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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 (I.R.S. Employer Identification
of incorporation or organization) Number)
743 NORTH ECKHOFF STREET, 92868
ORANGE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (714) 978-1900
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
As of March 1, 2000, 65,424,115 shares of common stock were outstanding.
The aggregate market value of the common stock on such date (based upon the
closing price of such shares on the New York Stock Exchange) held by persons
other than affiliates of registrant was approximately $755,190,000; the basis of
this calculation does not constitute a determination by the registrant that such
persons are affiliates, as defined in Rule 405.
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 5, 6, 7 and 8 The Company's Annual Report to
Shareholders for the year ended
December 31, 1999.
Part III, Items 10, 11, 12 and 13 The Company's definitive Proxy
Statement for the Annual Meeting of
Shareholders to be held on May 11,
2000 to be filed with the Commission
not later than April 30, 2000.
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ITEM 1. Business
Introduction
Varco was founded in 1908 and incorporated under the laws of the State
of California in 1911. Varco and its subsidiaries are engaged in the design,
manufacture, sale and rental of drilling tools, equipment and integrated systems
and rig instrumentation used for oil and gas drilling worldwide.
The Company's principal products are drilling equipment, drilling rig
instrumentation and controls, pressure control and motion compensation
equipment, solids control equipment and fluid handling systems. Drilling
equipment includes integrated systems for rotating and handling the various
sizes and types of pipe utilized on a drilling rig ("drilling systems") and
specific purpose pipe handling tools, hoisting equipment and rotary equipment
("oil tools"). Drilling systems are manufactured, sold and rented by the Varco
Systems Division while oil tools are manufactured and sold by the Varco BJ
Division. Drilling rig instrumentation and control products are manufactured,
sold and rented by the M/D Totco Division. Pressure control and motion
compensation equipment are manufactured and sold by the Shaffer Division. Solids
control equipment and fluid handling systems are sold and rented by the Rigtech
Division.
The following table sets forth the contribution to the Company's total
revenues of its five Divisions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Varco Systems $200,556 $266,776 $165,510
Varco BJ 66,006 95,959 68,931
M/D Totco 69,540 94,639 90,601
Shaffer 237,036 256,238 206,483
Rigtech 16,589 21,273 13,372
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Total $589,727 $734,885 $544,897
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</TABLE>
Sales of the Company's products depend on the level of construction of
new drilling rigs and the replacement and upgrading of equipment for existing
rigs, particularly for offshore rigs and intermediate to deep land rigs (rigs
designed for drilling in excess of 8,000 feet). The level of construction of
drilling rigs and the rate at which equipment on existing rigs is replaced or
upgraded depends, in substantial part, on the level of worldwide exploration and
development drilling activity. Rental revenue, which is generated predominately
by the M/D Totco Division, is directly related to the level of drilling
activity, particularly in the United States and Canada. Sales of equipment and
sales and rentals of instrumentation products have also depended on the design,
development and successful introduction of new products for the drilling
industry. Equipment and instrumentation are also sold to operators of existing
rigs for use as spare or replacement parts.
The level of worldwide drilling activity can be influenced by numerous
factors, including the prices of oil and gas, economic and political conditions,
finding and development costs of oil companies, development of alternative
energy sources, availability of equipment and materials, availability of new
onshore and offshore acreage or concessions, and new and continued governmental
regulations regarding environmental protection, taxation, price controls and
product allocations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Drilling Process
An oil or gas well is drilled by a bit attached to the end of the
drill stem which is made up of 30-foot lengths of drill pipe joined by threaded
connections known as "tool joints." Heavy drill collars at the
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bottom of the drill stem put weight on the bit. Using the conventional rotary
drilling method, the drill stem is turned from the rotary table in the floor of
the drilling rig by torque applied to the "kelly" (a square or hexagonal section
of pipe located at the top of the drill stem) by means of the master bushing and
kelly bushing. During the drilling process heavy fluids ("drilling mud") are
pumped down through the drill stem and forced out through the bit. The drilling
mud returns to the surface through the hole area surrounding the drill stem,
carrying with it the cuttings drilled out by the bit. The cuttings are removed
from the mud by a filtering system and the mud is continuously recirculated back
into the hole. The drilling mud also serves to contain pressure surges ("kicks")
that may intrude into the formation.
As the hole depth increases, the kelly must be removed frequently so
that additional 30-foot sections of pipe can be added to the drill stem, which
may reach lengths in excess of five miles. When the bit becomes dull, the entire
drill stem is pulled out of the hole and disassembled, the disconnected sections
of pipe are set aside or "racked," the old bit is replaced and the drill stem
reassembled and lowered back into the hole (a process called "tripping"). During
drilling and tripping operations, tool joints must be screwed together and
tightened ("spun in" and "made up"), and loosened and unscrewed ("broken out"
and "spun out"). When the hole has reached certain depths, all of the drill pipe
is pulled out of the hole and larger diameter pipe known as casing is lowered
into the hole and cemented in place in order to protect against collapse and
contamination of the hole.
The raising and lowering of the drill stem while drilling or tripping,
and the lowering of casing into the well bore, are accomplished with the rig's
hoisting system. A conventional hoisting system is a block and tackle mechanism
and the derrick must have sufficient structural integrity to support the entire
weight of the drill stem or casing string.
During the drilling process it is possible for formation fluids, such
as natural gas, water or oil, to get into the wellbore creating additional
pressure which, if not controlled, could lead to a "blowout" of the well. To
prevent blowouts, a series of high-pressure valves known as blowout preventers
("BOPs") are positioned at the top of the well and, when activated, form
pressure tight seals which prevent the escape of fluids. When closed,
conventional BOPs prevent normal rig operations and are activated only if
drilling mud and normal well control procedures cannot safely contain the
pressure. BOPs must be designed to contain pressure of up to 15,000 psi.
After the well has reached its total depth and the final section of
casing has been set, the drilling rig is moved off of the well and the well is
prepared to begin producing oil or gas in a process known as "well completion."
A producing well may undergo workover procedures to extend its life and increase
its production rate.
The Top Drive Drilling System, originally introduced by Varco in 1982,
significantly alters the traditional drilling process. Using the Top Drive
Drilling System, the drill stem is rotated from its top by means of a large
electric motor. This motor is affixed to rails installed in the derrick and
traverses from near the top of the derrick to the rig floor as the drill stem
penetrates the earth. Therefore, the Top Drive eliminates the use of the rotary
table for drilling. Components of the Top Drive also are used to connect
additional lengths of pipe to the drill stem during drilling operations.
Varco Systems
The Varco Systems Division designs and manufactures integrated systems
for rotating and handling the various sizes and types of pipe used on a drilling
rig. They are designed to enhance the safety and productivity of the drilling
rig through mechanization and automation.
The Varco Top Drive Drilling System ("TDS") combines elements of pipe
handling tools, as well as hoisting and rotary equipment, in a single system.
Torque to turn the drill stem is imparted directly by means of a large electric
motor which moves up and down along rails installed in the derrick and into
which the drill stem is connected. During drilling operations, elements of the
TDS perform functions such as spinning-in and making-up tool joints. It also
incorporates a drill pipe elevator, providing the capability to
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maneuver a stand of pipe into position to be added to the drill string when
drilling, or to hold and hoist the entire drill stem. Drilling with a Top Drive
Drilling System provides several advantages over conventional drilling. It
enables drilling with three lengths of drill pipe, reducing by two-thirds the
time spent in making connections of drill pipe. In addition it facilitates
"horizontal" and "extended reach" drilling (the practice of drilling wells which
deviate substantially from the vertical) by providing the ability to rotate the
pipe as it is removed from, or replaced into, the hole, thus reducing friction
and the incidence of pipe sticking. The Top Drive Drilling System also increases
the safety of drilling operations.
The Top Drive Drilling System has demonstrated substantial economic
advantages. Users of the system generally report reductions in drilling time
ranging from 20% to 40%. By facilitating extended reach drilling, the TDS
increases the area which can be drilled from a given location, such as a fixed
platform or man-made island. Thus, the production from a given reservoir of oil
can be increased, and the number of costly fixed platforms required to develop
the field can be minimized.
The Top Drive Drilling System has evolved continuously since its
initial introduction. Today, the Top Drive product line includes several
models, each designed to satisfy specific customer requirements. The version
initially introduced to the market in 1982, the TDS-3, remains a part of the
product line. The TDS-4, introduced in 1990, is a two-speed model which permits
a variation in speed and torque that is desirable for differing drilling
conditions. The TDS-6S, first delivered in 1991, is a dual motor version which
provides double the power and torque of a single motor unit. The TDS-7S,
initially introduced in 1993, is powered by an alternating current ("AC") motor
instead of the direct current ("DC") motor used on previous models. In the
fourth quarter of 1997 the first TDS-8S was delivered. The TDS-8S is the AC
motor version of Varco Systems' most popular Top Drive, the TDS-4S. The AC
system offers lower maintenance cost, as well as providing higher torque for
longer periods and a running speed more than twice that of conventional DC motor
powered systems. Four TDS-8S units were delivered in 1999.
In 1995 the TDS-9S was introduced. It is powered by dual AC motors,
is reduced in length and rides on a separately installed torque tube. For these
reasons it is especially well suited for sale or rental to the conventional land
rig market, where portability is critical. It is designed for ease of
installation in existing derricks, can be rigged up and rigged down in a matter
of hours, and is easily transported from one location to another. During 1997
the TDS-10S was introduced. The TDS-10S is a smaller version of the TDS-9S
designed for use in a variety of smaller land and workover rig applications. The
TDS-10S has a 250-ton hoisting capacity as compared to the 400-ton hoisting
capacity of the TDS-9S. In 1998 a higher hoisting capacity AC powered Top Drive
was introduced, the TDS-11S. The TDS-11S has a hoisting capacity of 500 tons.
One TDS-10S unit and nine TDS-11S units were sold in 1999.
Pipe racking systems are used to handle drill pipe, casing and other
types of pipe (collectively "tubulars") on a drilling rig. Vertical pipe racking
systems move drill pipe and casing between the well and a storage ("racking")
area on the rig floor. Horizontal racking systems are used to handle tubulars
while stored horizontally (for example, on the pipe deck of an offshore rig) and
transport it up to the rig floor and raise it to a vertical position from which
it may be passed to a vertical racking system.
Mechanical vertical pipe racking systems include those developed and
sold by BJ Machinery prior to its acquisition by Varco in 1988. Such systems
reduce, but do not eliminate, the manual effort involved in pipe handling. The
Pipe Handling Machine ("PHM"), introduced by Varco in 1985, provides a fully
automated mechanism for handling and racking of drill pipe and drill collars
during drilling and tripping operations. It incorporates the spinning and
torquing functions of the Automated Roughneck with the automatic hoisting and
racking of disconnected sections of pipe. These functions are integrated via
computer controlled sequencing, and the Pipe Handling Machine is operated by a
person in an environmentally secure cabin.
The Automated Roughneck is an automated version of the Iron
Roughneck(R), which was originally introduced by Varco in 1976. It is a
microprocessor controlled device which automatically
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performs the torquing and spinning functions required to connect and disconnect
sections of drill pipe during drilling and tripping operations, as well as
during the setting of casing.
The Pipe Racking System ("PRS") is a semi-automated vertical pipe racking
system which has evolved from the "Star" system to which the Company acquired
the rights in 1990. When used in conjunction with an Automated Roughneck, it
provides an alternative to the more fully automated PHM. Like the PHM, it is
operated remotely from the driller's cabin by a single operator, but it requires
more operator intervention. Its design makes it more easily adapted to a land
rig or for retrofitting to an existing offshore rig. The current version of the
PRS was introduced in 1996.
Vertical pipe racking systems are used predominantly on offshore rigs and
are virtually mandatory on floating rigs such as semisubmersibles. Horizontal
pipe racking systems were introduced by Varco in 1993. They include the Pipe
Deck Machine ("PDM"), which is used to manipulate and move tubulars while stored
in a horizontal position; the Pipe Transfer Conveyor ("PTC"), which transports
sections of pipe to the rig floor; and a Pickup Laydown System ("PLS"), which
raises the pipe to a vertical position for transfer to a vertical racking
system. These components may be employed separately, or incorporated together
to form a complete horizontal racking system, known as the Pipe Transfer System
("PTS").
Hoisting systems are used to raise or lower the drill stem while drilling
or tripping, and the lowering of casing into the well bore. During 1999, the
Company introduced its first "Automated Hoisting System" ("AHS"). Varco's AHS
uses an AC-powered motor and a braking system that offers precise proportional
control. The AHS automates the repetitive hoisting and drilling operations
through user-friendly, touch-screen Electronic Driller interface. The AHS is
smaller and lighter than conventional hoisting systems. The Company has yet to
sell and deliver its first AHS-10.
Varco BJ
The Varco BJ product line consists of a full complement of conventional rig
tools and equipment. It was formed by the combination of the original Varco oil
tool products and the related products acquired in the BJ Machinery and the
Martin-Decker acquisitions. These products include pipe handling tools, hoisting
equipment and rotary equipment.
Varco's pipe handling tools are designed to enhance the safety, efficiency
and reliability of pipe handling operations. Many of these tools have provided
innovative methods of performing the designated task through mechanization of
functions previously performed manually.
Varco BJ manufactures various tools used in the making up and breaking out
of drill pipe, including spinning wrenches, manual tongs, torque wrenches and
kelly spinners. The spinning wrench is a tool used to screw together and unscrew
sections of drill pipe. Powered pneumatically or hydraulically, it replaces a
hazardous device known as a spinning chain. Manual tongs are used to make up or
break out tool joints, while the torque wrench is a hydraulically powered device
which performs this function with enhanced safety and precision. The kelly
spinner is a pneumatically or hydraulically powered tool used to connect and
disconnect the kelly to and from the drill stem as additional lengths of pipe
are added while drilling.
The Company also manufactures other tools used in various pipe handling
functions. Slips are gripping devices which hold pipe or casing in suspension
while in the hole, and they may be either manual, spring or hydraulically
operated. Other products, which include safety clamps, casing bushings and
casing bowls, are used to hold and guide drill pipe or casing while in the hole.
When drilling, tripping or setting casing, lengths of pipe must be hoisted
into position above the hole, lowered into or lifted from the hole and held in
suspension while in the hole. Hoisting equipment includes devices used to grip
and hold various types of pipe ("tubulars") while being raised or lowered.
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Drill pipe elevators are used to hold lengths of drill pipe as they are hoisted
into position to be attached to the drill stem, and to hold the entire drill
stem as it is lowered into or lifted from the hole. Similarly, casing elevators
and spiders are gripping devices used to hold the casing as additional lengths
are added and lowered into the hole. Links are elongated steel forgings from
which the elevator is suspended and which, in turn, hangs from beneath the hook,
which is connected to the hoisting mechanism of the drilling rig. The Company
manufactures elevators to accommodate a variety of tubulars, as well as a
complete line of links and hooks, together with casing elevators and spiders, to
handle a variety of casing sizes and accommodate casing weighing up to 1,000
tons.
Varco BJ expanded its casing spider line in 1994 with the introduction of
the Flush Mounted Spider ("FMS 375"). It is designed to improve safety and
efficiency during casing operations by eliminating scaffolding which otherwise
must be used as a raised work platform for the rig crew.
During 1996, the Varco BJ product line was further expanded with the
introduction of the BX Hydraulic Elevator and the PS 21 and PS 30 Hydraulic
Power Slips. The BX Hydraulic Elevator increases safety and eliminates the
normal rig complement of several different types and sizes of elevators through
the use of removable bushings. The PS 21 and PS 30 Power Slips improve both
safety and rig efficiency by permitting the handling of all sizes and types of
tubulars with a single tool and by incorporating the FMS concept.
Rotary equipment products consist of kelly bushings and master bushings.
The kelly bushing applies torque to the kelly to rotate the drill stem and fits
in the master bushing which is turned by the rotary table on the floor of the
rig. Varco BJ produces kelly bushings and master bushings for most sizes of
kellys and makes of rotary tables.
In 1998, Varco BJ introduced the Rotary Support Table for use on rigs with
Top Drive Drilling Systems. The Rotary Support Table is used in concert with
the TDS to completely eliminate the need for the larger conventional rotary
table. 13 units were delivered in 1998, and ten units were delivered in 1999.
A substantial portion of the Company's sales in some of the Varco BJ
products is attributable to sales of replacement parts which are subject to
normal wear and to sales of spare parts. Replacement parts for kelly bushings,
rotary slips, casing tools and spinning wrenches are a material part of the
sales of those product lines.
M/D Totco
The M/D Totco Division designs, manufactures and sells or rents hydraulic
and electronic instrumentation and control systems, primarily for use in oil
and gas well drilling operations; and, to a lesser extent, provides
instrumentation to certain general industrial markets and for use in non-
drilling related oilfield applications.
A drilling rig instrumentation package is generally comprised of four
elements: (1) sensors, which measure selected variables at the point of origin;
(2) a mechanical or electronic means of transmitting that data to the display
device; (3) a display, which may range in sophistication from a simple gauge to
a computer terminal or workstation; and (4) a method for permanently recording
and/or electronically transmitting the data for subsequent review and analysis.
This equipment must be sufficiently rugged to withstand the hostile
environmental conditions of a drilling rig.
The driller relies on certain instruments to provide information critical
to the operation of the drilling rig. At a minimum, this information includes
the status of such basic data as weight-on-bit, rotary RPM, rotary torque, hook
load, rate of penetration, mud pit volume, and mud flow. The indicators which
display this data are generally contained in a common housing called a drilling
console. A drilling console may range in sophistication from a collection of
analog gauges to a microprocessor based system such as the M/D Totco "Spectrum
1000".
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Computer based electronic data acquisition systems provide real-time
analysis and display of the various drilling data at the driller's station, as
well as other locations around the rig. In 1991 M/D Totco introduced the TOTAL
system, a computer-based data acquisition system incorporating up-to-date
electronic technology with comprehensive analytical capabilities. The emphasis
in TOTAL is on the analysis and interpretation of data via computer software, so
that the information displayed to the driller enables him to operate the rig
more safely and efficiently.
In 1992, the Company licensed from the Sedco Forex Division of Schlumberger
Limited the rights to develop, manufacture and market the MDS(TM) System, an
advanced computer-based drilling information and alarm system which is
integrated with TOTAL. Its software programs incorporate the knowledge and
experience of drilling personnel and engineers to provide critical information
in a user-friendly format.
In addition to MDS(TM), a number of additional analytical capabilities have
been developed for the TOTAL System. Drill-Off, a computerized drilling
optimization program was jointly developed by M/D Totco and Exxon. An agreement
with Schlumberger's Anadril Division, authorizing M/D Totco to manufacture and
market a sophisticated kick detection system known as Kick-Alert(SM) was
finalized in 1993. A joint effort by M/D Totco and British Petroleum to
incorporate a software program known as Early Kick Detection (EKD) on the TOTAL
system was completed in 1995. An exclusive Worldwide Marketing agreement with
Logware, Inc. to market a Windows(TM) based drilling information system was
completed in 1993.
The TOTAL system is designed so that it may be scaled to the requirements
of a particular drilling operation. For relatively routine drilling requirements
it can represent a cost-effective means of providing basic information; however,
it can be expanded to encompass the full range of analytical capability for
complex and costly offshore drilling.
Other drilling related products of M/D Totco include drift indicators,
which are used to measure and record the degree of drift of the well from
vertical; mechanical recorders, which produce a permanent record in chart form
when an electronic system is not being used; drilling control systems (auto-
drillers) which automatically maintain a constant pressure on the drill bit, and
drilling chokes which provide a remotely actuated method of controlling "kicks."
In 1997, M/D Totco introduced the Varco Integrated Control and Information
System ("V-ICIS"), a computer-based system which combines the physical control
of all of Varco's automated equipment and potentially that of third parties,
into a common, user-friendly system which also integrates the analytical
capabilities of the TOTAL system. Five V-ICIS systems were delivered in 1998 and
13 in 1999.
In 1999, M/D Totco introduced RigSense to the industry as the technological
derivative of the existing TOTAL product line. RigSense is a Microsoft
WindowsNT(TM) based rig network, which provides a new range of capabilities to
the rigsite users in terms of distribution of drilling information, data
presentation, data analysis, archiving and ease of use. It provides the driller
with the ability to better analyze the drilling data during drilling, send
messages to other workstations, and archive the data for further use or transmit
the data offsite for additional analysis or for use when drilling future wells.
During 1999, sales and rentals of RigSense generated approximately $3.0 million
in revenues.
Electronic Driller ("ED") was also developed and introduced in 1999. ED is
a control system designed to provide steady state drilling conditions at the
drill bit through precision drawworks brake control. It is available for
upgrading drilling rigs as well as for newly constructed rigs. The system
consists of an electronic controller, rig sensors, a rig floor color touch
screen display and a disc brake system. The disc brake can either be an
existing caliper brake or a new Varco plate disc brake supplied as part of an ED
system. Improvements of 30% in rotating hours and a 40% reduction in the number
of bits per well have been documented in the field. 15 units have been sold to
date.
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Products of the M/D Totco Division used outside the drilling process
include load and radius indicating systems for pedestal type cranes, anchor
tension monitoring systems for use in mooring and positioning applications, and
specialty scales for industrial use.
In 1993, the Company acquired all of the outstanding shares of Metrox,
Inc., a manufacturer of strain gauge systems. The acquisition of strain gauge
technology provides further penetration into the industrial crane and weight
monitoring markets as well as enhancing the overall M/D Totco sensor technology.
Strain gauge sensors provide an extremely precise measurement of many factors
critical to drilling operations.
Drilling consoles, and recently, the V-ICIS, are typically sold as original
equipment to the rig manufacturer. However, electronic drilling consoles may be
sold as upgrades to existing rigs. In the United States and Canada, most other
instrumentation products are rented to the drilling contractor or oil company
when necessary, and are therefore, not permanently installed on the rig.
Internationally, nearly all instrumentation equipment is sold to the rig owner
and becomes a permanent part of the drilling rig. A significant portion of the
sales of some instrumentation product lines is in spare and replacement parts.
Shaffer
The Shaffer Division designs, manufactures, sells and distributes pressure
control equipment (including ram blowout preventers, annular or spherical
blowout preventers and rotating blowout preventers), blowout preventer control
systems, riser and motion compensation systems (including riser tensioners,
drillstring compensators and crown mounted compensators).
BOPs are devices used to seal the space between the drill string and the
borehole to prevent an uncontrolled flow of formation fluids and gases. Shaffer
manufactures three types of BOPs. Ram and annular BOPs are back-up devices and
are activated only if other techniques for controlling pressure in the well bore
are inadequate. When closed, these devices prevent normal rig operations. Ram
BOPs seal the wellbore by hydraulically closing rams against each other across
the wellbore. Specially designed packers seal around specific sizes of pipe in
the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs
seal the wellbore by hydraulically closing a rubber packing unit around the
drill pipe or kelly or by sealing against itself if nothing is in the hole. The
rotating BOP allows operators to drill or strip into or out of the well at low
pressures without interrupting normal operations.
Shaffer expanded its BOP line in 1995 with the introduction of a system for
achieving Pressure Control While Drilling (PCWD(R)). This new BOP allows
rotating of the drill string to proceed while controlling pressures up to 2,000
psi, and will operate as a normal spherical BOP at pressures up to 5,000 psi.
In 1998 Shaffer introduced the "NXT" ram type BOP which eliminates door
bolts, providing weight and space savings. Its unique features make subsea
operation more efficient through faster ram configuration changes without
tripping the stack. During 1999, four units were delivered to customers.
Shaffer sells conventional BOP control systems under the registered
trademark Koomey(R). The Koomey control system is hydraulically activated and is
used to operate BOPs and associated valves remotely for both land systems and
offshore systems. With the recent increase in deep-water drilling depths,
traditional hydraulic control systems are inadequate to activate BOPs, which
rest on the ocean floor and may be 5,000 feet or more below the surface. In
1997, Shaffer introduced the IVth Generation MUX, an electronic control system
designed specifically for deep-water applications. Twelve such systems were
delivered in 1998 and six in 1999.
Riser is large diameter pipe which, when drilling from a floating rig such
as a semisubmersible or drillship, connects the rig to the well on the ocean
floor. Therefore, the riser string, which consists of sections approximately 75
feet in length connected together, may extend to as much as 10,000 feet. Shaffer
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purchases the blank pipe, manufactures and attaches connectors to each section
and completes it with the attachment of related components.
Shaffer sells motion compensation equipment under the registered trademark
Rucker(R). Motion compensation equipment stabilizes the bit on the bottom of the
hole, increasing drilling effectiveness of floating offshore rigs by
compensating for wave and wind action. Shaffer also manufactures tensioners,
which provide continuous reliable axial tension to the marine riser pipe and
guide lines on floating drilling rigs, tension leg platforms and jack-up rigs.
An important product extension in 1996 was the Riser Recoil System, which
provides a safe disconnect when the floating rig encounters an unanticipated
need to leave location.
Shaffer also manufactures and sells flowline devices, primarily Best(TM)
chokes, used in the production phase of the oil and gas industry. These chokes
are designed for both topside-platform and subsea production, for both standard
service and sulfur (H2S) service.
Sales of spare and replacement parts, and the repair and reconditioning of
used equipment constitute a significant part of Shaffer's revenue.
Rigtech
The Rigtech Division designs, sells and rents solids control equipment and
fluid handling systems. Solids control equipment removes cuttings ("solids")
from the drilling fluid so that it may be recirculated, and fluid handling
systems automate the process of handling drilling fluids on a drilling rig.
Rigtech products are generally subcontracted to third parties for manufacturing.
In the drilling operation, mud is pumped down the drill pipe and exits
through nozzles in the drill bit. The mud acts as a lubricant to the drill bit,
as a pressure equalizer and as a vehicle which carries the drilled solids back
to the surface. Shale shakers are the principal solids control machines used to
clean the cuttings from the mud, enabling it to be reused. The VSM 100 is
designed to pass large volumes of mud over fine mesh screens to maximize the
removal of the cuttings from the mud, thus minimizing the use of other solids
removal equipment before the mud is recirculated. Other equipment that may be
employed to remove solids are the VSM 200 mud cleaner and de-sander and de-
silter hydrocyclones. During 1997, Rigtech introduced the VSM 300, a new
generation shale shaker designed to operate more efficiently in a wider variety
of geologic conditions.
The Rigtech fluid handling systems include the AMS 2000 mud chemical
handling system, which is designed to handle, store and mix mud chemicals. The
mud chemicals are provided to the rig in "big-bags" which are placed in a hopper
fitted with a vibrating mechanism. A computer controlled valve in the base of
the bag is used to discharge the chemical powder to the mud mixer at the desired
rate. The AMS 2000 eliminates the manual handling of large sacks of powdered
chemicals, improving efficiency and reducing exposure to a potentially hazardous
work environment.
The AMS 1000 automated mud system is a computer controlled system which
oversees and controls the entire mud management. The purpose of the system is to
release manpower from manual operations while continuously monitoring the
process to ensure that it is performing properly. Rigtech delivered three AMS
1000 systems in 1998 and four in 1999.
In 1999, Rigtech introduced the newly developed `HeviJet' Centrifuge, the
first production AC motor driven automated centrifuge developed specifically for
the drilling industry. Centrifuges are utilized to remove fine solids from the
drilling mud by imparting centrifugal force to the fluid/solid feed. Existing
oilfield centrifuges require constant operator attention and have very limited
capacity due to the use of low efficiency hydraulic drives. The `Hevijet'
Centrifuge has a process capacity of approximately three times that of a
standard oilfield unit, and in addition, is designed to operate without the
requirement for a dedicated operator. This reduces costs for personnel in
addition to reducing drilling mud costs due to more
8
<PAGE>
effective cleaning. Rigtech has received orders for eleven Centrifuge units, all
of which are expected to be delivered in 2000.
Rigtech equipment and systems are designed to minimize the cost of drilling
through lowering mud costs and improving operational efficiency, while at the
same time reducing the labor requirement and improving the safety of the
drilling operation.
Research and New Product Development
Varco believes that it is a leader in the development of new technology and
equipment to enhance the safety and productivity of the drilling process and
that its sales and earnings have been dependent, in part, upon the successful
introduction of new or improved products. Varco's significant product
developments have included the safety spinning wrench, the torque wrench, the
spring slip, pneumatically operated casing elevators and spiders, the Automated
Roughneck, the Top Drive Drilling System, the Pipe Handling Machine, the Pipe
Racking System, the TOTAL system, the V-ICIS control system, the Electronic
Driller, the NXT blowout preventor and the automated centrifuge. At December 31,
1999, the Company employed 264 persons on its engineering and design staffs who
were principally engaged in research and development. Total expenditures for
research and development were $28.8 million in 1999, $34.6 million in 1998 and
$21.1 million in 1997.
As of December 31, 1999, the Company held 59 United States patents and had
12 patent applications pending. Expiration dates of such patents range from 2000
to 2016. As of such date the Company also had 148 foreign patents and 30 patent
applications pending relating to inventions covered by the United States
patents. The preceding include patent rights received in connection with the BJ
Machinery, Martin-Decker, TOTCO and Shaffer acquisitions. There are no
assurances that patents will be granted in response to pending applications.
Although the Company believes that its patents and applications have value,
competitive products with different designs have been successfully developed and
marketed by others. The Company considers the quality and timely delivery of its
products, the service it provides to its customers and the technical knowledge
and skills of its personnel to be more important than its patents in its ability
to compete. While the Company stresses the importance of its research and
development programs, the expense and market uncertainties associated with the
development and successful introduction of new products are such that there can
be no assurance that the Company will realize future revenues from new products.
International Operations
The Company's products are sold for use in approximately 80 countries by
United States customers operating in the United States and abroad, as well as by
foreign customers such as privately-owned corporations and national oil
companies. The Company includes as an international sale any sale where the
product is designated for use other than in the United States. Revenues from
products sold for use outside the United States accounted for approximately 47%,
54% and 56% of the Company's total revenues for the years ended December 31,
1999, 1998, and 1997, respectively. For further information regarding the
Company's worldwide operations and international sales and rentals, see note j
of Notes to Consolidated Financial Statements included in the Company's Annual
Report to Shareholders.
The Company's international operations are subject to the usual risks of
changes in international conditions, such as changes in governmental policies
affecting the oil industry (e.g., environmental regulations or the
nationalization of the operations of the Company's customers). Most
international sales are payable in United States dollars.
The Company has a policy prohibiting the payment of any bribe, kickback or
similar gratuity to any person in order to facilitate the sale of the Company's
products or to secure favorable action by a
9
<PAGE>
government official. The Company believes that this policy does not impede its
competitive position in the sale of its products abroad.
Sales and Distribution
To facilitate the distribution of its drilling equipment and pressure
control products, the Company maintains domestic sales and service facilities in
California, Louisiana, Oklahoma, Texas and Wyoming. The rental of drilling rig
instrumentation requires local availability of equipment, transportation of the
equipment to the rig site and installation by qualified personnel. To service
this market, the Company maintains M/D Totco sales and service facilities in 11
states, including those mentioned above, as well as three locations in Canada.
Internationally, the Company maintains offices in Abu Dhabi, Brazil, China,
Holland, Moscow, Norway, Scotland, Singapore and Venezuela. The Company employs
independent agents in Mexico, South America, Europe, the Middle East, the Far
East and Asia, the South Pacific and in parts of the United States.
The Company's customers include private and government-owned oil companies,
drilling contractors, drilling rig manufacturers, rental tool companies, and
supply companies, which supply oilfield products to the end users of the
Company's products.
Drilling systems, such as the Automated Roughneck, Top Drive Drilling
System and pipe racking systems and pressure control and motion compensation
equipment, represent significant capital expenditures and are usually sold
directly to an oil company, drilling contractor or rig builder. Other drilling
equipment products may be sold through supply stores or directly to government-
owned oil companies or drilling contractors.
During 1999 sales to three customers were $83.9 million, $83.3 million and
$68.1 million, respectively. During 1998 sales to two customers were $122.0
million and $100.3 million, respectively. There were no sales to a single
customer in 1997 in excess of 10% of total sales.
Backlog
Sales of the Company's products are made on the basis of written purchase
orders or contracts and, consistent with industry practice, by telex, letter or
oral commitment later confirmed by a written order. In accordance with industry
practice, orders and commitments generally can be cancelled by customers at any
time. However the Company, is generally entitled to cancellation fees for
expenses and costs incurred prior to the cancellation of orders. In addition,
orders and commitments are sometimes modified before or during manufacture of
the products.
The backlog of unshipped orders was approximately as follows on the dates
indicated:
<TABLE>
<CAPTION>
December 31,
------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Varco Systems $26,767 $128,944 $172,838
Varco BJ 11,042 33,587 40,073
M/D Totco 7,182 26,069 16,259
Shaffer 17,925 174,430 224,180
Rigtech 845 4,383 9,545
------- -------- --------
Total $63,761 $367,413 $462,895
------- -------- --------
</TABLE>
The Company expects that substantially all of the backlog will be shipped
by December 31, 2000. At December 31, 1999 the Company had received $7.8
million in customer cash deposits related to orders included in backlog.
10
<PAGE>
Competition
The products of the Company are sold in highly-competitive markets and its
sales and earnings can be affected by competitive actions such as price changes,
new product development or improved availability and delivery. The Company
competes with a large number of companies, some of which are larger than the
Company and have greater resources and more extensive and diversified
operations.
Varco's principal competitors with respect to most Varco Systems products
are Maritime Hydraulics A/S, a division of Aker Maritime A/S, a Norwegian
company, and National-Oilwell Inc. Other competitors include A/S Hydralift,
another Norwegian company, which acquired the rights to the product previously
marketed by ACB offshore, a French company, and Tesco Corporation, a Canadian
company, that competes principally in the land Top Drive market against Varco
Systems' TDS-9S, TDS-10S and TDS-11S.
Varco's most significant domestic competitors with respect to oil tools
include Phoenix Energy Services, a subsidiary of National-Oilwell Inc., DenCon
Oil Tools and Weatherford International, Inc. In foreign markets Varco
experiences competition from most of its domestic competitors and from foreign
companies as well.
M/D Totco competes, in the domestic rental market, with the Swaco
Geolograph Division of Smith International, Inc., Petron Industries Inc., and
Epoch, a division of Nabors Industries. In domestic product sales, the
competition consists of Wagner International Inc., Acadiana Oilfield
Instruments, Inc. and a number of smaller regional companies. In the
international market it competes with these same companies along with such
foreign competitors as Hitec A/S, a division of National-Oilwell, Inc., and
Pason Systems, Inc., a Canadian company.
Shaffer competes, in the BOP and related controls market, with Cooper
Cameron Corporation, Hydril Company, a privately held company, and Stewart and
Stevenson Services, Inc. Shaffer's principal competitors with respect to motion
compensation equipment are Maritime Hydraulics A/S and A/S Hydralift.
Rigtech competes in the solids control equipment market principally with
Derrick Manufacturing Inc., Brandt/EPI, a division of Tuboscope Inc., and Swaco,
a division of Smith International, Inc.
Although accurate industry figures are not available, the Company believes
that it has a substantial share of the market for most of its equipment and
instrumentation products.
Manufacturing and Raw Materials
The manufacturing processes for the Company's drilling and pressure control
equipment products generally consist of machining, welding and fabrication, heat
treating, assembly of manufactured and purchased components and testing. The
Company's drilling and pressure control equipment products are manufactured
primarily from alloy steel, and the availability of alloy steel castings,
forgings, purchased components and bar stock is critical to the production and
timing of shipments. The Company believes that there are currently adequate
sources of supply for alloy steel castings, forgings, purchased components and
bar stock. The primary manufacturing processes associated with instrumentation
and solids control products are fabrication, machining, assembly of manufactured
and purchased components and testing. The Company believes that adequate sources
of supply exist for all such purchased components.
Rigtech products are generally subcontracted to third parties for
manufacturing. The Company believes that an adequate number of subcontractors
exist for the manufacture of Rigtech products.
Employees
11
<PAGE>
At December 31, 1999 the Company had a total of 1,906 employees (of which
42 were temporary employees). Of such employees, 644 employees were engaged in
sales and marketing, 281 employees were engaged in engineering and design, 144
employees were engaged in administrative or clerical capacities, and 837 were
engaged in manufacturing. The Company considers its relations with its employees
to be excellent and has never suffered a work stoppage or interruption due to a
labor dispute.
12
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Varco are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Walter B. Reinhold 75 Chairman Emeritus/Director and Consultant
George I. Boyadjieff 61 Chairman of the Board and Chief Executive Officer and
Director
Michael W. Sutherlin 53 President and Chief Operating Officer
Richard A. Kertson 60 Vice President-Finance and Chief Financial
Officer-Retired
Wallace K. Chan 42 Vice President-Finance and Chief Financial Officer
Donald L. Stichler 55 Vice President, Controller-Treasurer and Chief
Accounting Officer and Secretary
Robert J. Gondek 56 Vice President and President - M/D Totco
Mark A. Merit 42 Vice President and President - Shaffer
Roger D. Morgan 56 Vice President and President - Varco Systems
Dietmar Neidhardt 53 President - Rigtech Division
James G. Renfro President - Varco BJ Division
</TABLE>
Officers are elected by, and serve at the pleasure of, the Board of Directors.
Mr. Reinhold has been a director of the Company since 1970. He served as
Chairman of the Board from 1976 until 1999 and has been a consultant to the
Company since 1999. He served as Chief Executive Officer of the Company from
1970 until 1991, and prior thereto he served as Executive Vice President. He has
been employed by the Company since 1949. Mr. Reinhold is a director of Amdahl
Corporation.
Mr. Boyadjieff was elected Chief Executive Officer of the Company in April
1991 and Chairman of the Board in May 1998. Mr. Boyadjieff served as President
of the Company from May 1981 until February 2000 and as Chief Operating Officer
from June 1979 until April 1991. Prior to May 1981, he was the Senior Vice
President - Operations. He has been a director of the Company since 1976 and
joined the Company in 1969. Mr. Boyadjieff is a director of Unit Instruments,
Inc.
Mr. Sutherlin was elected President and Chief Operating Officer of the
Company in February 2000. Mr. Sutherlin served as Vice President of the Company
from May 1984 until February 2000 and as President-Varco BJ from July 1988 until
February 2000. Previously he served as Vice President-Best Operations. He has
been employed by the Company in various capacities since 1975.
Mr. Kertson served as Vice President - Finance and Chief Financial Officer
from May 1984 until February 2000 when in anticipation of his retirement, he was
replaced by Mr. Chan. Prior thereto, Mr. Kertson was Controller of Varco Oil
Tools from January 1982. He joined the Company in October 1975, as Director of
Management Information Services.
Mr. Chan was elected Vice President-Finance and Chief Financial Officer of
the Company in February 2000. Prior thereto, Mr. Chan served as the Vice
President-Finance of the Varco Systems Division. Mr. Chan has been employed by
the Company since November 1992.
Mr. Stichler was elected Controller-Treasurer of the Company in May 1984,
Secretary in May 1994, Chief Accounting Officer in May 1995 and Vice President
in 1998. He served as Corporate Controller from December 1982 to May 1984. He
served as Manager of Accounting and Taxation from 1981, when he joined the
Company.
13
<PAGE>
Mr. Gondek has served as President of the M/D Totco Division since November
1990 and was elected Vice President of the Company in April 1991. From
September 1986 until November 1990, Mr. Gondek was the Vice President and
General Manager of the TOTCO operations of Baker Hughes Incorporated.
Mr. Merit was elected Vice President of the Company and President of
Shaffer in October 1992. He had been Vice President-Manufacturing of Varco
Systems since August 1991. Previously he was Operations Manager of Varco U.K.
Limited from March 1990, and prior to that he was Manager of Engineering
Software Development for Varco Systems from 1985. He has been employed by the
Company in various capacities since 1980.
Mr. Morgan was elected Vice President of the Company in May 1984 and
President of Varco Systems in May 1990. He had been Vice President-Materials and
Manufacturing of Varco Oil Tools from May 1981. Previously, he was Vice
President-Materials and Production of Varco Oil Tools. He has been employed by
the Company in various capacities since 1974.
Mr. Neidhardt was elected President of Rigtech in April 1998 when he joined
the Company. Prior to joining the Company he was employed by Oiltools
International Ltd as its Vice President of Product Development. Mr. Neidhardt
was employed by Oiltools International Ltd. in various management capacities for
15 years.
Mr. Renfro was elected President of Varco BJ in February 2000. Prior
thereto, Mr. Renfro served as the Vice President of Manufacturing of the Varco
Systems Division from May 1996 and prior thereto he was Vice President of
Engineering from 1994. He has been employed by the Company in various capacities
since 1988.
ITEM 2. PROPERTIES
The Company's principal manufacturing facilities are located in Orange,
California (the "Orange Facility"), Etten-Leur, The Netherlands (the "Etten-Leur
Facility"), Cedar Park, Texas (the "Cedar Park Facility") and Houston, Texas.
The Orange Facility and the Etten-Leur Facility are used primarily for
manufacturing the Company's drilling equipment; the Cedar Park Facility
manufactures primarily instrumentation products; and the facilities located in
Houston are primarily used for manufacturing pressure control, motion
compensation and drilling equipment and flow line devices. Rigtech products are
generally subcontracted to third parties for manufacturing.
The Orange Facility occupies approximately nine acres in Orange County,
California and includes three manufacturing/warehouse buildings comprising a
total of approximately 160,000 square feet and a four-story high-rise facility
with automatic storage and retrieval capabilities. The Orange Facility is
currently leased under a long-term lease, and the lessors include certain
officers, shareholders, and directors of the Company and affiliated trusts.
During 1997 the Varco Systems Division leased an additional 19,000 square foot
manufacturing building located nearby for a term of five years. The Orange
Facility is the primary manufacturing location for the Varco Systems Division,
and the Company estimates that based upon direct labor hours and a two shift
operation, utilization of this facility was in excess of a two shift operation
for 1999, 1998 and 1997.
The Etten-Leur Facility consists of approximately 73,000 square feet of
manufacturing and warehousing space and approximately 12,900 square feet of
office space on approximately six acres of land. This facility is the primary
manufacturing location for the Varco BJ Division, and the Company estimates that
based upon direct labor hours and a two shift operation, utilization of this
facility was approximately 90% for 1999 as compared to in excess of a two shift
operation for 1998 and near capacity for 1997.
The M/D Totco products are manufactured at the Cedar Park Facility. The
Cedar Park Facility consists of approximately 200,000 square feet of
manufacturing and warehousing space and approximately
14
<PAGE>
33,000 square feet of office space located on approximately 40 acres. The
Company estimates that based upon direct labor hours and a two shift operation,
utilization of this facility was 80% of a two shift operation in 1999 as
compared to utilization in excess of a two shift operation in 1998 and 1997.
The Shaffer Division's products are principally manufactured at the
"Shaffer Facility", which consists of approximately 286,000 square feet of
manufacturing and warehousing space and approximately 77,000 square feet of
office space located on approximately 34 acres in Houston, Texas. The Company
estimates that based upon direct labor hours and a two shift operation,
utilization of this facility for 1999 was approximately 90% and was in excess of
a two shift operations for the years 1998 and 1997. In December 1996, Shaffer
purchased all the assets, including a 15,000 square foot manufacturing facility,
of a Houston machine shop. In February 1997, Shaffer purchased all of the assets
of a Houston machine shop operation and simultaneously entered into a five-year
lease for the related 80,000 square foot manufacturing facility. Shaffer began
operation of the facility in March 1997. During 1997 Shaffer further expanded
its manufacturing space by acquiring additional satellite facilities in the
Houston area. At the end of 1997 Shaffer leased the above 80,000 square foot
facility plus four additional satellite facilities ranging in size from 8,000
square feet to 33,000 square feet (together with the Shaffer Facility, the
"Houston Facilities.") One of the satellite machine shops (approximately 25,000
square feet) was sold in April 1999. Two additional facilities have been listed
for sale.
The Varco Systems Division's administration offices and the Company's
executive offices are located in Orange, California adjacent to the Orange
Facility. They comprise approximately 36,000 square feet of office space and are
leased from certain officers, shareholders and directors of the Company,
affiliated trusts and other lessors.
The Company owns sales and service facilities in Oklahoma, Wyoming,
Scotland and Singapore and leases approximately 11 such facilities throughout
the United States in addition to facilities in Abu Dhabi, Brazil, Canada, China,
and Venezuela.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which Varco or any of its
subsidiaries is a party or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information concerning the market for the Registrant's Common Stock and
related stockholder matters contained under the captions "Price Range of Varco
Common Stock," "Dividend Policy" and "Common Stock" on page 48 of the
Registrant's Annual Report to Shareholders for the year ended December 31, 1999,
is hereby incorporated by reference.
15
<PAGE>
During the fiscal year ended December 31, 1999, there were no sales of
equity securities of the Registrant by the Registrant which were not registered
under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth under the caption "Five-Year
Financial and Operating Highlights" on page 26 of the Registrant's Annual Report
to Shareholders for the year ended December 31, 1999, is hereby incorporated by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 28 through 31 of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1999, is hereby incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk included
in Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Quantitative and Qualitative Market Risk
Disclosures" on page 31 of the Registrant's Annual Report to Shareholders for
the year ended December 31, 1999, are hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is hereby incorporated by reference
to pages 32 through 46 of the Registrant's Annual Report to Shareholders for
the year ended December 31, 1999. The Report of Independent Auditors is included
in Item 14(d).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference
to the information set forth under the subcaptions "Nominees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" under the caption "ELECTION OF
DIRECTORS" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2000, except that information concerning the
Executive Officers of the Registrant is contained in Item 1 under the caption
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
to the information set forth under the subcaptions "Compensation and Stock
Option Information" and "Compensation Committee Interlocks and Insider
Participation" under the caption "EXECUTIVE COMPENSATION" and under the
subcaption "Director Compensation" under the caption "ELECTION OF DIRECTORS" in
the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be
held on May 11, 2000
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
16
<PAGE>
The information required by this item is hereby incorporated by reference
to the information set forth under the caption "BENEFICIAL OWNERSHIP OF VARCO
SECURITIES" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
to the information set forth under the caption "CERTAIN TRANSACTIONS AND
RELATIONSHIPS" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 11, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of Varco International, Inc.
and subsidiaries, included in the Registrant's Annual Report to Shareholders for
the year ended December 31, 1999, are incorporated by reference in Item 8:
<TABLE>
<CAPTION>
PAGE IN
ANNUAL
REPORT
------
<S> <C>
Consolidated Balance Sheets-as of December 31, 1999 and 1998......................................... 32
Consolidated Statements of Income-Years ended December 31, 1999, 1998 and 1997...................... 33
Consolidated Statements of Shareholders' Equity-Years ended December 31, 1999, 1998 and 1997......... 34
Consolidated Statements of Cash Flows-Years ended December 31, 1999, 1998 and 1997................... 35
Notes to Consolidated Financial Statements........................................................... 36
</TABLE>
The Report of Independent Auditors and the following consolidated financial
statement schedule of Varco International, Inc., and subsidiaries are included
in Item 14(d):
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................................ 22
Schedule II - Valuation and Qualifying Accounts................................................... 23
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
Individual financial statements of the registrant have been omitted as the
registrant is primarily an operating company and all subsidiaries included in
the consolidated financial statements filed, in the aggregate, do not have
minority equity interest and/or indebtedness to any person other than the
registrant or its consolidated subsidiaries in amounts which together (excepting
indebtedness incurred in the ordinary course of business which is not overdue
and matures within one year from the date of its creation, whether or not
evidenced by securities, and indebtedness of subsidiaries which is
collateralized by the registrant by guarantee, pledge, assignment or otherwise)
exceed 5 percent of the total assets as shown by the most recent year-end
consolidated balance sheet.
(b) Reports on Form 8-K
No reports on Form 8-K wree filed during the fourth quarter of 1999.
On March 24, 2000 the Company filed a Form 8-K reporting that on March 22,
2000, the Company and Tuboscope Inc., a Delaware corporation ("Tuboscope"),
entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant
to the Merger Agreement, and subject to the conditions set forth therein
(including approval of the transaction by the shareholders of the Company and
Tuboscope), the Company will be merged with and into Tuboscope (the "Merger").
The name of the combined company will be Varco International, Inc., and the
shares of the Combined Company will be listed for trading on the NYSE under the
symbol "VRC".
In connection with the Merger Agreement, the Company and Tuboscope entered
into (i) a Stock Option Agreement dated as of March 22, 2000, pursuant to which
Tuboscope has the right, under certain circumstances, to purchase up to
13,023,985 shares of Varco common stock (representing approximately 19.9% of the
issued and outstanding shares of Varco common stock) at a price of $14.56 per
share and (ii) a Stock Option Agreement, dated as of March 22, 2000, pursuant to
which the Company has the right, under certain circumstances, to purchase up to
8,908,653 shares (representing approximately 19.9% of the issued and outstanding
shares of Tuboscope common stock) at a price of $17.00 per share.
Copies of the Merger Agreement, the two Stock Option Agreements and the
joint press release of the Company and Tuboscope regarding the Merger are
included as exhibits to the Form 8-K.
17
<PAGE>
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Each management contract or compensation plan or
arrangement filed as an exhibit hereto is identified by a "+".
3.1 Amended and Restated Articles of Incorporation of Varco, incorporated
by reference to Exhibit 3.1 to Varco's annual report on Form 10-K for
the year ended December 31, 1995.
3.2 Certificate of Amendment of Amended and Restated Articles of
Incorporation of Varco, as filed with the California Secretary of State
on June 5, 1998, incorporated by reference to Exhibit 3.2 to Varco's
annual report on Form 10-K for the year ended December 31, 1998.
3.3 Certificate of Determination of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of Varco, as filed with the
California Secretary of State on November 6, 1997, incorporated by
reference to Exhibit 3.3 to Varco's annual report on Form 10-K for the
year ended December 31, 1998.
3.4 Certificate of Correction of Certificate of Determination of Rights,
Preferences and Privileges of Series A Participating Preferred Stock of
Varco, as filed with the California Secretary of State on November 14,
1997, incorporated by reference to Exhibit 3.4 to Varco's annual report
on Form 10-K for the year ended December 31, 1998.
3.5 Bylaws of Varco, incorporated by reference to Exhibit 3.7 to Amendment
No. 1 to Varco's Registration Statement on Form S-1, Registration No.
33-40191.
4.1 Credit Agreement, dated as of June 27, 1997, among Varco International,
Inc., the financial institutions listed therein as Lenders, and Union
Bank of California, N.A., as Agent, incorporated by reference to
Exhibit 4.8 to Varco's annual report on Form 10-K for the year ended
December 31, 1997.
4.2 First Amendment to Credit Agreement, dated as of July 15, 1997, to
Credit Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.9 to Varco's annual report on Form 10-K for the
year ended December 31, 1997.
4.3 Second Amendment to Credit Agreement dated as of August 13, 1997, to
Credit Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.10 to Varco's annual report on Form 10-K for the
year ended December 31, 1997.
4.4 Third Amendment to Credit Agreement dated as of November 7, 1997 to
Credit Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.11 to Varco's annual report on Form 10-K for the
year ended December 31, 1997.
4.5 Fourth Amendment to Credit Agreement dated as of February 18, 1998 to
Credit Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.12 to Varco's annual report on Form 10-K for the
year ended December 31, 1997.
4.6 Fifth Amendment to Credit Agreement dated as of November 3, 1998 to
Credit Agreement included as Exhibit 4.1 hereto, incorporated by
reference to Exhibit 4.13 to Varco's annual report on Form 10-K for the
year ended December 31, 1998.
4.7 Rights Agreement, dated as of November 6, 1997, between Varco
International, Inc. and Harris Trust Company of California as Rights
Agent, which includes: as Exhibit A thereto, the Form of Certificate of
Determination of Rights, Preferences, and Privileges of Series A
Participating Preferred Stock of Varco International, Inc.; as Exhibit
B thereto, the Form of Rights Certificate; and, as Exhibit C thereto,
the Summary of Rights, incorporated by reference to Exhibit 1 to the
18
<PAGE>
Corporation's Form 8-A Registration Statement filed November 13, 1997.
10.1+ The Varco 1980 Stock Option Plan, as amended, incorporated by reference
to Exhibit 4.5 to Post-Effective Amendment No. 4 to Varco's
Registration Statement on Form S-8, Registration No. 2-66830.
10.2+ Amendment to Varco 1980 Stock Option Plan included as Exhibit 10.1
hereto, incorporated by reference to Exhibit 10.2 to Varco's quarterly
report on Form 10-Q for the quarter ended September 30, 1984.
10.3+ Amendment to Varco 1980 Stock Option Plan included as Exhibit 10.1
hereto, incorporated by reference to Exhibit 10.3 to Varco's annual
report on Form 10-K for the year ended December 31, 1996.
10.4+ The Varco 1982 Non-Employee Director Stock Option Plan, incorporated by
reference to Exhibit 19.3 to Varco's quarterly report on Form 10-Q for
the quarter ended June 30, 1982.
10.5+ Varco International, Inc. Supplemental Executive Retirement Plan,
incorporated by reference to Exhibit 10.6 to Varco's annual report on
Form 10-K for the year ended December 31, 1992.
10.6+ Amendment to Varco International, Inc. Supplemental Executive
Retirement Plan included as Exhibit 10.5 hereto, incorporated by
reference to Exhibit 10.6 to Varco's annual report on Form 10-K for the
year ended December 31, 1996.
10.7+ Second Amendment to the Varco International, Inc. Supplemental
Executive Retirement Plan, included as Exhibit 10.5 hereto,
incorporated by reference to Exhibit 10.7 to Varco's annual report on
Form 10-K for the year ended December 31, 1997.
10.8+ Varco International, Inc. Stock Bonus Plan, incorporated by reference
to Exhibit 10.8 to Varco's annual report on Form 10-K for the year
ended December 31, 1985.
10.9+ Amendments to Varco International, Inc. Stock Bonus Plan included as
Exhibit 10.8 hereto, incorporated by reference to Exhibit 10.7 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
10.10+ Amendment to Varco International, Inc. Stock Bonus Plan included as
Exhibit 10.8 hereto. incorporated by reference to Exhibit 10.9 to
Varco's annual report on Form 10-K for the year ended December 31,
1996.
10.11 Lease dated March 7, 1975, as amended, incorporated by reference to
Exhibit 10.7 to Varco's annual report on Form 10-K for the year ended
December 31, 1981, and agreement with respect thereto dated as of
January 1, 1982, incorporated by reference to Exhibit 10.8 to Varco's
annual report on Form 10-K for the year ended December 31, 1982.
10.12 Agreement dated as of January 1, 1984, with respect to Lease included
as Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.13 to
Varco's annual report on Form 10-K for the year ended December 31,
1984.
10.13 Agreement dated as of February 8, 1985, with respect to Lease included
as Exhibit 10.11 hereto, incorporated by reference to Exhibit 10.14 to
Varco's annual report on Form 10-K for the year ended December 31,
1984.
10.14 Agreement dated as of April 12, 1985 to Lease included as Exhibit 10.11
hereto, incorporated by reference to Exhibit 10.2 to Varco's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1985.
19
<PAGE>
10.15 Amendment dated as of January 11, 1996 to Lease included as Exhibit
10.11 hereto, incorporated by reference to Exhibit 10.12 to Varco's
annual report on Form 10-K for the year ended December 31, 1995.
10.16 Standard Industrial Lease-Net dated September 29, 1988 for the
premises at 743 N. Eckhoff, Orange, California, incorporated by
reference to Exhibit 10.14 to Varco's annual report on Form 10-K for
the year ended December 31, 1988.
10.17 First amendment dated as of January 11, 1996 to Lease included as
Exhibit 10.16 hereto, incorporated by reference to Exhibit 10.15 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
10.18+ The Varco International, Inc. 1990 Stock Option Plan, as amended,
incorporated by reference to Exhibit 4.2 to Varco's Registration
Statement on Form S-8, Registration No. 333-21681.
*10.19+ Amendments to the Varco International, Inc. 1990 Stock Option Plan
included as Exhibit 10.18 hereto.
*10.20+ Form of amendment to stock option agreements under the Varco
International, Inc. 1990 Stock Option Plan, included as Exhibit 10.18
hereto.
10.21+ Varco 1980 Employee Stock Purchase Plan, as amended, incorporated by
reference to Exhibit 28 to Varco's Registration Statement on Form S-8,
Registration No. 33-36841.
10.22+ Amendment to the Varco 1980 Employee Stock Purchase Plan included as
Exhibit 10.21 hereto, incorporated by reference to Exhibit 10.19 to
Varco's annual report on Form 10-K for the year ended December 31,
1995.
10.23+ Amendment to the Varco 1980 Employee Stock Purchase Plan included as
Exhibit 10.21 hereto, incorporated by reference to Exhibit 10.21 to
Varco's annual report on Form 10-K for the year ended December 31,
1996.
*10.24+ Varco International Inc. Management Incentive Bonus Plan.
10.25+ Varco International Inc. 1994 Directors' Stock Option Plan,
incorporated by reference to Exhibit 10.24 to Varco's annual report on
Form 10-K for the year ended December 31, 1995.
10.26+ Amendment to Varco International Inc. 1994 Directors' Stock Option
Plan incorporated by reference to Exhibit 10.26 to Varco's annual
report on Form 10-K for the year ended December 31, 1997.
*10.27+ The Varco International, Inc. Director Deferred Compensation.
*10.28+ The Varco International, Inc. Deferred Compensation Plan.
*11 Statement re computation of per share earnings.
*12 Statement re computation of ratios.
20
<PAGE>
*13 1999 Annual Report to Shareholders, to the extent expressly
incorporated by reference in this Report on Form 10-K. Such Annual
Report, except for those portions so incorporated by reference, is
furnished only for information and is not to be deemed filed
herewith.
*21 Subsidiaries of Varco.
*23 Consent of Independent Auditors.
*27 Financial Data Schedule December 31, 1999
____________
* Filed herewith
+ Management contract, compensation plan or arrangement.
As to any security holder of the Registrant requesting a copy of this Form 10-K,
the Registrant will furnish copies of any exhibits listed above as filed with
this Form 10-K upon payment to it of its reasonable expenses in furnishing such
exhibits.
21
<PAGE>
(d) Schedules
The Report of Independent Auditors and the schedule listed in the Index to
Financial Statements and Schedules (Item 14(a)) are filed as part of this Annual
Report on Form 10-K.
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Varco International, Inc.
We have audited the accompanying consolidated balance sheets of Varco
International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Varco
International, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
February 8, 2000
22
<PAGE>
VARCO INTERNATIONAL, INC. AND
SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
------------------- -------------------------------------------- ------------------ ------------
Additions
---------------------------
Charged to
Balance at Charged to other Balance
beginning costs and accounts- Deductions- at end of
Description of period expenses describe describe period
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts........ $ 3,351 $ 57 $ 6 $ 460 (1) $ 2,954
Allowance for excess and obselete 26,151 6,611 93 16,112 (2) 16,743
inventory........
Reserve for assets held for sale....... 5,508 814 0 6,322
---------------------------------------------------------------------------------
TOTALS $35,010 $7,482 $ 99 $16,572 $26,019
==================================================================================
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts.......... $ 2,121 $1,331 $ 48 $ 149 (1) $ 3,351
Allowance for excess and obselete 28,758 1,989 (188) 4,408 (2) 26,151
inventory.......
Reserve for assets held for sale......... 5,262 240 (6) 5,508
----------------------------------------------------------------------------------
TOTAL $36,141 $3,560 ($140) $ 4,551 $35,010
==================================================================================
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts....... $ 1,756 $ 589 ($11) $ 213 (1) $ 2,121
Allowance for excess and obselete 36,879 3,701 (478) 11,344 (2) 28,758
inventory.........
Reserve for assets held for sale....... 4,996 240 (26) 5,262
------------------------------------------------------------------------------------
TOTALS $43,631 $4,530 ($489) $11,531 $36,141
====================================================================================
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventories physically disposed of.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VARCO INTERNATIONAL, INC.
By: /s/ GEORGE I. BOYADJIEFF
---------------------------
George I. Boyadjieff
Chairman and Chief
Executive Officer
Dated March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Principal Executive Officer and Director:
<TABLE>
<S> <C> <C>
Chairman and Chief Executive Officer March 24, 2000
/s/ GEORGE I. BOYADJIEFF
- ---------------------------------------
George I. Boyadjieff
Principal Financial Officer:
/s/ WALLACE K. CHAN Vice President- Finance and March 24, 2000
- ---------------------------------------
Wallace K. Chan Chief Financial Officer
Principal Accounting Officer:
/s/ DONALD L. STICHLER Vice President, Controller- March 24, 2000
- ---------------------------------------
Donald L. Stichler Treasurer and Secretary
Other Directors:
/s/ WALTER B. REINHOLD Director March 24, 2000
- ---------------------------------------
Walter B. Reinhold
/s/ GEORGE S. DOTSON Director March 24, 2000
- ---------------------------------------
George S. Dotson
/s/ ANDRE R. HORN Director March 24, 2000
- ---------------------------------------
Andre R. Horn
/s/ JACK W. KNOWLTON Director March 24, 2000
- ---------------------------------------
Jack W. Knowlton
/s/ LEO J. PIRCHER Director March 24, 2000
- ---------------------------------------
Leo J. Pircher
/s/ CARROLL W. SUGGS Director March 24, 2000
- ---------------------------------------
Carroll W. Suggs
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
/s/ ROBERT A. TEITSWORTH Director March 24, 2000
- -----------------------------------
Robert A. Teitsworth
/s/ EUGENE R. WHITE Director March 24, 2000
- -----------------------------------
Eugene R. White
/s/ JAMES D. WOODS Director March 24, 2000
- -----------------------------------
James D. Woods
</TABLE>
25
<PAGE>
Exhibit 10.19
Amendments to the Varco International, Inc. 1990 Stock Option Plan
WHEREAS, the Board of Directors of the Corporation deem it desirable
and in the best interests of the Corporation and its shareholders that
the Corporation's 1990 Stock Option Plan (the "Plan") be amended in
certain respects;
NOW, THEREFORE, BE IT RESOLVED, that paragraph F of Section 6(b) of
the Plan be, and the same hereby is, amended to read in its entirety
as follows:
F. Other Severance. In the event an employee's employment with
Varco and its subsidiaries is terminated for any reason other than as
set forth in paragraphs D and E above, any Nonstatutory Option which
he holds may be exercised, to the extent it was exercisable on the
date of termination of his employment, within such period after the
date of termination of his employment (not to exceed ninety (90) days)
as the Committee shall prescribe in his option agreement. For purposes
of this Paragraph F, an employee's employment shall be deemed to have
terminated on the earlier of the date his employment terminates or the
date he receives written notice that his employment is or will be
terminated. Such Option shall expire upon the expiration of such
period unless the employee dies prior thereto, in which event he shall
be deemed to have died on the date his employment terminated;
provided, however, in no event shall such Option be exercised more
than ten years from the date such Option was granted.
and further
RESOLVED, that paragraph F of Section 6(c) of the Plan be, and the
same hereby is, amended to read in its entirety as follows:
F. Other Severance. In the event an employee's employment with
Varco and its subsidiaries is terminated for any reason other than as
set forth in paragraphs D and E above, any Incentive Stock Option
which he holds may be exercised, to the extent it was exercisable on
the date of termination of his employment, within such period after
the date of termination of his employment (not to exceed ninety (90)
days) as the Committee shall prescribe in his option agreement. For
purposes of this Paragraph F, an employee's employment shall be deemed
to have terminated on the earlier of the date his employment
terminates or the date he receives written notice that his employment
is or will be terminated. Such Option shall expire upon the expiration
of such period unless the employee dies prior thereto, in which event
he shall be deemed to have died on the date his employment terminated;
provided, however, in no event shall such Option be exercised more
than ten years from the date such Option was granted.
and further
RESOLVED, that the Compensation Committee of the Board of Directors,
as the Committee under the Plan, is authorized, in its sole discretion
and from time to time, to amend any option outstanding under the Plan
in a manner consistent with the foregoing amendments to the Plan; and
RESOLVED, that each of the officers of the Corporation be, and he
hereby is, authorized and directed to perform all acts and to execute
and deliver all
<PAGE>
certificates and documents and to take or cause to be taken all other
action as any such officer may deem necessary or appropriate to carry
out the foregoing resolutions and to comply with the terms and
provisions of the Plan.
<PAGE>
Exhibit 10.20
Form of Amendment to Stock Option Agreements
VARCO INTERNATIONAL, INC.
AMENDMENT TO STOCK OPTION AGREEMENT
This AMENDMENT TO STOCK OPTION AGREEMENT, dated ___________, is made by and
between VARCO INTERNATIONAL, INC., a California corporation ("Varco") and the
employee executing this Amendment below as Employee (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employee was granted one or more options on or prior to May
13, 1999 (the "Outstanding Options") to purchase shares of Varco's Common Stock
pursuant to Varco's 1990 Stock Option Plan; and
WHEREAS, the Outstanding Options are evidenced by one or more Stock Option
Agreements (the "Option Agreements") made by Varco for the benefit of the
Employee; and
WHEREAS, on May 13, 1999, the Board of Directors of Varco approved certain
amendments to the Plan and authorized the Compensation Committee (the
"Committee") of the Board of Directors of Varco, in its sole discretion, to
amend outstanding options consistent with the amendments to the Plan; and
WHEREAS, the Compensation Committee of the Board of Directors of Varco has
approved an amendment to the Outstanding Options and authorized the execution
and delivery of amendments to the Outstanding Options incorporating such
amendment; and
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Each of the Outstanding Option Agreements is hereby amended as
follows:
The provisions of each Outstanding Option Agreement providing for the
termination of the option upon the termination of the Employee's employment
with Varco and its subsidiaries in cases other than the Employee's death or
retirement under certain circumstances, wherever located and however
designated or numbered, are hereby amended to read in their entirety as
follows:
<PAGE>
"Subject to the provisions hereof relating to the termination of the
Option upon the death of the Employee or the retirement of the Employee in
specified circumstances, on the 90th day following the termination of the
employment of Employee with Varco and its subsidiaries for any reason
whatsoever, including, without limitation, any termination caused by
Employee's quitting, resigning or having been discharged. For the purposes
of this paragraph an Employee's employment shall be deemed to have
terminated at the earlier of the date his/her employment actually
terminates or the date he/she receives written notice that his/her
employment is or will be terminated. If the Employee dies after his
employment has terminated but before the expiration of such 90-day period,
he/she shall be deemed to have died on the date his/her employment
terminated. As used in this paragraph, the term "Employee", if not
otherwise defined herein as the holder of the Option, shall mean the
employee holding the Option.
2. This Amendment shall not be effective with respect to an Outstanding
Option unless executed by both Varco and the Employee prior to the termination
of such Outstanding Option in accordance with its terms, without giving effect
to the foregoing amendment.
3. The Company and the Employee confirm that, as amended by this
Amendment, each Outstanding Options shall terminate on the 90th day following
the date hereof, or such earlier date as such Outstanding Option shall terminate
in accordance with its terms.
3. This Amendment shall be governed by and interpreted in accordance with
the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment on the day and
year first above written.
"Varco"
VARCO INTERNATIONAL, INC.
By_______________________________
Richard A. Kertson
Vice President-Finance
"Employee"
__________________________________
Signature
__________________________________
Printed Name
2
<PAGE>
To: Compensation Committee Exhibit 10.24
From: Dick Kertson
Date: February 7, 2000
Re: Proposed Financial Criteria and Structure--2000 Management Incentive
Bonus Plan
The general structure of the Plan and the financial performance criteria
employed remain generally unchanged from recent years; however, two additional
financial performance criteria have been included to provide heightened emphasis
on inventory management and new product development.
As in past years, the cash bonus payout is expressed as a percentage of annual
salary and is a function of Salary Grade and the overall financial performance
level achieved. Overall financial performance is measured by profitability (Net
Income at the total Company level and Operating Income at the Division level)
and return on investment (Economic Value Added or "EVA" at both the total
Company and Division level). To earn the bonus points associated with a given
level of overall financial performance, both the minimum profit and return on
----
investment associated with that level must be achieved. In 2000, additional
bonus points may be earned by reaching above-plan inventory turnover and new
product revenue.
In 1999, achieving the "Financial Plan" (the original Annual Financial Plan as
revised in the January quarterly update) equated to 7 Bonus Points for the total
Company (on a scale of 2-15). For the Drilling Systems and Oil Tools Divisions
reaching the Financial Plan generated 10 points, and for M/D Totco, Shaffer and
Rigtech, 6 points. This disparity between target points reflected the fact that
the 1999 Financial Plan for Drilling Systems and Oil Tools was at or above 1997
performance, and for the other three Divisions and the total Company it was
below that of 1997, on approximately the same revenue. The ratio of bonus to
salary which represented the average target percentage in the salary survey data
was set at 7 points, and the 75/th/ percentile ratio was set at 11 points.
1999 financial performance resulted in 13 points for Drilling systems, 7 points
for Oil Tools, 5 points for Shaffer, and 7 points for the total Corporation.
M/D Totco
<PAGE>
and Rigtech did not reach the minimum financial performance necessary to qualify
for a bonus.
Our experience over several years demonstrates that this methodology creates a
very strong relationship between actual financial performance and incentive pay.
A summary of the key elements of the proposed 2000 Management Incentive Bonus
Plan follows:
. Achieving the Annual Financial Plan ("AFP") would result in 7 Bonus Points
for the total Company, as well as each Division (on a scale of 2-15). Each
of the Division Plans is judged to have approximately the same degree of
challenge.
. In addition, achieving specific inventory turnover and new product revenue
levels above the AFP enable each Division to earn incremental bonus points
(or partial points), the sum of which could result in up to 2 additional
Bonus Points.
. Reflecting a significantly lower level of financial performance for the
Varco International as compared to the 1997-1999 period, the bonus
percentages (bonus/salary ratio) associated with each Bonus Point level
have been revised downward for all Salary Grades. The 7 Bonus Point level
generally yields payout ratios below the 25/th/ percentile when compared to
the salary survey data. The median ratio would generally equate to the 11-
12 point level and the 75\th\ percentile ratio to the 13-14 point
performance level.
In addition to the cash bonus, it is proposed that each participant in the Plan
be once again eligible for a Stock Bonus, based on total Company performance.
As has been the case for several years, the Stock Bonus would be paid in Varco
stock having a value equal to 1/3 of the bonus amount due a participant based on
his/her Salary Grade and the total Company financial performance level achieved.
<PAGE>
For Division Presidents, 30% of the cash bonus amount is based upon the points
attributable to total Company performance.
For 2000 achieving the AFP financial performance would result in Management
Incentive Bonuses totaling approximately $2,265,0000, 6.9% of Pre-Tax Income.
For 1999 the comparable figures were $3,273,000 and 5.5%.
Again in 1998 we propose that Corporate Officers have the opportunity to
increase their cash bonus by 50%, or decrease it by 33%, depending on the
performance of Varco Stock relative to a group of 9 peer companies.
Specifically, if the year-to-year increase in the price of Varco Stock (as
measured by the average of the last 5 trading days of 2000 divided by the
average for the last 5 trading days of 1999) is among the top 3 of 10 companies,
Corporate Officers' cash bonuses would be increased by 50%; if Varco's Stock
price increase is among the bottom 3 of the group such bonuses would be reduced
by 33%. (Note that this element of the Plan comes into play only during stock
price appreciation). We believe that this aspect of the bonus program achieved
its objective of focusing increased attention on stock price performance.
The peer group would again include: Baker Hughes, Halliburton, Schlumberger,
Smith International, Cooper Cameron, Tuboscope International, National Oilwell,
Weatherford International, and IRI.
<PAGE>
2000 BONUS POINTS
<TABLE>
<CAPTION>
BONUS POINTS = 2 3 4 5 6 7 8
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
E.P.S. $ 0.05 $ 0.10 $ 0.15 $ 0.20 $ 0.25 $ 0.30 $ 0.35
NET INCOME 3.4 6.7 10.1 13.4 16.8 20.1 23.5
AVERAGE INVESTMENT 226.2 229.8 233.4 237.0 240.6 244.2 249.6
NET INCOME R.O.I. 1.5% 2.9% 4.3% 5.7% 7.0% 8.2% 9.4%
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
DRILLING SYSTEMS:
REVENUE 84.7 89.7 94.8 99.8 104.8 109.8 115.8
OPERATING INCOME 7.4 9.2 10.9 12.7 14.4 16.2 18.3
AVERAGE NET ASSETS 55.5 56.7 57.9 59.1 60.3 61.5 63.3
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
OIL TOOLS:
REVENUE 36.4 38.6 40.7 42.9 45.0 47.2 49.8
OPERATING INCOME 3.5 4.3 5.0 5.8 6.5 7.3 8.1
AVERAGE NET ASSETS 16.3 16.8 17.3 17.9 18.4 18.9 19.7
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
M/D TOTCO:
REVENUE 41.7 44.2 46.7 49.2 51.6 54.1 57.1
OPERATING INCOME 2.6 3.4 4.3 5.2 6.0 6.9 8.0
AVERAGE NET ASSETS 28.7 29.3 29.9 30.5 31.1 31.7 32.6
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
<CAPTION>
9 10 11 12 13 14 15
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
E.P.S. $ 0.40 $ 0.45 $ 0.50 $ 0.55 $ 0.60 $ 0.65 $ 0.70
NET INCOME 26.8 30.2 33.5 36.9 40.2 43.6 46.9
AVERAGE INVESTMENT 255.0 260.4 265.8 271.2 277.2 283.2 289.2
NET INCOME R.O.I. 10.5% 11.6% 12.6% 13.6% 14.5% 15.4% 16.2%
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
DRILLING SYSTEMS:
REVENUE 121.8 127.9 133.9 139.9 146.6 153.3 160.0
OPERATING INCOME 20.4 22.5 24.6 26.7 29.1 31.4 33.8
AVERAGE NET ASSETS 65.1 66.9 68.7 70.5 72.5 74.5 76.5
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
OIL TOOLS:
REVENUE 52.4 55.0 57.5 60.1 63.0 65.9 68.8
OPERATING INCOME 8.9 9.6 10.4 11.2 12.0 12.9 13.8
AVERAGE NET ASSETS 20.5 21.2 22.0 22.8 23.6 24.5 25.4
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
M/D TOTCO:
REVENUE 60.0 63.0 66.0 68.9 72.2 75.5 78.8
OPERATING INCOME 9.1 10.2 11.2 12.3 13.4 14.6 15.7
AVERAGE NET ASSETS 33.5 34.4 35.3 36.1 37.1 38.1 39.1
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
</TABLE>
<PAGE>
2000 BONUS POINTS
<TABLE>
<CAPTION>
2 3 4 5 6 7 8
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SCHAFFER:
REVENUE 77.5 82.1 86.7 91.3 95.9 100.5 106.0
OPERATING INCOME 3.0 4.6 6.2 7.8 9.4 11.0 12.4
AVERAGE NET ASSETS 72.1 73.2 74.3 75.4 76.5 77.6 79.3
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
RIGTECH
REVENUE 13.0 13.7 14.5 15.3 16.0 16.8 17.7
-1.2 -1.0 -0.7 -0.4 -0.2 0.1 0.5
AVERAGE NET ASSETS 14.1 14.3 14.4 14.6 14.8 15.0 15.3
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
<CAPTION>
9 10 11 12 13 14 15
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SCHAFFER:
REVENUE 115.5 117.0 122.5 128.0 134.2 140.3 146.4
OPERATING INCOME 13.8 15.1 16.5 17.9 19.3 20.6 22.0
AVERAGE NET ASSETS 80.9 82.6 84.2 85.9 87.7 89.5 91.4
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
RIGTECH
REVENUE 18.6 19.6 20.5 21.4 22.4 23.5 24.5
OPERATING INCOME 0.9 1.4 1.8 2.4 2.9 3.5 4.1
AVERAGE NET ASSETS 15.6 15.8 16.1 16.4 16.7 17.0 17.3
EVA $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
</TABLE>
<PAGE>
2000 BONUS PLAN
<TABLE>
<CAPTION>
TOTAL DIVISIONS
<S> <C> <C> <C> <C> <C> <C> <C>
INCREMENTAL REVENUE 15.0 15.0 15.0 15.0 15.0 0.0 18.0
REVENUE 253.4 268.4 283.4 298.4 313.4 328.4 346.4
OPERATING INCOME 15.3 20.5 25.8 31.0 36.3 41.5 47.3
AVERAGE NET ASSETS 186.7 190.3 193.9 197.5 201.1 204.7 210.1
OPRA 8.2% 10.8% 13.3% 15.7% 18.0% 20.3% 22.5%
-----
<CAPTION>
TOTAL DIVISIONS
<S> <C> <C> <C> <C> <C> <C> <C>
INCREMENTAL REVENUE 18.0 18.0 18.0 18.0 20.0 20.0 20.0
REVENUE 364.4 382.4 400.4 418.4 438.4 458.4 478.4
OPERATING INCOME 53.0 58.9 64.6 70.4 76.7 83.1 89.4
AVERAGE NET ASSETS 215.5 220.9 226.3 231.7 237.7 243.7 249.7
OPRA 24.6% 26.6% 28.6% 30.4% 32.3% 34.1% 35.8%
</TABLE>
<PAGE>
2000 BONUS PLAN
<TABLE>
<CAPTION>
GRADE LEVEL 2 3 4 5 6 7 8 9 10 11 12 13 14 15
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXEC 0% 0% 30% 35% 40% 45% 50% 55% 60% 65% 70% 80% 85% 95%
16 0% 0% 21% 24% 27% 30% 33% 36% 40% 44% 48% 53% 58% 64%
15 0% 0% 18% 21% 24% 27% 30% 33% 37% 41% 44% 49% 54% 59%
14 0% 0% 16% 18% 20% 22% 25% 28% 31% 34% 37% 40% 44% 49%
13 8% 10% 12% 14% 16% 18% 20% 22% 25% 28% 31% 34% 37% 41%
12 6% 7% 9% 10% 11% 13% 15% 17% 19% 21% 23% 25% 27% 30%
10/11 5% 6% 7% 8% 9% 10% 11% 12% 13% 15% 17% 19% 21% 23%
</TABLE>
<PAGE>
EXHIBIT 10.27
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
ii
<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
iii
<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 10.28
Varco International Inc.
Deferred Compensation Plan
<PAGE>
Varco International Inc.
Deferred Compensation Plan
TABLE OF CONTENTS
-----------------
Page
----
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
i
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
"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
<PAGE>
"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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<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) 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
<PAGE>
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
<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.
11
<PAGE>
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>
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
Exhibit 11
1 of 2
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, 1999 December 31, 1999
----------------------------------------
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $ 3,737,000 $36,965,000
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 December 31, 1999 92 6,008,003,328 65,304,384 802,277 66,106,661
Twelve Months Ended December 31, 1999 365 23,741,706,609 65,045,772 833,207 65,878,979
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
----------------------------------------
Average Shares Outstanding
Diluted Income Per Share =
Three Months Ended December 31, 1999 3,737,000 = $0.06
-------------
66,106,661
Twelve Months Ended December 31, 1999 36,965,000 = $0.56
-------------
65,878,979
Basic Income Per Share
Three Months Ended December 31, 1999 3,737,000 = $0.06
-------------
65,304,384
Twelve Months Ended December 31, 1999 36,965,000 = $0.57
-------------
65,045,772
</TABLE>
<PAGE>
VARCO INTERNATIONAL, INC.
Statement Re Computation of Per Share Earnings
Exhibit 11
Page 2 of 2
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31 1998 December 31 1998
-----------------------------------------
A. CALCULATION OF ADJUSTED EARNINGS
Net Income After Tax $10,660,000 $60,338,000
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 December 31, 1998 92 5,946,770,493 64,638,810 703,460 65,342,270
Twelve Months Ended December 31, 1998 365 23,524,467,433 64,450,596 1,143,823 65,594,419
C. CALCULATION OF EARNINGS PER SHARE
Income Per Share = Net Income After Tax
-------------------------------------
Total Shares Outstanding
Diluted Income Per Share =
Three Months Ended December 31, 1998 10,660,000 = 0.16
-------------
65,342,270
Twelve Months Ended December 31, 1998 60,338,000 = 0.92
-------------
65,594,419
Basic Income Per Share
Three Months Ended December 31, 1998 10,660,000 = 0.16
-------------
64,638,810
Twelve Months Ended December 31, 1998 60,338,000 = 0.94
-------------
64,450,596
</TABLE>
<PAGE>
EXHIBIT 12
VARCO INTERNATIONAL, INC.
STATEMENT RE COMPUTATIONS OF RATIOS
($000'S)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Ratio of Earnings to Fixed Charges
- ----------------------------------
Earnings:
Pretax Income $57,946 $91,157 $76,696
Plus:
Interest Expense 745 1,823 3,510
Amortization of Debt
Issuance Costs 102 154 154
--------------------------------------------
Total $58,793 $93,134 $80,360
============================================
Fixed Charges:
Interest Expense $ 745 $ 1,823 $ 3,510
Amortization of Debt
Issuance Costs 102 154 154
--------------------------------------------
Total $ 847 $ 1,977 $ 3,664
============================================
Ratio of Earnings to Fixed Charges 69.41 47.11 21.93
</TABLE>
<PAGE>
EXHIBIT 13
Varco International, Inc. 1999 Annual Report
<PAGE>
consolidated financial and
operating highlights
(in thousands, except per share data & employees)
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $592,752 $740,979 $545,789 $368,422 $273,731
Net income 36,965 60,338 49,875 24,542 14,439
Diluted income per share .56 .92 .76 .38 .23
Net income as a percent of revenues 6.2% 8.1% 9.1% 6.7% 5.3%
Shares used in computing
diluted income per share 65,879 65,594 65,201 63,463 63,145
Shareholders' equity $360,748 $319,367 $253,199 $195,508 $151,179
Return on average shareholders' equity 10.8% 21.8% 22.7% 14.2% 9.2%
Capital expenditures $ 12,820 $ 35,269 $ 35,121 $ 11,023 $ 10,517
Number of employees 1,906 2,951 2,852 1,936 1,636
</TABLE>
For unaudited selected quarterly financial data see note i of Notes to
Consolidated Financial Statements.
<PAGE>
Varco
enters the
year 2000 as
the leading
supplier
of drilling
equipment in
the world.
<PAGE>
In recent years more than 50 rigs have been added to the
offshore fleet, among them the most technologically advanced, automated offshore
drilling rigs in the industry's history.
3
<PAGE>
Varco has been the leading supplier of drilling equipment
for these rigs with the leading market position in the majority of its product
lines.
Why?
Varco is advancing the technology of drilling, and drillers
and their oil company customers are seeing the results.
[COMPOSITE PHOTO OF DRILLSHIP APPEARS HERE]
4
<PAGE>
We strive to develop products and systems that reduce
drilling time, reduce drilling crews and improve drilling efficiency - enhancing
the safety and productivity of the drilling process.
[COMPOSITE PHOTO OF RIG EQUIPMENT APPEARS HERE]
7
<PAGE>
With the new rigs working, our opportunity is to bring
Varco's new level of productive automation to the large number of existing
drilling rigs operating around the world.
8
<PAGE>
Our
strategy
is working
<PAGE>
to our shareholders,
customers and employees:
Despite a strong and steady increase in oil prices during 1999, market
conditions for the oil service industry remained depressed. With oil prices
having fallen to $12-$13 per barrel early in the year the OPEC members, together
with certain non-OPEC producers, agreed to additional substantial cuts in oil
production. That action, together with gradually increasing demand, caused oil
prices to increase throughout the year, to an average of approximately $24.56
per barrel in the fourth quarter, and a high of slightly above $30 per barrel in
mid-February of 2000. However, oil companies continued to exercise restraint in
exploration and production spending, and worldwide drilling activity increased
only modestly from the historical lows reached during late 1998 and early 1999.
The impact of this weak market on Varco is most clearly
reflected in a sharp decline in incoming orders as our primary customers, the
offshore drilling contractors, experienced reduced rig utilization and lower
dayrates. Our revenues were not as severely impacted, since we entered 1999 with
a relatively large order backlog as a result of very strong order bookings
during the previous two years.
Financial Results
Net Income for 1999 was $37.0 million, $.56 per share (diluted), on Revenues of
$592.8 million, including a pre-tax net special charge of $4.6 million, $.05 per
share (diluted), for severance and other expenses related to further downsizing
in the first half of 2000. For the prior year, Revenues were $741.0 million and
Net Income was $60.3 million, $.92 per share (diluted), including a special
charge of $8.5 million, $.09 per share (diluted).
Our already strong financial condition improved further during 1999, as we
generated $45.5 million in free cash flow, resulting in a debt-free balance
sheet, with $77.9 million in cash and short-term investments at year-end.
Reflecting the weak market, order bookings for the year totaled $305.4 million
(excluding cancellations of $19.3 million), as compared to $757.4 million
(excluding cancellations of $118.0 million) in 1998. Backlog at December 31 was
$63.8 million, a level roughly commensurate with the current business level, as
virtually all of the equipment ordered during the rig construction cycle of
1997-98 has been delivered. Consequently, we anticipate that Revenues will be
more closely tied to the incoming order rate during the coming quarters.
[COMPOSITE PHOTO OF GLOBAL LOCATIONS APPEARS HERE]
Varco International, Inc. and Subsidiaries 11
<PAGE>
Market Position and Strategy
Over the past three years the industry has been engaged in an ambitious program
of offshore rig construction, particularly floating rigs capable of drilling in
very deep water. Upon its completion, some 50 semi-submersibles and drillships
will have been added to the fleet, most of which employ key elements of Varco's
newer technology drilling equipment, including automated pipe handling systems,
computer-based rig control systems, and the latest Top Drive Drilling Systems.
The breadth of products Varco has supplied to these rigs, coupled with our high
market share, affirms our position as the leading worldwide supplier of drilling
equipment. Additionally, as these rigs are placed in operation and the benefits
of this technology are demonstrated, we believe the opportunities to retrofit
existing rigs with equipment of this type will be significantly increased.
With many of these new rigs beginning to drill exploratory
wells in the Gulf of Mexico, as well as offshore West Africa and Brazil,
numerous hydrocarbon discoveries are beginning to highlight the potential of
deepwater fields. Ultimately, the development of these fields is likely to
require additional rigs with deepwater capability.
Our long-term strategy continues to be centered around the
development of new products which enhance the productivity of the drilling
process. The recently built rigs afford the opportunity to showcase the benefits
those products can provide, thereby creating future growth potential for Varco.
Market Outlook
The primary determinant of the overall health of the oil service industry is the
level of spending for exploration and production ("E&P") on the part of major
oil companies and independent oil and gas producers. Despite higher oil prices,
E&P spending declined approximately 18 percent during 1999 as caution prevailed.
However, Salomon Smith Barney's Annual Survey of Worldwide Exploration and
Production Expenditures for 2000 projects a recovery, with spending expected to
increase 11 percent. Importantly, these plans are based on an assumed oil price
of approximately $19 per barrel, indicating that although current oil prices are
not generally viewed as sustainable, a more moderate price scenario appears
sufficient to stimulate an improved industry environment.
Thus, it appears likely that our market will strengthen over
the next few quarters. We believe that any such improvement, coupled with the
continuing quest of oil companies to improve drilling efficiency and reduce
costs, affords us the opportunity to take full advantage of our capabilities.
12 Varco International, Inc. and Subsidiaries
<PAGE>
[PHOTO OF GEORGE BOYADJIEFF APPEARS HERE]
The Decade Past and Future
In our report to you for 1990 we concluded by stating, "The anticipation of
continued market improvement, together with our success in developing and
acquiring new products, makes us confident that the decade of the 1990's will be
the best ever for Varco." While the market improvement was less than we
anticipated, and was certainly more uneven, we feel justified in concluding that
the past decade was the best in the Company's 91-year history. 1999 Revenues
were up 567 percent from those of 10 years ago, an annualized growth rate of 21
percent. Net Income for 1999 increased 1,380 percent from that of 10 years ago.
As indicated elsewhere in this report, our stated goal of becoming "the premier
supplier of drilling equipment worldwide" has been achieved. As we look to
continued growth and accomplishment in the next decade, we expect it will be
even better.
On February 17, 2000, the Board of Directors elected Michael
W. Sutherlin as President and Chief Operating Officer. Before joining the
Corporate staff in July of last year, Mike was President of the Varco BJ
Division for more than ten years. Mike has over 25 years with Varco, in both
finance and operations, and we look forward to his broadened impact on the
Company in his new role.
Additionally, the Board elected Wallace K. (Wally) Chan as
Chief Financial Officer. Wally has been Vice President-Finance of the Varco
Systems Division since joining the Company seven years ago, and is replacing
Richard A. (Dick) Kertson, Varco's Chief Financial Officer for the past 15
years, who is retiring. Dick has been an important part of our success over that
period as Revenues have grown tenfold, and he leaves with the Company in
excellent financial condition. Many of our shareholders consider Dick to be one
of the best Chief Financial Officers in the oil service segment of the industry.
We have been fortunate to have his services for these many years and will miss
him and wish him well.
We appreciate your continuing support.
/s/ George Boyadjieff
George Boyadjieff
Chairman and Chief Executive Officer
February 24, 2000
Varco International, Inc. and Subsidiaries 13
<PAGE>
Operations
<PAGE>
industry conditions
The collapse of oil prices in 1998 continued to depress worldwide drilling
activity during 1999 despite a dramatic increase in oil prices during the final
three quarters of the year and generally favorable natural gas prices throughout
the year.
Oil prices were lingering in the $12-$13 per barrel range
when the OPEC members agreed in March of 1999 to additional production quota
reductions of approximately 1.7 million barrels per day. That agreement
increased to approximately 4.8 million barrels per day the total reductions
which they, together with certain non-OPEC producers, had implemented over a
twelve-month period. With the participants exhibiting more discipline in
adhering to these quotas than has generally been true in the past, oil prices
increased sharply, averaging approximately $17.65, $21.73 and $24.56 over the
final three quarters of the year. Natural gas prices, which did not decline as
severely during 1998, were modestly higher during 1999, averaging approximately
$2.15 per thousand cubic feet versus approximately $2.05 in the prior year.
Despite significantly higher oil prices, oil company
spending for 1999 was lower than originally projected. Salomon Smith Barney's
1999 Annual Survey of Worldwide Oil and Gas Exploration and Production
Expenditures had projected a decline of eleven percent; actual spending fell by
an estimated 18 percent. As a result, the total worldwide rig count reached a
historic annual low, averaging 1,457 for the year, 21 percent below the prior
year average and 31 percent below that of 1997. Offshore rig utilization
averaged approximately 75 percent, the lowest since 1989, following three
consecutive years above 90 percent.
International and offshore drilling, which typically
generate more revenue per active rig than other markets, were particularly weak,
magnifying the adverse effect on the oil service industry. Although the U.S. and
Canadian markets demonstrated improvement in the second half of the year, with
rig counts rising above the comparable year-earlier totals, the international
rig count remained below that of 1998 throughout the year, and worldwide
offshore drilling activity likewise remained below the prior year level.
Varco International, Inc. and Subsidiaries 15
<PAGE>
Although the average U.S. rig count for 1999 was down 25 percent
from 1998, it was above the prior year level during the fourth quarter, due to
increased natural gas drilling. Similarly, while the average Canadian rig count
in 1999 was five percent below the prior year average, it also rose above that
level in the second half. However, the international rig count remained below
the 1998 level throughout the year and reflected an average decline of 22
percent. The average number of offshore rigs under contract worldwide during
1999 was down approximately ten percent. In summary, drilling activity was
generally very weak throughout 1999, and a modest improvement during the final
months of the year in the U.S. and Canada was "too little, too late".
The outlook for the oil service industry is more positive than a
year ago as oil company spending is expected to increase. However, uncertainty
continues as the discrepancy between commodity prices and drilling activity has
rarely been as pronounced as it is today. The Salomon Smith Barney Survey for
2000 projects an 11 percent increase in exploration and production spending,
which would put it at a level similar to that of 1996. Significantly, the
average oil price assumption of the companies surveyed is $19.08 per barrel for
2000, well below the current price, indicating that the oil companies do not
view current oil prices as sustainable. Perhaps the potential exists for a more
aggressive turnaround if oil prices remain above expectations. In the oil
service industry it seems that the duration of any trend is frequently short and
reversals are often abrupt.
products and markets
Varco International is the foremost supplier of drilling equipment in the world
today, as evidenced by our leading market position in providing equipment for
the new offshore rigs-jackups, semisubmersibles, drillships and fixed platforms-
that have been added to the rig fleet over the past few years. Together, Varco's
product lines represent approximately 75-80 percent of the total dollar value of
all drilling equipment on a typical offshore rig-more than any other single
supplier. Varco has the largest market share in the majority of these product
lines, and the second largest in virtually all of the others.
Varco's most noteworthy product is the Top Drive Drilling System
("TDS"), which was developed and introduced approximately 15 years ago. The TDS
provides the power and torque that turns the drill stem during drilling
operations, and it has replaced the traditional rotary table method on virtually
all offshore rigs. Varco remains the market share leader in supplying the TDS to
offshore rigs.
Approximately ten years ago Varco introduced automation to the
drilling rig with the Pipe Handling Machine ("PHM"). The PHM provides complete
remote control
16 Varco International, Inc. and Subsidiaries
<PAGE>
of the pipe racking function, including connecting and disconnecting stands of
pipe, as well as vertically racking pipe as it is removed from, or placed into,
the well. Virtually all recently built offshore rigs incorporate automated pipe
racking, and Varco's PHM and its derivatives (known collectively as "Pipe
Racking Systems" or "PRS's") have the leading market position. More recently,
Varco has developed companion products called Pipe Deck Handling Systems. When
not required for operations, pipe is stored horizontally on the pipe deck. Pipe
Deck Handling Systems mechanize and automate the handling of pipe on the pipe
deck and its transfer to the rig floor. Although traditional pipe deck handling
methods, which Varco does not provide, are still widely used, the acceptance of
mechanization makes Varco the leading supplier of pipe deck handling solutions
today.
Top Drive Drilling Systems and automated pipe handling products
are designed and sold by the Varco Systems Division.
The original Varco product line consisted of rig floor tools and
equipment, generally referred to as Rotary or Pipe Handling Tools, including
slips, elevators, spinning wrenches and casing handling equipment. Today, many
of these tools have been mechanized, permitting remote operation. They may be
integrated with other components of automated pipe handling systems, or may be
used as stand-alone tools to reduce manual effort on rigs which are not fully
automated. Varco, through its Varco BJ Division, retains a dominant market
position in Pipe Handling Tools. As noted previously, use of the TDS replaces
the traditional rotary table for normal drilling; however, it is still used in
certain ancillary rig operations. Varco BJ provides a limited use "rotary table"
specifically designed for such functions.
Through the Shaffer Division, Varco designs and sells pressure
control equipment, primarily Blowout Preventers ("BOP's") and the control
systems that enable their remote activation. With respect to the new offshore
rig construction market, Shaffer and its primary competitor share the top two
market positions.
Floating rigs, such as semisubmersibles and drillships, are used
for drilling in deeper water and require certain drilling equipment not used on
jackups or fixed platform rigs. This includes: the "riser string", large
diameter pipe connecting the rig to the well on the ocean floor; riser
tensioners, devices which hold the riser string in tension; and a motion
compensator, equipment designed to offset the heave caused by wind and waves.
Each of these products is supplied by the Shaffer Division, which holds the
number one market share in motion compensators and riser tensioners and the
number two position in the sale of riser pipe.
Drilling control systems are used to operate the various pieces
of equipment that comprise the drilling rig. Varco's M/D Totco Division has
developed the Varco Integrated Control and Information System ("V-ICIS"), a
computer-based system which controls the operation of the automated rig
components as well as providing drilling information which can be employed to
enhance drilling efficiency. Using V-ICIS, rig personnel control all drilling
VArco International, Inc. and Subsidiaries 19
<PAGE>
functions from an environmentally secure cabin, using touch-screen graphic
displays. Thus, rig personnel are removed from the potentially hazardous
environment of the rig floor and are presented with information which helps
optimize drilling parameters and avoid potential problems. Varco, through its
M/D Totco Division, has the leading market position in drilling controls.
The Rigtech Division provides solids control equipment, which is
used to remove cuttings from drilling fluid ("mud") so that it can be
recirculated during drilling operations. Rigtech today has a relatively small
share of the worldwide solids control market.
Three classifications of drilling equipment that Varco has not
historically provided are: mud pumps, which circulate drilling fluid; the
drawworks, which provide the rig's hoisting capability; and the rig structure or
"derrick", including integral equipment such as the crown block and traveling
block. Varco has recently introduced and begun marketing an automated drawworks,
but does not participate in the market for the other two products.
Land rigs generally use the same types of equipment as offshore
rigs, excluding that specifically associated with floating rigs. However, land
drilling is typically less rigorous and complex, and the dollar value of
equipment used on a typical land rig is only 20 to 30 percent of that of an
offshore rig. Therefore, Varco's principal market is offshore drilling although
its equipment is frequently used on land rigs as well.
Varco has a 25-year history of developing tools and equipment to
enhance the safety and productivity of the drilling process. That capability has
been significantly expanded over the past ten years through a number of
acquisitions which have broadened the Varco product line, and today Varco is the
worldwide leader in supplying modern drilling equipment.
financial review
Revenues for 1999 were $592.8 million, 20 percent below the $741.0 million for
1998, but somewhat above the $545.8 million for 1997. Reflecting the weak market
conditions during 1999, incoming orders totaled $305.4 million (excluding
cancellations of $19.3 million), the lowest level since 1995, and well below the
$757.4 million (excluding cancellations of $118.0 million) and $820.9 million
booked in 1998 and 1997, respectively. As a result of the sharply reduced order
rate, backlog declined to $63.8 million at year-end, from $367.4 million at
December 31, 1998.
In response to the market decline, the Company continued to
aggressively reduce its cost base during 1999. As a result, Selling, General and
Administrative expenses were 22 percent below the 1998 level, and Research and
Development costs were down 17 percent. Total employment at December 31, 1999
was 35 percent below the year-earlier level. In spite of these actions,
financial results for the year were somewhat disappointing. The weaker
20 Varco International, Inc. and Subsidiaries
<PAGE>
market activity resulted in lower Revenue from "base" business (such as spare
parts, service and repair) while the delivery of large capital equipment orders
from backlog, together with the installation and start-up expenses for this
equipment, somewhat limited the pace of the cost reductions.
Gross margins for 1999 were below the 1998 level, primarily as a
result of (1) lower than average margins on several of the Company's newer
products; (2) a less favorable product mix, primarily a decline in higher margin
rental revenue and an increased percentage of revenue from the Shaffer Division
products, which generally carry lower margins than the average across the
Company; and (3) the impact of fixed manufacturing costs at reduced volume
levels.
As a result, Operating Profit margins (earnings before interest,
taxes, and special charge) declined to 10.3 percent, from 13.6 percent in 1998
and 14.6 percent in 1997. Cash Flow Return on Investment, defined as Operating
Profit plus Depreciation and Amortization as a percent of Average Net Investment
(Shareholders' Equity plus Debt less Cash), and considered by the Company to be
a very meaningful measure of overall financial performance, was 27 percent for
1999. Although well below the 45 and 42 percent rates achieved during 1998 and
1997, respectively, that result is within the range considered by the Company to
be good performance.
Net Income for 1999 totaled $37.0 million, $.56 per share
(diluted), including the special charge described below. Excluding such charge,
Net Income was $39.9 million, $.61 per share (diluted). 1998 results, which also
included a special charge, reflected Net Income of $60.3 million, $.92 per share
(diluted); or $66.0 million, $1.01 per share (diluted) excluding the special
charge. Net Income for 1997 was $49.9 million, $.76 per share (diluted). In the
fourth quarter of 1999 the Company recorded a net special charge of $4.6 million
for severance and other expenses which it expects to incur in the first half of
2000 as it continues to reduce its cost structure consistent with current market
conditions. In the fourth quarter of 1998 the Company took a similar charge of
$8.5 million.
Cash generation was a particularly strong point of 1999 financial
performance, as free cash flow was $45.5 million. Cash and short-term
investments totaled $77.9 million at December 31, 1999, and the Balance Sheet
was debt-free.
[PHOTOS OF OFFSHORE DRILLING RIGS APPEARS HERE]
Varco International, Inc. and Subsidiaries 23
<PAGE>
[CHARTS APPEARS HERE]
<TABLE>
<CAPTION>
Revenues
$ millions
<S> <C>
1995 273731
1996 368422
1997 545789
1998 740979
1999 592752
</TABLE>
<TABLE>
<CAPTION>
net income
$ millions
<S> <C>
1995 14439
1996 24542
1997 49875
1998 60338
1999 36965
</TABLE>
<TABLE>
<CAPTION>
income per share diluted
dollars
<S> <C>
1995 0.23
1996 0.38
1997 0.76
1998 0.92
1999 0.56
</TABLE>
<TABLE>
<CAPTION>
total assets
$ millions
<S> <C>
1995 246571
1996 316021
1997 471129
1998 546920
1999 459685
</TABLE>
<TABLE>
<CAPTION>
shareholders' equity
$ millions
<S> <C>
1995 151179
1996 195508
1997 253199
1998 319367
1999 360748
</TABLE>
<TABLE>
<CAPTION>
return on average equity
percent
<S> <C>
1995 9.2
1996 14.2
1997 22.7
1998 21.8
1999 10.8
</TABLE>
<TABLE>
<CAPTION>
r&d expense
$ millions
<S> <C>
1995 13156
1996 14331
1997 21084
1998 34567
1999 28782
</TABLE>
<TABLE>
<CAPTION>
return on revenues
percent
<S> <C>
1995 5.3
1996 6.7
1997 9.1
1998 8.1
1999 6.2
</TABLE>
<TABLE>
<CAPTION>
number of employees
<S> <C>
1995 1636
1996 1936
1997 2852
1998 2951
1999 1906
</TABLE>
[PHOTOS OF OFFSHORE DRILLING RIGS APPEARS HERE]
24 Varco International, Inc. and Subsidiaries
<PAGE>
five-year financial and operating highlights
<TABLE>
<CAPTION>
(in thousands, except per share amounts and employees)
Year ended December 31,
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $592,752 $740,979 $545,789 $368,422 $273,731
Gross profit 174,274 239,032 196,969 125,816 99,214
Research and development 28,782 34,567 21,084 14,331 13,156
Selling, general and
administrative expenses 85,266 109,079 96,398 70,891 61,014
Special charge 4,560 8,500
Interest expense 745 1,823 3,683 3,948 4,516
Income before income taxes 57,946 91,157 76,696 38,088 21,908
Income taxes 20,981 30,819 26,821 13,546 7,469
Net income 36,965 60,338 49,875 24,542 14,439
As a percent of revenues 6.2% 8.1% 9.1% 6.7% 5.3%
Return on average shareholders' equity 10.8% 21.8% 22.7% 14.2% 9.2%
Per share of Common Stock
Basic income $.57 $.94 $.78 $.39 $.23
Diluted income .56 .92 .76 .38 .23
Book value 5.52 4.94 3.95 3.09 2.51
===========================================================================================================
Year-end financial position
Working capital $216,853 $176,299 $137,477 $120,246 $89,187
Current ratio 3.6 1.8 1.7 2.4 2.5
Property plant and equipment - net 84,332 89,997 73,862 48,711 45,260
Total assets 459,685 546,920 471,129 316,021 246,571
Long-term debt 9,845 22,715 29,539
Shareholders' equity 360,748 319,367 253,199 195,508 151,179
Long-term debt as percent of
total capitalization 0.0% 0.0% 3.6% 10.4% 16.3%
===========================================================================================================
Other
Capital expenditures $ 12,820 $ 35,269 $ 35,121 $ 11,023 $ 10,517
Depreciation and amortization 23,049 22,121 16,971 13,249 12,347
Number of employees 1,906 2,951 2,852 1,936 1,636
Average shares used in computing
basic income per share(1) 65,046 64,451 63,650 62,181 62,610
Average shares used in computing
diluted income per share(1) 65,879 65,594 65,201 63,463 63,145
===========================================================================================================
</TABLE>
(1) The income per share amounts prior to 1997 have been restated, as required,
to comply with Statement of Financial Account Standard No. 128, Earnings per
Share, and the number of shares used in those calculations have been adjusted to
give effect to the Company's 1997 two-for-one stock split.
See notes to consolidated financial statements.
26 Varco International, Inc. and Subsidiaries
<PAGE>
management report of
financial responsibilities
The management of Varco International, Inc. is responsible for the preparation
and integrity of the accompanying consolidated financial statements and other
financial information contained in this Annual Report. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include amounts that are based on management's
informed judgments and estimates.
In fulfilling its responsibilities for the integrity of financial
information, management maintains and relies on the Company's system of internal
control. This system includes a program of financial and operational reviews by
a professional corporate staff and the independent auditors. The system is
designed to provide reasonable assurance that assets are safeguarded,
transactions are executed in accordance with management's authorization and
accounting records are reliable as a basis for the preparation of the
consolidated financial statements. Management believes that, as of December 31,
1999, the Company's internal control system provides reasonable assurance that
material errors or irregularities will be prevented or detected within a timely
period and is cost effective.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, reviews the Company's financial reporting and
accounting practices. The Audit Committee recommends to the Board of Directors
the selection of independent auditors and reviews their fee arrangements. It
meets periodically with the independent auditors and management to review the
financial statements of the Company and to review the work of each and the
propriety of the discharge of their responsibilities. The independent auditors
have full and free access to the Audit Committee, without management present, to
discuss auditing and financial reporting matters.
/s/ George Boyadjieff /s/ Richard A. Kertson
George Boyadjieff Richard A. Kertson
Chairman and Chief Executive Officer Vice President - Finance and Chief
Financial Officer
February 8, 2000
Varce International, Inc. and Subsidiaries 27
<PAGE>
management's discussion and analysis of
financial condition and results of operations
Background
The business of the Company depends primarily upon the level of worldwide
drilling activity, particularly offshore drilling activity. The level of
drilling activity can be influenced by numerous factors, including the prices of
oil and gas, economic and political conditions, discovery and development costs
of oil companies, oil company's exploration and production spending, development
of alternative energy sources, availability of equipment and materials,
availability of new onshore and offshore acreage or concessions, and new and
continued governmental regulations regarding environmental protection, taxation,
price controls and product allocations.
Beginning in late 1997 oil and gas prices began to weaken,
particularly the price of oil. The weakness continued through 1998 as the price
of oil averaged approximately $14.40 as compared to $20.60 per barrel for 1997.
During the early months of 1999 the price of oil remained weak, averaging $13.07
for the first quarter. Beginning in March of 1999 the price of oil began a trend
upward averaging approximately $17.65, $21.73 and $24.56 for the last three
quarters of 1999. Natural gas prices have not fluctuated as dramatically as the
price of oil. The price of natural gas averaged approximately $2.50 per thousand
cubic feet for 1997 as compared to $2.04 in 1998 and $2.15 for 1999. Commodity
prices have continued their upward trend in 2000. The recent price of oil has
been as high as $30 per barrel and the price of gas as high as $2.65 per
thousand cubic feet. During 1997, these commodity prices resulted in improved
profits and cash flows for oil companies. Due in part to these stronger
financial results, oil companies increased exploration and production
expenditures, leading to increased drilling activity in 1997. Conversely, the
declining commodity prices beginning in late 1997 led to lower cash flows for
the oil companies and a reduction in exploration and production expenditures,
leading to declining drilling activity. Despite the increasing commodity prices,
oil companies' exploration and production expenditures in 1999 were below the
1998 level and drilling activity remained depressed.
The Company's orders and revenues have been negatively impacted
by the decline in worldwide drilling activity which reached historically low
levels in the second quarter of 1999. Rig counts, as reported by industry
sources, for each of the past three years are summarized in the following table:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------
<S> <C> <C> <C>
Approximate Average Annual Rig Count:
Worldwide average rig count 1,457 1,843 2,126
United States & Canada average rig count 869 1,088 1,317
International average rig count 588 755 809
Approximate average number of
offshore rigs under contract 500 555 606
</TABLE>
Although drilling activity began to recover somewhat toward the end of 1999, the
average rig count for 1999 represented the lowest in modern history and was down
21% and 31% from the average levels of 1998 and 1997, respectively. The
worldwide average rig count for the fourth quarter of 1999 was approximately
1,682.
During 1997 worldwide utilization of offshore rigs (rigs under
contract as a percent of available rigs) increased, driven both by increased
demand and by a continually shrinking supply of available offshore rigs. The
utilization rate was 94% for the year 1997, resulting in increased dayrates and
longer contract periods, particularly among the "premium" offshore rigs. This
resulted in increased cash flow for the Company's major customers, the drilling
contractors, and in the construction of more than 50 offshore rigs during the
years 1997 to 1999. Both the average number of offshore rigs under contract and
the utilization rates began to decline in the second quarter of 1998 and have
continued to decline until recently. During 1999 the offshore utilization rate
declined to a low of approximately 69% and recovered to a rate of approximately
75% during the month of December.
[PHOTOS OF DRILLING EQUIPMENT APPEARS HERE]
28 Varco International, Inc. and Subsidiaries
<PAGE>
Results of Operations
The Company operates principally in the oil and gas well drilling equipment
segment of the oilfield service industry. Set forth below are the annual orders
for the Company's five Divisions which serve this segment.
(in thousands) 1999 1998 1997
------------------------------------------------------------------------
Orders
Varco Systems $ 98,379 $ 258,494 $ 287,435
Varco BJ 45,187 94,968 99,379
M/D Totco 51,335 110,647 100,602
Shaffer 97,470 273,626 311,052
Rigtech 13,051 19,621 22,452
Cancellations (19,347) (117,953)
------------------------------------------------------------------------
Total $ 286,075 $ 639,403 $ 820,920
========================================================================
Orders declined $353.3 million, 55%, in 1999 as compared to 1998 and declined
$181.5 million, 22%, in 1998 as compared to 1997. These declines are primarily
the result of the reduction in, and cancellation of, orders associated with
upgrading and construction of offshore drilling rigs. The cancellations in 1999
and 1998 were primarily due to customers' terminating the construction of
certain offshore drilling rigs and cancelling the related equipment orders. Of
the total cancellations, approximately $84.0 million were incurred by Shaffer
and $35.6 million by Varco Systems with the balance distributed among the
remaining Divisions. Beginning in the second half of 1998, new orders were also
negatively impacted at all Divisions by the decline in overall drilling
activity. M/D Totco's 1998 increase in orders was due to sales of its new
drilling rig control system, "V-ICIS," which was introduced in 1997.
During 1999, the quarterly order rate (excluding cancellations)
declined to a low of $63.2 million in the second quarter, and improved to $81.8
million and $88.1 million in the third and fourth quarters, respectively.
The higher level of orders in 1997, as compared to 1999 and 1998,
was primarily due to 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 Shaffer and Varco
Systems Divisions.
Set forth below are the annual revenues for the Company's five
Divisions.
(in thousands) 1999 1998 1997
-------------------------------------------------------------
Revenues
Varco Systems $ 200,556 $ 266,776 $ 165,510
Varco BJ 66,006 95,959 68,931
M/D Totco 69,540 94,639 90,601
Shaffer 237,036 256,238 206,483
Rigtech 16,589 21,273 13,372
-------------------------------------------------------------
Total $ 589,727 $ 734,885 $ 544,897
-------------------------------------------------------------
The Company's revenues declined by $145.2 million, 20%, in 1999 as compared to
1998. The revenue decreases, except at M/D Totco, in 1999 were generally due to
lower shipments of equipment for upgrading, conversion and new construction of
offshore drilling rigs and, to a lesser degree, the decline in drilling
activity. The lower revenues at M/D Totco were due to the decline in overall
drilling activity, particularly in the U.S. and Canada.
The Company's revenues increased by $190.0 million, 35%, in 1998
as compared to 1997, with the Shaffer and Varco Systems Divisions accounting for
$151.0 million of this increase. Approximately 85% of the increase at each of
these Divisions was due to the delivery of equipment for offshore rig upgrades
and construction, and the remainder was due to increased sales of spare and
replacement parts. Substantially all of the increases at the other Divisions are
due to the delivery of equipment for offshore rig upgrades and construction.
[PHOTOS OF DRILLING EQUIPMENT APPEARS HERE]
Varco International, Inc. and Subsidiaries 29
<PAGE>
The Company's backlog of unshipped orders was $63.8 million at
December 31, 1999, as compared to $367.4 million at December 31, 1998 and $462.9
million at December 31, 1997. The Company expects that substantially all of the
backlog will be shipped by December 31, 2000. At December 31, 1999, the Company
had received $7.8 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.
The 1999 other income primarily consists of interest income. The
increase in other income for 1998 as compared to 1997 is attributable to
cancellation fees due for expenses and costs incurred prior to the cancellation
of orders.
Gross profit margins (net sales and rental income less costs of
sales and rental income) as a percentage of net sales and rental income for the
Company were 29.6% for 1999, 32.5% for 1998 and 36.2% for 1997. The gross
margins in 1999 were negatively impacted by (1) high initial costs on newer
products at M/D Totco, Rigtech, and Shaffer and retrofit costs on certain new
products at Shaffer; (2) the combined product mix impact of a decline in rental
income (which carries a higher gross margin than other revenues) and the
increase in the proportion of Shaffer revenues to other revenues (Shaffer
products carry lower gross margins than other Divisions' products); and (3)
higher manufacturing costs and increased manufacturing inefficiencies. New
product and retrofit costs accounted for approximately 1.2% of the margin
decline and approximately 1.0% was due to the combined product mix impact. 1998
gross margins were negatively impacted by high initial costs and retrofit costs
on newer products at Shaffer,M/D Totco and Rigtech; higher manufacturing costs
and increased manufacturing inefficiencies at all Divisions related to the
increase in volume; and the decline in rental revenue. New products and retrofit
costs accounted for approximately 2.3% of the 3.7% gross margin decline from
1997; higher manufacturing costs and inefficiencies accounted for approximately
1.0%; and lower rental income accounted for the balance.
The Company believes that new product development is significant
to the future growth of the Company. Research and development expenses were
$28.8 million, $34.6 million and $21.1 million for the years 1999, 1998 and
1997, respectively, and represented 4.9%, 4.7% and 3.9% of revenue,
respectively, for those years. The Company expects that research and development
expenses will continue at approximately 4.0% to 5.0% of revenue in 2000.
Selling, general and administrative expenses were $85.3 million
in 1999 (14.4% of revenues) as compared to $109.1 million in 1998 (14.7% of
revenues) and $96.4 million (17.7% of revenues) in 1997. The decrease in 1999
expenses is primarily from the reduction in employment related costs;
conversely; the increase in 1998 as compared to 1997 resulted primarily from
increases in employment related costs. Due to the lower anticipated revenues in
2000, the Company expects that selling, general and administrative expenses as a
percent of revenue will be higher than the preceding rates.
At December 31, 1999, overall Company employment was 1,906
(including 42 temporary employees) as compared to 2,951 (including 155 temporary
employees) at December 31, 1998, and as compared to 2,852 (including 415
temporary employees) at December 31, 1997.
During the fourth quarter of 1999, the Company adopted a plan to
further reduce the cost structure of all of its Divisions, consistent with
current market conditions, and recognized a $5.7 million special charge
consisting primarily of cash severance costs for 528 employees. The Company
spent $1.9 million of this charge in the fourth quarter of 1999 and expects to
spend substantially all of the remaining cost in the first half of 2000. This
special charge was reduced by the unused portion of the 1998 special charge,
$1.1 million. In 1998 the Company recognized an $8.5 million special charge
consisting of the following: 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. The Company spent $5.9
million of the cash portion of this charge. In connection with the 1999
restructure plan, the Company discontinued the 1998 plan and $1.1 million of the
1998 special charge was used to reduce the 1999 special charge.
The Company's effective income tax rate was 36.2% in 1999 as
compared to 33.8% in 1998 and 35.0% in 1997. The higher effective income tax
rate in 1999 as compared to 1997 is primarily due to a lower tax benefit from
sales through the Company's Foreign Sales Corporation. The lower effective
income tax rate in 1998 as compared to both 1999 and 1997 resulted from 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 December 31, 1999, the Company had cash and cash equivalents and short-term
investments of $77.9 million as compared to $29.1 million at December 31, 1998.
During 1999, the Company generated $62.8 million from operations, invested $12.8
million in property, plant and equipment and paid down debt by $10.0 million.
30 Varco International, Inc. and Subsidiaries
<PAGE>
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. Proceeds from the initial advances were used to repay
borrowings under a previous credit agreement and for the June 30, 1997 principal
and interest payment on the Senior Notes. At December 31, 1999, there were no
advances outstanding and $4.4 million in letters of credit outstanding under
this facility.
The Credit Agreement restricts 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, 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 June 30,
1997, computed on a cumulative basis. At December 31, 1999, the amount available
for dividends and repurchases under the Credit Agreement was $37.3 million.
Working capital was $216.9 million at December 31, 1999, compared
to $176.3 million at December 31, 1998. The Company's current ratio has
increased from 1.8 to 1.0 at December 31, 1998 to 3.6 to 1.0 at December 31,
1999. The increase in working capital is primarily due to the cash generated
from operations, resulting in higher cash and cash equivalents at December 31,
1999. In addition, working capital and the current ratio is favorably impacted
by the reduction in customer deposits due to shipment of equipment for new rigs.
At December 31, 1999, the Company had no long-term debt.
Capital expenditures were $12.8 million in 1999 and $35.3 million
in 1998. These capital expenditures were primarily for the purchase of an office
and service facility and additional machine tools. The Company expects that its
2000 capital expenditures will be the same or lower than 1999 expenditures.
The Company believes that its December 31, 1999 cash and cash
equivalents, short-term investments and its credit facility will be sufficient
to meet its capital expenditures, cash portion of the special charge, and its
operating cash needs.
Quantitative and Qualitative Market Risk Disclosure
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 consider these risks
significant, and the Company does not enter into derivative financial instrument
transactions to offset these risks.
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 had no fixed interest rate debt at December
31, 1999. Foreign currency exposures, due to rate fluctuations, are minimized by
the Company's using natural hedges.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs that use only two digits
to identify a year rather than four. If not corrected, computer applications
could fail or create erroneous results before, during and after the Year 2000.
The Company has not experienced any significant impact from the Year 2000 Issue
from its products, internal business systems, or facility systems or from third-
party suppliers and customers.
The Company did not separately track internal cost incurred on
the Year 2000 Issue. The Company has estimated that approximately 15% of its
Information Technology personnel's time was spent on the Year 2000 Issue. The
Company estimates that it paid less than $1.5 million to third parties for
software, hardware and consultation.
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
Annual 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 prices of oil
and gas, manufacturing capacity, expectations for funding capital expenditures
and operations in future periods and plans, and objectives. 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
capacities, 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.
Varco International, Inc. and Subsidiaries 31
<PAGE>
consolidated balance sheets
(dollars in thousands)
December 31,
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------
assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 72,606 $ 29,138
Short-term investments 5,253
Receivables - principally trade, less allowances for
doubtful accounts of $2,954 (1999) and $3,351 (1998) 140,399 179,241
Inventories - note b 67,811 152,412
Deferred tax assets - note d 7,085 15,244
Assets held for sale 1,951 7,717
Prepaid expenses 4,924 6,639
- -----------------------------------------------------------------------------------
Total Current Assets 300,029 390,391
Property, plant and equipment - at cost,
less accumulated depreciation - note c 84,332 89,997
Rental equipment - at cost,
less accumulated depreciation 12,107 11,440
Cost in excess of net assets acquired, less accumulated
amortization of $9,616 (1999) and $8,534 (1998) 32,229 33,511
Other assets - notes a & b 30,988 21,581
- -----------------------------------------------------------------------------------
Total Assets $459,685 $546,920
===================================================================================
liabilities and shareholders' equity
Current Liabilities
Accounts payable - principally trade $ 29,643 $ 45,969
Accrued payroll and related costs 18,426 22,351
Other accrued liabilities 14,803 16,679
Customer deposits 7,836 95,766
Accrued warranty 7,034 7,558
Accrued special charge - note a 3,785 6,588
Taxes payable 1,649 9,233
Current portion of long-term debt - note e 9,948
- -----------------------------------------------------------------------------------
Total Current Liabilities 83,176 214,092
Postretirement obligations - note h 6,898 6,813
Other non-current liabilities 8,863 6,648
- -----------------------------------------------------------------------------------
Total Liabilities 98,937 227,553
Shareholders' Equity - notes a, e & f
Preferred Stock: 10,000,000 shares authorized, none issued and
outstanding Common Stock: 120,000,000 shares authorized,
65,334,082 (1999) and 64,642,326 (1998) issued and outstanding,
stated value 55,702 55,011
Additional paid-in capital 106,184 102,062
Other comprehensive income 281 678
Retained earnings 198,581 161,616
- -----------------------------------------------------------------------------------
Total Shareholders' Equity 360,748 319,367
Commitments and contingencies - note g
Total Liabilities and Shareholders' Equity $459,685 $546,920
===================================================================================
</TABLE>
See notes to consolidated financial statements.
32 Varco International, Inc. and Subsidiaries
<PAGE>
consolidated statements of income
(in thousands, except per share data)
Year Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales $ 568,024 $ 699,966 $ 500,067
Rental income 21,703 34,919 44,830
Other income 3,025 6,094 892
- ----------------------------------------------------------------------------------
592,752 740,979 545,789
Costs and expenses
Cost of sales 407,645 484,165 334,729
Cost of rental income 7,808 11,688 13,199
Selling, general and administrative expenses 85,266 109,079 96,398
Research and development costs 28,782 34,567 21,084
Special charge - note a 4,560 8,500
Interest expense 745 1,823 3,683
- ----------------------------------------------------------------------------------
534,806 649,822 469,093
- ----------------------------------------------------------------------------------
Income before income taxes 57,946 91,157 76,696
Income taxes - note d 20,981 30,819 26,821
- ----------------------------------------------- ----------------------------------
Net income $ 36,965 $ 60,338 $ 49,875
==================================================================================
Basic income per share $ .57 $ .94 $ .78
==================================================================================
Shares used in computing basic income per share . 65,046 64,451 63,650
==================================================================================
Diluted income per share $ .56 $ .92 $ .76
==================================================================================
Shares used in computing diluted income per share 65,879 65,594 65,201
==================================================================================
</TABLE>
See notes to consolidated financial statements.
Varco International, Inc. and Subdiaries 33
<PAGE>
consolidated statements of shareholders' equity
(in thousands)
Year ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Com-
Issued and Outstanding Paid-in prehensive Retained
----------------------
Shares Amount Capital Income Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 63,199 $ 53,567 $ 89,966 $ 572 $ 51,403 $ 195,508
Comprehensive income
Net income 49,875 49,875
Foreign currency
translation adjustment 127 127
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 50,002
Common Stock issuances 973 973 6,716 7,689
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 64,172 54,540 96,682 699 101,278 253,199
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 60,338 60,338
Foreign currency
translation adjustment (21) (21)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 60,317
Common Stock issuances 471 471 5,380 5,851
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 64,643 55,011 102,062 678 161,616 319,367
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 36,965 36,965
Foreign currency
translation adjustment (438) (438)
Unrealized gains on investments 41 41
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 36,568
Common Stock issuances 691 691 4,122 4,813
- ---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 65,334 $ 55,702 $ 106,184 $ 281 $ 198,581 $ 360,748
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
34 Varco International, Inc. and Subsidiaries
<PAGE>
consolidated statements of cash flows
(in thousands)
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 36,965 $ 60,338 $ 49,875
Items included in net income not requiring (providing) cash:
Depreciation 20,483 19,875 14,760
Amortization 2,566 2,246 2,211
Deferred income taxes 8,159 (6,681) (3,371)
Write-off of rental equipment 1,500
Other 1,627 2,744 2,170
Changes in operating assets and liabilities:
Receivables 38,842 (36,917) (47,164)
Inventories 84,601 (20,441) (40,098)
Additions to rental equipment (6,544) (3,295) (11,494)
Prepaids 1,715 (1,966) (516)
Accounts payable (16,326) (7,425) 15,579
Customer deposits (87,930) 16,698 76,372
Accrued liabilities (5,203) 9,161 5,009
Accrued payroll (3,925) (16) 8,970
Taxes payable (7,584) 359 3,021
Other (4,600) (4,961) 1,986
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 62,846 31,219 77,310
Investing Activities
Property, plant and equipment purchases (12,820) (35,269) (35,121)
Proceeds from equipment sales 5,470 306 1,280
Purchases of investments (5,253)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash (used in) Investing Activities (12,603) (34,963) (33,841)
Financing Activities
Proceeds from line of credit 4,000 61,000 124,500
Payments on long-term debt and line of credit (14,000) (71,000) (137,500)
Proceeds from issuance of Common Stock 3,225 3,055 3,914
Deferred issue costs (350)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash (used in) Financing Activities (6,775) (6,945) (9,436)
Net increase (decrease) in cash and cash equivalents 43,468 (10,689) 34,033
Cash and cash equivalents at beginning of year 29,138 39,827 5,794
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 72,606 $ 29,138 $ 39,827
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
Varco International, Inc. and Subsidiaries 35
<PAGE>
notes to consolidated financial statements
note a.
summary of significant accounting policies
Description of Business
Varco International, Inc. and its subsidiaries (the "Company") are engaged in
the design, manufacture, sale and rental of tools, equipment and instrumentation
used primarily in the worldwide oil and gas well drilling equipment segment of
the oil service industry. The Company operates through five Divisions: Varco
Systems, whose products include integrated systems for rotating and handling
pipe on a drilling rig; Varco BJ, whose products include pipe handling tools,
hoisting equipment and rotary equipment; M/D Totco, whose instrumentation
products are used in the management of drilling operations and control of
equipment; Shaffer, whose products include pressure control and motion
compensation equipment and flow devices; and Rigtech, whose products are used in
the handling, mixing, transport and conditioning of drilling fluids.
Principles of Consolidation
The consolidated financial statements include the accounts of Varco
International, Inc. and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual amounts could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-term Investments
The Company classifies its short-term investments as available-for-sale
securities and carries them at their fair value, based on currently quoted
market prices. Unrealized holding gains and losses, net of tax, on securities
classified as available-for-sale are carried as a separate component of
shareholders' equity. Short-term investments consist of debt securities with
interest rates ranging from 5% to 8%.
Available-for-sale securities at December 31, 1999 are as
follows:
Gross
Unrealized
(in thousands) Cost Gains Fair Value
---------------------------------------------------------------------
Obligations of states and
political divisions $ 1,265 $ 1,265
Corporate debt securities 3,947 $ 41 3,988
---------------------------------------------------------------------
$ 5,212 $ 41 $ 5,253
---------------------------------------------------------------------
The amortized cost and estimated fair value of available-for-sale securities at
December 31, 1999, by contractual maturity, are as follows:
Estimated
(in thousands) Cost Fair Value
---------------------------------------------------------------------
Due in one year or less $ 3,213 $ 3,249
Due after one year 1,999 2,004
---------------------------------------------------------------------
$ 5,212 $ 5,253
---------------------------------------------------------------------
There were no gross realized gains on sales of available-for-sale securities in
1999.
Concentrations of Credit Risk
Substantially all of the Company's accounts receivable are due from customers in
the oil and gas industry, both in the United States and internationally. The
Company performs periodic credit evaluations of its customers and generally does
not require collateral. In certain circumstances, the Company requires letters
of credit to further ensure credit worthiness.
36 Varco International, Inc. and Subsidiaries
<PAGE>
Inventories
Inventories are stated at the lower of cost or market. The Company determines
the cost of inventories using the last-in, first-out ("LIFO") method.
Rental Equipment
Rental equipment is stated at the lower of cost or market, net of accumulated
depreciation of $24,663,000 and $23,407,000 at December 31, 1999 and 1998,
respectively. Rental equipment is depreciated over estimated useful lives
ranging from 3 to 7 years. The equipment is generally leased under short-term
arrangements, usually not exceeding 90 days in duration. In 1998, the Company
determined, as a result of market conditions, that certain M/D Totco rental
equipment would not be rentable in the future. Accordingly, a special non-cash
charge of $1,500,000 was incurred to write-off this rental equipment.
Depreciation
Depreciation is provided using the straight-line method over estimated useful
lives ranging from 3 to 30 years.
Intangible Assets
The excess of cost over net assets of businesses acquired ("goodwill") is
amortized on a straight-line basis over periods ranging from 10 to 40 years. The
carrying value of goodwill will be reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the goodwill will be reduced by the estimated shortfall of cash flows. Included
in Other Assets are other intangible assets, primarily patents, totaling
$7,059,000, net of accumulated amortization of $7,943,000 at December 31, 1999,
which are being amortized on a straight-line basis over estimated useful lives
ranging from 5 to 17 years.
Income Taxes
The liability method is used to account for income taxes. Deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to amounts which are more likely than not to be realized. The
provision for income taxes is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets and liabilities.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. Long-
lived assets expected to be disposed of, including excess equipment and
production facilities held for sale, are stated at their estimated fair value
less cost to sell.
Revenue Recognition
The Company recognizes revenue upon shipment of product, upon the use of rented
equipment and upon the completion of installation work.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, short-term investments, accounts receivable and accounts payable
approximated fair value as of December 31, 1999 and 1998 because of the
relatively short maturity of these instruments. The carrying value of debt
approximated fair value as of December 31, 1998 based upon quoted market prices
for similar debt issues.
Foreign Currency
The Company has determined that the United States dollar is the functional
currency of all its foreign subsidiaries except for Rig Technology Limited whose
functional currency is the British pound sterling. Accordingly, the financial
statements of most foreign operations are remeasured in terms of the United
States dollar and exchange gains and losses are recognized in operations. The
exchange gains in 1999 and 1997 were $1,130,000 and $264,000 respectively;
exchange losses in 1998 were $994,000. Financial statements of Rig Technology
Limited are translated at current rates of exchange, with gains or losses
resulting from translation included in retained earnings.
Stock Based Compensation
The Company accounts for stock option grants to employees in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees".
Per Share Data
Basic per share amounts are computed by dividing net income by the weighted
average number of common shares outstanding. Dilutive per share amounts are
computed by dividing net income by the weighted average number of common shares
and dilutive common share equivalents, which consist solely of converting
outstanding stock options, using the treasury method.
Varco International, Inc. and Subsidiaries 37
<PAGE>
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting and display of total comprehensive income and its components
in financial statements. The adoption of this statement had no effect on the
Company's net earnings or total shareholders' equity for the years ended
December 31, 1999, 1998 and 1997.
Total comprehensive income represents the net change in
shareholders' equity during a period from sources other than transactions with
shareholders and as such, includes net earnings. For the Company, the only other
components of total comprehensive income are the changes in the cumulative
foreign currency translation adjustments and unrecognized gains on
available-for-sale securities.
Special Charge
During the fourth quarter of 1999, the Company adopted a plan to restructure all
of its Divisions' operations consistent with the current market conditions and
recognized a $5,655,000 special charge consisting primarily of cash severance
cost for 528 employees. The Company spent $1,870,000 of this charge in 1999 and
expects to spend substantially all of the remaining cost in 2000. This special
charge was partially offset by the unused portion of $1,095,000 of the 1998
special charge.
In 1998 the Company recognized an $8,500,000 special charge
consisting of the following: severance cost for 1,100 employees of $6,100,000; a
non-cash write-off of rental equipment of $1,500,000; and an allowance for
abandoned leases and other obligations of $900,000. At the termination of the
plan, severance for 752 employees totaling $5,185,000 had been incurred. The
Company has spent $5,905,000 of the total cash portion of this charge. With the
adoption of the 1999 restructure plan, the Company terminated the 1998 plan and
used the unused portion, $1,095,000, to reduce the 1999 special charge.
Reclassification
Certain amounts in the 1998 and 1997 financial statements have been reclassified
to conform with current year classification.
note b.
inventories
Inventories classified as current assets consist of the following:
December 31, (in thousands) 1999 1998
---------------------------------------------------------------------
Raw materials $ 4,118 $ 5,806
Work in process 14,625 50,684
Finished goods 61,030 109,581
Excess of current cost over LIFO value (11,962) (13,659)
---------------------------------------------------------------------
$ 67,811 $ 152,412
=====================================================================
In 1999 LIFO layers of preceding years were reduced which decreased cost of
goods sold by $1,698,000 in 1999. A portion of the Company's inventory is not
expected to be sold or used within one year and, accordingly has been
reclassified as Other Assets. The amount of inventory estimated to exceed one
year's usage was $6,500,000 and $7,500,000 at December 31, 1999 and 1998,
respectively.
note c.
property, plant and equipment
Property, plant and equipment consist of the following:
Estimated
Useful Lives
December 31, (in thousands) 1999 1998 (Years)
----------------------------------------------------------------------
Land ........................ $ 2,718 $ 2,726
Building and improvements ... 38,341 34,683 3-30
Machinery and equipment ..... 95,604 94,463 5-12
Furniture and fixtures ...... 28,423 28,215 3-5
Autos and trucks ............ 931 1,173 3-5
----------------------------------------------------------------------
166,017 161,260
Less accumulated depreciation 81,685 71,263
----------------------------------------------------------------------
$ 84,332 $ 89,997
======================================================================
38 Varco International, Inc. and Subsidiaries
<PAGE>
note d.
income taxes
Significant components of the Company's deferred tax liabilities and assets are
as follows:
December 31, (in thousands) 1999 1998
------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation $ 4,074 $ 3,105
Deferred tax assets:
Intercompany profit elimination 3,160 5,322
Postretirement benefit obligation 2,929 2,819
Allowance for loss on sale of assets 2,021 2,021
Allowance for warranty cost 1,903 2,094
Accruals 1,851 3,599
Allowance for excess inventory 1,546 2,623
Other 340 2,994
------------------------------------------------------------------
Total deferred tax assets 13,750 21,472
Net deferred taxes $ 9,676 $18,367
==================================================================
Current deferred tax assets $ 7,085 $15,244
Noncurrent deferred tax assets and liabilities 2,591 3,123
------------------------------------------------------------------
Net deferred taxes $ 9,676 $18,367
==================================================================
United States and foreign income before income taxes and the components of
income tax expense are as follows:
December 31, (in thousands) 1999 1998 1997
---------------------------------------------------------------------
Income before income taxes:
U.S. $ 39,993 $ 74,361 $ 59,279
Foreign 17,953 16,796 17,417
---------------------------------------------------------------------
$ 57,946 $ 91,157 $ 76,696
---------------------------------------------------------------------
Income tax expense (benefit):
December 31, (in thousands) 1999 1998 1997
---------------------------------------------------------------------
Current:
U.S. $ 5,108 $ 28,824 $ 21,340
Foreign 6,728 6,708 5,577
State 891 2,231 1,146
Utilization of net operating losses
and credits (1,019) (1,509) (1,099)
Tax benefits credited to paid-in
capital 582 1,246 3,206
---------------------------------------------------------------------
12,290 37,500 30,170
Deferred:
U.S. 8,857 (6,681) (4,448)
Foreign (166) 1,099
---------------------------------------------------------------------
$ 20,981 $ 30,819 $ 26,821
---------------------------------------------------------------------
Varco International, Inc. and Subsidiaries 39
<PAGE>
Differences between the Company's income tax expense and an amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
December 31, (in thousands) 1999 1998 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C>
At federal statutory rate $ 20,281 $ 31,905 $ 26,844
Increases (reductions) in taxes:
Change in valuation allowance (3,206)
FSC benefit (545) (1,788) (2,069)
State taxes, net of federal benefit 579 1,450 745
Tax impact of non-deductible expenses 853 877 772
Tax rate differential on foreign earnings
and losses recorded without tax benefit 444 829 519
Other (631) 752 10
-----------------------------------------------------------------------------
Total tax provision $ 20,981 $ 30,819 $ 26,821
-----------------------------------------------------------------------------
</TABLE>
Income taxes paid net of refunds received in 1999, 1998, and 1997 were
$20,450,000, $36,623,000, and $24,393,000, respectively.
The Company is currently under examination by the Internal Revenue Service
for the years ended December 31, 1996 and 1995. Management believes that the
resolution of this examination will not have a material adverse effect on the
Company's financial position or results of operations.
note e.
long-term debt
The Company has a seven-year unsecured revolving credit agreement, dated June
27, 1997, 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. Advances under the Credit Agreement bear interest at either a prime
rate minus .25% or a rate based on the Eurodollar Market. The Credit Agreement
requires a commitment fee (currently equal to .175% of the unused portion of the
credit facility), restricts additional borrowings if minimum asset levels are
not met and contains restrictive covenants requiring the maintenance of certain
financial ratios, limitations on additional borrowings and capital expenditures,
and restrictions on distribution of cash or other property. At December 31,
1999, there were no advances outstanding and $4.4 million in letters of credit
outstanding under this facility.
The Credit Agreement restricts 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, 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 June 30,
1997, computed on a cumulative basis. At December 31, 1999, the amount available
for dividends and repurchases under the Credit Agreement was $37.3 million.
Interest paid during 1999, 1998 and 1997 was $630,000, $1,698,000, and
$3,664,000, respectively.
note f.
shareholders' equity
The Varco 1980 Employee Stock Purchase Plan permits the Company's employees to
purchase Common Stock at a price equal to 85% of its fair market value at the
beginning or end of a six-month plan period. As of December 31, 1999, 2,899,527
shares have been sold under this plan with a maximum of 4,000,000 shares
available for sale under this plan.
The Varco International, Inc. Stock Bonus Plan (the "Bonus Plan")
authorizes the Compensation Committee of the Board of Directors to award
additional compensation to selected key employees of the Company in the form of
stock awards payable in shares of Common Stock of the Company to a maximum of
2,000,000 shares. Through December 31, 1999, 958,601 shares have been granted
and issued to key employees under the Bonus Plan.
The Varco International, Inc. 1990 Stock Option Plan permits, and
predecessor plans permitted, the grant of incentive and non-statutory options to
key employees and officers. Options granted under the plans must be not less
than the fair market value of the stock on the date of grant. Options are
exercisable during such periods as determined by the Compensation Committee and
expire not later than ten years from the date of the grant.
40 Varco International, Inc. and Subsidiaries
<PAGE>
The Varco International, Inc. 1994 Directors' Stock Option Plan provides
for the grant of a 10,000 share stock option on the initial date of election as
a director plus an annual grant of a 10,000 share stock option to each non-
employee director. Options granted under this plan are at the fair market value
of the stock on the date of grant. Options are exercisable for ten years from
the date of the grant unless sooner terminated.
Stock option activity for the plans was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------
weighted weighted weighted
average average average
exercise exercise exercise
options price options price options price
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,481,145 $ 8.53 2,324,724 $ 6.15 2,587,968 $ 3.80
Granted 627,936 9.01 406,861 20.47 557,502 13.25
Exercised 256,780 3.00 200,152 4.93 790,386 3.40
Cancelled 82,390 9.07 50,288 9.51 30,360 7.54
-------------------------------------------------------------------------------------------------
Outstanding at
end of year 2,769,911 $ 9.06 2,481,145 $ 8.53 2,324,724 $ 6.15
-------------------------------------------------------------------------------------------------
Exercisable at
end of year 1,524,510 1,201,444 803,788
=================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life(Years) Price Exercisable Price
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.28 to $4.625 760,750 3.96 $ 3.19 689,349 $ 3.21
$5.25 to $8.375 1,051,513 7.58 6.92 357,038 5.67
$10.4375 to $12.9688 605,298 7.67 12.52 275,922 8.84
$18.672 to $23.1875 352,350 7.97 22.16 202,201 21.40
----------------------------------------------------------------------------------------------------------
$2.28 to $23.1875 2,769,911 6.65 $ 9.06 1,524,510 $ 7.88
==========================================================================================================
</TABLE>
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", in accounting for its stock based compensation
plans. Accordingly, no compensation expense has been recognized for its stock
option plans and its stock purchase plan. The compensation cost that has been
charged against income for its stock bonus plan was $1,007,000, $985,000 and
$1,549,000 for the years 1999, 1998 and 1997 respectively. Had compensation
costs for the Company's stock option plans and stock purchase plan been
determined based upon fair value at the grant date under these plans, the
Company's net income and income per share would have been reduced to the pro
forma amounts shown below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $ 36,965,000 $ 60,338,000 $ 49,875,000
Net income - pro forma 34,451,000 58,136,000 48,574,000
As reported -
Basic income per share $ .57 $ .94 $ .78
Diluted income per share .56 .92 .76
Pro forma -
Basic income per share $ .53 $ .90 $ .76
Diluted income per shares .52 .89 .74
</TABLE>
Varco International, Inc. and Subsidiaries 41
<PAGE>
The fair value of shares is estimated using the Black-Scholes option-pricing
model with the following weighted-average assumptions.
<TABLE>
<CAPTION>
1994
1990 Stock Directors'Stock 1980 Stock
Option Plan Option Plan Purchase Plan
--------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (years) 6 3 .5
Risk-free interest rate
1999 6.5% 6.3% 5.7%
1998 5.9% 6.5% 5.0%
1997 6.3% 6.0% 5.2%
Volatility
1999 67% 67% 67%
1998 48% 48% 48%
1997 45% 45% 45%
</TABLE>
For the options granted during 1999, 1998 and 1997, the weighted-average fair
value at date of grant was $5.65, $10.65, and $6.05 per option, respectively.
The weighted-average fair value at date of grant for stock purchase shares
during 1999, 1998 and 1997 was $2.21, $1.21 and $2.35 per share, respectively.
The discounted value of the stock purchase plan shares granted in 1999, 1998 and
1997, using the Black-Scholes option-pricing model, was $344,000, $465,000 and
$277,000, respectively. At December 31, 1999, the Company had reserved 5,723,643
shares of Common Stock for future issuance in connection with the four stock-
based compensation plans.
During 1997, the Company adopted a Stockholder Rights Plan ("Rights Plan").
As part of the Rights Plan, the Company's Board of Directors declared a dividend
of one preferred stock purchase right ("Right") for each share of the Company's
Common Stock outstanding on November 27, 1997. The Board also authorized the
issuance of one such Right for each share of the Company's Common Stock issued
thereafter.
The Rights will become exercisable only if, without the prior approval of
the Board, a person or group acquires 15% or more of Varco's Common Stock or
announces a tender or exchange offer, the consummation of which would result in
ownership by a person or group of 15% or more of the Common Stock.
Each Right will entitle its holder to purchase one one-thousandth of a
share of a new series of the Company's Preferred Stock at an exercise price of
$140.00. If a person or group acquires 15% or more of the Company's outstanding
Common Stock, each Right will entitle its holder (other than the acquiring
person or group) to purchase at the Right's then-current exercise price, a
number of shares of Varco Common Stock (or in certain circumstances, cash,
property or other securities) having a market value equal to twice the exercise
price. In addition, if at any time after such an acquisition, the Company is
acquired in a merger or other business combination transaction or 50% or more of
its consolidated assets or earning power are sold, each outstanding Right will
entitle its holder (other than the acquiring person or group) to purchase, at
the Right's then-current exercise price, a number of the acquiring person's
common shares having a market value equal to twice the exercise price.
Following the acquisition by a person or group of beneficial ownership of
15% or more of the Company's Common Stock and prior to an acquisition of 50% or
more of the Common Stock, the Board of Directors may exchange the Rights (other
than Rights owned by the acquiring person or group), in whole or in part, at an
exchange ratio of one share of Common Stock (or in certain circumstances, cash,
property or other securities) per Right.
Prior to the acquisition by a person or group of 15% or more of the Common
Stock, the Rights are subject to redemption at the option of the Board of
Directors at a price of $0.01 per Right. The Rights currently trade with the
Company's Common Stock, have no voting or dividend rights and expire on November
5, 2007.
note g.
commitments and contingencies
The Company leases land and its executive offices in Orange, California under
two operating leases, from certain officers, directors, and shareholders of the
Company. The land lease expires in 2012, has an annual aggregate rental of
$480,000 (subject to upward adjustment in 2002 based on appraisals) plus real
estate taxes and other expenses. The Company has the option to purchase the
leased land at a price equal to the greater of the original cost of the property
to the lessors or the fair market value at the time of purchase. The office
lease expires in 2005 and has an aggregate annual rental of $378,000 (subject to
periodic upward adjustments based upon the consumer price index.) The Company
has an option to extend this lease for 60 months based on the then fair market
rent of the building.
The Company leases most of its sales, service and distribution facilities
under agreements ranging from one to eight years.
42 Varco International, Inc. and Subsidiaries
<PAGE>
Approximate minimum annual rental payments under noncancellable
operating leases as of December 31, 1999 are as follows:
(in thousands) Real Estate Equipment Total
--------------------------------------------------------
2000 $ 1,923 $ 2,572 $ 4,495
2001 1,456 1,458 2,914
2002 1,257 545 1,802
2003 1,111 182 1,293
2004 1,111 2 1,113
Thereafter 5,073 2 5,075
--------------------------------------------------------
$ 11,931 $ 4,761 $ 16,692
--------------------------------------------------------
Rent expense amounted to $7,639,000, $8,867,000, and $6,696,000 for 1999, 1998,
and 1997, respectively.
The Company is sometimes named as a defendant in litigation relating
to the products and services it provides. The Company insures against these
risks to the extent deemed prudent by its management, but no assurance can be
given that the nature and amount of such insurance will in every case fully
indemnify the Company against liabilities arising out of pending and future
legal proceedings relating to its ordinary business activities. The Company
provides for costs related to these contingencies when a loss is probable. It is
the opinion of management that it is remote that there will be an unfavorable
resolution in excess of amounts previously provided.
The Company has been designated as a potentially responsible party
("PRP") for two separate waste disposal sites. With respect to both of the
sites, numerous other PRPs have similarly been designated. The Company has
contribution agreements with other PRPs, and settlements and costs paid by the
Company have not been significant. In the opinion of the Company's management
neither these nor other environmental matters would have a material adverse
effect on the consolidated financial position of the Company.
note h.
benefit plans
The Company has a contributory profit sharing plan covering eligible
U.S. employees and certain foreign employees with more than one year's service.
Under the plan, the Company contributes from 2% to 20% of its net income (as
defined) at the discretion of the Board of Directors. The total contribution may
not exceed the maximum amount allowable for income tax purposes. Contributions
to the plan amounted to $4,600,000, $6,500,000 and $5,000,000, for 1999, 1998
and 1997, respectively. In 1993, the Company amended its Profit Sharing Plan to
designate a portion of profit sharing contributions for retiree healthcare and
life insurance benefits for certain eligible employees retiring after December
31, 1993. In 1995 the plan was further amended to include an employer matching
contribution. The Company's matching contribution amounted to $1,043,000
$1,084,000, and $831,000 in 1999, 1998 and 1997, respectively. The Company also
has a supplemental defined benefits plan providing retirement and death benefits
for a number of key employees. The plan is unfunded and the net pension
liability was $3,623,000 and $3,396,000 at December 31, 1999 and 1998,
respectively. Expense under the plan was $770,000, $723,000 and $652,000 in
1999, 1998, and 1997, respectively.
For certain former employees who retired prior to December 31, 1993,
healthcare and life insurance benefits are provided through insurance companies.
In 1993 the Company adopted FASB Statement No. 106, "Accounting for
Postretirement Benefits Other Than Pensions." The transition obligation is being
amortized over 20 years.
The assumed weighted-average annual rate of increase in the per capita
cost of covered benefits is 8.5% for 1999 and is assumed to decrease gradually
to 5.0% for 2010 and remain at that level thereafter. The health care cost trend
rate assumption has a significant effect on the amounts reported. For example,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1999, by $872,000 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for 1999 by $59,000.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 6.75% at December 31, 1999 and
1998, respectively.
43
<PAGE>
Net periodic postretirement benefit cost includes the following components:
Year ended December 31, (in thousands) 1999 1998 1997
-----------------------------------------------------------------------
Interest cost $ 669 $ 723 $ 856
Amortization of transition obligation 763 763 763
Amortization of (gain) (534) (513) (378)
-----------------------------------------------------------------------
$ 898 $ 973 $ 1,241
-----------------------------------------------------------------------
The following table sets forth the change in benefit obligation of the Company's
postretirement benefit plan:
December 31, (in thousands) 1999 1998
-----------------------------------------------------------------------
Changes in benefit obligation
Benefit obligation at beginning of year $ 10,356 $ 10,758
Interest cost 669 723
Benefits paid (813) (721)
Actuarial loss (gain) 422 (404)
-----------------------------------------------------------------------
Benefit obligation at end of year $ 10,634 $ 10,356
Funded status $(10,634) $(10,356)
Unrecognized actuarial (gain) (6,170) (7,126)
Unrecognized transition obligation 9,906 10,669
-----------------------------------------------------------------------
Accrued postretirement benefit obligation $ (6,898) $ (6,813)
-----------------------------------------------------------------------
The Company has an Executive Management Savings Plan and a Directors Saving Plan
(the "Plans") which permit eligible executives and the Company's non-employee
directors to defer a portion of their compensation. Participants in the Plans
may also participate in the Company's "split-dollar" life insurance program
pursuant to which the Company will purchase a life insurance policy for a
premium equal to the amounts deferred plus any additional amount required to
provide a minimum death benefit. Amounts payable to a participant under the
Plans are offset by any benefits paid under the participant's life insurance
policy. The life insurance policies are intended to provide security for the
payment of benefits under the Plans.
note i.
selected quarterly financial data (unaudited)
<TABLE>
<CAPTION>
(in thousands except per share data) 1stQuarter 2ndQuarter 3rdQuarter 4thQuarter
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenues $ 152,168 $ 155,877 $ 140,400 $ 144,307
Gross profit 47,321 45,605 43,744 37,604
Special charge 4,560
Income before income taxes 18,145 16,566 15,634 7,601
Income taxes 6,411 5,402 5,304 3,864
Net income 11,734 11,164 10,330 3,737
Basic income per share .18 .17 .16 .06
Diluted income per share .18 .17 .16 .06
1998
Revenues $ 150,191 $ 197,211 $ 193,985 $ 199,592
Gross profit 54,695 67,313 59,445 57,579
Special charge 8,500
Income before income taxes 22,760 29,997 22,574 15,826
Income taxes 7,775 10,268 7,610 5,166
Net income 14,985 19,729 14,964 10,660
Basic income per share .23 .31 .23 .16
Diluted income per share .23 .30 .23 .16
</TABLE>
44
<PAGE>
note j.
business segment and geographic information
The Company has five reportable segments-its five Divisions described in note a.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies except that certain
expenses, such as interest, amortization of certain intangibles, special charges
and general corporate expenses are not allocated to the Divisions. In addition,
certain assets including cash and cash equivalents, short-term investments,
deferred taxes, and certain intangible assets are held at Corporate.
Intersegment sales are recorded at the selling Division's cost plus
profit which is calculated as a fixed percentage mark-up on cost.
The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production
processes, and each Division has its own President that reports directly to the
Chief Operating Officer of the Company.
Selected financial information for the Company's reportable segments
for the years ended December 31, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
(in thousands) Varco Systems Varco BJ M/D Totco Shaffer Rigtech Total
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues from
external customers $ 200,556 $ 66,006 $ 69,540 $ 237,036 $ 16,589 $ 589,727
Intersegment revenues 1,431 170 2,466 4,067
Depreciation and
amortization 8,314 2,085 5,476 5,505 895 22,275
Segment income (loss) 41,634 16,006 619 20,022 (3,279) 75,002
Segment assets 94,978 30,932 75,776 128,624 24,099 354,409
Expenditures for
long-lived assets 5,051 1,111 199 2,558 3,301 12,220
1998
Revenues from
external customers $ 266,776 $ 95,959 $ 94,639 $ 256,238 $ 21,273 $ 734,885
Intersegment revenues 2,798 285 5,429 8,512
Depreciation and
amortization 6,851 1,488 5,980 6,611 959 21,889
Segment income (loss) 64,668 24,678 9,061 19,574 (222) 117,759
Segment assets 141,309 58,372 81,905 178,947 21,864 482,397
Expenditures for
long-lived assets 15,544 5,758 5,156 3,729 5,082 35,269
1997
Revenues from
external customers $ 165,510 $ 68,931 $ 90,601 $ 206,483 $ 13,372 $ 544,897
Intersegment revenues 3,372 320 3,399 41 7,132
Depreciation and
amortization 5,499 1,101 5,488 3,789 859 16,736
Segment income 36,272 15,966 20,054 27,102 785 100,179
Segment assets 114,695 47,504 89,036 151,985 17,735 420,955
Expenditures for
long-lived assets 11,429 3,086 3,731 16,467 408 35,121
</TABLE>
Varco International, Inc. and Subsidiaries 45
<PAGE>
The following reconciles segment income to consolidated income before income
taxes and segment assets and depreciation and amortization to consolidated
assets and consolidated depreciation and amortization.
(in thousands) 1999 1998 1997
-----------------------------------------------------------------------
Income
Segment income $ 75,002 $ 117,759 $100,179
Elimination of intercompany profit (966) (1,952) (1,558)
Unallocated amounts:
Corporate and other expenses (10,785) (14,327) (18,261)
Special charge (4,560) (8,500)
Interest expense (745) (1,823) (3,664)
-----------------------------------------------------------------------
Income before income taxes $ 57,946 $ 91,157 $ 76,696
-----------------------------------------------------------------------
Assets
Total assets for reportable segments $ 354,409 $ 482,397 $420,955
Assets held at Corporate 105,276 64,523 50,174
-----------------------------------------------------------------------
Total assets $ 459,685 $ 546,920 $471,129
-----------------------------------------------------------------------
Depreciation and amortization
Depreciation and amortization
for reportable segments $ 22,275 $ 21,889 $ 16,736
Other 774 232 235
-----------------------------------------------------------------------
Total depreciation and amortization $ 23,049 $ 22,121 $ 16,971
-----------------------------------------------------------------------
Information about the Company's revenue and long-lived assets by geographical
area for 1999, 1998 and 1997 are as follows:
(in thousands) 1999 1998 1997
-----------------------------------------------------------------------
Geographic Area Revenue
United States $ 311,577 $ 340,536 $240,706
United Kingdom 41,819 53,838 52,705
Brazil 28,046 68,123 26,945
Singapore 22,887 33,575 32,198
Rest of World 185,398 238,813 192,343
-----------------------------------------------------------------------
Total Revenue $ 589,727 $ 734,885 $544,897
-----------------------------------------------------------------------
Geographic Area-Long-Lived Assets
United States $ 93,557 $ 100,981 $100,115
United Kingdom 19,571 16,370 13,488
Netherlands 10,428 11,664 8,243
Singapore 2,948 3,203 1,918
Rest of World 2,164 2,730 2,920
-----------------------------------------------------------------------
Total Long-Lived Assets $ 128,668 $134,948 $126,684
-----------------------------------------------------------------------
During 1999 sales to three customers were $83,899,000, $83,306,000, and
$68,088,000. During 1998 sales to two customers were $122,010,000 and
$100,304,000. There were no sales to a single customer in 1997 in excess of 10%
of total sales.
46 Varco International, Inc. and Subsidiaries
<PAGE>
report of independent auditors
Shareholders and Board of Directors
Varco International, Inc.
We have audited the accompanying consolidated balance sheets of Varco
International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Varco International, Inc. and subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernest & Young LLP
Orange County, California
February 8, 2000
47
<PAGE>
stock information
Price Range of Varco Common Stock
The following table sets forth for the periods indicated the high and low sale
prices per share of Common Stock reported by the New York Stock Exchange. There
were 2,465 holders of record of the Common Stock as of the close of business on
February 23, 2000.
High Low High Low
1999 1998
First Quarter 12 15/16 7 First Quarter 28 15 1/4
Second Quarter 12 11/16 8 11/16 Second Quarter 32 3/16 18 13/16
Third Quarter 14 1/4 9 9/16 Third Quarter 21 3/8 7 1/8
Fourth Quarter 12 5/8 9 1/4 Fourth Quarter 13 3/8 5 7/16
Dividend Policy
The payment of dividends (other than dividends payable solely in shares of
Common Stock) on, and repurchases of, Common Stock are restricted by Varco's
revolving Credit Agreement with three financial institutions. Under the
revolving Credit Agreement, the amount available for the payment of dividends
on, and repurchases of, Common Stock is limited to $5,000,000 plus 25% of
Varco's consolidated net income arising after June 30, 1997, computed on a
cumulative basis. At December 31, 1999, the amount available for dividends and
repurchases under the Credit Agreement was $37,256,000. The Company may also
purchase or otherwise acquire shares of Common Stock from the proceeds of the
substantially concurrent sale of shares of Common Stock.
The Company has not paid a dividend on the Common Stock since 1982,
and the Board of Directors presently has no plans to resume the payment of
dividends.
Annual Report on Form 10-K
The Company's Annual Report on Form 10-K for the year ended December 31, 1999,
as filed with the Securities and Exchange Commission, is available by writing to
Donald L. Stichler, Vice-President, Controller-Treasurer and Secretary, Varco
International, Inc., 743 North Eckhoff Street, Orange, California 92868.
Common Stock
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol VRC.
Transfer Agent & Registrar
Harris Trust Company of California
Los Angeles, California
e-mail
[email protected]
web site
http://www.varco.com
48
<PAGE>
Corporate Headquarters
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
(714) 978-1900
Operating Units
M/D Totco
1200 Cypress Creek Road
Cedar Park, Texas 78613
(512) 340-5000
Shaffer
12950 West Little York
Houston, Texas 77041
(713) 937-5000
Rigtech
Badentoy Crescent
Badentoy Park
Portlethen
Aberdeen,
Scotland AB12 4YD
Varco BJ
Nijverheidsweg 45
4879 AP Etten-Leur
The Netherlands
and
12950 West Little York
Houston, Texas 77041
(713) 937-5500
Varco Systems
743 North Eckhoff Street
Orange, California 92868
(714) 978-1900
Independent Accountants
Ernst & Young LLP
Orange County
General Counsel
Pircher, Nichols &
Meeks
Los Angeles
Board of Directors
George Boyadjieff
Chairman of the Board
and Chief Executive Officer
of the Company
Walter B. Reinhold
Chairman Emeritus
of the Company
George S. Dotson
President
Helmerich & Payne
International Drilling Co.
Andre R. Horn*
Chairman Emeritus
Needham & Company, Inc.
Jack W. Knowlton*+
President
The Knowlton Co.
Leo J. Pircher
Partner
Pircher, Nichols & Meeks
Carroll W. Suggs
Chairman of the Board
Petroleum Helicopters, Inc.
Robert A. Teitsworth*+
Independent Oil & Gas
Producer
Eugene R. White
Retired Chairman of the Board
Amdahl Corporation
James D. Woods+
Chairman Emeritus
of Baker Hughes
Incorporated
* Member of the Audit Committee
+ Member of the Compensation Committee
Officers
Varco International, Inc.
George Boyadjieff
Chairman of the Board
and Chief Executive Officer
Michael W. Sutherlin
President and
Chief Operating Officer
Wallace K. Chan
Vice President -- Finance
and Chief Financial Officer
Robert J. Gondek
Vice President
Richard A. Kertson
Vice President -- Finance
and Chief Financial Officer
- --Retired
Mark A. Merit
Vice President
Roger D. Morgan
Vice President
Donald L. Stichler
Vice President
Controller -- Treasurer
and Secretary
Varco Systems
Roger D. Morgan
President
Brian L. Eidem
Vice President --
Product Development
Maurice E. Jacques
Senior Vice President --
Marketing
Andrew P. Lesko
Vice President --
Service and Training
Jama K. Meyer
Vice President --
Manufacturing and
Information Technology
Michael Williams
Vice President -- Sales
Dennis E. Yenzer
Vice President --
Product Engineering
Varco BJ
James Gregory Renfro
President
Robert R.D. deVries
Vice President --
Sales and Marketing
David B. Mason
Vice President --
Product Development
Rob C. Voesenek
Vice President -- Finance
M/D Totco
Robert J. Gondek
President
Ellis Greg Hottle
Vice President -- Sales
James P. Lawler
Vice President --
V-ICIS Installation
Gregory A. Martin
Vice President --
Rig Instrumentation
Charles A. Shamburg
Vice President -- Finance
Terry L. Tarvin
Vice President --
North American Operations
Keith A. Womer
Vice President --
Research and Development
Shaffer
Mark A. Merit
President
Thomas E. Bishop
Vice President --
Sales and Service
E. J. Devine
Vice President -- Finance
Tri C. Le
Vice President --
Engineering
Reid V. Nuttall
Vice President --
Information Technology
David L. O'Donnell
Vice President --
Quality Assurance
Mark D. Galagaza
Vice President --
Manufacturing
Rigtech
Dietmar Neidhardt
President
<PAGE>
Add to spine
varco international, inc 1999 annual report
Varco International, Inc.
743 North Eckhoff Street
Orange, California 92868
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF VARCO INTERNATIONAL, INC.
ALL 100% OWNED
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION ADDRESS
------------- -------
<S> <C> <C>
Best Industries, Inc. Texas 12950 West Little York
Houston, Texas 77041
--------------------
Martin-Decker TOTCO, Inc. Texas 1200 Cypress Creek Road
Cedar Park, Texas 78613
-----------------------
Varco Shaffer, Inc. Texas 12950 W. Little York
Houston, Texas 77041
--------------------
Varco International Inc Singapore No. 8 Sixth Lok Yang Road
Pte Ltd Jurong
Singapore 2262
--------------
Varco BJ Oil Tools B.V. The Netherlands Nijverheidsweg 45
4879 AP Etten-Leur
P.O. Box 17, 4870 AA Etten-Leur
The Netherlands
---------------
Varco (U.K.) Limited United Kingdom Forties Road, Montrose
Angus, Scotland
---------------
Varco BJ FSC Inc. Barbados 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco International (Canada)Ltd. Alberta, Bay 15 - 2916 5th Ave. N.E.L
Canada Calgary, Alberta T2A 6M7
Canada
------
Rig Technology Limited United Kingdom Badentoy Park Portlethen
Aberdeen, Scotland
------------------
Varco Del Venezuela CA Venezuela 743 No. Eckhoff Street
Orange, California 92668
------------------------
</TABLE>
<PAGE>
EXHIBIT 21
Page 2 of 2
JURISDICTION OF
INACTIVE SUBSIDIARIES INCORPORATION ADDRESS
- --------------------- ------------- -------
Varco Marine Tools
International, Inc. Texas 12950 West Little York
Houston, Texas 77041
--------------------
Varco-Disc California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Best Disc Texas 12950 West Little York
Houston, Texas 77041
---------------------
Varco Eastern, Inc. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Metrox, Inc. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco de Mexico
Holdings, Inc. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Singapore, Ltd. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Middle East California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Electronics, Inc. California 743 No. Eckhoff Street
Orange, California 92668
------------------------
Varco Electronics Disc California 743 No. Eckhoff Street
Orange, California 92668
------------------------
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements Number
2-66830, 2-96290, 33-36841, 33-62118, 33-61861, 33-61939 and 333-21681 on
Form S-8 of Varco International, Inc. and in the related Prospectuses of our
report dated February 8, 2000, with respect to the consolidated financial
statements and schedule of Varco International, Inc. included in the annual
report on Form 10-K for the year ended December 31, 1999.
/s/ Ernst & Young LLP
Orange County, California
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT INCLUDED IN ITS ANNUAL REPORT TO
SHAREHOLDERS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 72,606,000
<SECURITIES> 5,253,000
<RECEIVABLES> 143,353,000
<ALLOWANCES> (2,954,000)
<INVENTORY> 67,811,000
<CURRENT-ASSETS> 300,029,000
<PP&E> 166,017,000
<DEPRECIATION> (81,685,000)
<TOTAL-ASSETS> 459,685,000
<CURRENT-LIABILITIES> 83,176,000
<BONDS> 0
0
0
<COMMON> 161,886,000
<OTHER-SE> 198,862,000
<TOTAL-LIABILITY-AND-EQUITY> 459,685,000
<SALES> 589,727,000
<TOTAL-REVENUES> 592,752,000
<CGS> 415,453,000
<TOTAL-COSTS> 505,279,000
<OTHER-EXPENSES> 28,782,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 745,000
<INCOME-PRETAX> 57,946,000
<INCOME-TAX> 20,981,000
<INCOME-CONTINUING> 36,965,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,965,000
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.56
</TABLE>
