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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to________________
Commission File number 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 Identification No.)
incorporation or organization)
743 North Eckhoff Street, Orange, CA 92868
(Address of principal executive offices)
(Zip code)
(714) 978-1900
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities 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
--- ---
65,037,410
(Number of shares of Common Stock outstanding at April 30, 1999)
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
Pursuant to General Instruction D to Form 10-Q, the Condensed
Consolidated Statements of Cash Flows, Condensed Consolidated Balance Sheets and
Condensed Consolidated Statements of Income of Varco International, Inc. (the
"Company") and its subsidiaries included in the registrant's First Quarter
Report to Shareholders for the three months ended March 31, 1999, filed as
Exhibit 19 hereto are incorporated herein by reference. Such financial
statements should be read in light of the following:
Adjustments. The financial statements contained in Exhibit 19 hereto
include all adjustments which in the opinion of management are of a normal
recurring nature, considered necessary to present fairly the results of
operations for the interim periods presented.
Net Income Per Share. Basic net income per share is based upon an
average of 64,735,804 and 64,239,730 shares outstanding for the three months
ended March 31, 1999, and 1998 respectively. Diluted net income per share is
based upon an average of 65,480,304 and 65,661,636 shares outstanding for the
three months ended March 31, 1999, and 1998 respectively.
Inventories. The Company estimates the components of inventory at March
31, 1999, and December 31, 1998, to be as follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Raw Materials $ 5,564,000 $ 5,806,000
Work in Process 51,144,000 50,684,000
Finished Goods 101,330,000 109,581,000
LIFO Reserves (13,709,000) (13,659,000)
------------ ------------
$144,329,000 $152,412,000
============ ============
Fixed Assets. Fixed assets are stated net of accumulated depreciation of
$76,632,000 at March 31, 1999, and $71,263,000 at December 31, 1998.
Common Stock and Additional Paid-In-Capital. On March 31, 1999, the
Company Common Stock account was $55,196,000 and Additional Paid-In-Capital
accounts were $103,128,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Pursuant to General Instruction D to Form 10-Q, Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in the
registrant's First Quarter Report to Shareholders for the three months ended
March 31, 1999, filed as Exhibit 19 hereto, is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to certain market risks which are inherent in the
Company's financial instruments and which arise from transactions entered into
in the normal course of business. The Company does not considered these risks
significant, and the Company does not enter into derivative financial instrument
transactions to offset these risks.
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Borrowings under the Company's revolving credit facility do not give
rise to significant interest rate risks because these borrowings have a variable
interest rate. The Company is subject to interest rate risk on its fixed
interest rate debt. Generally, the fair market value of debt with a fixed
interest rate will increase as interest rates fall, and the fair market value
will decrease as interest rates rise. Fixed interest rate borrowings have not
been significant during the three Months ended December 31, 1999.
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
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 (as amended, the "Note Agreement"). The remaining $10.0 million principal
balance of the Senior Notes is payable on June 30, 1999.
The Note Agreement prohibits any "Restricted Payment" subsequent to July
17, 1992 unless after giving effect thereto, (i) the aggregate amount of all
Restricted Payments subsequent to such date would not exceed $5,000,000 plus the
cumulative sum of 50% of the Company's consolidated net income (or minus 100% in
the case of a deficit) subsequent to March 31, 1992 and (ii) the Company could
incur at least $1.00 of additional indebtedness under the Note Agreement
covenant limiting indebtedness. The term "Restricted Payment" includes (a) any
dividend (other than dividends payable in shares of capital stock) or other
distributions on any shares of capital stock of the Company; (b) any purchase,
redemption or other acquisition of any shares of the capital stock of the
Company or any rights or options to purchase or acquire such shares; and (c) any
"Restricted Investment", which is generally defined as any investment other than
an investment in a subsidiary of the Company or an investment in certain
designated government or rated securities. In addition, the Company may
purchase, redeem or otherwise acquire shares of its capital stock or make
Restricted Investments from the net cash proceeds of the substantially
concurrent sales of shares of capital stock or from the sale of securities
convertible into such shares upon conversion.
On June 27, 1997 the Company entered into a seven-year unsecured
revolving credit agreement with three banks (the "Credit Agreement"). The Credit
Agreement provides for a credit facility of $65.0 million, inclusive of a $20.0
million letter of credit sub-facility. The maximum available under the Credit
Agreement is reduced in equal quarterly amounts over the last four years of the
Credit Agreement.
The Credit Agreement prohibits any "Restricted Junior Payment" unless
(1) at the time thereof no default exists under the Credit Agreement or will be
caused thereby and (2) the cumulative amount of all Restricted Junior Payments
subsequent to June 27, 1997, would not exceed the sum of $5,000,000 plus 25% of
the Company's consolidated net income arising after June 30, 1997. "Restricted
Junior Payment" is generally defined as (1) any dividend or other distribution
on any class of the Company's capital stock, except a dividend payable solely in
shares of that class; (2) any redemption, purchase or other acquisition for
value of any shares of any class of the capital stock of the Company; (3) any
payment made to retire or obtain the surrender of any outstanding warrants,
options or similar rights to acquire any shares of any class of the capital
stock of the Company; and (4) any payment on the Senior Notes other than
regularly scheduled payments of principal and interest thereon.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Varco International Inc. Deferred Compensation Plan
10.2 Varco International, Inc. Director Deferred Compensation Plan.
11 Statement re computation of per share earnings for the three
months ended March 31, 1999 and 1998.
19 Varco International, Inc. First Quarter Report to Shareholders,
Three Months Ended March 31, 1999.
27 Financial Data Schedule March 31, 1999
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARCO INTERNATIONAL, INC.
Date: May 10, 1999 By: /s/ Richard A. Kertson
----------------------
Vice President-Finance
and Chief Financial Officer
Date: May 10, 1999 By: /s/ Donald L. Stichler
----------------------
Vice President
Controller-Treasurer
and Secretary
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EXHIBIT INDEX
10.1 Varco International Inc. Deferred Compensation Plan
10.2 Varco International, Inc. Director Deferred Compensation Plan.
11 Statement re computation of per share earnings for the three months
ended March 31, 1999 and 1998.
19 Varco International, Inc. First Quarter Report to Shareholders, Three
Months Ended March 31, 1999.
27 Financial Data Schedule March 31, 1999
<PAGE>
EXHIBIT 10.1
Varco International Inc.
Deferred Compensation Plan
<PAGE>
Varco International Inc.
Deferred Compensation Plan
TABLE OF CONTENTS
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Page
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ARTICLE I.................................................... 1
1.1 - Title................................................ 1
1.2 - Definitions.......................................... 1
ARTICLE II................................................... 5
2.1 - Participation........................................ 5
ARTICLE III.................................................. 6
3.1 - Elections to Defer Compensation...................... 6
3.2 - Investment Elections................................. 7
ARTICLE IV................................................... 9
4.1 - Deferral Account..................................... 9
4.2 - Employer Contributions Account....................... 10
ARTICLE V.................................................... 11
5.1 - Deferral Account..................................... 11
5.2 - Employer Contributions Account....................... 11
ARTICLE VI................................................... 12
6.1 - Distribution of Deferred Compensation................ 12
6.2 - Forfeitures.......................................... 13
6.3 - Nonscheduled In-Service Withdrawals.................. 13
6.4 - Hardship Withdrawals................................. 14
6.5 - Inability to Locate Participant...................... 14
6.6 - Pre-Retirement Death Benefit......................... 14
6.7 - Trust................................................ 15
ARTICLE VII.................................................. 16
ADMINISTRATION............................................... 16
7.1 - Committee............................................ 16
7.2 - Committee Action..................................... 16
7.3 - Powers and Duties of the Committee................... 16
7.4 - Construction and Interpretation...................... 17
7.5 - Information.......................................... 17
7.6 - Compensation, Expenses and Indemnity................. 17
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7.7 - Quarterly Statements................................. 18
7.8 - Disputes............................................. 18
ARTICLE XIII................................................. 20
8.1 - Unsecured General Creditor........................... 20
8.2 - Restriction Against Assignment....................... 20
8.3 - Withholding.......................................... 20
8.4 - Amendment, Modification, Suspension or Termination... 21
8.5 - Governing Law........................................ 21
8.6 - Receipt or Release................................... 21
8.7 - Payments on Behalf of Persons Under Incapacity....... 21
8.8 - Headings, etc. Not Part of Agreement................. 21
ii
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Varco International Inc.
Deferred Compensation Plan
(Effective as of April 1, 1999)
Varco International, Inc. (the "Company") hereby establishes the Varco
International Inc. Deferred Compensation Plan (the "Plan"), effective as of
April 1, 1999, to provide a tax-deferred capital accumulation opportunity to a
select group of management and highly compensated employees through deferral of
salary and bonuses.
ARTICLE I
TITLE AND DEFINITIONS
1.1 - Title.
-----
This Plan shall be known as the Varco International Inc. Deferred
Compensation 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 Employer Contributions 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 (other than those benefits
set forth in Section 6.6) in the event of the Participant's death. No
beneficiary designation shall become effective until it is filed with the
Committee, and no beneficiary designation of someone other than the
Participant's spouse shall be effective unless such designation is consented to
by the Participant's spouse on a form provided by and in accordance with
procedures established by 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 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
1
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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 living and the Committee decides not to select
another custodian to hold the funds for the minor, then payment shall be made to
the duly appointed and currently acting guardian of the 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" 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 described in 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 of
Directors 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 member.
"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 (a)
the portion of the Participant's Salary that he or she elects to defer, (b) the
portion of the Participant's Bonus that he or she elects to defer, and (c)
earnings or losses pursuant to Section 4.1.
"Disability" shall mean an incapacity which has rendered the
Participant eligible to commence receiving benefits under the Company's long-
term disability plan.
2
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"Distribution Subaccounts" shall mean subaccounts of a Participant's
Deferral Account and Employer Contributions Account established to separately
account for deferred Compensation and Employer Contribution Amounts (and
earnings thereon) which are subject to different in-service distribution
elections.
"Earnings 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.
"Effective Date" shall mean April 1, 1999.
"Eligible Employee" shall mean an employee of the Company who is: (a)
designated by the Committee to participate in the Plan; and (b) a division or
corporate vice president or above.
"Employer Contributions Account" shall mean the bookkeeping account
maintained by the Committee for each Participant that is credited with an amount
equal to the Employer Contribution Amount (if any) and earnings or losses
pursuant to Section 4.2.
"Employer Contribution Amount" shall mean an amount to equal to a
percentage of the amount of Compensation deferred by a Participant or such other
amount, which percentage or other amount, if any, shall be determined by the
Company, in its sole discretion, and which percentage or amount need not be the
same for each Participant.
"Fund" or "Funds" shall mean one or more of the investment funds or
portfolios selected by the Committee pursuant to Section 3.2(b).
"Initial Election Period" for an Eligible Employee shall mean the
later of: (a) the thirty-day period ending March 26, 1999; or (b) the thirty-
day period following the Eligible Employee's designation by the Committee as an
Eligible Employee.
"Participant" shall mean any Eligible Employee who elects to defer
Compensation in accordance with Section 3.1 and files a completed insurance
application form in accordance with Section 2.1.
"Payment Eligibility Date" shall mean the first day of the month
following the end of the calendar quarter in which a Participant ceases to be
employed by the Company, incurs a Disability or dies.
"Plan" shall mean the Varco International Inc. Deferred Compensation
Plan set forth herein, now in effect, or as amended from time to time.
3
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"Plan Year" shall mean the 12 consecutive month period beginning on
January 1 and ending December 31, except that the initial Plan Year shall be the
period beginning on April 1, 1999 and ending December 31, 1999.
"Salary" shall mean the Participant's base salary after reduction for
any salary deferral contributions to a plan described in Section 125 or Section
401(k) of the Code.
4
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ARTICLE II
PARTICIPATION
2.1 - Participation.
-------------
(a) Generally. An Eligible Employee shall become a Participant in the
----------
Plan by (1) electing to defer Compensation in accordance with Section 3.1; (2)
if required by the Committee, filing a life insurance application form along
with his or her deferral election form; and (3) satisfying any medical
underwriting requirement established by the Committee.
(b) Participants in the Varco Executive Savings Plan. Notwithstanding
-------------------------------------------------
the foregoing, an Eligible Employee who is currently participating in the Varco
Executive Savings Plan may not become a Participant without completing the
"Agreement for Transfer of Policy and Termination of Split-Dollar Life Insurance
Agreement" in the form set forth in Exhibit A attached hereto.
5
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ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation.
-------------------------------
(a) Initial Election Period. Subject to Section 2.1, 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. Subject to the minimum deferral provisions of
------------
Section 3.1(c) below, the amount of Compensation which an Eligible Employee may
elect to defer is as follows:
(1) Any percentage of Salary up to 100%; 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 sum of: (a) the amount that the Company is required to
withhold from such Eligible Employee's Compensation for such calendar year for
purposes of federal, state and local (if any) income tax and employment tax
(including Federal Insurance Contributions Act (FICA) tax withholding); and (b)
the amount that the Company is required to withhold from such Eligible
Employee's Compensation for such calendar year for contributions to any employee
benefit plan (other than this Plan).
(c) Minimum Deferrals. For each Plan Year during which an Eligible
-----------------
Employee is a Participant, the minimum amount that may be elected under Section
3.1(b) is $5,000. This $5,000 minimum deferral for any Plan Year may be met by
a combination of deferrals of Salary and/or Bonus for the Plan Year. If the
Compensation which the Participant has elected to defer for a Plan Year includes
a percentage of the Bonus payable in such Plan Year and the actual amount of
such Bonus to be deferred, when combined with the percentage of Salary elected
to be deferred for the Plan Year, is less than $5,000 for the Plan Year, then no
portion of such Bonus shall be deferred under this Plan, no further Salary shall
be deferred for such Plan Year and any Salary previously deferred for such Plan
Year shall be refunded to the Participant without interest.
(d) Effect of Initial Election. An election to defer Compensation
--------------------------
during the Initial Election Period shall be effective with respect to (1) Salary
earned during the first pay
6
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period beginning after the Initial Election Period and each subsequent pay
period beginning in the same Plan Year and (2) to the Bonus paid with respect to
services performed in the Plan Year for which the election is made.
(e) Elections other than Elections during the Initial Election Period.
-----------------------------------------------------------------
Subject to the requirement for filing a completed life insurance form pursuant
to Section 2.1, any Eligible Employee may participate for any Plan Year by
filing an election, on a form provided by the Committee, to defer Compensation
as described in paragraph (b) above. An election to defer Compensation for a
Plan Year (other than the Plan Year beginning April 1, 1999) must be filed on or
before November 30 of the preceding Plan Year and will be effective for Salary
and Bonus earned during pay periods beginning on or after the following January
1. Each such election shall designate the time at which such deferred
Compensation (and allocable earnings) shall be distributed to the Participant in
accordance with Article VI of this Plan.
(f) In-service Distributions. At the time of making an election to
------------------------
defer Compensation for a Plan Year pursuant to this Section 3.1, a Participant
may elect to receive an in-service distribution of the amount deferred under
such election, together with any Employer Contribution Amounts for the same Plan
Year and earnings credited with respect to such amounts pursuant to Article IV,
in a lump sum in any year beginning after the second anniversary of the last day
of the Plan Year in which the amount deferred was earned. A Participant may
subsequently elect to defer the year of such an in-service distribution to any
subsequent year by filing a written election with the Committee, on a form
provided by the Committee, at least one year prior to the first day of the
previously elected in-service distribution year. The election to defer the year
of an in-service distribution may be made no more than twice.
(g) Irrevocability. Any election filed pursuant to this Section 3.1
--------------
shall be irrevocable except to the extent provided in subsection (f) hereof and
Section 6.3.
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 types of investment funds or portfolios selected by the Committee the
Participant's Accounts will be deemed to be invested in for purposes of
determining the amount of earnings to be credited to each Account.
(b) In making the designation pursuant to this Section 3.2, the
Participant must specify, in whole numbers, the percentage of his Deferral
Account and Employer Contributions Account which shall be deemed to be invested
in one or more of the types of investment funds or
7
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portfolios. Effective as of the end of any month, a Participant may change the
designation made under this Section 3.2 by filing an election, on a form
provided by the Committee. If a Participant fails to elect a type of investment
fund or portfolio under this Section 3.2, he or she shall be deemed to have
elected the Money Market option.
(c) Although the Participant may designate the type of investment
----
funds or portfolios, the Committee shall select from time to time, in its sole
discretion, commercially available investment funds or portfolios to be the
Funds. The Earnings Rate of each such commercially available investment fund or
portfolio shall be used to determine the amount of earnings or losses to be
credited to Participants' Accounts under Article IV.
8
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ARTICLE IV
ACCOUNTS
4.1 - Deferral Account.
----------------
The Committee shall establish and maintain a Deferral Account for each
Participant under the Plan. For each Participant who makes one or more in-
service distribution elections pursuant to Section 3.1(f), the Deferral Account
shall be divided into two or more Distribution Subaccounts as necessary to
separately account for deferrals which are payable at different times. A
Participant's Deferral Account shall be divided (or each Distribution Subaccount
of a Participant's Deferral Account shall be further divided) into separate
subaccounts ("investment subaccounts"), each of which corresponds to an
investment fund or portfolio 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
investment subaccounts of the Deferral Account (or the appropriate
Distribution Subaccount 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 investment fund or
portfolio shall be credited to the investment subaccount corresponding
to that investment fund or portfolio;
(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 investment
subaccounts of the Deferral Account (or the appropriate Distribution
Subaccount of the Participant's Deferral Account) with an amount equal
to the portion of the Bonus deferred by the Participant in accordance
with 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 investment fund or
portfolio shall be credited to the investment subaccount corresponding
to that investment fund or portfolio; and
(c) As of the last day of each month, each investment subaccount of a
Participant's Deferral Account (or Distribution Subaccount of the
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 investment subaccount
9
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as of the last day of the preceding month by the Earnings Rate for the
corresponding Fund selected by the Committee pursuant to Section
3.2(b).
4.2 - Employer Contributions Account.
------------------------------
The Committee shall establish and maintain an Employer Contributions
Account for each Participant under the Plan. For each Participant who makes one
or more in-service distribution elections pursuant to Section 3.1(f), the
Participant's Employer Contributions Account shall be divided into two or more
Distribution Subaccounts as necessary to separately account for Employer
Contribution Amounts which are payable at different times. A Participant's
Employer Contributions Account shall be divided (or each Distribution Subaccount
of a Participant's Employer Contributions Account shall be further divided) into
separate investment subaccounts corresponding to the investment fund or
portfolio elected by the Participant pursuant to Section 3.2(a). A
Participant's Employer Contributions Account shall be credited as follows:
(a) As of the last day of any month or Plan Year for which the
Company, in its sole discretion, decides to credit a Participant with
an Employer Contribution Amount, the Committee shall credit the
investment subaccounts of the Employer Contributions Account (or the
appropriate Distribution Subaccount of the Participant's Employer
Contributions Account) with an amount equal to the Employer
Contribution Amount applicable to that Participant in accordance with
the Participant's election under Section 3.2(a); that is, the portion
of the Participant's Employer Contribution Amount which the
Participant elected to be deemed to be invested in a certain type of
investment fund or portfolio shall be credited to the corresponding
investment subaccount; and
(b) As of the last day of each month, each investment subaccount of
the Employer Contributions Account (or the appropriate Distribution
Subaccount of the Participant's Employer Contributions Account) shall
be credited with earnings or losses in an amount equal to that
determined by multiplying the balance credited to such investment
subaccount as of the last day of the preceding month by the Earnings
Rate for the corresponding Fund selected by the Committee pursuant to
Section 3.2(b).
10
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ARTICLE V
VESTING
5.1 - Deferral Account.
----------------
A Participant's Deferral Account shall be 100% vested at all times.
5.2 - Employer Contributions Account.
------------------------------
(a) A Participant's Employer Contributions Account shall vest at a
rate determined by the Company for each Participant. Each Participant's vesting
schedule shall be set forth in a separate letter agreement between the
Participant and the Company.
(b) Notwithstanding anything contained herein to the contrary, the
Committee may, in its sole discretion, provide for 100% vesting of a
Participant's Employer Contributions Account at any time.
11
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ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution of Deferred Compensation.
-------------------------------------
(a) Distribution of the vested amount credited to a Distribution
Subaccount of the Participant's Deferral Account and Employer Contribution
Account which was established with respect to an in-service distribution
election shall be made in a lump sum payment during January of the year elected
by the Participant pursuant to Section 3.1(f), provided that the Participant is
employed by the Company on January 1 of such year. In the event the
Participant's employment with the Company is terminated for any reason prior to
January 1 of the year elected by the Participant pursuant to Section 3.1(f), the
Participant's in-service distribution election(s) with respect to benefits not
yet distributed shall no longer be effective and all of the vested amounts
credited to his or her Deferral Account and Employer Contributions Account shall
be distributed together as set forth in the following subsections of this
Section 6.1.
(b) In the event a Participant terminates employment for a reason
other than death, the amount credited to his or her Deferral Account and the
vested portion of the amount, if any, credited to his or her Employer
Contributions Account shall be distributed in a lump sum payment payable as soon
as practicable following his or her Payment Eligibility Date. Notwithstanding
the foregoing, a Participant may elect to receive distribution in 20, 40, or 60
substantially equal quarterly installments beginning as soon as practicable
following the Participant's Payment Eligibility Date, provided that his or her
election is filed with the Committee at least one year prior to his or her
termination of employment on a form to be provided by the Committee.
Notwithstanding anything contained herein to the contrary, in the
event that the sum of the amount credited to a Participant's Deferral Account
and the vested portion of the amount, if any, credited to his or her Employer
Contributions Account is $25,000 or less, such amount shall be paid in a cash
lump sum payment as soon as practicable following his or her Payment Eligibility
Date.
(c) In the event a Participant terminates employment because of death,
the amount credited to his or her Deferral Account and the vested and unvested
portion of the amount, if any, credited to his or her Employer Contributions
Account shall be paid to his or her Beneficiary in the form of a cash lump sum
payment as soon as practicable following the Participant's Payment Eligibility
Date.
12
<PAGE>
(d) The Participant's Accounts shall continue to be credited monthly
with earnings pursuant to Sections 4.1 and 4.2 of the Plan until all amounts
credited to his or her Accounts under the Plan have been distributed.
(e) In the event that a former Participant dies while receiving
installment payments under this Plan, any remaining installments shall be paid
to the Participant's Beneficiary as such installments would have otherwise been
due to the Participant.
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
(regardless of whether such payment is a lump sum payment or the first
installment payment), the portion of his or her Employer Contributions Account,
if any, 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.
6.3 - Nonscheduled In-Service Withdrawals.
-----------------------------------
At any time prior to his or her termination of employment from the
Company, a Participant may elect to withdraw an amount not in excess of 90% of
the amount credited to his or her Deferral Account and 90% of the vested portion
of the amount, if any, credited to his or her Employer Contributions Account,
subject to a withdrawal penalty described below. The Participant may make such
an election by filing a written notice with the Committee on a form provided by
the Committee. Within 90 days following the Committee's receipt of such notice,
an amount equal to the sum of the amount that the Participant has elected to
withdraw from the Participant's Deferral Account and the amount that the
Participant has elected to withdraw from his or her Employer Contributions
Account shall be paid to the Participant in a cash lump sum payment. Upon the
payment of such withdrawal, (a) an amount equal to 11.11% of the amount
withdrawn from the Participant's Deferral Account and 11.11% of the amount
withdrawn from the Participant's Employer Contributions Account shall be
forfeited, (b) the Participant shall cease to participate in the Plan for the
remainder of the Plan Year in which the withdrawal occurs and shall be
ineligible to participate during the Plan Year immediately following the Plan
Year in which the withdrawal occurs, and (c) any deferral elections made by the
Participant for such periods shall be terminated. A Participant may not make
more than two withdrawals under this Section 6.3.
13
<PAGE>
6.4 - Hardship Withdrawals.
--------------------
At any time prior to his or her termination of employment from the
Company, a Participant may request a distribution for hardship without penalty.
Such distribution for hardship shall be subject to approval by the Committee and
may be made only to the extent necessary to satisfy the hardship. A
distribution for hardship shall be granted only for one of the following
reasons:
(a) A Participant's or dependent's illness or accident;
(b) Casualty loss with respect to a Participant's property; or
(c) Other circumstances arising out of events beyond the control of
the Participant, which the Committee finds are similar to the events described
in Section 6.4(a) or (b).
6.5 - 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 amounts allocated to the Participant's Deferral Account and Employer
Contributions Account shall be forfeited. If, after such forfeiture, the
Participant or Beneficiary later claims such benefits, such benefits shall be
reinstated without interest or earnings, provided that Section 6.2 shall still
apply.
6.6 - Pre-Retirement Death Benefit.
----------------------------
(a) If a Participant dies while employed by the Company, in addition
to the payment or payments to the Participant's Beneficiary under Section
6.1(c), a death benefit shall be paid to the Participant's beneficiary under a
life insurance policy purchased by or transferred to the trustee of the Trust
described in Section 6.7 to insure the life of the Participant (the "Policy").
The death benefit payable to the Participant's beneficiary shall be $300,000.
(b) The Participant shall have the right to designate and change such
beneficiary (which need not be his or her Beneficiary under this Plan) at any
time on a form provided by and filed with the insurance company. If no such
form is on file with the insurance company, the death benefit described in the
preceding paragraph shall be paid to the Beneficiary.
(c) The death benefit payable pursuant to paragraph (a) shall not be
paid if an insurance company has not issued a Policy on the life of the
Participant at the time of his death and shall be subject to all conditions and
exceptions set forth in the Policy and split dollar life
14
<PAGE>
insurance agreement in effect between the Participant and the Trustee of the
Trust, described in Section 6.7 below.
(d) Notwithstanding any provision of this Plan or any other document
to the contrary, the pre-retirement death benefit provided under Section 6.6(a)
shall be payable solely from the proceeds of the Policy, if any. In addition,
no Policy shall be allocated to any Account.
(e) Notwithstanding the foregoing, if a Participant dies while
employed by the Company, but has a zero balance in his or her Deferral Account
and no vested interest in his or her Employer Contributions Account due to
distributions under Sections 6.1(a), 6.3, or 6.4, he or she will not be eligible
for the death benefit described in Section 6.6(a).
6.7 - Trust.
-----
(a) The Company shall cause the payment of benefits under this Plan
(excluding the amounts described in Section 6.6) to be made in whole or in part
by the Trustee of the Varco International Inc. Deferred Compensation Plan Trust
(the "Trust") in accordance with the provisions of this Section 6.7. The
Company shall contribute to the Trust for each Participant an amount equal to
the amount deferred by the Participant for the Plan Year and the Employer
Contribution Amount for the Participant for the Plan Year, if any; the
contributions shall be made no later than the Company's tax return due date for
that Plan Year. Notwithstanding the foregoing, the Company shall contribute at
least an amount equal to the "cost of insurance" (as defined in each Policy) for
the death benefits described in Section 6.6 for each Participant, provided that
such obligation shall not apply with respect to a Policy if the Participant is
no longer employed by the Company.
(b) The Committee shall direct the Trustee to pay the Participant or
his or her Beneficiary at the time and in the amount described in Article VI
(excluding amounts described in Section 6.6). In the event the amounts held
under the Trust are not sufficient to provide the full amount (excluding amounts
described in Section 6.6) payable to the participant or his or her Beneficiary,
the Company shall pay the remainder of such amount at the time(s) set forth in
Article VI.
15
<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 of Directors which may from time to time vary the number
of members, provided, however, that the Director of Human Resources for the
Company and the Chief Financial Officer of the Company shall be members of the
Committee. A member of the Committee may resign by delivering a written notice
of resignation to the Board of Directors. The Board of Directors may remove any
member by delivering a letter signed by each director notifying such member of
his or her removal. Vacancies in the membership of the Committee shall be
filled promptly by the Board of Directors.
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 portfolios to be the Funds in
accordance with Section 3.2(b) hereof;
(2) To construe and interpret the terms and provisions of this
Plan;
16
<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.
17
<PAGE>
(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. 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 each member thereof, and delegates of the Committee who are
employees 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 as of the last
day of each calendar quarter.
7.8 - Disputes.
--------
(a) Claim.
A person who believes that he or she is being denied a benefit to
which he or she is entitled under this Plan (hereinafter referred to as
"Claimant") may file a written request for such benefit with the Committee,
setting forth his or her claim. The request must be addressed to the Committee
at the Company's principal place of business.
(b) Claim Decision.
Upon receipt of a claim, the Committee shall advise the Claimant that
a reply will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Committee may, however, extend the reply
period for an additional ninety (90) days for special circumstances.
If the claim is denied in whole or in part, the Committee shall inform
the Claimant in writing, using language calculated to be understood by the
Claimant, setting forth: (1) the specified reason or reasons for such denial;
(2) the specific reference to pertinent provisions of this Plan on which such
denial is based; (3) a description of any additional material or information
18
<PAGE>
necessary for the Claimant to perfect his or her claim and an explanation why
such material or such information is necessary; (4) appropriate information as
to the steps to be taken if the Claimant wishes to submit the claim for review;
and (5) the time limits for requesting a review under subsection (c).
(c) Request for Review.
Within sixty (60) days after the receipt by the Claimant of the
written opinion described above, the Claimant may request in writing that the
Committee review the determination. Such request must be addressed to the
Committee, at the Company's principal place of business. The Claimant or his or
her duly authorized representative may, but need not, review the pertinent
documents and submit issues and comments in writing for consideration by the
Committee. If the Claimant does not request a review within such sixty (60) day
period, he or she shall be barred and estopped from challenging the original
determination.
(d) Review of Decision.
Within sixty (60) days after the Committee's receipt of a request for
review, after considering all materials presented by the Claimant, the Committee
will inform the Claimant in writing, in a manner calculated to be understood by
the Claimant, of its decision setting forth the specific reasons for the
decision and containing specific references to the pertinent provisions of this
Plan on which the decision is based. If special circumstances require that the
sixty (60) day time period be extended, the Committee will so notify the
Claimant and will render the decision as soon as possible, but no later than one
hundred twenty (120) days after receipt of the request for review.
19
<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. It is the intention of the Company that this Plan (and the
Trust described in Section 6.7) be unfunded for purposes of the Code and for
purposes of Title I of ERISA.
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, sell, transfer,
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 other
compensation) by the amount of cash sufficient to provide the amount of said
taxes.
20
<PAGE>
8.4 - Amendment, Modification, Suspension or Termination.
--------------------------------------------------
The Board of Directors 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. (Neither the Policies themselves nor the death
benefit described in Section 6.6 shall be treated as allocated to Accounts.)
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 therefor 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.
21
<PAGE>
IN WITNESS WHEREOF, the Company, has executed this document this
30th day of March, 1999.
- --------
Varco International, Inc.
By: Donald L. Stichler
-------------------------------------
Its: Vice President, Controller--
------------------------------------
Treasurer and Secretary
22
<PAGE>
EXHIBIT 10.2
Varco International Inc.
Director Deferred Compensation Plan
<PAGE>
Varco
Director Deferred Compensation Plan
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I......................................................................1
1.1 - Title....................................................................1
1.2 - Definitions..............................................................1
ARTICLE II.....................................................................4
2.1 - Participation............................................................4
ARTICLE III....................................................................5
3.1 - Elections to Defer Compensation..........................................5
3.2 - Investment Elections.....................................................6
ARTICLE IV.....................................................................7
4.1 - Deferral Account.........................................................7
4.2 - Employer Contributions Account...........................................7
ARTICLE V......................................................................9
5.1 - Deferral Account.........................................................9
5.2 - Employer Contributions Account...........................................9
ARTICLE VI....................................................................10
6.1 - Distribution of Deferred Compensation...................................10
6.2 - Forfeitures.............................................................11
6.3 - Nonscheduled In-Service Withdrawals.....................................11
6.4 - Hardship Withdrawals....................................................12
6.5 - Inability to Locate Participant.........................................12
6.6 - Pre-Retirement Death Benefit............................................12
6.7 - Trust...................................................................13
ARTICLE VII...................................................................14
ADMINISTRATION................................................................14
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
i
<PAGE>
7.6 - Compensation, Expenses and Indemnity....................................15
7.7 - Quarterly Statements....................................................16
7.8 - Disputes................................................................16
ARTICLE XIII..................................................................18
8.1 - Unsecured General Creditor..............................................18
8.2 - Restriction Against Assignment..........................................18
8.3 - Withholding.............................................................18
8.4 - Amendment, Modification, Suspension or Termination......................19
8.5 - Governing Law...........................................................19
8.6 - Receipt or Release......................................................19
8.7 - Payments on Behalf of Persons Under Incapacity..........................19
8.8 - Headings, etc. Not Part of Agreement....................................19
ii
<PAGE>
Varco
Director Deferred Compensation Plan
(Effective as of April 1, 1999)
Varco International, Inc. (the "Company") hereby establishes the Varco
Director Deferred Compensation Plan (the "Plan"), effective as of April 1, 1999,
to provide a tax-deferred capital accumulation opportunity to its non-employee
directors through deferral of director fees.
ARTICLE I
TITLE AND DEFINITIONS
1.1 - Title.
-----
This Plan shall be known as the Varco International, Inc. Director
Deferred Compensation 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 Employer Contributions 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 (other than those benefits
set forth in Section 6.6) in the event of the Participant's death. No
beneficiary designation shall become effective until it is filed with the
Committee, and no beneficiary designation of someone other than the
Participant's spouse shall be effective unless such designation is consented to
by the Participant's spouse on a form provided by and in accordance with
procedures established by 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 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
1
<PAGE>
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 living and the
Committee decides not to select another custodian to hold the funds for the
minor, then payment shall be made to the duly appointed and currently acting
guardian of the 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" 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 of Directors
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 member.
"Compensation" shall mean the Participant's Annual Retainer and Meeting
Fees.
"Deferral Account" shall mean the bookkeeping account maintained by the
Committee for each Participant that is credited with amounts equal to (a) the
portion of the Participant's Compensation that he or she elects to defer and (b)
earnings or losses pursuant to Section 4.1.
"Distribution Subaccounts" shall mean subaccounts of a Participant's
Deferral Account and Employer Contributions Account established to separately
account for deferred Compensation and Employer Contribution Amounts (and
earnings thereon) which are subject to different in-service distribution
elections.
"Earnings 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.
2
<PAGE>
"Effective Date" shall mean April 1, 1999.
"Eligible Director" shall mean each member of the Board of Directors who
is not an employee of the Company.
"Employer Contributions Account" shall mean the bookkeeping account
maintained by the Committee for each Participant that is credited with an amount
equal to the Employer Contribution Amount (if any) and earnings or losses
pursuant to Section 4.2.
"Employer Contribution Amount" shall mean an amount to equal to a
percentage of the amount of Compensation deferred by a Participant or such other
amount, which percentage or other amount, if any, shall be determined by the
Company, in its sole discretion, and which percentage or amount need not be the
same for each Participant.
"Fund" or "Funds" shall mean one or more of the investment funds or
portfolios selected by the Committee pursuant to Section 3.2(b).
"Initial Election Period" for an Eligible Director shall mean the later
of: (a) the thirty-day period ending March 31, 1999; or (b) the thirty-day
period following the Eligible Director's appointment to the Board of Directors.
"Participant" shall mean any Eligible Director who elects to defer
Compensation in accordance with Section 3.1 and files a completed insurance
application form in accordance with Section 2.1.
"Payment Eligibility Date" shall mean the first day of the month
following the end of the calendar quarter in which a Participant ceases to be a
member of the Board of Directors for any reason.
"Plan" shall mean the Varco Director Deferred Compensation 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 and ending December 31.
3
<PAGE>
ARTICLE II
PARTICIPATION
2.1 - Participation.
-------------
An Eligible Director shall become a Participant in the Plan by (a)
electing to defer Compensation in accordance with Section 3.1, (b) filing a life
insurance application form along with his or her deferral election form and (c)
satisfying any medical underwriting requirement established by the Committee.
4
<PAGE>
ARTICLE III
DEFERRAL ELECTIONS
3.1 - Elections to Defer Compensation.
-------------------------------
(a) Initial Election Period. Subject to Section 2.1, each Eligible
Director 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. Subject to the minimum deferral provisions of Section
3.1(c) below, an Eligible Director may elect to defer any percentage of
Compensation up to 100%; provided, however, that no election shall be effective
to reduce the Compensation paid to an Eligible Director for a calendar year to
an amount which is less than the amount that the Company is required to withhold
from such Eligible Director's Compensation for such calendar year for any reason
(other than contributions to this Plan).
(c) Minimum Deferrals. For each Plan Year during which an Eligible
Director is a Participant, the minimum amount that may be elected under Section
3.1(b) is $5,000. If the Compensation which the Participant has elected to defer
for a Plan Year includes a percentage of the Compensation payable in such Plan
Year and the actual amount of such Compensation to be deferred is less than
$5,000 for the Plan Year, then no portion of such Compensation shall be deferred
under this Plan and any Compensation previously deferred for such Plan Year
shall be refunded to the Participant without interest.
(d) Effect of Initial Election. An election to defer Compensation
during the Initial Election Period shall be effective with respect to
Compensation paid with respect to pay periods commencing after the end of the
Initial Election Period.
(e) Elections other than Elections during the Initial Election Period.
Subject to the requirement for filing a completed life insurance form pursuant
to Section 2.1, any Eligible Director may participate for any Plan Year by
filing an election, on a form provided by the Committee, to defer Compensation
as described in paragraph (b) above. An election to defer Compensation for a
Plan Year (other than the Plan Year beginning January 1, 1999) must be filed on
or before December 15 of the preceding Plan Year and will be effective for
Compensation earned during pay periods beginning on or after the following
January 1. Each such election shall designate the time at which such deferred
Compensation (and allocable earnings) shall be distributed to the Participant in
accordance with Article VI of this Plan.
5
<PAGE>
(f) In-service Distributions. At the time of making an election to
defer Compensation for a Plan Year pursuant to this Section 3.1 (or by May 31,
1999 with respect to the election to defer Compensation for the Plan Year
commencing May 1, 1999), a Participant may elect to receive an in-service
distribution of the amount deferred under such election, together with any
Employer Contribution Amounts for the same Plan Year and earnings credited with
respect to such amounts pursuant to Article IV, in a lump sum in any year
beginning after the second anniversary of the last day of the Plan Year in which
the amount deferred was earned. A Participant may subsequently elect to defer
the year of such an in-service distribution to any subsequent year by filing a
written election with the Committee, on a form provided by the Committee, at
least one year prior to the first day of the previously elected in-service
distribution year. The election to defer the year of an in-service distribution
may be made no more than twice.
(g) Irrevocability. Any election filed pursuant to this Section 3.1
shall be irrevocable except to the extent provided in subsection (f) hereof and
Section 6.3.
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 types of investment funds or portfolios set forth in Appendix A the
Participant's Accounts will be deemed to be invested in for purposes of
determining the amount of earnings to be credited to each Account.
Notwithstanding the foregoing, with respect to deferral elections made during
the thirty-day period ending April 30, 1999, the Participant shall designate the
types of investment funds or portfolios set forth in Appendix A on or before May
31, 1999.
(b) In making the designation pursuant to this Section 3.2, the
Participant must specify, in whole numbers, the percentage of his Deferral
Account and Employer Contributions Account which shall be deemed to be invested
in one or more of the types of investment funds or portfolios listed in Appendix
A. Effective as of the end of any month, a Participant may change the
designation made under this Section 3.2 by filing an election, on a form
provided by the Committee. If a Participant fails to elect a type of investment
fund or portfolio under this Section 3.2, he or she shall be deemed to have
elected the Money Market option.
(c) Although the Participant may designate the type of investment funds
or portfolios, the Committee shall select from time to time, in its sole
discretion, a commercially available investment fund or portfolio of each of the
types described in Appendix A to be the Funds. The Earnings Rate of each such
commercially available investment fund or portfolio shall be used to determine
the amount of earnings or losses to be credited to Participants' Accounts under
Article IV.
6
<PAGE>
ARTICLE IV
ACCOUNTS
4.1 - Deferral Account.
----------------
The Committee shall establish and maintain a Deferral Account for each
Participant under the Plan. For each Participant who makes one or more
in-service distribution elections pursuant to Section 3.1(f), the Deferral
Account shall be divided into two or more Distribution Subaccounts as necessary
to separately account for deferrals which are payable at different times. A
Participant's Deferral Account shall be divided (or each Distribution Subaccount
of a Participant's Deferral Account shall be further divided) into separate
subaccounts ("investment subaccounts"), each of which corresponds to an
investment fund or portfolio elected by the Participant pursuant to Section
3.2(a). A Participant's Deferral Account shall be credited as follows:
(a) No later than five business days after the end of each month, the
Committee shall credit the investment subaccounts of the Deferral
Account (or the appropriate Distribution Subaccount 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
investment fund or portfolio shall be credited to the investment
subaccount corresponding to that investment fund or portfolio; and
(b) As of the last day of each month, each investment subaccount of a
Participant's Deferral Account (or Distribution Subaccount of the
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 investment subaccount as of the last day of the
preceding month by the Earnings Rate for the corresponding Fund selected
by the Committee pursuant to Section 3.2(b).
4.2 - Employer Contributions Account.
------------------------------
The Committee shall establish and maintain an Employer Contributions
Account for each Participant under the Plan. For each Participant who makes one
or more in-service distribution elections pursuant to Section 3.1(f), the
Participant's Employer Contributions Account shall be divided into two or more
Distribution Subaccounts as necessary to separately account for Employer
Contribution Amounts which are payable at different times. A
7
<PAGE>
Participant's Employer Contributions Account shall be divided (or each
Distribution Subaccount of a Participant's Employer Contributions Account shall
be further divided) into separate investment subaccounts corresponding to the
investment fund or portfolio elected by the Participant pursuant to Section
3.2(a). A Participant's Employer Contributions Account shall be credited as
follows:
(a) No later than five business days after the end of any calendar
quarter or Plan Year for which the Company, in its sole discretion,
decides to credit a Participant with an Employer Contribution Amount,
the Committee shall credit the investment subaccounts of the Employer
Contributions Account (or the appropriate Distribution Subaccount of the
Participant's Employer Contributions Account) with an amount equal to
the Employer Contribution Amount applicable to that Participant in
accordance with the Participant's election under Section 3.2(a); that
is, the portion of the Participant's Employer Contribution Amount which
the Participant elected to be deemed to be invested in a certain type of
investment fund or portfolio shall be credited to the corresponding
investment subaccount; and
(b) As of the last day of each month, each investment subaccount of the
Employer Contributions Account (or the appropriate Distribution
Subaccount of the Participant's Employer Contributions Account) shall be
credited with earnings or losses in an amount equal to that determined
by multiplying the balance credited to such investment subaccount as of
the last day of the preceding month by the Earnings Rate for the
corresponding Fund selected by the Committee 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.
5.2 - Employer Contributions Account.
------------------------------
(a) A Participant's Employer Contributions Account shall vest at a rate
determined by the Company for each Participant. Each Participant's vesting
schedule shall be set forth in a separate letter agreement between the
Participant and the Company.
(b) Notwithstanding anything contained herein to the contrary, the
Committee may, in its sole discretion, provide for 100% vesting of a
Participant's Employer Contributions Account at any time.
9
<PAGE>
ARTICLE VI
DISTRIBUTIONS
6.1 - Distribution of Deferred Compensation.
-------------------------------------
(a) Distribution of the amount credited to a Distribution Subaccount of
the Participant's Deferral Account and Employer Contribution Account which was
established with respect to an in-service distribution election shall be made in
a lump sum payment during January of the year elected by the Participant
pursuant to Section 3.1(f), provided that the Participant is a member of the
Board of Directors on January 1 or such year. In the event the Participant
ceases to be a member of the Board of Directors for any reason prior to January
1 of the year elected by the Participant pursuant to Section 3.1(f), the
Participant's in-service distribution election(s) with respect to benefits not
yet distributed shall no longer be effective and all of the amounts credited to
his or her Deferral Account and Employer Contributions Account shall be
distributed together as set forth in the following subsections of this Section
6.1.
(b) In the event a Participant ceases to be a member of the Board of
Directors for a reason other than death, the amount credited to his or her
Deferral Account and the vested portion of the amount, if any, credited to his
or her Employer Contributions Account shall be distributed in 60 quarterly
installments commencing as soon as practicable following 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 one year prior to his or her last day as a
member of the Board of Directors on a form to be provided by the Committee:
(1) A lump sum payment payable as soon as practicable after the
Participant's Payment Eligibility Date, or
(2) Either 20 or 40 quarterly installments beginning as soon as
practicable following the Participant's Payment Eligibility Date.
Notwithstanding anything contained herein to the contrary, in the event that the
sum of the amount credited to a Participant's Deferral Account and the vested
portion of the amount, if any, credited to his or her Employer Contributions
Account is $25,000 or less, such amount shall be paid in a cash lump sum payment
as soon as practicable following his or her Payment Eligibility Date.
(c) In the event a Participant ceases to be a member of the Board of
Directors because of death, the amount credited to his or her Deferral Account
and the vested and unvested
10
<PAGE>
portion of the amount, if any, credited to his or her Employer Contributions
Account shall be paid to his or her Beneficiary in the form of a cash lump sum
payment as soon as practicable following the Participant's Payment Eligibility
Date unless (1) prior to his or her death the Participant had elected on a form
provided by and filed with the Committee that the distribution be made in 20,
40 or 60 quarterly installments beginning as soon as practicable following the
Participant's Payment Eligibility Date and (2) the sum of the amount credited to
the Participant's Deferral Account and the vested portion of the amount, if any,
credited to his or her Employer Contribution Account exceeds $25,000.
(d) 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.
(e) In the event that a former Participant dies while receiving
installment payments under this Plan, any remaining installments shall be paid
to the Participant's Beneficiary as such installments would have otherwise been
due to the Participant.
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
(regardless of whether such payment is a lump sum payment or the first
installment payment), the portion of his or her Employer Contributions Account,
if any, 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.
6.3 - Nonscheduled In-Service Withdrawals.
-----------------------------------
At any time prior to his or her last day as a member of the Board of
Directors, a Participant may elect to withdraw the entire amount credited to his
or her Deferral Account and the vested portion of the amount, if any, credited
to his or her Employer Contributions Account, subject to a 10% withdrawal
penalty. The Participant may make such an election by filing a written notice
with the Committee on a form provided by the Committee. Within 90 days following
the Committee's receipt of such notice, an amount equal to the sum of 90% of the
amount credited to the Participant's Deferral Account and 90% of the vested
portion of the amount, if any, credited to his or her Employer Contributions
Account shall be paid to the amount, if any, credited to his or her Employer
Contributions Account shall be paid to the Participant in a cash lump sum
payment. Upon the payment of such withdrawal, (a) the remainder of the amounts
credited to the Participant's Accounts shall be forfeited, (b) the Participant
shall cease to participate in the Plan for the remainder of the Plan Year in
which the withdrawal occurs and shall be ineligible to participate during the
Plan Year immediately
11
<PAGE>
following the Plan Year in which the withdrawal occurs, and (c) any deferral
elections made by the Participant for such periods shall be terminated. A
Participant may not make more than two withdrawals under this Section 6.3.
6.4 - Hardship Withdrawals.
--------------------
At any time prior to his or her last day as a member of the Board of
Directors, a Participant may request a distribution for hardship without
penalty. Such distribution for hardship shall be subject to approval by the
Committee and may be made only to the extent necessary to satisfy the
hardship. A distribution for hardship shall be granted only for one of the
following reasons:
(a) A Participant's or dependent's illness or accident;
(b) Casualty loss with respect to a Participant's property; or
(c) Other circumstances arising out of events beyond the control of the
Participant, which the Committee finds are similar to the events described in
Section 6.4(a) or (b).
6.5 - 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 amounts allocated to the Participant's Deferral Account and Employer
Contributions Account shall be forfeited. If, after such forfeiture, the
Participant or Beneficiary later claims such benefits, such benefits shall be
reinstated without interest or earnings, provided that Section 6.2 shall still
apply.
6.6 - Pre-Retirement Death Benefit.
----------------------------
(a) If a Participant dies while a member of the Board of Directors, in
addition to the payment or payments to the Participant's Beneficiary under
Section 6.1(c), a death benefit shall be paid to the Participant's beneficiary
under a life insurance policy purchased by or transferred to the trustee of the
Trust described in Section 6.7 to insure the life of the Participant (the
"Policy"). The death benefit payable to the Participant's beneficiary shall be
$300,000.
(b) The Participant shall have the right to designate and change such
beneficiary (which need not be his or her Beneficiary under this Plan) at any
time on a form provided by and filed with the insurance company. If no such form
is on file with the insurance company, the death benefit described in the
preceding paragraph shall be paid to the Beneficiary.
12
<PAGE>
(c) The death benefit payable pursuant to paragraph (a) shall not be
paid if an insurance company has not issued a Policy on the life of the
Participant at the time of his death and shall be subject to all conditions and
exceptions set forth in the Policy.
(d) Notwithstanding any provision of this Plan or any other document to
the contrary, the pre-retirement death benefit provided under Section 6.6(a)
shall be payable solely from the proceeds of the Policy, if any. In addition, no
Policy shall be allocated to any Account.
6.7 - Trust.
-----
(a) The Company shall cause the payment of benefits under this Plan
(excluding the amounts described in Section 6.6) to be made in whole or in part
by the Trustee of the Varco Deferred Compensation Plan Trust (the "Trust") in
accordance with the provisions of this Section 6.7. The Company shall contribute
to the Trust for each Participant an amount equal to the amount deferred by the
Participant for the Plan Year and the Employer Contribution Amount for the
Participant for the Plan Year, if any; the contributions shall be made no later
than the Company's tax return due date for that Plan Year. The Company shall
also contribute cash in amounts approximately equal to the "cost of insurance"
(as defined in each Policy) for the death benefits described in Section 6.6 for
each Participant, provided that such obligation shall not apply with respect to
a Policy if the Participant is no longer a member of the Board of Directors.
Notwithstanding the foregoing, if the Company acquires a Policy and subsequently
transfers it to the Trust, then, prior to the date the Policies are contributed
to the Trust, the amounts described in the preceding two sentences shall be used
to pay premiums on the Policies, rather than contributed to the Trust.
(b) The Committee shall direct the Trustee to pay the Participant or
his or her Beneficiary at the time in the amount described in Article VI
(excluding amounts described in Section 6.6). In the event the amounts held
under the Trust are not sufficient to provide the full amount (excluding amounts
described in Section 6.6) payable to the participant or his or her Beneficiary,
the Company shall pay the remainder of such amount at the time(s) set forth in
Article VI.
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 of Directors which may from time to time vary the number
of members, provided, however, that the Director of Human Resources for the
Company and the Chief Financial Officer of the Company shall be members of the
Committee. A member of the Committee may resign by delivering a written notice
of resignation to the Board of Directors. The Board of Directors may remove any
member by delivering a letter signed by each director notifying such member of
his or her removal. Vacancies in the membership of the Committee shall be filled
promptly by the Board of Directors.
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 portfolios 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.
15
<PAGE>
(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. 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 each member thereof, and delegates of the Committee who are
employees 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 as of the last
day of each calendar quarter.
7.8 - Disputes.
--------
(a) Claim.
A person who believes that he or she is being denied a benefit to which
he or she is entitled under this Plan (hereinafter referred to as "Claimant")
may file a written request for such benefit with the Committee, setting forth
his or her claim. The request must be addressed to the Committee at the
Company's principal place of business.
(b) Claim Decision.
Upon receipt of a claim, the Committee shall advise the Claimant that a
reply will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Committee may, however, extend the reply
period for an additional ninety (90) days for special circumstances.
If the claim is denied in whole or in part, the Committee shall inform
the Claimant in writing, using language calculated to be understood by the
Claimant, setting forth: (1) the specified reason or reasons for such denial;
(2) the specific reference to pertinent provisions of this Plan on which such
denial is based; (3) a description of any additional material or information
16
<PAGE>
necessary for the Claimant to perfect his or her claim and an explanation why
such material or such information is necessary; (4) appropriate information as
to the steps to be taken if the Claimant wishes to submit the claim for review;
and (5) the time limits for requesting a review under subsection (c).
(c) Request for Review.
Within sixty (60) days after the receipt by the Claimant of the written
opinion described above, the Claimant may request in writing that the Committee
review the determination. Such request must be addressed to the Committee, at
the Company's principal place of business. The Claimant or his or her duly
authorized representative may, but need not, review the pertinent documents and
submit issues and comments in writing for consideration by the Committee. If the
Claimant does not request a review within such sixty (60) day period, he or she
shall be barred and estopped from challenging the original determination.
(d) Review of Decision.
Within sixty (60) days after the Committee's receipt of a request for
review, after considering all materials presented by the Claimant, the Committee
will inform the Claimant in writing, in a manner calculated to be understood by
the Claimant, of its decision setting forth the specific reasons for the
decision and containing specific references to the pertinent provisions of this
Plan on which the decision is based. If special circumstances require that the
sixty (60) day time period be extended, the Committee will so notify the
Claimant and will render the decision as soon as possible, but no later than one
hundred twenty (120) days after receipt of the request for review.
17
<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. It is the intention of the Company that this Plan (and the
Trust described in Section 6.7) be unfunded for purposes of the Code.
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, sell, transfer,
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 other
compensation) by the amount of cash sufficient to provide the amount of said
taxes.
18
<PAGE>
8.4 - Amendment, Modification, Suspension or Termination.
--------------------------------------------------
The Board of Directors 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. (Neither the Policies themselves nor the death benefit
described in Section 6.6 shall be treated as allocated to Accounts.)
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 therefor 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.
19
<PAGE>
IN WITNESS WHEREOF, the Company, has executed this document this 30th
------
day of March 1999.
Varco International, Inc.
By: Donald Stichler
----------------------------------
Its: Vice President, Controller--
---------------------------------
Treasurer and Secretary
20
<PAGE>
EXHIBIT 11
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31 1998
--------------------------------
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $14,985,000
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares Diluted EPS
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES OUTSTANDING
Common Stock Outstanding from
time-to-time during:
Three Months Ended March 31, 1998 90 5,781,575,698 64,239,730 1,421,906 65,661,636
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share=Net Income After Tax
------------------------
Total Shares Outstanding
Basic Income Per Share
Three Months Ended March 31, 1998 14,985,000 = $0.23
-----------
64,239,730
Diluted Income Per Share=
Three Months Ended March 31, 1998 14,985,000 = $0.23
-----------
65,661,636
</TABLE>
<PAGE>
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended
March 31 1999
----------------------------
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $11,734,000
Total Number Average Number Stock Option Shares Used
Number of of Shares after of Shares Equivalent To Calculate
Days Weighing Outstanding Shares Diluted EPS
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
B. CALCULATION OF AVERAGE SHARES OUTSTANDING
Common Stock Outstanding from
time-to-time during:
Three Months Ended March 31, 1999 90 5,826,222,344 64,735,804 744,500 65,480,304
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
------------------------
Total Shares Outstanding
Basic Income Per Share
Three Months Ended March 31, 1999 11,734,000 = $0.18
-----------
64,735,804
Diluted Income Per Share =
Three Months Ended March 31, 1999 11,734,000 = $0.18
-----------
65,480,304
</TABLE>
<PAGE>
Varco
International, Inc.
1999 FIRST QUARTER REPORT
Varco is the leading
supplier of drilling
equipment in the world
with key products that
enhance the safety and
productivity of the
drilling process.
<PAGE>
[LOGO] TO OUR SHAREHOLDERS,
CUSTOMERS AND EMPLOYEES
Industry conditions remained depressed through the first quarter of 1999, as
continued low oil and gas prices caused both major oil companies and independent
producers to curtail spending. As a result, overall worldwide drilling activity
fell to its lowest level in more than 25 years. Although not as severe, the
offshore drilling segment has demonstrated considerable weakness. Offshore rig
utilization declined to an average of approximately 78 per cent in the most
recent quarter, as compared to approximately 95 per cent in the same period a
year ago, and dayrates were sharply lower.
With oil prices averaging less than $13 per barrel during January and
February, OPEC members, together with certain non-OPEC oil producing countries,
agreed in mid-March to substantial reductions in oil production. As a result,
the price of oil has increased significantly, recently climbing above $18 per
barrel for the first time since the fourth quarter of 1997. However, it is not
clear at this time where oil prices will settle in the medium term and what the
effect on drilling activity will be.
The impact of these industry conditions on Varco is most directly reflected
in incoming orders, which totaled $72.3 million in the most recent quarter,
excluding cancellations of $15.8 million. In the first quarter of last year
orders reached an all-time high of $299.6 million (before cancellations of $13.0
million) and in the fourth quarter of 1998 totaled $117.5 million (before
cancellations of $54.4 million). The principal factor behind the year-to-year
decline is a dramatic reduction in orders to equip new offshore rigs, as
commitments to build rigs have essentially ceased in the current industry
environment. A secondary factor is the overall decline in drilling activity,
particularly offshore drilling.
Net Income for the first quarter of 1999 was $11.7 million, $.18 per share
(diluted), on Revenues of $152.2 million. In the comparable quarter of last
year, Net Income was $15.0 million, $.23 per share (diluted), and Revenues were
$150.2 million.
<PAGE>
The backlog of unfilled orders, which totaled $272.1 million at March 31,
is expected to result in Revenues which exceed the incoming order rate for the
remainder of 1999. Most of this backlog represents equipment to be installed on
offshore rigs currently under construction, for which commitments were made in
1997 and early 1998.
Our industry has, over the years, undergone a number of sudden and
unforeseen periods of expansion and contraction. However, the volatility we
have experienced over the past eighteen months, and the degree of uncertainty
that exists today, make this period as challenging as any in our memory. Our
focus during this time is to adjust the Company's cost structure to the current
level of business, a process that we began in the fourth quarter of last year,
and to emphasize the strategies that have made us successful so far. Foremost
among the latter is the development of products and technologies that reduce the
cost of drilling and have the potential to gain acceptance in a difficult
market. Another important task for this year is to ensure the timely
installation and effective operation of all our equipment on new offshore rigs.
These rigs are the most advanced and automated in the industry, and by
demonstrating enhanced capabilities and productivity they can promote the
retrofitting of existing rigs with similar equipment.
We appreciate your continued support.
/s/ GEORGE I. BOYADJIEFF
George I. Boyadjieff
Chairman and
Chief Executive Officer
April 28, 1999
<PAGE>
Condensed Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 18,121 $ 29,138
Receivables (net) 168,327 179,241
Inventories 144,329 152,412
Other 30,554 29,600
- -------------------------------------------------------------------------
Total Current Assets 361,331 390,391
Property, plant and equipment (net) 89,234 89,997
Rental equipment (net) 11,270 11,440
Cost in excess of net assets acquired 33,143 33,511
Other assets 27,281 21,581
- -------------------------------------------------------------------------
Total Assets $522,259 $546,920
=========================================================================
Current Liabilities
Accounts payable $ 34,023 $ 45,969
Customer deposits 69,209 95,766
Other liabilities 62,982 62,409
Current portion of long-term debt 9,974 9,948
- -------------------------------------------------------------------------
Total Current Liabilities 176,188 214,092
Non-current liabilities 13,943 13,461
- -------------------------------------------------------------------------
Total Liabilities 190,131 227,553
Shareholders' Equity
Common Stock and additional paid-in capital 158,324 157,073
Retained earnings 173,804 162,294
- -------------------------------------------------------------------------
Total Shareholders' Equity 332,128 319,367
- -------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $522,259 $546,920
=========================================================================
</TABLE>
Notes to Condensed Consolidated
Financial Statements
Note 1. Basis of Presentation
These statements are condensed and do not contain disclosures required by
generally accepted accounting principles. Reference should be made to the
financial statements contained in the Annual Report to Shareholders for the year
ended December 31, 1998.
Varco International, Inc. and Subsidiaries
<PAGE>
Note 2. Special Charge
During the fourth quarter of 1998, the Company recognized an $8.5 million
special charge consisting of severance for 1,100 employees of $6.1 million; a
non-cash write-off of rental equipment of $1.5 million; and an allowance for
abandoned leases and other obligations of $900 thousand. During the first
quarter of 1999 the Company spent $900 thousand of the cash charge. As of March
31, 1999, the Company had spent, in total, $1.3 million of this charge and
expects to spend substantially all of the remaining charge during the balance of
1999.
Note 3. Business Segments
Selected financial information for the Company's reportable segments for the
three months ended March 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999
Revenues Intercompany Operating
Revenues Profit (Loss)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Varco Systems $ 60,141 $ 320 $13,082
Varco BJ 20,985 43 5,336
M/D Totco 13,647 888 (1,415)
Shaffer 53,735 4,905
Rigtech 3,233 (544)
- -----------------------------------------------------------------------------
$151,741 $ 1,251 $21,364
=============================================================================
1998
Varco Systems $ 53,496 $ 730 $11,523
Varco BJ 20,018 88 5,310
M/D Totco 23,609 1,032 4,020
Shaffer 47,212 4,006
Rigtech 5,408 597
- -----------------------------------------------------------------------------
$149,743 $ 1,850 $25,456
=============================================================================
</TABLE>
The following reconciles segment operating income to consolidated income before
income taxes.
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of profit (loss)
Segment income $21,364 $25,456
Elimination of intercompany profit (265) 170
Unallocated amounts:
Interest expense (297) (505)
Corporate and other expenses (2,657) (2,361)
- -----------------------------------------------------------------------------
Earnings before income taxes $18,145 $22,760
=============================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
Condensed Consolidated
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 11,734 $ 14,985
Depreciation and amortization 6,009 4,904
Increase (decrease) in operating cash flows:
Receivables 10,914 (11,638)
Inventories 8,083 (25,723)
Additions to rental equipment (1,633) (1,205)
Accounts payable (11,946) 2,148
Customer deposits (26,557) 11,590
Taxes payable 1,987 4,669
Interest payable 263 493
Other (5,582) (7,849)
- -----------------------------------------------------------------------
Net cash (used in) operating activities (6,728) (7,626)
- -----------------------------------------------------------------------
Investing Activities
Equipment purchases (4,571) (7,283)
Proceeds from equipment sales 39 80
- -----------------------------------------------------------------------
Net cash (used in) investing activities (4,532) (7,203)
- -----------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common Stock 243 448
- -----------------------------------------------------------------------
Net cash from financing activities 243 448
- -----------------------------------------------------------------------
Net change in cash and cash equivalents (11,017) (14,381)
- -----------------------------------------------------------------------
Cash and cash equivalents at beginning of year 29,138 39,827
- -----------------------------------------------------------------------
Cash and cash equivalents at end of quarter $ 18,121 $ 25,446
=======================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
Condensed Consolidated
Statements of Income
(unaudited)
<TABLE>
<CAPTION>
(in thousands, Three Months Ended March 31,
except per share data) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net sales $146,329 $138,941
Rental income 5,412 10,802
Other income 427 448
- -------------------------------------------------------------------------------------------------
152,168 150,191
- -------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales 102,392 91,830
Cost of rental income 2,028 3,218
Selling, general and administrative expenses 21,847 24,348
Research and development costs 7,459 7,530
Interest expense 297 505
- -------------------------------------------------------------------------------------------------
134,023 127,431
- -------------------------------------------------------------------------------------------------
Income before income taxes 18,145 22,760
Provision for income taxes 6,411 7,775
Net income $ 11,734 $ 14,985
=================================================================================================
Basic income per share $.18 $.23
=================================================================================================
Shares used in basic income per share calculation 64,736 64,240
=================================================================================================
Diluted income per share $ .18 $ .23
=================================================================================================
Shares used in diluted income per share calculation 65,480 65,662
=================================================================================================
</TABLE>
Varco International, Inc. and Subsidiaries
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General Industry Conditions
Commodity prices for oil and gas have remained low during the first quarter of
1999. The first quarter price of oil averaged approximately $13.20 per barrel.
This compares to an average of $14.40 per barrel for the year 1998 and to an
average in excess of $20.00 per barrel during the years 1997 and 1996. The
price of natural gas for the first quarter of 1999 averaged approximately $1.78
per thousand cubic feet as compared to $2.11 in the same period of 1998. For
all of 1998 the average price was $2.04 per thousand cubic feet, and it was
$2.50 per thousand cubic feet for the years 1997 and 1996. These low commodity
prices have led to lower cash flows for the oil companies and a reduction in
exploration and production expenditures, leading to declining drilling activity.
Worldwide drilling activity, as measured by the average number of active
drilling rigs, decreased 35% in the first three months of 1999 to an average of
approximately 1,461 from an average of approximately 2,240 during the same
period in 1998. The U.S. and Canadian component of the rig count averaged 840,
a 41% decrease from the prior year's first quarter rig count. The international
component of active drilling rigs averaged approximately 620 in the first
quarter of 1998, a decrease of 195 rigs from the prior year.
Offshore drilling activity decreased year-to-year, as reflected by a
decrease in rig utilization (mobile offshore rigs under contract as a percent of
available rigs). For the first quarter of 1999, mobile offshore rig utilization
averaged 78% as compared to 95% in the first quarter of 1998. The lower
utilization was accompanied by decreasing dayrates, which have a negative impact
on the cash flows of the Company's primary customer, the drilling contractor.
This was accompanied by no new commitments to build offshore drilling rigs.
Recently the price of oil has increased to above $18 per barrel. At this
time it is uncertain if the price of oil will remain at this level, and if it
does, whether or not that price will be sufficient to cause an increase in
exploration and production expenditures.
Results of Operations
Set forth below are the orders and revenues for the Company's five operating
Divisions:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Orders
Varco Systems $ 20,972 $ 134,730
VarcoBJ 13,935 31,276
M/D Totco 12,836 31,951
Shaffer 20,344 93,555
Rigtech 4,176 8,038
Cancellations (15,831) (13,024)
- -------------------------------------------------------------------------------
Total $ 56,432 $ 286,526
===============================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Varco Systems $ 60,141 $ 53,496
VarcoBJ 20,985 20,018
M/D Totco 13,647 23,609
Shaffer 53,735 47,212
Rigtech 3,233 5,408
- -------------------------------------------------------------------------------
Total $ 151,741 $ 149,743
===============================================================================
</TABLE>
First quarter 1999 new order bookings, before cancellations, of $72.3
million declined from $299.6 million, before cancellations, in the first quarter
of 1998 and from $117.5 million, before cancellations, in the fourth quarter of
1998. The decline from the first quarter of 1998 is primarily the result of the
reduction in orders associated with upgrading and construction of offshore
drilling rigs, particularly floating rigs that are capable of drilling in water
depths exceeding 3,000 feet. Each such rig creates significant potential for the
high dollar value products provided by the Varco Systems and Shaffer Divisions.
In addition, new orders were negatively impacted by the decline in overall
drilling activity. The decline as compared to the fourth quarter of 1998 is
primarily due to the decline in drilling activity.
The revenue increases at Varco Systems, Varco BJ and Shaffer, as compared
to the first quarter 1998, were due to the delivery from backlog of equipment
for offshore rig upgrades and construction. The revenue decline at M/D Totco
was due to the decline in overall drilling activity, particularly in the U.S.
and Canada, where M/D Totco generates a greater portion of its revenue as
compared to other Divisions.
At March 31, 1999, the Company's backlog of unshipped orders was
approximately $272.1 million as compared to $367.4 million at December 31, 1998,
and $599.7 million at March 31, 1998. The Company expects that substantially all
of its March 31, 1999 backlog will be shipped by December 31, 1999. At March
31, 1999, the Company had received $69.2 million in customer cash deposits
related to orders included in backlog. In accordance with industry practice,
orders and commitments generally are cancellable by customers at any time.
Gross margin (net sales and rental income less costs of sales and rental
income) as a percentage of net sales and rental income for the first quarter of
1999 was 31.2%. This compares to a gross margin of 36.5% for the same period in
1998. This decline was caused by high initial costs and retrofit costs on newer
products at Shaffer, M/D Totco and Rigtech; by higher manufacturing costs and
increased manufacturing inefficiencies; and by the decline in rental revenue,
which carries a higher gross margin than other revenues. Approximately 2.5% of
the 5.3% decline was due to high initial costs and retrofit costs on newer
product, and higher manufacturing costs and the decline in rental revenue each
accounted for approximately 1.3% of the decline.
<PAGE>
The Company believes that new product development is a significant factor
for the future of the Company. Research and development costs were $7.5
million, 5% of revenue, for each of the first quarters of 1999 and 1998.
Selling, general and administrative expenses decreased 10.3% in the first
quarter of 1999 as compared to the first quarter of 1998. As a percent of
revenue, selling, general and administrative expenses decreased to 14.4% from
16.2% in the first quarter of 1998. This reduction in cost is primarily due to
a reduction in employees. Overall Company employment at March 31, 1999, was
2,623 (including 70 temporary employees) which compares to 3,025 (including 402
temporary employees) a year ago.
The Company's effective income tax rate was 34.2% in the first quarter of
1998 as compared to 35.3% in the same quarter of 1999. The lower effective tax
rate in 1998 is due to the elimination in 1998 of the Company's valuation
allowance on deferred tax assets. The Company now believes that it is more
likely than not that all of its deferred tax assets will be realized.
Liquidity and Capital Resources
At March 31, 1999, the Company had cash and cash equivalents of $18.1 million as
compared to $29.1 million at December 31, 1998. This decline was primarily due
to reductions in accounts payable and customer deposits. At March 31, 1999, the
Company's working capital was $185.1 million as compared to $176.3 million at
December 31, 1998, and its current ratio was 2.1 to 1.0 as compared to 1.8 to
1.0 at December 31, 1998. The preceding changes are also primarily due to the
reduction in accounts payable and customer deposits.
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 remaining $10.0 million principal balance of the
Senior Notes is payable on June 30, 1999.
On June 27, 1997, the Company entered into a seven-year unsecured revolving
credit agreement with three banks (the "Credit Agreement"). The Credit Agreement
provides for a credit facility of $65.0 million, inclusive of a $20.0 million
letter of credit sub-facility. The maximum available under the Credit Agreement
is reduced in equal quarterly amounts over the last four years of the Credit
Agreement. At March 31, 1999, there were no advances and $4.9 million in letters
of credit outstanding under this facility.
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 $5.0 million
plus 25% of the Company's consolidated net income arising after September 30,
1997, computed on a cumulative basis.
<PAGE>
The Company's capital expenditures during the first quarter of 1999 were
$4.6 million as compared to $7.3 million for the first quarter of 1998. The
Company's current plans for capital expenditures for the balance of 1999 are
approximately $10.0 million. The Company anticipates that its March 31, 1999
cash and cash equivalents and its existing credit facility will be sufficient to
meet its capital expenditures and operating cash needs and the principal payment
on the Senior Notes in 1999.
Year 2000 Compliance
The following supplements the Year 2000 disclosure included in the Company's
Annual Report to Shareholders for the year ended December 31, 1998 and reference
should be made to such disclosure.
Products Compliance testing of the Company's products is approximately 99%
complete, and the Company believes that its currently supported products, as
opposed to discontinued and obsolete products, are Year 2000 compliant. The
Company has mailed to its customers a list of compliant products and has advised
customers which products needed to be upgraded or replaced for Year 2000
compliance.
Internal Business Systems The Company has completed its assessment phase
and believes that it has identified substantially all of the major systems,
software applications and related equipment used in connection with its internal
operations that must be modified or upgraded in order to minimize the
possibility of a material disruption to its business. The Company estimates that
its business systems will be Year 2000 compliant by the end of the third quarter
of 1999.
Third-Party Suppliers and Customers The Company has requested
confirmation from its suppliers of their Year 2000 compliance. The replies
received to date indicate that Year 2000 compliance will be achieved. The
Company plans to canvas its customers during the second quarter of 1999 to
determine whether its customers are Year 2000 compliant.
Facility Systems The Company does not anticipate any material impact on
the Company's operations from any of its facility systems.
The Company does not separately track internal cost incurred on the Year
2000 Issue. The Company has estimated that approximately 15% to 20% of its IT
personnel's time is spent on the Year 2000 Issue. As of March 31, 1999,
approximately $750 thousand have been accrued or paid to third parties relating
to this issue. The Company has estimated that approximately $1.0 to $1.5 million
will be paid in 1999 to third parties for software, hardware and consultation.
<PAGE>
Cautionary Statement Pursuant
to the Private Securities Litigation
Reform Act of 1995
In accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company notes that the statements in this
Quarterly Report, which are forward-looking and which provide other than
historical information, involve risks and uncertainties that may impact the
Company's results of operations. These forward-looking statements include,
among others, statements concerning the Company's general business strategies,
customer orders and cancellations, backlog, operating trends, industry trends,
the price of oil and gas, manufacturing capacity, and expectations for funding
capital expenditures and operations in future periods. The Company also
continues to face many risks and uncertainties including: changes in the prices
of oil and natural gas, changes in capital spending by companies in the oil and
gas industry for exploration, development and equipment, potential excess
capacity, competitive pressures, technological and structural changes in the
industry, litigation and environmental laws. The risks and uncertainties
inherent in these forward-looking statements could cause actual results to
differ materially from those expressed in or implied by these statements.
Profile
Varco International, Inc. is a leading manufacturer of products used in the oil
and gas well drilling industry worldwide. The Company also leads in the
development of new technology and equipment to enhance the safety and
productivity of the drilling process. Operating through five divisions, the
Company's products include: integrated systems for rotating and handling the
various sizes and types of pipe used on a drilling rig; conventional pipe
handling tools, hoisting equipment and rotary equipment; drilling rig
instrumentation; pressure control and motion compensation equipment; and solids
control equipment and systems.
Investor Contact
Richard A. Kertson
Vice President - Finance
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
Tel (714) 978-1900
Fax (714) 937-5029
E-mail: [email protected]
Web site: http://www.varco.com
VARCO
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS FIRST QUARTER REPORT TO
SHAREHOLDERS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,121,000
<SECURITIES> 0
<RECEIVABLES> 171,809,000
<ALLOWANCES> (3,482,000)
<INVENTORY> 144,329,000
<CURRENT-ASSETS> 361,331,000
<PP&E> 165,866,000
<DEPRECIATION> (76,632,000)
<TOTAL-ASSETS> 522,259,000
<CURRENT-LIABILITIES> 176,188,000
<BONDS> 0
0
0
<COMMON> 158,324,000
<OTHER-SE> 173,804,000
<TOTAL-LIABILITY-AND-EQUITY> 522,259,000
<SALES> 151,741,000
<TOTAL-REVENUES> 152,168,000
<CGS> 104,420,000
<TOTAL-COSTS> 126,267,000
<OTHER-EXPENSES> 7,459,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 297,000
<INCOME-PRETAX> 18,145,000
<INCOME-TAX> 6,411,000
<INCOME-CONTINUING> 11,734,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,734,000
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
