose certain benefits under
the Policy. In the event that a Participant satisfies the conditions specified
in Section 4 or 5 of the Split-Dollar Life Insurance Agreement, so that the
Participant or his or her beneficiary under the Policy becomes entitled to
exercise rights free from the Company's security interest under one of those
sections, or the Company's security interest in the Policy is otherwise
released, the value of those benefits shall constitute an offset to any benefits
otherwise payable under this Plan which accrued in years for which premiums were
paid on the Policy. As the case may be, this offset (the "Offset Value") shall
be equal to the value of benefits payable under the Split-Dollar Life Insurance
Agreement, that is, the cash surrender value of the Policy or, in the case of
Participant's death, the death benefit payable to the beneficiary under the
Policy. The Offset Value shall then be compared to the Participant's Account,
and the amounts credited to the Account shall be reduced, but not to less than
zero, by the Offset Value; provided, however, that any portion of the Account
which is attributable to Compensation deferred during Plan Years in which the
Company did not pay premiums on the Policy shall not be reduced by the Offset
Value, and the Committee shall maintain subaccounts of a Participant's Account
to the extent necessary to determine that portion of the Account which is
subject to offset and the portion which is not subject to offset.
(b) If the Policy in subsection (a) is not on the life of the Participant
and the insured dies prior to distribution of benefits under this Plan, then the
value of the benefits received by the participant under the Policy will offset
the Participant's Account under this Plan to the extent provided in this
subsection (b). This offset ("Offset Value") shall be equal
20
<PAGE>
to the amount of death benefit payable to the Participant divided by the Tax
Adjustment Factor. This Offset Value shall then be compared to the Participant's
Account, and the amounts credited to the Account shall be reduced, but not to be
less than zero, by the Offset Value; provided, however, that any portion of the
Account which is attributable to Compensation deferred during Plan Years in
which the Company did not pay premiums on the Policy shall not be reduced by the
Offset Value.
(c) The reduction described in Section 9.1(a) or 9.1(b) shall be made as of
the date on which the Participant or his or her beneficiary becomes entitled to
exercise rights under the Policy free of the Company's security interest.
(d) Any election to receive distribution of the amount credited to a
Participant's Account in the form of installments shall be deemed to be revoked,
and any benefits which are or become payable under this Plan after such offset
shall be paid in a lump sum on the later of the Participant's Payment
Eligibility Date or the later date designated by the Participant in any election
made in accordance with Section 6.1(a) of the Plan.
IN WITNESS WHEREOF, the Company has caused this document to be executed by
its duly authorized officer on this________day of_________,1994.
VARCO INTERNATIONAL, INC.
By:__________________
By:___________________
21
<PAGE>
[For Employees]
SPLIT-DOLLAR LIFE INSURANCE AGREEMENT
-------------------------------------
This Agreement is entered into as of_______, 19__ by and between Varco
International, Inc. (the "Company") and______________ ("Employee") in reference
to the following facts:
1. Employee is a valued employee of__________________________.
2. The Company has simultaneously with the execution of this Agreement
caused the Manufacturers Life Insurance Company of America (the "Insurance
Company") to issue policy number___________________(the "Policy") on the life of
Employee and delivered the Policy to Employee. The first annual premium has been
paid by the Company as of the date of this Agreement.
3. For purposes of this Agreement, the Company and its subsidiaries
shall constitute the "Employer." For this purpose, a subsidiary is a corporation
which is a member of a controlled group of corporations (within the meaning of
Section 414(b) of the Internal Revenue Code of 1986, as amended (the "Code")) of
which the Company is a member. If Employee is employed by a corporation which,
as a result of a sale or other corporate reorganization, ceases to be a member
of such controlled group, such sale or other corporate reorganization shall be
treated as a termination of Employee by Employer without Cause (as defined in
Section 8) unless immediately following the event and without any break in
employment the Employee remains employed by the Company or another corporation
which is a member of the controlled group of corporations.
NOW THEREFORE, in consideration of the facts set forth above and the
various promises and covenants set forth below, the parties to this Agreement
agree as follows:
1. Ownership of Policy.
--------------------
The Company acknowledges that Employee is the owner of the Policy and that
Employee is entitled to exercise all of his or her ownership rights granted by
the terms of the Policy, except to the extent that the power of the Employee to
exercise those rights is specifically limited by this Agreement. Except as so
limited, it is the expressed intention of the parties to reserve to Employee all
rights in and to the Policy granted to its owner by the terms thereof,
including, but not limited to, the right to change the beneficiary and the right
to exercise settlement options.
<PAGE>
2. The Company's Security Interest.
---------------------------------
The Company's security interest in the Policy is conditioned upon its
satisfactorily performing all of the covenants under this Agreement. Each period
covered by any individual premium payment described in Section 3 shall be
considered a discrete extension of the Company's security interest in the
Policy. The Company shall not have nor exercise any right in and to the Policy
which could, in any way, endanger, defeat, or impair any of the rights of
Employee in the Policy, including by way of illustration any fight to collect
the proceeds of the Policy in excess of the amount due the Company as provided
in this Agreement and in the Policy. The only rights in and to the Policy
granted to the Company in this Agreement shall be limited to the Company's
security interest in and to the cash value of the Policy, as defined herein (the
"Security Interest"). The Company shall not assign any of its Security Interest
in the Policy to anyone other than Employee.
3. Premium payments.
-----------------
Until Employee files a notice with the Company pursuant to Section 10
electing a Security Release Date (as defined in Section 10 below) or Employee's
employment with the Company is terminated for any reason, the Company agrees to
pay an annual premium on the Policy on or before the last day of each "policy
year" (as such term is used in the Policy) in an amount equal to the sum of (a)
the compensation deferred by Employee under Varco International, Inc. Executive
Management Savings Plan (the "Plan") during the pay periods ending during such
policy year plus (b) the "cost of insurance" (as defined in the Policy) for the
excess, if any, of (i) the minimum death benefit required under Section 4 hereof
(determined in compliance with the 7-pay test set forth in Section 7702A of the
Code) over (ii) the minimum death benefit (determined in compliance with such 7-
pay test) which could be provided by that portion of the accumulated premiums
actually paid under the Policy which were paid pursuant to clause (a) of this
sentence. The premium payment shall be transmitted directly by the Company to
the Insurance Company. Consistent with the preceding sentences, prior to the
release of the Company's Security Interest in the Policy, Employee and the
Company agree that the Company shall from time to time designate one or more
individuals (the "Designee"), who may be officers of the Company, who shall be
entitled to adjust the death benefit under the Policy and to direct the
investments under the Policy; provided, however, that the Designee may only
increase, but not decrease, the death benefit in effect on the date that the
Policy is issued; provided further, that the Designee may only direct the
investments under the Policies in funds offered by the Insurance Company under
the Policy. During the period of time that this Agreement is in effect, Employee
irrevocably agrees that all dividends paid on the Policy shall be applied to
purchase from the Insurance Company additional paid-up life insurance on the
life of Employee.
4. Death of Employee while employed by Employer.
---------------------------------------------
(a) If Employee dies prior to termination of employment with Employer and
prior to his or her Security Release Date (as defined in Section 10 below),
Employee's designated beneficiary shall be entitled to receive the entire death
benefit under the Policy, which shall
2
<PAGE>
be at least equal to the greater of (1) 50% of Employee's annual base salary at
the time of death, up to a maximum of $100,000 (adjusted as described herein),
or (2) the following multiple of the amount credited to Employee's Accounts
under the Plan depending on the Employee's insurance age at death: (A) if under
56, 2.0 or (B) if 56 or older, 1.75. The $100,000 death benefit described in the
preceding sentence shall be adjusted annually for changes in the cost of living
commencing on January 1, 1995 on the basis of the relationship between the U.S.
Consumer Price Index for Urban Wage Earners and Clerical Workers, as published
by the U.S. Department of Labor (or, if there is no such index, then a
comparable substitute selected by the Committee) for the preceding calendar year
and the same index for the calendar year 1993.
(b) Employee agrees that, during the period of this Agreement, Employee
will obtain and provide to the Company and/or the Insurance Company the written
consent of the spouse of the Employee, in the form attached hereto as Exhibit B,
to any designation by Employee of anyone other than the Employee's spouse as the
beneficiary to receive the benefits under this Section 4.
5. Employee's attaining his Or her Security Release Date or termination of
------------------------------------------------------------------------
Employee's employment on account of a Qualifying Termination.
-------------------------------------------------------------
(a) By making timely payment of the premiums described in Section 3, the
Company may renew its Security Interest in the Policy for the period commencing
with the due date of such payment until the later of (1) the due date of the
next annual premium described in Section 3, or (2) the date that Employee
attains his or her Security Release Date or terminates employment with the
Employer on account of a Qualifying Termination (either of which events
described in this clause 2 is referred to herein as a "Qualifying Event"). The
Company may not extend its Security Interest in the Policy under the Collateral
Security Assignment Agreement attached as Exhibit A after the occurrence of a
Qualifying Event. After such Qualifying Event, Employee shall be entitled to
exercise all of his or her ownership rights in the Policy without any
limitation, and this Agreement and its accompanying Collateral Security
Assignment Agreement shall no longer constitute a restriction on Employee's
rights.
(b) Notwithstanding paragraph (a), the Company shall continue to have its
Security Interest in the Policy to the extent required to satisfy its
withholding obligations as described in Section 12.
6. Termination of an Employee for a reason other than a Qualifying
---------------------------------------------------------------
Termination.
------------
If the employment of Employee with Employer is terminated prior to his or
her Security Release Date for a reason other than a Qualifying Termination (as
described below), Employee shall cause, either by withdrawing from or borrowing
against the Policy, on a non-recourse basis, to be transferred to the Company an
amount equal to the maximum amount that may then be obtained under the Policy.
In the event that the amount that can be withdrawn from or borrowed against the
Policy is less than the cash surrender value of the
3
<PAGE>
Policy, the Company shall withhold from other compensation payable to Employee
the amount of such difference unless Employee has previously transferred to the
Company an amount equal to such difference. In no event shall Employee's
voluntary resignation prior to attaining his or her Security Release Date (as
such concept is further defined below) ever constitute a Qualifying Termination,
except in certain situations following a Change in Control (see Section 9).
7. Definition of a Qualifying Termination.
---------------------------------------
A Qualifying Termination is either of the following events: the termination
of Employee by Employer for any reason other than "Cause," as described in
Section 8; or the termination of Employee after a Change in Control under the
circumstances described in Section 9(a). Both of these concepts are further
defined below.
8. Qualifying Termination because Employee is terminated for a reason other
-------------------------------------------------------------------------
than "Cause".
-------------
For purposes of this Section, "Cause" shall mean (1) Employee's failure to
render services to the Employer where such failure amounts to gross neglect or
misperformance of Employee's responsibilities and duties; (2) Employee's
commission of an act of fraud or dishonesty against the Employer; or (3)
Employee's conviction of a felony or other crime involving moral turpitude.
9. Qualifying Termination on account of termination after a Change in Control.
---------------------------------------------------------------------------
(a) A Qualifying Termination shall be treated as occurring after a "Change
in Control" (as defined below) if there is first a "Change in Control" and then,
within three years following such Change in Control, either (1) Employee's
employment with the Employer is terminated without "Cause" (as defined in
Section 8) or (2) Employee terminates his or her employment with the Employer
for "Good Reason" (as defined in subsection (c) below).
(b) For purposes of this Section, a "Change in Control" shall mean the
occurrence of any of the following:
(1) Any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934 but excluding any benefit
plan for employees of the Company or its subsidiaries or any
trustee, agent, or other fiduciary for any such plan acting in
such person's capacity as such fiduciary), directly or indirectly,
becomes the beneficial owner of securities of the Company
representing 20% or more of the combined voting power of the
Company's then outstanding securities;
(2) During any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the
Company cease for any reason to constitute at least a majority
thereof
4
<PAGE>
unless the election, or the nomination for election by the
Company's shareholders, of each new director it was approved by a
vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period; or
(3) The shareholders of the Company approve (A) any consolidation or
merger of the Company in which the Company is not the continuing
or surviving corporation or pursuant to which shares of the
Company's common stock are converted into cash, securities or
other property, other than a merger of the Company in which the
holders of the Company's common stock immediately prior to the
merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (B) any
sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of
the assets of the Company, or (C) any plan or proposal for the
liquidation or dissolution of the Company.
(c) For purposes of this Section, "Good Reason" shall mean the occurrence
of one of the following events without Employee's consent:
(1) An adverse and significant change in the Employee's position,
duties, responsibilities, or status with the Employer, or a change
in business location to a point which is more than 50 miles from
his or her location prior to the Change in Control, except for
required travel on Employer business to an extent substantially
consistent with his or her business travel obligations prior to
the Change in Control;
(2) A reduction by the Employer in Employee's base salary; and
(3) The taking of any action by the Employer to eliminate benefit
plans without providing substitutes therefor, to reduce benefits
thereunder or to substantially diminish the aggregate value of
incentive awards or other fringe benefits including insurance and
vacation days.
(d) A termination of employment by Employee within the 36-month period
following a Change in Control shall be for Good Reason if one of the occurrences
specified in paragraph (c) shall have occurred, notwithstanding that Employee
may have other reasons for terminating employment, including employment by
another employer which Employee desires to accept.
10. Employee's attaining his or her Security Release Date.
------------------------------------------------------
(a) Employee's "Security Release Date" shall mean the date which is two
years following the date on which the Company receives from Employee a completed
notice in the
5
<PAGE>
form attached hereto as Exhibit C, provided that Employee continues to be
employed by Employer until such date. Employee's election of a Security Release
Date shall be irrevocable.
(b) Employee shall attain his or her Security Release Date upon becoming
disabled while employed by the Employer. Employee shall be considered "disabled"
at the time that the Administrator (as defined in Section 13(a) below)
determines, based upon competent medical advice, that an Employee is incapable
of rendering substantial services to the Employer by reason of mental or
physical disability.
(c) The Company's Security Interest in the Policy is contingent upon the
timely payment of the premiums required under Section 3 of this Agreement. Each
period covered by any individual premium payment shall be considered an
independent extension of the Company's Security Interest in the Policy. In the
event that the Company waives its rights by reason of failure to make payments
under Section 3 of this Agreement, Employee shall immediately attain his or her
Security Release Date (provided, however, that the cessation of the Company's
obligation to pay premiums upon Employer's filing of an election of a Security
Release Date shall not result in Employee immediately attaining his or her
Security Release Date). The Company's failure to extend its rights in no way
affects the Company's duties and obligations under this Agreement.
11. Limitation on Employee's rights prior to a Qualifying Event.
------------------------------------------------------------
In order to protect the Company's Security Interest and notwithstanding any
other provisions in this Agreement, prior to a Qualifying Event, Employee agrees
that he or she will not modify the death benefit under the Policy, direct the
investment of the cash surrender value of the Policy, borrow against the Policy,
assign the Policy, or obtain any portion of the cash value of the Policy.
Notwithstanding the preceding sentence, if Section 6 applies to a termination,
Employee may borrow or withdraw from the Policy, so long as the borrowing or
withdrawal request is submitted to the Insurance Company along with a directive
that the borrowed or withdrawn amount be transferred directly to the Company.
Prior to the release of the Company's Security Interest in the Policy, Employee
and the Company agree that the Company shall from time to time appoint one or
more individuals (the "Designee"), who may be officers of the Company, who shah
be entitled to direct the investments under the Policy; provided, however, that,
the Designee may only direct the investments under the Policy in funds offered
by the Insurance Company under the Policy.
12. Tax Withholding.
----------------
It is recognized by the parties that the rights of Employee in the Policy
(as modified by the Agreement) may cause Employee to be treated under certain
circumstances as in receipt of gross income. These circumstances may also impose
upon the Company an obligation to deduct and withhold federal, state or local
taxes. Unless Employee otherwise provides the Company the amounts it is required
to withhold, Employee shall cause, either by withdrawing from or borrowing on a
nonrecourse basis against the Policy, to be
6
<PAGE>
transferred to the Company that portion of the cash value of the Policy which is
equal to the amount of any federal, state or local taxes required to be
withheld.
13. Disputes.
---------
(a) The Varco International, Inc. Split-Dollar Life Insurance Committee
(the "Administrator") shall administer this Agreement. The Administrator (either
directly or through its designees) will have power and authority to interpret,
construe, and administer this Agreement (for the purpose of this section, the
Agreement shall include the Collateral Security Assignment Agreement); provided
that, the Administrator's authority to interpret this Agreement shall not cause
the Administrator's decisions in this regard to be entitled to a deferential
standard of review in the event that Employee or his or her beneficiary seeks
review of the Administrator's decision as described below.
(b) Neither the Administrator, its designee nor its advisors, shall be
liable to any person for any action taken or omitted in connection with the
interpretation and administration of this Agreement.
(c) Because it is agreed that time will be of the essence in determining
whether any payments are due to Employee or his or her beneficiary under this
Agreement, Employee or his or her beneficiary may, if he or she desires, submit
any claim for payment under this Agreement or dispute regarding the
interpretation of this Agreement to arbitration. This right to select
arbitration shall be solely that of Employee or his or her beneficiary and
Employee or his or her beneficiary may decide whether or not to arbitrate in his
or her discretion. The "right to select arbitration" is not mandatory on
Employee or his or her beneficiary and Employee or his or her beneficiary may
choose in lieu thereof to bring an action in an appropriate civil court. Once an
arbitration is commenced, however, it may not be discontinued without the mutual
consent of both parties to the arbitration. During the lifetime of the Employee
only he or she can use the arbitration procedure set forth in this section.
(d) Any claim for arbitration may be submitted as follows: if Employee or
his or her beneficiary disagrees with the Administrator regarding the
interpretation of this Agreement and the claim is finally denied by the
Administrator in whole or in part, such claim may be filed in writing with an
arbitrator of Employee's or beneficiary's choice who is selected by the method
described in the next four sentences. The first step of the selection shall
consist of Employee or his or her beneficiary submitting a list of five
potential arbitrators to the Administrator. Each of the five arbitrators must be
either (1) a member of the National Academy of Arbitrators located in the State
of California or (2) a retired California Superior Court or Appellate Court
judge. Within one week after receipt of the list, the Administrator shall select
one of the five arbitrators as the arbitrator for the dispute in question. If
the Administrator fails to select an arbitrator in a timely manner, Employee or
his or her beneficiary shall then designate one of the five arbitrators as the
arbitrator for the dispute in question.
7
<PAGE>
(e) The arbitration hearing shall be held within seven days (or as soon
thereafter as possible) after the picking of the arbitrator. No continuance of
said hearing shall be allowed without the mutual consent of Employee or his or
her beneficiary and the Administrator. Absence from or nonparticipation at the
hearing by either party shall not prevent the issuance of an award. Heating
procedures which will expedite the hearing may be ordered at the arbitrator's
discretion, and the arbitrator may close the hearing in his or her sole
discretion when he or she decides he or she has heard sufficient evidence to
satisfy issuance of an award.
(f) The arbitrator's award shall be rendered as expeditiously as possible
and in no event later than one week after the close of the hearing. In the event
the arbitrator finds that the Company has breached this Agreement, he or she
shall order the Company to immediately take the necessary steps to remedy the
breach. The award of the arbitrator shall be final and binding upon the parties.
The award may be enforced in any appropriate court as soon as possible after its
rendition. If an action is brought to confirm the award, both the Company and
Employee agree that no appeal shall be taken by either party from any decision
rendered in such action.
(g) Solely for purposes of determining the allocation of the costs
described in this subsection, the Administrator will be considered the
prevailing party in a dispute if the arbitrator determines (1) that the Company
has not breached this Agreement and (2) the claim by Employee or his or her
beneficiary was not made in good faith. Otherwise, Employee or his or her
beneficiary will be considered the prevailing party. In the event that the
Company is the prevailing party, the fee of the arbitrator and all necessary
expenses of the hearing (excluding any attorneys' fees incurred by the Company)
including stenographic reporter, if employed, shall be paid by the other party.
In the event that Employee or his or her beneficiary is the prevailing party,
the fee of the arbitrator and all necessary expenses of the hearing (including
----------
all attorneys' fees incurred by Employee or his or her beneficiary in pursuing
his or her claim), including the fees of a stenographic reporter if employed,
shall be paid by the Company.
14. Collateral Security Assignment of Policy to the Company.
--------------------------------------------------------
In consideration of the promises contained herein, the Employee has
contemporaneously herewith granted the Security Interest in the Policy to the
Company as collateral, under the form of Collateral Security Assignment attached
hereto as Exhibit A, which Collateral Security Assignment gives the Company the
limited power to enforce its rights to recover the cash value of the Policy
under the circumstances defined herein. The Company's Security Interest in the
Policy shall be specifically limited to the rights set forth above in this
Agreement, notwithstanding the provisions of any other documents including the
Policy. Employee agrees to execute any notice prepared by the Company requesting
a withdrawal or non-recourse loan in an amount equal to the amount to which the
Company is entitled under Sections 5, 6 or 12 of this Agreement.
8
<PAGE>
15. Employee's beneficiary rights and security interest.
----------------------------------------------------
(a) The Company and Employee intend that in no event shall the Company have
any power or interest related to the Policy or its proceeds, except as provided
herein and in the Collateral Security Assignment. In the event that the Company
ever receives or may be deemed to have received any right or interest in the
Policy or its proceeds beyond the limited rights described herein and in the
Collateral Security Assignment, such right or interest shall be held in trust
for the benefit of Employee and be held separate from the property of the
Company.
(b) In order to further protect the fights of the Employee, the Company
agrees that its rights to the Policy and proceeds thereof shall serve as
security for the Company's obligations as provided in this Agreement to
Employee. The Company grants to Employee a security interest in and collaterally
assigns to Employee any and all fights the Company has in the Policy, and
products and proceeds thereof whether now existing or hereafter arising pursuant
to the provisions of the Policy, this Agreement, the Collateral Security
Assignment or otherwise, to secure any and all obligations owed by the Company
to Employee under this Agreement. In no event shall this provision be
interpreted to reduce Employee's rights to the Policy or expand in any way the
rights or benefits of the Company under this Agreement, the Policy or the
Collateral Security Assignment. This security interest granted to Employee from
the Company shall automatically expire and be deemed waived if Employee
terminates employment with Employer prior to a Qualifying Event.
16. Amendment of Agreement.
-----------------------
Except as provided in a written instrument signed by the Company and
Employee, this Agreement may not be cancelled, amended, altered, or modified.
17. Notice under Agreement.
-----------------------
Any notice, consent, or demand required or permitted to be given under the
provisions of this Agreement by one party to another shall be in writing, signed
by the party giving or making it, and may be given either by delivering it to
such other party personally or by mailing it, by United States Certified mail,
postage prepaid, to such party, addressed to its last known address as shown on
the records of the Company. The date of such mailing shall be deemed the date of
such mailed notice, consent, or demand.
18. Binding Agreement.
------------------
This Agreement shall bind the parties hereto and their respective
successors, heirs, executor, administrators, and transferees, and any Policy
beneficiary.
19. Controlling law and characterization of Agreement.
--------------------------------------------------
9
<PAGE>
(a) To the extent not governed by federal law, this Agreement and the right
to the parties hereunder shall be controlled by the laws of the State of
California.
(b) If this Agreement is considered a "plan" under the Employee Retirement
Income Security Act of 1974 (ERISA), both the Company and Employee acknowledge
and agree that for all purposes the Agreement shall be treated as a "welfare
plan" within the meaning of Section 3(1) of ERISA, so that only those portions
of ERISA applicable to welfare plans shall apply to the Agreement and that any
rights that might arise under ERISA if this Agreement were treated as a "pension
plan" within the meaning of Section 3(2) of ERISA are hereby expressly waived.
Consistent with the preceding sentence, Employee further acknowledges that his
or her rights to the Policy and the release of the Company's Security Interest
are strictly limited to those rights set forth in this Agreement. In furtherance
of this acknowledgement and in consideration of the Company's payment of the
initial premiums for this Policy, Employee voluntarily and irrevocably
relinquishes and waives any additional rights in the Policy or any different
restrictions on the release of the Company's Security Interest that he or she
might otherwise argue to exist under either state, federal, or other law.
Employee further agrees that he or she will not argue that any such additional
rights or different restrictions exist in any judicial or arbitration
proceeding. Similarly, the Company acknowledges that its Security Interest is
strictly limited as set forth in this Agreement and voluntarily and irrevocably
relinquishes and waives any additional interests or different interests or
advantages that the Company would have or enjoy if the Agreement were not
treated as a "welfare plan" within the meaning of section 3(1) of ERISA.
20. Execution of Documents.
-----------------------
The Company and Employee agree to execute any and all documents necessary
to effectuate the terms of this Agreement.
VARCO INTERNATIONAL, INC.
By:________________________
Its:_______________________
EMPLOYEE
___________________________
10
<PAGE>
EXHIBIT A
COLLATERAL SECURITY ASSIGNMENT AGREEMENT
This Collateral Security Assignment is made and entered into effective as
of_______, 19__, by the undersigned as the owner (the "Owner") of Life Insurance
Policy Number______________(the "Policy") issued by the Manufacturers Life
Insurance Company of America, (the "Insurer") upon the life of Owner and by
Varco International, Inc., a California corporation (the "Assignee").
WHEREAS, the Owner is a valued employee of Assignee or a subsidiary of
Assignee, and the Assignee wishes to retain him or her in its or its
subsidiary's employ; and
WHEREAS, as an inducement to the Owner's continued employment, the Assignee
wishes to pay premiums on the Policy, as more specifically provided for in that
certain Split-Dollar Life Insurance Agreement dated as of____________, 19__, and
entered into between the Owner and the Assignee as such agreement may be
hereafter amended or modified (the "Agreement") (unless otherwise indicated the
terms herein shall have the definitions ascribed thereto in the Agreement);
WHEREAS, in consideration of the Assignee agreeing to make the premium
payments, the Owner agrees to grant the Assignee a security interest in the
Policy as collateral security; and
WHEREAS, the Owner and Assignee intend that the Assignee have no greater
interest in the Policy than that prescribed herein and in the Agreement and that
if the Assignee ever obtains any right or interest in the Policy or the proceeds
thereof, except as provided herein and in the Agreement, such right or interest
shall be held in trust for the Owner to satisfy the obligations of Assignee to
Owner under the Agreement and the Assignee additionally agrees that its rights
to the Policy shall serve as security for its obligations to the Owner under the
Agreement;
NOW, THEREFORE, the Owner hereby assigns, transfers and sets over to the
Assignee for security the following specific rights in the Policy, subject to
the following terms, agreements and conditions:
1. This Collateral Security Assignment is made, and the Policy is to be
held, as collateral security for all liabilities of the Owner to the Assignee
pursuant to the terms of the Agreement, whether now existing or hereafter
arising (the "Secured Obligations"). The Secured Obligations include: (i) the
obligation of the Owner to transfer an amount equal to the entire cash value in
the event that the Owner terminates employment with Employer for a reason other
than a Qualifying Termination and before attaining his or her Security Release
Date and (ii) the obligation of the Owner to pay an amount of cash to the
Assignee or transfer to the Assignee that portion of the cash value which is
equal to any federal, state
A-1
<PAGE>
or local taxes that Assignee may be required to withhold and collect (as set
forth in Section 12 of the Agreement).
2. The Owner hereby grants to Assignee a security interest in and
collaterally assigns to Assignee the Policy and the cash value to secure the
Secured Obligations. However, the Assignee's interest in the Policy shall be
strictly limited to:
(a) The right to receive an amount equal to the entire cash value of the
Policy (which fight may be realized by Owner's causing such amount to be
transferred to Assignee (through withdrawing from or borrowing against the
Policy), in accordance with the terms of the Agreement) if the Owner terminates
employment with Employer for a reason other than a Qualifying Termination
(unless he or she has previously attained his or her Security Release Date); and
(b) The right to receive an amount equal to any federal, state or local
taxes that Assignee may be required to withhold and collect (as set forth in
Section 12 of the Agreement).
3.(a) Owner shall retain all incidents of ownership in the Policy, and may
exercise such incidents of ownership except as otherwise limited by the
Agreement and hereunder. The Insurer is only authorized to recognize (and is
fully protected in recognizing) the exercise of any ownership rights by Owner if
the Insurer determines that the Assignee has been given notice of Owner's
purported exercise of ownership rights in compliance with the provisions of
Section 3 (b) hereof and as of the date thirty days after such notice is given,
the Insurer has not received written notification from the Assignee of
Assignee's objection to such exercise; provided that, the designation of the
beneficiary to receive the death benefits pursuant to Section 4 of the Agreement
may be changed by the Owner without prior notification of Assignee. The Insurer
shall not be responsible to ensure that the actions of the Owner conform to the
Agreement.
(b) Assignee hereby acknowledges that for purposes of this Collateral
Security Assignment, Assignee shall be conclusively deemed to have been properly
notified of Owner's purported exercise of his or her ownership rights as of the
third business day following either of the following events: (1) Owner mails
written notice of such exercise to Assignee by United States certified mail,
postage paid, at the address below and provides the Insurer with a copy of such
notice and a copy of the certified mail receipt or (2) the Insurer mails written
notice of such exercise to Assignee by regular United States mail, postage paid,
at the address set forth below:
VARCO INTERNATIONAL, INC.
743 NORTH ECKHOFF STREET
ORANGE, CALIFORNIA 92668
ATTN: Corporate Secretary
A-2
<PAGE>
The foregoing address shall be the appropriate address for such notices to be
sent unless and until the receipt by both Owner and the Insurer of a written
notice from Assignee of a change in such address.
(c) Notwithstanding the foregoing, Owner and Assignee hereby agree that,
until Assignee's security interest in the Policy is released, Assignee shall
from time to time designate one or more individuals (the "Designee"), who may be
officers of Assignee, who shall be entitled to adjust the death benefit under
the Policy and to direct the investments under the Policy; provided, however,
that the Designee may only increase, but not decrease, the death benefit in
effect on the date that the Policy is issued; provided, further, that the
Designee may only direct the investments under the Policy in funds offered by
the Insurer under the Policy. Assignee shallnotify the Insurer in writing of the
identity of the Designee and any changes in the identity of the Designee. Until
Assignee's security interest in the Policy is released, no other party may
direct the investments under the Policy without the consent of the Assignee and
Owner.
4. If the Policy is in the possession of the Assignee, the Assignee shall,
upon request, forward the Policy to the Insurer without unreasonable delay for
endorsement of any designation or change of beneficiary or the exercise of any
other right reserved by the Owner.
5.(a) Assignee shall be entitled to exercise its rights under the Agreement
by delivering a written notice to Insurer, executed by the Assignee and the
Owner or the Owner's beneficiary, requesting a withdrawal or nonrecourse policy
loan equal to the amount to which Assignee is entitled under Sections 5, 6 or 12
of the Agreement and transfer of such withdrawn or borrowed amount to Assignee.
So long as the notice is also signed by Owner or his or her beneficiary, Insurer
shall pay or loan the specified amounts to Assignee without the need for any
additional documentation.
(b) Upon receipt of a properly executed notice complying with the
requirements of subsection (a) above, the Insurer is hereby authorized to
recognize the Assignee's claims to rights hereunder without the need for any
additional documentation and without investigating (1) the reason for such
action taken by the Assignee; (2) the validity or the amount of any of the
liabilities of the Owner to the Assignee under the Agreement; (3) the existence
of any default therein; (4) the giving of any notice required herein; or (5) the
application to be made by the Assignee of any amounts to be paid to the
Assignee. The receipt of the Assignee for any sums received by it shall be a
full discharge and release therefor to the Insurer.
6. Upon the full payment of the liabilities of the Owner to the Assignee
pursuant to the Agreement, the Assignee shall execute an appropriate release of
this Collateral Security Assignment.
7. The Assignee shall have the right to request of the Insurer and/or the
Owner notice of any action taken with respect to the Policy by the Owner.
A-3
<PAGE>
8.(a) The Assignee and the Owner intend that in no event shall the Assignee
have any power or interest related to the Policy or its proceeds, except as
provided herein and in the Agreement, notwithstanding the provisions of any
other documents including the Policy. In the event that the Assignee ever
receives or may be deemed to have received any right or interest beyond the
limited rights described herein and in the Agreement, such right or interest
shall be held in trust for the benefit of the Owner and be held separate from
the property of the Assignee.
(b) In order to further protect the rights of the Owner, the Assignee
agrees that its rights to the Policy and proceeds thereof shall serve as
security for the Assignee's obligations to the Owner as provided in the
Agreement. Assignee hereby grants to Owner a security interest in and
collaterally assigns to Owner any and all rights it has in the Policy, and
products and proceeds thereof, whether now existing or hereafter arising
pursuant to the provisions of the Policy, the Agreement, this Collateral
Security Assignment or otherwise, to secure Assignee's obligations ("Assignee
Obligations") to Owner under the Agreement, whether now existing or hereafter
arising. The Assignee Obligations include all obligations owed by the Assignee
to Owner under the Agreement, including without limitation: (i) the obligation
to transfer ownership of the Policy to Owner and to make the premium payments
required under Section 3 of the Agreement and (ii) the obligation to do nothing
which may, in any way, endanger, defeat or impair any of the rights of Owner in
the Policy as provided in the Agreement. In no event shall this provision be
interpreted to reduce Owner's rights in the Policy or expand in any way the
rights or benefits of the Assignee under the Agreement. In the event that Owner
terminates employment with Employer for any reason prior to a Qualifying Event,
this security interest and collateral assignment granted by Assignee to Owner
shall automatically expire and be deemed waived.
9. Assignee and Owner agree to execute any documents necessary to
effectuate this Collateral Security Assignment pursuant to the provisions of the
Agreement. All disputes shall be settled as provided in Section 13 of the
Agreement. The rights under this Collateral Security Assignment may be enforced
pursuant to the terms of the Agreement.
A-4
<PAGE>
IN WITNESS WHEREOF, the Owner and Assignee have executed this Collateral
Security Assignment effective the day and year first above written.
________________________
, Owner
Varco International, Inc.
By:______________________
Title:___________________
A-5
<PAGE>
EXHIBIT B
SPOUSAL CONSENT TO DESIGNATION OF NONSPOUSAL BENEFICIARY
My spouse is_________________________________. I hereby consent to the
designation made by my spouse of______________________________as the beneficiary
under Life Insurance Policy No.______________________, which Varco
International, Inc. has purchased from the Manufacturers Life Insurance Company
of America and transferred to him/her. I understand that this consent is valid
only with respect to the naming of the beneficiary indicated above and that the
designation of any other beneficiary will not be valid unless I consent in
writing to such designation.
This consent is being voluntarily given, and no undue influence or
coercion has been exercised in connection with my consent to the designation
made by my spouse of the beneficiary named above rather than myself as the
beneficiary under the Split-Dollar Life Insurance Policy.
__________________
Spouse's Signature
___________________
Print Spouse's Name
___________________
Date
B-1
<PAGE>
EXHIBIT C
SPLIT-DOLLAR LIFE INSURANCE
TWO YEAR SECURITY RELEASE NOTICE
Pursuant to the Split-Dollar Life Insurance Agreement entered into between
Varco International, Inc. (the "Company") and me on__________(the "Agreement"),
I hereby notify the Company that I request to be released on___,____("Security
Release Date") from the Company's collateral security in Policy Number_________
issued by the Manufacturers Life Insurance Company of America. I understand that
my Security Release Date must be at least two years from the date on which the
Company receives this Notice. I further understand that in order for the
Company's collateral security interest to be released on my Security Release
Date, I must continue to be employed by the Company or one of its subsidiaries
until such date.
_________________________
Participant
_________________________
Date
Received by Varco International, Inc.
on_________________________________
By_________________________________
C-1
<PAGE>
[For Directors]
SPLIT-DOLLAR LIFE INSURANCE AGREEMENT
-------------------------------------
This Agreement is entered into as of_________, 19__ by and between
Varco International, Inc. (the "Company") and______________ ("Director") in
reference to the following facts:
1. Director is a valued member of the board of directors of the
Company.
2. The Company has simultaneously with the execution of this
Agreement caused the Manufacturers Life Insurance Company of America (the
"Insurance Company") to issue policy number_________________ (the "Policy") on
the life of Director and delivered the Policy to Director. The first annual
premium has been paid by the Company as of the date of this Agreement.
NOW THEREFORE, in consideration of the facts set forth above and the
various promises and covenants set forth below, the parties to this Agreement
agree as follows:
1. Ownership of Policy.
--------------------
The Company acknowledges that Director is the owner of the Policy and that
Director is entitled to exercise all of his or her ownership rights granted by
the terms of the Policy, except to the extent that the power of the Director to
exercise those rights is specifically limited by this Agreement. Except as so
limited, it is the expressed intention of the parties to reserve to Director all
rights in and to the Policy granted to its owner by the terms thereof,
including, but not limited to, the right to change the beneficiary and the right
to exercise settlement options.
2. The Company's Security Interest.
--------------------------------
The Company's security interest in the Policy is conditioned upon its
satisfactorily performing all of the covenants under this Agreement. Each period
covered by any individual premium payment described in Section 3 shall be
considered a discrete extension of the Company's security interest in the
Policy. The Company shall not have nor exercise any right in and to the Policy
which could, in any way, endanger, defeat, or impair any of the rights of
Director in the Policy, including by way of illustration any right to collect
the proceeds of the Policy in excess of the amount due the Company as provided
in this Agreement and in the Policy. The only rights in and to the Policy
granted to the Company in this Agreement shall be limited to the Company's
security interest in and to the cash value of the Policy, as defined herein (the
"Security Interest"). The Company shall not assign any of its Security Interest
in the Policy to anyone other than Director.
<PAGE>
3. Premium payments.
-----------------
Until Director files a notice with the Company pursuant to Section 10
electing a Security Release Date (as defined in Section 10 below) or Director's
service as a director of the Company is terminated for any reason, the Company
agrees to pay an annual premium on the Policy on or before the last day of each
"policy year" (as such term is used in the Policy) in an amount equal to the sum
of (a) the compensation deferred by Director under the Varco International, Inc.
Director Savings Plan (the "Plan") during such policy year plus (b) the "cost of
insurance" (as defined in the Policy) for the excess, if any, of (i) the minimum
death benefit required under Section 4 hereof (determined in compliance with the
7-pay test set forth in Section 7702A of the Code) over (ii) the minimum death
benefit (determined in compliance with such 7-pay test) which could be provided
by that portion of the accumulated premiums actually paid under the Policy which
were paid pursuant to clause (a) of this sentence. The premium payment shall be
transmitted directly by the Company to the Insurance Company. Consistent with
the preceding sentences, prior to the release of the Company's Security Interest
in the Policy, Director and the Company agree that the Company shall from time
to time designate one or more individuals (the "Designee"), who may be officers
of the Company, who shah be entitled to adjust the death benefit under the
Policy and to direct the investments under the Policy; provided, however, that
the Designee may only increase, but not decrease, the death benefit in effect on
the date that the Policy is issued; provided further, that the Designee may only
direct the investments under the Policies in funds offered by the Insurance
Company under the Policy. During the period of time that this Agreement is in
effect, Director irrevocably agrees that all dividends paid on the Policy shall
be applied to purchase from the Insurance Company additional paid-up life
insurance on the life of Director.
4. Death of Director while serving as a director of the Company.
-------------------------------------------------------------
(a) If Director dies while serving as a director of the Company and prior
to his or her Security Release Date (as defined in Section 10 below), Director's
designated beneficiary shall be entitled to receive the entire death benefit
under the Policy, which shall be at least equal to the greater of (1) the amount
of the Company's annual retainer fee for directors in effect at the time of
Director's death multiplied by the number of whole and fractional years
(measured in completed months) of Director's service as a director of the
Company, up to a maximum of $100,000 (adjusted as described herein), or (2) the
following multiple of the amount credited to Employee's Accounts under the Plan
depending on the Employee's insurance age at death: (A) if under 56, 2.0 or (B)
if 56 or older, 1.75. The $100,000 death benefit described in the preceding
sentence shall be adjusted annually for changes in the cost of living commencing
on January 1, 1995 on the basis of the relationship between the U.S. Consumer
Price Index for Urban Wage Earners and Clerical Workers, as published by the
U.S. Department of Labor (or, if there is no such index, then a comparable
substitute selected by the Committee) for the preceding calendar year and the
same index for the calendar year 1993.
2
<PAGE>
(b) Director agrees that, during the period of this Agreement, Director
will obtain and provide to the Company and/or the Insurance Company the written
consent of the spouse of the Director, in the form attached hereto as Exhibit B,
to any designation by Director of anyone other than the Director's spouse as the
beneficiary to receive the benefits under this Section 4.
5. Director's attaining his or her Security. Release Date or termination of
-------------------------------------------------------------------------
Director's service On account of a Qualifying Termination.
----------------------------------------------------------
(a) By making timely payment of the premiums described in Section 3, the
Company may renew its Security Interest in the Policy for the period commencing
with the due date of such payment until the later of (1) the due date of the
next annual premium described in Section 3, or (2) the date that Director
attains his or her Security Release Date or terminates service as a director of
the Company on account of a Qualifying Termination (either of which events
described in this clause 2 is referred to herein as a "Qualifying Event"). The
Company may not extend its Security Interest in the Policy under the Collateral
Security Assignment Agreement attached as Exhibit A after the occurrence of a
Qualifying Event. After such Qualifying Event, Director shall be entitled to
exercise all of his or her ownership rights in the Policy without any
limitation, and this Agreement and its accompanying Collateral Security
Assignment Agreement shah no longer constitute a restriction on Director's
rights.
(b) Notwithstanding paragraph (a), the Company shall continue to have its
Security Interest in the Policy to the extent required to satisfy any
withholding obligations as described in Section 12.
6. Termination of Director's service for a reason other than a Qualifying
----------------------------------------------------------------------
Termination.
------------
If Director ceases to be a director of the Company prior to his or her
Security Release Date for a reason other than a Qualifying Termination (as
described below), Director shall cause, either by withdrawing from or borrowing
against the Policy, on a nonrecourse basis, to be transferred to the Company an
amount equal to the maximum amount that may then be obtained under the Policy.
In the event that the amount that can be withdrawn from or borrowed against the
Policy is less than the cash surrender value of the Policy, the Company shall
withhold from other compensation payable to Director the amount of such
difference unless Director has previously transferred to the Company an amount
equal to such difference. In no event shall Director's voluntary resignation
prior to attaining his or her Security Release Date (as such concept is further
defined below) ever constitute a Qualifying Termination, except in certain
situations following a Change in Control (see Section 9).
7. Definition of a Qualifying Termination.
---------------------------------------
A Qualifying Termination is either of the following events: (a) the
termination of Director from service on the board of directors of the Company
(for this purpose, a termination of service as a member of the board of
directors of the Company includes the
3
<PAGE>
completion of Director's term of office without Director's having been
renominated and elected for another term, which event shall constitute a
termination of service as of the date Director's term of office is completed)
where (i) Director has indicated his or her willingness to continue to serve on
the board of directors and (ii) in the event that the Company's bylaws permit
removal of a Director by other members of the board of directors, Director's
termination is not the result of his or her removal by other directors for
"cause," as described in Section 8; or (b) the termination of Director after a
Change in Control under the circumstances described in Section 9(a).
8. Qualifying Termination because DirectOr is terminated for a reason other
-------------------------------------------------------------------------
than "Cause".
-------------
For purposes of this Section, "Cause" shall mean (1) Director's failure to
render services to the Company where such failure amounts to gross neglect or
misperformance of Director's responsibilities and duties; (2) Director's
commission of an act of fraud or dishonesty against the Company; or (3)
Director's conviction of a felony or other crime involving moral turpitude.
9. Qualifying Termination on account of termination after a Change in Control.
---------------------------------------------------------------------------
(a) A Qualifying Termination shall be treated as occurring after a "Change
in Control" (as defined below) if there is first a "Change in Control" and then,
within three years following such Change in Control, either (1) Director's
service on the board of directors of the Company is terminated without "Cause"
(as defined in Section 8) or (2)Director terminates his or her service on the
board of directors of the Company for "Good Reason" (as defined in subsection
(c) below).
(b) For purposes of this Section, a "Change in Control" shall be deemed to
have occurred if and when:
(1) Any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934 but excluding any benefit
plan for employees of the Company or its subsidiaries or any
trustee, agent, or other fiduciary for any such plan acting in
such person's capacity as such fiduciary), directly or indirectly,
becomes the beneficial owner of securities of the Company
representing 20% or more of the combined voting power of the
Company's then outstanding securities;
(2) During any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the
Company cease for any reason to constitute at least a majority
thereof unless the election, or the nomination for election by the
Company's shareholders, of each new director it was approved by a
vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period; or
4
<PAGE>
(3) The shareholders of the Company approve (A) any consolidation or
merger of the Company in which the Company is not the continuing
or surviving corporation or pursuant to which shares of the
Company's common stock are converted into cash, securities or
other property, other than a merger of the Company in which the
holders of the Company's common stock immediately prior to the
merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger, or (B) any
sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of
the assets of the Company, or (C) any plan or proposal for the
liquidation or dissolution of the Company.
(c) For purposes of this Section, "Good Reason" shall mean any reduction in
Director's fees not agreed to by Director.
(d) A termination of service by Director within the 36-month period
following a Change in Control shall be for Good Reason if the event specified in
paragraph (c) shall have occurred, notwithstanding that Director may have other
reasons for terminating service, including employment by another employer which
Director desires to accept.
10. Director's attaining his or her Security Release Date.
------------------------------------------------------
(a) Director's "Security Release Date" shah mean the date which is at least
two years following the date on which the Company receives from Director a
completed notice in the form attached hereto as Exhibit C, provided that
Director continues to serve on the board of directors of the Company until such
date. Director's election of a Security Release Date shall be irrevocable.
(b) Director shall attain his or her Security Release Date upon becoming
disabled while serving as a director of the Company. Director shall be
considered "disabled" at the time that the Administrator (as defined in Section
13(a) below) determines, based upon competent medical advice, that an Director
is incapable of rendering substantial services to the Company by reason of
mental or physical disability.
(c) The Company's Security Interest in the Policy is contingent upon the
timely payment of the premiums required under Section 3 of this Agreement. Each
period covered by any individual premium payment shall be considered an
independent extension of the Company's Security Interest in the Policy. In the
event that the Company waives its rights by reason of failure to make payments
under Section 3 of this Agreement, Director shall immediately attain his or her
Security Release Date (provided, however, that the cessation of the Company's
obligation to pay premiums upon Director's filing of an election of a Security
Release Date shall not result in Director immediately attaining his or her
Security Release Date). The Company's failure to extend its rights in no way
affects the Company's duties and obligations under this Agreement.
5
<PAGE>
11. Limitation On Director's rights prior to a Qualifying Event.
------------------------------------------------------------
In order to protect the Company's Security Interest and notwithstanding any
other provisions in this Agreement, prior to a Qualifying Event, Director agrees
that he or she will not modify the death benefit under the Policy, direct the
investment of the cash surrender value of the Policy, borrow against the Policy,
assign the Policy, or obtain any portion of the cash value of the Policy.
Notwithstanding the preceding sentence, if Section 6 applies to a termination,
Director may borrow or withdraw from the Policy, so long as the borrowing or
withdrawal request is submitted to the Insurance Company along with a directive
that the borrowed or withdrawn amount be transferred directly to the Company.
Prior to the release of the Company's Security Interest in the Policy, Director
and the Company agree that the Company shall from time to time appoint one or
more individuals (the "Designee"), who may be officers of the Company, who shall
be entitled to direct the investments under the Policy; provided, however, that,
the Designee may only direct the investments under the Policy in funds offered
by the Insurance Company under the Policy.
12. Tax Withholding.
----------------
It is recognized by the parties that the fights of Director in the Policy
(as modified by the Agreement) may cause Director to be treated under certain
circumstances as in receipt of gross income. These circumstances may also impose
upon the Company an obligation to deduct and withhold federal, state or local
taxes. Unless Director otherwise provides the Company the amounts it is required
to withhold, Director shall cause, either by withdrawing from or borrowing on a
nonrecourse basis against the Policy, to be transferred to the Company that
portion of the cash value of the Policy which is equal to the amount of any
federal, state or local taxes required to be withheld.
13. Disputes.
---------
(a) The Varco International, Inc. Split Dollar Life Insurance Committee
(the "Administrator") shall administer this Agreement. The Administrator (either
directly or through its designees) will have power and authority to interpret,
construe, and administer this Agreement (for the purpose of this section, the
Agreement shall include the Collateral Security Assignment Agreement); provided
that, the Administrator's authority to interpret this Agreement shall not cause
the Administrator's decisions in this regard to be entitled to a deferential
standard of review in the event that Director or his or her beneficiary seeks
review of the Administrator's decision as described below.
(b) Neither the Administrator, its designee nor its advisors, shall be
liable to any person for any action taken or omitted in connection with the
interpretation and administration of this Agreement.
(c) Because it is agreed that time will be of the essence in determining
whether any payments are due to Director or his or her beneficiary under this
Agreement, Director or his or her beneficiary may, if he or she desires, submit
any claim for payment under this
6
<PAGE>
Agreement or dispute regarding the interpretation of this Agreement to
arbitration. This right to select arbitration shall be solely that of Director
or his or her beneficiary and Director or his or her beneficiary may decide
whether or not to arbitrate in his or her discretion. The "right to select
arbitration" is not mandatory on Director or his or her beneficiary and Director
or his or her beneficiary may choose in lieu thereof to bring an action in an
appropriate civil court. Once an arbitration is commenced, however, it may not
be discontinued without the mutual consent of both parties to the arbitration.
During the lifetime of the Director only he or she can use the arbitration
procedure set forth in this section.
(d) Any claim for arbitration may be submitted as follows: if Director or
his or her beneficiary disagrees with the Administrator regarding the
interpretation of this Agreement and the claim is finally denied by the
Administrator in whole or in part, such claim may be filed in writing with an
arbitrator of Director's or beneficiary's choice who is selected by the method
described in the next four sentences. The first step of the selection shall
consist of Director or his or her beneficiary submitting a list of five
potential arbitrators to the Administrator. Each of the five arbitrators must be
either (1) a member of the National Academy of Arbitrators located in the State
of California or (2) a retired California Superior Court or Appellate Court
judge. Within one week after receipt of the list, the Administrator shall select
one of the five arbitrators as the arbitrator for the dispute in question. If
the Administrator fails to select an arbitrator in a timely manner, Director or
his or her beneficiary shall then designate one of the five arbitrators as the
arbitrator for the dispute in question.
(e) The arbitration hearing shall be held within seven days (or as soon
thereafter as possible) after the picking of the arbitrator. No continuance of
said hearing shall be allowed without the mutual consent of Director or his or
her beneficiary and the Administrator. Absence from or nonparticipation at the
hearing by either party shall not prevent the issuance of an award. Hearing
procedures which will expedite the hearing may be ordered at the arbitrator's
discretion, and the arbitrator may close the hearing in his or her sole
discretion when he or she decides he or she has heard sufficient evidence to
satisfy issuance of an award.
(f) The arbitrator's award shall be rendered as expeditiously as possible
and in no event later than one week after the close of the hearing. In the event
the arbitrator finds that the Company has breached this Agreement, he or she
shah order the Company to immediately take the necessary steps to remedy the
breach. The award of the arbitrator shall be final and binding upon the parties.
The award may be enforced in any appropriate court as soon as possible after its
rendition. If an action is brought to confirm the award, both the Company and
Director agree that no appeal shall be taken by either party from any decision
rendered in such action.
(g) Solely for purposes of determining the allocation of the costs
described in this subsection, the Administrator will be considered the
prevailing party in a dispute if the arbitrator determines (1) that the Company
has not breached this Agreement and (2) the
7
<PAGE>
claim by Director or his or her beneficiary was not made in good faith.
Otherwise, Director or his or her beneficiary will be considered the prevailing
party. In the event that the Company is the prevailing party, the fee of the
arbitrator and all necessary expenses of the hearing (excluding any attorneys'
fees incurred by the Company) including stenographic reporter, if employed,
shall be paid by the other party. In the event that Director or his or her
beneficiary is the prevailing party, the fee of the arbitrator and all necessary
expenses of the hearing (including all attorneys' fees incurred by Director or
----------
his or her beneficiary in pursuing his or her claim), including the fees of a
stenographic reporter if employed, shall be paid by the Company.
14. Collateral Security Assignment Of Policy to the Company.
--------------------------------------------------------
In consideration of the promises contained herein, the Director has
contemporaneously herewith granted the Security Interest in the Policy to the
Company as collateral, under the form of Collateral Security Assignment attached
hereto as Exhibit A, which Collateral Security Assignment gives the Company the
limited power to enforce its rights to recover the cash value of the Policy
under the circumstances defined herein. The Company's Security Interest in the
Policy shall be specifically limited to the rights set forth above in this
Agreement, notwithstanding the provisions of any other documents including the
Policy. Director agrees to execute any notice prepared by the Company requesting
a withdrawal or non-recourse loan in an amount equal to the amount to which the
Company is entitled under Sections 5, 6 or 12 of this Agreement.
15. Director's beneficiary rights and security interest.
----------------------------------------------------
(a) The Company and Director intend that in no event shall the Company have
any power or interest related to the Policy or its proceeds, except as provided
herein and in the Collateral Security Assignment. In the event that the Company
ever receives or may be deemed to have received any right or interest in the
Policy or its proceeds beyond the limited rights described herein and in the
Collateral Security Assignment, such right or interest shall be held in trust
for the benefit of Director and be held separate from the property of the
Company.
(b) In order to further protect the fights of the Director, the Company
agrees that its rights to the Policy and proceeds thereof shah serve as security
for the Company's obligations as provided in this Agreement to Director. The
Company grants to Director a security interest in and collaterally assigns to
Director any and all fights the Company has in the Policy, and products and
proceeds thereof whether now existing or hereafter arising pursuant to the
provisions of the Policy, this Agreement, the Collateral Security Assignment or
otherwise, to secure any and all obligations owed by the Company to Director
under this Agreement. In no event shall this provision be interpreted to reduce
Director's rights to the Policy or expand in any way the rights or benefits of
the Company under this Agreement, the Policy or the Collateral Security
Assignment. This security interest granted to Director from the Company shall
automatically expire and be deemed waived if Director terminates service on the
board of directors of the Company prior to a Qualifying Event.
8
<PAGE>
16. Amendment of Agreement.
-----------------------
Except as provided in a written instrument signed by the Company and
Director, this Agreement may not be cancelled, amended, altered, or modified.
17. Notice under Agreement.
-----------------------
Any notice, consent, or demand required or permitted to be given under the
provisions of this Agreement by one party to another shall be in writing, signed
by the party giving or making it, and may be given either by delivering it to
such other party personally or by mailing it, by United States Certified mail,
postage prepaid, to such party, addressed to its last known address as shown on
the records of the Company. The date of such mailing shall be deemed the date of
such mailed notice, consent, or demand.
18. Binding Agreement.
------------------
This Agreement shall bind the parties hereto and their respective
successors, heirs, executor, administrators, and transferees, and any Policy
beneficiary.
19. Controlling law and characterization of Agreement.
--------------------------------------------------
(a) To the extent not governed by federal law, this Agreement and the right
to the parties hereunder shall be controlled by the laws of the State of
California.
(b) If this Agreement is considered a "plan" under the Employee Retirement
Income Security Act of 1974 (ERISA), both the Company and Director acknowledge
and agree that for all purposes the Agreement shall be treated as a "welfare
plan" within the meaning of Section 3(1) of ERISA and that any rights that might
arise under ERISA if this Agreement were treated as a "pension plan" within the
meaning of Section 3(2) of ERISA are hereby expressly waived. Consistent with
the preceding sentence, Director further acknowledges that his or her rights to
the Policy and the release of the Company's Security Interest are strictly
limited to those rights set forth in this Agreement. In furtherance of this
acknowledgement and in consideration of the Company's payment of the initial
premiums for this Policy, Director voluntarily and irrevocably relinquishes and
waives any additional rights in the Policy or any different restrictions on the
release of the Company's Security Interest that he or she might otherwise argue
to exist under either state, federal, or other law. Director further agrees that
he or she will not argue that any such additional rights or different
restrictions exist in any judicial or arbitration proceeding. Similarly, the
Company acknowledges that its Security Interest is strictly limited as set forth
in this Agreement and voluntarily and irrevocably relinquishes and waives any
additional interests or different interests or advantages that the Company would
have or enjoy if the Agreement were not treated as a "welfare plan" within the
meaning of section 3(1) of ERISA.
9
<PAGE>
20. Execution 0f Documents.
-----------------------
The Company and Director agree to execute any and all documents necessary
to effectuate the terms of this Agreement.
VARCO INTERNATIONAL, INC.
By:_____________________
Its:____________________
Director
________________________
10
<PAGE>
EXHIBIT A
COLLATERAL SECURITY ASSIGNMENT AGREEMENT
This Collateral Security Assignment is made and entered into effective as
of__________,19__, BY THE UNDERSIGNED AS THE OWNER (THE "OWNER") OF LIFE
INSURANCE POLICY NUMBER _______________(THE "POLICY") ISSUED BY THE
MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA, (THE "INSURER") UPON THE LIFE
OF OWNER AND BY VARCO INTERNATIONAL, INC., A CALIFORNIA CORPORATION (THE
"ASSIGNEE").
WHEREAS, the Owner is a valued member of the board of directors of
Assignee, and the Assignee wishes to retain him or her as a member of its board
of directors; and
WHEREAS, as an inducement to the Owner's continued services, the Assignee
wishes to pay premiums on the Policy, as more specifically provided for in that
certain Split-Dollar Life Insurance Agreement dated as of____________,19__, and
entered into between the Owner and the Assignee as such agreement may be
hereafter amended or modified (the "Agreement") (unless otherwise indicated the
terms herein shall have the definitions ascribed thereto in the Agreement);
WHEREAS, in consideration of the Assignee agreeing to make the premium
payments, the Owner agrees to grant the Assignee a security interest in the
Policy as collateral security; and
WHEREAS, the Owner and Assignee intend that the Assignee have no greater
interest in the Policy than that prescribed herein and in the Agreement and that
if the Assignee ever obtains any right or interest in the Policy or the proceeds
thereof, except as provided herein and in the Agreement, such right or interest
shall be held in trust for the Owner to satisfy the obligations of Assignee to
Owner under the Agreement and the Assignee additionally agrees that its rights
to the Policy shall serve as security for its obligations to the Owner under the
Agreement;
NOW, THEREFORE, the Owner hereby assigns, transfers and sets over to the
Assignee for security the following specific rights in the Policy, subject to
the following terms, agreements and conditions:
1. This Collateral Security Assignment is made, and the Policy is to be
held, as collateral security for all liabilities of the Owner to the Assignee
pursuant to the terms of the Agreement, whether now existing or hereafter
arising (the "Secured Obligations"). The Secured Obligations include: (i) the
obligation of the Owner to transfer an amount equal to the entire cash value in
the event that the Owner terminates service as a director of Assignee for a
reason other than a Qualifying Termination and before attaining his or her
Security Release Date and (ii) the obligation of the Owner to pay an amount of
cash to the Assignee or transfer to the Assignee that portion of the cash value
which is equal to any federal, state
A-1
<PAGE>
or local taxes that Assignee may be required to withhold and collect (as set
forth in Section 12 of the Agreement).
2. The Owner hereby grants to Assignee a security interest in and
collaterally assigns to Assignee the Policy and the cash value to secure the
Secured Obligations. However, the Assignee's interest in the Policy shall be
strictly limited to:
(a) The right to receive an amount equal to the entire cash value of the
Policy (which right may be realized by Owner's causing such amount to be
transferred to Assignee (through withdrawing from or borrowing against the
Policy), in accordance with the terms of the Agreement) if the Owner terminates
service as a director of Assignee for a reason other than a Qualifying
Termination (unless he or she has previously attained his or her Security
Release Date); and
(b) The right to receive an amount equal to any federal, state or local
taxes that Assignee may be required to withhold and collect (as set forth in
Section 12 of the Agreement).
3.(a) Owner shall retain all incidents of ownership in the Policy, and may
exercise such incidents of ownership except as otherwise limited by the
Agreement and hereunder. The Insurer is only authorized to recognize (and is
fully protected in recognizing) the exercise of any ownership rights by Owner if
the Insurer determines that the Assignee has been given notice of Owner's
purported exercise of ownership rights in compliance with the provisions of
Section 3(b) hereof and as of the date thirty days after such notice is given,
the Insurer has not received written notification from the Assignee of
Assignee's objection to such exercise; provided that, the designation of the
beneficiary to receive the death benefits pursuant to Section 4 of the Agreement
may be changed by the Owner without prior notification of Assignee. The Insurer
shall not be responsible to ensure that the actions of the Owner conform to the
Agreement.
(b) Assignee hereby acknowledges that for purposes of this Collateral
Security Assignment, Assignee shall be conclusively deemed to have been properly
notified of Owner's purported exercise of his or her ownership rights as of the
third business day following either of the following events: (1) Owner mails
written notice of such exercise to Assignee by United States certified mail,
postage paid, at the address below and provides the Insurer with a copy of such
notice and a copy of the certified mail receipt or (2) the Insurer mails written
notice of such exercise to Assignee by regular United States mail, postage paid,
at the address set forth below:
VARCO INTERNATIONAL, INC.
743 North Eckhoff Street
Orange, California 92668
ATTN: Corporate Secretary
A-2
<PAGE>
The foregoing address shall be the appropriate address for such notices to be
sent unless and until the receipt by both Owner and the Insurer of a written
notice from Assignee of a change in such address.
(c) Notwithstanding the foregoing, Owner and Assignee hereby agree that,
until Assignee's security interest in the Policy is released, Assignee shall
from time to time designate one or more individuals (the "Designee"), who may be
officers of Assignee, who shall be entitled to adjust the death benefit under
the Policy and to direct the investments under the Policy; provided, however,
that the Designee may only increase, but not decrease, the death benefit in
effect on the date that the Policy is issued; provided, further, that the
Designee may only direct the investments under the Policy in funds offered by
the Insurer under the Policy. Assignee shall notify the Insurer in writing of
the identity of the Designee and any changes in the identity of the Designee.
Until Assignee's security interest in the Policy is released, no other party may
direct the investments under the Policy without the consent of the Assignee and
Owner.
4. If the Policy is in the possession of the Assignee, the Assignee shall,
upon request, forward the Policy to the Insurer without unreasonable delay for
endorsement of any designation or change of beneficiary or the exercise of any
other right reserved by the Owner.
5.(a) Assignee shall be entitled to exercise its rights under the Agreement
by delivering a written notice to Insurer, executed by the Assignee and the
Owner or the Owner's beneficiary, requesting a withdrawal or nonrecourse policy
loan equal to the amount to which Assignee is entitled under Sections 5, 6 or 12
of the Agreement and transfer of such withdrawn or borrowed amount to Assignee.
So long as the notice is also signed by Owner or his or her beneficiary, Insurer
shall pay or loan the specified amounts to Assignee without the need for any
additional documentation.
(b) Upon receipt of a properly executed notice complying with the
requirements of subsection (a) above, the Insurer is hereby authorized to
recognize the Assignee's claims to rights hereunder without the need for any
additional documentation and without investigating (1) the reason for such
action taken by the Assignee; (2) the validity or the amount of any of the
liabilities of the Owner to the Assignee under the Agreement; (3) the existence
of any default therein; (4) the giving of any notice required herein; or (5) the
application to be made by the Assignee of any amounts to be paid to the
Assignee. The receipt of the Assignee for any sums received by it shall be a
full discharge and release therefor to the Insurer.
6. Upon the full payment of the liabilities of the Owner to the Assignee
pursuant to the Agreement, the Assignee shall execute an appropriate release of
this Collateral Security Assignment.
7. The Assignee shall have the right to request of the Insurer and/or the
Owner notice of any action taken with respect to the Policy by the Owner.
A-3
<PAGE>
8.(a) The Assignee and the Owner intend that in no event shall the Assignee
have any power or interest related to the Policy or its proceeds, except as
provided herein and in the Agreement, notwithstanding the provisions of any
other documents including the Policy. In the event that the Assignee ever
receives or may be deemed to have received any right or interest beyond the
limited rights described herein and in the Agreement, such right or interest
shall be held in trust for the benefit of the Owner and be held separate from
the property of the Assignee.
(b) In order to further protect the rights of the Owner, the Assignee
agrees that its rights to the Policy and proceeds thereof shall serve as
security for the Assignee's obligations to the Owner as provided in the
Agreement. Assignee hereby grants to Owner a security interest in and
collaterally assigns to Owner any and all rights it has in the Policy, and
products and proceeds thereof, whether now existing or hereafter arising
pursuant to the provisions of the Policy, the Agreement, this Collateral
Security Assignment or otherwise, to secure Assignee's obligations ("Assignee
Obligations") to Owner under the Agreement, whether now existing or hereafter
arising. The Assignee Obligations include all obligations owed by the Assignee
to Owner under the Agreement, including without limitation: (i) the obligation
to transfer ownership of the Policy to Owner and to make the premium payments
required under Section 3 of the Agreement and (ii) the obligation to do nothing
which may, in any way, endanger, defeat or impair any of the rights of Owner in
the Policy as provided in the Agreement. In no event shall this provision be
interpreted to reduce Owner's rights in the Policy or expand in any way the
rights or benefits of the Assignee under the Agreement. In the event that Owner
terminates service as a director of Assignee for any reason prior to a
Qualifying Event, this security interest and collateral assignment granted by
Assignee to Owner shall automatically expire and be deemed waived.
9. Assignee and Owner agree to execute any documents necessary to
effectuate this Collateral Security Assignment pursuant to the provisions of the
Agreement. All disputes shall be settled as provided in Section 13 of the
Agreement. The rights under this Collateral Security Assignment may be enforced
pursuant to the terms of the Agreement.
A-4
<PAGE>
IN WITNESS WHEREOF, the Owner and Assignee have executed this Collateral
Security Assignment effective the day and year first above written.
________________________
, Owner
VARCO INTERNATIONAL, INC.
By:_____________________
Title:__________________
A-5
<PAGE>
EXHIBIT B
SPOUSAL CONSENT TO DESIGNATION OF NONSPOUSAL BENEFICIARY
My spouse is_________________________________I hereby consent to the
designation made by my spouse of______________________________as the beneficiary
under Life Insurance Policy No.______________________, which Varco
International, Inc. has purchased from the Manufacturers Life Insurance Company
of America and transferred to him/her. I understand that this consent is valid
only with respect to the naming of the beneficiary indicated above and that the
designation of any other beneficiary will not be valid unless I consent in
writing to such designation.
This consent is being voluntarily given, and no undue influence or
coercion has been exercised in connection with my consent to the designation
made by my spouse of the beneficiary named above rather than myself as the
beneficiary under the Split-Dollar Life Insurance Policy.
______________________
Spouse's Signature
______________________
Print Spouse's Name
______________________
Date
B-1
<PAGE>
EXHIBIT C
SPLIT-DOLLAR LIFE INSURANCE
TWO YEAR SECURITY RELEASE NOTICE
Pursuant to the Split-Dollar Life Insurance Agreement entered into between
Varco International, Inc. (the "Company") and me on________(the "Agreement"), I
hereby notify the Company that I request to be released on______,______
("Security Release Date") from the Company's collateral security in Policy
Number_________issued by the Manufacturers Life Insurance Company of America. I
understand that my Security Release Date must be at least two years from the
date on which the Company receives this Notice. I further understand that in
order for the Company's collateral security interest to be released on my
Security Release Date, I must continue to serve as a director of the Company
until such date.
__________________________
Participant
__________________________
Date
Received by Varco International, Inc.
on_________________________________
By_________________________________
C-1
<PAGE>
ACKNOWLEDGEMENT OF RECEIPT BY INSURER
-------------------------------------
The Insurer's Home Office hereby acknowledges receipt of a duplicate original of
the Collateral Security Assignment Agreement (the "Agreement") between__________
and Varco International, Inc., which document concerns Policy Number____________
issued by the Insurer. Insurer agrees to comply with the terms of the Agreement
to the extent permitted by law, but assumes no responsibility for the validity
or sufficiency of the document and does not pass upon its legality, and reserves
the right to demand proof of interest in case of claim. Insurer further agrees
to obtain, and provide to Varco International, Inc. a copy of, the written
consent of the spouse of the Insured to any designation of a beneficiary other
than such spouse to receive the death benefit under the Policy.
Dated at______________________on________________________
MANUFACTURERS LIFE INSURANCE COMPANY OF AMERICA
By_________________________________________
(Title)
<PAGE>
EXHIBIT 11
1 of 2
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, 1994 December 31, 1994
------------------ -------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $3,891,000 $12,161,000
<CAPTION>
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares EPS
--------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES
OUTSTANDING
Common Stock Outstanding from
time-to-time during:
Three Months Ended December 31, 1994 92 3,072,655,896 33,398,434 147,350 33,545,784
Twelve Months Ended December 31, 1994 365 12,181,823,412 33,374,859 147,350 33,522,209
</TABLE>
C. CALCULATION OF EARNINGS PER SHARE
Net Income After Tax
Income Per Share = -------------------------
Total Shares Outstanding
Income Per Share =
<TABLE>
<S> <C> <C>
Three Months Ended December 31, 1994 3,891,000 = $0.12
----------
33,545,784
Twelve Months Ended December 31, 1994 12,161,000 = $0.36
----------
33,522,209
</TABLE>
<PAGE>
EXHIBIT 11
2 of 2
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, 1993 December 31, 1993
------------------ -------------------
<S> <C> <C>
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $3,293,000 $7,096,000
<CAPTION>
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares EPS
--------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES
OUTSTANDING
Common Stock Outstanding from
time-to-time during:
Three Months Ended December 31, 1993 92 3,063,457,226 33,298,448 213,107 33,511,555
Twelve Months Ended December 31, 1993 365 12,113,200,018 33,186,849 213,107 33,399,956
</TABLE>
C. CALCULATION OF EARNINGS PER SHARE
Net Income After Tax
Income Per Share = -------------------------
Total Shares Outstanding
Income Per Share =
<TABLE>
<S> <C> <C>
Three Months Ended December 31, 1993 3,293,000 = $0.10
----------
33,511,555
Twelve Months Ended December 31, 1993 7,096,000 = $0.21
----------
33,399,956
</TABLE>
<PAGE>
EXHIBIT 12
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATIONS OF RATIOS
($000'S)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- ------
<S> <C> <C> <C>
Ratio of Earnings to Fixed Charges
----------------------------------
Earnings:
Pretax Income $18,917 $10,811 $ 852
Plus:
Interest Expense 4,766 5,010 3,918
Amortization of Debt
Issuance Costs 185 260 294
------- ------- ------
Total $23,868 $16,081 $5,064
======= ======= ======
Fixed Charges:
Interest Expense $ 4,766 $ 5,010 $3,918
Amortization of Debt
Issuance Costs 185 260 294
Preferred Stock Dividend 0 0 35
------- ------- ------
Total $ 4,951 $ 5,270 $4,247
======= ======= ======
Ratio of Earnings to Fixed Charges 4.82 3.05 1.19
</TABLE>
<PAGE>
EXHIBIT 13
PRICE RANGE OF VARCO COMMON STOCK
The following table sets forth for the periods indicated the high and low sale
prices per share of Common Stock reported by the New York Stock Exchange. There
were 2,064 holders of record of the Common Stock as of the close of business on
March 1, 1995.
<TABLE>
<CAPTION>
High Low High Low
------------------------------------ --------------------------------
<S> <C> <C> <S> <C> <C>
1994 1993
First Quarter 7 5 1/4 First Quarter 6 5/8 4 1/8
Second Quarter 7 5 1/8 Second Quarter 8 3/8 5 7/8
Third Quarter 7 3/8 5 7/8 Third Quarter 8 1/2 5 7/8
Fourth Quarter 7 3/8 6 Fourth Quarter 8 3/4 5 3/8
</TABLE>
DIVIDEND POLICY
The payment of dividends (other than dividends payable solely in shares of
Common Stock) on, and repurchases of, Common Stock are restricted by the note
agreement between Varco and its institutional lenders and Varco's revolving
credit agreement with two financial institutions. Under the revolving credit
agreement, which is generally the more restrictive, the amount available for the
payment of dividends on, and repurchases of, Common Stock is limited to 25% of
Varco's consolidated net income arising after January 1, 1992, computed on a
cumulative basis. At December 31, 1994, the amount available for dividends and
repurchases under the credit agreement was $4,895,000.
The Company has not paid a dividend on the Common Stock since 1982, and the
Board of Directors presently has no plans to resume the payment of dividends.
COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol VRC.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
FIVE YEAR FINANCIAL AND OPERATING HIGHLIGHTS
(in thousands, except per share amounts and employees)
<TABLE>
<CAPTION>
Years Ended December 31, 1994(1) 1993(1) 1992(1) 1991 1990(1)
---------------------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $223,601 $193,480 $173,069 $216,622 $132,108
Gross Profit 86,761 72,010 63,049 79,431 45,294
Research and Development 11,438 9,479 9,818 10,757 7,929
Selling, General and
Administrative Expenses 53,458 48,078 44,210 47,616 24,976
Interest Expense 4,766 5,010 3,918 4,509 3,716
Income Before Income Taxes 18,917 10,811 852 16,925 9,837
Income Taxes 6,756 3,715 530 2,894 1,102
Income Before Cumulative
Effect of Change in Accounting
for Income Taxes 12,161 7,096 322 14,031 8,735
Net Income 12,161 7,096 2,358 14,031 8,735
As a Percent of Revenues 5.4% 3.7% 1.4% 6.5% 6.6%
Return on Average
Shareholders' Equity 7.7% 4.8% 1.6% 11.6% 12.5%
======== ======== ======== ======== ========
Per Share of Common Stock
Income Before Cumulative
Effect of Change in Accounting
for Income Taxes .36 .21 .01 .45 .33
Net Income .36 .21 .07 .45 .33
Book Value 4.91 4.58 4.37 4.28 3.22
======== ======== ======== ======== ========
Year-end Financial Position
Working Capital 112,342 113,241 102,953 82,748 58,142
Current Ratio 3.4 3.9 4.1 3.3 2.5
Property and Equipment -- Net 47,659 47,242 49,797 43,018 44,462
Total Assets 257,641 248,021 232,301 204,066 185,781
Long-Term Debt 39,349 49,164 51,326 25,567 51,846
Shareholders' Equity 163,728 152,608 144,366 141,919 94,252
Percent of Long Term Debt
to Total Capitalization 19.4% 24.4% 26.2% 15.3% 35.5%
======== ======== ======== ======== ========
Other
Capital Expenditures 8,588 4,029 4,577 7,850 4,010
Depreciation and Amortization 10,996 10,687 10,964 9,943 5,799
Number of Employees 1,410 1,261 1,198 1,310 1,166
Average Shares Used in Computing
Earnings Per Share 33,522 33,400 32,996 31,161 26,539
======== ======== ======== ======== ========
</TABLE>
(1) Includes the acquisitions of Martin-Decker Division as of May 22, 1990;
TOTCO Product Line as of November 28, 1990, Shaffer as of July 17, 1992;
Metrox as of August 17, 1993 and Rig Technology Limited as of November 30,
1994.
See notes to consolidated financial statements.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
The business of the Company depends primarily upon the level of worldwide
drilling activity. The level of drilling activity can be influenced by numerous
factors, including economic and political conditions, the prices of oil and gas,
development of alternative energy sources, availability of equipment and
materials, availability of new onshore and offshore acreage or concessions, and
new and continued governmental regulations regarding environmental protection,
taxation, price controls and product allocations.
The price of oil has averaged approximately $20.59, $18.31 and $17.19 a
barrel for 1992, 1993 and 1994, respectively. Oil prices dropped to less than
$15 in December 1993 and remained low through the first quarter of 1994. The
price of oil increased in the second quarter and has averaged approximately
$18.10 for the second half of 1994.
The price of natural gas has averaged approximately $1.65, $1.99 and $1.72
per thousand cubic feet for 1992, 1993 and 1994, respectively. The price of
natural gas was strong at the beginning of 1994, averaging approximately $2.16
during the first quarter. This price began to decline in April and declined
throughout the year, averaging approximately $1.46 in the fourth quarter of
1994. Although the drop in prices had little effect in 1994, it is a cause for
concern in the coming months.
Rig counts for each of the past three years are summarized in the
following table:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------------------------------- ----- -----
<S> <C> <C> <C>
Approximate Average Annual Rig Count:
Worldwide average rig count 1,766 1,711 1,674
United States & Canada average rig count 1,033 938 817
International average rig count 733 773 857
Number of offshore rigs under contract 525 523 490
</TABLE>
The higher North American rig count in 1994 as compared to 1993 is
primarily due to increased Canadian gas drilling. The Canadian rig count
averaged approximately 259 in 1994 versus 184 in the prior year, while the U.S.
rig count was up modestly from 754 in 1993 to 774 in 1994. The increase in 1993
as compared to 1992 for North America was prompted by higher natural gas prices.
International drilling activity has been flat to down for six consecutive
years. The reduced international drilling activity is generally attributable to
lower oil prices, down for four consecutive years, resulting in lower
exploration and production spending on the part of major oil companies, both
U.S. and foreign.
ACQUISITIONS
On November 30, 1994 the Company acquired all of the outstanding shares of Rig
Technology Limited ("Thule Rigtech"), a company incorporated in Scotland, for a
cost of approximately $9.0 million. Thule Rigtech provides equipment and systems
used in the handling, mixing, transport and conditioning of drilling fluids and
operates as the Company's Thule Rigtech Division.
On August 17, 1993 the Company acquired all of the outstanding common
stock of Metrox, Inc. for a cash consideration of approximately $4.0 million.
Metrox designed and manufactured instrumentation used in the oil and gas
industry, as well as in general commercial and industrial applications. Metrox
has been combined with, and is reported within, the Company's Martin-
Decker/TOTCO Instrumentation Division.
On July 17, 1992 the Company acquired substantially all of the assets and
assumed certain of the liabilities of the Shaffer Product Line ("Shaffer") of
Baroid Corporation for a cash consideration of approximately $36.0 million.
Shaffer designed, manufactured, and sold blowout prevention equipment and
related control systems and
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
motion compensation systems used on drilling rigs in the oil and gas industry.
The Shaffer operations now comprise the Company's Shaffer Division.
For further information concerning these acquisitions see Note L of Notes
to Consolidated Financial Statements.
FACILITY CLOSURE
During the third quarter of 1992 the Company announced its intention to close
and list for sale the Houston, Texas manufacturing plant of its Varco BJ Oil
Tools Division ("Houston BJ Facility"). Activities performed at this plant have
been moved to other Company locations, principally the Houston facility acquired
as part of the Shaffer acquisition. The Company took a charge to 1992 earnings
of $4.9 million and additional charges of $340 thousand and $345 thousand in
1994 and 1993, respectively, for the estimated cost of the closure and to write-
down the facility and excess equipment to estimated net realizable value.
RESULTS OF OPERATIONS
The Company operates principally in the oil and gas well drilling equipment
segment of the oilfield service industry. Set forth below are the annual net
orders and revenues for the Company's five divisions which serve this segment.
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
--------------------------------------------------- -------- --------
<S> <C> <C> <C>
Net Orders
Varco Drilling Systems $ 98,044 $ 52,000 $ 56,951
Varco BJ Oil Tools 41,201 38,279 48,654
Martin-Decker/TOTCO Instrumentation 54,341 46,171 45,243
Shaffer 46,708 46,623 20,596
Thule Rigtech 1,191
-------- -------- --------
Total $241,485 $183,073 $171,444
======== ======== ========
Revenues
Varco Drilling Systems $ 74,405 $ 58,703 $ 57,687
Varco BJ Oil Tools 41,309 40,157 53,219
Martin-Decker/TOTCO Instrumentation 54,176 44,738 45,617
Shaffer 50,900 48,169 15,940
Thule Rigtech 653
-------- -------- --------
Total $221,443 $191,767 $172,463
======== ======== ========
</TABLE>
In 1994 Drilling Systems' growth in new orders was primarily due to the
receipt of orders for 53 Top Drive Drilling Systems ('TDS") as compared to 21
such orders in 1993. In addition, Drilling Systems' orders for automated pipe
handling systems increased by $8.6 million with orders for both vertical racking
systems (five "Star" Pipe Racking Systems ("Star Systems") orders received) and
horizontal racking devices (four Pipe Transfer Systems orders received). In 1993
Drilling Systems' orders declined from 1992 as a result of a decline in new rig
construction. TDS unit orders fell to 21 units in 1993 from 24 in 1992. In
addition to the decline in TDS orders, orders for Pipe Handling Machines
("PHMs") and Star Systems were lower. Orders in 1992 included three PHMs and one
Star System compared to only one Star System in 1993.
The increase in revenues in 1994 for Drilling Systems is primarily due to
the sales of Top Drive Drilling Systems, as 41 TDS units were shipped as
compared to 22 units in 1993. Drilling Systems' revenue increased slightly in
1993 as compared to 1992 due to a $1.6 million increase in service revenue,
primarily related to activities on TDS units previously shipped.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
The increase in orders for Varco BJ Oil Tools during 1994 as compared to
1993 is primarily due to the receipt of $2.4 million in orders from Russia and
Latin America during the first half of 1994 and to the increase in worldwide
drilling activity. Orders and revenues for 1993 were negatively impacted by the
decline in international drilling activity, as international shipments of Oil
Tools products declined 22% from their 1992 levels. In 1993 U.S. orders and
revenues were also lower as a result of transferring the choke product line from
the Oil Tools Division to the Shaffer Division.
The increase in both orders and revenues for Martin-Decker/TOTCO
Instrumentation in 1994 is primarily due to new product revenues, to the full
year impact of the Metrox acquisition and to the increase in drilling activity.
The increase in revenues in 1994 as compared to the 1993 is comprised of: $5.7
million in international product sales, primarily from the TOTAL System; $2.0
million in additional revenues from Metrox products; and $2.5 million in higher
rental revenue as a result of increased drilling activity in the U.S. and
Canada, and increased rental revenue from the TOTAL system.
Increased drilling in the U.S. and Canada in 1993 over 1992 also favorably
impacted the Division's rental business, increasing revenues by approximately
$3.8 million. However, this improvement plus the contribution of Metrox products
subsequent to its acquisition totaling $1.4 million were entirely offset by a
decline in international product sales.
The increase in drilling activity in 1994 resulted in a small increase in
Shaffer's spare parts, service and repair revenues. Acquired in July of 1992,
1993 represented Shaffer's first full year as a Varco Division. Included in
Shaffer's 1993 orders and revenues is approximately $3.1 million of choke sales,
a product previously sold by the Varco BJ Oil Tools Division.
The Company's new orders for the fourth quarter of 1994 were $73.1 million
as compared to an average of $56.1 million for the first three quarters of 1994.
Most of this increase came from the Drilling Systems Division with fourth
quarter orders of $35.4 million, compared to an average of $20.9 million for the
first three quarters of 1994. During the fourth quarter, Drilling Systems
received orders for 22 TDS units and two Star Systems. The Company does not
believe that its fourth quarter order rate is indicative of a trend and does not
expect the orders to continue at that rate into 1995.
The Company's backlog of unshipped orders was $52.8 million at December
31, 1994 as compared to $32.3 million at December 31, 1993 and $40.4 million at
December 31, 1992. In accordance with industry practice, orders and commitments
generally are cancelable by customers at any time. The Company believes that
substantially all of the backlog at December 31, 1994 will be shipped by
December 31, 1995.
Other income increased in 1994 and 1993, as compared to 1992, due to
investment earnings on higher average cash equivalents and short-term
investments and to higher average interest rates.
Gross margins (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income for the Company were
39.2% for 1994, 37.6% for 1993 and 36.6% for 1992. The improvement in 1994 is
due to increased utilization of the Company's manufacturing facilities. The
Company estimates that based upon direct labor hours its manufacturing
facilities were approximately 75% utilized in 1994 as compared to 60% during
1993 and 1992. The effect of this higher utilization has been to increase the
percentage of manufacturing expenses allocated to inventory and decrease
expenses charged directly to cost of sales, thereby contributing to an increase
in gross margins.
As compared to 1992, the 1993 gross margins were favorably impacted by:
(1) an improvement in Drilling Systems' margins (1.7%) primarily as a result of
year-to-year
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
cost reductions; (2) increased Instrumentation margins (0.7%) resulting from a
higher proportion of rental revenue, which carries higher margins; and (3) cost
reductions resulting from the closure of the Houston BJ Facility (1.0%). These
increases were partially offset by: (1) the inclusion of Shaffer for the full
year with margins which are lower than the average gross margin of the other
Divisions (1.7%) and (2) a decline in the utilization of Varco BJ Oil Tools
manufacturing facility located in The Netherlands which operated at
approximately 90% utilization in 1992 as compared to approximately 50% in 1993
(0.7%).
The Company believes that new product development is significant to the
future growth of the Company. Research and development expenses as a percent of
revenue were 5.1%, 4.9%, and 5.7% for the years 1994, 1993 and 1992,
respectively. The Company expects to continue to incur research and development
expenses at similar rates.
Selling, general and administrative expenses were $53.5 million in 1994,
$5.4 million higher than in 1993. This increase is primarily due to higher
selling and marketing expenses associated with the higher revenue levels in
1994. Selling, general and administrative expenses were $3.9 million higher in
1993 than 1992. The 1993 increase is primarily due to the full year impact of
the Shaffer Division and to the $1.7 million impact of adopting Statement of
Financial Accounting Standards No. 106 Accounting for Postretirement Benefits
Other Than Pensions. (see Note I of Notes to Consolidated Financial Statements.)
At December 31, 1994 overall Company employment was 1,410 (including 179
temporary employees) as compared to 1,261 (including 200 temporary employees) at
December 31, 1993. The employment increase is mostly due to an increase in
manufacturing employees to meet the higher level of shipments.
The increase in interest expense in 1994 and 1993 as compared to 1992 is
due to higher average debt as a result of debt associated with the purchase of
Shaffer in 1992.
The Company's effective income tax rate was 35.7% in 1994 compared to
34.4% in 1993. The increase is due to the utilization of $1.7 million of tax
credits in 1993 compared to only $1.3 million of tax credits in 1994. At
December 31, 1994 the Company has no further tax credits to offset against
future taxes.
The provision for income tax expense increased to $3.7 million in 1993
from $530,000 (excluding the cumulative effect of a change in accounting for
income taxes of $2.0 million) in 1992. In 1992, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 109 Accounting for
Income Taxes ("Statement 109"). The cumulative effect of adopting Statement 109
was to increase 1992 net income by $2.0 million. The Company believes that in
the future its effective tax rate will approximate the statutory tax rate and
that future taxable income will be sufficient to recover net deferred assets.
(See Note E of Notes to Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994 the Company had cash and cash equivalents and short-term
investments of $38.6 million as compared to $53.3 million at December 31, 1993.
This decrease is due to increases in accounts receivable and inventory, the
acquisition of Rig Technology Limited and to capital equipment expenditures made
during the year.
In July 1992 the Company sold $50.0 million aggregate principal amount of
its 8.95% Senior Notes Due June 30, 1999 (the "Senior Notes") to a group of ten
institutional investors pursuant to a Note Agreement dated as of July 1, 1992
(the "Note Agreement"). The principal of the Senior Notes is payable in five
equal annual
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
installments commencing on June 30, 1995. The Notes include a yield maintenance
prepayment penalty if any principal is repaid prior to the installment due date.
Had the entire outstanding principal amount been prepaid at December 31, 1994,
the prepayment penalty would have been approximately $1.7 million. The proceeds
of this sale along with a portion of cash generated from operations were used to
purchase Shaffer and for the redemption of the $20.0 million of 8 1/2%
Convertible Subordinated Debentures Due 1996. The Company also redeemed the
outstanding $2.00 Cumulative Convertible Preferred Stock, Series A.
On February 25, 1993 the Company entered into an unsecured revolving
credit agreement with Citicorp USA, Inc. and Citibank, N.A. (the "Credit
Agreement") which currently provides for advances and letters of credit of up to
$10,000,000 each, subject to reduction in certain events. Advances under the
Credit Agreement bear interest at either a prime rate plus 1/2% or a rate based
on the Eurodollar Market, and the Credit Agreement requires a commitment fee of
.375% of the unused portion of the credit facility. There have been no advances
made under the Credit Agreement, and there were $3.5 million in letters of
credit outstanding at December 31, 1994.
Both the Note Agreement and the Credit Agreement restrict the payment of
dividends (other than dividends payable solely in shares of Common Stock) on,
and repurchases of, Common Stock. Under the terms of the Credit Agreement, which
is generally the more restrictive of these, the amount available for the payment
of dividends on, and repurchases of, Common Stock is limited to 25% of the
Company's consolidated net income arising after January 1, 1992, computed on a
cumulative basis. In addition, pursuant to an amendment to the Credit Agreement
entered into in May 1994, the Company may repurchase at any time prior to
December 31, 1995 not in excess of one million shares of its Common Stock for an
aggregate cost not exceeding $6 million. The Company may also purchase or
otherwise acquire shares of Common Stock from the proceeds of the substantially
concurrent sale of shares of Common Stock.
On May 26, 1994 the Company announced that its Board of Directors
authorized the repurchase of up to one million shares of the Company's Common
Stock for an aggregate purchase price not exceeding $6 million. Subsequent to
that date the Company has repurchased on the open market 267,200 shares of its
Common Stock at an average price of approximately $6.28 per share.
Working capital was $112.3 million at December 31, 1994 compared to $113.2
million at December 31, 1993. The Company's current ratio has decreased from 3.9
to 1.0 at December 31, 1993 to 3.4 to 1.0 at December 31, 1994 and long-term
debt as a percentage of total capitalization has decreased to 19% at December
31, 1994 from 24% at December 31, 1993 as a result of the maturity of the first
$10.0 million Senior Notes installment due June 30, 1995.
Capital expenditures were $8.6 million in 1994 as compared to $4.0 million
in 1993. The Company expects 1995 expenditures will be at a level comparable to
the 1994 amount. The major capital expenditures in 1994 included $3.8 million of
machinery and equipment in all divisions and $2.2 million of rental assets at
Martin-Decker/TOTCO. The Company believes its December 31, 1994 cash and cash
equivalents, short-term investments and its credit facility will be sufficient
to meet its capital expenditures and operating cash needs in 1995.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
December 31, 1994 1993
--------------------------------------------------------------------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 8,793 $ 22,560
Short-term investments -- Note B 29,832 30,746
Receivables -- principally trade, less allowances for
doubtful accounts of $1,580 (1994) and $1,743 (1993) 52,250 40,239
Inventories -- Note C 60,299 51,452
Deferred tax assets -- Note E 5,068 5,238
Prepaid expenses 2,535 2,320
-------- --------
Total Current Assets 158,777 152,555
Property, plant and equipment -- at cost,
less accumulated depreciation -- Note D 47,659 47,241
Assets held for sale -- Note L 2,148 2,523
Cost in excess of net assets acquired, less accumulated
amortization of $4,210 (1994) and $3,466 (1993) 37,529 31,180
Other assets -- Note C 11,528 14,522
-------- --------
Total Assets $257,641 $248,021
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable -- principally trade $ 15,345 $ 13,818
Accrued payroll and related cost 7,258 7,036
Accrued warranty 2,563 4,000
Taxes payable 1,152 3,505
Customer deposits 743 2,975
Other accrued liabilities 9,374 7,980
Current portion of long-term debt -- Note F 10,000
-------- --------
Total Current Liabilities 46,435 39,314
Long-term debt, less current portion -- Note F 39,349 49,164
Deferred taxes -- Note E 1,304 1,992
Postretirement obligations -- Note I 6,825 4,943
-------- --------
Total Liabilities 93,913 95,413
Shareholders' Equity -- Note G
Preferred Stock: 10,000,000 shares authorized, none
issued and outstanding Common Stock: 80,000,000
shares authorized, 33,335,553 (1994) and
33,304,023 (1993) issued and outstanding, stated value 23,704 23,672
Additional paid-in capital 102,193 102,630
Retained earnings 37,831 26,306
-------- --------
Total Shareholders' Equity 163,728 152,608
Commitments and Contingencies -- Note H
-------- --------
Total Liabilities and Shareholders' Equity $257,641 $248,021
======== ========
</TABLE>
See notes to consolidated financial statements.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
---------------------------------------------------------------------------------------- -------- --------
<S> <C> <C> <C>
Revenues:
Net sales $197,956 $171,812 $156,518
Rental income 23,487 19,955 15,945
Other income 2,158 1,713 606
-------- -------- --------
223,601 193,480 173,069
Costs and Expenses:
Cost of sales 127,752 114,000 104,033
Cost of rental income 6,930 5,757 5,381
Selling, general and administrative expenses 53,458 48,078 44,210
Research and development costs 11,438 9,479 9,818
Interest expense 4,766 5,010 3,918
Provision for production facility closure -- Note L 340 345 4,857
-------- -------- --------
204,684 182,669 172,217
-------- -------- --------
Income before income taxes and cumulative effect
of change in accounting for income taxes 18,917 10,811 852
Income taxes -- Note E 6,756 3,715 530
Income before cumulative effect of change in
accounting for income taxes 12,161 7,096 322
Cumulative effect of change in accounting
for income taxes 2,036
-------- -------- --------
Net income $ 12,161 $ 7,096 $ 2,358
======== ======== ========
Income per common share before cumulative effect of
change in accounting for income taxes $ .36 $ .21 $ .01
Cumulative effect of change in accounting
for income taxes .06
-------- -------- --------
Net income per common share $ .36 $ .21 $ .07
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Issued and Outstanding Issued and Outstanding Additional
Years Ended December 31, ---------------------- ---------------------- Paid-in Retained
1994, 1993, and 1992 Shares Amount Shares Amount Capital Earnings Total
-------------------------------------------------- ------ ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991 23 $ 469 32,929 $ 23,297 $101,266 $ 16,887 $141,919
Net income 2,358 2,358
Preferred Stock conversions (1) (18) 2 2 16
Preferred Stock redeemed (22) (451) (5) (456)
Common Stock issuances 122 122 458 580
Dividend payments (35) (35)
----- ----- ------ -------- -------- -------- --------
Balances at December 31, 1992 0 0 33,053 23,421 101,735 19,210 144,366
Net income 7,096 7,096
Common Stock issuances 251 251 895 1,146
----- ----- ------ -------- -------- -------- --------
Balances at December 31, 1993 0 0 33,304 23,672 102,630 26,306 152,608
Net income 12,161 12,161
Common Stock repurchased (264) (264) (1,395) (1,659)
Common Stock issuances 296 296 958 1,254
Unrealized losses on
investments (462) (462)
Foreign currency
translation adjustment (174) (174)
----- ----- ------ -------- -------- -------- --------
Balances at December 31, 1994 0 $ 0 33,336 $ 23,704 $102,193 $ 37,831 $163,728
===== ===== ====== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net income $ 12,161 $ 7,096 $ 2,358
Items included in net income not requiring
(providing) cash:
Depreciation 8,250 8,137 8,952
Write down of production facility to net realizable value 340 345 3,837
Cumulative effect of change in accounting for income taxes (2,036)
Amortization 2,746 2,550 2,012
Deferred income taxes (517) (519) (258)
(Gain) loss on sale of equipment (44) (1) 76
Stock bonus 261 138
Post retirement obligations 2,178 2,618
Changes in operating assets and liabilities,
net of effects of acquisition:
Receivables (10,491) 2,203 17,521
Inventories (7,761) 8,251 17,512
Accounts payable 982 2,086 (4,586)
Accrued liabilities (3,030) 1,637 (6,486)
Customer deposits (2,232) 2,975
Other 792 (822) (1,040)
-------- -------- --------
Net Cash from Operating Activities 3,635 36,556 38,000
Investing Activities
Equipment purchases (8,588) (4,029) (4,577)
Proceeds from equipment sales 178 658 603
Acquisitions (8,954) (5,553) (37,216)
Purchases of short-term investments (87,548) (81,470)
Proceeds from sale of short-term investments 5,221 6,900
Proceeds from maturities of short-term investments 83,241 43,824
Unrealized losses on investments (462)
-------- -------- --------
Net Cash Used in Investing Activitites (16,912) (39,670) (41,190)
Financing Activities
Increases in long-term debt and line of credit 56,000
Payments on long-term debt and line of credit (2,055) (29,739)
Deferred issue costs (189) (907)
Redemption of Preferred Stock (456)
Proceeds from issuance of Common Stock 1,169 997 442
Common Stock repurchased (1,659)
Dividends paid (35)
-------- -------- --------
Net Cash from (used in) Financing Activities (490) (1,247) 25,305
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (13,767) (4,361) 22,115
Cash and cash equivalents at beginning of year 22,560 26,921 4,806
-------- -------- --------
Cash and cash equivalents at end of year $ 8,793 $ 22,560 $ 26,921
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[A] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business _ Varco International, Inc. and its subsidiaries
(hereinafter, the "Company") are engaged in the design, manufacture, sale and
rental of tools, equipment and instrumentation used primarily in the oil and
gas well drilling equipment segment of the oil field service industry. The
Company operates through five divisions: Varco Drilling Systems, whose
products include integrated systems for rotating and handling pipe on a
drilling rig; Varco BJ Oil Tools, whose products include pipe handling tools,
hoisting equipment and rotary equipment; Martin-Decker/TOTCO Instrumentation,
whose instrumentation products are used in the management of drilling
operations; Shaffer, whose products include pressure control and motion
compensation equipment and flow devices; and Thule Rigtech whose products are
used in the handling, mixing, transport and conditioning of drilling fluids.
Principles of Consolidation _ The consolidated financial statements include
the accounts of Varco International, Inc. and its wholly-owned subsidiaries.
All material intercompany items and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents _ The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amount reported in the balance sheet for cash and
cash equivalents approximates its fair value.
Short-term Investments _ In May 1993 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("Statement 115"). The
Company adopted the provisions of the new standard for investments held as of
or acquired after January 1, 1994. In accordance with the Statement, prior
period financial statements have not been restated to reflect the change in
accounting principle. There was no cumulative effect of adopting Statement
115.
Under Statement 115, management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities that the Company has
both the positive intent and ability to hold to maturity are carried at
amortized cost. Debt securities that the Company does not have the positive
intent and ability to hold to maturity and all marketable equity securities are
classified as available-for-sale and carried at fair value. Unrealized holding
gains and losses, net of tax, on securities classified as available-for-sale are
carried as a separate component of shareholders' equity.
Presently, the Company classifies its short-term investments as
available-for-sale securities and carries them at their fair value. Short-term
investments consist of government and debt securities with interest rates
ranging from 3% to 9%.
Concentrations of Credit Risk _ The Company places its short-term
investments in high credit quality financial institutions and investment grade
short-term investments and limits the amount of credit exposure to any one
entity. Substantially all of the Company's accounts receivable are due from
customers in the oil and gas industry, both in the United States and
internationally. The Company performs periodic credit evaluations of its
customers and generally does not require collateral. In certain circumstances,
the Company requires letters of credit to further ensure credit worthiness.
Inventories _ Inventories are stated at the lower of cost or market. The
Company determines the cost of inventories using the last-in, first-out
("LIFO") method.
Depreciation _ Depreciation is provided using the straight-line method over
estimated useful lives ranging from 3 to 25 years.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
Assets Held for Sale _ Excess equipment and a production facility held for
sale are stated at their estimated net realizable value.
Intangible assets _ The excess of cost over net assets of businesses
acquired ("goodwill") is being amortized on a straight-line basis over periods
ranging from 10 to 40 years. The carrying value of goodwill will be reviewed if
the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of cash flows. Included in Other Assets are other
intangible assets totaling $5,597,000 net of accumulated amortization of
$3,448,000 at December 31, 1994, which are being amortized on a straight-line
basis over estimated useful lives ranging from 5 to 17 years.
Income Taxes _ Effective January 1, 1992 the Company adopted the provisions
of Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("Statement 109"). As permitted by Statement 109, prior years' financial
statements have not been restated to reflect the change in accounting method.
The cumulative effect of adopting Statement 109 was to increase 1992 net income
by $2,036,000, or $.06 per share.
Under Statement 109, the liability method is used to account for income
taxes. Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts which are
more likely than not to be realized. The provision for income taxes is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
Foreign Currency _ The Company has determined that the United States dollar
is the functional currency of all its foreign subsidiaries except for Rig
Technology Limited whose functional currency is the British pound sterling.
Accordingly, the financial statements of most foreign operations are remeasured
in terms of the United States dollar and exchange gains and losses are
recognized in operations. Exchange losses were $68,000, $264,000, and $948,000
in 1994, 1993 and 1992, respectively. Financial statements of Rig Technology
Limited are translated at current rates of exchange, with gains or losses
resulting from translation included in shareholders' equity.
Per Share Data _ Per share amounts are computed by dividing income
attributable to common shareholders by the weighted average number of common
shares and dilutive common share equivalents which were 33,522,209, 33,399,956,
and 32,996,050 in 1994, 1993 and 1992, respectively.
Reclassification _ Certain amounts in the 1993 financial statements have
been reclassified to conform with current year classification.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
[B] SHORT-TERM INVESTMENTS
Available-for-sale securities at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
(in thousands) Cost Gains Losses FairValue
-------------------------------------------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury notes and obligations
of U.S. government agencies $14,451 $ 9 $ 290 $ 14,170
Obligations of states and political
subdivisions 10,812 102 10,710
Corporate debt securities 5,031 79 4,952
------- ---------- ---------- ---------
$30,294 $ 9 $ 471 $ 29,832
======= ========== ========== =========
</TABLE>
The gross realized gains on sales of available-for-sale securities totaled
$7,000 and the gross realized losses totaled $153,000 in 1994.
The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1994, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Estimated
(in thousands) Cost Fair Value
------------------------------------------------------- ----------
<S> <C> <C>
Due in one year or less $16,727 $16,605
Due after one year 13,567 13,227
------- -------
$30,294 $29,832
======= =======
</TABLE>
[C] INVENTORIES
Inventories classified as current assets consist of the following:
<TABLE>
<CAPTION>
December 31, (in thousands) 1994 1993
------------------------------------------------------- -------
<S> <C> <C>
Raw materials $ 6,164 $ 5,615
Work in process 13,677 11,806
Finished goods 40,458 34,031
------- -------
$60,299 $51,452
======= =======
</TABLE>
The excess of approximate current cost over LIFO cost was $14,421,000 and
$12,892,000 at December 31, 1994 and 1993, respectively. In 1994, 1993 and
1992 LIFO layers of preceding years were reduced which decreased cost of goods
sold by $246,000, $590,000 and $718,000, respectively. A portion of the
Company's inventory is not expected to be sold or used within one year and,
accordingly has been reclassified as other assets. The amount of inventory
estimated to exceed one year's usage was $3,500,000 and $4,500,000 at December
31, 1994 and 1993, respectively.
[D] PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, (in thousands) 1994 1993
------------------------------------------------------- -------
<S> <C> <C>
Land $ 1,929 $ 1,929
Building and improvements 19,242 19,128
Machinery and equipment 52,679 50,607
Rental equipment 15,615 13,548
Furniture and fixtures 9,814 7,415
Autos and trucks 713 382
------- -------
99,992 93,009
Less accumulated depreciation and amortization 52,333 45,768
------- -------
$47,659 $47,241
======= =======
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
[E] INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
December 31, (in thousands) 1994 1993
------------------------------------------------------------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 3,910 $ 3,423
Deferred tax assets:
Intercompany profit elimination 3,530 2,522
Tax credit carryforwards 990
Allowance for excess inventory 1,778 1,856
Allowance for loss on sale of assets 1,663 1,431
Postretirement benefit obligation 1,698 1,264
Accruals 845 571
Other 414 289
------- -------
Total deferred tax assets 9,928 8,923
Valuation allowance for deferred tax assets (2,254) (2,254)
------- -------
Net deferred tax assets 7,674 6,669
------- -------
Net deferred taxes $ 3,764 $ 3,246
======= =======
Current deferred tax assets $ 5,068 $ 5,238
Noncurrent deferred tax liabilities,
net of noncurrent deferred tax assets (1,304) (1,992)
------- -------
Net deferred taxes $ 3,764 $ 3,246
======= =======
</TABLE>
United States and foreign income (loss) before income taxes and the components
of income tax expense are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
----------------------------------------------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. $17,376 $12,104 $ 1,125
Foreign 1,541 (1,293) (273)
------- ------- -------
$18,917 $10,811 $ 852
======= ======= =======
</TABLE>
Income tax expense (benefit):
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
------------------------------------------------- ------- -------
<S> <C> <C> <C>
Current:
U.S. $ 7,042 $ 4,894 $ 727
Foreign 660 441 (116)
State 559 429 177
Utilization of credits (1,258) (1,680)
Tax benefits credited to paid-in capital 270 149
------- ------- -------
7,273 4,233 788
Deferred:
U.S. (517) (518) (258)
------- ------- -------
$ 6,756 $ 3,715 $ 530
======= ======= =======
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
Differences between the Company's income tax expense and an amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
------------------------------------------------------------------ ------- -------
<S> <C> <C> <C>
At federal statutory rate $ 6,621 $ 3,684 $ 290
Increases (reductions) in taxes:
FSC benefit (767) (536) (240)
Financial statement benefit from credit carryovers (1,278)
Tax impact of non-deductible expenses 605 421 354
Alternative minimum tax 32
State taxes, net of federal benefit 363 283 117
Tax rate differential on foreign earnings
and losses recorded without tax benefit 120 881 (23)
Other (186) 260
------- ------- -------
Total tax provision $ 6,756 $ 3,715 $ 530
======= ======= =======
</TABLE>
Income taxes paid net of refunds received in 1994, 1993 and 1992 were
$8,957,000, $2,318,000 and $600,000, respectively.
The Company is currently under examination by the Internal Revenue Service for
the years ended December 31, 1992, 1991 and 1990. Management believes the
resolution of this examination will not have a material adverse effect on the
Company's financial position.
[F] LONG-TERM DEBT
Long-term debt consists of notes payable to institutional investors under an
8.95% Senior Note Agreement (the "Note Agreement.") Principal is due in five
equal annual installments beginning June 30, 1995 and interest is payable
semiannually. The Note Agreement contains restrictive covenants requiring the
maintenance of certain financial ratios, limitations on additional borrowings
and capital expenditures, and restrictions on distribution of cash or other
property. The carrying amount of the Notes approximate their fair value.
The Company has an unsecured revolving credit and term loan agreement
with two Citicorp affiliates which provides for advances up to $10,000,000 and
letters of credit up to $10,000,000, subject to reduction in certain events.
Advances under the loan agreement bear interest at either a prime rate plus 1/2%
or a rate based on the Eurodollar Market. The agreement requires a commitment
fee of .375% of the unused portion of the credit facility, restricts additional
borrowings if minimum asset levels are not met and contains restrictive
covenants requiring the maintenance of certain financial ratios, limitations on
additional borrowings and capital expenditures, and restrictions on distribution
of cash or other property. The agreement terminates in May 1996. There were no
borrowings under the agreement at December 31, 1994.
Required principal payments on long-term debt as of December 31, 1994, are
as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------------------------------------------------------
<S> <C>
1995 $10,000
1996 10,000
1997 10,000
1998 10,000
1999 10,000
-------
$50,000
=======
</TABLE>
Interest paid during 1994, 1993 and 1992 was $4,766,000, $4,757,000, and
$5,530,000, respectively.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
[G] SHAREHOLDERS' EQUITY
On October 1, 1992 the Company redeemed its outstanding $2.00 Cumulative
Convertible Preferred Stock, Series A for a redemption price of $20.70 per
share.
The Company has an employee stock purchase plan under which 1,000,000
shares of Common Stock may be sold at a price equal to 85% of the lower of
market price at the beginning or end of a six-month plan period. As of
December 31, 1994, 910,857 shares have been sold under this plan.
The Varco International, Inc. Stock Bonus Plan (the "Bonus Plan")
authorizes the Compensation Committee of the Board of Directors to award
additional compensation to selected key employees of the Company in the form of
stock awards payable in shares of Common Stock of the Company to a maximum of
500,000 shares. Through December 31, 1994, 277,078 shares have been granted
and issued to key employees under the Bonus Plan.
The Varco International, Inc. 1990 Stock Option Plan permits and
predecessor plans permitted, the grant of incentive and non-statutory options
to key employees and officers. Options granted under the plans must be not less
than the fair market value of the stock on the date of grant. Options are
exercisable during such periods as determined by the compensation committee and
expire not later than ten years from the date of the grant.
The Varco International, Inc. 1994 Directors' Stock Option Plan provides
for the annual grant of a 5,000 share stock option to each non-employee
director. Options granted under this plan are at the fair market value of the
stock on the date of grant. Options are exercisable for ten years from the data
of grant unless sooner terminated.
Stock option activity during 1994, 1993 and 1992 was as follows:
<TABLE>
<CAPTION>
Number of Shares 1994 1993 1992
----------------------------------------------------------------- ---------- ---------
<S> <C> <C> <C>
Stock options outstanding, beginning of year 1,062,732 995,532 864,132
Activity during the year (prices per share):
Granted: 255,750 218,050 176,300
1994, $6.3125 to $6.69
1993, $4.563
1992, $6.25 to $6.31
Exercised: 194,960 144,400 1,000
1994, $3.0625 to $6.25
1993, $3.0625 to $4.69
1992, $3.375 to $4.69
Canceled: 14,900 6,450 43,900
1994, $4.563 to $6.69
1993, $3.0625 to $4.69
1992, $3.0625 to $9.25
--------- --------- ---------
Stock options outstanding, end of year 1,108,622 1,062,732 995,532
1994, $3.25 to $9.25
1993, $3.0625 to $9.25
1992, $3.0625 to $9.25
--------- --------- ---------
Stock options exercisable 590,132 640,162 686,632
========= ========= =========
Stock options available for future grant 916,600 577,500 754,100
========= ========= =========
</TABLE>
At December 31, 1994, 2,031,000 shares of Common Stock were reserved for
future issuance in connection with stock purchase, stock bonus and stock option
plans.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
[H] COMMITMENTS AND CONTINGENCIES
The Company leases land and its executive offices in Orange, California
under two operating leases, from certain officers, directors, and shareholders
of the Company. The land lease expires in 2012, has an annual aggregate rental
of $480,000 (subject to upward adjustment in 2002 based on appraisals) plus
real estate taxes and other expenses. The Company has the option to purchase
the leased land at a price equal to the greater of the original cost of the
property to the lessors or the fair market value at the time of purchase. The
office lease expires in 1998 and has an aggregate annual rental of $289,000
(subject to periodic upward adjustments based upon the consumer price index.)
The Company has an option to extend this lease for 60 months based on the then
fair market rent of the building.
The Company leases most of its sales, service and distribution
facilities under agreements ranging from one to eight years.
Approximate minimum annual rental payments under noncancelable operating
leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
(in thousands) Real Estate Equipment Total
----------------------------- --------- -------
<S> <C> <C> <C>
1995 $ 2,136 $1,728 $ 3,864
1996 1,770 1,433 3,203
1997 978 904 1,882
1998 873 402 1,275
1999 573 121 694
Thereafter 6,902 12 6,914
------- ------ -------
$13,232 $4,600 $17,832
======= ====== =======
</TABLE>
Rent expense amounted to $4,428,000, $4,045,000, and $3,795,000 for 1994,
1993, and 1992, respectively.
The Company is obligated to make royalty payments to Baker Hughes, a
shareholder of the Company, each year for which sales of certain products
("royalty products") exceed $40,000,000. Royalty payments are required until
the earlier of such time as the discounted value (discount rate 12.5%) of all
such payments equals $15,000,000 or September 29, 1996. The royalty rate ranges
from 2% to 4 1/2% as the annual royalty product sales increase from $40,000,000
to in excess of $90,000,000. The Company's royalty payment obligations can be
accelerated in certain circumstances, including a change in control of the
Company. Royalty expense attributable to Baker Hughes amounted to $1,763,000,
$33,000, and $1,002,000, in 1994, 1993, and 1992, respectively.
At December 31, 1994 the Company was obligated under outstanding letters
of credit in the face amount of approximately $3,505,000.
The Company is sometimes named as a defendant in litigation relating to
the products and services it provides. The Company insures against these risks
to the extent deemed prudent by its management, but no assurance can be given
that the nature and amount of such insurance will in every case fully indemnify
the Company against liabilities arising out of pending and future legal
proceedings relating to its ordinary business activities. The Company provides
for costs related to these contingencies when a loss is probable. It is the
opinion of management that it is remote that there will be an unfavorable
resolution in excess of amounts previously provided.
The Company has been designated as a potentially responsible party
("PRP") for two separate waste disposal sites. With respect to both of the
sites, numerous other PRPs have similarly been designated. In one case the
Company has a contribution agreement with other PRPs, and settlements and costs
paid by the Company have not been significant. In the opinion of the Company's
management it is remote that there will be additional material amounts in excess
of amounts previously provided.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
[I] POSTRETIREMENT BENEFITS
The Company has a contributory profit sharing plan covering eligible U.S.
employees and certain foreign employees with more than one year's service.
Under the plan, the Company contributes from 2% to 20% of its net income (as
defined) at the discretion of the Board of Directors. The total contribution
may not exceed the maximum amount allowable for income tax purposes.
Contributions to the Plan amounted to $1,200,000, $850,000, and $250,000, for
1994, 1993 and 1992, respectively. In 1993, the Company amended its Profit
Sharing Plan to designate a portion of profit sharing contributions for retiree
healthcare and life insurance benefits for certain eligible employees retiring
after December 31, 1993.
The Company also has a supplemental defined benefits plan providing
retirement and death benefits for a number of key employees. The net pension
liability was $1,382,000 and $1,389,000 at December 31, 1994 and 1993,
respectively. Expense under the plan was $300,000 $248,000, and $223,000 in
1994, 1993, and 1992, respectively.
For certain former employees who retired prior to December 31, 1993,
healthcare and life insurance benefits are provided through insurance
companies. In 1993 the Company adopted FASB Statement No. 106, Accounting for
Postretirement Benefits Other Than Pensions. Postretirement benefit cost of
$534,000 for 1992, which was recorded on a cash basis, was not restated.
The following table presents the funded status of the defined benefit
health care and life insurance plan, reconciled with amounts recognized in the
Company's balance sheet:
<TABLE>
<CAPTION>
December 31, (in thousands) 1994 1993
------------------------------------------------------------ --------
<S> <C> <C>
Accumulated postretirement benefit obilgation $(13,124) $(16,450)
Unrecognized net gain (5,376) (1,639)
Unrecognized transition obligation 13,721 14,484
-------- --------
$ (4,779) $ (3,605)
======== ========
Net periodic postretirement benefit cost
includes the following components:
Service cost $ $ 81
Interest cost 1,115 1,423
Amortization of transition obligation 763 763
-------- --------
$ 1,878 $ 2,267
======== ========
</TABLE>
The weighted-average annual rate of increase in the per capita cost of
covered benefits is 11% for 1994 and is assumed to decrease gradually to 6% for
2010 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as
of December 31, 1994 by $1,305,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for 1994
by $106,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8% and 7% at December 31, 1994 and 1993,
respectively.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
[J] SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994
Revenues $51,314 $57,519 $54,248 $60,520
Gross profit 20,266 21,440 21,802 23,253
Income before income taxes 3,650 4,616 4,864 5,787
Provision for income taxes 1,292 1,712 1,856 1,896
Net income 2,358 2,904 3,008 3,891
Net income per share of common stock .07 .09 .09 .11
1993
Revenues $45,813 $48,658 $43,692 $55,317
Gross profit 17,361 17,193 16,380 21,076
Income before income taxes 2,098 2,304 1,679 4,730
Provision for income taxes 749 884 645 1,437
Net income 1,349 1,420 1,034 3,293
Net income per share of common stock .04 .04 .03 .10
</TABLE>
[K] GEOGRAPHIC INFORMATION
Information about the Company's worldwide operations for 1994, 1993 and 1992
follows:
<TABLE>
<CAPTION>
Adjustments &
(in thousands) United States Europe Asia Eliminations Consolidated
---------------------------------------------- ------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1994
Sales and rentals to
unaffiliated customers $159,812 $39,189 $22,442 $221,443
Intercompany sales 34,257 15,484 1,085 (50,826)
Total sales and rentals 194,069 54,673 23,527 (50,826) 221,443
Operating profit 12,521 4,037 2,359 18,917
Identifiable assets 191,273 49,924 16,444 257,641
1993
Sales and rentals to
unaffiliated customers $140,046 $35,890 $15,831 $191,767
Intercompany sales 29,756 10,819 453 (41,028)
Total sales and rentals 169,802 46,709 16,284 (41,028) 191,767
Operating profit 5,418 4,176 1,217 10,811
Identifiable assets 195,185 40,750 12,086 248,021
1992
Sales and rentals to
unaffiliated customers $124,594 $37,548 $10,321 $172,463
Intercompany sales 22,383 13,623 401 (36,407)
Total sales and rentals 146,977 51,171 10,722 (36,407) 172,463
Operating profit (loss) (10,731) 5,829 5,754 852
Identifiable assets 178,925 42,283 11,093 232,301
</TABLE>
Intercompany sales are transferred at prices that approximate those charged
to third party distributors.
International sales from all of the Company's operating locations are
principally to the following geographic areas:
<TABLE>
<CAPTION>
(in thousands) 1994 1993 1992
-------------------------------------- -------- --------
<S> <C> <C> <C>
Europe $ 49,783 $ 50,735 $ 48,987
Asia and Australia 38,761 33,774 25,105
Africa and Middle East 18,544 13,402 26,370
South America 25,515 15,663 15,976
Canada 7,401 14,861 2,830
Mexico 3,438 1,748 3,164
Former Soviet Union 6,376 6,320 2,209
Miscellaneous 276 240 542
-------- -------- --------
$150,094 $136,743 $125,183
======== ======== ========
</TABLE>
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
<PAGE>
No individual customer accounted for more than 10% of total sales in 1994,
1993 or 1992.
[L] ACQUISITIONS
On November 30, 1994 the Company acquired all of the outstanding shares of
Rig Technology Limited ("Thule Rigtech"), a company incorporated in Scotland,
for approximately $8,954,000 consisting of cash, the assumption of debt and
the payment of certain expenses. Thule Rigtech provides equipment and systems
used in the handling, mixing, transport and conditioning of drilling fluids.
On August 17, 1993 the Company acquired all of the outstanding common
stock of Metrox, Inc. for a cash consideration of approximately $4,000,000.
Metrox designed and manufactured instrumentation used in the oil and gas
industry, as well as in general commercial and industrial applications. Metrox
has been combined with, and is reported within, the Company's Martin-
Decker/TOTCO Instrumentation Division.
On July 17, 1992 the Company acquired substantially all of the assets
and assumed certain of the liabilities of the Shaffer Product Line ("Shaffer")
of Baroid Corporation pursuant to an Asset Purchase Agreement dated as of April
10, 1992. Shaffer designed, manufactured, and sold pressure control equipment,
control systems and motion compensation systems used on drilling rigs. Total
cost, including direct acquisition costs, was approximately $36,829,000.
As a result of the Shaffer acquisition, which included a manufacturing
facility in Houston, Texas, the Company determined that its manufacturing
capacity exceeded its needs. Accordingly, in the third quarter of 1992, the
Company decided to sell a Varco BJ Oil Tools manufacturing facility located in
Houston and to combine the operations into the Shaffer facility. As a result of
this decision, in 1992 a charge of $4,857,000 was recorded to reduce the
carrying value of the facility and excess equipment to net realizable value and
accrue estimated relocation and severance expenses. In 1994 and 1993 additional
charges of $340,000 and $345,000, respectively, were incurred to further lower
the carrying value of the facility.
The acquisitions were accounted for as purchases and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair values at
the dates of acquisition and operating results are included in the consolidated
statements of income from the respective dates of acquisition.
Supplemental unaudited information is not presented for Rig Technology
Limited or Metrox because it would not have a material impact on previously
reported results.
VARCO INTERNATIONAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Varco International, Inc.
We have audited the consolidated balance sheets of Varco International,
Inc. and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Varco International, Inc. and subsidiaries at December 31, 1994 and 1993, and
the consolidated results of operations and cash flows for each of the three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in note A to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1992 to adopt the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
ERNST & YOUNG LLP
Orange County, California
February 17, 1995
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF VARCO INTERNATIONAL, INC.
ALL 100% OWNED
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION ADDRESS
-------------- -------
<S> <C> <C>
Best Industries, Inc. Texas 12950 West Little York
Houston. Texas 77041
--------------------
Varco de Mexico California 743 No. Eckhoff Street
Holdings, Inc. Orange. California 92668
------------------------
Martin-Decker TOTCO, Inc. Texas 1200 Cypress Creek Road
Cedar Park, Texas 78613
-----------------------
Metfox, Inc. California 743 No. Eckhoff Street
Orange. California 92668
------------------------
Varco Shaffer, Inc. Texas 12950 W. Little York
Houston. Texas 77041
--------------------
Varco International Inc Singapore No. 8 Sixth Lok Yang Road
Pte Ltd Jurong
Singapore 2262
--------------
Varco BJ 0il Tools B.V. The Netherlands Nijverheidsweg 45
4879 AP Etten-Leur
P.O. Box 17, 4870 AA Etten-Leur
The Netherlands
---------------
Varco (U.K.) Limited United Kingdom Forties Road, Montrose
Angus. Scotland
---------------
Varco BJ FSC Inc. Barbados 743 No. Eckhoff Street
Orange, California 92668
------------------------
304774 Alberta Ltd. Alberta, Canada Bay 15 - 2916 5th Ave. N.E.
Calgary, Alberta T2A 6M7
Canada
------
Rig Technology Limited United Kingdom South College Street
Aberdeen, Scotland
------------------
</TABLE>
<PAGE>
EXHIBIT 21
PAGE 2 OF 2
<TABLE>
<CAPTION>
JURISDICTION OF
INACTIVE SUBSIDIARIES INCORPORATION ADDRESS
--------------------- --------------- -------
<S> <C> <C>
Varco Marine Tools Texas 12950 West Little York
International, Inc. Houston, Texas 77041
--------------------
Varco-Disc California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Best Disc Texas 12950 West Little York
Houston, Texas 77041
----------------------
Varco Eastern, Inc. California 743 NO. Eckhoff Street
Orange, California 92668
------------------------
Varco International Netherlands P.O. Box 507
Finance N.V. Antilles Curacao
-------
Varco Singapore, Ltd. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Middle East California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Electronics, Inc. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Electronics Disc California 743 No. Eckhoff Street
Orange, California 92668
------------------------
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements
Number 2-66830, 2-96290, 33-36841 and 33-62118 on Form S-8 of Varco
International, Inc. and in the related Prospectuses of our report dated February
17, 1995, with respect to the consolidated financial statements and schedule
of Varco International, Inc. incorporated by reference in the annual report on
Form 10-K for the year ended December 31, 1994.
ERNST & YOUNG LLP
Orange County, California
March 23, 1995
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Varco International, Inc. of our report dated February 17, 1995 included in
the 1994 Annual Report to Shareholders of Varco International, Inc.
Our audits also included the financial statement schedule of Varco
International, Inc. listed in item 14(d). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Orange County, California
February 17, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS ANNUAL REPORT TO
SHAREHOLDERS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 8,793,000
<SECURITIES> 29,832,000
<RECEIVABLES> 53,830,000
<ALLOWANCES> (1,580,000)
<INVENTORY> 60,299,000
<CURRENT-ASSETS> 158,777,000
<PP&E> 99,992,000
<DEPRECIATION> (52,333,000)
<TOTAL-ASSETS> 257,641,000
<CURRENT-LIABILITIES> 46,425,000
<BONDS> 39,349,000
<COMMON> 125,897,000
0
0
<OTHER-SE> 37,831,000
<TOTAL-LIABILITY-AND-EQUITY> 257,641,000
<SALES> 221,443,000
<TOTAL-REVENUES> 223,601,000
<CGS> 134,682,000
<TOTAL-COSTS> 188,480,000
<OTHER-EXPENSES> 11,438,000
<LOSS-PROVISION> 4,766,000
<INTEREST-EXPENSE> 18,917,000
<INCOME-PRETAX> 6,756,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,161,000
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0
</TABLE>
