AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 333-50323
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
OEI INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 8711 76-552644
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2727 NORTH LOOP WEST, SUITE 400
HOUSTON, TEXAS 77009
PHONE: (713) 880-6200
FAX: (713) 880-6300
</TABLE>
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL L. BURROW
CHIEF EXECUTIVE OFFICER
OEI INTERNATIONAL, INC.
2727 NORTH LOOP WEST, SUITE 400
HOUSTON, TEXAS 77009
PHONE: (713) 880-6200
FAX: (713) 880-6300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
ROBERT G. REEDY STEPHEN P. FARRELL
PORTER & HEDGES, L.L.P. MORGAN, LEWIS & BOCKIUS LLP
700 LOUISIANA, 35TH FLOOR 101 PARK AVENUE
HOUSTON, TEXAS 77002-2764 NEW YORK, NEW YORK 10178-0060
PHONE: (713) 226-0600 PHONE: (212) 309-6000
FAX: (713) 226-0274 FAX: (212) 309-6273
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. The securities offered hereby may not be
sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be any sale of the
securities offered hereby in any state in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such state.
SUBJECT TO COMPLETION, DATED MAY 22, 1998
PROSPECTUS
4,300,000 Shares
OEI INTERNATIONAL, INC.
Common Stock
------------------
All of the 4,300,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by OEI
International, Inc. ("OEI"). Prior to the Offering, there has been no public
market for the Common Stock of OEI. It is currently estimated that the initial
public offering price will be between $13.00 and $15.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Application is being made to list the Common
Stock on the New York Stock Exchange under the symbol "ENG."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- ------------------------------------------------------------------------------
Per Share $ $ $
- ------------------------------------------------------------------------------
Total(3) $ $ $
================================================================================
(1) For information regarding indemnification of the several Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering payable by OEI, estimated at
$ .
(3) OEI has granted the Underwriters a 30-day option to purchase up to 645,000
additional shares of Common Stock solely to cover over-allotments, if any.
See "Underwriting." If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, and Proceeds to Company
will be $ , $ and $ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998 at the office of Salomon Smith Barney, 333 West 34th Street,
New York, NY 10001.
Salomon Smith Barney
CIBC Oppenheimer
Sanders Morris Mundy
, 1998
<PAGE>
[To be supplied by amendment]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
UNLESS OTHERWISE INDICATED, REFERENCES HEREIN TO (I) "OEI" MEAN OEI
INTERNATIONAL, INC., WHICH IS THE HOLDING COMPANY FORMED FOR THE PURPOSE OF
CONDUCTING THE OFFERING AND SIMULTANEOUSLY COMBINING, IN SEPARATE TRANSACTIONS
(THE "PENDING ACQUISITIONS"), FOUR OTHER ENGINEERING FIRMS (SUCH OTHER FIRMS
COLLECTIVELY, THE "ACQUIRED COMPANIES") WITH PETROCON ENGINEERING, INC. AND
ITS SUBSIDIARIES ("PETROCON") AND (II) THE "COMPANY" MEAN OEI AND ITS
SUBSIDIARIES, WHICH INCLUDE, AFTER GIVING EFFECT TO THE PENDING ACQUISITIONS,
PETROCON AND THE ACQUIRED COMPANIES.
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS, INCLUDING SHARE AND PER SHARE DATA, (I) GIVES EFFECT TO THE
PENDING ACQUISITIONS, (II) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS
NOT EXERCISED AND (III) GIVES EFFECT TO A 1,828.368-FOR-ONE SPLIT OF COMMON
STOCK EFFECTED ON APRIL 6, 1998.
THE COMPANY
The Company is a diversified engineering company providing engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally. The
Company's multidisciplined expertise enables it to offer its clients total
design and engineering solutions extending from project inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets. During 1997, the Company was involved in engineering
projects in 26 states and over 21 countries worldwide, generating pro forma
combined revenues of approximately $169.1 million, of which $125.1 million, or
74.0%, was from domestic projects, and $44.0 million, or 26.0%, was from
international work.
OEI was formed in October 1997 by Petrocon's management to conduct the
Offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. The Company, through Petrocon, has
grown significantly through acquisitions, having acquired more than 13
engineering firms since 1988. As a result of the Pending Acquisitions and the
Offering, the Company believes it will have greater financial, technical and
professional resources, which will enable it to aggressively continue its
successful acquisition strategy, enhance its technical capabilities and expand
its already diversified client base.
The Company operates in two principal segments: engineering services and
engineered systems. The Company's engineering services encompass all aspects of
the process, civil, structural, mechanical, instrument, electrical, geotechnical
and environmental engineering and design disciplines, providing its clients with
a single source for all their design, engineering and permitting needs. The
Company has designed and engineered facilities ranging from refineries,
petrochemical plants, pulp and paper processing plants and wastewater treatment
facilities, to food and beverage processing plants, pharmaceutical plants and
laboratories, electronics manufacturing facilities, hotels and casinos. The
Company's engineered systems are primarily custom designed, built, programmed
and installed on a fixed-price, turnkey basis and include control and
instrumentation systems and modular processing plants primarily for the oil and
gas, refining and chemical processing industries. During 1997, approximately
$123.5 million, or 73.0%, of the Company's pro forma combined revenues were
attributable to engineering services and $45.6 million, or 27.0%, were
attributable to engineered systems. The Company provides engineering services
and engineered systems to a number of Fortune 100 companies through a staff of
over 1,600 employees, including approximately 1,100 engineers and design
professionals as of March 31, 1998.
The Company has developed a strategic plan to:
o EXPAND AND DIVERSIFY THROUGH ACQUISITIONS. By continuing to
acquire well-established and highly respected local and regional firms
within the U.S., as well as foreign firms, the Company intends to (i)
expand into new geographic markets, (ii) broaden its areas of acknowledged
technical
3
<PAGE>
expertise, (iii) continue to strengthen its presence within existing
geographic markets and specialties and (iv) enhance its cross-marketing
opportunities.
o ACCELERATE INTERNAL GROWTH. The principal elements of the
Company's internal growth strategy are to (i) attract larger, higher margin
projects, (ii) leverage the Company's capabilities and expertise through
cross-marketing and (iii) develop partnering relationships and other
strategic alliances.
o IMPROVE OPERATING MARGINS. The Company intends to capitalize on
opportunities to achieve operating efficiencies and cost savings by
implementing strategies to (i) increase its overall staff utilization rate
by more effectively deploying and allocating its professional resources,
(ii) consolidate administrative functions and (iii) use its increased
purchasing power to gain volume discounts for itself and in connection with
its procurement services for its clients.
o OUTSOURCE CONSTRUCTION ACTIVITIES. The Company believes it can
offer clients the advantages of turnkey, lump sum projects, without
directly performing the construction activities associated with these
projects, by forming joint ventures and other partnering relationships with
construction firms. The Company believes it will benefit from such a
strategy by limiting its exposure to construction risks.
o OPERATE ON A DECENTRALIZED BASIS. The Company intends to manage
its operating companies on a decentralized basis, with local management
retaining responsibility for day-to-day operations, profitability and
growth. The Company believes that combining a decentralized management
structure with strong, centralized operating and financial controls geared
to accountability, will support the entrepreneurial and creative culture at
each of the operating companies, while allowing the Company to capitalize
on the local and regional market knowledge, goodwill, name recognition and
client relationships of each of the operating companies.
In recent years, the Company has observed and benefitted from a growing
demand for its services and systems due to, among other reasons, (i) an industry
trend towards outsourcing engineering functions as a result of reduced in-house
engineering staffs, (ii) rapid technological advancements in construction,
manufacturing and processing operations, (iii) the increased scope and
complexity of governmental, and particularly environmental, regulations and (iv)
increased capital expenditures resulting from aging infrastructures of the
United States and Western Europe, as well as the rapid growth and
industrialization of the lesser developed countries. According to ENGINEERING
NEWS-RECORD ("ENR"), its "Top 500 Design Firms," which include U.S.-based
engineer-constructor, engineer-architect and other hybrid organizations, as well
as exclusively design and planning firms, billed their clients an aggregate of
$32.7 billion in 1997. ENR also reports that the world's "Top 200 International
Design Firms" had worldwide revenues aggregating more than $34.5 billion in
1996, the latest year for which data is currently available. Industry
consultants estimate there are more than 28,000 engineering firms in the U.S.
alone, and the Company believes there are significant opportunities for an
established, professionally managed and well-capitalized engineering company to
consolidate regional, local and foreign engineering firms.
The Company's executive offices are located at 2727 North Loop West, Suite
400, Houston, Texas 77009, and its telephone number is (713) 880-6200.
4
<PAGE>
THE OFFERING
Common Stock offered by the
Company............................ 4,300,000
Common Stock to be outstanding after
the Offering(1).................... 11,835,494
Use of Proceeds...................... To pay the cash portion of the purchase
price for the Pending Acquisitions, to
repay expenses incurred in connection
with the organization of OEI and the
Offering and to repay certain
indebtedness of the Company. See "Use of
Proceeds."
Proposed NYSE symbol................. ENG
- ------------
(1) The number of shares estimated to be outstanding on completion of the
Offering consists of (i) 1,828,368 shares issued to the organizers of OEI,
including 609,395 shares issued to members of OEI's executive management,
(ii) 5,053,027 shares to be issued as consideration in the Pending
Acquisitions, (iii) the 4,300,000 shares being offered by this Prospectus
and (iv) 654,099 shares which will be placed in escrow, and which will be
subject to a maximum three-year earnout arrangement with respect to one of
the Pending Acquisitions (see "The Company -- Summary of Terms of the
Pending Acquisitions"). Such share number does not include (i) an aggregate
of 1,765,223 subject to options to be granted or allocated for grant on or
prior to the closing of the Offering under the Company's 1998 Incentive Plan
(the "Incentive Plan"), 996,839 shares of which have an exercise price
equal to the initial public offering price per share and 768,384 of which
will have a weighted average exercise price per share of $7.68 (see
"Management -- Incentive Plan") or (ii) an aggregate of 357,579 shares
subject to warrants at an exercise price per share of $9.42 to be issued in
connection with the acquisition of Petrocon (see "The Company -- Summary of
Terms of the Pending Acquisitions").
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" beginning immediately after this Prospectus Summary for information
that should be considered by prospective investors. Such risks include limited
combined operating history and risks related to integration and internal growth;
dependence on industry spending; dependence on large projects; risks related to
foreign operations; dependence on acquisitions for growth; need for additional
financing for acquisition program; risks associated with new credit facility;
pricing and related risk sharing; competition; risks associated with backlog;
risks inherent in completion guarantees; reliance on skilled professionals and
management personnel; proceeds of offering payable to affiliates and associates;
liability claims and insurance; fluctuations in quarterly operating results;
implications of government regulations; significant intangible assets; impact of
year 2000 compliance; significant voting control by existing management and
stockholders; potential effect of shares eligible for future sale on price of
Common Stock; immediate and substantial dilution; no prior market and possible
volatility of stock price; potential anti-takeover effects; and forward-looking
statements.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The Company will consummate the Pending Acquisitions concurrently with, and
as a condition to, the consummation of the Offering. For financial statement
presentation purposes, Petrocon is deemed to be the accounting acquirer. The
following summary historical financial data of Petrocon for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, have
been derived from audited consolidated financial statements of Petrocon included
elsewhere in this Prospectus. The following selected historical financial data
for Petrocon for the three months ended March 31, 1997 and 1998, and as of March
31, 1998, have been derived from unaudited consolidated financial statements of
Petrocon which have been prepared on the same basis as the audited financial
statements and, in the opinion of Petrocon, reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of such data.
The following summary unaudited pro forma combined financial data gives effect
to the Pending Acquisitions and certain other pro forma adjustments and is
adjusted to reflect the consummation of the Offering and the application of the
estimated net proceeds therefrom. See "Selected Historical and Pro Forma
Combined Financial Data" and the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PETROCON
----------------------------------------------------- PRO FORMA COMBINED(1)
THREE MONTHS ------------------------------
ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
------------------------------- -------------------- DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998 1997 1998
--------- --------- --------- --------- --------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 52,386 $ 61,851 $ 92,616 $ 19,496 $ 25,915 $ 169,065 $ 42,184
--------- --------- --------- --------- --------- ------------ ------------
Gross profit....................... 10,242 12,599 20,923 4,017 5,394 51,204 12,183
General and administrative
expenses.......................... 8,336 9,498 15,062 3,233 3,689 30,904(2) 8,386(2)
Goodwill amortization.............. 23 79 254 85 103 1,713(3) 468(3)
--------- --------- --------- --------- --------- ------------ ------------
Income from operations............. 1,883 3,022 5,607 699 1,602 18,587 3,329
Interest income (expense), net..... (456) (592) (1,569) (350) (386) (446)(4) (196) (4)
Other income (expense), net........ 382 86 290 88 (65) 421 (51)
--------- --------- --------- --------- --------- ------------ ------------
Income from continuing operations
before provision for income
taxes............................. 1,809 2,516 4,328 437 1,151 18,562 3,082
Provision for income taxes....... 599 1,051 1,574 159 479 8,010 1,379
--------- --------- --------- --------- --------- ------------ ------------
Income from continuing
operations........................ $ 1,210 $ 1,465 $ 2,754 $ 278 $ 672 $ 10,552 $ 1,703
========= ========= ========= ========= ========= ============ ============
Income per share from continuing
operations
Basic............................ $ .89 $ .14
============ ============
Diluted.......................... $ .86 $ .14
============ ============
Shares used in computing pro forma
income per share from continuing
operations
Basic............................ 11,835,494(4) 11,835,494(4)
============ ============
Diluted.......................... 12,299,454(4) 12,299,454(4)
============ ============
PETROCON
---------------------------------- MARCH 31, 1998
DECEMBER 31, MARCH 31, ------------------------------
-------------------- ----------- PRO FORMA
1996 1997 1998 COMBINED(1) AS ADJUSTED(5)
--------- --------- ----------- ------------ --------------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Working capital (deficit).......... $ (1,482) $ (3,807) $(3,610) $(32,556) $ 17,080
Total assets....................... 26,377 41,903 42,864 130,031 131,203
Total debt, including current
portion........................... 11,865 16,445 16,435 56,890 5,832
Stockholders' equity............... 6,753 13,919 14,638 48,437 101,423
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
- ------------
(1) The pro forma combined statement of operations data assume the following
transactions and events were consummated on January 1, 1997: (i) the
organization of OEI and its initial issuance of shares of Common Stock; (ii)
a 1,828.368 for-one split of the outstanding Common Stock; (iii) the Pending
Acquisitions; and (iv) the closing of the Offering and the application of
its estimated net proceeds, and are not necessarily indicative of the
results the Company would have obtained had these events actually occurred
at that date or of the Company's future results. The pro forma combined
balance sheet data assume that items (i), (ii) and (iii) above occurred on
March 31, 1998 and that the net indebtedness incurred by the Company since
March 31, 1998 occurred and existed on that date. The pro forma combined
financial data (i) are based on preliminary estimates, available information
and certain assumptions that management deems appropriate and (ii) should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus.
(2) The pro forma combined statement of operations data include the effect of:
(i) a reduction in compensation and benefits of approximately $2.7 million
for the year ended December 31, 1997 and $0.1 million for the three months
ended March 31, 1998 agreed to as part of the purchase agreements by certain
owners and key employees of the Acquired Companies pursuant to the Pending
Acquisitions; (ii) the elimination of a non-cash, non-recurring compensation
charge of approximately $6.4 million by the Company for the year ended
December 31, 1997 and $0.4 million for the three months ended March 31,
1998; and (iii) distributions by certain Acquired Companies of certain
assets prior to the closing of the Pending Acquisitions. The Unaudited Pro
Forma Combined Financial Statements do not reflect other potential cost
savings, revenue growth or costs associated with being a public company.
(3) Reflects amortization of the goodwill to be recorded over a 40-year period
as a result of the Pending Acquisitions.
(4) Computed on a basis described in Note 4 of Notes to the Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects the closing of the Offering and the Company's application of the
net proceeds therefrom and repayment of $1.4 million at March 31, 1998 of
Petrocon indebtedness from cash on hand. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
Prior to making an investment decision, prospective purchasers of the
Common Stock offered hereby should consider carefully all of the information set
forth in this Prospectus and, particularly, should evaluate the following risk
factors.
LIMITED COMBINED OPERATING HISTORY; RISKS RELATED TO INTEGRATION AND INTERNAL
GROWTH
Petrocon and the Acquired Companies have operated, and will continue to
operate prior to the closing of the Pending Acquisitions, as separate,
independent businesses. Consequently, the pro forma financial information
contained herein may not be indicative of the Company's future operating results
and financial condition. The Company will rely initially on the separate
accounting and information systems of Petrocon and each of the Acquired
Companies, but the success of the Company will depend, in part, on the extent to
which it is able to centralize and integrate necessary systems and functions,
including accounting, financial reporting and job costing systems, among the
Acquired Companies. The inability of the Company to successfully centralize and
integrate these systems and functions could have a material adverse effect on
the Company's business, financial condition and results of operations, and could
adversely affect the Company's implementation of its acquisition and operating
strategies. See "Business -- Operations."
The success of the Company's internal growth strategy will depend on
various factors, including the demand for the Company's services and systems and
the Company's ability to (i) attract larger, higher margin projects, (ii)
leverage its capabilities and expertise through cross-marketing, (iii) develop
partnering relationships and other strategic alliances and (iv) achieve client
acceptance of project processes through which the Company intends to share work,
professionals and other resources among its operating companies. These factors
are, at least in part, beyond the Company's control, and there can be no
assurance the Company's internal growth strategy will be successful.
DEPENDENCE ON INDUSTRY SPENDING
The demand for the Company's services and systems depends on the level of
capital and maintenance expenditures by its industrial, commercial and
institutional clients, particularly those private sector clients involved in the
oil and gas, refining and petrochemical industries. In 1997, the revenues
attributable to the oil and gas, refining and petrochemical industries
represented $141.2 million, or 83.5% of the Company's pro forma combined
revenues. These industries historically have been cyclical in nature and
vulnerable to many of the same national and regional economic factors that
affect the economy in general. In addition, if the current or any future decline
in energy prices were to be sustained over a significant period of time, the
capital and maintenance expenditures within these industries may be adversely
affected, which could have a material adverse effect on the Company's operating
results. Other factors influencing private and public spending levels include
general economic conditions, inflation, interest rates, the availability of
financing, the availability and price of raw materials, and political
considerations.
DEPENDENCE ON LARGE PROJECTS
The Company historically has not had a continuing dependence on any single
client or a limited group of clients; however, one or a few clients have
contributed in the past, and may in the future contribute, a substantial portion
of the Company's revenues in any one year or over a period of several
consecutive years due to the size of particular engineering projects. In 1997,
the Company's five largest projects represented $14.4 million, or 8.5%, of the
Company's pro forma combined revenues. Accordingly, the Company must continually
obtain significant new engineering projects, whether from existing or new
clients, in order to generate revenues in the future as existing projects are
completed. The failure to do so would have a material adverse effect on the
Company's operating results. See "Business -- Clients."
RISKS RELATED TO FOREIGN OPERATIONS
In 1997, the Company derived approximately $44.0 million, or approximately
26.0%, of its pro forma combined revenues from foreign projects. Also, Petrocon
Arabia Limited ("PAL"), in which the Company has a 50% interest, had 1997
revenues of approximately $16.4 million, which are not included in the
8
<PAGE>
Company's 1997 pro forma combined revenues because the Company accounts for its
interest in PAL by the equity method. Most of PAL's revenues were derived from
work in the Middle East. International engineering and design work involves
risks that are normally associated with doing business overseas, such as risks
of war, terrorism, expropriation, civil unrest, political and economic
instability, nationalization of assets, currency fluctuation and repatriation
risks, overlap of different tax structures and sometimes ill-defined or
underdeveloped systems of contract laws and commercial codes. Additionally,
certain international risks are particular to engineering and construction,
including (i) open-ended bonds or other security instruments to guarantee bids
and performance, (ii) reliance on host country subcontractors, suppliers and
personnel, (iii) permitting, construction and payment delays occasioned by
bureaucratic inefficiencies, and (iv) difficulties in obtaining required or
appropriate insurance. See "Business -- Foreign Operations."
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring engineering and design
firms which expand or complement the Company's existing operations. The
Company's acquisition strategy presents risks that, singly or in combination,
could materially adversely affect its business and financial performance. These
risks include those inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities and potential profitability of acquisition
candidates, the possibility of an adverse effect on existing operations of the
Company from the diversion of management attention and resources to
acquisitions, and the possible loss of acquired client bases and key personnel,
including engineers, designers, scientists and other professionals. The success
of the Company's acquisition strategy will depend on the extent to which
acquisition candidates continue to be available and whether the Company will be
able to acquire, successfully integrate and profitably manage additional
businesses. The Company believes that competitive and other pressures are
causing engineering firms of all sizes to combine at the local, regional,
national and international levels. Therefore, competition for acquisition
candidates could materially increase their cost. The timing, size and success of
the Company's acquisition efforts, and the associated capital commitments,
cannot readily be predicted. Accordingly, no assurance can be given the
Company's acquisition strategy will succeed. See "Business -- Business
Strategy" and "Business -- Acquisition Strategy."
NEED FOR ADDITIONAL FINANCING FOR ACQUISITION PROGRAM
All of the net proceeds of the Offering will be used in connection with the
Pending Acquisitions. See "Use of Proceeds." The Company's acquisition
strategy will require substantial additional capital. The Company currently
intends to use cash and shares of Common Stock in making future acquisitions.
Using internally generated cash or debt to complete acquisitions could
substantially limit the Company's operational and financial flexibility. The
extent to which the Company will be able or willing to use Common Stock for
acquisitions will depend on the market value of the Common Stock from time to
time and the willingness of potential sellers to accept the Common Stock as full
or partial payment. Using Common Stock for acquisitions may result in a
significant dilution to then existing Company stockholders. To the extent the
Company is unable to use Common Stock to make future acquisitions, its growth
may be limited by its ability to raise capital for this purpose through debt or
additional equity financings. The Company cannot assure that it will be able to
obtain the necessary capital to finance a successful acquisition program while
meeting its other cash needs. If the Company is unable to obtain additional
capital on acceptable terms, it may be required to reduce the scope of its
presently anticipated expansion. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Pro Forma Combined -- Liquidity
and Capital Resources."
RISKS ASSOCIATED WITH NEW CREDIT FACILITY
The Company has recently received a commitment letter from
to provide the Company with a $ million credit
facility (the "New Credit Facility"), which may be used for refinancing of
certain indebtedness of the Company, acquisitions, working capital and other
general corporate purposes. The Company expects the New Credit Facility will
require compliance with various affirmative and negative covenants (including
maintenance of certain financial ratios) which could limit the Company's
operational and financial flexibility. The New Credit Facility is subject to
negotiation of
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definitive documentation and certain other customary conditions, and there can
be no assurance that the Company will be able to obtain the New Credit Facility
on terms acceptable to the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Pro Forma
Combined -- Liquidity and Capital Resources."
PRICING AND RELATED RISK SHARING
Historically, a high percentage of the Company's projects have been
undertaken on a relatively riskless cost plus fee (either fixed or a percentage)
basis. However, project owners are increasingly seeking, and the Company and its
competitors are accepting and even initiating, pricing alternatives designed to
shift to the service provider, or requiring the service provider to at least
share in, the risks of cost overruns and inefficiencies in the delivery of
services. These alternatives include fixed-price, guaranteed maximum price,
incentive fee, competitive bidding and other "value based" pricing
arrangements. The Company expects this trend to continue in the future, with the
result that the Company will be required to maintain and continually improve,
relative to its competitors, both the precision of its cost estimates and the
efficiency with which it delivers its services. If the Company's discipline in
either of these areas declines or fails to keep pace with that of its
competitors, both the volume of awarded projects and their margins may be
affected adversely. See "-- Competition," "Business -- Contracts" and
"Business -- Competition."
COMPETITION
The Company competes nationally and internationally with many engineering
and construction management firms that are substantially larger and have
substantially greater financial, professional and other resources than the
Company. The Company also faces competition from many regional and local firms.
Barriers to entry for engineering firms are relatively low, and the risk of new
competitors entering the market, particularly in local and regional areas, and
particularly with respect to speciality areas, is high. See
"Business -- Competition."
RISKS ASSOCIATED WITH BACKLOG
The Company's combined backlog was $101.6 million at December 31, 1997
compared to $63.3 million at December 31, 1996, and was $86.2 million at March
31, 1998. The combined backlog, most of which is expected to be completed within
the next 12 months, includes only contracts for which the Company has received
authorization to proceed with the work. Although this backlog represents only
work which is under contract, it is not necessarily indicative of the Company's
future revenues or earnings related to the performance of the work included in
backlog. The Company's contracts are subject to standard industry cancellation
provisions, including cancellation on short notice or upon completion of
designated stages. Authorizations to proceed are for periods generally shorter
than the duration of the work the Company expects to perform for a particular
client, and substantial scope-of-work adjustments are common. For these and
other reasons beyond the Company's control, work represented in backlog may be
delayed or cancelled, and backlog should not be relied upon as an indicator of
the Company's future performance. See "Business -- Backlog."
RISKS INHERENT IN COMPLETION GUARANTEES
In certain instances, the Company guarantees project completion by a
scheduled date or by achievement of certain acceptance and performance testing
or milestone levels. At December 31, 1997, the Company had underway projects
aggregating approximately $46.9 million in contract amount, which are subject to
some form of completion or performance guarantee. If the Company fails to meet
any required completion or performance requirement and is unable to remedy the
failure within any applicable cure period, the Company could incur financial
penalties in the form of liquidated damages or could be required to redesign or
repeat the service or replace or repair the system. While the Company has in the
past undertaken a limited number of guaranteed projects and has not incurred
material obligations with respect to such projects, the Company may in the
future undertake more guaranteed projects, which could have a material adverse
effect on the Company if it is unable to satisfy future guarantee requirements.
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RELIANCE ON SKILLED PROFESSIONALS AND MANAGEMENT PERSONNEL
The Company derives its revenues from, and its reputation is based on, the
efforts of engineers, scientists, chemists, designers and other highly skilled
and experienced technical personnel. Demand for these professionals is high,
their qualifications render them particularly mobile, and they are particularly
attentive to their workplace environment. The on-going risk of losing qualified
and experienced professionals from the Company could increase because of actual
or perceived changes resulting from becoming part of a larger and perhaps
culturally different organization. The business of the Company could be affected
adversely if the Company's ability to retain skilled professionals becomes
impaired for any reason.
The Company also depends in large part on the continuing efforts of its
executive officers and senior management, and will likely depend on the senior
management of any significant business it acquires in the future. That
dependence may be intensified by the Company's decentralized operating strategy.
If members of senior management leave the Company, until the Company attracts
and retains qualified replacements, the Company's business or prospects could be
affected adversely. Further, the historical growth of the Company can in some
measure be attributed to the entrepreneurial spirit of the senior management of
the Acquired Companies. To the extent the Company, as a larger, more structured
organization than any of the Acquired Companies, fails to sustain this
entrepreneurial attitude, the impetus for the Company's continued growth
following the Pending Acquisitions could diminish.
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES AND ASSOCIATES
The net proceeds from the Offering will be used: (i) to pay the cash
portion of the aggregate purchase price for the Pending Acquisitions
(approximately $27.8 million); (ii) to repay certain outstanding indebtedness of
the Company (approximately $21.8 million); (iii) to place in escrow
approximately $3.4 million, which will be subject to a maximum three year
earnout arrangement with respect to one of the Pending Acquisitions; and (iv) to
pay certain expenses of the Offering and the Pending Acquisitions. See "Use of
Proceeds." The cash payable to the former stockholders of Petrocon and the
Acquired Companies will include approximately $2.7 million payable to persons
who will become directors or executive officers of OEI. The Offering will enable
the Company to repay $2.5 million of advances by Equus II Incorporated ("Equus
II"), which were used to pay expenses of the Offering, and will benefit the
existing stockholders of the Company by creating a public market for the Common
Stock. For a more detailed discussion of the use of proceeds of the Offering,
and the benefits to be received by persons who are or will become directors or
executive officers of OEI or beneficial holders of 5% or more of the Common
Stock on consummation of the Offering and the Pending Acquisitions, see "Use of
Proceeds" and "Certain Transactions -- Pending Acquisitions Involving Certain
Officers, Directors and Stockholders."
LIABILITY CLAIMS AND INSURANCE
Providing engineering and design services involves the risk of contract,
professional errors and omissions and other liability claims, as well as adverse
publicity. Further, many of the Company's contracts with its clients require the
Company to indemnify the clients not only for the Company's negligence, but also
for the concurrent negligence of the clients. While the Company maintains
liability insurance coverage, including for professional errors and omissions,
in amounts it considers adequate, there can be no assurance that claims outside
of or exceeding its insurance coverage will not be made, or that the Company
will be able to continue to obtain adequate insurance coverage at rates it
considers reasonable. See "Business -- Risk Management; Litigation."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Holidays and inclement weather during the Company's fourth quarter exert
downward pressure on the Company's revenues for that quarter, which is only
partially offset by the year-end efforts on the part of many of the Company's
clients, particularly in the energy and public sectors, to spend any remaining
funds budgeted for capital expenditures during the year. The annual budgeting
and approval process under which these clients operate is normally not completed
until after the beginning of each new year, which, when combined with continuing
inclement weather, can depress the Company's operating results for the first
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quarter. Principally due to these factors, the Company's revenues during its
first and fourth quarters tend to be, but are not always, lower than in its
second and third quarters.
IMPLICATIONS OF GOVERNMENT REGULATIONS
The Company and its clients are subject to various foreign, federal, state
and local laws and regulations, including those relating to the environment,
health and safety. To date, the Company has mostly benefited from these laws and
regulations because of their impact on its clients, and the cost of the
Company's own compliance has not been material, but the fact that such laws and
regulations are changed frequently makes uncertain both the Company's future
benefits and costs associated with such laws and regulations. The modification
of existing laws or regulations or the adoption of new laws or regulations
affecting the Company's clients or its own operations or industry could
adversely affect the Company.
SIGNIFICANT INTANGIBLE ASSETS
As a result of the Pending Acquisitions, goodwill will account for a
material portion of the Company's total assets. On a pro forma combined basis,
goodwill was recorded at approximately $67.6 million at March 31, 1998,
representing approximately 52.0% of the Company's total assets. The Company's
goodwill is to be amortized over a 40-year period resulting in annual non-cash
amortization charges against income of approximately $1.7 million. The Company
may record additional goodwill and related amortization charges in connection
with the implementation of its acquisition strategy. See "-- Dependence on
Acquisitions for Growth."
IMPACT OF YEAR 2000 COMPLIANCE
The Company uses computer software programs and operating systems in its
internal operations, including applications used in financial business systems
and various administration functions, and also utilizes software programs in
providing certain engineering services and engineered systems. To the extent
that these software applications contain code that is unable to appropriately
interpret upcoming calendar year 2000, some level of modification of such source
code or applications will be necessary. Prior to the year 2000, the Company
expects to incur approximately $2.5 million of capital expenditures for upgraded
computer software and hardware relating to financial reporting and certain
engineering applications, all of which will be year 2000 compliant. The Company
is currently in the process of evaluating its other computer software programs
and operating systems to ensure such programs and systems will be able to
process transactions in the year 2000. The Company does not believe that the
costs to modify its other programs or systems will be material to its financial
condition or results of operations. The Company does not currently have
information concerning the year 2000 compliance of its clients and suppliers.
However, since the Company does not generally interface its computer systems
with its clients or suppliers, the failure of the Company's clients and
suppliers to achieve year 2000 compliance should not have a material adverse
effect on the Company's financial condition and results of operations.
SIGNIFICANT VOTING CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
Upon closing of the Pending Acquisitions and the Offering, the respective
stockholders of Petrocon and the Acquired Companies, OEI's initial financing
source (Equus II) and the executive officers of OEI (all but one of whom is also
an executive officer of Petrocon), will beneficially own in the aggregate
approximately 63.7% of the outstanding Common Stock. If these persons were to
act in concert, they would be able to exercise control over the Company's
affairs, including the election of the entire Board of Directors and, subject to
Section 203 of the Delaware General Corporation Law (the "DGCL"), any matter
submitted to a vote of stockholders. See "Principal Stockholders."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
RESALES OF EXISTING SHARES. Upon closing of the Pending Acquisitions and
the Offering, 11,835,494 shares of Common Stock will be outstanding. The
4,300,000 shares sold in the Offering (other than shares purchased by affiliates
of the Company) will be freely tradable. The remaining shares outstanding may be
resold publicly only following their effective registration under the Securities
Act of 1933, as amended (the
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"Securities Act"), or under an available exemption from the registration
requirements of the Securities Act, such as the exemption provided by Securities
Act Rule 144 promulgated by the Securities and Exchange Commission (the
"SEC"). Under Rule 144, all those remaining shares will be eligible for Rule
144 sales, subject to certain volume limitations and other requirements, on the
day following the first anniversary of the date the Offering closes. The holders
of a substantial number of those remaining shares have certain registration
rights granted by OEI in connection with the Pending Acquisitions, subject to a
two-year lockup period.
EXERCISES OF OPTIONS AND WARRANTS. Upon closing of the Offering, options
and warrants to purchase up to a total of 2,122,802 shares of Common Stock will
be outstanding, of which options and warrants to purchase 566,076 shares will be
exercisable immediately after the closing. The Company intends to register all
the shares subject to options granted under the Incentive Plan and the Company's
1998 Employee Stock Purchase Plan (the "Employee Purchase Plan") under the
Securities Act for public resale.
LOCKUP ARRANGEMENT. The Company, the OEI directors, executive officers and
current stockholders (including Equus II) and all persons who acquire shares of
Common Stock in connection with the Pending Acquisitions have agreed not to
offer, sell or otherwise dispose of any shares for a period of two years
following the date of this Prospectus without the prior written consent of Smith
Barney Inc., except that the Company may issue, subject to certain conditions,
Common Stock in connection with acquisitions and pursuant to awards under the
Incentive Plan and the Employee Purchase Plan (see "Management -- Incentive
Plan"). Smith Barney, Inc. will evaluate various factors in determining whether
to consent to any proposed transfer during the two-year restriction period,
including the reason for the transfer, the number of shares requested to be
transferred, the potential effect of the transfer on the market price of the
Common Stock, the number of shares previously allowed to be transferred and
other relevant circumstances at the time of the transfer.
FUTURE REGISTRATIONS FOR ACQUISITIONS. The Company intends to register
3,000,000 additional shares of Common Stock under the Securities Act during
1998, for use in connection with future acquisitions. These shares generally
will be freely tradable after their issuance by persons not affiliated with the
Company, unless the Company is able to contractually restrict their resale.
Sales of these shares during the Lockup Period would require the prior written
consent of Smith Barney, Inc.
Availability for sale, or sale, of the shares of Common Stock eligible for
future sale could adversely affect the market price of the Common Stock from
time to time. See "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $11.15 per
share and (ii) may experience further dilution in that value from future
issuances of shares of Common Stock. See "Dilution."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Before the Offering, no public market for the Common Stock has existed, and
the initial public offering price negotiated by the Company and the
representatives of the Underwriters may not be indicative of the price at which
the Common Stock will trade after the Offering. See "Underwriting" for the
factors to be considered in determining the initial public offering price. The
Company has applied for listing of the Common Stock on the New York Stock
Exchange, but no assurance can be given that an active trading market for the
Common Stock will develop or, if it does, that it will continue after the
Offering. The market price of the Common Stock after the Offering may be subject
to significant fluctuations from time to time in response to many factors,
including variations in the reported financial results of the Company and
changing conditions in the economy in general, in the Company's industry in
particular, or in the industry of one of the Company's major client groups. In
addition, the stock markets experience significant price and volume volatility
from time to time which may affect the market price of the Common Stock for
reasons unrelated to the Company or its performance.
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POTENTIAL ANTI-TAKEOVER EFFECTS
OEI's Certificate of Incorporation, as amended (the "Charter"),
authorizes the issuance, without stockholder approval, of one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends, distributions and voting rights) as the board of directors
of OEI (the "Board of Directors") may determine. See "Description of Capital
Stock -- Preferred Stock."
Certain provisions of the Charter, OEI's bylaws and the DGCL may delay,
discourage, inhibit, prevent or render more difficult an attempt to obtain
control of the Company, whether by means of a tender offer, business
combination, proxy contest or otherwise. These provisions include the Charter
authorization of "blank check" preferred stock, classification of the Board of
Directors, a limitation on the removal of directors only for cause, and then
only on approval of holders of two-thirds of the outstanding voting stock, a
restriction on the ability of stockholders to take actions by written consent
and a DGCL restriction on business combinations with certain interested parties.
See "Description of Capital Stock."
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Prospectus may include forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements may be
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Business -- Business Strategy,"
"Business -- Acquisition Strategy," "Business -- Business Development and
Marketing" and "Business -- Clients," as well as in this Prospectus
generally. While forward-looking statements are sometimes presented with
numerical specificity, they are based on a variety of assumptions made by
management regarding future circumstances over which the Company has little or
no control. A number of important factors, including those identified in this
paragraph or discussed elsewhere in this Prospectus, could cause the Company's
actual results to differ materially from those depicted in forward-looking
statements or financial information. Actual results may differ from
forward-looking results for a number of reasons, including the following: (i)
changes in world economic conditions (including, but not limited to, the
potential instability of governments and legal systems in countries in which the
Company conducts business, and significant changes in energy prices and currency
valuations); (ii) changes in client demands as they affect levels of capital and
maintenance expenditures (including, but not limited to, the effect of strikes
at clients' facilities, variations in backlog and the impact of changes in
business cycles); (iii) competitive factors (including, but not limited to,
changes in client contract terms and procedures and the introduction of new
design and other processes by existing and new competitors); (iv) changes in
operating costs (including, but not limited to, the effect of changes in the
Company's engineering processes, changes in costs associated with varying levels
of operations, changes resulting from different levels of clients' demands and
changes in cost of labor and benefits); (v) the success of the Company's
operating plan (including, but not limited to, its ability to achieve the total
planned benefits of its strategic plan, its ability to integrate acquisitions
into Company operations, and the ability of recently acquired companies to
achieve satisfactory operating results); and (vi) unanticipated litigation,
claims or assessments (including, but not limited to, claims or problems related
to contract, professional errors and omissions and other liability claims).
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THE COMPANY
OEI was formed in October 1997 by Petrocon's management to conduct the
Offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. Petrocon is a multidisciplined
engineering company, which provides a full range of process, civil, structural,
mechanical, instrument and electrical engineering and design services,
principally to the oil and gas, petroleum processing and pulp and paper
industries both domestically and abroad. Petrocon also designs, engineers,
programs and installs automated control systems for specific applications,
primarily for the downstream petroleum and chemical processing industries.
Petrocon, formed in 1988, is headquartered in Beaumont, Texas, with offices in
Houston, Texas, Lake Charles and Baton Rouge, Louisiana, Saudi Arabia and Abu
Dhabi. At March 31, 1998, Petrocon had approximately 1,171 employees, including
839 engineers, designers and draftsmen and 124 construction managers, inspectors
and technicians. Petrocon has experienced significant growth in its ten-year
history, having increased its revenues from approximately $4.0 million in 1988,
to approximately $92.6 million in 1997, in large part through acquisitions.
Since 1988, Petrocon has made more than 13 acquisitions, gaining in the process
valuable experience in negotiating, closing and successfully integrating
acquisitions. According to ENR'S 1997 ranking of the top 500 engineering and
design firms in the United States, Petrocon ranked 58th in terms of client
billings.
Concurrently with, and as a condition to, the closing of the Offering, OEI
will consummate the Pending Acquisitions. For a description of the transactions
in which Petrocon and the Acquired Companies will be acquired and the
consideration to be paid by OEI for each of them, see "-- Summary of Terms of
the Pending Acquisitions" and "Certain Transactions -- Organization of OEI."
The Acquired Companies are:
PS&S: Paulus, Sokolowski and Sartor, Inc. ("PS&S") provides total
design, engineering, geotechnical and environmental services to the
pharmaceutical, industrial, entertainment and utility industries, as well as to
commercial, institutional and public sector clients in the United States and
abroad. PS&S was founded in 1962 and is headquartered in Warren, New Jersey,
with regional offices in Atlantic City, New Jersey and Tampa, Florida. At March
31, 1998, PS&S's staff consisted of approximately 204 employees, including over
160 engineers, designers and draftsmen. For 1997, PS&S had revenues of
approximately $21.7 million and was ranked 253rd, based on client billings, in
ENR'S ranking of the top 500 engineering and design firms in the United States.
GEI: Gulsby Engineering, Inc. (together with its subsidiary, "GEI")
designs, engineers, builds and installs modular processing plants for the oil
and gas industry. GEI was founded in 1977 and maintains its offices and
fabrication facilities in Houston, Texas. While GEI specializes in cryogenic
turbo-expander units which employ extremely low temperatures in the processing
of natural gas, it also designs and fabricates a large range of modular
treatment and processing facilities for the refining and petrochemical
industries, including plants for gas treatment, sulfur, dehydration and
fractionation, crude stabilization and production, MTBE, waste heat recovery,
cogeneration and amine treatment. At March 31, 1998, GEI's staff consisted of
approximately 54 employees, including a team of 13 chemical, electrical and
mechanical engineers and designers. For 1997, GEI had revenues of approximately
$18.3 million.
W-I: W-Industries, Inc. ("W-I") designs, engineers, assembles, programs
and installs control and instrumentation systems for specific applications in
the upstream and offshore oil and gas and processing industries, including both
conventional pneumatic and hydraulic control systems and sophisticated
microprocessor-based controls employing programmable logic. W-I was founded in
1984 and maintains its headquarters and engineering and assembly plant
facilities in Houston, Texas. At March 31, 1998, W-I's staff consisted of
approximately 103 employees, including 17 engineers and designers representing
the instrument, electrical and mechanical disciplines. For 1997, W-I had
revenues of approximately $20.6 million.
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C&I: Chemical & Industrial Engineering, Inc. ("C&I") provides full
engineering, procurement and construction management services, with
state-of-the-art 3D modeling capabilities, principally to the refining,
chemical, food and beverage, pharmaceutical and utility industries, both
domestically and internationally. C&I was founded in 1983 and maintains its
executive and engineering offices in Louisville, Kentucky. At March 31, 1998,
C&I's staff consisted of approximately 107 employees, including approximately 79
engineers. For 1997, C&I had revenues of approximately $15.9 million and was
ranked 338th, based on client billings, in ENR'S 1997 ranking of the top 500
engineering and design firms in the United States.
SUMMARY OF TERMS OF THE PENDING ACQUISITIONS: Subject to certain
adjustments described below, the aggregate consideration payable to consummate
the Pending Acquisitions consists of (i) approximately $27.8 million in cash,
(ii) 5,053,027 shares of Common Stock, (iii) 654,099 shares of Common Stock and
approximately $3.4 million, which will be placed in escrow, and which will be
subject to a maximum three-year earnout arrangement with respect to one of the
Pending Acquisitions, (iv) options to purchase 768,384 shares of Common Stock to
be issued in connection with the Petrocon acquisition (the "Replacement
Options") and (v) warrants to purchase 357,579 shares of Common Stock to be
issued in connection with the Petrocon acquisition (the "Replacement
Warrants"). The Replacement Options and Replacement Warrants will be in the
money at the closing of the Offering in the aggregate amount of approximately
$6.5 million (assuming an initial public offering price of $14.00 per share).
The Company will assume and repay upon or shortly after the Closing of the
Offering, certain of the then outstanding indebtedness of Petrocon and the
Acquired Companies, which as of March 31, 1998 aggregated approximately $28.7
million ($21.8 million of which will be repaid from proceeds of the Offering and
$1.4 million of which will be repaid from cash on hand), attributable as
follows: Petrocon -- $16.4 million; PS&S -- $3.2 million; GEI -- $4.6 million;
W-I -- $4.3 million; and C&I -- $0.1 million. The Company will also repay to
Equus II funds advanced to OEI to pay expenses of the Offering (estimated to be
approximately $2.5 million as of the closing of the Offering). Before the
closing of the Pending Acquisitions, W-I and PS&S, each of which is an S
corporation, are expected to distribute cash to their respective stockholders in
amounts accumulated in their respective accumulated adjustment accounts ("AAA
accounts") after December 31, 1997. An AAA account generally represents
undistributed earnings of an S corporation on which taxes have been or will be
paid by its stockholders. Before the closing of the Pending Acquisitions,
certain of the Acquired Companies will make other distributions to their
stockholders of certain assets and related liabilities with an aggregate net
book value of approximately $9.1 million.
The Replacement Options and Replacement Warrants to be issued in the
Petrocon acquisition will replace options and warrants to purchase shares of
Petrocon common stock granted to employees and issued in connection with a prior
Petrocon acquisition. The aggregate purchase price which would have otherwise
been payable for Petrocon has been reduced by $4.2 million as a result of the
grant of the Replacement Options and Replacement Warrants.
The purchase price for Petrocon was reduced by $2.0 million based on a
negotiated discounted value of projected annual earnout payments due by Petrocon
to the former shareholders of RPM Engineering, Inc. ("RPM") through 2001 in
connection with the RPM acquisition in October 1996. The additional earnout
payments, if any, will be accounted for as additional goodwill and amortized
over the applicable amortization period. See Note 15 to the Notes to the
Petrocon Consolidated Financial Statements.
A portion of the purchase price for GEI will be subject to a maximum
three-year earnout arrangement. Upon the closing of the GEI acquisition,
approximately $3.4 million in cash and 654,099 shares of Common Stock will be
placed in escrow and held for subsequent distribution to the former GEI
stockholders, or returned to the Company, depending on the future financial
performance of GEI. Distributions from the escrow will be made annually to the
former GEI stockholders if certain cumulative financial performance thresholds
are achieved by GEI within the three-year period, or earlier if those thresholds
are achieved sooner. The additional earnout payments, if any, will be accounted
for as additional goodwill and amortized
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over the applicable amortization period. Any escrowed stock and cash not
distributed to the former GEI stockholders after three years will be returned by
the escrow agent to the Company.
The consideration being paid by the Company for each Acquired Company was
determined by customary and usual negotiations between the Company and
representatives of that Acquired Company. The consideration being paid for
Petrocon was determined using the same valuation methodology used to negotiate
the consideration being paid to the stockholders of the Acquired Companies,
except that in the determination of the Petrocon consideration, a higher pricing
multiple was applied to Petrocon's adjusted earnings. See "Certain
Transactions."
The closing of each Pending Acquisition is subject to customary conditions.
They include, among others: the continuing accuracy of the respective
representations and warranties made by Petrocon and the Acquired Companies,
their respective principal stockholders and OEI; the performance of each of
their respective covenants included in the agreements relating to the Pending
Acquisitions; and the absence of a material adverse change in the results of
operations, financial condition or business of Petrocon and each Acquired
Company.
No assurance can be given that the conditions to the closing of all the
Pending Acquisitions will be satisfied or waived or that each of the Pending
Acquisitions will close. For information regarding the employment agreements to
be entered into by certain key officers of Petrocon and the Acquired Companies,
see "Management -- Employment Agreements."
STRATEGIC BENEFITS OF ACQUIRED COMPANIES: The Company believes the
Acquired Companies provide the following strategic benefits, among others: PS&S
provides the Company with additional engineering services expertise in the
geotechnical and environmental disciplines, as well as broadening the Company's
client base to include the pharmaceutical and entertainment industries. GEI
contributes modular plant systems expertise, which the Company believes can be
cross-marketed to clients of certain of the other operating companies. W-I
enhances the Company's control systems capabilities, while at the same time
expanding the Company's client base into the upstream oil and gas market. C&I
expands the geographic coverage of the Company's engineering services segment,
broadens the Company's client base into the food and beverage and pharmaceutical
industries and provides the Company with state-of-the-art 3D modeling
capabilities that can be utilized at other operating companies.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by this Prospectus, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company (including
the repayment of approximately $2.5 million of advances by Equus II to fund a
portion of the Offering expenses), are estimated to be approximately $53.0
million (approximately $61.4 million if the Underwriters exercise their
over-allotment option in full), assuming an initial public offering price of
$14.00 per share (the midpoint of the estimated initial public offering price
range). Of the net Offering proceeds, approximately $27.8 million will be used
to pay the cash portion of the purchase prices for the Pending Acquisitions,
approximately $21.8 million will be used concurrently for the repayment of
certain outstanding indebtedness of Petrocon and the Acquired Companies
(excluding the repayment of the $2.5 million of advances by Equus II referred to
above) and approximately $3.4 million will be placed in escrow with respect to
one of the Pending Acquisitions. See "The Company -- Summary of Terms of the
Pending Acquisitions" and "Certain Transactions -- Organization of OEI."
The indebtedness to be repaid from the proceeds of the Offering (some of
which has been guaranteed by stockholders of the Acquired Companies) bears
interest at rates ranging from 5.9% to 10.0% per annum. Such indebtedness would
otherwise mature at various dates through January 2004.
DIVIDEND POLICY
It is the Company's current intention to retain earnings to finance the
expansion of its business. Any future dividends will be at the discretion of the
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated cash needs and expansion plans, the
income tax laws then in effect, the requirements of Delaware law, the
restrictions imposed by the New Credit Facility and any restrictions that may be
imposed by the Company's future credit facilities. The Company expects that its
New Credit Facility will require compliance with various loan covenants,
including restrictions on the payment of dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Pro
Forma Combined -- Liquidity and Capital Resources."
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization as of March 31, 1998 of the Company
on a pro forma combined basis: (i) giving effect to the Pending Acquisitions and
the net incurrence of indebtedness by the Company since March 31, 1998; and (ii)
as adjusted giving effect to the Offering and the application of the estimated
net proceeds therefrom. See "Use of Proceeds" and Unaudited Pro Forma Combined
Financial Statements and the related notes thereto included elsewhere in this
Prospectus.
MARCH 31, 1998
------------------------
PRO FORMA
COMBINED AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Short-term debt and current maturities
of long-term obligations(1)........... $53,540 $ 5,832
========= ===========
Long-term obligations, less current
maturities............................ $ 3,350 $ --
--------- -----------
Stockholders' equity:
Preferred stock: $.001 par value
1,000,000 authorized; none issued
and outstanding.................. -- --
Common stock: $.001 par value
40,000,000 shares authorized;
7,535,494 outstanding pro forma;
and 11,835,494 outstanding, as
adjusted(2)...................... 8 12
Additional paid-in capital......... 42,840 95,822
Retained earnings.................. 5,589 5,589
--------- -----------
Total stockholders' equity.... 48,437 101,423
--------- -----------
Total capitalization.......... $51,787 $ 101,423
========= ===========
- ------------
(1) The pro forma combined balance includes $27.8 million of cash consideration
payable in connection with the Pending Acquisitions.
(2) Includes an aggregate 654,099 shares which will be placed in escrow and will
be subject to a maximum three-year earnout arrangement with respect to one
of the Pending Acquisitions (see "The Company -- Summary of Terms of the
Pending Acquisitions"), and excludes (i) an aggregate of 1,765,223 shares
subject to options to be granted or allocated for grant on or prior to the
closing of the Offering under the Incentive Plan, 996,839 of which will have
an exercise price equal to the initial public offering price per share and
768,384 of Replacement Options which will have a weighted average exercise
price per share of $7.68, and (ii) an aggregate of 357,579 shares subject to
the Replacement Warrants to be issued in connection with the Petrocon
acquisition and which have an exercise price per share of $9.42. See
"Management -- Incentive Plan," "Certain Transactions -- Organization of
OEI" and "The Company -- Summary of Terms of the Pending Acquisitions."
19
<PAGE>
DILUTION
The deficit in pro forma combined net tangible book value of the Company as
of March 31, 1998 was approximately $19.2 million, or approximately $2.55 per
share, after giving effect to the Pending Acquisitions and the net incurrence of
indebtedness by the Company since March 31, 1998. The deficit in pro forma net
tangible book value per share represents the amount by which the Company's pro
forma total liabilities exceeded the Company's pro forma net tangible assets as
of March 31, 1998, divided by the number of shares to be outstanding after
giving effect to the Pending Acquisitions. After giving effect to the sale of
the 4,300,000 shares offered hereby and deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the Company's pro forma net tangible book value as of March 31, 1998
would have been approximately $33.8 million, or approximately $2.85 per share,
based on an assumed initial public offering price of $14.00 per share (the
midpoint of the estimated initial public offering price range). This represents
an immediate increase in pro forma net tangible book value of approximately
$5.40 per share to existing stockholders and an immediate dilution of
approximately $11.15 per share to new investors purchasing shares in the
Offering. The following table illustrates this per share pro forma dilution:
Initial public offering price per
share.............................. $ 14.00
Pro forma net tangible book
value (deficit) per share
before the Offering............ $ (2.55)
Increase in pro forma tangible
value attributable to new
investors...................... 5.40
Pro forma net tangible book value per
share after the Offering........... 2.85
---------
Dilution per share to new
investors............................ $ 11.15
=========
The following table sets forth, on a pro forma basis to give effect to the
Pending Acquisitions and the closing of the Offering and the application of the
estimated net proceeds therefrom as of March 31, 1998, the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid to the Company by existing
stockholders (including persons acquiring Common Stock in the Pending
Acquisitions) and the new investors purchasing shares of Common Stock in the
Offering (before deducting the underwriting discounts and commissions and
estimated offering expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION(1) AVERAGE
---------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 7,535,494 63.7% $(19,203) (46.8)% $(2.55)
New investors........................ 4,300,000 36.3 60,200 146.8 14.00
---------- -------- -------- --------
Total...................... 11,835,494 100.0% $ 40,997 100.0%
========== ======== ======== ========
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the pro forma
shareholders' equity of the Company less pro forma goodwill before giving
effect to the post-merger adjustments set forth on the Unaudited Pro Forma
Combined Balance Sheet included herein.
20
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company will consummate the Pending Acquisitions concurrently with, and
as a condition to, the consummation of the Offering. For financial statement
presentation purposes, Petrocon is deemed to be the accounting acquirer. The
following selected historical financial data of Petrocon for the years ended
December 31, 1995, 1996 and 1997, and as of December 31, 1996 and 1997, have
been derived from the audited consolidated financial statements of Petrocon
included elsewhere in this Prospectus. The following selected historical
financial data for Petrocon for the years ended December 31, 1993 and 1994 and
the three months ended March 31, 1997 and 1998, and as of December 31, 1993,
1994 and 1995 and March 31, 1998, have been derived from unaudited consolidated
financial statements of Petrocon which have been prepared on the same basis as
the audited financial statements and, in the opinion of Petrocon, reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The following summary unaudited pro forma combined
financial data gives effect to the Pending Acquisitions and certain other pro
forma adjustments and is adjusted to reflect the consummation of the Offering
and the application of the estimated net proceeds therefrom. See the Unaudited
Pro Forma Combined Financial Statements and the notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
PETROCON PRO FORMA
--------------------------------------------------------------------------- COMBINED(1)
THREE MONTHS ENDED ------------
YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED
----------------------------------------------------- -------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997 1998 1997
--------- --------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 48,113 $ 51,524 $ 52,386 $ 61,851 $ 92,616 $ 19,496 $ 25,915 $ 169,065
--------- --------- --------- --------- --------- --------- --------- ------------
Gross profit....................... 9,162 9,317 10,242 12,599 20,923 4,017 5,394 51,204
General and administrative
expenses.......................... 7,989 7,274 8,336 9,498 15,062 3,233 3,689 30,904(2)
Goodwill amortization.............. -- -- 23 79 254 85 103 1,713(3)
--------- --------- --------- --------- --------- --------- --------- ------------
Income from operations............. 1,173 2,043 1,883 3,022 5,607 699 1,602 18,587
Interest income (expense), net..... (291) (358) (456) (592) (1,569) (350) (386) (446)(4)
Other income (expense), net........ (93) 739 382 86 290 88 (65) 421
--------- --------- --------- --------- --------- --------- --------- ------------
Income from continuing operations
before provision for income taxes. 789 2,424 1,809 2,516 4,328 437 1,151 18,562
Provision for income taxes......... 307 720 599 1,051 1,574 159 479 8,010
--------- --------- --------- --------- --------- --------- --------- ------------
Income from continuing
operations........................ $ 482 $ 1,704 $ 1,210 $ 1,465 $ 2,754 $ 278 $ 672 $ 10,552
========= ========= ========= ========= ========= ========= ========= ============
Income per share from continuing
operations
Basic............................ $ .89
============
Diluted.......................... $ .86
============
Shares used in computing pro forma
income per share from continuing
operations
Basic............................ 11,835,494(4)
============
Diluted.......................... 12,299,454(4)
</TABLE>
THREE MONTHS
ENDED
MARCH 31,
1998
-------------
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 42,184
-------------
Gross profit....................... 12,183
General and administrative
expenses.......................... 8,386(2)
Goodwill amortization.............. 468(3)
-------------
Income from operations............. 3,329
Interest income (expense), net..... (196)(4)
Other income (expense), net........ (51)
-------------
Income from continuing operations
before provision for income taxes. 3,082
Provision for income taxes......... 1,379
-------------
Income from continuing
operations........................ $ 1,703
=============
Income per share from continuing
operations
Basic............................ $ .14
=============
Diluted.......................... $ .14
=============
Shares used in computing pro forma
income per share from continuing
operations
Basic............................ 11,835,494(4)
=============
Diluted.......................... 12,299,454(4)
=============
<TABLE>
<CAPTION>
PETROCON
---------------------------------------------------------------- MARCH 31,
1998
DECEMBER 31, -------------
----------------------------------------------------- MARCH 31, PRO FORMA
1993 1994 1995 1996 1997 1998 COMBINED (1)
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............. $ 73 $ 1,044 $ 2,402 $ (1,482) $ (3,807) $(3,610) $ (32,556)
Total assets.......................... 21,013 18,007 20,014 26,377 41,903 42,864 130,031
Total debt, including current
portion.............................. 4,950 5,121 5,495 11,865 16,445 16,435 56,890
Stockholders' equity.................. 3,331 4,271 3,865 6,753 13,919 14,638 48,437
</TABLE>
AS
ADJUSTED (5)
------------
BALANCE SHEET DATA:
Working capital (deficit)............. $ 17,080
Total assets.......................... 131,203
Total debt, including current
portion.............................. 5,832
Stockholders' equity.................. 101,423
(FOOTNOTES ON FOLLOWING PAGE)
21
<PAGE>
- ------------
(1) The pro forma combined statement of operations data assume that the
following transactions and events were consummated on January 1, 1997: (i)
the organization of OEI and its initial issuance of shares of Common Stock;
(ii) a 1,828.368-for-one split of the outstanding Common Stock; (iii) the
Pending Acquisitions; and (iv) the closing of the Offering and the
application of its estimated net proceeds, and are not necessarily
indicative of the results the Company would have obtained had these events
actually occurred at that date or of the Company's future results. The pro
forma combined balance sheet data assume that items (i), (ii) and (iii)
above occurred on March 31, 1998 and that the net indebtedness incurred by
the Company since March 31, 1998 occurred and existed on that date. The pro
forma combined financial data (i) are based on preliminary estimates,
available information and certain assumptions that management deems
appropriate and (ii) should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(2) The pro forma combined statement of operations data include the effect of:
(i) a reduction in compensation and benefits of approximately $2.7 million
for the year ended December 31, 1997 and $0.1 million for the three months
ended March 31, 1998 agreed to as part of the purchase agreements by certain
owners and key employees of the Acquired Companies pursuant to the Pending
Acquisitions; (ii) the elimination of a non-cash, non-recurring compensation
charge of approximately $6.4 million by the Company for the year ended
December 31, 1997 and $0.4 million for the three months ended March 31,
1998; and (iii) distributions by certain Acquired Companies of certain
assets prior to the closing of the Pending Acquisitions. The Unaudited Pro
Forma Combined Financial Statements do not reflect other potential cost
savings, revenue growth or costs associated with being a public company.
(3) Reflects amortization of the goodwill to be recorded over a 40-year period
as a result of the Pending Acquisitions.
(4) Computed on a basis described in Note 4 of Notes to the Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects the closing of the Offering and the Company's application of the
net proceeds therefrom and repayment of $1.4 million at March 31, 1998 of
Petrocon indebtedness from cash on hand. See "Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Historical and Pro Forma
Combined Financial Data" appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are primarily derived from engineering, design and
related services provided to its clients. Direct costs consist primarily of
labor, material and other related expenses necessary to complete the various
engineering and design projects. General and administrative expenses consist
primarily of executive compensation and related benefits, administrative
salaries and benefits, office supplies, rent, utilities, insurance and
professional fees.
Petrocon and the Acquired Companies have been managed throughout the
periods discussed below as independent private companies, and their results of
operations reflect different tax structures (S corporations and C corporations),
which have influenced, among other things, their historical levels of owners'
compensation. Some owners of these companies and certain key employees have
prospectively agreed to certain reductions in their compensation and benefits in
connection with the Pending Acquisitions.
OEI has conducted no operations to date other than in connection with the
Offering and the Pending Acquisitions. The Company intends to integrate these
businesses and their operations and administrative functions. The integration
process may present opportunities to reduce costs through the elimination of
duplicate functions and through economies of scale, but will necessitate
additional costs and expenditures for corporate management and administration.
The Company will also incur corporate expenses related to being a public
company, implementation of an acquisition program and systems integration. These
various costs and possible cost-savings may make comparison of historical
operating results not comparable to, nor indicative of, future performance. No
such cost savings were reflected in the pro forma combined statement of
operations data, except for compensation reductions provided for in the
agreements entered into in connection with certain of the Pending Acquisitions
and other known cost eliminations.
In October 1997 and March 1998, OEI sold 609,395 shares of Common Stock to
its management, all but one of whom are members of the management of Petrocon.
As a result, the Company recorded a non-recurring, non-cash compensation charge
of $6.4 million and $0.4 million in the fourth quarter of 1997 and first quarter
of 1998, respectively, representing the difference between the amount paid for
the shares and the estimated fair value of the shares, which value has been
discounted from the estimated initial public offering price due primarily to
restrictions on the sale and transferability of the shares issued.
In July 1996, the SEC issued Staff Accounting Bulletin No. 97 ("SAB 97")
relating to business combinations immediately prior to an initial public
offering. SAB 97 requires that these combinations be accounted for using the
purchase method of accounting. Under the purchase method, the owners of the
company that receive the largest portion of voting rights in the combined
enterprise as a result of the Pending Acquisitions are presumed to be the
accounting acquirer. Accordingly, Petrocon has been designated as the accounting
acquirer. For the Acquired Companies, $58.4 million, representing the excess of
the fair value of the merger consideration to be received over the fair value of
the net assets to be acquired, will be recorded as goodwill on the Company's
balance sheet. This goodwill will be amortized over a 40-year period as a
non-cash charge to the Company's statements of operations. The pro forma impact
of this amortization expense, which is non-deductible for federal income tax
purposes, is $1.5 million per year on an after-tax basis.
PRO FORMA COMBINED -- LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, on a pro forma combined basis, after giving effect to
(i) the net incurrence of indebtedness by the Company since March 31, 1998, (ii)
the Pending Acquisitions, (iii) the closing of the Offering and the Company's
application of the net proceeds therefrom to repay certain indebtedness of
Petrocon and the Acquired Companies (approximately $21.8 million), (iv) the
repayment of an additional
23
<PAGE>
1.4 million of Petrocon indebtedness from cash on hand and (v) $1.0 million of
advances by Equus II, which have been used to pay a portion of the expenses of
the Offering (which advances are estimated to aggregate $2.5 million at the time
the Offering closes), the Company would have had an aggregate of $3.5 million of
cash and short-term investments, $19.4 million of working capital and no
long-term debt obligations.
The Company has recently received a commitment letter from to
provide the New Credit Facility, which would be available upon the closing of
the Offering. According to the proposed New Credit Facility terms, the Company
would have a line of credit of up to $ million, which may be used for
general corporate purposes, including refinancing of certain indebtedness of
Petrocon and the Acquired Companies, acquisitions, capital expenditures and
working capital. The Company expects the New Credit Facility will require
compliance with various affirmative and negative covenants, including, among
others, (i) maintenance of certain financial ratios, (ii) a restriction on
additional indebtedness and (iii) restrictions on liens, guarantees, advances,
dividends and business activities unrelated to the Company's existing
operations. Failure to comply with such covenants and restrictions would
constitute a default under the New Credit Facility. The New Credit Facility is
subject to negotiation of definitive documentation and certain other customary
conditions, and there can be no assurance that the Company will be able to
obtain the New Credit Facility on terms acceptable to the Company.
The Company intends to pursue further acquisition opportunities. The
Company expects to fund future acquisitions through the issuance of additional
Common Stock, borrowings (including amounts available under the New Credit
Facility) and cash flow from operations. To the extent the Company funds a
significant portion of the consideration for future acquisitions with cash, it
may have to increase the amount available under the New Credit Facility or
obtain other sources of financing. There can be no assurance such financing will
be available on terms acceptable to the Company. The Company expects that its
cash flow from operations will provide cash sufficient to meet the Company's
normal working capital needs, debt service requirements and planned capital
expenditures for property and equipment (exclusive of acquisitions of other
businesses) for at least the next several years. On a combined basis, the
Company made capital expenditures for property and equipment of approximately
$1.6 million and $1.9 million in 1996 and 1997, respectively. The Company's
capital expenditures for 1998 are expected to be approximately $2.0 million,
primarily for computer equipment and software, excluding capital expenditures
for acquisitions.
Due to the relatively low levels of inflation experienced in 1997,
inflation did not have a significant effect on the pro forma combined results of
operations of the Company in that period.
SEASONALITY
The Company historically has experienced quarterly fluctuations in
revenues, operating income and cash flows. In recent years, the Company has
experienced greater revenue, operating income and cash flows in the second and
third calendar quarters as compared with the other two calendar quarters,
primarily as a result of holidays and inclement weather during the first and
fourth calendar quarters and delays in expenditures until after completion of
the Company's clients annual budgeting process, which normally occurs during the
first calendar quarter.
IMPACT OF YEAR 2000
Prior to the year 2000, the Company expects to incur approximately $2.5
million of capital expenditures for upgrades to its computer software and
hardware relating to financial reporting and certain engineering applications,
all of which software will be year 2000 compliant. The Company is currently in
the process of evaluating its other computer software programs and operating
systems to ensure such programs and systems will be able to process transactions
in the year 2000. The Company does not believe that the costs to modify these
other programs or systems will be material to its financial condition or results
of operations. The Company does not currently have information concerning the
year 2000 compliance of its clients and suppliers. However, since the Company
does not generally interface its computer systems with
24
<PAGE>
its client or suppliers, the failure of the Company's clients and suppliers to
achieve year 2000 compliance could have a material adverse effect on the
Company's financial condition and results of operations.
PETROCON -- RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship that certain items in Petrocon's Consolidated Statements of Income
bear to revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 52,386 100.0% $ 61,851 100.0% $ 92,616 100.0% $ 19,496 100.0%
Direct costs............................ 42,144 80.4 49,252 79.6 71,693 77.4 15,479 79.4
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 10,242 19.6 12,599 20.4 20,923 22.6 4,017 20.6
General and administrative expenses..... 8,359 16.0 9,577 15.5 15,315 16.6 3,318 17.0
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. 1,883 3.6 3,022 4.9 5,608 6.0 699 3.6
Other income (expense).................. (74) (0.1) (506) (0.8) (1,279) (1.3) (262) (1.3)
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations before
income tax............................ 1,809 3.5 2,516 4.1 4,329 4.7 437 2.3
Provision for income tax................ 599 1.2 1,051 1.7 1,574 1.7 159 .8
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations....... $ 1,210 2.3% $ 1,465 2.4% $ 2,755 3.0% $ 278 1.5%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1998
--------------------
Revenues................................ $ 25,915 100.0%
Direct costs............................ 20,521 79.2
--------- ---------
Gross profit............................ 5,394 20.8
General and administrative expenses..... 3,792 14.6
--------- ---------
Income from operations.................. 1,602 6.2
Other income (expense).................. (451) (1.7)
--------- ---------
Income from continuing operations before
income tax............................ 1,151 4.5
Provision for income tax................ 479 1.9
--------- ---------
Income from continuing operations....... $ 672 2.6%
========= =========
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues increased by $6.4 million, or 32.9%, to $25.9 million during the
first quarter of 1998 from $19.5 million during the three months ended March 31,
1997. This increase was mainly due to internal growth at most of the Company's
subsidiaries caused by strong customer demand for Petrocon's engineering and
design services. In addition, Alliance Engineering, Inc. ("AEI"), was acquired
during the first quarter of 1997 and contributed revenues of $2.1 million during
that period compared to $4.9 million during the first three months of the
current year.
Gross profit improved by $1.4 million, or 34.3%, to $5.4 million during the
three months ended March 31, 1998 from $4.0 million during the same period in
the prior year. The gross margin increased to 20.8% for the first quarter of
1998 from 20.6% for the same period in 1997. The increase was primarily due to
increased revenues throughout the Company, and particularly at AEI, which
generally achieves higher gross margins than the other Petrocon subsidiaries.
General and administrative expenses increased by $0.5 million to $3.8
million during the first quarter of 1998 from $3.3 million during the comparable
prior year period. This increase was principally related to the inclusion of
administrative costs for AEI for the full three-month period during 1998 versus
only two months during the 1997 quarter. Various other payroll-related and
administrative costs increased during the first three months of 1998 from the
comparable prior year period mainly due to the rise in revenues from 1997 to
1998.
Other income (expense) for the first quarter of 1998 increased by $(0.2)
million to $(0.5) million from $(0.3) million for the comparable period in 1997.
This increase was primarily related to a $0.2 million decrease in the earnings
of PAL resulting from a reduction in project revenues from the Middle East
region, which earnings are reported under the equity method.
Net income increased by $0.4 million, or 165%, to $0.7 million for the
first three months ended March 31, 1998 from $0.3 million during the same period
in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for 1997 increased by $30.7 million, or 49.6% to $92.6 million
from $61.9 million for 1996. This increase was principally due to the
acquisitions of AEI, RPM/Barnard & Burke ("RPM") and Triangle Engineers &
Constructors, Inc. ("TE&C") in February 1997, October 1996 and July 1996,
respectively. These entities contributed revenues of $39.7 million in 1997 as
compared to $6.1 million in 1996. This increase was partially offset by a
reduction in revenues at Petrocon (excluding revenues attributable to the
acquisitions) primarily as a result of the transfer of an aggregate of
approximately $3.5 million of revenues to PAL and the acquired companies.
25
<PAGE>
Gross profit for 1997 increased by $8.3 million, or 65.9%, to $20.9 million
from $12.6 million for 1996. The gross margin increased to 22.6% in 1997 from
20.4% in 1996. This increase was principally due to the acquisitions of AEI and
RPM, which achieved generally higher gross margins than the other Petrocon
subsidiaries. AEI, RPM and TE&C contributed aggregate gross profit for 1997 of
$10.6 million as compared to $1.6 million for 1996.
General and administrative expenses for 1997 increased by $5.7 million to
$15.3 million from $9.6 million for 1996, primarily as a result of the AEI, RPM,
and TE&C acquisitions, the addition during June 1996 of a corporate acquisition
staff and an increase in office work as contrasted with in-plant assignments.
AEI, RPM and TE&C accounted for $7.4 million of general and administrative
expenses for 1997 as compared to only $1.2 million in 1996. In addition, office
work generally carries higher general and administrative expenses but also
generates higher margins than in-plant assignments.
Other income (expense) for 1997 increased by $(0.8) million to $(1.3)
million from $(0.5) million for 1996. This increase was primarily due to (i) a
$1.0 million increase in interest expense resulting from increased borrowings
needed to fund acquisitions, a shareholder preferred stock buy-back program and
working capital requirements and (ii) a $0.5 million charge related to the
write-off of certain leasehold improvements and other property. These expense
increases were partially offset by an $0.8 million increase in the earnings of
PAL reported under the equity method.
Income from continuing operations for 1997 increased by $1.3 million, or
86.7%, to $2.8 million from $1.5 million for 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues for 1996 increased by $9.5 million, or 18.1%, to $61.9 million
from $52.4 million in 1995. This increase was primarily the result of the
acquisitions of RPM and TE&C, which contributed revenues of $6.1 million in
1996. In addition, internal growth accounted for an increase of $3.4 million
based in part on the receipt of significant incentive payments on several large
projects completed in 1996.
Gross profit for 1996 increased by $2.4 million, or 23.5%, to $12.6 million
from $10.2 million for 1995, primarily due to the increase in revenues and from
the RPM and TE&C acquisitions. The gross margin increased to 20.4% in 1996 from
19.6% in 1995. This improvement was principally due to the RPM acquisition,
which achieved generally a higher gross margin than the other Petrocon
subsidiaries.
General and administrative expenses for 1996 increased by $1.2 million to
$9.6 million from $8.4 million for 1995, primarily as a result of the RPM and
TE&C acquisitions and the addition of the corporate acquisition staff in June
1996. RPM and TE&C accounted for $1.2 million of general and administrative
expenses in 1996.
Other income (expense) for 1996 increased by $(0.4) million to $(0.5)
million from $(0.1) million for 1995. This increase related principally to (i) a
$0.1 million increase in interest expense due to increased borrowings to fund
acquisitions and the shareholder preferred stock buy-back program and (ii) a
$0.5 million decrease in the earnings of PAL reported under the equity method.
The decrease in the earnings of PAL resulted primarily from the imposition of
quota requirements under certain client contracts that have since been resolved.
Income from continuing operations for 1996 increased $0.3 million to $1.5
million from $1.2 million for 1995.
PETROCON -- LIQUIDITY AND CAPITAL RESOURCES
Petrocon had cash and cash equivalents of $2.3 million and $0.7 million at
December 31, 1997 and March 31, 1998, respectively. In addition, Petrocon has a
$14 million revolving credit facility, of which $11.6 million and $12.3 million
was outstanding at December 31, 1997 and March 31, 1998, respectively. This
credit facility is secured by the Company's accounts receivable and requires
Petrocon to maintain certain financial covenants regarding net worth and cash
flow, as well as certain financial ratios, including fixed charge coverage and
specified levels of certain other items. The credit facility expires in August
1999. The Company intends to repay this credit facility with proceeds from the
Offering and enter into the New Credit Facility. See "Use of Proceeds" and
"-- Pro Forma Combined -- Liquidity and Capital Resources."
26
<PAGE>
For 1997, net cash provided by operations totaled $3.3 million as compared
to $4.6 million for 1996. Cash provided by operations for 1997 consisted of net
income of $2.8 million, plus non-cash revenue and expenses of $1.9 million, less
changes in working capital of $1.4 million in the aggregate. Non-cash revenue
and expenses for 1997 included depreciation and amortization expense of $1.8
million. Changes in working capital included a $3.3 million increase in accounts
receivable as a result of the higher revenues in 1997, and a $1.4 million
increase in costs and estimated earnings in excess of billings on uncompleted
contracts due to an increase in projects in progress but not completed at year
end. This use of working capital was partially offset by increases in accounts
payable of $0.8 million and accrued salaries and fringe benefits of $2.7
million, primarily due to the higher revenues in 1997 and the AEI acquisition.
For the three months ended March 31, 1998, net cash used in operations
totaled $1.2 million compared to $0.8 million during the same period in 1997.
Current year cash used in operations consisted of net income of $0.7 million,
plus non-cash expenses of $0.3 million, less working capital changes of $2.2
million.
Non-cash revenue and expenses during the January to March 1998 period
included depreciation and amortization expense of $0.4 million. Changes in
working capital included a $0.8 million increase in accounts receivable as a
result of higher revenues in 1998, and a $1.4 million increase in costs and
estimated earnings in excess of billings on uncompleted contracts due to an
increase in the amount of projects in progress but not completed at March 31. In
addition, working capital was used to reduce accrued compensation and benefits.
This use of working capital was partially offset by an increase in amounts
payable of $1.1 million, primarily due to higher revenues in 1998.
Capital expenditures were $1.2 million and $0.4 million for the year ended
December 31, 1997 and for the three months ended March 31, 1998, respectively.
Such expenditures were principally for the purchase of computer equipment and
software and certain AEI leasehold improvements.
In February 1997, a wholly-owned subsidiary of Petrocon merged with AEI.
Cash used for the acquisition, net of cash acquired, was $3.1 million in the
aggregate. In August 1997, Petrocon repurchased 154,531 shares of its
outstanding Series A preferred stock in exchange for cash of $0.9 million and
other consideration. At December 31, 1997, net increases in amounts outstanding
under PEI's credit facility and notes payable were $3.8 million in the
aggregate, principally to fund the AEI acquisition and for working capital
requirements.
Petrocon capital expenditures for 1998 are expected to be approximately
$1.5 million, primarily for Petrocon computer equipment and software.
27
<PAGE>
INDUSTRY OVERVIEW
GENERAL
Engineering is an integral part of virtually every type of construction,
manufacturing, processing, natural resource extraction, power generation or
transportation activity. Firms providing engineering services range from small,
local firms employing several or even a single engineer, to global organizations
whose professionals number in the thousands and which have worldwide
capabilities. Some engineering firms confine their activities to "pure"
planning and design functions, while many combine their engineering work with
varying degrees of construction, architectural and other activities. Some
engineering firms are specialized, either on a discipline or industry basis, and
others are multidisciplined and serve a broader base of clients.
Given the breadth of activities constituting "engineering" and the
diversity of the firms conducting these activities, generalizations and
characterizations are difficult and largely subjective. ENRannually reports on
and ranks by client billings what it calls "The Top 500 Design Firms," which
include U.S.-based engineer-constructor, engineer-architect and other hybrid
organizations, as well as exclusively design and planning firms. Ranked
companies classify themselves as concentrating in specified areas of work.
According to ENR'S report for 1997, its 500 top ranked firms as a group billed
their clients $32.7 billion in 1997, representing a 10.3% increase over 1996.
For 1997, the "Top 500's" total reported client billings by areas of work were
as follows:
BILLINGS
(IN BILLIONS PERCENT
TYPE OF WORK OF DOLLARS) OF TOTAL
- ------------------------------------- ------------- --------
General Building..................... 5.0 16.8
Transportation....................... 4.6 15.4
Hazardous Waste...................... 4.5 15.1
Petroleum............................ 4.0 13.7
Industrial Process................... 3.0 10.1
Sewerage/Solid Waste................. 2.6 8.7
Power................................ 1.7 5.6
Manufacturing........................ 1.6 5.3
Water Supply......................... 1.5 4.9
Other................................ 1.3 4.5
Of the total 1997 billings reported by ENR'S "Top 500," $25.4 billion, or
77.7%, was represented by domestic billings, and $7.3 billion, or 22.3%, was
represented by international work. Out of the "Top 500" firms, 309 firms
reported increases in their professional staff during 1997, versus 179 firms
which reported losses or no change in professional staff, and 304 firms reported
higher backlogs at the end of the year, while 163 firms reported lower or
unchanged backlog levels.
INDUSTRY CONDITIONS
The markets served by the ENR ranked firms and the many thousands of
unranked U.S. and foreign-based design and engineering firms make up a global
construction market estimated to exceed $3 trillion annually. In the United
States, over the last decade, the annual value of construction put in place has
been assessed by the U.S. Department of Commerce at over $400 billion in current
dollars. The market for engineering services has experienced significant growth
in recent years as reflected by an increase in annual billings by ENR'S "Top
500" of $3.3 billion, or 11.2%, from $29.4 billion in 1995 to $32.7 billion in
1997. The Company believes there will be a continued strong demand for
engineering services within the United States and internationally due to, among
other things, the following factors:
ANTICIPATED SPENDING ON INFRASTRUCTURES. The United States
infrastructure needs have been much publicized. Upgrades and expansions of
the existing infrastructure, including highways, water and sewer lines and
gas and other power utilities are currently estimated by the Associated
General Contractors of America to require more than $3 trillion over the
next 20 years, averaging approximately $180 billion each year. Similarily,
significant infrastructure expenditures are expected in
28
<PAGE>
Europe, with construction spending estimated at approximately $500 billion
per year. In lesser developed countries, increasing urbanization and the
growing demand for an improved standard of living are expected to generate
substantial engineering and construction infrastructure projects.
CONTINUED IMPROVEMENT OF INDUSTRIAL OPERATING AND PROCESSING
EFFICIENCIES. The industrial construction market both within the United
States and abroad is expected to continue to be driven by competitive and
technological forces. Global competition is believed by management to be
motivating plant owners to increase their spending on solutions that
further automate and streamline their businesses. As a result, the global
demand for technically diverse engineering services is expected to continue
to increase.
CONTINUED INCREASES IN REGULATORY REQUIREMENTS IMPACTING U.S.
INDUSTRY. Regulations regarding the environmental and safety compliance of
U.S. businesses continue to create significant construction and engineering
opportunities. For example, the EPA currently estimates that U.S. pulp and
paper manufacturers will be required to make more than $1.8 billion in
total capital expenditures and $277 million annually to comply with surface
water discharge limitations currently in effect. The EPA further estimates
that approximately $140 billion must be spent over the next 20 years to
conform U.S. wastewater and hazardous waste disposal sites to comply with
current regulatory requirements.
CONTINUED TRENDS IN OUTSOURCING OF PLANT OPERATION AND
MAINTENANCE. Technical staffing by engineering firms should continue to
expand as refineries and manufacturing and processing plants rely
increasingly on outside firms to provide engineering services related to
plant operations and maintenance. Industrial clients have continued to
reduce their in-house engineering staffs related to these areas as a result
of outsourcing non-core business functions and industry downsizing.
Industry studies estimate that between 20% and 50% of the total cost of
running a plant is represented by maintenance and that the total potential
plant maintenance market ranges from $300 billion to $500 billion annually.
TREND TOWARD CONSOLIDATION
The Company believes that more than 28,000 U.S. firms, and an even greater
number of foreign firms, offer some form of engineering and design services. The
Company also believes that these firms are combining at the local, national and
international levels as they seek to expand their geographic coverage, broaden
their professional capabilities, expand within existing geographic markets and
specialties, and leverage their engineering capabilities through
cross-marketing. The Company believes that the same motivating factors that have
led some of Europe's largest firms to acquire or obtain controlling interests in
some of the largest and best known engineering firms in the United States, and
VICE VERSA, will continue to induce combinations among local, regional, national
and foreign firms of every size and type.
The Company further believes that at the mid-size and regional firm level,
several other factors are contributing to an increasing number of firms seeking
to combine with other, larger organizations. Frequently, the founders and
principals of these firms are engineers or designers first, and professional
business managers second. Their firm's growth has imposed on them greater
management responsibilities at the expense of their professional practice, and
many are seeking either relief from or assistance with their management burdens.
Also, regardless of their legal form, many such firms, over the life of their
development, have assumed partnership-like characteristics as growing numbers of
professionals have become equity owners in the firm, a process which often
raises difficult governance and other issues that can be solved by a combination
with a larger, professionally managed firm. Furthermore, many of these firms
recognize their need for overhead reductions, but feel constrained in making
them by what often are non-economic factors. The Company believes that in many
instances, such firms may view their acquisition as an opportunity to achieve
appropriate and necessary overhead reductions without having to self-impose
them. Finally, the growth opportunities of these firms are often limited by
bonding and other performance guarantee requirements which are beyond their
financial capabilities, but which could be satisfied by access to greater
financial resources through association with a larger firm.
29
<PAGE>
BUSINESS
GENERAL
The Company is a diversified engineering company providing engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally. The
Company's multidisciplined expertise enables it to offer its clients total
design and engineering solutions extending from project inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets. During 1997, the Company was involved in engineering
projects in 26 states and over 21 countries worldwide, generating pro forma
combined revenues of $169.1 million, of which $125.1 million, or 74.0%, was from
domestic projects, and $44.0 million, or 26.0%, was from international work.
OEI was formed in October 1997 by Petrocon's management to conduct the
offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. The Company, through Petrocon, has
grown significantly through acquisitions, having acquired more than 13
engineering firms since 1988. As a result of the Pending Acquisitions and the
Offering, the Company believes it will have greater financial, technical and
professional resources, which will enable it to aggressively continue its
successful acquisition strategy, enhance its technical capabilities and expand
its already diversified client base.
The Company operates in two principal segments: engineering services and
engineered systems. The Company's engineering services encompass all aspects of
the process, civil, structural, mechanical, instrument, electrical, geotechnical
and environmental engineering and design disciplines, providing its clients with
a single source for all their design, engineering and permitting needs. The
Company has designed and engineered facilities ranging from refineries,
petrochemical plants, pulp and paper processing plants and wastewater treatment
facilities, to food and beverage processing plants, pharmaceutical plants and
laboratories, electronics manufacturing facilities, hotels and casinos. The
Company's engineered systems are primarily custom designed, built, programmed
and installed on a fixed-price, turnkey basis and include control and
instrumentation systems and modular processing plants primarily for the oil and
gas, refining and chemical processing industries. During 1997, approximately
$123.5 million, or 73.0%, of the Company's pro forma combined revenues were
attributable to engineering services and $45.6 million, or 27.0%, were
attributable to engineered systems. The Company provides engineering services
and engineered systems to a number of Fortune 100 companies through a staff of
over 1,600 employees, including approximately 1,100 engineers and design
professionals as of March 31, 1998.
BUSINESS STRATEGY
The Company has developed a strategic plan to:
EXPAND AND DIVERSIFY THROUGH ACQUISITIONS. The Company intends to
aggressively continue its acquisition program targeted at well-established,
profitable engineering companies offering engineering services and engineered
systems similar or complementary to those offered by the Company. See
"-- Acquisition Strategy" and "-- Acquisition History." The key elements of
the Company's acquisition strategy are to:
ENTER NEW GEOGRAPHIC MARKETS. The Company intends to expand its
geographic coverage by acquiring well-established and highly respected
local and regional firms within the U.S., as well as foreign firms, with
operations in geographic areas not currently served by the Company.
EXPAND AREAS OF TECHNICAL EXPERTISE. The Company intends to expand
the scope of its technical expertise by acquiring firms with acknowledged
expertise and experience in specialized service areas that are not offered
by the Company or in which the Company does not enjoy a widely recognized
reputation. This would provide the Company's existing and future clients
with a broader range of services.
30
<PAGE>
STRENGTHEN PRESENCE WITHIN EXISTING GEOGRAPHIC MARKETS AND
SPECIALTIES. The Company intends to acquire firms in markets currently
served and specialties currently offered by the Company in order to
increase the professional resources available to the Company and secure
larger projects.
ENHANCE CROSS-MARKETING OPPORTUNITIES The Company also intends to
enhance its cross-marketing opportunities by acquiring other engineering
firms whose services and systems can be packaged or cross-marketed with the
Company's existing services and systems.
ACCELERATE INTERNAL GROWTH. The principal elements of the Company's
internal growth strategy are to (i) attract larger, higher-margin projects by
virtue of increased financial, professional and technical resources, (ii)
leverage the Company's capabilities and expertise through cross-marketing and
(iii) develop new partnering relationships and other strategic alliances.
IMPROVE OPERATING MARGINS. The Company believes that combining Petrocon
and the Acquired Companies will provide significant opportunities to increase
the Company's profitability. The key components of this strategy are to:
INCREASE OPERATING EFFICIENCIES. The Company believes that it will be
able to increase its overall staff utilization rate by more effectively
deploying and allocating its professional resources. The Company intends to
accomplish this goal with the aid of computer networking, which will allow
work to be sent instantly by computer to the location of available
resources, and by extending the concepts of the Company's "Vision 2000,"
a project-driven approach which the Company has had in place for almost
four years and which has helped Petrocon lower significantly its
non-billable hours and maximize its rate of chargeability. The Company also
expects improvements in its overall staff utilization rate as a result of:
(i) increased utilization of highly specialized personnel based upon a
larger number of Company-wide engineering projects; (ii) increased
flexibility to make staff adjustments at those operating companies located
in geographic areas with more limited talent pools; and (iii) the
Company-wide application of Petrocon's operating experience in the Texas
Gulf Coast area, which is one of the country's most competitive
environments for engineering services.
CENTRALIZE APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company believes
that opportunities exist to improve operating margins by consolidating the
administrative functions of the Company, such as finance, insurance,
employee benefits and accounting.
EXPLOIT PURCHASING POWER. The Company expects to use its increased
purchasing power to gain volume discounts both for itself and in connection
with its procurement services for its clients. These discounts will enable
the Company to secure larger margins on its turnkey projects and
fixed-price contracts, and to potentially secure additional contracts in
situations where these discounts can be passed through to its clients.
OUTSOURCE CONSTRUCTION ACTIVITIES. While the Company recognizes the
current trend among project owners and operators toward turnkey projects, under
which a single firm provides all engineering, procurement and construction
services associated with a project, the Company believes it can offer clients
these projects, without assuming all of their associated construction risks, by
forming joint ventures and other partnering relationships with specialized
construction firms. Similarly, in instances where the Company is asked or
required to take an equity interest in a project, the Company intends to seek
financial partners with capital available for that purpose, rather than
deploying its own capital in meeting any project equity requirements. The
Company believes that combining Petrocon and the Acquired Companies will result
in a larger firm, both financially and in terms of professional resources, and
thus a more attractive partnering candidate for potential construction and
financial partners.
OPERATE ON A DECENTRALIZED BASIS. The Company intends to manage its
operating companies and subsequently acquired companies on a decentralized
basis, with local management retaining responsibility for day-to-day operations,
profitability and growth. The Company's executive management intends to closely
monitor operating results of its operating companies and will provide direction
and guidance on operational matters, such as staff utilization rates, backlog
control and marketing and cross-selling opportunities, in an effort to improve
profitability at each operating level. The Company believes that
31
<PAGE>
combining a decentralized management structure with strong, centralized
operating and financial controls geared to accountability will support the
entrepreneurial and creative culture at each of its operating companies, while
allowing the Company to capitalize on the local and regional market knowledge,
goodwill, name recognition and client relationships of each of the operating
companies.
ACQUISITION STRATEGY
The Company intends to aggressively continue its acquisition program
targeting well-established and profitable companies offering engineering
services and engineered systems similar or complementary to those offered by the
Company. Acquisitions will be expected to expand the Company's geographic
coverage, broaden its technical capabilities or expertise, improve its market
share within existing geographic markets or specialties, or provide increased
cross-selling opportunities. Certain acquisitions will be large enough to
maintain their own operating and management structure, while other smaller
acquisitions will be folded into an existing operation without significantly
increasing the Company's infrastructure. From among the many thousands of
engineering companies estimated to be active in the United States, and the many
more thousands of foreign firms, the Company believes there will be no shortage
of acquisition candidates. The Company will selectively pursue acquisition
candidates based on the Company's acquisition criteria, such as profitability,
revenue growth potential, similar or complementary services, systems and client
bases that provide potential cross-selling opportunities, established
reputation, qualified and experienced management, professional and technical
personnel and geographic and cultural compatibility.
The Company believes it will be regarded by acquisition candidates as an
attractive acquirer because of: (i) the Company's strategy for creating a
professionally managed engineering firm of internationally recognized stature;
(ii) the Company's decentralized operating strategy which emphasizes an ongoing
role for owners, management and key personnel of acquired firms, as well as
meaningful equity positions for these individuals which will enable them to
participate in the Company's growth and realize improved liquidity; (iii) the
Company's objective of maintaining a professional environment which will attempt
to preserve and capitalize on the entrepreneurial spirit, creativity and
ingenuity of the acquired firms' owners and professional personnel; (iv) the
potential for growth of both the acquired entity and the Company overall by
virtue of increasing the scope and variety of services which the acquired firm
and the Company can together make available to their existing client bases, as
well as increasing the size and variety of the projects which can be undertaken
by the acquired firm as a result of its access to greater financial, technical
and professional resources; and (v) the potential for increased profitability of
the acquired company due to centralization of administrative functions, enhanced
information and design systems capabilities and purchasing economies.
The Company intends to use various combinations of its Common Stock, cash
and notes as consideration for future acquisitions. The consideration for each
future acquisition will vary on a case-by-case basis. The Company will finance
future acquisitions through funds provided by operations, by the New Credit
Facility and from the proceeds of future equity and debt financings. During
1998, the Company intends to register 3,000,000 shares of Common Stock under the
Securities Act for use in connection with future acquisitions.
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<PAGE>
ACQUISITION HISTORY
Since 1988, the Company has experienced substantial growth through
acquisitions. Key members of the Company's management team have worked together
for several years at Petrocon, which has made over 13 acquisitions to date. In
the process, the Company's management has gained valuable experience in
sourcing, negotiating, closing and successfully integrating acquisitions. The
following table describes eight of the more strategically significant
acquisitions by the Company since 1988:
<TABLE>
<CAPTION>
PRE-ACQUISITION
YEAR REVENUES(1)
COMPANY ACQUIRED ACQUIRED (IN MILLIONS) DESCRIPTION
- ------------------------------ -------- --------------- ------------------------------
<S> <C> <C>
Engineering Division of Austin 1988 $ 6.5 Multidisciplined engineering
Industries, Inc. services to the process
industries in the Texas and
Louisiana Gulf Coast Area
DLH Associates 1991 $ 1.2 Intrumentation and
programmable logic control
systems
Coastal Technical Corporation 1991 $ 8.0 Technical personnel
outsourcing
HTC, Inc. 1992 $ 0.6 Instrumentation and
programmable logic control
systems
Eagleton Saudi Arabia Limited 1992 $12.0(3) Engineering services to the
(PAL)(2) petroleum industry in the
Middle East
Triangle Engineers & 1996 $ 7.0 Multidisciplined engineering
Constructors, Inc. services to the petroleum and
chemical industries in the
Gulf Coast area
RPM/Barnard & Burke 1996 $17.5 Services to the downstream oil
and gas industry in the
Mississippi River corridor of
Louisiana
Alliance Engineering, Inc. 1997 $14.0 Process design serving the
upstream segment of the oil
and gas industry, with subsea
structural design specialty
</TABLE>
- ------------
(1) Represents unaudited revenues for the fiscal year ending in the year
immediately preceding the year of the acquisition.
(2) Acquisition of a 50% interest in what is now PAL.
(3) Represents 100% of PAL's revenues. No PAL revenues are included in the
Company's revenues because it uses the equity method to account for PAL.
Through these acquisitions, the Company has demonstrated the ability to
implement its acquisition strategy. The Company expanded internationally through
its acquisition of a 50% interest in PAL (formerly Eagleton Saudi Arabia
Limited), which has provided the Company with a presence in the Middle East and
surrounding countries. PAL has also provided cross-selling opportunities by
assisting the Company in securing engineering projects for its U.S-based
operating companies. The Company broadened its technical expertise in control
systems through a series of acquisitions, including DLH Associates and HTC,
Inc., which enabled the Company to immediately compete for a growing number of
control system project opportunities. The Company acquired Coastal Technical
Corporation to take advantage of an industry trend of outsourcing certain
in-plant engineering functions and as a hedge against cyclical downturns. The
acquisitions of RPM/Barnard & Burke, Triangle Engineers & Constructors, Inc. and
Alliance Engineering, Inc. have strengthened the Company's position in the Gulf
Coast region, while at the same time expanding the Company's engineering
capabilities in the upstream oil and gas market. These acquisitions also
permitted the Company to gain additional plant engineering projects with certain
of its long-term alliance clients by adding new office locations in close
proximity to their plants.
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<PAGE>
ENGINEERING ACTIVITIES
The Company groups its engineering activities into two principal segments:
engineering services and engineered systems. The following table sets forth, for
the periods indicated, the contribution to the Company's combined revenues from
each of these segments:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Engineering Services................. $ 80.8 $ 94.7 $ 123.5
Engineered Systems................... 19.6 39.7 45.6
--------- --------- ---------
Total........................... $ 100.4 $ 134.4 $ 169.1
========= ========= =========
</TABLE>
ENGINEERING SERVICES. The Company's engineering service capabilities
encompass all aspects of the process, civil, structural, mechanical, instrument,
electrical, geotechnical and environmental engineering disciplines, providing
its clients with a single source for all their design, engineering and
permitting needs. This multidisciplined expertise enables the Company to offer
total design and engineering solutions extending from product inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets.
The Company's services include feasibility studies, conceptual design,
detail engineering, site and environmental planning, evaluation and permitting,
procurement, project and construction management, inspection and verification,
maintenance, plant operations, quality assurance/control and information
technology. The Company has designed and engineered facilities ranging from
refineries, petrochemical plants, pulp and paper processing plants and
wastewater treatment facilities, to food and beverage processing plants,
pharmaceutical plants and laboratories, electronics manufacturing facilities,
hotels and casinos.
The nature and variety of the Company's engineering services are
illustrated by the following representative listing of projects completed by the
Company:
o Total design, integration and project management for a substantial
refinery upgrade project for Lyondell-Citgo in the Houston, Texas
area.
o Total design, procurement, installation supervision and startup of a
fruit processing plant in southern India.
o Engineering, procurement and construction management services for a
significant distributed control system upgrade for a major refinery in
the Middle East.
o Engineering, design, procurement, construction support and startup
services for a process system to blend coffee for Pepsi-Cola
International.
o Full range of environmental planning, permitting and engineering
consulting services relating to a 25,000 seat waterfront amphitheater
located in New Jersey.
o Design and permitting services related to a gas/odor collection system
project for a major New York landfill.
o Total engineering and design services for a marine research
laboratory, which includes a state-of-the-art 32,000 gallon aquarium
with seawater filtration and water temperature and lighting controls
for simulation of various aquatic conditions.
o Process engineering services for a substantial chemical plant project
in mainland China for a major U.S. chemical company.
The Company also provides engineers, designers and draftsmen to its clients
for assignment inside the clients' facilities. These staffing arrangements,
primarily with refineries and petrochemical and processing plants in the Texas
and Louisiana Gulf Coast region, include: partnering relationships with clients;
in-plant task forces operating under the Company's supervision; and
employee-lending arrangements where Company employees work under the client's
supervision. At March 31, 1998, approximately 509 Company
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<PAGE>
personnel were contracted for some form of in-plant assignment. The Company
intends to continue pursuing a strategy of placing employees on in-plant
assignments in order to take advantage of what it believes to be a sustained
trend toward outsourcing and single sourcing among plant owners and operators,
and as a hedge against cyclical slumps resulting from general economic or
industry specific conditions.
ENGINEERED SYSTEMS. The Company provides two primary types of engineered
systems: control and instrumentation systems and modular processing plants.
CONTROL AND INSTRUMENTATION SYSTEMS. The Company designs, engineers,
assembles, programs, installs, integrates and services control and
instrumentation systems for specific applications, principally in various energy
and processing related industries. The Company's control and instrumentation
systems are custom designed and include both conventional pneumatic and
hydraulic control systems and sophisticated electronic, microprocessor-based
controls employing programmable logic. Typical applications for the Company's
control and instrumentation systems include oil and gas production safety
systems, fire and gas detection systems, pipeline compressor station and data
acquisition systems, surface controls for subsea production systems and control
systems for oil and gas wells, engine and gas turbine driven compressors, pumps,
boilers and heaters, and processing equipment. The Company offers turnkey
electrical and instrumentation field construction services for equipment
packages, offshore oil and gas production facilities, pipeline compressor
stations, refineries and processing plants. All facets of control and
instrumentation system design, engineering, assembly and testing are performed
in-house by the Company, and the Company's full service field installation and
technical staff performs complete electrical and instrumentation installation
projects, start-up and commissioning services, modifications to existing
systems, on-site training and routine maintenance procedures for client
operating personnel. The Company's control systems unit does not produce
products for inventory and purchases component parts for its systems only on an
as-needed basis.
MODULAR PROCESSING PLANTS. The Company designs, engineers, fabricates and
installs modular processing plants for the oil and gas and petrochemical
industries. The Company specializes in cryogenic turbo-expander units which
employ extreme low temperatures in the processing of natural gas for the
extraction of ethane and heavier gas liquids and the removal of nitrogen and
other inerts. The Company also designs and builds extraction plants using
conventional refrigeration to remove propane and heavier gas liquids from
natural gas. Other modular plants designed and built by the Company include
plants for gas treatment, sulfur, dehydration and fractionation, crude
stabilization and production, MTBE, waste heat recovery and cogeneration, and
amine treatment. The Company has designed and built plants ranging in capacity
up to 450 million standard cubic feet per day for extraction plants, 250 million
standard cubic feet per day for gas treatment plants, 600 tons per day for
sulfur plants, 60,000 barrels per day for fractionation plants and 1.2 billion
cubic feet per day for gas dehydration plants.
All mechanical, structural, civil, piping, electrical and instrumentation
engineering incorporated in the Company's modular plants is performed by the
Company. The Company's modular plants are constructed at its fabrication
facility in Houston, Texas. The plants are built on skids and transported to
their site either by the Company or its client depending on the client's
preference. If requested by the client, the Company provides full on-site
installation, testing and commissioning services for its modular plants.
The Company believes that its modular plants offer advantages over
comparable plants constructed on site, including quicker and more predictable
delivery schedules, higher quality assurance due to the controlled environment
in which the plants are built, and lower costs attributable to simplified
materials delivery, quantifiable labor costs and simplified field installation.
Historically, the Company has undertaken only a small number of high-margin
modular plant projects annually, and most of its plants were for installation in
the oil and gas producing regions of the United States, principally in Texas,
Louisiana, Oklahoma and New Mexico. In recent years, the Company has been
concentrating on building plants for foreign clients, for installation abroad,
since the Company believes foreign projects generally offer greater profit
opportunities. In 1997, the Company's two largest foreign projects were built
for installation in Argentina and the Ivory Coast, respectively.
35
<PAGE>
BUSINESS DEVELOPMENT AND MARKETING
The Company believes marketing and business development are Company-wide
responsibilities, and all of the Company's project and other managers are
formally encouraged to be actively involved in business development efforts
through the maintenance of professional and personal relationships and through
the identification and pursuit of new business opportunities. Company managers
closely monitor the Company's client list to insure that all existing clients
are contacted on a regular basis so that the Company remains before the client
and aware of all current and proposed client projects.
At March 31, 1998, the Company also has 20 full-time business development
managers who are responsible for both maintaining existing client relationships
and identifying new clients, projects and markets. The Company business
development managers are located in Houston (six) and Beaumont (four), Texas;
Baton Rouge (four) and Lake Charles (one), Louisiana; Louisville, Kentucky
(three); and Warren, New Jersey (two). The Company has two full-time business
development managers responsible primarily for international business
development. In addition, the Company retains business development agents in
Mexico City, three Saudi Arabia locations and Lagos, Nigeria.
In addition to the regional business development managers, the Company has
recently created the position of Executive Vice President of Marketing and
Development to implement, control, monitor, report and evaluate marketing
policies and procedures to be adopted on a corporate level and approved by the
President. These policies and procedures will be set after consultation with
management of the Company's primary operating locations and will be modified
from time to time as market and Company conditions warrant. Other
responsibilities of the Executive Vice President of Marketing and Development
will include developing, implementing, monitoring and evaluating policies and
procedures relating to cost-effective integration techniques at the operating
company level with emphasis on resource allocation, such as staff utilization,
work-load variances and man-hour cost-to-billing differentials, in an effort to
achieve periodic and long-term consolidated financial planning objectives, while
at the same time maintaining acceptable internal growth rates at the operating
companies.
OPERATIONS
The Company intends to operate on a decentralized basis, with the
management of each operating company responsible for day-to-day operations,
profitability and growth. However, the Company intends to centralize certain
administrative activities from its executive offices. Centralized activities
will include accounting for the consolidated group, financing, business
development support, management information systems support, contract
administration, insurance and safety administration and audits. In addition, all
operating locations will be required to adhere to Company-wide policies and
procedures relating to financial reporting, internal controls, purchasing and
human resources and administration.
The Company will also initiate "best practices" among all the operating
companies for project monitoring and cost controls, backlog reporting, risk
management and, where determined by the Company to be advisable, engineering
policies and procedures. The Company intends to establish a President's Council,
comprised of the president of OEI and the presidents of each of the Company's
significant operating companies, to meet periodically for the purpose of
implementing "best practices" and identifying areas where opportunities for
synergies may be realized.
The Company intends to integrate in the near term the existing computer
system of Petrocon with each of the primary facilities of the Company's
significant operations. This system should increase the Company's overall staff
utilization rate by allowing the Company to instantly transmit work to the
location of available resources. The Company has recently retained an
integration coordinator to implement the integration of this system and other
centralized administrative functions.
COMPETITION
In its engineering services segment, the Company competes nationally and
internationally with a large number of other firms of all sizes, ranging from
the industry's largest firms which operate on a worldwide basis to much smaller
regional and local firms. Among the firms larger than the Company, many offer a
36
<PAGE>
broader range of services than does the Company, many concentrate their services
in one or more of the Company's service areas, and many have greater financial
and professional resources than the Company. The Company does not believe that
any one firm dominates or contributes a significantly large percentage of the
total volume of work performed in any particular service area.
Competition in the Company's engineering services segment is primarily
centered on performance and the ability to provide the engineering, planning and
project execution skills required to complete projects in a timely and cost
efficient manner, as well as price. The high level of competition in this area
of the Company's business has fostered a trend away from the relatively riskless
cost-plus fee arrangements to pricing alternatives designed to shift to the
service provider, or requiring the service provider to at least share in, the
risks of cost overruns and inefficiencies in the delivery of services. These
alternatives include fixed-price, guaranteed maximum price, incentive fee,
competitive bidding, and other "value based" pricing arrangements. See "Risk
Factors -- Pricing and Related Risk Sharing" and "-- Contracts."
In its engineered systems segment, the Company emphasizes, and believes it
is known for, the engineering quality and performance characteristics of its
systems, its total turnkey capabilities, its innovative design solutions and its
ability to meet promised delivery dates. The emphasis both clients and the
Company place on pricing tends to vary with cyclical conditions in the oil and
gas, petroleum and processing industries, with pricing becoming a more important
factor during industry downturns. The Company's control systems and modular
processing plants compete with similar systems built by other companies both
larger and smaller than the Company, some of which compete primarily on the
basis of pricing.
FOREIGN OPERATIONS
The Company has performed engineering and construction management services
in over 25 countries, both directly and through its 50% interest in PAL, which
is headquartered in Al Khobar, Saudi Arabia and serves the entire Arabian Gulf
Region. In addition to its Al Khobar headquarters, PAL has branch offices in
Riyadh, Yanbu and Abu Dhabi, from which it services clients in Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the United Arab Emirates. Through agents and
partners, the Company maintains offices in Mexico City, Mexico and Lagos,
Nigeria.
For the years ended December 31, 1995, 1996 and 1997, combined revenues
from Company projects outside of the United States, excluding all PAL projects,
were approximately 19.2%, 29.3% and 26.0% of total revenues, respectively. The
Company accounts for its 50% interest in PAL by the equity method, and therefore
no PAL revenues are included in the Company's revenues. For the years ended
December 31, 1995, 1996 and 1997, PAL had revenues of approximately $9.2
million, $8.1 million and $16.5 million, respectively.
CONTRACTS
The price provisions of the Company's contracts with its clients vary
greatly. However, these provisions can generally be grouped into one of three
categories: cost-plus; guaranteed maximum price; and fixed-price.
COST-PLUS contracts provide for reimbursement of costs incurred by the
Company plus a predetermined fee or a fee based on a percentage of costs
incurred. This pricing arrangement presents the least risk to the Company.
GUARANTEED MAXIMUM PRICE contracts are performed in the same manner as cost
plus contracts, except the total actual cost plus the fee cannot exceed the
guaranteed price negotiated between the Company and its client. If it does, then
the Company may bear all or a portion of the excess. Where the cost and fee are
less than the guaranteed price, the Company may share the savings with the
client on a predetermined basis.
FIXED-PRICE contracts include both negotiated fixed-price contracts and
lump sum bid contracts that require the Company to perform work for a stated
amount. Under a negotiated fixed-price contract, the Company is first selected
as the contractor, and then the contract price is negotiated. Negotiated
fixed-price contracts are frequently agreed to in turnkey arrangements where the
Company has the opportunity to
37
<PAGE>
perform feasibility studies and design work before negotiating the price. Under
lump sum bid contracts, the Company must bid against other firms based upon
specifications furnished by the client. Contract bidding carries certain
inherent risks, including the possibility of ambiguities in specifications,
problems with new technologies, strike delays, work stoppages and other
unforseen developments and changes that may occur over the contract period, that
are reallocated through the negotiation process. Although both forms of contract
involve a firm price for the customer, the lump sum bid contract presents the
greater degree of risk to the Company.
The Company's control systems and modular processing plants are contracted
primarily on a lump sum, turnkey basis either FOB the Company or installed on
site. For modular processing plants, the client typically makes an initial
payment upon commencement of the project and progress payments at various stages
of the project. Retainages beyond the completion date, designed to insure plant
performance and compliance with specifications, are common.
Most of the Company's contracts related to its engineering services
activities have historically been undertaken on a cost-plus basis. However, the
trend in the industry is away from this form of relatively riskless pricing,
with project owners increasingly requiring pricing alternatives that shift to
the service provider certain or all of the risk associated with cost overruns
and other service delivery inefficiencies. These alternatives include guaranteed
maximum price, fixed-price, incentive fee and other forms of "value-based"
pricing arrangements. The Company expects this trend to continue in the future,
with the result that the Company will be required to maintain and continually
improve, relative to its competitors, both the precision of its cost estimates
and the efficiency with which it delivers services. If managed properly, these
forms of pricing arrangements provide the Company with the potential for higher
margins. However, if the Company's discipline in either its cost estimates or
service efficiency declines or fails to keep pace with that of its competitors
the volume of awarded projects and their margins may be affected adversely. See
"-- Competition."
The following table reflects the amount and approximate percentage of the
Company's combined revenues for each of the last three years, derived from each
of the Company's three basic types of contract pricing provisions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Cost-plus............................ $ 74.8 74.5% $ 84.9 63.2% $ 109.6 64.8%
Guaranteed maximum price............. 6.1 6.1 5.9 4.4 6.7 4.0
Fixed-price.......................... 19.5 19.4 43.6 32.4 52.8 31.2
--------- --------- --------- --------- --------- ---------
Total........................... $ 100.4 100.0% $ 134.4 100.0% $ 169.1 100.0%
========= ========= ========= ========= ========= =========
</TABLE>
In cases relating to the Company's engineering service projects where the
Company is responsible for equipment or materials procurement and places a
markup on the procurement costs, the Company records on its accounts the
revenues and expenses associated with the procurement services. On other
projects involving procurement services where the Company charges no mark-up on
the equipment or materials provided to its client, the revenues and expenses
associated with the Company's procurement services are not recorded on its
accounts.
In accordance with industry practice, most of the Company's contracts are
subject to termination at the discretion of the client. Most contracts provide
for reimbursement of costs incurred and payment of fees earned by the Company
through the date of termination. Many of the Company's contracts also provide
indemnification to the client for losses and expenses incurred by the client as
a result of the Company's negligence and, in certain instances, the concurrent
negligence of the client. While the Company historically has not incurred
material losses with respect to these claims and maintains insurance in amounts
it considers adequate, no assurance can be given that the Company will not have
significant indemnification claims in the future, that claims made will not be
outside or exceed the Company's insurance coverage or that the
38
<PAGE>
Company will be able to continue to obtain insurance coverage at rates it
considers reasonable. See "-- Risk Management; Litigation."
Under certain contracts, the Company guarantees project completion by a
scheduled date or by achievement of certain acceptance and perfomance testing or
milestone levels. At December 31, 1997, the Company had underway projects
aggregating approximately $46.9 million in contract amount, which are subject to
some form of completion or performance guarantee. If the Company fails to meet
any required completion or performance requirements and is unable to remedy the
failure within the applicable cure period, the Company could incur financial
penalties in the form of liquidated damages or could be required to design or
repeat the service or repair or replace the system. See "Risk
Factors -- Completion Guarantees."
CLIENTS
During 1997, the Company provided engineering, design, construction
management and procurement services to more than 702 industrial, commercial and
institutional clients, involving more than 1,780 projects in the private sector
and 90 projects in the public sector. The following table reflects the
approximate percentage of combined revenues derived from the Company's major
client groups for each of the last three years:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN MILLIONS)
General Building..................... $ 4.7 $ 5.2 $ 6.5
Transportation....................... 1.8 1.6 0.2
Hazardous waste...................... 3.2 1.3 0.7
Industrial/Petroleum................. 75.6 113.1 141.2
Sewerage/solid waste................. 4.9 4.0 4.5
Power................................ 3.3 3.0 1.7
Manufacturing........................ 5.9 5.3 5.6
Water supply......................... 0.4 0.9 1.4
Other(1)............................. 0.6 0.0 7.3
--------- --------- ---------
Total........................... $ 100.4 $ 134.4 $ 169.1
========= ========= =========
- ------------
(1) Includes environmental and geotechnical reports and retail and residential
site surveys.
The Company's engineering services group has many clients representing a
broad range of industries and institutions, most of whom are repeat clients, and
historically has not had a continuing dependence on any single client or any
limited group of clients. However, one or a few clients have in the past and may
in the future contribute a substantial portion of the Company's revenues in any
one year or over a period of several consecutive years due to the size of major
engineering projects. The Company's business is not necessarily dependent upon
sustaining the level of revenues contributed by particular clients in any given
year or period of consecutive years. Historically, the Company has not generated
significant revenues from governmental clients, which accounted for only
approximately $4.4 million, $4.4 million and $3.6 million of the Company's
combined revenues during 1995, 1996 and 1997, respectively. In the Company's
experience, once it begins work on a particular project, it is unlikely the
client will terminate the Company's involvement before completion of the
project, unless the project itself is cancelled or postponed. Historically, the
Company has undertaken new projects for prior clients and has provided ongoing
services to clients following completion of their projects. Nonetheless, the
Company must continually obtain new engineering projects, whether from existing
or new clients, in order to generate revenues in future years as existing
projects are completed.
In recent years, the continuing trend among the Company's engineering
services clients and their industry counterparts toward outsourcing,
single-sourcing and downsizing has fostered the development of arrangements with
clients which are less oriented toward specified projects and more focused on
ongoing,
39
<PAGE>
longer-term relationships. These arrangements, often referred to as partnering
relationships or alliances, and, in some cases, sole source contracts, vary in
their scope, duration and degree of commitment. Some provide the Company with a
minimum number of work man-hours over specified periods; some assure the Company
of at least a designated percentage of the client's requirements for engineering
services at one or more locations; and some establish the Company as the
client's sole source of engineering services at a specific location or
locations. Other agreements express only a client's non-binding preference or
intent with respect to the Company and its services, or establish a general
contractual framework for what the parties expect will be an ongoing
relationship. Despite their variety, the collective effect of these partnering
relationships or alliances is to exert a stabilizing influence on the Company's
engineering services revenues. At present, the Company has some form of
partnering or alliance arrangement with several major refineries and chemical
companies. At March 31, 1998, approximately an aggregate $29.8 million of future
work under the Company's partnering or alliance contracts was considered to be
sufficiently firm for inclusion in the Company's backlog at that date. See
"-- Backlog".
The Company's engineered systems clients include both end users, such as
drilling companies, oil and gas producers, pipelines, compressor stations,
chemical companies and processing plants, that own or operate the facilities for
which the systems are designed, and equipment manufacturers, construction
contractors and other engineering firms that incorporate the Company's control
systems into facilities and products of their own design, construction and
manufacture. In the past, the Company has undertaken only a small number of
modular processing plant projects each year, seeking out and choosing only those
which offer the greatest profit margin opportunities. As in the Company's
engineering services segment, in any given year, a small number of clients may
account for a large percentage of the engineered systems revenues for that year,
depending on the number of major projects undertaken by the Company. Though the
engineered systems segment frequently receives work from repeat clients, its
client list may vary greatly from year to year.
No single client accounted for 10% or more of the Company's 1997 pro forma
combined revenues.
BACKLOG
The following table sets forth the Company's combined backlog at December
31, 1996 and 1997 and March 31, 1998, for each of its two major segments and by
geographic regions:
DECEMBER 31,
-------------------- MARCH 31,
1996 1997 1998
--------- --------- ---------
(IN MILLIONS)
Engineering Services................. $ 42.7 $ 86.1 $ 74.6
Engineered Systems................... 20.6 15.5 11.6
--------- --------- ---------
Total........................... $ 63.3 $ 101.6 $ 86.2
========= ========= =========
Domestic............................. $ 44.0 $ 79.4 $ 73.3
International........................ 19.3 22.2 12.9
--------- --------- ---------
Total........................... $ 63.3 $ 101.6 $ 86.2
========= ========= =========
The Company's combined backlog at March 31, 1998, most of which is expected
to be completed within the next 12 months, includes only contracts for which the
Company has received authorization to proceed with the work. Although this
backlog represents only work which is under contract, it is not necessarily
indicative of the Company's future revenues or earnings related to the
performance of the work included in backlog. The Company's contracts are subject
to standard industry cancellation provisions, including cancellation on short
notice or upon completion of designated stages. Authorizations to proceed are
for periods generally shorter than the duration of the work the Company expects
to perform for a particular client, and significant scope-of-work adjustments
are common. For certain risks associated with the Company's backlog, see "Risk
Factors -- Nature of Backlog."
40
<PAGE>
FACILITIES
For its professional, technical and administrative staff, the Company
leases 16 offices in the U.S. and foreign locations totaling approximately
358,000 square feet, and owns two office buildings in Baton Rouge, Louisiana
totaling approximately 40,500 square feet. The leases have remaining terms
ranging from one to four years and are at what the Company considers to be
commercially reasonable rental rates. The Company's principal office locations
are in Houston, Beaumont and Nederland, Texas; Baton Rouge and Lake Charles,
Louisiana; Warren and Atlantic City, New Jersey; Miami and Tampa, Florida;
Louisville, Kentucky; Al-Khobar, Riyadh and Yanbu, Saudi Arabia; and Abu Dhabi,
United Arab Emirates. The Company's Warren, New Jersey offices, comprising
approximately 90,300 square feet, are leased from entities controlled by certain
of the former stockholders of PS&S under several leases expiring in 2008.
Engineering and assembly of the Company's control and instrumentation
systems is performed at its approximately 21,000 square foot leased facility in
Beaumont, Texas, and at its approximately 30,000 square foot owned facility in
Houston. The Beaumont property is leased from a partnership owned one-third by
each of Petrocon, Michael L. Burrow and another Petrocon shareholder, which
lease expires in 2000.
The Company builds its modular gas processing plants in Houston, Texas at a
five-acre site, which includes approximately 33,000 square feet of owned office
and shop space and an adjacent 2,300 square foot leased paint and sandblasting
building, which is leased from a former GEI stockholder.
The Company believes its office and other facilities are well-maintained
and adequate for the Company's existing and planned operations at each operating
location.
EMPLOYEES
As of March 31, 1998, the Company had approximately 1,639 regular,
full-time employees, including 1,111 engineers, scientists, chemists, designers
and draftsmen, 220 construction managers, inspectors and technicians, 55
production support staff, and 253 administrative and clerical personnel. At that
date, approximately 1,632 Company employees were based in the United States, of
which approximately 509 were placed on assignment in client facilities, and
approximately 7 employees were based in foreign countries. In addition, at March
31, 1998, PAL employed 239 foreign-based employees. The table below shows the
number of regular, full-time employees in each of the Company's engineering
segments at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- MARCH 31,
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Engineering Services................. 1,473 1,322 1,393 1,415
Engineered Systems................... 150 195 221 224
--------- --------- --------- ---------
Total........................... 1,623 1,517 1,614 1,639
========= ========= ========= =========
</TABLE>
The Company is not a party to any collective bargaining agreements, has not
experienced any strikes or work stoppages and believes its relationship with its
employees is good.
GOVERNMENT REGULATION
The Company and its clients are subject to various evolving foreign,
federal, state and local laws and regulations, including those relating to the
environment, health and safety. To date, the Company has mostly benefited from
these laws and regulations and their impact on its clients, and the cost of the
Company's own compliance has not been material, but the fact that such laws and
regulations are changed frequently makes uncertain both the Company's expected
continuing benefits and costs associated with such laws and regulations. The
modification of existing laws or regulations or the adoption of new laws or
regulations affecting the Company's clients or its own operations or industry
could adversely affect the Company.
The Company and members of its professional staff are subject to a variety
of state, local and foreign licensing, registration and other regulatory
requirements governing the practice of engineering. Company professionals are
licensed or registered in approximately 46 states and foreign jurisdictions. The
Company endeavors to be in compliance with all applicable licensing and
registration requirements, and does not
41
<PAGE>
believe that any failure to be in such compliance at any given time will have a
material adverse effect on its operations or revenues. Nor does the Company
believe that such licensing or registration requirements will offer any material
impediment to the Company's proposed geographic expansion due to the prevalence
of reciprocity arrangements, the relative ease of the licensing process in most
jurisdictions, and the number and varied disciplines and qualifications of its
professional staff.
RISK MANAGEMENT; LITIGATION
In performing services for its clients, the Company could potentially be
liable for breach of contract, personal injury, property damage or negligence,
including professional errors and omissions. The Company often agrees to
indemnify its clients for losses and expenses incurred by them as a result of
the Company's negligence and, in certain instances, the concurrent negligence of
the clients. A portion of the Company's activities relate to environmental
services which involve significant risks to the Company with respect to
environmental damage, personal injury, fines and costs imposed by regulatory
agencies. Although liabilities arising from environmental regulations are more
directly applicable to the Company's clients, under certain circumstances those
regulations could impose liability on the Company, including on a joint and
several liability basis. The Company's quality control and assurance program
includes a control function to establish standards and procedures for
performance and documentation of performance project tasks, and an assurance
function to audit the control function and to monitor compliance with procedures
and quality standards. The Company maintains liability insurance for bodily
injury and third-party property damage, professional errors and omissions, and
workers compensation coverage which it considers sufficient to insure against
these risks, subject to self-insured amounts.
The Company is, from time to time, a party to litigation arising in the
ordinary course of its business, most of which involves contract claims,
professional errors and omissions claims and claims for personal injury or
property damage incurred in connection with its operations. The Company is not
currently involved in any litigation that the Company believes will have a
material adverse effect on its financial condition or results of operations.
No assurance can be given that the Company's insurance will be sufficient
under all circumstances to protect the Company against significant claims for
damages. The occurrence of a significant event not fully insured against could
materially and adversely affect the Company's financial condition and results of
operations. Moreover, no assurance can be given that the Company will be able to
maintain adequate insurance in the future at commercially reasonable rates or on
acceptable terms.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
individuals who will be OEI's directors and executive officers when the Offering
closes (ages are as of , 1998):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------------- ---- ------------------------------------------------ ---------
<S> <C> <C>
Michael L. Burrow, P.E.(1)(4)........ 50 Chairman of the Board, Chief Executive Officer Class III
Gary J. Coury(1)(4).................. 54 President, Chief Operating Officer, Director Class II
Rick Berry........................... 45 Executive Vice President, Chief Financial
Officer
Dana W. Swindler..................... 39 Executive Vice President -- Mergers and
Acquisitions
Robert W. Raiford.................... 52 Controller
Nolan Lehmann(1)(2)(3)(4)............ 54 Director Class II
Gary L. Forbes(1)(2)(3)(4)........... 54 Director Class I
W. Bernard Pieper*(2)(3)............. 65 Director Class I
Bob G. Gower*(2)(3).................. 60 Director Class III
C. Roland Haden*(2)(3)............... 57 Director Class II
- ------------
</TABLE>
* Appointment will become effective on closing of the Offering.
(1) Member of the Board's Executive Committee.
(2) Member of the Board's Audit Committee.
(3) Member of the Board's Compensation Committee.
(4) Member of the Board's Nominating Committee.
MICHAEL L. BURROW has been the Chairman, Chief Executive Officer and a
director of OEI since its formation in October 1997. Mr. Burrow founded Petrocon
and has served as its Chairman and Chief Executive Officer since its inception
in 1988. Mr. Burrow is a registered mechanical engineer and has approximately 27
years of experience in the engineering industry.
GARY J. COURY has been the President, Chief Operating Officer and a
director of OEI since its formation in October 1997. Mr. Coury has served as the
President and Chief Operating Officer of Petrocon since September 1995. Before
then, he served for eight years in various positions with Petrocon and its
predecessors, subsidiaries and affiliates, including as the President of PAL and
the President of international operations and a Vice President/General Manager,
of Petrocon's Houston operations from 1989 to 1993. Mr. Coury has over 30 years
of experience in the engineering industry.
RICK BERRY was appointed Executive Vice President and Chief Financial
Officer of OEI in March 1998. From 1989 to March 1998, Mr. Berry served as
Executive Vice President, Chief Financial Officer, Secretary and Treasurer of
TEI, Inc., a publicly traded environmental services company. From 1979 to 1989,
he served as Senior Vice President Finance of Mischer Enterprises, Inc., and
prior to that time, was employed by Peat Marwick, Mitchell & Co. Mr. Berry is a
certified public accountant.
DANA W. SWINDLER has been the Executive Vice President -- Mergers and
Acquisitions of OEI since October 1997. From June 1996 to the present, Mr.
Swindler served in that same capacity for Petrocon. Mr. Swindler served as the
Chief Financial Officer and a director of Maxim Technologies, Inc., a Dallas,
Texas based engineering and environmental company from April 1995 to May 1996,
and as the Executive Vice President of Maxim Engineers, Inc., a predecessor of
Maxim Technologies, Inc., commencing in April 1992.
ROBERT W. RAIFORD has been the Controller of OEI since its formation in
October 1997. He has served as the Executive Vice-President, Administrative
Services and Chief Financial Officer of Petrocon, since 1988.
43
<PAGE>
NOLAN LEHMANN has been a director of OEI since its formation in October
1997. Since 1983, Mr. Lehmann has served as the President and a director of
Equus Capital Management Corporation, a registered investment advisor. He also
serves as the President and a director of Equus II, a registered investment
company. Mr. Lehmann serves as a director of Allied Waste Industries, Inc., a
solid waste management company, American Residential Services, Inc., a
residential services company, Brazos Sportswear, Inc., a casual sportswear
company, Drypers Corporation, a manufacturer of disposable diapers, and Garden
Ridge Corporation, a specialty retailer, all of which are public companies. He
was appointed to the Board of Directors under OEI's funding agreement with Equus
II. See "Certain Transactions."
GARY L. FORBES has been a director of OEI since October 1997. Since 1991,
Mr. Forbes has served as a Vice President of Equus Capital Management
Corporation, a registered investment advisor, and as a Vice President of Equus
II. He serves as a director of Consolidated Graphics, Inc., a consolidator of
commercial printing companies, Drypers Corporation, a manufacturer of disposable
diapers, NCI Building Systems, Inc., a manufacturer of prefabricated metal
buildings, and Advanced Technical Products, Inc., a manufacturer of high
performance composite parts for the aerospace and defense industries, all of
which are publicly owned companies. Mr. Forbes was also appointed to the Board
of Directors under OEI's funding agreement with Equus II. See "Certain
Transactions."
W. BERNARD PIEPER will be appointed a director of OEI upon the closing of
the Offering. Mr. Pieper retired from Halliburton Company in January 1996, after
a 38-year career with Halliburton Company and its Brown & Root, Inc. subsidiary.
He was named President of Brown & Root, Inc. in 1989, and served in that
capacity until 1992, when he became Vice Chairman of Halliburton Company. In
1994, he added the title of Chief Operating Officer and became responsible for
Halliburton's three operating units: Brown and Root, Inc., Halliburton Energy
Services and Highlands Insurance Company. Mr. Pieper is a fellow of the American
Society of Civil Engineers and serves on the Board of Governors, the George R.
Brown School of Engineering Advisory Board, and the Jones Graduate School of
Administration Council of Overseers at Rice University, and is the current
Chairman of the Engineering Advisory Board at Rice. Mr. Pieper serves as a
director of Union Texas Petroleum Holdings, Inc., a public independent oil and
gas company, and Highlands Insurance Group, Inc., a public insurance company.
BOB G. GOWER will be appointed a director of OEI upon the closing of the
Offering. Mr. Gower is Chairman and Chief Executive Officer of Specified Fuels &
Chemicals, L.L.C., a custom processor of specialty chemicals and manufacturer of
reference fuels. From 1985 to 1997, he served first as President and then as
Chairman of Lyondell Petrochemical Company. Mr. Gower serves as a director of
Kirby Corporation, a public marine transportation company.
C. ROLAND HADEN will be appointed a director of OEI upon the closing of the
Offering. Since 1993, Dr. Haden has served as Vice Chancellor and Dean of
Engineering of Texas A&M University. He serves as the Chair for the Texas
Society of Professional Engineers PEE Committee and the Engineering Dean Council
of Texas, and as director of the Engineering Dean Council ASEE, and has
affiliations with several other professional and engineering organizations. Dr.
Haden also serves as a director of Inter-Tel, Inc., a public communication
company. He has served in various academic capacities for over 30 years,
including Dean and Professor of Engineering and Applied Services at Arizona
State University and Vice Chancellor for Academic Affairs at Louisiana State
University. Dr. Haden received his Ph.D. from University of Texas, Austin and
his MS from California Institute of Technology.
CLASSES OF DIRECTORS; DIRECTOR COMPENSATION
The Board of Directors is divided into three classes. Following a
transitional period, the directors of each class will serve for three years,
with one class being elected each year at the annual stockholders' meeting.
During the transitional period, the terms of the Class I directors will expire
at the 1999 meeting, the terms of the Class II directors will expire at the 2000
meeting and the terms of the Class III directors will expire at the 2001
meeting. Classification of the Board could lengthen the time necessary to change
the composition of a majority of the members comprising the Board. In general,
at least two annual meetings of
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<PAGE>
stockholders will be necessary for stockholders to effect a change in a majority
of the members of the Board.
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Following the closing of the Offering,
each director who is not an employee of the Company initially will receive a fee
of $2,500 for each board meeting attended and $1,500 for each board committee
meeting attended and will periodically be granted options under the Incentive
Plan for the purchase of Common Stock. See "-- Incentive Plan." When the
Offering closes, each of OEI's five outside directors will be granted options to
purchase 10,000 shares of Common Stock at an exercise price per share equal to
the initial public offering price. The Company will reimburse directors for
out-of-pocket expenses incurred in attending Board of Directors or Board
committee meetings in their capacity as directors.
EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
On closing of the Offering, the Company will have employment agreements
with Messrs. Burrow, Coury, Berry, Swindler and Raiford, which provide for
annual base salaries of $300,000, $250,000, $175,000, $200,000 and $162,000,
respectively. As of the closing of the Pending Acquisitions, certain Acquired
Companies will enter into employment agreements with a total of 13 of their key
officers, including Jerry G. Gulsby, the President of GEI, William Paulus, Jr.,
Anthony J. Sartor and Philip A. Falcone, the principal stockholders and
executive officers of PS&S, Kenneth W. Castlebury, T.L. Lynn, Kenneth W. Oliver
and John W. White, the principal stockholders and executive officers of W-I, and
James W. Kerr and Jamie Ghazi, stockholders and executive officers of C&I. The
following is a summary of the material terms of the employment agreements of
these executives and key officers, a form of which agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
Each of these agreements has a three-year term subject to the right of the
Company to terminate the employee's employment at any time after one year. If
the employee's employment is terminated by the Company within the first three
years without cause (as defined), the employee will be entitled to the payment
of any annual base salary and continuation of health insurance benefits for one
year following termination. Each employment agreement contains a covenant
limiting competition with the Company following the termination of employment
for a period of (i) four years from the effective date of the employment
agreement if employment is terminated for cause (as defined) or voluntarily by
the executive or (ii) six months following the termination if employment is
terminated without cause or due to disability, subject to the right of the
Company, in the latter circumstances, to extend the period of restricted
competition for up to an additional one year by continuing the executive's
annual base salary and insurance benefits for the additional year.
The Company will also pay one-time cash bonuses in the amount of $60,000 to
each of Messrs. Coury and Swindler for their efforts and assistance in
connection with, and conditioned on the closing of, the Pending Acquisitions and
the Offering.
INCENTIVE PLAN
The description set forth below summarizes the principal terms and
conditions of the Incentive Plan, does not purport to be complete and is
qualified in its entirety by reference to the Incentive Plan, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
GENERAL. The objectives of the Incentive Plan, which was approved by the
Board of Directors and stockholders, are to attract and retain selected key
employees, consultants and outside directors, encourage their commitment,
motivate their performance, facilitate their obtaining ownership interests in
the Company (aligning their personal interests to those of the Company's
stockholders) and enable them to share in the long-term growth and success of
the Company.
SHARES SUBJECT TO INCENTIVE PLAN. Under the Incentive Plan, the Company
may issue Incentive Awards (as defined below) covering at any one time an
aggregate of the greater of (i) 2,000,000 shares of Common Stock and (ii) 10% of
the number of shares of Common Stock issued and outstanding on the last day of
the then preceding calendar quarter. No more than 2,000,000 shares of Common
Stock will be available for ISOs (as defined below). As of the closing of the
Pending Acquisitions, options covering
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<PAGE>
1,765,223 shares of Common Stock will be outstanding or allocated for grant and
234,777 shares of Common Stock then will be available for subsequent Incentive
Awards. The number of securities available under the Incentive Plan and
outstanding Incentive Awards are subject to adjustments to prevent enlargement
or dilution of rights resulting from stock dividends, stock splits,
recapitalization or similar transactions or resulting from a change in
applicable laws or other circumstances.
ADMINISTRATION. The Incentive Plan will be administered by the
compensation committee of the Board of Directors (the "Committee"). Following
the Offering, the Committee will consist solely of directors ("Outside
Directors") each of whom is (i) an "outside director" under Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) a
"non-employee director" under Rule 16b-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Committee may delegate to the chief
executive officer or other senior officers of the Company its duties under the
Incentive Plan, except with respect to any authority to grant Incentive Awards
or take other action with respect to persons who are subject to Section 16 of
the Exchange Act or Section 162(m) of the Code. In the case of an Incentive
Award to an Outside Director, the Board of Directors shall act as the Committee.
Subject to the express provisions of the Incentive Plan, the Committee is
authorized to, among other things, select grantees under the Incentive Plan and
determine the size, duration and type, as well as the other terms and conditions
(which need not be identical), of each Incentive Award. The Committee also
construes and interprets the Incentive Plan and any related agreements. All
determinations and decisions of the Committee are final, conclusive and binding
on all parties. The Company will indemnify members of the Committee against any
damage, loss, liability, cost or expenses arising in connection with any claim,
action, suit or proceeding by reason of any action taken or failure to act under
the Incentive Plan, except for any such act or omission constituting willful
misconduct or gross negligence.
ELIGIBILITY. Key employees, including officers (whether or not they are
directors), and consultants of the Company and non-employee directors are
eligible to participate in the Incentive Plan. A key employee generally is any
employee of the Company who, in the opinion of the Committee, is in a position
to contribute materially to the growth and development and to the financial
success of the Company.
TYPES OF INCENTIVE AWARDS. Under the Incentive Plan, the Committee may
grant (i) incentive stock options ("ISOs"), as defined in Section 422 of the
Code, (ii) "nonstatutory" stock options ("NSOs"), (iii) stock appreciation
rights ("SARs"), (iv) shares of restricted stock, (v) performance units and
performance shares, (vi) other stock-based awards, and (vii) supplemental
payments dedicated to the payment of income taxes (collectively, "Incentive
Awards"). ISOs and NSOs are sometimes referred to collectively herein as
"Options." The terms of each Incentive Award will be reflected in an agreement
(the "Incentive Agreement") between the Company and the participant.
OPTIONS. Generally, Options must be exercised within 10 years of the grant
date. ISOs may be granted only to employees, and the exercise price of each ISO
may not be less than 100% of the fair market value of a share of Common Stock on
the date of grant. The Committee will have the discretion to determine the
exercise price of each NSO granted under the Incentive Plan. To the extent the
aggregate fair market value of shares of Common Stock with respect to which ISOs
are exercisable for the first time by any employee during any calendar year
exceeds $100,000, those Options must be treated as NSOs.
The exercise price of each Option is payable in cash or, in the discretion
of the Committee, by the delivery of shares of Common Stock owned by the
Optionee, or the withholding of shares that would otherwise be acquired on the
exercise of the Option, or by any combination of the foregoing.
An employee will not recognize any income for federal income tax purposes
at the time an ISO is granted, or on the qualified exercise of an ISO, but
instead will recognize capital gain or loss (as applicable) upon the subsequent
sale of shares acquired in a qualified exercise. The exercise of an ISO is
qualified if a participant does not dispose of the shares acquired by the
participant's exercise within two years after the ISO grant date and one year
after such exercise. The Company is not entitled to a tax deduction as a result
of the grant or qualified exercise of an ISO.
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An optionee will not recognize any income for federal income tax purposes,
nor will the Company be entitled to a deduction, at the time an NSO is granted.
However, when an NSO is exercised, the optionee will recognize ordinary income
in an amount equal to the difference between the fair market value of the shares
received and the exercise price of the NSO, and the Company will generally
recognize a tax deduction in the same amount at the same time.
The foregoing federal income tax information is a summary only, does not
purport to be a complete statement of the relevant provisions of the Code and
does not address the effect of any state, local or foreign taxes.
SARS. Upon exercise of an SAR, the holder will receive cash, shares of
Common Stock or a combination thereof, as specified in the related Incentive
Agreement, the aggregate value of which equals the amount by which the fair
market value per share of the Common Stock on the date of exercise exceeds the
exercise price of the SAR, multiplied by the number of shares underlying the
exercised portion of the SAR. An SAR may be granted in tandem with or
independently of an NSO. SARs will be subject to such terms and conditions and
will be exercisable at such times as determined by the Committee, provided, that
the exercise price per share must equal at least 100% of the fair market value
of a share of a Common Stock on the date of grant. The value of an SAR may be
paid in cash, shares of Common Stock or both in combination, as determined by
the Committee.
RESTRICTED STOCK. Restricted stock may be subject to substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal of the Company, as determined by the Committee. Unless otherwise
determined by the Committee, during the period of restriction, the grantee will
have all other rights of a stockholder, including the right to vote and receive
dividends on the shares.
PERFORMANCE UNITS AND PERFORMANCE SHARES. Performance units and
performance shares may be granted only to employees and consultants. For each
performance period (to be determined by the Committee), the Committee will
establish specific financial or non-financial performance objectives, the number
of performance units or performance shares and their contingent values, which
values may vary depending on the degree to which such objectives are met.
OTHER STOCK-BASED AWARDS. Other stock-based awards are awards denominated
or payable in, valued in whole or in part by reference to or otherwise related
to shares of Common Stock. Subject to the terms of the Incentive Plan, the
Committee may determine any terms and conditions of other stock-based awards,
provided that, in general, the amount of consideration to be received by the
Company shall be either (i) no consideration other than services actually
rendered or to be rendered (in the case of the issuance of shares) or (ii) in
the case of an award in the nature of a purchase right, consideration (other
than services rendered) at least equal to 50% of the fair market value of the
shares covered by such grant on the date of grant. Payment or settlement of
other stock-based awards will be in shares of Common Stock or in other
consideration related to such shares.
SUPPLEMENTAL PAYMENTS FOR TAXES. The Committee may grant, in connection
with an Incentive Award (except for ISOs), a supplemental payment in an amount
not to exceed the amount necessary to pay the federal and state income taxes
payable by the grantee with respect to the Incentive Award and the receipt of
the supplemental payment.
OTHER TAX CONSIDERATIONS. Upon accelerated exercisability of Options and
accelerated lapsing of restrictions upon restricted stock or other Incentive
Awards in connection with a Change in Control (as defined in the Incentive
Plan), certain amounts associated with such Incentive Awards could, depending
upon the individual circumstances of the participant, constitute "excess
parachute payments" under Section 280G of the Code, thereby subjecting the
participant to a 20% excise tax on those payments and denying the Company a
corresponding deduction. The limit on the deductibility of compensation under
Section 162(m) of the Code is also reduced by the amount of any excess parachute
payments. Whether amounts constitute excess parachute payments depends upon,
among other things, the value of the Incentive Awards accelerated and the past
compensation of the participant.
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Taxable compensation earned by executive officers who are subject to
Section 162(m) of the Code in respect of Incentive Awards is subject to certain
limitations set forth in the Incentive Plan generally intended to satisfy the
requirements for "qualified performance-based compensation," but no assurance
can be given that OEI will be able to satisfy these requirements in all cases,
and the Company may, in its sole discretion, determine in one or more cases that
it is in its best interest not to satisfy these requirements even if it is able
to do so.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. Except as otherwise
provided in the applicable Incentive Agreement, if a participant's employment or
other service with the Company (or its subsidiaries) is terminated (i) other
than due to his death, Disability, Retirement or for Cause (each capitalized
term as defined in the Incentive Plan), his then exercisable Options will remain
exercisable for 60 days after such termination, (ii) by reason of Disability or
death, his then exercisable Options will remain exercisable for one year
following such termination, (iii) due to his retirement, his then exercisable
Options will remain exercisable for six months (except for ISOs, which will
remain exercisable for three months), or (iv) for Cause, all his Options will
expire at the commencement of business on the date of such termination.
Upon a Change in Control of OEI, any restrictions on restricted stock and
other stock-based awards will be deemed satisfied, all outstanding Options and
SARs may become immediately exercisable and all the performance shares and units
and any other stock-based awards may become fully vested and deemed earned in
full, at the discretion of the Committee. These provisions could in some
circumstances have the effect of an "anti-takeover" defense because, as a
result of these provisions, a Change in Control of OEI could be more difficult
or costly.
INCENTIVE AWARDS NONTRANSFERABLE. No Incentive Award may be assigned, sold
or otherwise transferred by a participant, other than by will or by the laws of
descent and distribution, or be subject to any encumbrance, pledge, lien,
assignment or charge. An Incentive Award may be exercised during the
participant's lifetime only by the participant or the participant's legal
guardian.
AMENDMENT AND TERMINATION. The Board of Directors may amend or terminate
the Incentive Plan at any time, except that the Incentive Plan may not be
modified or amended, without stockholder approval, if such amendment would (i)
increase the number of shares of Common Stock which may be issued thereunder,
except in connection with a recapitalization of the Common Stock, (ii) amend the
eligibility requirements for employees to purchase Common Stock under the
Incentive Plan, (iii) increase the maximum limits on Incentive Awards that may
be issued to executive officers who are subject to Section 162(m) of the Code,
(iv) extend the term of the Incentive Plan or (v) decrease the authority granted
to the Committee under the Incentive Plan in contravention of Rule 16b-3 under
the Exchange Act. No termination or amendment of the Incentive Plan shall
adversely affect in any material way any outstanding Incentive Award previously
granted to a participant without his consent.
On the closing of the Offering, the Company expects Options to purchase a
total of 1,765,223 shares of Common Stock will be outstanding or allocated for
grant. Of these Options, 768,384 Options represent Replacement Options
(including 2,722, 238,038, 146,734 and 153,288 options held by Messrs. Burrow,
Coury, Raiford and Swindler, respectively). These replacement options have a
weighted exercise per share of $7.68. On or prior to closing of the Offering,
additional Options to purchase shares of Common Stock will be granted or
allocated for grant to the following persons to purchase the respective number
of shares indicated: (i) Mr. Burrow (15,512 shares); (ii) Mr. Coury, (13,812
shares); (iii) Mr. Berry (36,564 shares); (iv) Mr. Swindler (11,046 shares); (v)
Mr. Raiford (6,984 shares); (vi) Messrs. Lehmann, Forbes, Pieper, Gower and
Haden (10,000 shares each); and (vii) other employees as a group 862,921
shares). All these additional options will have an initial exercise price per
share equal to the initial public offering price and will become exercisable as
to 25% of such shares six months after the date the Offering closes and as to
25% of such shares on each anniversary of that date.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan for United States employees (the
"Employee Purchase Plan") was adopted by the Board of Directors in April 1998.
A total of 300,000 shares of Common Stock
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<PAGE>
has been reserved for issuance under the Employee Purchase Plan. The Employee
Purchase Plan, which is intended to qualify under Section 423 of the Code, has
quarterly offering periods each year beginning on the first trading day on or
after January 1, April 1, July 1 and October 1, respectively, except for the
first such offering period which commences on the first trading day on or after
the effective date of the Offering and ends on the last trading day on or before
, 1998. The Employee Purchase Plan is administered by the Board of
Directors or by a committee appointed by the Board. A United States employee is
eligible to participate if the employee is (i) customarily employed by the
Company or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year and (ii) employed by the Company or any
participating subsidiary on the effective date of the Employee Purchase Plan, or
if not employed on such effective date, has completed at least six consecutive
months of employment with the Company or any participating subsidiary. The
Employee Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions of up to 15% of an employee's compensation (including
commissions and overtime, but excluding other bonuses and incentive
compensation), up to a maximum of $25,000 for all offering periods ending within
the same calendar year. The price of stock purchased under the Employee Purchase
Plan is 90% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be repaid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company or any participating subsidiary.
Rights granted under the Employee Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Employee Purchase Plan. The Employee Purchase Plan
provides that, in the event of a merger of OEI with or into another corporation
or a sale of substantially all of OEI's assets, the Board of Directors shall
shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). The Employee Purchase Plan will terminate in April 2008. The Board of
Directors has the authority to amend or terminate the Employee Purchase Plan,
except that no such action may adversely affect any outstanding rights to
purchase stock under the Employee Purchase Plan.
BONUS AWARDS; OTHER PLANS
The 1998 bonuses for officers and key employees of the Company, if any,
will be based upon the performance standards to be established by the
Compensation Committee. The Company expects the Compensation Committee to
establish such performance standards for the remainder of 1998 following the
closing of the Offering.
The Company has adopted or intends to adopt deferred compensation,
supplemental disability, supplemental life and retirement or other benefit or
welfare plans in which executive officers of the Company will be eligible to
participate.
The Compensation Committee will be established on the closing of the
Offering and will be comprised solely of non-employee directors of OEI. In the
past, matters with respect to the compensation of executive officers of OEI were
determined by its Board of Directors, including those members who serve as
executive officers.
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CERTAIN TRANSACTIONS
ORGANIZATION OF OEI
OEI was formed in October 1997 by Petrocon's management to conduct the
Offering, simultaneously consummate the Pending Acquisitions and continue
Petrocon's successful acquisition program. OEI was initially capitalized with
$1,000 provided by Messrs. Burrow, Coury, Berry and Swindler and Equus II, in
exchange for 1,828,368 shares of Common Stock. Mr. Lehmann, a director of OEI,
is a director and the President of Equus II, and Mr. Forbes, also an OEI
director, is a Vice President of Equus II.
Since October 1997, Equus II has advanced funds to OEI under a $2.5 million
short-term promissory note (the "Equus Note") for use in connection with OEI's
efforts to conduct the Offering and consummate the Pending Acquisitions. The
Equus Note bears interest at a designated prime rate plus 1/2%. At March 31,
1998, approximately $1.0 million was outstanding under the Equus Note. OEI
expects to borrow an additional $1.5 million under the Equus Note before the
Offering closes. The Company intends to repay the Equus Note in full from
proceeds of the Offering.
Concurrently with the closing of the Offering, OEI will consummate the
Pending Acquisitions. The consideration to be paid by the Company in the Pending
Acquisitions consists of (i) approximately $27.8 million in cash, (ii) 5,053,027
shares of Common Stock and (iii) approximately $3.4 million and 654,099 shares
to be placed in escrow with respect to one of the Pending Acquisitions. In
addition, the Company will assume certain of the indebtedness of Petrocon and
the Acquired Companies (approximately $28.1 million as of December 31, 1997).
Subject to certain adjustments described below, the following table sets
forth for Petrocon and each Acquired Company the cash and shares of Common Stock
to be paid and issued to its stockholders in the Pending Acquisitions.
CASH SHARES OF
COMPANY CONSIDERATION COMMON STOCK
- ---------------------------------------- ------------- ------------
Petrocon................................ $ 12,715,786 2,118,888
PS&S.................................... 4,521,905 879,258
GEI..................................... 2,786,170 541,757
W-I..................................... 4,901,814 953,129
C&I..................................... 2,879,981 559,995
------------- ------------
Total.............................. $ 27,805,656 5,053,027
============= ============
The Company will also assume and repay an aggregate of $28.7 million of
indebtedness of Petrocon and certain of the Acquired Companies ($21.8 million of
which will be repaid from proceeds of the Offering and $1.4 million of which
will be repaid from cash on hand), as follows: Petrocon -- $16.4 million;
PS&S -- $3.2 million; GEI -- $4.6 million; W-I -- $4.3 million; and C&I -- $0.1
million. In addition, the Company will place approximately $3.4 million and
654,099 shares of Common Stock in escrow in connection with the GEI acquisition,
which will be paid to the former GEI stockholders, or returned to the Company,
depending on the future financial performance of GEI. See "The Company --
Summary of Terms of the Pending Acquisitions."
Prior to the closing of the Pending Acquisitions, certain Acquired
Companies may make additional distributions to their stockholders of certain
assets and related liabilities with an aggregate net book value of approximately
$9.1 million.
Pursuant to the acquisition agreements, certain stockholders of each of
Petrocon and the Acquired Companies have agreed not to compete with the Company
for a period of three years commencing on the date of closing of the Pending
Acquisitions.
In connection with the Pending Acquisitions, OEI will grant certain
registration rights to former stockholders of Petrocon and the Acquired
Companies. OEI has also granted certain registration rights to Equus II. See
"Shares Eligible for Future Sale."
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PENDING ACQUISITIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Persons who are or will become directors, executive officers, or beneficial
owners of 5% or more of the Common Stock will receive the following
consideration in the Pending Acquisitions for their equity interests in Petrocon
and the Acquired Companies.
CASH SHARES OF
NAME CONSIDERATION COMMON STOCK(1)
- ------------------------------------- ------------- ---------------
Michael L. Burrow(2)................. $ 2,409,238 451,188
Gary J. Coury........................ 35,397 6,629
Robert W. Raiford.................... 301,811 56,521
Jerry G. Gulsby(3)................... 2,786,170 541,757
------------- ---------------
Total........................... $ 5,532,616 1,056,095
============= ===============
- ------------
(1) Excludes options to purchase 540,782 shares of Common Stock which are to be
granted on closing of the Offering in replacement of Petrocon options as
follows: Michael L. Burrow -- 2,722 shares at an exercise price per share of
$6.52; Gary J. Coury -- 238,038 shares at exercise prices per share of $6.52
(133,327 shares) and $9.55 (104,711 shares); Dana W. Swindler -- 153,288
shares at an exercise price per share of $6.52; and Robert W. Raiford --
146,734 shares at exercise prices per share of $9.55 (104,711 shares) and
$6.52 (42,023 shares).
(2) Represents cash and shares payable to the M.L. Burrow Family Partnership,
Ltd., in which Mr. Burrow has a 95% partnership interest.
(3) Includes approximately $0.8 million and 157,110 shares issuable to certain
trusts for the benefit of Mr. Gulsby's descendents. Excludes (i)
approximately $3.4 million and 654,099 shares of Common Stock which will be
placed in escrow in connection with the GEI acquisition, and which will be
subject to a maximum three-year earnout arrangement, (ii) approximately $3.1
million of advances from GEI to Mr. Gulsby to be assumed by OEI upon
consummation of the GEI acquisition, which, for accounting purposes, will be
eliminated on the consolidation of GEI with OEI and (iii) the assignment of
retainages associated with certain GEI client contracts having a net book
value of approximately $3.7 million, plus approximately $0.1 million for
adjustments in retainages between December 31, 1997 and the closing of the
Pending Acquisitions.
REAL ESTATE AND OTHER TRANSACTIONS
The Company leases office space in Beaumont, Texas from a partnership owned
one-third by each of Petrocon, Mr. Burrow and another Petrocon shareholder. The
lease expires in 2000 and has a present annual rental rate of approximately
$115,000.
The Company believes the rentals paid under the lease described above
represent fair market rates.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved in advance by a majority of the Board of Directors, including a
majority of disinterested members of the Board of Directors.
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PRINCIPAL STOCKHOLDERS
The following table shows, immediately after giving effect to the closing
of the Pending Acquisitions and the Offering, the beneficial ownership of the
Common Stock of (i) each person who then will beneficially own more than five
percent of the outstanding shares of Common Stock, (ii) each person who then
will be a director of OEI, (iii) each person who then will be an executive
officer of OEI and (iv) all persons who then will be directors and executive
officers of OEI as a group. The table assumes none of these persons intends to
acquire shares directly from the Underwriters in connection with the Offering.
SHARES BENEFICIALLY
OWNED
AFTER OFFERING(2)
-----------------------
BENEFICIAL OWNER(1) NUMBER PERCENT
- ------------------------------------- ----------- -------
Equus II Incorporated................ 1,218,973 10.3%
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Jerry G. Gulsby(3)................... 1,195,856 10.1
1250 Indiana Drive
Humble, Texas 77347
Michael L. Burrow(4)................. 661,104 5.6
Gary J. Coury(5)..................... 281,356 2.4
Rick Berry........................... 36,564 *
Dana W. Swindler(6).................. 189,101 1.6
Robert W. Raiford(7)................. 92,832 *
Nolan Lehmann(8)..................... 1,218,973 10.3
Gary L. Forbes(8).................... 1,218,973 10.3
W. Bernard Pieper.................... -- *
Bob G. Gower......................... -- *
C. Roland Haden...................... -- *
All directors and officers as a group
(10 persons) (4)-(8)............... 2,479,930 20.7%
- ------------
* Less than 1%.
(1) All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated.
(2) Shares shown do not include shares of Common Stock that could be acquired on
exercise of currently outstanding options which do not vest within 60 days
hereof.
(3) Includes 654,099 shares which will be placed in escrow on closing of the
Offering, subject to a maximum three-year earnout arrangement. Mr. Gulsby
has voting but not investment powers during the period these shares are held
in escrow. Also, includes 157,110 shares held by certain trusts for the
benefit of Mr. Gulsby's descendents.
(4) Includes 451,188 shares held by the M.L. Burrow Family Partnership, Ltd., in
which Mr. Burrow has a 95% partnership interest and includes 2,722 shares of
Common Stock issuable on exercise of stock options.
(5) Includes 67,653 shares of Common Stock issuable on exercise of stock
options.
(6) Includes 30,658 shares of Common Stock issuable on exercise of stock
options.
(7) Includes 36,311 shares of Common Stock issuable on exercise of stock
options.
(8) All these shares are beneficially owned by Equus II. Messrs. Lehmann and
Forbes are both directors of OEI. Mr. Lehmann is the President and a
director of Equus II, Mr. Forbes is a Vice President of Equus II, and each
of them may be deemed to be beneficial owners of the Equus II shares. Both
Mr. Lehmann and Mr. Forbes disclaim beneficial ownership of any of those
shares.
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SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Pending Acquisitions and the Offering, 11,835,494 shares
of Common Stock will be outstanding. The shares sold in the Offering (other than
to affiliates of the Company) will be freely tradable by the public. The
remaining outstanding shares of Common Stock (collectively, the "Restricted
Shares") have not been registered under the Securities Act and may be resold
publicly only following their effective registration under the Securities Act or
under an available exemption from the registration requirements of the
Securities Act, such as Rule 144. In general, under Rule 144 as now in effect,
if a minimum of one year elapses from the later of the date of acquisition of
the Restricted Shares from OEI or from an affiliate of OEI, a person (or persons
whose shares of Common Stock are aggregated), including persons who may be
deemed "affiliates" of OEI, would be entitled to sell in any three-month
period a number of Restricted Shares which does not exceed the greater of (i) 1%
of the then outstanding shares of Common Stock and (ii) the average weekly
trading volume of the Common Stock during the period of the four preceding
calendar weeks. Sales under Rule 144 are also subject to certain provisions as
to the manner of sale, notice requirements and the availability of current
public information about the Company. In addition, under Rule 144, if a period
of at least two years elapses from the later of the date Restricted Shares were
acquired from OEI or the date they were acquired from an affiliate of OEI, a
stockholder who is not an affiliate of OEI at the time of sale and has not been
an OEI affiliate for at least three months before the sale would be entitled to
sell shares of Common Stock in the public market immediately, without compliance
with the foregoing Rule 144 requirements. Rule 144 does not require the same
person to hold the Restricted Shares for the applicable periods under certain
circumstances. This Rule 144 summary is not intended to be a complete
description of the Rule. The SEC has proposed amendments to Rule 144 that would,
among other things, eliminate the manner of sale requirements and revise the
notice provisions of the Rule. The SEC has also solicited comments on other
possible changes to Rule 144, including possible revisions to its one- and two-
year holding periods and its volume limitations.
The Company has agreed not to directly or indirectly sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase or
otherwise transfer or dispose of any shares of Common Stock or any security
convertible or exchangeable for Common Stock for a period of two years (the
"Lockup Period") following the date of this Prospectus, without the prior
written consent of Smith Barney Inc., except that the Company may issue Common
Stock in connection with acquisitions, pursuant to awards under the Incentive
Plan or pursuant to the exercise of warrants outstanding as of the closing of
the Offering (consisting only of the Replacement Warrants). Further, all of
OEI's officers, directors and current stockholders (including Equus II), and all
persons who acquire shares in connection with the Pending Acquisitions, have
agreed generally not to offer, sell or otherwise dispose of any of their shares
for two years following the date of this Prospectus, without the prior written
consent of Smith Barney Inc. Various factors will be considered by Smith Barney,
Inc. in evaluating whether to consent to a proposed transfer of shares during
the Lockup Period, including the reason for the transfer, the number of shares
requested to be transferred, the potential effect of the transfer on the market
price of the Common Stock, the number of shares previously allowed to be
transferred and other relevant circumstances at the time of the transfer.
OEI will enter into a registration rights agreement (the "RRA") with the
former stockholders of Petrocon and the Acquired Companies, which will provide
certain registration rights with respect to the Common Stock issued to such
stockholders in the Pending Acquisitions. The RRA will provide for a single
demand registration right, exercisable by the holders of at least 51.0% of the
shares of Common Stock initially subject to the RRA, to require the Company to
file a registration statement under the Securities Act to register the sale of
not less than 1,000,000 shares by the requesting stockholders and any other
holders of Common Stock parties to the RRA who desire to sell pursuant to such
registration statement. The demand request may not be made until ,
. The demand registration rights conferred by the RRA will terminate on
. Subject to certain conditions and limitations, the RRA will
also give its parties the right to participate in registrations by the Company
of OEI equity securities in underwritten offerings commencing on
. In a separate registration rights agreement with Equus II,
OEI has granted Equus II the right to demand two registrations of shares of
Common Stock, and the right to
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include for its own account, or for the account of others, subject to certain
exceptions, shares of Common Stock in certain registrations in which the Company
registers shares for its account.
The RRA requires the Company to pay the costs associated with an offering
subject to the RRA, other than underwriting discounts and commissions and
transfer taxes attributable to the shares sold on behalf of the selling
stockholders. The RRA provides that the number of shares of Common Stock that
must be registered on behalf of selling stockholders is subject to limitation if
the managing underwriter determines that market conditions require such a
limitation. Pursuant to the RRA, OEI will indemnify the selling stockholders,
and the selling stockholders will indemnify OEI, against certain liabilities in
respect of any registration statement or offering covered by the RRA.
The Company intends to register 3,000,000 shares of Common Stock under the
Securities Act during 1998 for its use in connection with future acquisitions.
These shares generally will be freely tradable after their issuance by persons
not affiliated with the Company; however, sales of these shares during the
Lockup Period would require the prior written consent of Smith Barney Inc.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan and Employee Purchase
Plan. Shares of Common Stock issued pursuant to the Incentive Plan and Employee
Purchase Plan after the effective date of that registration statement generally
will be available for sale in the open market by holders who are not affiliates
of OEI and, subject to the volume and other limitations of Rule 144, by holders
who are affiliates of OEI.
DESCRIPTION OF CAPITAL STOCK
OEI's authorized capital stock consists of 40,000,000 shares of Common
Stock and 1,000,000 shares of preferred stock, par value $.001 per share (the
"Preferred Stock"). At May 15, 1998, 1,828,368 shares of Common Stock and no
shares of Preferred Stock were issued and outstanding. On closing of the Pending
Acquisitions and the Offering, 11,835,494 shares of Common Stock (12,480,494
shares if the underwriters' over-allotment option is exercised in full) will be
issued, outstanding and nonassessable, and 2,122,802 shares of Common Stock will
then be reserved for issuance under all then outstanding options, warrants and
other rights (consisting only of Incentive Plan options and the Replacement
Warrants issued in connection with the Petrocon acquisition). The following is a
summary of the material terms and provisions relevant to the holders of OEI
capital stock contained in the Charter, which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters. Each share has one vote.
The Common Stock affords no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all
directors if they so choose. The Common Stock carries no preemptive rights and
is not convertible, redeemable, assessable or entitled to the benefits of any
sinking fund. The holders of Common Stock are entitled to dividends in such
amounts and at such times as may be declared by the Board of Directors out of
funds legally available for that purpose, subject to the dividend preference of
any stock ranking senior to the Common Stock, including the Preferred Stock. See
"Dividend Policy" for information regarding the Company's initial dividend
policy.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Charter and limitations prescribed by law, the Board of Directors is
expressly authorized to adopt resolutions to issue the shares, fix the number of
shares and change the number of shares constituting any series, and provide for
the powers, designations, preferences and relative, participating, optional or
other rights, and the qualifications, limitations or restrictions thereof,
including without limitation, voting powers, dividend rights (including whether
dividends are cumulative),
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dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the Preferred Stock, in each case without
any further action or vote by the holders of Common Stock. Although OEI has no
present intention to issue shares of Preferred Stock, the issuance of shares of
Preferred Stock, or the issuance of rights to purchase such shares, could be
used to discourage an unsolicited acquisition proposal. For example, the
issuance of a series of Preferred Stock might impede a business combination by
including class voting rights that would enable the holders to block the
transaction; or such an issuance might facilitate a business combination by
including voting rights that would supply a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
Preferred Stock could adversely affect the voting power of the holders of the
Common Stock. The Board of Directors could act in a manner that would discourage
an acquisition attempt or other transaction that some or a majority of the
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over its then market price.
The Board of Directors does not presently intend to seek stockholder approval
before any issuance of currently authorized stock, unless otherwise required by
law or the rules of any exchange on which OEI's securities are traded.
STATUTORY BUSINESS COMBINATION PROVISION
OEI is a Delaware corporation and is subject to Section 203 of the DGCL. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the date the person became an interested stockholder
unless: (i) before the person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
person becoming an interested stockholder, that person owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not permit employees to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (iii) following the transaction in
which such person became an interested stockholder, the business combination was
approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of 66% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, its restrictions also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of the majority of the corporation's directors, if
the extraordinary transaction is approved or not opposed by a majority of the
directors who were directors before any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
OTHER MATTERS
Delaware law authorizes a Delaware corporation to limit or eliminate the
personal liability of its directors to the corporation and its stockholders for
monetary damages for breach of a director's fiduciary duty of care. The duty of
care requires that directors, when acting on behalf of the corporation, must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware law,
directors are accountable to a Delaware corporation and its stockholders in
monetary damages, for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables a Delaware corporation to limit
available relief to equitable remedies such as injunction or rescission. The
Charter limits the liability of directors of OEI to OEI or its stockholders to
the fullest extent permitted by Delaware law. Specifically, no member of the
Board of Directors will be personally liable for monetary damages for breach of
a director's fiduciary duty as a director, except for liability (i) for any
breach of the member's duty of loyalty to OEI or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for
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<PAGE>
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL or (iv) for any transaction from which the
member derived an improper personal benefit. This Charter provision may have the
effect of reducing the likelihood of derivative litigation against directors and
may discourage or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though such an action,
if successful, might otherwise have benefited OEI and its stockholders. The
Charter and bylaws provide indemnification to OEI's officers and directors and
certain other persons with respect to certain matters, and the Company has
entered into agreements with each of OEI's directors and executive officers
providing for indemnification with respect to certain matters.
The Charter provides that (i) stockholders may act only at an annual or
special meeting of stockholders and not by written consent and (ii) special
meetings of the stockholders can be called only by the chairman of the board,
the chief executive officer, the president or a majority of the Board of
Directors. The Charter also provides that the Board of Directors shall consist
of three classes of directors serving for staggered terms. It is currently
contemplated that approximately one-third of the Board of Directors will be
elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of OEI from
obtaining control of the Board of Directors until the second annual
stockholders' meeting following the date the acquirer obtains the controlling
interest. See "Management -- Directors and Executive Officers." The Charter
provides that the number of directors shall be as determined by the Board of
Directors from time to time, but shall not be less than three. It also provides
that directors may be removed only for cause, and then only by the affirmative
vote of the holders of at least two-thirds of all outstanding voting stock. This
provision, in conjunction with the Charter provisions authorizing the Board of
Directors to fill vacant directorships, will prevent stockholders from removing
incumbent directors without cause and then filling the resulting vacancies with
their own nominees.
STOCKHOLDER PROPOSALS
OEI's bylaws contain provisions requiring that advance notice be delivered
to OEI of any business to be brought by a stockholder before an annual meeting
of stockholders and establishing certain procedures to be followed by
stockholders in nominating persons for election to the Board of Directors.
Generally, the advance notice provisions provide that written notice must be
given to the secretary of OEI by a stockholder (i) in the event of business to
be brought by a stockholder before an annual meeting and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, in each case not less than 60 nor more than 180 days prior to the
anniversary date of the immediately preceding annual meeting of stockholders
(with certain exceptions if the date of the annual meeting is different by more
than specified periods from the anniversary date). The stockholder's notice must
set forth specific information regarding the stockholder and his business or
director nominee, as described in OEI's bylaws. The foregoing is a summary of
the material terms and provisions relating to stockholder proposals contained in
OEI's bylaws, which are filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement, each of the Underwriters named below has severally agreed to purchase
from OEI, and OEI has agreed to sell to such Underwriter, the number of shares
of Common Stock set forth opposite the name of such Underwriter.
NUMBER
UNDERWRITER OF SHARES
- ---------------------------------------- ------------
Smith Barney Inc........................
CIBC Oppenheimer Corp...................
Sanders Morris Mundy Inc................
------------
Total......................... 4,300,000
============
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., CIBC Oppenheimer Corp. and
Sanders Morris Mundy Inc. are acting as representatives (the
"Representatives"), propose to offer part of the shares of Common Stock
directly to the public at the offering price set forth on the cover page of this
Prospectus and part of the shares to certain dealers at a price which represents
a concession not in excess of $ per share under the public offering price.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other dealers. After the initial offering
of the shares to the public, the public offering price and such concessions may
be changed by the Representatives. The Representatives of the Underwriters have
advised the OEI that the Underwriters do not intend to confirm any shares to any
accounts over which they exercise discretionary authority.
OEI has granted to the Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to an additional 645,000 shares of
Common Stock at the price to the public set forth on the cover page of this
Prospectus, minus the underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, in connection with the Offering. To the extent such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
OEI's officers or directors when the Offering closes, its current
stockholders (including Equus II) and all persons who acquire shares of Common
Stock and receive Replacement Options and Replacement Warrants in the Pending
Acquisitions who, immediately following the Offering, collectively will
beneficially own an aggregate of at least 8,661,457 shares of Common Stock
(including shares issuable upon the exercise of outstanding options and warrants
exercisable within 60 days of the closing of the Offering), have agreed that for
a period of two years after the date of this Prospectus they will not, without
the prior written consent of Smith Barney Inc., directly or indirectly sell,
offer to sell, solicit an offer to buy, contract to sell, grant any option to
purchase or otherwise transfer or dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or any securities exchangeable or
exercisable for or convertible into shares of Common Stock. OEI has also agreed
not to directly or indirectly sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase or otherwise transfer or dispose,
or announce the offering of, or file any registration statement under the
Securities Act in
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respect of, any shares of Common Stock, options or warrants to acquire shares of
the Common Stock or securities exchangeable or exercisable for or convertible
into shares of Common Stock, for a period of two years after the date of this
Prospectus without the prior written consent of Smith Barney Inc., except (i)
shares of Common Stock issued in connection with the Pending Acquisitions, (ii)
shares of Common Stock issued on the exercise of Options awarded under the
Incentive Plan, the Employee Purchase Plan or the Replacement Warrants, (iii)
additional Options awarded under the Incentive Plan and (iv) shares of Common
Stock issued in connection with future acquisitions (but not greater than an
aggregate of 3,000,000 shares during the first year of the two-year lock-up
period), so long as, (a) in the case of issuances described in the preceding
clauses (ii) and (iii), the recipient agrees to remain subject to the lock-up
until the end of the two-year period (or, if the recipient is an employee of the
Company but is neither an officer or director of OEI nor the holder of 5% or
more of the outstanding shares of Common Stock, until the lapse of the first 180
days of the two-year period) and (b) in the case of issuances described in the
preceding clause (iv), the recipient agrees to remain subject to a negotiated
lock-up period.
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in the Offering has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in determining such price are the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the pro
forma combined revenues and earnings of the Company, the historical revenues and
earnings of Petrocon and the Acquired Companies, the prospects for the growth of
the Company's revenues and earnings, the current state of the economy in the
United States and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities in the securities markets,
including current market valuations of publicly traded companies that are
comparable to the Company.
The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the Offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for
or the purchase of the Common Stock on behalf of the Underwriters for the
purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the Offering. A "penalty bid" is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with the
Offering if the Common Stock originally sold by such Underwriter or syndicate
member is purchased by the Representatives in a syndicate covering transaction,
and has therefore not been effectively placed by such Underwriter or syndicate
member. The Representatives have advised the Company that such transactions may
be effected on The New York Stock Exchange or otherwise and, if commenced, may
be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed upon for OEI by Porter & Hedges, L.L.P.,
Houston, Texas, and for the Underwriters by Morgan, Lewis & Bockius LLP, New
York, New York.
EXPERTS
The audited financial statements of OEI, Petrocon and each of the Acquired
Founding Companies included in this Prospectus and elsewhere in the registration
statement have been audited by Arthur
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Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
ADDITIONAL INFORMATION
OEI has not previously been subject to the reporting requirements of the
Exchange Act. OEI has filed a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with the SEC with respect
to the Offering. This Prospectus, filed as a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
or the exhibits thereto, in accordance with the rules and regulations of the
SEC, and reference is hereby made to such omitted information. The statements
made in this Prospectus concerning documents filed as exhibits to the
Registration Statement accurately describe the material provisions of such
documents and are qualified in their entirety by reference to such exhibits for
complete statements of their provisions. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities of the SEC at its principal office at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and its regional offices at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and at 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of all
or any portion of the Registration Statement can be obtained at prescribed rates
from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Unaudited Pro Forma Combined Financial
Statements
Basis of Presentation.............. F-2
Unaudited Pro forma Combined
Balance Sheet..................... F-3
Unaudited Pro Forma Combined
Statements of Operations.......... F-4
Notes to Unaudited Pro Forma
Combined Financial Statements..... F-6
Historical Financial Statements
OEI International, Inc.
Report of Independent Public
Accountants................... F-11
Balance Sheet................. F-12
Statement of Loss............. F-13
Statement of Stockholders'
Equity........................ F-14
Statement of Cash Flows....... F-15
Notes to Financial
Statements.................... F-16
Petrocon Engineering, Inc. and
Subsidiaries
Report of Independent Public
Accountants................... F-19
Consolidated Balance Sheets... F-20
Consolidated Statements of
Income........................ F-22
Consolidated Statements of
Stockholders' Equity.......... F-23
Consolidated Statements of
Cash Flows.................... F-24
Notes to Consolidated
Financial Statements.......... F-26
Paulus, Sokolowski and Sartor, Inc.
Report of Independent Public
Accountants................... F-39
Balance Sheets................ F-40
Statements of Income.......... F-41
Statements of Shareholders'
Equity........................ F-42
Statements of Cash Flows...... F-43
Notes to Consolidated
Financial Statements.......... F-45
Gulsby Engineering, Inc. and
Subsidiary
Report of Independent Public
Accountants................... F-53
Balance Sheets................ F-54
Statements of Income.......... F-55
Statements of Stockholders'
Equity........................ F-56
Statements of Cash Flows...... F-57
Notes to Financial
Statements.................... F-58
W-Industries, Inc.
Report of Independent Public
Accountants................... F-63
Balance Sheets................ F-64
Statements of Income.......... F-65
Statements of Stockholders'
Equity........................ F-66
Statements of Cash Flows...... F-67
Notes to Financial
Statements.................... F-68
Chemical & Industrial Engineering,
Inc.
Report of Independent Public
Accountants................... F-72
Balance Sheets................ F-73
Statements of Income.......... F-74
Statements of Stockholders'
Equity........................ F-75
Statements of Cash Flows...... F-76
Notes to Financial
Statements.................... F-77
F-1
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OEI INTERNATIONAL, INC. AND PETROCON AND THE ACQUIRED COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by OEI International, Inc. (OEI), of the outstanding
capital stock of Petrocon Engineering, Inc. and Subsidiaries (Petrocon), Paulus,
Sokolowski and Sartor Inc. (PS&S), Gulsby Engineering, Inc. and Subsidiary
(GEI), W-Industries, Inc. (W-I) and Chemical & Industrial Engineering, Inc.
(C&I) (together, the Pending Acquisitions), and related transactions and (ii)
the Offering. The Pending Acquisitions will occur simultaneously with the
closing of OEI's initial public offering (the Offering) and will be accounted
for using the purchase method of accounting. Petrocon has been identified as the
accounting acquiror for financial statement presentation purposes as its
stockholders will represent the largest voting interest within OEI.
The unaudited pro forma combined balance sheet gives effect to the Pending
Acquisitions and related transactions, and the Offering, as if they had occurred
on March 31, 1998. The unaudited pro forma combined statements of operations
give effect to these transactions as if they had occurred on January 1, 1997.
OEI has preliminarily analyzed the savings expected to be realized from
reductions in salaries, bonuses and certain benefits to the owners and other
known cost eliminations. To the extent the owners of Petrocon and the Acquired
Companies have contractually agreed to prospective reductions in salary,
bonuses, benefits and lease payments, these reductions and other known cost
eliminations have been reflected in the unaudited pro forma combined statements
of operations. With respect to other potential cost savings, OEI has not and
cannot quantify these savings until completion of the Pending Acquisitions. It
is anticipated that these savings will be offset by costs related to OEI's new
corporate management and by the costs associated with being a public company.
However, because these costs cannot be accurately quantified at this time, they
have not been included in the pro forma financial information of OEI.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. However,
management does not expect the final purchase price allocation to be materially
different from the preliminary allocation nor does it expect there to be any
material post closing adjustments. The pro forma financial data do not purport
to represent what OEI's financial position or results of operations would
actually have been if such transactions in fact had occurred on those dates and
are not necessarily representative of OEI's financial position or results of
operations for any future period. Since Petrocon and the Acquired Companies were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance. The unaudited pro forma
combined financial statements should be read in conjunction with the other
financial statements and notes thereto included elsewhere in this Prospectus.
See also "Risk Factors" included elsewhere herein.
F-2
<PAGE>
OEI INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PETROCON PS&S GEI W-I C&I OEI ADJUSTMENTS COMBINED
--------- --------- ------- ------ --------- ------ ------------ ----------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and equivalents................. $ 657 $ 122 $ 508 $ 86 $ 224 $ 1 $ -- $ 1,598
Trade receivables.................... 16,203 5,897 870 3,347 1,761 -- -- 28,078
Other receivables.................... -- -- 27 -- -- -- -- 27
Advances to stockholder.............. -- -- 3,096 -- -- -- (3,096) --
Current portion of note receivable... 13 -- -- -- -- -- -- 13
Inventory............................ -- -- -- 186 -- -- -- 186
WIP.................................. -- -- -- -- -- -- -- --
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... 3,302 3,409 4,684 4,092 191 -- (3,726) 11,952
Prepaid expenses and other........... 1,194 329 140 114 118 756 -- 2,651
Deferred tax asset................... 600 -- -- -- 176 -- -- 776
--------- --------- ------- ------ --------- ------ ------------ ----------
Total current assets............. 21,969 9,757 9,325 7,825 2,470 757 (6,822) 45,281
Property and equipment, net.......... 6,662 590 524 1,099 1,171 -- 371 10,417
Investment in Petrocon Arabia, LTD... 3,775 -- -- -- -- -- -- 3,775
Note receivable, net of current
portion............................ 50 -- -- -- -- -- -- 50
Deferred tax asset................... -- 55 1,074 -- -- -- -- 1,129
Goodwill............................. 9,239 -- -- -- -- -- 58,401 67,640
Other assets......................... 1,169 2,358 3 -- 29 -- (1,820) 1,739
--------- --------- ------- ------ --------- ------ ------------ ----------
Total assets..................... $42,864 $ 12,760 $10,926 $8,924 $ 3,670 $ 757 $ 50,130 $130,031
========= ========= ======= ====== ========= ====== ============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ 3,259 $ 1,175 $ 302 $1,908 $ 312 $ -- $ -- $ 6,956
Accrued compensation and benefits.... 6,888 1,098 31 213 648 -- -- 8,878
Accrued liabilities.................. -- -- 73 44 47 1,024 -- 1,188
Short-term debt...................... 12,435 2,590 4,636 3,689 115 -- 28,182 51,647
Current maturities of long-term
debt............................... 1,760 63 -- 70 -- -- -- 1,893
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... 323 -- 418 206 266 -- -- 1,213
Income taxes payable................. 710 -- 1,900 -- 69 -- -- 2,679
Deferred tax liability............... -- 737 -- -- -- -- 2,353 3,090
Other liabilities.................... 204 89 -- -- -- -- -- 293
--------- --------- ------- ------ --------- ------ ------------ ----------
Total current liabilities........ 25,579 5,752 7,360 6,130 1,457 1,024 30,535 77,837
Long-term debt, net of current
portion............................ 2,240 555 -- 555 -- -- -- 3,350
Deferred tax liability............... 407 -- -- -- -- -- -- 407
--------- --------- ------- ------ --------- ------ ------------ ----------
Total liabilities................ 28,226 6,307 7,360 6,685 1,457 1,024 30,535 81,594
Stockholders' equity:
Common stock....................... 1,531 437 10 12 576 -- (2,558) 8
Additional paid-in capital......... 7,518 -- -- 8 -- 6,826 28,488 42,840
Note receivable -- capital stock... -- (379) -- -- -- -- 379 --
Retained earnings.................. 5,589 6,395 3,556 2,219 1,637 (7,093) (6,714) 5,589
--------- --------- ------- ------ --------- ------ ------------ ----------
Total stockholders' equity....... 14,638 6,453 3,566 2,239 2,213 (267) 19,595 48,437
--------- --------- ------- ------ --------- ------ ------------ ----------
Total liabilities and
stockholders' equity........... $42,864 $ 12,760 $10,926 $8,924 $ 3,670 $ 757 $ 50,130 $130,031
========= ========= ======= ====== ========= ====== ============ ==========
</TABLE>
POST MERGER AS
ADJUSTMENTS ADJUSTED
------------ --------
ASSETS
Cash and equivalents................. $ 1,928 $ 3,526
Trade receivables.................... -- 28,078
Other receivables.................... -- 27
Advances to stockholder.............. -- --
Current portion of note receivable... -- 13
Inventory............................ -- 186
WIP.................................. -- --
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... -- 11,952
Prepaid expenses and other........... (756) 1,895
Deferred tax asset................... -- 776
------------ --------
Total current assets............. 1,172 46,453
Property and equipment, net.......... -- 10,417
Investment in Petrocon Arabia, LTD... -- 3,775
Note receivable, net of current
portion............................ -- 50
Deferred tax asset................... -- 1,129
Goodwill............................. -- 67,640
Other assets......................... -- 1,739
------------ --------
Total assets..................... $ 1,172 $131,203
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable..................... $ -- $ 6,956
Accrued compensation and benefits.... -- 8,878
Accrued liabilities.................. (756) 432
Short-term debt...................... (45,815) 5,832
Current maturities of long-term
debt............................... (1,893) --
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... -- 1,213
Income taxes payable................. -- 2,679
Deferred tax liability............... -- 3,090
Other liabilities.................... -- 293
------------ --------
Total current liabilities........ (48,464) 29,373
Long-term debt, net of current
portion............................ (3,350) --
Deferred tax liability............... -- 407
------------ --------
Total liabilities................ (51,814) 29,780
Stockholders' equity:
Common stock....................... 4 12
Additional paid-in capital......... 52,982 95,822
Note receivable -- capital stock... -- --
Retained earnings.................. -- 5,589
------------ --------
Total stockholders' equity....... 52,986 101,423
------------ --------
Total liabilities and
stockholders' equity........... $ 1,172 $131,203
============ ========
See accompanying notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
OEI INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PETROCON PS&S GEI W-I C&I OEI ADJUSTMENTS
-------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $92,616 $ 21,675 $ 18,264 $ 20,604 $ 15,906 $ -- $ --
DIRECT COSTS......................... 71,693 9,731 11,768 13,700 10,969 -- --
-------- --------- --------- --------- --------- --------- ------------
Gross profit..................... 20,923 11,944 6,496 6,904 4,937 -- --
GENERAL AND
ADMINISTRATIVE EXPENSES............ 15,062 10,787 927 3,003 3,997 6,416 (9,288)
GOODWILL AMORTIZATION................ 254 -- -- -- -- -- 1,459
-------- --------- --------- --------- --------- --------- ------------
Income from operations............... 5,607 1,157 5,569 3,901 940 (6,416) 7,829
OTHER INCOME (EXPENSE):
Interest income (expense), net... (1,569) (208) (233) (247) 36 -- 1,775
Equity in earnings of
affiliates..................... 860 -- -- -- -- -- --
Abandonment/Loss on impairment of
assets......................... (364) -- -- -- -- -- --
Other............................ (206) (75) 57 154 (5) -- --
-------- --------- --------- --------- --------- --------- ------------
Income (loss) from operations before
income tax......................... 4,328 874 5,393 3,808 971 (6,416) 9,604
Provision for income tax............. 1,574 97 1,559 -- 424 -- 4,356
-------- --------- --------- --------- --------- --------- ------------
NET INCOME........................... $ 2,754 $ 777 $ 3,834 $ 3,808 $ 547 $ (6,416) $ 5,248
======== ========= ========= ========= ========= ========= ============
NET INCOME PER SHARE
Basic............................
Diluted..........................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE
Basic............................
Diluted..........................
</TABLE>
PRO FORMA
COMBINED
----------
REVENUES............................. $ 169,065
DIRECT COSTS......................... 117,861
----------
Gross profit..................... 51,204
GENERAL AND
ADMINISTRATIVE EXPENSES............ 30,904
GOODWILL AMORTIZATION................ 1,713
----------
Income from operations............... 18,587
OTHER INCOME (EXPENSE):
Interest income (expense), net... (446)
Equity in earnings of
affiliates..................... 860
Abandonment/Loss on impairment of
assets......................... (364)
Other............................ (75)
----------
Income (loss) from operations before
income tax......................... 18,562
Provision for income tax............. 8,010
----------
NET INCOME........................... $ 10,552
==========
NET INCOME PER SHARE
Basic............................ $ .89
==========
Diluted.......................... $ .86
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE
Basic............................ 11,835,494
==========
Diluted.......................... 12,299,454
==========
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
OEI INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PETROCON PS&S GEI W-I C&I OEI ADJUSTMENTS
-------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $25,915 $ 5,899 $ 1,524 $ 6,695 $ 2,151 $ -- $ --
DIRECT COSTS......................... 20,521 2,469 1,188 4,330 1,493 -- --
-------- --------- --------- --------- --------- --------- ------------
Gross profit..................... 5,394 3,430 336 2,365 658 -- --
GENERAL AND
ADMINISTRATIVE EXPENSES............ 3,689 2,655 184 691 1,088 678 (599)
GOODWILL AMORTIZATION................ 103 -- -- -- -- -- 365
-------- --------- --------- --------- --------- --------- ------------
Income from operations............... 1,602 775 152 1,674 (430) (678) 234
OTHER INCOME (EXPENSE):
Interest income (expense), net... (386) (59) (94) (107) 4 -- 446
Equity in earnings of
affiliates..................... (42) -- -- -- -- -- --
Abandonment/Loss on impairment of
assets......................... -- -- -- -- -- -- --
Other............................ (23) -- -- 20 (6) -- --
-------- --------- --------- --------- --------- --------- ------------
Income (loss) from operations before
income tax......................... 1,151 716 58 1,587 (432) (678) 680
Provision for income tax............. 479 69 18 -- (165) -- 978
-------- --------- --------- --------- --------- --------- ------------
NET INCOME........................... $ 672 $ 647 $ 40 $ 1,587 $ (267) $ (678) $ (298)
======== ========= ========= ========= ========= ========= ============
NET INCOME PER SHARE
Basic............................
Diluted..........................
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE
Basic............................
Diluted..........................
</TABLE>
PRO FORMA
COMBINED
----------
REVENUES............................. $ 42,184
DIRECT COSTS......................... 30,001
----------
Gross profit..................... 12,183
GENERAL AND
ADMINISTRATIVE EXPENSES............ 8,386
GOODWILL AMORTIZATION................ 468
----------
Income from operations............... 3,329
OTHER INCOME (EXPENSE):
Interest income (expense), net... (196)
Equity in earnings of
affiliates..................... (42)
Abandonment/Loss on impairment of
assets......................... --
Other............................ (9)
----------
Income (loss) from operations before
income tax......................... 3,082
Provision for income tax............. 1,379
----------
NET INCOME........................... $ 1,703
==========
NET INCOME PER SHARE
Basic............................ $ .14
==========
Diluted.......................... $ .14
==========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE
Basic............................ 11,835,494
==========
Diluted.......................... 12,299,454
==========
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
OEI INTERNATIONAL, INC. AND PETROCON AND THE ACQUIRED COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
The Company is a diversified engineering company providing engineering
services and engineered systems to a broad range of industrial, commercial and
institutional clients throughout the United States and internationally. The
Company's multidisciplined expertise enables it to offer its clients total
design and engineering solutions extending from project inception through
completion, start-up and operation, within multiple industries and across
diverse geographic markets. OEI has conducted no operations to date and will
acquire Petrocon and the Acquired Companies concurrently with and as a condition
of the closing of this Offering.
The historical financial statements reflect the financial position and
results of operations of Petrocon and the Acquired Companies' and were derived
from Petrocon and the Acquired Companies' respective financial statements where
indicated. The periods included in these financial statements for Petrocon and
the Acquired Companies are as of and for the three months ended March 31, 1998
and for the year ended December 31, 1997. The audited historical financial
statements included elsewhere in this Prospectus have been included in
accordance with Securities and Exchange Commission (SEC) Regulation S-X. I. Rule
3-05.
2. ACQUISITION OF PETROCON AND THE ACQUIRED COMPANIES:
Concurrently with and as a condition to the closing of the Offering, OEI
will acquire all of the outstanding capital stock of Petrocon and Acquired
Companies. The acquisitions will be accounted for using the purchase method of
accounting with Petrocon being reflected as the accounting acquiror as its
stockholders will represent the largest voting interest within OEI.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of Common Stock to the common stockholders of Petrocon and
Acquired Companies. For purposes of computing the estimated purchase price for
accounting purposes, the value of the shares was determined using an estimated
fair value of $11.20 per share, which is less than the initial public offering
price of $14.00 per share (the midpoint of the estimated offering price range)
due primarily to restrictions on the sale and transferability of the shares
issued. The total estimated purchase price of $84.4 million for the acquisitions
is based upon preliminary estimates and is subject to certain purchase price
adjustments at and following closing.
SHARES OF
CASH COMMON STOCK
--------- ------------
(IN THOUSANDS)
Petrocon............................. $ 12,716 2,119
PS&S................................. 4,522 879
GEI.................................. 2,786 542
W-I.................................. 4,902 953
C&I.................................. 2,880 560
--------- ------------
Total...................... $ 27,806 5,053
========= ============
The GEI consideration set forth above does not include approximately $3.4
million in cash and 654,099 shares of Common Stock, which will be placed in
escrow in connection with the acquisition. These amounts will be held for
subsequent distribution to the former GEI stockholders, or returned to the
Company, depending on the future financial performance of GEI. The earnout
payments, if any, will be accounted for as additional goodwill and amortized
over the applicable amortization period.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the liability for the cash portion of the consideration to be
paid to the stockholders of Petrocon and the Acquired Companies in
connection with the Pending Acquisitions.
F-6
<PAGE>
(b) Records the distribution of contract retainages, advances to
stockholder and other personal assets to stockholders.
(c) Records the issuance of 2,934,139 shares of Common Stock valued at
$11.20 per share (or $32.9 million) in connection with the purchase of
the Acquired Companies by OEI, excluding Petrocon (the accounting
acquiror) for a total estimated purchase price of $47.9 million
resulting in goodwill of $42.4 million after allocating the purchase
price to the aggregate assets acquired and liabilities assumed, as
shown below. In addition, goodwill of $13.7 million has been recorded
attributable to the 1.2 million shares of Common Stock issued to Equus
II Incorporated, OEI's initial financing source and goodwill of $2.4
million has been recorded attributable to additional deferred tax
liabilities associated with the Pending Acquisitons. See Note 2.
ASSETS
Cash and equivalents................. $ 941
Accounts receivable.................. 11,902
Inventories.......................... 186
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... 8,650
Prepaid expenses and other........... 1,457
Deferred tax asset................... 176
---------
Total current asssets........... 23,312
Property and equipment, net.......... 3,384
Deferred tax asset................... 1,129
Other assets......................... 638
---------
Total assets.................... $ 28,463
=========
LIABILITIES
Accounts payable and accrued
liabilities........................ $ 4,885
Accrued compensation and benefits.... 1,990
Short-term debt...................... 11,102
Current maturities of long-term
debt............................... 133
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... 890
Income taxes payable................. 1,969
Deferred income taxes................ 737
Other liabilities.................... 89
---------
Total current liabilities....... 21,795
---------
Long-term obligation, net of current
maturities......................... 1,110
---------
Total liabilities............... $ 22,905
=========
(d) Records the contribution of assets to OEI.
(e) Records the cash proceeds of $60.2 million from the issuance of shares of
OEI Common Stock net of estimated offering costs of $7.2 million (based on
an initial public offering price of $14.00 per share and includes the
payment of deferred offering costs of $1 million incurred through March 31,
1998). Offering costs primarily consist of underwriting discounts and
commissions, accounting fees, legal fees and printing expenses.
(f) Records the cash portion of the consideration to be paid to the
stockholders of Petrocon and the Acquired Companies in connection with the
Pending Acquisitions.
(g) Records the repayment of certain liabilities and debt obligations with the
net proceeds from the Offering and from cash on hand, including $3.6
million of notes payable to stockholders or related parties of Petrocon and
the Acquired Companies, all of which was current at March 31, 1998, and
$3.5 million attributable to an accrued legal judgment.
F-7
<PAGE>
The following table summarizes unaudited pro forma balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
---------- --------- ---------- --------- ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and equivalents................. $ -- $ -- $ -- $ -- $ --
Advances to stockholder.............. -- (3,096) -- -- (3,096)
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... -- (3,726) -- -- (3,726)
---------- --------- ---------- --------- ------------
Total current asssets........... -- (6,822) -- -- (6,822)
Property and equipment, net.......... -- -- -- 371 371
Goodwill............................. -- -- 58,401 -- 58,401
Other assets......................... -- (1,753) -- (67) (1,820)
---------- --------- ---------- --------- ------------
Total assets......................... $ -- $ (8,575) $ 58,401 $ 304 $ 50,130
========== ========= ========== ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt...................... $ 27,806 $ 72 $ -- $ 304 $ 28,182
Deferred tax liability............... -- -- 2,353 -- 2,353
---------- --------- ---------- --------- ------------
Total current liabilities....... 27,806 72 2,353 304 30,535
---------- --------- ---------- --------- ------------
Total liabilities............... 27,806 72 2,353 304 30,535
Stockholders' equity
Common stock.................... -- -- (2,558) -- (2,558)
Additional paid-in capital...... (27,806) -- 56,294 28,488
Note receivable -- capital
stock......................... -- 379 -- -- 379
Retained earnings............... -- (9,026) 2,312 -- (6,714)
---------- --------- ---------- --------- ------------
Total stockholders' equity...... (27,806) (8,647) 56,048 -- 19,595
---------- --------- ---------- --------- ------------
Total liabilities and stockholders'
equity............................. $ -- $ (8,575) $ 58,401 $ 304 $ 50,130
========== ========= ========== ========= ============
POST MERGER
(E) (F) (G) ADJUSTMENTS
--------- ---------- ---------- ------------
ASSETS
Cash and equivalents................. $ 52,986 $ (27,806) $ (23,252) $ 1,928
Deferred costs....................... (756) -- -- (756)
--------- ---------- ---------- ------------
Total current
assets............. 52,230 (27,806) (23,252) 1,172
--------- ---------- ---------- ------------
Total assets......................... $ 52,230 $ (27,806) $ (23,252) $ 1,172
========= ========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt...................... $ -- $ (27,806) $ (18,009) $(45,815)
Current maturities of long-term
debt............................... -- -- (1,893) (1,893)
Accrued liabilities.................. (756) -- -- (756)
--------- ---------- ---------- ------------
Total current
liabilities........ (756) (27,806) (19,902) (48,464)
Long-term debt, net of current
portion............................ -- -- (3,350) (3,350)
--------- ---------- ---------- ------------
Total liabilities..... (756) (27,806) (23,252) (51,814)
Stockholders' equity
Common stock.................... 4 -- -- 4
Additional paid-in capital...... 52,982 -- -- 52,982
--------- ---------- ---------- ------------
Total stockholders'
equity............. 52,986 -- -- 52,986
--------- ---------- ---------- ------------
Total liabilities and stockholders'
equity............................. $ 52,230 $ (27,806) $ (23,252) $ 1,172
========= ========== ========== ============
</TABLE>
F-8
<PAGE>
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
YEAR ENDED DECEMBER 31, 1997
(a) Reduces compensation expense to the contractual levels the owners and
key employees of the Petrocon and the Acquired Companies have agreed
to receive subsequent to the Pending Acquisitions. Additionally,
reflects the reversal of the $6.4 million non-recurring non-cash
compensation charge by OEI related to the issuance of 572,831 shares
of Common Stock to management. The historical financial statements of
OEI include a compensation charge representing the differences between
the amounts paid for the shares issued to OEI's management and their
estimated value on the date of the sale as if the Pending Acquisitions
had occurred.
(b) Records goodwill amortization expense using a 40-year estimated life.
(c) Reduces interest expense for repayment of certain debt obligations
which will be repaid from the net proceeds of the Offering and
existing cash.
(d) Records a reduction of rent expense of $236 net of depreciation of $74
for property to be acquired in connection with the Pending
Aquisitions.
(e) Reflects the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for
income taxes on S Corporation income.
(f) The number of shares estimated to be outstanding on completion of the
Offering includes the following (reflects the April 6, 1998 stock
split) (in thousands):
Issued to management................. 609
Issued to financial sponsor.......... 1,219
Issued in the Pending Acquisitions
(including escrowed shares).......... 5,707
Issued in the Offering............... 4,300
---------
Shares used in computing basic pro
forma income per share............... 11,835
Net effect of OEI stock options and
warrants using the Treasury Stock
method............................... 464
---------
Shares used in computing fully
diluted pro forma income per share... 12,299
=========
Such share number does not include an aggregate of 937,662 shares
subject to options granted under OEI's Incentive Plan which have an
exercise price equal to the initial Offering price per share. See
"Management -- Incentive Plan."
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (9,126) $ -- $ -- $ (162) $ -- $ (9,288)
GOODWILL AMORTIZATION................ -- 1,459 -- -- -- 1,459
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM OPERATIONS........ 9,126 (1,459) -- 162 -- 7,829
OTHER INCOME (EXPENSE):
Interest expense................. -- -- 1,775 -- -- 1,775
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 9,126 (1,459) 1,775 162 -- 9,604
PROVISION FOR INCOME TAXES........... -- -- -- -- 4,356 4,356
--------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 9,126 $ (1,459) $ 1,775 $ 162 $ (4,356) $ 5,248
========= ========= ========= ========= ========= ============
</TABLE>
F-9
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998
(a) Reduces compensation expense to the contractual levels the owners and
key employees of the Petrocon and the Acquired Companies have agreed
to receive subsequent to the Pending Acquisitions. Additionally,
reflects the reversal of the $0.4 million non-recurring non-cash
compensation charge by OEI related to the issuance of 36,564 shares of
Common Stock to management. The historical financial statements of OEI
include a compensation charge representing the differences between the
amounts paid for the shares issued to OEI's management and their
estimated value on the date of the sale as if the Pending Acquisitions
had occurred.
(b) Records goodwill amortization expense using a 40-year estimated life.
(c) Reduces interest expense for repayment of certain debt obligations
which will be repaid from the net proceeds of the Offering and
existing cash.
(d) Records a reduction of rent expense of $59 net of depreciation of $19
for property to be acquired in connection with the Pending
Acquisitions.
(e) Reflects the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for
income taxes on S Corporation income.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C>
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... $ (559) $ -- $ -- $ (40) $ -- $ (599)
GOODWILL AMORTIZATION................ -- 365 -- -- -- 365
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM OPERATIONS........ 559 (365) -- 40 -- 234
OTHER INCOME (EXPENSE):
Interest expense................. -- -- 446 -- -- 446
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 559 (365) 446 40 -- 680
PROVISION FOR INCOME TAXES........... -- -- -- -- 978 978
--------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 559 $ (365) $ 446 $ 40 $ (978) $ (298)
========= ========= ========= ========= ========= ============
</TABLE>
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OEI International, Inc.:
We have audited the accompanying balance sheet of OEI International, Inc.
(a Delaware corporation), as of December 31, 1997, and the related statement of
loss, stockholders' equity and cash flows from inception (October 9, 1997)
through December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OEI International, Inc., as
of December 31, 1997, and the results of its operations and its cash flows from
inception (October 9, 1997) through December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 27, 1998
F-11
<PAGE>
OEI INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
ASSETS
CASH................................. $ 893 $ 840
DEFERRED OFFERING COSTS.............. 112,427 755,681
------------ ------------
Total assets.......... $ 113,320 $ 756,521
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCRUED LIABILITIES AND AMOUNTS DUE
TO STOCKHOLDER..................... $ 112,427 $ 1,024,050
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par,
1,000,000 authorized, none
issued and outstanding......... -- --
Common stock, $.001 par,
40,000,000 shares authorized,
1,791,804 and 1,828,368 shares
outstanding, respectively...... 1,792 1,828
Additional paid-in capital...... 6,414,649 6,824,128
Retained deficit................ (6,415,548) (7,093,485)
------------ ------------
Total stockholders'
equity............ 893 (267,529)
------------ ------------
Total liabilities and
stockholders'
equity............ $ 113,320 $ 756,521
============ ============
Reflects a 1,828.368-for-one stock split effective April 6, 1998.
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
OEI INTERNATIONAL, INC.
STATEMENT OF LOSS
PERIOD FROM
INCEPTION
(OCTOBER 9, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------ ---------------
(UNAUDITED)
REVENUES............................. $ -- $ --
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,415,548 677,937
------------------ ---------------
NET LOSS............................. $ (6,415,548) $ (677,937)
================== ===============
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
OEI INTERNATIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION (October 9,
1997).............................. 1,791,804 $1,792 $6,414,649 $ -- $ 6,416,441
Net loss........................ -- -- -- (6,415,548) (6,415,548)
--------- ------ ---------- ----------- ------------
BALANCE, December 31, 1997........... 1,791,804 1,792 6,414,649 (6,415,548) 893
Issuance of Common Stock
(unaudited)................... 36,564 36 409,479 -- 409,515
Net loss (unaudited)............ -- -- -- (677,937) (677,937)
--------- ------ ---------- ----------- ------------
BALANCE, March 31, 1998
(unaudited)........................ 1,828,368 $1,828 $6,824,128 $(7,093,485) $ (267,529)
========= ====== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
OEI INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 9, 1997) THREE MONTHS
THROUGH ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $(6,415,548) $ (677,937)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities --
Compensation expense related to
issuance of management
shares........................ 6,415,461 409,495
Changes in assets and
liabilities --
Increase in deferred
costs................... (112,427) (643,254)
Increase in accrued
liabilities and amounts
due to stockholder...... 112,427 911,623
----------------- ---------------
Net cash used in
operating
activities (87) (73)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of
common stock.................. 980 20
----------------- ---------------
Net cash provided by
financing
activities......... 980 20
----------------- ---------------
NET INCREASE (DECREASE) IN CASH...... 893 (53)
CASH, beginning of period............ -- 893
----------------- ---------------
CASH, end of period.................. $ 893 $ 840
================= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
OEI INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
OEI International, Inc. (OEI or the Company), a Delaware corporation, was
founded on October 9, 1997. The Company is a diversified engineering company
providing engineering services and engineered systems to a broad range of
industrial, commercial and institutional clients throughout the United States
and internationally. OEI intends to acquire five engineering companies (the
Acquisitions), complete an initial public offering (the Offering) of its common
stock and, subsequent to the Offering, continue to acquire, through merger or
purchase, similar companies to expand its national and international operations.
OEI's primary assets at December 31, 1997, are cash and deferred offering
costs. OEI has not conducted any operations, and all activities to date have
related to the Acquisitions and the Offering. Cash of $980 was generated from
the initial capitalization of the Company (see Note 2). There is no assurance
that the Acquisitions discussed below will be completed and that OEI will be
able to generate future operating revenues. Funding for the deferred offering
costs has been provided by Equus II Incorporated (Equus II). OEI is dependent
upon the Offering to fund the amounts due to Equus II, the Acquisitions and
future operations.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months then ended are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements, have been included.
The results of operations for the interim period is not necessarily indicative
of the results for the entire fiscal year.
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the 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
underlying assets or liabilities are recovered or settled.
STOCK OPTIONS
Effective September 4, 1997, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." This pronouncement allows two methods of
calculating the fair market value of equity instruments issued to employees, in
accordance with Accounting Principles Board (APB) Opinion No. 25 or using an
option-pricing model. The fair market value of equity instruments issued to
employees may be calculated using an option-pricing model such as the
Black-Scholes model that takes into account, as of the grant date, the exercise
price and expected life of the equity instrument, the current price of the
underlying stock, expected dividends on the stock and the risk-free interest
rate for the expected term of the equity instrument. The Company has elected to
calculate compensation expense in accordance with APB No. 25 which calculates
compensation expense as the difference between the employee's exercise price and
the current price of the underlying stock. There were no financial statement
effects from the adoption of this pronouncement.
F-16
<PAGE>
OEI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. STOCKHOLDERS' EQUITY:
On April 6, 1998, OEI effected a 1,828.368-for-one stock split for each
share of common stock of the Company ("Common Stock") then outstanding. In
addition, the Company increased the number of authorized shares of Common Stock
to 40,000,000 and authorized 1,000,000 shares of $.001 par value preferred
stock. The effects of the Common Stock split and the increase in the shares of
authorized Common Stock have been retroactively reflected on the balance sheet
and in the accompanying notes. In connection with the organization and initial
capitalization of OEI, the Company issued 1,218,973 shares of common stock at
$.001 per share to Equus II at an aggregate purchase price of $667.67.
In October 1997, the Company issued a total of 572,831 shares of common
stock to management at an aggregate purchase price of $980.00. As a result, the
Company recorded a non-recurring, non-cash compensation charge of $6.4 million
at December 31, 1997, representing the difference between the amount paid for
the shares and the estimated fair value of the shares, which value has been
discounted from the estimated initial public offering price due primarily to
restrictions on the sale and transferability of the shares issued. The shares
issued to Equus II and members of management were issued to engage such parties
in providing services related primarily to the Company's public offering
activities, including financial advisory and other consulting services. The fair
value of such shares was based on specific factors related to the Company and
the transactions including restrictions on transferability and sale of the
shares issued and the limited vote provisions of such shares.
3. INCENTIVE PLAN:
In April 1998, the Company's stockholders and Board of Directors approved
the Company's Incentive Plan which provides for the granting of incentive or
nonstatutory stock options, stock appreciation rights, restricted stock,
performance units and performance shares and other stock-based awards
(collectively, "Incentive Awards") to key employees, officers, non-employee
directors and consultants to the Company. Under the Incentive Plan, the Company
may issue Incentive Awards covering at any one time an aggregate of the greater
of (i) 2,000,000 shares of Common Stock and (ii) 10% of the number of shares of
Common Stock issued and outstanding on the last day of the then preceding
calendar quarter. No more than 2,000,000 shares of Common Stock will be
available for incentive stock options.
4. EMPLOYEE STOCK PURCHASE PLAN:
In April 1998, the Company's Board of Directors approved the Company's
Employee Stock Purchase Plan for the United States employees (the "Employee
Purchase Plan"). A total of 300,000 shares of Common Stock has been reserved
for issuance under the Employee Purchase Plan. The Employee Purchase Plan
permits eligible employees to purchase Common Stock through payroll deductions
of up to 15% of an employee's compensation (including commissions and overtime,
but excluding other bonuses and incentive
F-17
<PAGE>
OEI INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation), up to a maximum of $25,000 for all offering periods ending within
the same calendar year. The price of stock purchased under the Employee Purchase
Plan is 90% of the lower of the fair market value of the Common Stock at the
beginning or at the end of each offering period. Employees may end their
participation at any time during an offering period, and they will be repaid
their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company or any participating subsidiary. The
Employee Purchase Plan will terminate in April, 2008.
5. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
OEI has signed definitive agreements to acquire by acquisition or share
exchange five companies (the Founding Companies) to be effective
contemporaneously with the Offering. The companies to be acquired are Petrocon
Engineering, Inc. and subsidiary, Paulus, Sokolowski, and Sartor, Inc., Gulsby
Engineering, Inc. and subsidiary, W-Industries, Inc., and Chemical & Industrial
Engineering, Inc. The aggregate consideration that will be paid by OEI to
acquire the Founding Companies is approximately $27.8 million in cash and
5,053,027 shares of common stock.
In April 1998, OEI filed a registration statement on Form S-1 for the sale
of its common stock.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Petrocon Engineering, Inc.:
We have audited the accompanying consolidated balance sheets of Petrocon
Engineering, Inc. (a Texas corporation), and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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
the Company as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-19
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1996 1997 1998
-------------- -------------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 320,811 $ 2,253,527 $ 656,904
Trade receivables, net.......... 10,697,851 15,397,931 16,202,765
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 463,786 1,881,417 3,302,316
Current portion of note
receivable.................... 33,746 16,884 12,793
Prepaid expenses and other...... 651,116 976,100 1,194,385
Deferred income taxes........... 667,439 543,373 599,787
-------------- -------------- -----------
Total current assets....... 12,834,749 21,069,232 21,968,950
PROPERTY AND EQUIPMENT, net.......... 6,385,573 6,583,796 6,662,269
INVESTMENT IN PETROCON ARABIA,
LTD................................ 3,555,964 3,666,306 3,775,308
NOTE RECEIVABLE, net of current
portion............................ 112,525 50,040 50,040
GOODWILL, net........................ 2,290,849 9,342,460 9,239,088
OTHER ASSETS......................... 1,197,107 1,190,840 1,169,212
-------------- -------------- -----------
Total assets............... $ 26,376,767 $ 41,902,674 $42,864,867
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1996 1997 1998
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 5,085,908 $ 11,641,357 $12,330,148
Current maturities of long-term
debt.......................... 2,772,604 1,976,174 1,760,092
Notes payable................... 249,544 147,284 105,282
Accounts payable................ 868,315 2,114,356 3,259,328
Accrued compensation and
benefits...................... 4,046,574 7,749,986 6,888,183
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... -- 499,395 322,695
Income taxes payable............ 478,104 526,002 709,772
Other liabilities............... 815,735 221,819 204,002
-------------- -------------- -----------
Total current
liabilities............. 14,316,784 24,876,373 25,579,502
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities.................... 3,756,492 2,680,046 2,240,023
Deferred income taxes........... 424,316 427,311 407,465
-------------- -------------- -----------
Total liabilities.......... 18,497,592 27,983,730 28,226,990
-------------- -------------- -----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK........... 1,126,549 -- --
STOCKHOLDERS' EQUITY:
Common stock, $.3333 par value;
60,000,000 shares authorized;
3,945,186, 4,586,328 and
4,591,828 shares
outstanding................... 1,315,062 1,528,760 1,530,594
Additional paid-in capital...... 3,196,068 7,473,014 7,518,212
Retained earnings............... 2,275,271 4,917,170 5,589,071
Treasury stock, 7,607 common
shares, at cost............... (33,775) -- --
-------------- -------------- -----------
Total stockholders'
equity.................. 6,752,626 13,918,944 14,637,877
-------------- -------------- -----------
Total liabilities and
stockholders' equity.... $ 26,376,767 $ 41,902,674 $42,864,867
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 52,385,813 $ 61,850,638 $ 92,616,378 $ 19,496,160 $ 25,915,315
DIRECT COSTS......................... 42,143,967 49,251,240 71,692,881 15,479,245 20,521,489
------------ ------------ ------------ ------------ ------------
Gross profit..................... 10,241,846 12,599,398 20,923,497 4,016,915 5,393,826
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,358,923 9,577,274 15,315,782 3,318,177 3,792,093
------------ ------------ ------------ ------------ ------------
Income from operations........... 1,882,923 3,022,124 5,607,715 698,738 1,601,733
OTHER INCOME (EXPENSE):
Interest expense, net............ (456,114) (591,848) (1,569,475) (349,572) (385,557)
Equity in earnings of Petrocon
Arabia, Ltd.................... 507,204 47,139 860,341 93,136 (42,268)
Impairment of property........... -- -- (363,696) -- --
Other............................ (125,005) 38,436 (206,028) (5,686) (22,783)
------------ ------------ ------------ ------------ ------------
Income from continuing
operations
before income tax......... 1,809,008 2,515,851 4,328,857 436,616 1,151,125
PROVISION FOR INCOME TAX............. 598,738 1,050,853 1,574,045 158,786 479,224
------------ ------------ ------------ ------------ ------------
Income from continuing
operations................ 1,210,270 1,464,998 2,754,812 277,830 671,901
------------ ------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from discontinued operations
of construction subsidiaries
through October 19, 1995 (net
of $417,117 income tax
benefit)....................... (809,699) -- -- -- --
Estimated loss on disposal of
construction subsidiaries,
including a provision of
$341,012 for operating losses
from October 19, 1995, to
February 8, 1996 (net of
$180,774 income tax benefit)... (350,913) -- -- -- --
------------ ------------ ------------ ------------ ------------
Loss from discontinued
operations................ (1,160,612) -- -- -- --
------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 49,658 $ 1,464,998 $ 2,754,812 $ 277,830 $ 671,901
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
---------------------- PAID-IN RETAINED -------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
--------- ----------- ----------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995............. 3,857,147 $ 1,285,716 $ 1,381,965 $ 1,603,027 -- $ -- $ 4,270,708
Purchase of treasury stock....... -- -- -- -- (7,607) (33,775) (33,775)
Accretion on redeemable preferred
stock.......................... -- -- -- (421,200) -- -- (421,200)
Net income....................... -- -- -- 49,658 -- -- 49,658
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, December 31, 1995........... 3,857,147 1,285,716 1,381,965 1,231,485 (7,607) (33,775) 3,865,391
Common stock issued.............. 88,039 29,346 581,547 -- -- -- 610,893
Accretion on redeemable preferred
stock.......................... -- -- -- (421,212) -- -- (421,212)
Redemption of preferred stock.... -- -- -- -- -- -- --
Warrants issued in connection
with acquisition............... -- -- 1,232,556 -- -- -- 1,232,556
Net income....................... -- -- -- 1,464,998 -- -- 1,464,998
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, December 31, 1996........... 3,945,186 1,315,062 3,196,068 2,275,271 (7,607) (33,775) 6,752,626
Common stock issued.............. 542,443 180,812 4,043,607 -- -- -- 4,224,419
Treasury stock issued............ -- -- -- -- 7,607 33,775 33,775
Redemption of preferred stock.... 98,699 32,886 233,339 -- -- -- 266,225
Accretion on redeemable preferred
stock.......................... -- -- -- (112,913) -- -- (112,913)
Net income....................... -- -- -- 2,754,812 -- -- 2,754,812
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, December 31, 1997........... 4,586,328 1,528,760 7,473,014 4,917,170 -- -- 13,918,944
Common stock issued
(unaudited).................... 5,500 1,834 41,176 -- -- -- 43,010
Options issued to employees
(unaudited).................... -- -- 4,022 -- -- -- 4,022
Net income (unaudited)........... -- -- -- 671,901 -- -- 671,901
--------- ----------- ----------- ----------- --------- --------- ------------
BALANCE, March 31, 1998
(unaudited)........................ 4,591,828 $ 1,530,594 $ 7,518,212 $ 5,589,071 -- $ -- $ 14,637,877
========= =========== =========== =========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 49,658 $ 1,464,998 $ 2,754,812 $ 277,830 $ 671,901
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 903,271 868,037 1,760,549 434,873 418,305
Equity in undistributed earnings
of Petrocon Arabia, Ltd......... (207,204) 952,861 (110,341) (93,136) (109,002)
Issuance of stock to
management...................... -- 102,293 24,420 -- 47,031
Deferred income taxes............ (689,421) 141,286 22,461 (79,472) (76,256)
Other, net....................... 220,472 46,411 262,238 -- (4,595)
Changes in current assets and
liabilities, net of effects of
acquisitions --
(Increase) decrease in --
Trade receivables.............. 806,140 1,855,630 (3,266,554) (1,292,816) (804,834)
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... (1,963,187) 1,499,401 (1,417,631) 463,786 (1,420,899)
Prepaid expenses and other..... (120,708) 203,032 323,079 (180,046) (199,268)
Increase (decrease) in --
Accounts payable............... 404,999 (939,071) 802,052 608,321 1,144,972
Accrued compensation and
benefits...................... 438,499 (394,969) 2,687,042 (447,669) (854,503)
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 1,390,412 (1,390,412) 499,395 -- (176,700)
Accrual for loss on disposal of
discontinued operations....... 114,307 (196,588) -- -- --
Other liabilities.............. (192,120) (369,714) (593,916) (380,374) (16,044)
Income taxes receivable
(payable)..................... (868,707) 771,243 (449,102) (76,389) 183,770
------------ ------------ ------------ ------------ ------------
Net cash provided by operating
activities...................... 286,411 4,614,438 3,298,504 (765,092) (1,196,122)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment......................... (781,629) (723,056) (1,186,607) (248,614) (378,241)
Cash used for acquisitions, net of
cash acquired..................... -- (1,187,974) (3,134,223) (3,011,964) --
Other, net......................... (6,582) 18,108 100,867 -- 12,584
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities...................... (788,211) (1,892,922) (4,219,963) (3,260,578) (365,657)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock......... $ (33,775) $ -- $ -- $ -- $ --
Redemption of preferred stock...... -- (3,225,860) (939,463) -- --
Debt financing costs............... -- (145,509) -- -- --
Proceeds from borrowings under line
of credit........................ 33,977,000 56,614,032 106,438,476 25,205,056 25,776,612
Payments on line of credit......... (34,762,000) (55,178,123) (99,883,027) (20,920,666) (25,087,821)
Proceeds from issuance of notes
payable.......................... 2,916,623 1,935,645 1,806,296 372,140 --
Principal payments on notes
payable.......................... (1,516,301) (2,768,340) (4,568,107) (740,821) (723,635)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities........ 581,547 (2,768,155) 2,854,175 3,915,709 (34,844)
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 79,747 (46,639) 1,932,716 (109,961) (1,596,623)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 287,703 367,450 320,811 (198,429) 2,253,527
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 367,450 $ 320,811 $ 2,253,527 $ (308,390) $ 656,904
============= ============= ============= ============= =============
NONCASH ACTIVITIES:
Insurance acquired with notes
payable.......................... $ 143,743 $ 285,175 $ 370,054 $ -- $ 25,528
Accretion on redeemable preferred
stock............................ 421,200 421,212 112,913 13,434 --
Fair value of warrants issued as
consideration for acquisition.... -- 1,232,556 -- -- --
Shares issued as consideration for
acquisition...................... -- -- 4,200,000 -- --
Additional consideration payable
for acquisitions................. -- 89,409 916,781 -- --
Fair value of shares and options
issued for redemption of
preferred stock.................. -- -- 1,572,910 -- --
Combination of balances related to
discontinued operations --
Net book value of equipment
disposed......................... 433,758 -- -- -- --
Loans on equipment disposed........ 385,364 -- -- -- --
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest......................... 512,353 540,089 1,314,140 260,917 389,010
Income taxes..................... 1,558,973 714,461 2,007,791 495,000 311,697
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-25
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
Petrocon Engineering, Inc. (a Texas corporation), is an international
engineering, systems and construction management contractor, servicing
industrial customers with primary focus in the process industries -- oil,
chemical, petrochemical and forest products.
A brief description of the active companies included in the consolidated
group follows:
a. PETROCON ENGINEERING, INC. (PEI) -- Provides general engineering
services for industrial customers with specialties in the areas of
distributive control systems, forest products, power distribution,
process design and process safety management.
b. PETROCON ENGINEERING OF LOUISIANA, INC. (PEI-LA) -- Extends PEI's
service area into southwest Louisiana.
c. PETROCON SYSTEMS, INC. (PSI) -- Provides design, fabrication,
installation, start-up, checkout and maintenance of analyzers and PLC
systems.
d. PETROCON TECHNOLOGIES, INC. (PTI) -- Currently provides development,
sales and marketing focused on PTI's licensed hybrid low NOX process.
e. PETROCON CONSTRUCTION RESOURCES, INC. (PCR) -- Provides technical,
inspection and operator personnel within client facilities.
f. TRIANGLE ENGINEERS AND CONSTRUCTORS, INC. (TE&C) -- Provides
engineering services and construction management services.
g. RPM ENGINEERING, INC. (RPM) -- Provides engineering services in
southeast Louisiana.
h. ALLIANCE ENGINEERING, INC. (AEI) -- Provides upstream engineering
design and project services.
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrently with the consummation of the initial public
offering (the Offering) of the common stock of OEI.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Petrocon Engineering, Inc., and its wholly owned subsidiaries (collectively, the
Company). All significant intercompany transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
REVENUE RECOGNITION
The Company provides a majority of its services through cost-plus
contracts. Revenues are recognized to the extent of billable rates times hours
delivered plus other reimbursable expenses incurred. Accounts receivable include
amounts currently billable per cost-plus contracts that are not billed until the
following
F-26
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period. Fixed-price contracts represent approximately 5%, 8% and 14% of revenues
in 1995, 1996 and 1997, respectively. Revenue on fixed-price contracts is
recognized using the percentage-of-completion method of accounting. Methods used
to measure percentage of completion consist of labor hours or costs incurred
compared to total estimated labor hours or costs or other appropriate bases of
measurement. Revisions in revenue and cost projections are recorded in the
period in which the facts requiring the revision become known. When estimates of
projected revenues and costs indicate a loss, the total estimated loss is
accrued. Contract performance incentives are included in income when earned.
Potential additional revenues on projects from claims and unapproved change
orders are not recognized until amounts may be reliably estimated and
realization is virtually certain. The asset "Costs and estimated profits in
excess of billings on uncompleted contracts" represents revenues recognized in
excess of amounts billed. The liability "Billings in excess of costs and
estimated profits on uncompleted contracts" represents amounts billed in excess
of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit with maturities
of three months or less.
INVESTMENTS
The Company has a one-third ownership interest in PEI Investments, a Texas
joint venture. The Company uses the equity method of accounting for this
investment. In addition, the Company accounts for its 50% interest in Petrocon
Arabia Limited (PAL) by the equity method. PAL, an engineering company located
in Saudi Arabia, provides general engineering services for oil field, pipeline,
gas plants and offshore facilities as well as refinery and petrochemical plants.
Results of operations for PAL are translated at the average exchange rate for
the year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flow associated with the asset is
compared to the asset's carrying amount to determine if a write-down to fair
value is necessary.
During 1997, the Company wrote off approximately $241,000 of leasehold
improvements made to a leased facility which the Company vacated prior to the
expiration of the lease term. Additionally, the Company has, during 1997,
written down to fair value certain property which the Company elected to hold
for sale. The amount of the property write-down was approximately $122,000, and
the net realizable value of the property, based on an independent appraisal, was
$275,000 at December 31, 1997. These write-downs have been included in the
accompanying consolidated statement of income for the year ended December 31,
1997.
F-27
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recorded based upon the differences between
the 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 underlying
assets or liabilities are recovered or settled.
STOCK OPTIONS
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," and, as permitted, has elected to calculate compensation expense
in accordance with Accounting Principles Bulletin Opinion No. 25 which
calculates compensation expense as the difference between the employee's
exercise price and the current price of the underlying stock. See Note 10 for
the financial statement effects from the adoption of this pronouncement.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
INTANGIBLE ASSETS AND AMORTIZATION
Goodwill represents the excess of cost over the fair value of net tangible
assets of businesses acquired. Goodwill is being amortized on a straight-line
basis over an expected useful life of 40 years. Other intangible assets,
included in other assets, are amortized over the period expected to be benefited
(five to seven years). Amortization expense for goodwill and other intangible
assets was $1,020, $53,651 and $336,375 for 1995, 1996 and 1997, respectively.
Accumulated amortization of goodwill at December 31, 1996 and 1997, was $55,606
and $391,981, respectively. See Note 12 for amortization of cost over equity in
net assets included in the equity in earnings of PAL.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of the
percentage-of-completion method of accounting, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. MAJOR CUSTOMERS AND CREDIT RISK:
A significant portion of the Company's customers are engaged in the energy
industry. This concentration of customers may impact the Company's overall
exposure to credit risk, either positively or negatively, in that customers may
be similarly affected by changes in economic and industry conditions. The
Company performs ongoing credit evaluations of its customers and does not
generally require collateral in support of its trade receivables. The Company
maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations. Foreign sales also present
various risks, including risks of war, civil disturbances and adverse
governmental activities. Most of the Company's foreign sales are to large
international companies or are secured by letters of credit or similar
arrangements. The Company does not believe itself to be dependent to any
material degree on any single customer.
F-28
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (dollars in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1996 1997
------------- --------- ---------
Land................................. $ 535 $ 500
Buildings............................ 39 2,627 2,250
Transportation equipment............. 5 283 289
Machinery and equipment.............. 5-10 885 1,674
Computer equipment and software...... 3-5 3,607 5,278
Leasehold improvements............... 5-10 661 591
Furniture and fixtures............... 10 1,261 922
--------- ---------
9,859 11,504
Less -- Accumulated depreciation..... 3,473 4,921
--------- ---------
Property and equipment, net..... $ 6,386 $ 6,583
========= =========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
The components of trade receivables are as follows:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Amounts billable at December 31,
billed January of the following
year............................... $ 2,566,000 $ 3,592,762
Amounts billed at December 31........ 7,982,368 11,722,706
Retainage............................ 262,376 264,027
Allowance for uncollectible
accounts........................... (112,893) (181,564)
-------------- --------------
$ 10,697,851 $ 15,397,931
============== ==============
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Balance at beginning of year......... $ 124 $ 137 $ 113
Balance acquired at purchase of
subsidiary......................... -- 66 --
Additions to costs and expenses...... 126 87 120
Deductions for uncollectible
receivables written off and
recoveries......................... (113) (177) (51)
--------- --------- ---------
$ 137 $ 113 $ 182
========= ========= =========
F-29
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The status of fixed-price contracts in progress is as follows (in
thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Costs incurred on contracts in
progress........................... $ 2,608 $ 7,198
Estimated earnings, net of losses.... 801 1,933
--------- ---------
3,409 9,131
Less -- Billings to date............. (2,945) (7,749)
--------- ---------
$ 464 $ 1,382
========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 464 $ 1,881
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... -- (499)
--------- ---------
$ 464 $ 1,382
========= =========
5. LINE OF CREDIT AND DEBT:
The Company has a line of credit with a credit limit of $13,000,000, of
which $5,085,908 and $11,641,357 was outstanding at December 31, 1996 and 1997,
respectively. The line of credit is secured by an interest in all of the
Company's accounts receivable and expires on August 8, 1999. Advances on the
credit line accrue interest at a rate equal to one-half of 1% plus the prime
rate (9.0% at December 31, 1997), and the commitment fee on the unused line of
credit is 0.25%. Interest is payable monthly. The line of credit contains
covenants pertaining to the maintenance of certain ratios, including fixed
charge coverage, specified levels of certain other items, including tangible net
worth and EBITDA, and various other covenants as specified in the loan
agreement, as amended. In March 1998, the credit limit on the line of credit was
increased to $14,000,000.
In August 1996, the Company refinanced its long-term debt. The refinancing
paid off all long-term debt and established two term loans and a new line of
credit. Debt financing costs of approximately $145,000 were incurred in
conjunction with the refinancing. These costs are being amortized over three
years, the life of the debt agreement.
Debt consists of the following:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Heller Financial, Inc. --
Term Loan A, interest at prime
plus 0.75% (9.25% at December
31, 1997) due in monthly
installments, maturing through
1999.......................... $ 2,151,933 $ 2,610,000
Term Loan B, interest at prime
plus 1.25% (9.75% at December
31, 1997) due in quarterly
installments, maturing through
1999.......................... 3,083,333 1,793,357
Merrill Lynch Business Financial
Services, Inc...................... 834,570 --
RPM Investments, Inc., interest at
10% due in three installments,
maturing through 1998.............. 400,000 200,000
Other................................ 59,260 52,863
-------------- --------------
6,529,096 4,656,220
Less -- Current maturities...... (2,772,604) (1,976,174)
-------------- --------------
$ 3,756,492 $ 2,680,046
============== ==============
F-30
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all debt is collateralized by security interests in accounts
receivable, property and equipment.
Maturities of long-term debt are as follows:
Year ending December 31 --
1998............................ $ 1,976,174
1999............................ 2,680,046
------------
$ 4,656,220
============
6. LEASES:
The Company leases office space under noncancelable operating lease
agreements. Minimum payments on the multiyear leases over the remaining terms of
the leases are as follows:
Year ending December 31 --
1998............................ $ 1,280,992
1999............................ 967,812
2000............................ 505,815
2001............................ 225,757
2002............................ 5,700
------------
$ 2,986,076
============
Rent expense for operating leases was $870,735, $1,036,776 and $1,373,555
for the years ended December 31, 1995, 1996 and 1997, respectively.
7. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ------------ ------------
Federal --
Current......................... $ 483,884 $ 743,168 $ 1,476,332
Deferred........................ (623,183) 123,677 (134,352)
State --
Current......................... 206,384 166,399 266,477
Deferred........................ (66,238) 17,609 (34,412)
---------- ------------ ------------
$ 847 $ 1,050,853 $ 1,574,045
========== ============ ============
The provision for income tax does not include foreign income taxes of
$458,914, $155,330 and $781,006 for the years ended December 31, 1995, 1996 and
1997, respectively. These foreign income taxes are attributable to the Company's
interest in PAL (see Note 12). The earnings of PAL have been reflected net of
income taxes in equity in earnings of PAL in the accompanying statements of
income.
F-31
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income from
continuing operations before income taxes as follows:
DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Provision at the statutory rate...... $ 615,062 $ 855,389 $ 1,471,811
Increase (decrease) resulting from --
Goodwill amortization and
other......................... (44,012) 71,670 338,210
Increase (decrease) in valuation
allowance..................... 101,049 (28,794) (10,689)
Net cost (benefit) of foreign
tax credit from unconsolidated
foreign subsidiary............ (143,336) 25,156 (366,749)
State income tax, net of benefit
for federal deduction......... 69,975 127,432 141,462
------------ ------------ ------------
$ 598,738 $ 1,050,853 $ 1,574,045
============ ============ ============
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Net current deferred income tax
assets (liabilities) --
Accrued expenses................ $ 651,953 $ 737,504
Allowance for doubtful accounts
receivable.................... 15,486 69,686
Deferred income................. -- (263,817)
------------ ------------
$ 667,439 $ 543,373
============ ============
Net noncurrent deferred income tax
assets (liabilities) --
Depreciation and amortization... $ (432,275) $ (440,061)
Federal and state net operating
loss carryforward............. 221,378 215,480
Valuation allowance............. (213,419) (202,730)
------------ ------------
$ (424,316) $ (427,311)
============ ============
At December 31, 1997, the Company had state of California, state of Texas
and federal net operating loss carryforwards of $317,050, $3,108,557 and
$133,685, respectively, which will expire between 1998 and 2012. Most of the
federal and all of the state net operating loss carryforwards are expected to
expire unused. The valuation allowance is due to expected expiration of net
operating loss carryforwards. During 1997, the deferred tax asset and valuation
allowance were reduced by $10,689 due to the expiration of net operating losses
that were not expected to be utilized.
8. STOCKHOLDERS' EQUITY:
The Company has a common stock redemption agreement whereby, upon a
stockholder's employment termination, divorce or desire to sell, the Company has
right of first refusal to purchase the stock held by such stockholder. Upon the
death or disability of a stockholder, the Company is obligated to purchase the
stock held by such stockholder subject to certain limits as set forth by the
Company's amended and restated stockholders' agreement. The purchase price per
share is at fair market value, as determined by the Company's board of
directors, in its good faith, and as reasonably acceptable to the stockholder.
F-32
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company issued 65,000 shares of common stock valued at $4.44
per share in connection with the acquisition of TE&C (see Note 15) and awarded a
stock bonus to management of 23,039 shares valued at $4.44 per share.
In 1997, the Company issued 536,943 shares of common stock valued at $7.82
per share in connection with the acquisition of AEI (see Note 15).
9. REDEEMABLE PREFERRED STOCK:
The Company has authorized 3,000,000 shares of $.3333 par value preferred
stock, which may be divided into one or more series as determined by the board
of directors. The board is authorized to fix and determine the relative rights
and preferences of each series as to dividend rate, redemption, liquidation
preferences, sinking fund provision, convertibility and voting rights. As
described below, the board has established one series of redeemable preferred
stock consisting of 675,168 shares.
The Company's Series A convertible preferred stock (Series A) was issued
for the purpose of acquiring PAL Series A is convertible into common shares at a
specified conversion ratio based upon a conversion price of $3.33 per share, and
the stock has a liquidation preference based upon a stated value of $4.44 per
share plus the greater of a valuation increment of 12% per annum compounded from
August 31, 1992, or the increment that would have occurred had the shares been
converted to common shares. The Series A shares have full voting rights
determined by the specified conversion ratio. Stockholders may demand redemption
of up to one-sixth of their shares on September 30, 1996, and an additional
one-sixth every six months thereafter until March 31, 1999. Such redemption
rights are cumulative for any amounts not previously redeemed. The redemption
price is equal to the stated value of $4.44 per share plus a redemption premium
computed as a 12% annualized compound rate of return on the stated value from
August 31, 1992, through the redemption date.
During such time as any shares of Series A are outstanding, the Company may
not declare or pay any dividend on or otherwise acquire or retire for value any
shares of common stock, except as required under the stock redemption agreement
described above. As of December 31, 1997, the Company has charged accretion
toward the redemption value in the aggregate amount of $1,774,785 to retained
earnings and increased the redeemable preferred stock by the same amount.
In August 1996, the Company redeemed 463,592 shares of its Series A at
$4.44 per share plus 12% per annum as provided in the stock agreement. In August
1997, the remaining 154,531 of the Series A shares were redeemed by the Company
in exchange for (a) cash of $939,463, (b) the issuance of 106,306 shares of
common stock and (c) the issuance of options to purchase 135,998 shares of
common stock of the Company for a price of $4.44 per share. At December 31,
1997, there are no shares of Series A outstanding.
10. EMPLOYEE BENEFIT PLANS:
Employees of the Company may participate in a 401(k) savings plan, whereby
the employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length-of-service requirements. The plan also
provides for discretionary contributions by the Company, as determined by the
board of directors. Under the plan, contributions to the 401(k) plan will be
made in the name of each participating employee in direct proportion to the
employee's 401(k) contribution. Contributions of $266,000 and $220,000 are
included in accrued expenses for the years ended December 31, 1996 and 1997,
respectively. No contributions were made related to the year ended December 31,
1995.
The Company and its employees contribute to a health plan that is
self-insured by the Company up to $60,000 per claim and approximately $2,300,000
in the aggregate.
F-33
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a nonqualified stock option plan that provides for the
issuance of options up to 1,200,000 shares of the Company's common stock. The
exercise price per share at the date of grant is equal to the fair market value
of the Company's common stock; therefore, no compensation expense is recognized.
Vesting of the options is generally as follows: one-third after one year,
two-thirds after two years and all after three years. Other vesting schedules
can be followed. Some of the options granted during 1996 and 1997 vest 10% at
grant date, 10% at January 1 of the year following grant and 10% annually
thereafter until fully vested. Another option granted during 1997 vests 16.67%
at January 1, 1998, and is fully vested in six years. Options are canceled upon
termination of employment and lapse 10 years after grant. A summary of stock
option activity is as follows:
EXERCISE
PRICE PER
SHARES SHARE
--------- ---------
Outstanding, January 1, 1995......... 94,750 $4.44
Granted.............................. 4,890 4.44
Canceled............................. (800) 4.44
---------
Outstanding, December 31, 1995....... 98,840 4.44
Granted.............................. 474,865 4.44
Granted.............................. 397,700 6.50
Canceled............................. (4,150) 4.44
---------
Outstanding, December 31, 1996
(397,700 options at $6.50 and
569,555 options at $4.44).......... 967,255
Granted.............................. 1,000 4.44
Granted.............................. 34,000 6.50
Canceled............................. (8,475) 4.44
---------
Outstanding, December 31, 1997
(431,700 options at $6.50 and
562,080 options at $4.44).......... 993,780
=========
Exercisable, December 31, 1997
(60,770 options at $6.50 and
212,843 options at $4.44).......... 273,613
=========
Available for grant, December 31,
1997............................... 70,222
=========
Weighted average remaining life of
options outstanding at December 31,
1997............................... 6.24
=========
The summary above does not include 135,998 options issued in consideration
for redemption of Series A preferred shares (see Note 9).
Stock-based compensation costs, as calculated under SFAS No. 123, would
have reduced pretax income by approximately $357,533 and $47,301 in 1996 and
1997, respectively, if the fair values of the options granted in those years had
been recognized as compensation expense on a straight-line basis over the
vesting period of the grant. For the purposes of SFAS No. 123, the fair market
value of the options granted during 1996 and 1997 used a risk-free interest rate
of 6.8% and 5.8%, respectively, an expected life of 10 years and expected
dividends of 0%. The pro forma effect on net income for 1996 and 1997 may not be
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
11. RELATED-PARTY TRANSACTIONS:
The Company leases office space from PEI Investments, a Texas joint
venture, of which the Company and an officer each own a one-third interest.
Rental paid under these leases was $105,632 for 1995, 1996
F-34
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1997. The lease expires in 2000 and has a present annual rental rate of
approximately $115,000. The Company is contingently liable as a guarantor for a
PEI Investments bank loan. The principal balance was $288,838 and $229,916 at
December 31, 1996 and 1997, respectively.
During 1995, 1996 and 1997, the Company provided services to PAL which
totaled $176,521, $56,216 and $33,083, respectively, in revenue. A receivable of
$1,381 and $3,158 for these services was outstanding at December 31, 1996 and
1997, respectively.
The Company had a note payable to RPM Investments, Inc., a partnership
owned by members of Company management, in the amount of $400,000 and $200,000
at December 31, 1996 and 1997, respectively.
12. PETROCON ARABIA LIMITED:
The Company accounts for its 50% investment in PAL under the equity method
of accounting. Financial statement information of PAL as of and for the years
ended December 31, 1995, 1996 and 1997, is as follows:
1995 1996 1997
------------ ------------ --------------
Revenues.......................... $ 9,186,507 $ 8,142,431 $ 16,372,534
Net income........................ 1,235,902 305,566 1,931,961
Total assets...................... 8,448,268 5,914,215 9,857,780
Stockholders' equity.............. 6,036,424 4,837,220 5,270,952
The difference between the carrying amount of the investment and the
underlying equity in net assets at acquisition date consisted of a noncompete
agreement in the amount of $1,000,000 and goodwill of $669,023, which are being
amortized over 15 years and 40 years, respectively.
The Company's equity in PAL and its earnings from PAL as of December 31,
1995, 1996 and 1997, and for the years then ended are as follows:
1995 1996 1997
------------ ------------ ------------
Company's equity in PAL.............. $ 3,265,827 $ 2,418,610 $ 2,634,591
Unamortized excess of cost over
equity in underlying net assets
acquired........................... 1,242,998 1,137,354 1,031,715
------------ ------------ ------------
Company's investment in
PAL..................... $ 4,508,825 $ 3,555,964 $ 3,666,306
============ ============ ============
Company's equity in net income of
PAL................................ $ 617,951 $ 152,783 $ 965,981
Amortization of the excess of cost
over equity in underlying net
assets acquired.................... (110,747) (105,644) (105,640)
------------ ------------ ------------
Company's equity in
earnings of PAL......... $ 507,204 $ 47,139 $ 860,341
============ ============ ============
The Company has guaranteed borrowings of PAL up to the amount of
$1,133,333.
F-35
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. DISCONTINUED OPERATIONS:
On October 19, 1995, the board of directors approved a resolution to
discontinue all operations of Petrocon Plant Services, Inc. (PPS), PCR and
Petrocon Instrument and Electrical, Inc. (PIE), except for the PCR and PPS
inspection operations. The related financial results are reported as
discontinued operations. On February 8, 1996, the Company sold the discontinued
operations of PIE for $303,083. Combined financial statement information of the
discontinued operations through October 19, 1995, is as follows:
Revenues............................. $ 13,669,901
Operating costs...................... (14,858,327)
Interest expense..................... (38,390)
Income tax benefit................... 417,117
--------------
Net loss........................ $ (809,699)
==============
For the period from October 19, 1995, through December 31, 1995, the
discontinued operations had a net loss of $286,705.
14. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses in excess of insurance recoveries.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its executive officers, the
terms of which expire at various times through October 2001. Such agreements
provide for minimum salary levels, adjusted annually for cost-of-living changes,
as well as for incentive bonuses that are payable if specified management goals
are attained. The aggregate commitment for future salaries at December 31, 1997,
excluding bonuses, was approximately $4,400,000.
15. ACQUISITIONS:
Effective July 1, 1996, the Company acquired all outstanding shares of TE&C
in exchange for 65,000 shares of Company stock valued at $4.44 per share.
Additional consideration given for TE&C included assumption of outstanding
liabilities by the Company. The combination was accounted for using the purchase
method. The total purchase price of approximately $1,206,000 resulted in
$689,000 of goodwill which is being amortized over 40 years using the
straight-line method. The Company also signed an employment agreement with
TE&C's sole stockholder that includes the right to additional shares of the
Company's common stock based on continued employment with the Company. For the
years ended December 31, 1996 and 1997, $18,315 and $24,420, respectively, of
compensation expense was recognized by the Company in relation to 11,000
additional shares to be issued under this agreement. TE&C's sole stockholder
also received commissions based on the gross billings of TE&C through December
31, 1997, and these amounts were accounted for as compensation expense in the
period earned.
Effective October 17, 1996, the Company acquired all outstanding shares of
RPM for approximately $1,859,000 in cash and stock warrants for 525,386 shares
of the Company's stock at $6.50 per share. The
F-36
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
combination was accounted for using the purchase method and resulted in
approximately $1,843,556 of goodwill that is being amortized over 40 years using
the straight-line method. The warrants have an exercise price of $6.50 and an
exercise period from October 17, 1996, through October 17, 2003. RPM's
stockholders will receive additional compensation based on the earnings of RPM
through December 31, 2001. The additional compensation will be accounted for as
additional goodwill to be amortized over the remaining goodwill amortization
period when the required earnings levels are achieved. The Company also signed
three- and five-year employment agreements with two of RPM's stockholders. As of
December 31, 1997, approximately $955,781 of additional consideration had been
earned and accounted for as additional goodwill.
Effective February 1, 1997, a wholly owned subsidiary of the Company merged
with AEI in exchange for cash of $4,500,000 and 536,943 shares of Company stock
valued at $7.82 per share. The combination was accounted for using the purchase
method, and the total purchase price of $8,700,000 resulted in approximately
$6,266,000 of goodwill, which is being amortized over 40 years using the
straight-line method. The Company also signed four-year employment agreements
with certain of the former officers of AEI.
The results of operations of companies acquired are included in the
accompanying consolidated statements of income from their respective acquisition
dates.
The following unaudited pro forma consolidated results of operations assume
that the purchase of AEI occurred on January 1, 1997 and that the purchases of
RPM and TE&C occurred on January 1, 1996. Results of operations are also shown
for the periods immediately preceding the periods in which the respective
purchases occurred.
EARNINGS (LOSS)
FROM CONTINUING NET INCOME
REVENUE OPERATIONS (LOSS)
------------ ---------------- -----------
1997:
Petrocon as reported....... $ 92,616,378 $ 2,754,812 $2,754,812
AEI........................ 954,980 56,584 56,854
------------ ---------------- -----------
Pro Forma............. $ 93,571,358 $ 2,811,666 $2,811,666
============ ================ ===========
1996:
Petrocon as reported....... $ 61,850,638 $ 1,464,998 1,464,998
AEI........................ 14,068,660 1,088,748 1,088,748
RPM........................ 13,826,582 531,424 531,424
TE&C....................... 2,738,911 (567,427) (567,427)
------------ ---------------- -----------
Pro Forma............. $ 92,484,791 $ 2,517,743 $2,517,743
============ ================ ===========
1995:
Petrocon as reported....... $ 52,385,813 $ 1,210,270 49,658
RPM........................ 17,483,509 415,205 415,205
TE&C....................... 6,917,763 629,843 629,843
------------ ---------------- -----------
Pro Forma............. $ 76,787,085 $ 2,255,318 $1,094,706
============ ================ ===========
The pro forma financial information may not necessarily be indicative of
the Company's results of operations that would have occurred had the
transactions been effected on the assumed dates, nor do the pro forma results
purport to indicate the Company's results of operations for any future period.
F-37
<PAGE>
PETROCON ENGINEERING, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. EXPORT SALES:
Export sales were approximately $13,100,000, $15,500,000 and $24,100,000
for the years ended December 31, 1995, 1996 and 1997, respectively. Such sales
were in South America, Europe, Africa and the Middle East and the Far East.
17. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In April 1998, the Company and its stockholders entered into a definitive
agreement with OEI providing for the acquisition of the Company by OEI.
Concurrently with the acquisition, the Company will enter into agreements
with PEI Investments to lease land and buildings used in the Company's
operations for a negotiated amount and term.
F-38
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Paulus, Sokolowski and Sartor, Inc.:
We have audited the accompanying balance sheets of Paulus, Sokolowski and
Sartor, Inc. (a New Jersey corporation) as of December 31, 1996 and 1997 and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paulus, Sokolowski and
Sartor, Inc. as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 8, 1998
F-39
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ MARCH 31,
1996 1997 1998
-------------- -------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents....... $ 102,531 $ 96,247 $ 121,560
Trade receivables, net.......... 4,807,538 5,172,513 5,896,808
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 2,369,097 2,817,853 3,409,436
Prepaid expenses................ 111,527 159,266 328,669
-------------- -------------- --------------
Total current assets....... 7,390,693 8,245,879 9,756,473
-------------- -------------- --------------
PROPERTY AND EQUIPMENT, net.......... 733,729 611,235 590,276
DEFERRED TAX ASSET................... 73,364 54,800 54,800
OTHER ASSETS:
Cash surrender value of life
insurance..................... 1,446,781 1,698,299 1,752,378
Intangible assets............... 500,000 500,000 458,333
Other receivables............... 99,228 103,961 147,432
-------------- -------------- --------------
Total other assets......... 2,046,009 2,302,260 2,358,143
-------------- -------------- --------------
Total assets............... $ 10,243,795 $ 11,214,174 $ 12,759,692
============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable.................... $ 960,000 $ 950,000 $ 2,590,000
Current portion of long-term
debt.......................... 116,181 82,076 62,908
Accounts payable................ 1,200,391 1,618,440 1,175,350
Accrued compensation and
benefits...................... 1,495,357 1,505,958 1,097,887
Other liabilities............... 60,570 38,450 88,968
Deferred income taxes........... 589,562 667,768 736,742
Due to affiliate................ 88,000 -- --
Billings in excess of costs and
estimated earnings
on uncompleted contracts...... 110,846 -- --
-------------- -------------- --------------
Total current
liabilities............. 4,620,907 4,862,692 5,751,855
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities.................... 599,688 546,522 554,540
-------------- -------------- --------------
Total liabilities.......... 5,220,595 5,409,214 6,306,395
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value,
50,000 shares authorized;
31,176, 31,076 and 31,076
shares outstanding,
respectively.................. 1,023,969 1,005,169 1,005,169
Retained earnings............... 4,971,038 5,748,195 6,395,273
Shareholder note receivable..... (403,329) (379,926) (378,667)
Treasury Stock, 4,833 common
shares........................ (568,478) (568,478) (568,478)
-------------- -------------- --------------
Total shareholders'
equity.................. 5,023,200 5,804,960 6,453,297
-------------- -------------- --------------
Total liabilities and
shareholders' equity.... $ 10,243,795 $ 11,214,174 $ 12,759,692
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 18,706,643 $ 20,514,995 $ 21,675,092 $ 5,358,988 $ 5,898,774
DIRECT COSTS......................... 8,974,302 9,395,908 9,730,641 2,411,155 2,469,129
------------ ------------ ------------ ----------- -----------
Gross profit..................... 9,732,341 11,119,087 11,944,451 2,947,833 3,429,645
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 9,384,957 10,454,943 10,787,390 2,678,852 2,654,933
------------ ------------ ------------ ----------- -----------
Income from operations........... 347,384 664,144 1,157,061 268,981 774,712
OTHER INCOME (EXPENSE)
Interest expense, net............ (190,308) (149,889) (208,359) (52,089) (58,660)
Other............................ 8,445 358 (74,775) (18,694) --
------------ ------------ ------------ ----------- -----------
Income from continuing operations
before income taxes............ 165,521 514,613 873,927 198,198 716,052
PROVISION (BENEFIT) FOR INCOME TAX... 25,124 56,339 96,770 47,137 68,974
------------ ------------ ------------ ----------- -----------
Income before Extraordinary
Item........................... 140,397 458,274 777,157 151,061 647,078
EXTRAORDINARY ITEM
Gain on forgiveness of debt (net
of applicable income tax of
$101,205)...................... 1,023,295 -- -- -- --
------------ ------------ ------------ ----------- -----------
NET INCOME........................... $ 1,163,692 $ 458,274 $ 777,157 $ 151,061 $ 647,078
============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE-- TREASURY STOCK TOTAL
-------------------- COMMON RETAINED ------------------ SHAREHOLDERS'
SHARES AMOUNT STOCK EARNINGS SHARES AMOUNT EQUITY
------- --------- -------------- --------- ------ -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995............. 31,176 $1,023,969 $ (420,839) $3,444,072 -- -- $4,047,202
Payments on notes receivable......... -- -- 10,921 -- -- -- 10,921
Purchase of common stock............. -- -- -- -- (4,833) (568,478) (568,478)
Net income........................... -- -- -- 1,163,692 -- -- 1,163,692
------- --------- -------------- --------- ------ -------- -------------
BALANCE, December 31, 1995........... 31,176 1,023,969 (409,918) 4,607,764 (4,833) (568,478) 4,653,337
Dividends............................ -- -- -- (95,000) -- -- (95,000)
Payments on notes receivable......... -- -- 6,589 -- -- -- 6,589
Net income........................... -- -- -- 458,274 -- -- 458,274
------- --------- -------------- --------- ------ -------- -------------
BALANCE, December 31, 1996........... 31,176 1,023,969 (403,329) 4,971,038 (4,833) (568,478) 5,023,200
Cancellation of notes................ (100) (18,800) 18,800 -- -- -- --
Payments on notes receivable......... -- -- 4,603 -- -- -- 4,603
Net income........................... -- -- -- 777,157 -- -- 777,157
------- --------- -------------- --------- ------ -------- -------------
BALANCE, December 31, 1997........... 31,076 1,005,169 (379,926) 5,748,195 (4,833) (568,478) 5,804,960
Payments on notes receivable
(unaudited)........................ -- -- 1,259 -- -- -- 1,259
Net income (unaudited)............... -- -- -- 647,078 -- -- 647,078
------- --------- -------------- --------- ------ -------- -------------
BALANCE, March 31, 1998
(unaudited)........................ 31,076 $1,005,169 $ (378,667) $6,395,273 (4,833) (568,478) $6,453,297
======= ========= ============== ========= ====== ======== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 1,163,692 $ 458,274 $ 777,157 $ 151,061 $ 647,078
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and
amortization.............. 116,368 146,518 162,463 13,628 70,696
Provision for losses on
trade receivables......... (35,333) 34,953 148,849 -- --
Deferred tax asset.......... (65,379) (7,986) 18,564 -- --
Deferred income taxes....... 191,708 64,325 78,206 978 68,974
Gain on forgiveness of
debt...................... (1,124,500) -- -- -- --
(Loss) on sale of property
and equipment............. (8,445) -- 74,775 -- --
Changes in assets and
liabilities --
(Increase) decrease in --
Trade receivable............ 389,505 (44,515) (513,824) 554,691 (724,295)
Costs and estimated earnings
in excess of billings on
uncompleted jobs.......... (164,897) 257 (448,756) (837,971) (591,583)
Prepaid expenses............ (24,442) (63,098) (47,739) (11,038) (169,403)
Cash surrender value of life
insurance................. (166,636) (38,533) (251,518) (29,069) (54,079)
Intangible asset............ (500,000) -- -- --
Other receivables........... (20,492) (39,460) (4,733) (397,630) (43,471)
Increase (decrease) in --
Accounts payable............ 738,665 (80,657) 418,049 680,737 (443,090)
Accrued compensation and
benefits.................. 143,807 (435,282) 10,601 (524,632) (408,071)
Other liabilities........... 44,418 (22,120) 8,880 50,518
Billings in excess of costs
and estimated earnings on
uncompleted jobs.......... -- 110,846 (110,846) (110,846) --
------------ ---------- ---------- ----------- ------------
Net cash provided by
operating
activities............ 633,621 150,060 289,128 (501,211) (1,596,726)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of
property and equipment......... 23,685 -- 34,679 -- --
Purchase of property and
equipment...................... (439,355) (147,519) (149,423) -- (8,070)
------------ ---------- ---------- ----------- ------------
Net cash used in
investing
activities............ (415,670) (147,519) (114,744) -- (8,070)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable..................... (150,000) 360,000 (10,000) 740,000 1,640,000
Dividends paid................... -- (95,000) -- -- --
Repayment of long-term debt...... (188,018) (307,299) (87,271) 65,605 (11,150)
Proceeds from Shareholder notes
receivable..................... 10,921 6,589 23,403 403,329 1,259
(Reductions) Proceeds from
long-term debt................. 197,659 -- --
Retirement of common stock....... (85,272) -- (18,800)
Due from Affiliates.............. -- -- (88,000) (88,000) --
------------ ---------- ---------- ----------- ------------
Net cash provided by
(used in) financing
activities............ (214,710) (35,710) (180,668) 1,120,934 1,630,109
------------ ---------- ---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH...... 3,241 (33,169) (6,284) 619,723 25,313
CASH AND CASH EQUIVALENTS BEGINNING
OF YEAR............................ 132,459 135,700 102,531 102,531 96,247
------------ ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS END OF
YEAR............................... $ 135,700 $ 102,531 $ 96,247 $ 722,254 $ 121,560
============ ========== ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest................... 202,715 165,590 224,549 33,290 44,529
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-44
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Paulus, Sokolowski and Sartor, Inc. (a New Jersey Corporation) provides
comprehensive consulting engineering services, including studies, reports, and
design and field inspections, in the areas of structural engineering, civil
engineering, mechanical and electrical engineering (including HVAC systems),
geology, geophysics, foundation design, site selection, environmental studies,
earth and rock structures, soil and foundation, air quality control, water
quality control, noise control, and solid waste disposal. The Company conducts
its business predominantly in New Jersey and New York.
The Company and its shareholders intend to enter into a definitive
agreement with OEI International, Inc. ("OEI") pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of OEI common stock concurrently with the consummation of the initial
public offering (the "Offering") of the common stock of OEI.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line and accelerated methods over the estimated
useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
REVENUE RECOGNITION
The Company provides a majority of its services through cost-plus-markup
contracts. Revenues are recognized to the extent of billable rates times hours
delivered plus materials expense incurred. Fixed priced contracts represent
approximately 26.0, 19.7 and 24.8 percent of the Company's revenues in 1995,
1996 and 1997 respectively. Revenue on fixed priced contracts is accrued through
the recognition of projected revenues and costs on a percentage-of-completion
basis. Methods used to measure percentage of completion consist of labor hours
or costs incurred compared to total estimated labor hours or costs or other
appropriate
F-45
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
bases of measurement. Revisions in revenue and cost projections are recorded in
the period in which the facts which require the revision become known. When
estimates of projected revenues and costs indicate a loss, the total estimated
loss is accrued. Contract performance incentives are included in income when
earned. Potential additional revenues on projects from claims and unapproved
change orders are not recognized until amounts may be reliably estimated and
realization is virtually certain. The asset "Costs and estimated profits in
excess of billings on uncompleted contracts" represents revenues recognized in
excess of amounts billed. The liability "Billings in excess of costs and
estimated earnings on uncompleted contracts" represents amounts billed in
excess of revenues recognized.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. The Company will terminate its S Corporation status concurrent with
the effective date of the offering. Under S Corporation status, the shareholders
report their shares of the Company's taxable earnings or losses in their
personal tax returns.
Deferred income taxes reflect temporary differences between financial
reporting and state income tax reporting of revenues and expenses. The principal
differences arise from the reporting of income and expenses under the accrual
method of accounting for financial statement purposes versus the modified
accrual method for income tax purposes. These deferred taxes are classified in
the balance sheet as current.
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 reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES IN YEARS 1996 1997
------------------ -------------- --------------
<S> <C> <C> <C>
Furniture and fixtures............... 5-10 $ 339,441 $ 352,617
Field and laboratory equipment....... 5-7 323,948 351,996
Vehicles............................. 3-5 635,192 390,059
Leasehold improvements............... 5-39 785,845 813,858
-------------- --------------
2,084,426 1,908,530
Less -- Accumulated depreciation..... 1,350,697 1,297,295
-------------- --------------
Property and equipment, net..... $ 733,729 $ 611,235
============== ==============
</TABLE>
F-46
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Balance at beginning of year......... $ 689,580 $ 654,247 $ 689,198
Additions to costs and expenses...... 348,868 188,404 148,849
Deductions for uncollectible
receivables written off and
recoveries......................... (464,611) (153,453) (463,325)
---------- ---------- ----------
$ 654,247 $ 689,198 $ 374,722
========== ========== ==========
The status of contracts in progress is as follows:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Costs incurred on contracts in
progress........................... $ 24,874,548 $ 27,117,851
Estimated earnings, net of losses.... 4,413,139 5,846,913
-------------- --------------
29,287,687 32,964,764
Less Billings to date................ 26,918,590 30,146,911
-------------- --------------
$ 2,369,097 $ 2,817,853
============== ==============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 2,479,943 $ 2,817,853
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (110,846) --
-------------- --------------
$ 2,369,097 $ 2,817,853
============== ==============
4. DEBT:
LINE OF CREDIT
The Company has a revolving line of credit of $2,000,000 in 1996 and
$3,000,000 in 1997 of which 1,040,000 and 2,050,000 was unused at December 31,
1996 and 1997, respectively. The line of credit expires July 31, 1998 and is
payable in monthly installments of interest only on the outstanding balance, at
the bank's prime rate. On December 31, 1997 the interest rate was 8.5%. This
obligation is secured by all of the assets of the Company and is personally
guaranteed by certain shareholders.
F-47
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
1996 1997
---------- ----------
Otokar Von Bradsky, a former
shareholder, note payable in
quarterly installments of interest
only at 7.93% per annum through
January 1, 1999. Thereafter quarterly
self-liquidating payments of $29,501
inclusive of interest at 7.93% per
annum until maturity on January 1,
2004. This note was issued in
connection with the repurchase of
4,833 shares of Company stock for
$568,478............................. $ 483,206 $ 483,206
Installment notes payable
collateralized by certain Company
vehicles having a net book value of
$124,267 at December 31, 1997. As of
December 31, 1997 the notes are
payable in monthly installments
through April, 2000 ranging from $617
to $4,284 inclusive of interest at
rates ranging from 5.9% to 8.75%..... 213,437 145,392
Robert Bloch, note payable in
quarterly installments of $6,457,
plus interest at 9% per annum,
through October 1997................. 19,226 --
---------- ----------
715,869 628,598
Less, current portion................ 116,181 82,076
---------- ----------
$ 599,688 $ 546,522
========== ==========
Principal payments for the next five years are scheduled as follows:
1998................................. $ 82,076
1999................................. 108,575
2000................................. 103,207
2001................................. 94,181
2002................................. 101,874
Thereafter........................... 138,685
----------
$ 628,598
==========
The Company paid interest of $100,688, $64,252 and $67,784 related to debt
for the years ended December 31, 1995, 1996 and 1997, respectively.
5. INCOME TAXES
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Federal--
Current......................... $ -- $ -- $ --
Deferred........................ -- -- --
State--
Current......................... (300) -- --
Deferred........................ 25,424 56,339 96,770
--------- --------- ---------
$ 25,124 $ 56,339 $ 96,770
========= ========= =========
F-48
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the state statutory corporate rate of 9 percent to income before income
taxes as follows:
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Provision at the statutory rate...... $ 14,897 $ 46,315 $ 78,653
Increase resulting from --
Permanent differences.............. 10,227 10,024 18,117
--------- --------- ---------
Provision for income tax............. 25,124 56,339 96,770
========= ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Trade receivable, net................ $ (432,678) $ (465,573)
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... (177,151) (253,607)
Prepaid expenses and other
receivables........................ 30,677 (66,500)
Other................................ (58,246) 25,470
Accounts payable and accrued
compensation and benefits.......... 47,836 92,442
Net operating loss carryforwards..... 73,364 54,800
------------ ------------
Net deferred tax liability........... $ (516,198) $ (612,968)
============ ============
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Deferred tax assets --
Current......................... $ 47,595 $ 78,737
Long-term....................... 73,364 54,800
------------ ------------
Total...................... 120,959 133,537
============ ============
Deferred tax liabilities --
Current......................... 637,157 746,505
Long-term....................... -- --
------------ ------------
Total...................... 637,157 746,505
============ ============
Net deferred income tax
liability..................... $ (516,198) $ (612,968)
============ ============
At December 31, 1997, the Company had net operating loss carryforwards
which expire as follows:
1998................................. $ 544,000
2001................................. 61,800
6. RELATED PARTY TRANSACTIONS
Notes receivable common stock represent notes due from four shareholders in
connection with their purchase of 2,066 shares of common stock effective January
1, 1994. The notes are collateralized by the issued shares of stock and require
annual interest payments at 5% through December 15, 2002, at which time the
entire outstanding principal balance and any accrued interest is due. One
shareholder has elected to prepay his note through equal bi-weekly payments of
principal and interest until fully satisfied in January
F-49
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1998. Interest receivable on these notes is $20,825, $21,601 and $15,711 for
years ended December 31, 1995, 1996 and 1997.
The Company leases office space from Mountain Boulevard I, Mountain
Boulevard II, and Mountain Boulevard III. Rentals paid under these leases were
$1,544,357, $1,592,100 and $1,626,449 for 1995, 1996 and 1997, respectively.
The Company leases equipment from PSF Leasing Company. Rentals paid under
these leases were $307,803, $228,930 and $231,597 for 1995, 1996 and 1997,
respectively.
During 1995, 1996 and 1997, the Company provided services to Paulus,
Sokolowski & Sartor Engineering, P.C., an affiliate. Included in contract
revenues for the years ending December 31, 1995, 1996 and 1997 was $1,072,415,
$3,977,109 and $4,710,308, respectively. At December 31, 1996, and 1997,
included in accounts receivable was $606,994 and $1,936,169, respectively, for
these services. In addition, $69,000 of management fee income was received
during the year ended December 31, 1997 from this entity, which is included in
revenues.
In December, 1991, a shareholder loaned the Company $200,000 which was
repaid in March 1996. Interest expense for 1995 at 7% per annum amounted to
$14,000.
In April, 1992, a related entity loaned the Company $88,000, which was
repaid in December 1997. Interest expense for years 1995, 1996 and 1997, was
$7,040, $7,040 and $25,374, respectively.
During 1995, 1996 and 1997 the wife of a shareholder provided advertising
and promotional services to the Company, in the amounts of $39,898, $58,722 and
$101,082, respectively.
7. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. For the years ended
December 31, 1996 and 1997, one customer accounted for 10% and 11%,
respectively, of the Company's revenues. Receivables outstanding from this
customer represented $122,828 and $1,409,729 of the Company's trade receivables
at December 31, 1996 and 1997 respectively. For the year ended December 31,
1995, there was not a significant customer.
During the year ended December 31, 1995, 1996 and 1997, there were no
significant vendors.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, worker's compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
LEASES
The Company is the lessee under three long-term building leases and various
equipment leases with related entities. The controlling interests of the lessors
are the same as the controlling interests of the Company.
On December 31, 1995, the Company entered into new building leases with its
related lessors which reflect current market conditions and expire in 2011 and
2017. In addition to base rents the leases require the Company to pay all
operating costs plus real estate tax increases over base year amounts pertaining
to the buildings. In connection with the previously existing leases, the lessors
forgave rents due in the amount
F-50
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $1,124,500 in 1995. Furthermore, the lessors reduced the 1995 total base rent
from $2,065,616 to $1,371,532. The Company predominantly leases the buildings
for their offices and subleases certain space to third parties.
The equipment leases expire in various years through 2001 and require
monthly rent based upon the current prime rate plus six percentage points as
adjusted by Summit Bank.
The following is a summary of rental expense of all operating leases:
1995 1996 1997
------------ ------------ ------------
Rentals to related parties........... $ 1,679,524 $ 1,821,030 $ 1,858,046
Other rentals........................ 50,774 92,380 99,416
------------ ------------ ------------
1,730,298 1,913,410 1,957,462
Less: Sublease rentals............... (431,179) (462,705) (448,712)
------------ ------------ ------------
Total rent expense.... $ 1,299,119 $ 1,450,705 $ 1,508,750
============ ============ ============
The following is a schedule of noncancellable minimum rental payments under
all operating leases in excess of one year as of December 31, 1997:
RENTAL
RENTAL EXPENSE INCOME NET AMOUNT
-------------- ------------ --------------
1998............................ $ 1,847,278 $ 392,259 $ 1,455,019
1999............................ 1,808,046 420,701 1,387,345
2000............................ 1,708,596 425,126 1,283,470
2001............................ 1,682,191 415,741 1,266,450
2002............................ 1,660,724 35,101 1,625,623
Thereafter...................... 21,413,383 2,925 21,410,458
-------------- ------------ --------------
$ 30,120,218 $ 1,691,853 $ 28,428,365
============== ============ ==============
In addition to the above, the Company has a month-to-month sublease for
approximately $8,400 per month.
EMPLOYMENT ARRANGEMENT
The Company is committed to pay a former employee $125,000 per year for
four years effective March 31, 1995 for a total of $500,000. The employee's
services were terminated on December 31, 1997. During 1997 and 1996, the Company
paid $125,000, with respect to this obligation which has been classified as a
deferred expense on the balance sheet.
GUARANTEES
The Company guarantees a $500,000 line of credit for PSF Leasing Company,
an entity related through common ownership. The outstanding balance at December
31, 1997 was $370,564.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a profit-sharing 401k plan covering substantially all
employees. The plan provides for discretionary contributions by the Company, as
determined by the Board of Directors. Total contributions by the Company under
this plan were approximately $600,000, $118,382 and $119,463 during 1995, 1996
and 1997, respectively. Amounts due to this plan were approximately $600,000,
$118,382 and $119,463 for the years ended December 31, 1995, 1996 and 1997,
respectively.
10. EXPORT SALES
Export sales were approximately $65,000 and $60,000 for the years ended
December 31, 1996 and 1997, respectively. Such sales were in South America and
Europe. There were no export sales in 1995.
F-51
<PAGE>
PAULUS, SOKOLOWSKI AND SARTOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):
In April 1998, the Company and its stockholders entered into a definitive
agreement with OEI providing for the acquisition of the Company by OEI.
Concurrently with the acquisition, the Company will enter into agreements
with the shareholders to lease land and buildings used in the Company's
operations for a negotiated amount and term.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gulsby Engineering, Inc.:
We have audited the accompanying consolidated balance sheets of Gulsby
Engineering, Inc. (a Texas corporation), and its subsidiary, Gulsby
International Engineers, Limited, as of December 31, 1996 and 1997, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 financial position of Gulsby
Engineering, Inc., and its subsidiary as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1998
F-53
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,357,173 $ 603,390 $ 507,960
Receivables --
Trade receivables.......... 321,122 278,405 870,023
Other receivables.......... 15,761 27,821 27,015
Advances to stockholder.... 2,650,585 3,120,571 3,095,880
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... 646,283 4,210,372 4,683,853
Prepaid expenses and other........... 43,367 154,292 139,771
------------ ------------ -------------
Total current assets....... 5,034,291 8,394,851 9,324,502
PROPERTY AND EQUIPMENT, net.......... 547,375 539,490 523,923
DEFERRED TAX ASSET................... 933,686 949,602 1,073,962
OTHER ASSETS......................... 10,221 3,736 3,552
------------ ------------ -------------
Total assets............... $ 6,525,573 $ 9,887,679 $ 10,925,939
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
LIABILITIES:
Accounts payable................ $ 211,483 $ 501,683 $ 301,668
Accrued compensation and
benefits...................... 125,092 13,309 30,522
Accrued liabilities............. 29,803 73,218 73,218
Accrued legal judgment.......... 3,200,741 3,520,815 3,608,835
Notes payable................... 29,831 66,300 1,027,414
Billings in excess of costs and
estimated profits on
uncompleted contracts......... 2,733,859 422,588 418,339
Income taxes payable............ 502,505 1,763,826 1,900,190
------------ ------------ -------------
Total liabilities.......... 6,833,314 6,361,739 7,360,186
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $1 par; 1,000,000
shares authorized, 10,000
shares outstanding............ 10,000 10,000 10,000
Retained earnings (deficit)..... (317,741) 3,515,940 3,555,753
------------ ------------ -------------
Total stockholders' equity
(deficit)............... (307,741) 3,525,940 3,565,753
------------ ------------ -------------
Total liabilities and
stockholders' equity
(deficit)............... $ 6,525,573 $ 9,887,679 $ 10,925,939
============ ============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 3,165,447 $ 20,285,341 $ 18,264,303 $ 1,515,397 $ 1,523,594
DIRECT COSTS......................... 2,324,980 17,451,222 11,768,322 1,167,228 1,187,963
----------- ------------ ------------ ----------- -----------
Gross profit..................... 840,467 2,834,119 6,495,981 348,169 335,631
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 633,296 849,868 927,357 278,450 183,893
----------- ------------ ------------ ----------- -----------
Income from operations........... 207,171 1,984,251 5,568,624 69,719 151,738
OTHER INCOME (EXPENSE):
Interest expense, net............ (299,245) (193,915) (233,066) (60,349) (93,665)
Other............................ 33,645 7,733 56,919 10,347 --
----------- ------------ ------------ ----------- -----------
Total....................... (265,600) (186,182) (176,147) (50,002) (93,665)
----------- ------------ ------------ ----------- -----------
Income (loss) before income
taxes..................... (58,429) 1,798,069 5,392,477 19,717 58,073
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (21,003) 529,127 1,558,796 5,612 18,260
----------- ------------ ------------ ----------- -----------
NET INCOME (LOSS).................... $ (37,426) $ 1,268,942 $ 3,833,681 $ 14,105 $ 39,813
=========== ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED STOCKHOLDERS'
----------------- EARNINGS EQUITY
SHARES AMOUNT (DEFICIT) (DEFICIT)
------ ------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 10,000 $10,000 $ (1,549,257) $ (1,539,257)
Net loss........................ -- -- (37,426) (37,426)
------ ------- -------------- -------------
BALANCE, December 31, 1995........... 10,000 10,000 (1,586,683) (1,576,683)
Net income...................... -- -- 1,268,942 1,268,942
------ ------- -------------- -------------
BALANCE, December 31, 1996........... 10,000 10,000 (317,741) (307,741)
Net income...................... -- -- 3,833,681 3,833,681
------ ------- -------------- -------------
BALANCE, December 31, 1997........... 10,000 10,000 3,515,940 3,525,940
Net income (unaudited).......... -- -- 39,813 39,813
------ ------- -------------- -------------
BALANCE, March 31, 1998
(unaudited)........................ 10,000 $10,000 $ 3,555,753 $ 3,565,753
====== ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ (37,426) $ 1,268,942 $ 3,833,681 $ 14,105 $ 39,813
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Depreciation and amortization.... 97,740 97,959 95,612 24,542 23,251
Deferred tax asset............... (64,758) (72,884) (15,916) (3,977) (124,360)
Changes in assets and
liabilities-
(Increase) decrease in-
Trade receivables........... 31,880 (311,725) 42,717 (1,040,180) (591,618)
Other receivables........... (15,271) 13,065 (12,060) (6,845) 806
Advances to stockholder..... (889,343) (1,227,303) (469,986) (391,010) 24,691
Costs and estimated profits
in excess of billings on
uncompleted contracts..... -- (646,283) (3,564,089) (39,037) (473,481)
Prepaid expenses and
other..................... (95,581) 56,101 (110,925) 14,586 14,521
Other assets................ (6,003) (4,425) 5,750 -- --
Increase (decrease) in-
Accounts payable............ (503,885) 35,100 290,200 100,709 (200,015)
Accrued compensation and
benefits.................. (32,029) 85,098 (111,783) (58,060) 17,213
Accrued liabilities......... (4,559) (392) 43,415 (1,646) --
Accrued legal judgment...... 264,525 290,975 320,074 80,018 88,020
Billings in excess of costs
and estimated profits on
uncompleted contracts..... 5,057,079 (2,547,484) (2,311,271) 919,910 (4,249)
Income taxes payable........ 60,168 612,116 1,261,321 11,157 136,364
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities........... 3,862,537 (2,351,140) (703,260) (375,728) (1,049,044)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment........................ (63,720) (28,138) (86,992) (2,695) (7,500)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities..................... (63,720) (28,138) (86,992) (2,695) (7,500)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes
payable.......................... 338,116 53,655 112,367 -- 1,002,592
Principal payments on notes
payable.......................... (277,627) (176,510) (75,898) (17,955) (41,478)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 60,489 (122,855) 36,469 (17,955) 961,114
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 3,859,306 (2,502,133) (753,783) (396,378) (95,430)
CASH AND CASH EQUIVALENTS, beginning
of year............................ -- 3,859,306 1,357,173 1,357,173 603,390
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 3,859,306 $ 1,357,173 $ 603,390 $ 960,795 $ 507,960
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for-
Interest......................... $ 72,465 $ 60,192 $ 2,434 $ 19,669 $ 4,020
Income taxes..................... 2,180 6,434 321,412 -- 6,255
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
Gulsby Engineering, Inc. (the Company), a Texas corporation, and its
subsidiary, Gulsby International Engineers, Limited (a U.S. Virgin Islands
Foreign Sales Corporation), are engineering, systems and construction management
contractors, servicing industrial customers with primary focus in the process
industries--oil, chemical and petrochemical products. The Company has operated
primarily in the domestic markets of Texas, Louisiana, Oklahoma and New Mexico.
The Company focus in 1996 and 1997 has changed to the foreign market (98% and
94% of revenues for 1996 and 1997, respectively).
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrent with the consummation of the initial public offering
(the Offering) of the common stock of OEI.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany transactions and balances have
been eliminated.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
REVENUE RECOGNITION
The Company provides a majority of its services through fixed-price
contracts. Revenue on fixed-price contracts is recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Revisions in revenue and cost
projections are recorded in the period in which the facts requiring the revision
become known. When estimates of projected revenues and costs indicate a loss,
the total estimated loss is accrued. Potential additional revenues on projects
from claims and unapproved change orders are not recognized until amounts may be
reliably estimated and realization is virtually certain. The asset "Costs and
estimated profits in excess of billings on uncompleted contracts" represents
revenues recognized in excess of amounts billed. The liability "Billings in
excess of costs and estimated profits on uncompleted contracts" represents
amounts billed in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit with maturities
of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and
F-58
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depreciated. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon the differences between the 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 underlying assets or liabilities are
recovered or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of the
percentage-of-completion method of accounting, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVES IN YEARS 1996 1997
------------------ ------------ ------------
Land............................... $ 214,775 $ 214,775
Equipment.......................... 5-22 472,383 475,567
Buildings.......................... 15-16.5 1,019,987 1,019,987
Leasehold improvements............. 15-16.5 464,650 523,980
Furniture and fixtures............. 5-10 552,452 576,930
------------ ------------
2,724,247 2,811,239
Less- Accumulated depreciation..... 2,176,872 2,271,749
------------ ------------
Property and equipment, net... $ 547,375 $ 539,490
============ ============
F-59
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS:
The status of contracts in progress is as follows:
DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
Costs incurred on contracts in
progress........................... $ 26,536,894 $ 30,522,573
Estimated earnings, net of losses.... 5,999,206 10,487,443
-------------- --------------
32,536,100 41,010,016
Less -- Billings to date............. 34,623,676 37,222,232
-------------- --------------
$ (2,087,576) $ 3,787,784
============== ==============
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... $ 646,283 $ 4,210,372
Billings in excess of costs and
estimated profits on uncompleted
contracts.......................... (2,733,859) (422,588)
-------------- --------------
$ (2,087,576) $ 3,787,784
============== ==============
4. DEBT:
Current debt consists of the following:
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Note payable to a bank, interest at
7.69%, maturing May 9, 1997........ $ 29,831 $ --
Note payable to a finance company,
interest at 7.16%, maturing May 9,
1998............................... -- 66,300
--------- ---------
$ 29,831 $ 66,300
========= =========
The Company paid interest of $5,192 and $2,160 related to debt for the
years ended December 31, 1996 and 1997, respectively.
On March 6, 1998, the Company entered into a working capital loan agreement
with Sterling Bank in the principal amount of $1,000,000 at 10% interest per
annum. The loan matures the earlier of August 1, 1998 or the closing of the
acquisition of the Company by OEI.
5. INCOME TAXES:
Provisions (benefits) for federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ------------
Federal--
Current......................... $ 38,429 $ 539,594 $ 1,703,672
Deferred........................ (56,876) (74,872) (144,876)
State--
Current......................... 5,326 62,415 (128,959)
Deferred........................ (7,882) 1,990 128,959
---------- ---------- ------------
$ (21,003) $ 529,127 $ 1,558,796
========== ========== ============
F-60
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income (loss)
before income taxes as follows:
DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ------------ ------------
Provision (benefit) at the statutory
rate............................... $ (19,866) $ 611,343 $ 1,833,442
Increase (decrease) resulting from--
Permanent differences........... 550 2,092 19,244
State income tax, net of federal
benefit....................... (1,687) 42,508 --
Foreign Sales Corporation
benefit....................... -- (126,816) (293,890)
---------- ------------ ------------
$ (21,003) $ 529,127 $ 1,558,796
========== ============ ============
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing differed
tax assets and liabilities, result principally from the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Accrued legal contingency not
deducted for tax purposes.......... $ 1,232,285 $ 1,197,077
State taxes.......................... (43,846) --
Bases differences on property and
equipment and capital lease
accounting......................... 3,358 (4,830)
Other accrued expenses not deducted
for tax purposes................... (258,111) (242,645)
------------ ------------
Net deferred tax asset.......... $ 933,686 $ 949,602
============ ============
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Deferred tax assets--
Current......................... $ -- $ --
Long-term....................... 1,176,332 1,192,248
------------ ------------
Total...................... 1,176,332 1,192,248
------------ ------------
Deferred tax liabilities--
Current......................... -- --
Long-term....................... 242,646 242,646
------------ ------------
Total...................... 242,646 242,646
------------ ------------
Net deferred income tax
asset................... $ 933,686 $ 949,602
============ ============
6. RELATED-PARTY TRANSACTIONS:
The Company has made noninterest-bearing advances to its stockholder over a
period of several years. The amounts outstanding at December 31, 1996 and 1997,
were $2,650,585 and $3,120,571, respectively. The stockholder has represented
that he has the intent and the ability to repay such advances by December 31,
1998. During 1995, 1996 and 1997, the Company paid interest of $24,108, $55,000
and $274 for loans to the Company which are reflected as an offset to the
stockholder advances. The Company makes various other noninterest-bearing loans
to its employees payable on demand.
The Company uses a paint facility on the premises which is owned by its
stockholder. The amount of rent not charged to the Company for the use of this
facility is not significant.
F-61
<PAGE>
GULSBY ENGINEERING, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. During the year ended
December 31, 1995, one customer accounted for 88% of the Company's revenues. No
receivables were outstanding for this customer at December 31, 1995. For the
year ended December 31, 1996, two customers accounted for 71% and 27% of the
Company's revenues. Receivables outstanding at December 31, 1996, for these
customers were less than 10%. For the year ended December 31, 1997, three
customers accounted for 65%, 16% and 10% of the Company's revenues. Receivables
outstanding from the largest customer were 64% of the Company's trade
receivables at December 31, 1997. No receivables were outstanding for the other
two significant customers.
During the years ended December 31, 1995 and 1996, one vendor accounted for
27% and 48%, respectively, of the Company's cost of services. During the year
ended December 31, 1997, no one vendor accounted for greater than 10% of the
Company's cost of services.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company and its stockholder were party to a suit in 1989 as defendants
against a customer. The suit sought reimbursement from the Company of amounts
paid by the customer in settlement with another general contractor in a patent
infringement suit. In 1991, a summary judgment against the Company for
approximately $1.6 million plus interest was rendered. The judgment accrues
simple interest at 10% from September 29, 1989, through the date of judgment
(October 21, 1991) and thereafter at the rate of 10% per annum compounded
annually until paid. The accompanying statements of income include accruals of
interest at the stated rate. No payments on the judgment have been made at this
time.
The Company is involved in various other legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business, auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
OTHER COMMITMENTS
The Company contributed $40,152 into a trust during 1996 on behalf of its
employees for a potential profit sharing plan. A plan has not been adopted as of
December 31, 1997.
9. EXPORT SALES:
Export sales were approximately $2,800,000, $19,900,000 and $17,900,000,
for the years ended December 31, 1995, 1996 and 1997, respectively. Such sales
were in South America, Europe, Africa and the Middle East.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In April 1998, the Company and its stockholder entered into a definitive
agreement with OEI, providing for the acquisition of the Company by OEI. The
definitive agreement provides that the advances to stockholder (Note 6) and
accrued legal judgement (Note 8) will be paid from the proceeds of the sale of
the stockholder's shares under the agreement.
Concurrently with the acquisition, the Company will enter into agreements
with the stockholder to lease facilities used in the Company's operations for a
negotiated amount and term.
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To W-Industries, Inc.:
We have audited the accompanying balance sheets of W-Industries, Inc. (a
Texas corporation), as of December 31, 1996 and 1997, and the related statements
of income, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of W-Industries, Inc., as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1998
F-63
<PAGE>
W-INDUSTRIES, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 295,323 $ 1,978,972 $ 86,357
Trade receivables............... 1,213,683 3,393,416 3,346,535
Note receivable................. 32,052 -- --
Costs and estimated profits in
excess of billings on
uncompleted contracts......... 1,191,764 1,477,201 4,092,337
Inventory....................... 80,253 95,237 185,511
Prepaid expenses and other...... 3,789 9,145 113,846
------------ ------------ ------------
Total current
assets............. 2,816,864 6,953,971 7,824,586
PROPERTY AND EQUIPMENT, net.......... 1,045,395 1,051,582 1,099,175
------------ ------------ ------------
Total assets.......... $ 3,862,259 $ 8,005,553 $ 8,923,761
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 437,930 $ 885,502 $ 1,907,831
Accrued compensation and
benefits...................... 157,283 360,848 213,428
Accrued liabilities............. 55,032 26,850 43,513
Line of credit.................. 200,000 -- 100,000
Current maturities of long-term
debt.......................... 62,565 68,467 70,217
Payable to stockholder.......... 1,690,187 5,438,546 3,588,833
Billings in excess of costs and
estimated profits on
uncompleted contracts......... -- -- 206,022
------------ ------------ ------------
Total current
liabilities........ 2,602,997 6,780,213 6,129,844
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities.................... 641,593 573,127 554,903
------------ ------------ ------------
Total liabilities..... 3,244,590 7,353,340 6,684,747
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value,
100,000 shares authorized;
12,000 shares outstanding..... 12,000 12,000 12,000
Additional paid-in capital...... 8,000 8,000 8,000
Retained earnings............... 597,669 632,213 2,219,014
------------ ------------ ------------
Total stockholders'
equity............. 617,669 652,213 2,239,014
------------ ------------ ------------
Total liabilities and
stockholders'
equity............. $ 3,862,259 $ 8,005,553 $ 8,923,761
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
W-INDUSTRIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- --------------------------
1995 1996 1997 1997 1998
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 13,743,205 $ 14,615,652 $ 20,603,651 $ 3,610,380 $ 6,694,992
DIRECT COSTS......................... 8,563,129 10,382,226 13,699,944 2,451,166 4,330,106
-------------- -------------- -------------- ------------ ------------
Gross profit.................... 5,180,076 4,233,426 6,903,707 1,159,214 2,364,886
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,981,656 2,513,157 3,003,226 645,752 691,104
-------------- -------------- -------------- ------------ ------------
Income from operations.......... 3,198,420 1,720,269 3,900,481 513,462 1,673,782
-------------- -------------- -------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net........... (204,546) (189,381) (246,757) (60,041) (106,775)
Other........................... 89,658 31,106 154,185 38,041 19,794
-------------- -------------- -------------- ------------ ------------
Total...................... (114,888) (158,275) (92,572) (22,000) (86,981)
-------------- -------------- -------------- ------------ ------------
NET INCOME........................... $ 3,083,532 $ 1,561,994 $ 3,807,909 $ 491,462 $ 1,586,801
============== ============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
W-INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........... 12,000 $ 12,000 $8,000 $ 181,106 $ 201,106
Net income...................... -- -- -- 3,083,532 3,083,532
Dividends declared.............. -- -- -- (1,279,458) (1,279,458)
--------- --------- ---------- ----------- -------------
BALANCE, December 31, 1995........... 12,000 12,000 8,000 1,985,180 2,005,180
Net income...................... -- -- -- 1,561,994 1,561,994
Dividends declared.............. -- -- -- (2,949,505) (2,949,505)
--------- --------- ---------- ----------- -------------
BALANCE, December 31, 1996........... 12,000 12,000 8,000 597,669 617,669
Net income...................... -- -- -- 3,807,909 3,807,909
Dividends declared.............. -- -- -- (3,773,365) (3,773,365)
--------- --------- ---------- ----------- -------------
BALANCE, December 31, 1997........... 12,000 $ 12,000 8,000 632,213 652,213
Net income (unaudited).......... -- -- -- 1,586,801 1,586,801
--------- --------- ---------- ----------- -------------
BALANCE, March 31, 1998
(unaudited)........................ 12,000 $ 12,000 $8,000 $ 2,219,014 $ 2,239,014
========= ========= ========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
W-INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 3,083,532 $ 1,561,994 $ 3,807,909 $ 491,462 $ 1,586,801
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation................ 99,237 35,193 60,440 7,284 13,635
Gain on sale of equipment... -- -- (2,020) -- --
Changes in assets and
liabilities --
(Increase) decrease in
assets --
Trade receivables........... (304,929) 110,126 (2,179,733) (1,082,920) 46,881
Note receivable............. (120,901) 88,849 32,052 23,919 --
Costs and estimated profits
in excess of billings on
uncompleted contracts..... (2,646,054) 1,797,672 (285,437) 297,327 (2,615,136)
Inventory................... 24,676 (43,104) (14,984) (11,376) (90,274)
Prepaid expenses and
other..................... 4,334 (3,123) (5,356) (115,638) (104,701)
Increase (decrease) in
liabilities --
Accounts payable............ 437,863 (80,827) 447,572 700,244 1,022,329
Accrued compensation and
benefits.................. (3,506) 74,608 203,565 50,891 (147,420)
Accrued liabilities......... 26,507 2,162 (28,182) (7,045) 16,663
Billings in excess of costs
and estimated profits on
uncompleted contracts..... -- -- -- -- 206,022
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities............ 600,759 3,543,550 2,035,826 354,148 (65,200)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (1,099,207) (24,592) (67,607) -- (61,228)
Proceeds from the sale of
equipment...................... -- -- 3,000 -- --
------------ ------------ ------------ ------------ ------------
Net cash used in
investing
activities............ (1,099,207) (24,592) (64,607) -- (61,228)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) line
of credit 300,000 (100,000) (200,000) -- 100,000
Proceeds from issuance of note
payable........................ 800,000 -- -- -- --
Principal payments on note
payable........................ (33,642) (62,199) (62,564) (15,924) (16,474)
Payments on stockholder
payable........................ (815,229) (3,306,220) (25,006) (520,676) (1,849,713)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ 251,129 (3,468,419) (287,570) (536,600) (1,766,187)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (247,319) 50,539 1,683,649 (182,452) (1,892,615)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 492,103 244,784 295,323 295,323 1,978,972
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 244,784 $ 295,323 $ 1,978,972 $ 112,871 $ 86,357
============ ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest.................... $ 217,966 $ 217,799 $ 251,388 $ 61,716 $ 106,775
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
W-Industries, Inc. (the Company), a Texas corporation, is an engineering,
systems and construction management contractor, servicing industrial customers
with primary focus in the process industries -- oil, chemical and petrochemical.
W-Industries, Inc., primarily operates in Houston, Texas.
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrent with the consummation of the initial public offering
(the Offering) of the common stock of OEI.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
REVENUE RECOGNITION
The Company generally provides its services under cost-plus contracts.
Revenues are recognized to the extent of billable rates times hours delivered
plus materials expense incurred. The Company reflects the costs of materials and
equipment as revenues which are reimbursable to the Company when it is
responsible for the engineering specification, procurement and management of
such cost components on behalf of the customer. The asset "Costs and estimated
profits in excess of billings on uncompleted contracts" represents revenues
recognized in excess of amounts billed.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include certificates of deposit with maturities
of three months or less.
INVENTORY
Inventories consist of stainless steel tube fittings, valves and
accessories held for use in the course of business and are stated at the lower
of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method of depreciation.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if
F-68
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a write-down to market value is necessary. Adoption of this standard did not
have a material effect on the financial position or results of operations of the
Company.
INCOME TAX
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S Corporation status concurrently with the effective
date of the Offering.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of contract
accounting, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVES IN YEARS 1996 1997
---------------- ------------ ------------
Land.............................. -- $ 370,464 $ 370,464
Building.......................... 39 707,459 707,459
Transportation equipment.......... 5 133,145 167,429
Machinery and equipment........... 3 16,994 16,994
Computer and telephone equipment.. 3-5 10,547 17,565
Furniture and fixtures............ 3 25,710 35,010
------------ ------------
1,264,319 1,314,921
Less -- Accumulated depreciation.. 218,924 263,339
------------ ------------
Property and equipment, net.. $ 1,045,395 $ 1,051,582
============ ============
3. CONTRACTS IN PROGRESS:
The status of contracts in progress is as follows:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Costs incurred on contracts in
progress............................. $ 2,004,847 $ 2,100,648
Estimated earnings, net of losses.... 1,038,527 1,034,648
------------ ------------
3,043,374 3,135,296
Less -- Billings to date............. 1,851,610 1,658,095
------------ ------------
Costs and estimated profits in excess
of billings on uncompleted
contracts.......................... $ 1,191,764 $ 1,477,201
============ ============
F-69
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT:
LINE OF CREDIT
The Company has a line of credit of $750,000, of which $550,000 and
$750,000 was unused at December 31, 1996 and 1997, respectively. The line of
credit is secured by an interest in all the Company's accounts receivable,
inventory and equipment and expires on April 14, 1998. Advances on the line of
credit accrue interest at a rate equal to prime (8.5% at December 31, 1997).
Interest is payable monthly.
On April 14, 1998, the Company renewed the line of credit and increased the
line to $1,500,000. All terms remain the same and the line expires on April 14,
1999.
Long-term debt consisted of the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Note payable to a bank, interest at
the bank's base rate plus 0.5%
(interest is 10% at December 31,
1997), maturing February 24,
2000............................... $ 704,159 $ 641,594
Less -- Current maturities........... (62,565) (68,467)
------------ ------------
$ 641,594 $ 573,127
============ ============
The long-term debt is collateralized by buildings and real estate property.
Maturities of long-term debt are as follows:
Year ending December 31 --
1998............................ $ 68,467
1999............................ 75,740
2000............................ 497,387
----------
$ 641,594
==========
The Company paid interest of $80,043, $80,610 and $82,369 related to debt
for the years ended December 31, 1995, 1996 and 1997, respectively.
5. RELATED-PARTY TRANSACTIONS:
The Company has followed a policy of paying substantially all of its
earnings to its stockholders. As of December 31, 1995, 1996 and 1997,
$2,046,901, $1,690,187 and $5,438,546, respectively, have not been paid to the
stockholders. Approximately $1,700,000 of this payable at December 31, 1997,
represents taxes on the earnings which is paid by the Company on behalf of its
stockholders. This amount plus $140,000 to the stockholders were paid subsequent
to year-end. Interest is earned annually at a rate of 10% on the unpaid
principal from the date of funding. For the years ended December 31, 1995, 1996
and 1997, the Company paid interest of $137,923, $137,189 and $169,019,
respectively, related to these dividends payable.
6. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. For the years ended
December 31, 1995, 1996 and 1997, one customer accounted for 17%, 20% and 12%,
respectively, of the Company's revenues. Receivables outstanding from this
customer represented 47%, 23% and 9% of the Company's trade receivables at
December 31, 1995, 1996 and 1997, respectively.
F-70
<PAGE>
W-INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1995, one vendor accounted for 11% of
the Company's purchases. Also, during the years ended December 31, 1995, 1996
and 1997, one vendor accounted for 17%, 15% and 19%, respectively, of the
Company's purchases.
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business, auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
8. EXPORT SALES:
Export sales were approximately $2,700,000, $2,900,000 and $5,200,000 for
the years ended December 31, 1995, 1996 and 1997, respectively. Such sales were
in South America, Africa and the Middle East and the Far East.
9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In April the Company and its stockholders entered into a definitive
agreement with OEI providing for the acquisition of the Company by OEI.
Prior to the acquisition, the Company will make a cash distribution of
$3,588,833 prior to the acquisition which represents the Company's payable to
shareholder (See Note 5). Had these transactions been recorded at December 31,
1997, the effect on the accompanying balance sheet would be a decrease in assets
of $3,588,833, and a decrease in liabilities of $3,588,833. This amount will be
funded through the proceeds of the Offering.
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Chemical & Industrial Engineering, Inc.:
We have audited the accompanying balance sheets of Chemical & Industrial
Engineering, Inc. (a Kentucky corporation), as of December 31, 1996 and 1997,
and the related statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Chemical & Industrial
Engineering, Inc., as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 19, 1998
F-72
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
BALANCE SHEETS
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 16,297 $ 1,730,847 $ 224,121
Trade receivables............... 3,268,064 1,493,635 1,760,951
Costs and estimated profits in
excess of billings on
uncompleted contracts......... 75,186 -- 190,887
Prepaid expenses and other...... 171,368 115,632 118,282
Deferred tax asset.............. 169,718 175,710 176,033
------------ ------------ -----------
Total current assets....... 3,700,633 3,515,824 2,470,274
PROPERTY AND EQUIPMENT, net.......... 1,297,269 1,220,778 1,170,786
DEFERRED TAX ASSET................... -- -- 28,830
------------ ------------ -----------
Total assets............... $ 4,997,902 $ 4,736,602 $ 3,669,890
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 1,124,419 $ 140,969 $ 311,834
Accrued compensation and
benefits...................... 798,129 1,168,250 648,233
Accrued liabilities............. 325,338 75,497 46,962
Notes payable................... 172,414 119,941 114,772
Billings in excess of costs and
estimated profits on
uncompleted contracts......... 331,780 364,615 266,031
Income taxes payable............ 70,520 253,301 68,885
------------ ------------ -----------
Total current
liabilities............. 2,822,600 2,122,573 1,456,717
LONG-TERM LIABILITIES:
Deferred tax liability.......... 119,788 146,462 --
------------ ------------ -----------
Total liabilities.......... 2,942,388 2,269,035 1,456,717
------------ ------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
No par, nonvoting, 100,000
shares authorized; 13,913,
13,373, 13,384 shares
outstanding,
respectively............... 202,828 176,283 176,840
No par, voting, 200,000 shares
authorized; 27,658, 26,268,
26,540 shares outstanding,
respectively............... 419,418 386,384 399,547
Retained earnings............... 1,433,268 1,904,900 1,636,786
------------ ------------ -----------
Total stockholders'
equity.................. 2,055,514 2,467,567 2,213,173
------------ ------------ -----------
Total liabilities and
stockholders' equity.... $ 4,997,902 $ 4,736,602 $ 3,669,890
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 12,522,354 $ 17,176,773 $ 15,906,131 $5,632,668 $2,151,342
DIRECT COSTS......................... 9,165,439 13,300,422 10,968,890 4,293,761 1,492,612
------------ ------------ ------------ --------- -------------
Gross profit................ 3,356,915 3,876,351 4,937,241 1,338,907 658,730
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,151,834 3,546,955 3,996,613 773,332 1,087,835
------------ ------------ ------------ --------- -------------
Income from operations...... 205,081 329,396 940,628 565,575 (429,105)
OTHER INCOME (EXPENSE):
Interest income (expense), net... 33,714 (25,826) 36,464 (2,618) 4,353
Other............................ (2,761) 3,993 (5,249) (657) (6,270)
------------ ------------ ------------ --------- -------------
Total....................... 30,953 (21,833) 31,215 (3,275) (1,917)
------------ ------------ ------------ --------- -------------
Income before income
taxes..................... 236,034 307,563 971,843 562,300 (431,022)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 121,254 139,640 423,877 244,600 (165,031)
------------ ------------ ------------ --------- -------------
NET INCOME (LOSS).................... $ 114,780 $ 167,923 $ 547,966 $ 317,700 $(265,991)
============ ============ ============ ========= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------- TOTAL
NONVOTING VOTING NONVOTING VOTING RETAINED STOCKHOLDERS'
SHARES SHARES AMOUNT AMOUNT EARNINGS EQUITY
--------- ------ --------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 23,181 28,210 $ 298,518 $280,233 $1,781,892 $ 2,360,643
Issuance of common stock........... 1,338 745 67,234 28,306 -- 95,540
Retirement of common stock......... (5,397) (2,745) (69,465) (11,024) (292,409) (372,898)
Transfers of common stock.......... (500) 500 (21,500) 21,500 -- --
Distribution to stockholders....... -- -- -- -- (113,883) (113,883)
Net income......................... -- -- -- -- 114,780 114,780
--------- ------ --------- -------- ---------- -------------
BALANCE, December 31, 1995.............. 18,622 26,710 274,787 319,015 1,490,380 2,084,182
Issuance of common stock........... 226 1,566 11,543 71,960 -- 83,503
Retirement of common stock......... (3,664) (1,889) (41,578) (13,481) (225,035) (280,094)
Transfers of common stock.......... (1,271) 1,271 (41,924) 41,924 -- --
Net income......................... -- -- -- -- 167,923 167,923
--------- ------ --------- -------- ---------- -------------
BALANCE, December 31, 1996.............. 13,913 27,658 202,828 419,418 1,433,268 2,055,514
Issuance of common stock........... 216 717 10,585 32,378 -- 42,963
Retirement of common stock......... (693) (2,170) (33,849) (68,693) (76,334) (178,876)
Transfers of common stock.......... (63) 63 (3,281) 3,281 -- --
Net income......................... -- -- -- -- 547,966 547,966
--------- ------ --------- -------- ---------- -------------
BALANCE, December 31, 1997.............. 13,373 26,268 176,283 386,384 1,904,900 2,467,567
Issuance of Common Stock
(unaudited)...................... 65 357 3,458 16,788 -- 20,246
Retirement of Common Stock
(unaudited)...................... -- (139) -- (6,526) (2,123) (8,649)
Transfer of Common Stock
(unaudited)...................... (54) 54 (2,901) 2,901 -- --
Net income (unaudited)............. -- -- -- -- (265,991) (265,991)
--------- ------ --------- -------- ---------- -------------
BALANCE, March 31, 1998 (unaudited)..... 13,384 26,540 $ 176,840 $399,547 $1,636,786 $ 2,213,173
========= ====== ========= ======== ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------ ------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................... $ 114,780 $ 167,923 $ 547,966 $ 317,700 $ (265,991)
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities --
Depreciation................ 272,691 306,049 354,424 74,272 86,895
Loss (gain) on sale/disposal
of assets................. 5,916 (308) 9,132 (607)
Deferred income taxes....... (8,640) 11,853 20,682 246,745 (175,615)
Changes in assets and
liabilities --
(Increase) decrease in --
Trade receivables....... (1,359,907) (1,004,122) 1,774,429 692,485 (267,316)
Costs and estimated
profits in excess of
billings on
uncompleted
contracts............. (147,080) 71,894 75,186 75,186 (190,887)
Prepaid expenses and
other................. 2,649 (71,055) 55,736 79,628 (2,650)
Increase (decrease) in --
Accounts payable........ 637,146 306,976 (983,450) (1,022,229) 170,865
Accrued compensation and
benefits.............. 568,267 (271,887) 370,121 (83,300) (520,017)
Accrued liabilities..... 237,564 87,449 (249,841) (297,960) (28,535)
Billings in excess of
costs and estimated
profits on uncompleted
contracts............. 517,812 (186,032) 32,835 (62,189) (98,584)
Income taxes payable.... (212,821) 240,392 182,781 (77,360) (184,416)
------------ ------------ ----------- ------------ ------------
Net cash provided by (used
in) operating
activities................ 628,377 (340,868) 2,190,001 (57,022) (1,476,858)
------------ ------------ ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment...................... (521,294) (566,190) (287,065) (116,504) (39,983)
Proceeds from sale of
equipment...................... 2,222 1,939 -- -- 3,687
------------ ------------ ----------- ------------ ------------
Net cash used in investing
activities................ (519,072) (564,251) (287,065) (116,504) (36,296)
------------ ------------ ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (principal payments
on) notes payable.............. 243,426 (85,077) (52,473) 173,783 (5,169)
Proceeds from issuance of common
stock.......................... 95,540 83,503 42,963 9,654 20,246
Payments for retirement of common
stock.......................... (372,898) (280,094) (178,876) -- (8,649)
Distributions to stockholders.... (56,655) (57,228) -- -- --
------------ ------------ ----------- ------------ ------------
Net cash used in financing
activities................ (90,587) (338,896) (188,386) 183,437 6,428
------------ ------------ ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 18,718 (1,244,015) 1,714,550 9,911 (1,506,726)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 1,241,594 1,260,312 16,297 16,297 1,730,847
------------ ------------ ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year............................... $ 1,260,312 $ 16,297 $ 1,730,847 $ 26,208 $ 224,121
============ ============ =========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for --
Interest.................... $ 8,029 $ 37,752 $ 27,109 3,595 --
Income taxes................ 343,839 -- 218,747 321,960 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS ACTIVITY
Chemical & Industrial Engineering, Inc. (the Company), a Kentucky
corporation, is an engineering and systems procurement management contractor,
servicing industrial customers with primary focus in the process industries
- -oil, chemical, petrochemical and food products. Chemical & Industrial
Engineering, Inc., primarily operates in Kentucky.
The Company and its stockholders intend to enter into a definitive
agreement with OEI International, Inc. (OEI), pursuant to which all outstanding
shares of the Company's common stock will be exchanged for cash and shares of
OEI common stock concurrent with the consummation of the initial public offering
(the Offering) of the common stock of OEI.
INTERIM FINANCIAL INFORMATION
The interim financial statements as of March 31, 1998, and for the three
months ended March 31, 1997 and 1998, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
REVENUE RECOGNITION
The Company provides a majority of its services through cost-plus
contracts. Revenues are recognized to the extent of billable rates times hours
delivered plus materials expense incurred. The Company does not reflect the
costs of materials and equipment as revenues which are reimbursable to the
Company when it is responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer. For the three
years ended December 31, 1995, 1996 and 1997, these amounts were $4,395,384,
$4,803,742 and $8,329,277, respectively. Fixed-price contracts represent
approximately 30% of the Company's revenues in 1996 and approximately 18% of
revenues in 1997. Revenue on fixed-price contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Revisions in revenue and cost
projections are recorded in the period in which the facts requiring the revision
become known. When estimates of projected revenues and costs indicate a loss,
the total estimated loss is accrued. Potential additional revenues on projects
from claims and unapproved change orders are not recognized until amounts may be
reliably estimated and realization is virtually certain. The asset "Costs and
estimated profits in excess of billings on uncompleted contracts" represents
revenues recognized in excess of amounts billed. The liability "Billings in
excess of costs and estimated profits on uncompleted contracts" represents
amounts billed in excess of revenues recognized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term cash investments with
maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and
F-77
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
depreciated. Upon retirement or disposition of property and equipment, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statements of income.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Accordingly, in the event that facts and
circumstances indicate that property and equipment may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.
INCOME TAX
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon the differences between the 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 underlying assets or liabilities are
recovered or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company enters into various types of financial instruments in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes, nor does it hold interest rate, leveraged or
other types of derivative financial instruments. The carrying amounts of the
Company's financial instruments approximate their fair values.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles, particularly in the use of the
percentage-of-completion method of accounting, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL --------------------------
LIVES IN YEARS 1996 1997
----------------- ------------ ------------
<S> <C> <C> <C>
Computer and telephone equipment..... 5 $ 1,893,389 $ 2,190,379
Leasehold improvements............... 3 21,437 21,437
Furniture and fixtures............... 10 920,760 863,292
------------ ------------
2,835,586 3,075,108
Less- Accumulated depreciation....... 1,538,317 1,854,330
------------ ------------
Property and equipment, net..... $ 1,297,269 $ 1,220,778
============ ============
</TABLE>
F-78
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS:
The status of contracts in progress is as follows:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Costs incurred on contracts in
progress.............................. $ 488,556 $ 3,145,107
Estimated earnings, net of losses....... 125,835 472,753
------------ ------------
614,391 3,617,860
Less -- Billings to date................ 870,985 3,982,475
------------ ------------
$ (256,594) $ (364,615)
============ ============
Costs and estimated profits in excess of
billings on uncompleted contracts..... $ 75,186 $ --
Billings in excess of costs and
estimated profits on uncompleted
contracts............................. (331,780) (364,615)
------------ ------------
$ (256,594) $ (364,615)
============ ============
4. DEBT:
LINE OF CREDIT
The Company has a line of credit of $1,500,000, which was unused at
December 31, 1996 and 1997. The line of credit is secured by an interest in all
the Company's accounts receivable, contract rights and equipment and expires on
June 15, 1998. Advances on the line of credit accrue interest at a rate equal to
prime (8.5% at December 31, 1997). Interest is payable quarterly. Management
believes the line of credit can be renewed upon expiration.
The line of credit contains covenants requiring the maintenance of a
borrowing base equal to the aggregate of 50% of the Company's net carrying value
of equipment plus 80% of the Company's then-current accounts receivable less
than 90 days old, and various other covenants as specified in the loan
agreement, as amended. The Company is in compliance with these covenants at
December 31, 1996 and 1997.
NOTES PAYABLE FOR STOCK REDEMPTIONS
Notes payable consist of amounts due to 12 terminated employees for stock
redemptions at book value at the date of termination. All notes payable have
maturities of one year from redemption (currently all are due in 1998) and bear
interest ranging from 8.25% to 8.5%. The Company paid interest of $49,757 and
$15,124 related to this debt for the years ended December 31, 1996 and 1997,
respectively.
5. LEASES:
The Company leases office space under an operating lease agreement which
expires in June 1999. Rent expense was $257,887, $302,176 and $366,308 for the
years ended December 31, 1995, 1996 and 1997, respectively.
The Company leases vehicles for certain key members of management which
expire 1998-2000. The lease payments under these vehicle leases were
approximately $5,437, $19,471 and $16,124 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-79
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future lease payments for existing operating leases are as follows:
Year ending December 31 --
1998................................. $ 355,581
1999................................. 165,137
2000................................. 4,343
----------
$ 525,061
==========
6. INCOME TAXES:
Provisions for federal, state and local income taxes are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Federal --
Current......................... $ 96,889 $ 100,681 $ 306,662
Deferred........................ -- 9,877 17,235
State and local --
Current......................... 24,365 27,106 96,533
Deferred........................ -- 1,976 3,447
---------- ---------- ----------
$ 121,254 $ 139,640 $ 423,877
========== ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory personal service corporate rate of 35% to
income before income taxes as follows:
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Provision at the statutory rate...... $ 82,612 $ 107,647 $ 340,145
Increase resulting from --
Nondeductible expenses.......... 15,099 11,853 17,400
State income tax, net of federal
benefit....................... 23,543 20,140 66,332
---------- ---------- ----------
$ 121,254 $ 139,640 $ 423,877
========== ========== ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The cumulative effects of these temporary differences represent
deferred tax assets and liabilities and relate principally to the following:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Accrued expenses..................... $ 169,718 $ 175,710
Property and Equipment............... (119,788) (146,462)
------------ ------------
Net deferred income tax asset... $ 49,930 $ 29,248
============ ============
F-80
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are classified in the
accompanying balance sheet as follows:
DECEMBER 31,
----------------------
1996 1997
---------- ----------
Deferred tax assets-
Current......................... $ 169,718 $ 175,710
Long-term....................... -- --
Deferred tax liabilities-
Current......................... -- --
Long-term....................... 119,788 146,462
---------- ----------
Net deferred income tax
asset................... $ 49,930 $ 29,248
========== ==========
7. STOCKHOLDERS' EQUITY:
An employee is eligible to invest upon board-of-director approval in the
voting shares of the Company upon becoming a full-time, benefited employee with
a total continuous service of one year. Nonvoting stock is restricted to
full-time employees. Redemption of shares is mandatory upon employee
termination, change in employment status or death of employee. Issuance and
redemption price of stock is based on (a) the price last fixed by the board of
directors as the stock price or (b) the book value (defined as total
stockholders' equity divided by the total shares outstanding) per share,
whichever is larger. Book value per share at December 31, 1997, is $62.25. Stock
is canceled upon redemption.
8. EMPLOYEE BENEFIT PLANS:
Employees of the Company may participate in a 401(k) plan, whereby the
employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length-of-service requirements. The plan provides
for the Company to match 50% of the first 6% contributed by each employee. Total
contributions by the Company under this plan were $132,895, $160,427 and
$165,345 during 1995, 1996 and 1997, respectively.
9. RELATED-PARTY TRANSACTIONS:
At December 31, 1997, the Company had advanced $27,083 to OEI in expenses
related to compliance with the letter-of-intent agreement with OEI dated
November 1997. These expenses are on behalf of the stockholders and are included
in the prepaid expenses. The current intent is for the monies advanced by the
Company to be reimbursed by the stockholders upon the consummation of the
Offering.
10. SIGNIFICANT CUSTOMERS AND VENDORS:
Significant customers and vendors are those that account for greater than
10% of the Company's revenues and expenses, respectively. During the year ended
December 31, 1995, two customers accounted for 50% and 13% of the Company's
total revenues. Receivables outstanding from these customers represented 16% and
6% of the Company's trade receivables at December 31, 1995. For the year ended
December 31, 1996, two customers accounted for 47% and 20% of total revenues.
Receivables outstanding for these customers represented 34% and 15% of the
Company's trade receivables at December 31, 1996. For the year ended December
31, 1997, three customers accounted for 39%, 28% and 14% of total revenues.
Receivables outstanding from these customers represented 12%, 21% and 0% of the
Company's trade receivables at December 31, 1997.
For the years ended December 31, 1995, 1996 and 1997, no vendors accounted
for greater than 10% of the Company's purchases.
F-81
<PAGE>
CHEMICAL & INDUSTRIAL ENGINEERING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including
professional and director and officer liability, general and business, auto
liability, commercial property, foreign coverage liability, workers'
compensation and a general umbrella policy. The Company has not incurred
significant claims or losses on any of its insurance policies.
12. EXPORT SALES
Export sales were approximately $2,200,000 for the year ended December 31,
1997. Such sales were in Africa and the Middle East.
13. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In April 1998, the Company and its stockholders entered into a definitive
agreement with OEI, providing for the acquisition of the Company by OEI.
F-82
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 3
Risk Factors............................ 8
The Company............................. 15
Use of Proceeds......................... 18
Dividend Policy......................... 18
Capitalization.......................... 19
Dilution................................ 20
Selected Historical and Pro Forma
Combined Financial Data............... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operation............................. 23
Industry Overview....................... 28
Business................................ 30
Management.............................. 43
Certain Transactions.................... 50
Principal Stockholders.................. 52
Shares Eligible for Future Sale......... 53
Description of Capital Stock............ 54
Underwriting............................ 57
Legal Matters........................... 58
Experts................................. 58
Additional Information.................. 59
Index to Financial Statements........... F-1
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS, WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS ON
SUBSCRIPTIONS.
4,300,000 Shares
OEI INTERNATIONAL, INC.
Common Stock
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
CIBC OPPENHEIMER
SANDERS MORRIS MUNDY
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 3. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by OEI. All of such amounts
(except the SEC Registration Fee, the NASD Filing Fee and the New York Stock
Exchange Listing Fee) are estimated.
SEC Registration Fee................. $
NASD Filing Fee......................
New York Stock Exchange Listing
Fee................................
Blue Sky Fees and Expenses...........
Printing and Engraving Costs.........
Legal Fees and Expenses..............
Accounting Fees and Expenses.........
Transfer Agent and Registrar Fees and
Expenses...........................
Miscellaneous........................
---------
Total...........................
=========
- ------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action. In an action brought to obtain a judgment in the corporation's favor,
whether by the corporation itself or derivatively by a stockholder, the
corporation may only indemnify for expenses, including attorney's fees, actually
and reasonably incurred in connection with the defense or settlement of such
action, and the corporation may not indemnify for amounts paid in satisfaction
of a judgment or in settlement of the claim. In any such action, no
indemnification may be paid in respect of any claim, issue or matter as to which
such person shall have been adjudged liable to the corporation except as
otherwise approved by the Delaware Court of Chancery or the court in which the
claim was brought. In any other type of proceeding, the indemnification may
extend to judgments, fines and amounts paid in settlement, actually and
reasonably incurred in connection with such other proceeding, as well as to
expenses.
The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and, in the
case of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. The statute contains additional limitations
applicable to criminal actions and to actions brought by or in the name of the
corporation. The determination as to whether a person seeking indemnification
has met the required standard of conduct is to be made (1) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (3)
by the stockholders.
II-1
<PAGE>
OEI's Certificate of Incorporation and Bylaws require OEI to indemnify its
directors and officers to the fullest extent permitted under Delaware law. OEI's
Certificate of Incorporation limits the personal liability of a director to the
corporation or its stockholders to damages for breach of the director's
fiduciary duty.
OEI has not purchased insurance on behalf of its directors and officers
against certain liabilities that may be asserted against, or incurred by, such
persons in their capacities as directors or officers of the registrant, or that
may arise out of their status as directors or officers of the registrant,
including liabilities under the federal and state securities laws. OEI has
entered into indemnification agreements to indemnify its directors and executive
officers to the maximum extent permitted under Delaware law.
The Underwriting Agreement provides for indemnification of the directors
and officers of the Company in certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table reflects sales by OEI of unregistered securities within
the past three years. Share amounts have been adjusted for the 1,828.368-for-one
stock split effected on April 6, 1998. Except as otherwise disclosed, the
issuances by OEI of the securities sold in the transactions referenced below
were not registered under the Securities Act, pursuant to the exemption
contemplated in Section 4(2) thereof, for transactions not involving a public
offering. No underwriter was involved in the transactions and no commissions
were paid. The consideration for which the shares of Common Stock were sold, all
of which was payable in cash, is indicated below:
<TABLE>
<CAPTION>
NUMBER OF CASH
DATE PURCHASER SHARES CONSIDERATION
- ------------------------------------------------------------ --------- -------------
<S> <C> <C> <C>
M. L. Burrow Family
October 9, 1997............... Partnership, Ltd. 207,194 $ 113.33
October 9, 1997............... Gary J. Coury 207,194 $ 113.33
October 9, 1997............... Dana W. Swindler 158,443 $ 86.67
October 9, 1997............... Equus II Incorporated 1,218,973 $ 667.67
March 31, 1998................ Rick Berry 36,564 $ 20.00
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
**1.1 -- Form of Underwriting Agreement dated , 1998, by and among OEI and Smith
Barney Inc.
*2.1 -- Uniform Provisions for the Acquisition of the Founding Companies.
*2.2 -- Agreement and Plan of Reorganization dated April 10, 1998, by and among OEI, PEI
Acquisition, Inc., Petrocon and certain of its principal stockholders.
*2.3 -- Agreement and Plan of Reorganization dated as of April 10, 1998, by and among OEI, PS&S
Acquisition, Inc., PS&S and its stockholders.
*2.4 -- Agreement and Plan of Reorganization dated as of April 10, 1998, by and among OEI, GEI
Acquisition, Inc., GEI and its stockholders.
*2.5 -- Agreement and Plan of Reorganization dated as of April 10, 1998, by and among OEI, W-I
Acquisition Inc., W-I and its stockholders.
*2.6 -- Agreement and Plan of Reorganization dated as of April 10, 1998, by and among OEI, C&I
Acquisition, Inc., C&I and certain of its principal stockholders.
**3.1 -- Amended and Restated Certificate of Incorporation of OEI.
**3.2 -- Bylaws of OEI.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
+4.1 -- Form of Certificate representing Common Stock.
**4.2 -- Form of Registration Rights Agreement among OEI and the stockholders listed on the
signature pages thereto.
**5.1 -- Opinion of Porter & Hedges, L.L.P.
*10.1 -- 1998 Incentive Plan of OEI.
*10.2 -- 1998 Employee Stock Purchase Plan of OEI.
*10.3 -- Form of Indemnification Agreement between OEI and each of its directors and executive
officers.
*10.4 -- Employment Agreement by and between OEI and Michael L. Burrow dated April 10, 1998.
*10.5 -- Employment Agreement by and between OEI and Gary J. Coury dated April 10, 1998.
*10.6 -- Employment Agreement by and between OEI and Rick Berry dated April 10, 1998.
*10.7 -- Employment Agreement by and between OEI and Dana W. Swindler dated April 10, 1998.
*10.8 -- Employment Agreement by and between OEI and Robert W. Raiford dated April 10, 1998.
*10.9 -- Employment Agreement by and between GEI and Jerry G. Gulsby dated April 10, 1998.
+10.10 -- Lease dated as of May 1, 1983, as amended, between PS&S and Mountain Boulevard Associates
I and Lease Modification Agreement dated , 1998.
+10.11 -- Lease Agreement dated January 12, 1981, as amended, between PS&S and Mountain Boulevard
Associates II and Lease Modification Agreement dated , 1998.
+10.12 -- Lease Agreement dated December 29, 1986, as amended, between PS&S and Mountain Boulevard
Associates III and Lease Modification Agreement dated , 1998.
**21.1 -- Subsidiaries of OEI.
**23.1 -- Consent of Arthur Andersen LLP.
**23.2 -- Consent of Porter & Hedges, L.L.P. (contained in Exhibit 5.1).
*23.3 -- Consent of W. Bernard Pieper as a nominee for director.
*23.4 -- Consent of Bob G. Gower as a nominee for director.
*23.5 -- Consent of C. Roland Haden as nominee for director.
*24.1 -- Power of Attorney (included on the signature page of this Registration Statement).
**27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* Previously filed.
** Filed herewith.
+ To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates representing the shares of Common Stock offered hereby in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as a part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON MAY 22, 1998.
OEI INTERNATIONAL, INC.
By: /s/ MICHAEL L. BURROW
MICHAEL L. BURROW,
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED AND ON MAY 22, 1998.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED
- ------------------------------------------------------ ---------------------------------------------------------
<S> <C>
/s/MICHAEL L. BURROW Chief Executive Officer, Director (Principal Executive
MICHAEL L. BURROW Officer)
/s/RICK BERRY Executive Vice President and Chief Financial Officer
RICK BERRY (Principal Financial and Accounting Officer)
* President, Chief Operating Officer
GARY J. COURY Director
* Director
NOLAN LEHMANN
* Director
GARY L. FORBES
*By: /s/RICK BERRY
RICK BERRY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
AS ATTORNEY-IN-FACT
</TABLE>
II-5
EXHIBIT 1.1
OEI International, Inc.
4,300,000 Shares 1
Common Stock
($0.001 par value)
Underwriting Agreement
New York, New York
, 1998
Smith Barney Inc.
CIBC Oppenheimer Corp.
Sanders Morris Mundy Inc.
As Representatives of the several Underwriters,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
OEI International, Inc., a Delaware corporation ("OEI"), proposes to sell
to the several underwriters named in Schedule I hereto (the "Underwriters"), for
whom you (the "Representatives") are acting as representatives, 4,300,000 shares
of Common Stock, $0.001 par value ("Common Stock") of OEI (said shares to be
issued and sold by OEI being hereinafter called the "Underwritten Securities").
OEI also proposes to grant to the Underwriters an option to purchase up to
645,000 additional shares of Common Stock to cover over-allotments (the "Option
Securities"; the Option Securities, together with the Underwritten Securities,
being hereinafter called the "Securities"). To the extent there are no
additional Underwriters listed on Schedule I other than you, the term
Representatives as used herein shall mean you, as Underwriters, and the terms
Representatives and Underwriters shall mean either the singular or plural as the
context requires. Certain terms used herein are defined in Section 17 hereof.
- --------
1 Plus an option to purchase from OEI, up to 645,000 additional shares to
cover over-allotments.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES. OEI represents and warrants to, and
agrees with, each Underwriter as set forth below in this Section 1.
(a) OEI has prepared and filed with the Commission a registration
statement (Reg. No. 333-50323) on Form S-1, including a related preliminary
prospectus, for the registration under the Act of the offering and sale of the
Securities. OEI may have filed one or more amendments thereto, including a
related preliminary prospectus, each of which has previously been furnished to
you. OEI will next file with the Commission either (1) prior to the Effective
Date of such registration statement, a further amendment to such registration
statement (including the form of final prospectus) or (2) after the Effective
Date of such registration statement, a final prospectus in accordance with Rules
430A and 424(b). In the case of clause (2), OEI has included in such
registration statement, as amended at the Effective Date, all information (other
than Rule 430A Information) required by the Act and the rules thereunder to be
included in such registration statement and the Prospectus. As filed, such
amendment and form of final prospectus, or such final prospectus, shall contain
all Rule 430A Information, together with all other such required information,
and, except to the extent the Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the Execution Time or, to the extent not completed at the Execution
Time, shall contain only such specific additional information and other changes
(beyond that contained in the latest Preliminary Prospectus) as OEI has advised
you, prior to the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or will, and
when the Prospectus is first filed (if required) in accordance with Rule 424(b)
and on the Closing Date (as defined herein) and on any date on which Option
Securities are purchased, if such date is not the Closing Date (a "settlement
date"), the Prospectus (and any supplements thereto) will, comply in all
material respects with the applicable requirements of the Act and the rules
thereunder; on the Effective Date and at the Execution Time, the Registration
Statement did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on the Effective Date,
the Prospectus, if not filed pursuant to Rule 424(b), will not, and on the date
of any filing pursuant to Rule 424(b) and on the Closing Date and any settlement
date, the Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that OEI makes no representations or warranties as to the information contained
in or omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished herein or in writing to OEI by or on behalf of any Underwriter through
the Representatives specifically for inclusion in the Registration Statement or
the Prospectus (or any supplement thereto).
(c) Each of OEI and its subsidiaries and each of Petrocon Engineering,
Inc., a Texas corporation, and its subsidiaries ("Petrocon"), W-Industries,
Inc., a Texas corporation ("W-I"),
-2-
<PAGE>
Paulus, Sokolowski and Sartor, Inc., a New Jersey corporation ("PS&S"), Gulsby
Engineering, Inc., a Texas corporation and its subsidiary ("GEI") and Chemical &
Industrial Engineering, Inc., a Kentucky corporation ("C&I"), (each of W-I,
PS&S, GEI and C&I, individually a "Company" and, collectively, the "Companies")
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease, as the case
may be, and to operate its properties and conduct its business as described in
the Prospectus, and is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction which requires such
qualification, except for such jurisdictions where the failure to so qualify or
to be in good standing would not, individually or in the aggregate, have a
material adverse effect on the condition (financial or otherwise), prospects,
results of operations, business or properties of OEI and its subsidiaries,
Petrocon and its subsidiaries and the Companies and their respective
subsidiaries, taken as a whole (a "Material Adverse Effect").
(d) All the outstanding shares of capital stock of each of OEI and its
subsidiaries, Petrocon and its subsidiaries and the Companies and their
subsidiaries have been duly and validly authorized and issued and are fully paid
and nonassessable, and, except as otherwise set forth in the Prospectus, all
outstanding shares of capital stock of each of OEI and its subsidiaries,
Petrocon and its subsidiaries and the Companies and their subsidiaries are owned
by OEI, Petrocon or such Company, as the case may be, either directly or through
wholly owned subsidiaries, free and clear of any perfected security interest or
any other security interests, claims, liens or encumbrances of any kind.
(e) OEI's authorized capitalization is as set forth in the Prospectus;
the capital stock of OEI conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of Common Stock have
been duly and validly authorized and issued and are fully paid and
nonassessable; the Securities have been duly and validly authorized, and, when
issued and delivered to and paid for by the Underwriters pursuant to this
Agreement, will be duly issued free of preemptive and other rights and
encumbrances, fully paid and nonassessable; the Securities are duly listed, and
admitted and authorized for trading, subject to official notice of issuance and
evidence of satisfactory distribution, on the New York Stock Exchange; the
certificates for the Securities are in valid and sufficient form; the holders of
outstanding shares of capital stock of OEI are not entitled to preemptive or
other rights to subscribe for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase, agreements or
other obligations to issue, or rights to convert any obligations into or
exchange any securities for, shares of capital stock of or ownership interests
in OEI are outstanding.
(f) There is no franchise, contract or other document, or any
transaction that has occurred between or among OEI and its subsidiaries,
Petrocon and its subsidiaries or any Company and its subsidiaries, or any of the
officers or directors or any affiliate or affiliates of OEI and its
subsidiaries, Petrocon and its subsidiaries or any Company and its subsidiaries
of a character required to be described in the Registration Statement or
Prospectus, or, in case of a
-3-
<PAGE>
franchise, contract or other document, to be filed as an exhibit thereto, which
is not described or filed as required.
(g) This Agreement has been duly authorized, executed and delivered by
OEI and constitutes a valid and binding obligation of OEI enforceable in
accordance with its terms, except as rights to indemnity and contribution
hereunder may be limited by federal and state securities laws or principles of
public policy and subject to qualification that the enforceability of OEI's
obligations hereunder may be limited by bankruptcy, fraudulent conveyance,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equitable principles.
(h) OEI will not, after giving effect to the offering and sale of the
Securities and the application of the proceeds thereof as described in the
Prospectus, be an "investment company" as defined in the Investment Company Act
of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under the
Act and such as may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectus.
(j) Neither the issue and sale of the Securities nor the consummation
of any other of the transactions herein contemplated nor the fulfillment of the
terms hereof will conflict with, result in a breach, violation or default (or an
event which with notice or lapse of time or both could become a default) or
imposition of any lien, charge or encumbrance upon any property or assets of OEI
and its subsidiaries, Petrocon and its subsidiaries or any Company and its
subsidiaries pursuant to, (i) the charter or by-laws of OEI and its
subsidiaries, Petrocon and its subsidiaries or any Company and its subsidiaries,
(ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument or give rise to any right of termination, amendment acceleration or
cancellation of any such indenture, contract, lease, agreement or other
obligation to which OEI and its subsidiaries, Petrocon and its subsidiaries or
any Company and its subsidiaries is a party or bound or to which its or their
property is subject, or (iii) any statute, law, rule, regulation, judgment,
order or decree applicable to OEI and its subsidiaries, Petrocon and its
subsidiaries or any Company and its subsidiaries, of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over OEI and its subsidiaries, Petrocon and its subsidiaries or any
Company and subsidiaries, or any of its or their properties.
(k) No holders of securities of OEI have rights to the registration of
such securities under the Registration Statement, OEI has obtained from all
officers and directors of OEI and the stockholders of Petrocon and the Companies
(collectively, the "Stockholders"), their enforceable written agreement that for
a period of at least [two years] from the date of this Agreement they
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will not, sell, offer to sell, solicit an offer to buy, contract to sell, grant
any option to purchase or otherwise transfer or dispose of any shares of Common
Stock or any security convertible or exchangeable for Common Stock (other than
shares acquired on exercise of employee stock options by stockholders who are
not directors or executive officers of OEI or beneficial owners of 5% or more of
the Common Stock), without the prior written consent of Smith Barney Inc.
(l) The respective historical financial statements and schedules of OEI
and its subsidiaries, Petrocon and its subsidiaries and each Company and its
subsidiaries, included in the Prospectus and the Registration Statement present
fairly in all material respects the respective financial condition, results of
operations and cash flows of OEI and its subsidiaries, Petrocon and its
subsidiaries and each Company and its subsidiaries, as of the dates and for the
periods indicated, comply as to form with the applicable accounting requirements
of the Act and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as otherwise noted therein). The selected financial data set
forth under the captions "Summary Historical and Pro Forma Combined Financial
Data" and "Selected Historical and Pro Forma Combined Financial Data" in the
Prospectus and Registration Statement fairly present, on the basis stated in the
Prospectus and the Registration Statement, the information included therein. The
pro forma combined financial statements included in the Prospectus and the
Registration Statement include assumptions that provide a reasonable basis for
presenting the significant effects directly attributable to the transactions and
events described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma adjustments reflect the proper
application of those adjustments to the historical financial statement amounts
in the pro forma combined financial statements included in the Prospectus and
the Registration Statement. The pro forma combined financial statements included
in the Prospectus and the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of Regulation S-X
under the Act and the pro forma adjustments have been properly applied to the
historical amounts in the compilation of those statements.
(m) Except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto), no action, suit or proceeding by or before any court
or governmental agency, authority or body or any arbitrator involving OEI or any
of its subsidiaries, Petrocon or any of its subsidiaries or any Company or any
of its subsidiaries, or its or their property is pending or, to the best
knowledge of OEI and its subsidiaries, Petrocon and its subsidiaries and each
Company and its subsidiaries, threatened, that (i) could reasonably be expected
to have a material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to result in a Material Adverse Effect, whether or not
arising from transactions in the ordinary course of business.
(n) Each of OEI and its subsidiaries, Petrocon and its subsidiaries and
the Companies and their subsidiaries owns or leases all such properties as are
necessary to the conduct of its operations as presently conducted.
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(o) None of OEI or its subsidiaries, Petrocon or its subsidiaries or
any Company or its subsidiaries is in violation or default of (i) any provision
of its charter or bylaws, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which it is a party or bound or
to which its property is subject, except for such violations or defaults as
would not, individually or in the aggregate, result in a Material Adverse
Effect, or (iii) any statute, law, rule, regulation, judgment, order or decree
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over OEI and its subsidiaries,
Petrocon and its subsidiaries or any Company and its subsidiaries or any of
their respective properties, as applicable except for such violations or
defaults as would not, individually or in the aggregate, result in a Material
Adverse Effect.
(p) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, except as described therein,
there has not been any material adverse change or development or event involving
a prospective material adverse change in the condition (financial or otherwise),
prospects, earnings, business or properties of any of OEI and its subsidiaries,
Petrocon and its subsidiaries or any Company and its subsidiaries, respectively,
taken as a whole, whether or not arising from transactions in the ordinary
course of business or from events beyond their control; neither OEI and its
subsidiaries, Petrocon and its subsidiaries nor any Company and its subsidiaries
has entered into any transaction, other than in the ordinary course of business,
that is material to OEI and its subsidiaries, Petrocon and its subsidiaries or
any Company and its subsidiaries, respectively; neither OEI and its
subsidiaries, Petrocon and its subsidiaries nor any Company and its subsidiaries
has sustained any material loss or interference with its assets, businesses or
properties from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree. Since the date of the latest
respective consolidated balance sheets included in the Registration Statement
and the Prospectus, except as reflected in the Registration Statement and the
Prospectus, neither OEI and its subsidiaries, nor Petrocon and its subsidiaries
nor any Company and its subsidiaries has incurred any liability or obligation,
direct or contingent, except for liabilities or obligations undertaken in the
ordinary course of business, including purchases or leases of equipment.
(q) Arthur Andersen LLP, which has certified the annual historical
financial statements of OEI and its subsidiaries for the year ended December 31,
1997, Petrocon and its subsidiaries for the years ended December 31, 1996 and
1997 and for each Company and its subsidiaries, if any, for the years ended
December 31, 1996 and 1997, and delivered their report with respect to the
audited financial statements and schedules included in the Prospectus, are
independent public accountants with respect to OEI within the meaning of the Act
and the applicable published rules and regulations thereunder.
(r) There are no transfer taxes or other similar fees or charges under
Federal law or the laws of any state, or any political subdivision thereof,
required to be paid in connection with
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the execution and delivery of this Agreement or the issuance by OEI or sale by
OEI of the Securities.
(s) Except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto), each of OEI and its subsidiaries, Petrocon and its
subsidiaries and each Company and its subsidiaries have filed all foreign,
federal, state and local tax returns that are required to be filed or has
requested extensions thereof (except in any case in which the failure so to file
would not have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of OEI and its
subsidiaries, Petrocon and its subsidiaries and each Company and its
subsidiaries, taken as a whole), whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto) and has paid all taxes required
to be paid by it and any other assessment, fine or penalty levied against it, to
the extent that any of the foregoing is due and payable, except for any such
assessment, fine or penalty that is currently being contested in good faith or
as would not result in a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business.
(t) Except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto), no labor problem or dispute with the employees of
OEI or its subsidiaries, Petrocon or its subsidiaries or any Company or its
subsidiaries exists or, to the best knowledge of OEI and its subsidiaries,
Petrocon and its subsidiaries and each Company and its subsidiaries, is
threatened or imminent, and neither OEI, Petrocon nor any Company is aware of
any existing or imminent labor disturbance by the employees of any of its or its
subsidiaries' principal suppliers, contractors or customers, that could result
in a Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business.
(u) Each of OEI and its subsidiaries, Petrocon and its subsidiaries and
the Companies and their subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
are prudent and customary in the businesses in which they are engaged; all
policies of insurance insuring OEI and its subsidiaries, Petrocon and its
subsidiaries and each Company and its subsidiaries or their respective
businesses, assets, employees, officers and directors are in full force and
effect; OEI and its subsidiaries, Petrocon and its subsidiaries and each Company
and its subsidiaries are in compliance with the terms of such policies and
instruments in all material respects; and there are no material claims by OEI or
its subsidiaries, Petrocon or its subsidiaries or any Company or its
subsidiaries under any such policy or instrument as to which any insurance
company is denying liability or defending under a reservation of rights clause;
neither OEI or its subsidiaries, Petrocon or its subsidiaries nor any Company or
its subsidiaries has been refused any insurance coverage sought or applied for;
and neither OEI or its subsidiaries, Petrocon or its subsidiaries nor any
Company or its subsidiaries has any reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect,
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<PAGE>
whether or not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
(v) Except as set forth in or contemplated by the Prospectus (exclusive
of any supplements thereto), no subsidiary of OEI, Petrocon or any Company is
currently prohibited, directly or indirectly, from paying any dividends to any
of OEI, Petrocon or any Company or its parent Company, respectively, from making
any other distribution on such subsidiary's capital stock, from repaying to any
of OEI, Petrocon or any Company or its parent Company, respectively, any loans
or advances to such subsidiary from OEI, Petrocon or any Company, respectively,
or from transferring any of such subsidiary's property or assets to any of OEI,
Petrocon or any Company or its parent Company, respectively, or any other
subsidiary of OEI, Petrocon or any Company.
(w) Except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto), each of OEI and its subsidiaries, Petrocon and its
subsidiaries and the Companies and their subsidiaries possesses all licenses,
certificates, permits and other authorizations (collectively, "Permits") issued
by the appropriate federal, state or foreign regulatory authorities necessary to
conduct its respective business, except any Permits as to which the failure to
possess the same would not, individually or in the aggregate, result in a
Material Adverse Effect, and neither OEI and its subsidiaries, Petrocon and its
subsidiaries nor any Company and its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect, whether or not arising from transactions in the ordinary course of
business.
(x) OEI, Petrocon and each Company maintains a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(y) Neither OEI nor Petrocon or any Company has taken, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or otherwise,
in stabilization or manipulation of the price of any security of OEI to
facilitate the sale or resale of the Securities.
(z) Except as set forth in or contemplated in the Prospectus (exclusive
of any supplement thereto), each of OEI and its subsidiaries, Petrocon and its
subsidiaries and the Companies and their subsidiaries are (i) in compliance with
any and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety,
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<PAGE>
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in compliance
with all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) have not
received notice of any actual or potential liability for the investigation or
remediation of any disposal or release of hazardous or toxic substances or
wastes, pollutants or contaminants, except where such non-compliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals, or liability would not, individually or in the aggregate, result in a
Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business. Except as set forth in the Prospectus, neither OEI
and its subsidiaries, Petrocon and its subsidiaries nor any Company and its
subsidiaries has been named as a "potentially responsible party" under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended.
(aa) In the ordinary course of business, each of Petrocon and the
Companies periodically reviews the effect of Environmental Laws on their
respective business, operations and properties, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws, or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, Petrocon and each
Company has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or properties
of OEI and its subsidiaries, Petrocon and its subsidiaries and each Company and
its subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(bb) Each of OEI and its subsidiaries, Petrocon and its subsidiaries
and each Company and its subsidiaries has fulfilled its obligations, if any,
under the minimum funding standards of Section 302 of the United States Employee
Retirement Income Security Act of 1974 ("ERISA") and the regulations and
published interpretations thereunder with respect to each "plan" (as defined in
Section 3(3) of ERISA and such regulations and published interpretations) in
which employees of OEI and its subsidiaries, Petrocon and its subsidiaries and
each Company and its subsidiaries are eligible to participate, and each such
plan is in compliance in all material respects with the presently applicable
provisions of ERISA and such regulations and published interpretations, except
for failures to fulfill its obligations or be in compliance which would not,
individually or in the aggregate, result in a Material Adverse Effect. None of
OEI and its subsidiaries, Petrocon and its subsidiaries or any Company and its
subsidiaries has incurred any unpaid liability to the Pension Benefit Guaranty
Corporation (other than for the payment of premiums in the ordinary course) or
to any such plan under Title IV of ERISA.
(cc) OEI has no significant subsidiaries as defined by Rule 1-02 of
Regulation S-X other than Petrocon or the Companies.
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(dd) Each of OEI and its subsidiaries, Petrocon and its subsidiaries
and the Companies and their subsidiaries own, possess, license or have other
rights to use, on reasonable terms, all patents, patent applications, trade and
service marks, trade and service mark registrations, trade names, copyrights,
licenses, inventions, trade secrets, technology, know-how and other intellectual
property (collectively, the "Intellectual Property") described in the Prospectus
or material to the conduct of OEI's business as now conducted or as proposed in
the Prospectus to be conducted.
(ee) OEI (i) does not have any material lending or other relationship
with any bank or lending affiliate of Salomon Smith Barney Holding Inc. and (ii)
does not intend to use any of the proceeds from the sale of the Securities
hereunder to repay any outstanding debt owed to any affiliate of Salomon Smith
Barney Holding Inc.
(ff) OEI is in compliance in all material respects with the
Commission's staff legal bulletin No. 5 dated October 8, 1997 related to Year
2000 compliance.
Any certificate signed by any officer of OEI and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by OEI as to
matters covered thereby to each Underwriter.
2. PURCHASE AND SALE. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, OEI agrees to
sell to each Underwriter, and each Underwriter agrees, severally and not
jointly, to purchase from OEI, at a purchase price of $_________ per share, the
amount of the Underwritten Securities set forth opposite such Underwriter's name
in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, OEI hereby grants an option to
the several Underwriters to purchase, severally and not jointly, up to 645,000
Option Securities at the same purchase price per share as the Underwriters shall
pay for the Underwritten Securities. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Securities by the Underwriters.
Said option may be exercised in whole or in part at any time (but not more than
once) on or before the 30th day after the date of the Prospectus upon written or
telegraphic notice by the Representatives to OEI setting forth the number of
shares of the Option Securities as to which the several Underwriters are
exercising the option and the settlement date. Delivery of certificates for the
shares of Option Securities by OEI, and payment therefor to OEI, shall be made
as provided in Section 3 hereof. The number of Option Securities to be purchased
by each Underwriter shall be the same percentage of the total number of shares
of the Option Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to such
adjustments as you in your absolute discretion shall make to eliminate any
fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised
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on or before the third Business Day prior to the Closing Date) shall be made at
10:00 AM, New York City time, on ________ , 1998, or at such time on such later
date not more than three Business Days after the foregoing date as the
Representatives shall designate, which date and time may be postponed by
agreement between the Representatives and OEI or as provided in Section 9 hereof
(such date and time of delivery and payment for the Securities being herein
called the "Closing Date"). Delivery of the Securities shall be made to the
Representatives for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of OEI by wire transfer payable in same-day
funds to an account specified by OEI. Delivery of the Underwritten Securities
and the Option Securities shall be made through the facilities of The Depository
Trust Company unless the Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised after the
third Business Day prior to the Closing Date, OEI will deliver the Option
Securities (at the expense of OEI) to the Representatives on the date specified
by the Representatives (which shall be within three Business Days after exercise
of said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of OEI by wire transfer payable in same-day
funds to an account specified by OEI. If settlement for the Option Securities
occurs after the Closing Date, OEI will deliver to the Representatives on the
settlement date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon receipt
of, supplemental opinions, certificates and letters confirming as of such date
the opinions, certificates and letters delivered on the Closing Date pursuant to
Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS. OEI agrees with the several Underwriters that:
(a) OEI will use its best efforts to cause the Registration Statement,
if not effective at the Execution Time, and any amendment thereof, to become
effective. Prior to the termination of the offering of the Securities, OEI will
not file any amendment of the Registration Statement or supplement to the
Prospectus or any Rule 462(b) Registration Statement unless OEI has furnished
you a copy for your review prior to filing and will not file any such proposed
amendment or supplement to which you reasonably object. Subject to the foregoing
sentence, if the Registration Statement has become or becomes effective pursuant
to Rule 430A, or filing of the Prospectus is otherwise required under Rule
424(b), OEI will cause the Prospectus, properly completed, and any supplement
thereto to be filed with the Commission pursuant to the applicable paragraph of
Rule 424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. OEI will promptly
advise the Representatives (1) when the Registration Statement, if not effective
at the Execution Time, shall have become effective, (2) when the Prospectus, and
any supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b) or when any Rule 462(b)
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Registration Statement shall have been filed with the Commission, (3) when,
prior to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4) of any
request by the Commission or its staff for any amendment of the Registration
Statement, or any Rule 462(b) Registration Statement, or for any supplement to
the Prospectus or for any additional information, (5) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that purpose
and (6) of the receipt by OEI of any notification with respect to the suspension
of the qualification of the Securities for sale in any jurisdiction or the
institution or threatening of any proceeding for such purpose. OEI will use its
best efforts to prevent the issuance of any such stop order or the suspension of
any such qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it shall be necessary to amend the Registration
Statement or supplement the Prospectus to comply with the Act or the rules
thereunder, OEI promptly will (1) notify the Representatives of any such event;
(2) prepare and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will correct
such statement or omission or effect such compliance; and (3) supply any
supplemented Prospectus to you in such quantities as you may reasonably request.
(c) As soon as practicable, OEI will make generally available to its
security holders and to each Representative an earnings statement or statements
of OEI and its Subsidiaries which will satisfy the provisions of Section 11(a)
of the Act and Rule 158 under the Act.
(d) OEI will furnish to each Representative and counsel for the
Underwriters signed copies of the Registration Statement (including exhibits
thereto) and to each other Underwriter a copy of the Registration Statement
(without exhibits thereto) and, so long as delivery of a prospectus by an
Underwriter or dealer may be required by the Act, as many copies of each
Preliminary Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request.
(e) OEI will arrange, if necessary, for the qualification of the
Securities for sale under the laws of such jurisdictions as the Representatives
may designate and will maintain such qualifications in effect so long as
required for the distribution of the Securities; PROVIDED that in no event shall
OEI be obligated to qualify to do business in any jurisdiction where it is not
now so qualified or to take any action that would subject it to service of
process in suits, other than those arising out of the offering or sale of the
Securities, in any jurisdiction where it is not now so subject.
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(f) OEI will not, and will cause its directors, officers and the
Stockholders not to, without the prior written consent of Smith Barney Inc. for
a period of [two years] following the Execution Time (the "Lockup"), sell, offer
to sell, solicit an offer to buy, contract to sell, grant an option to purchase,
or otherwise transfer or dispose of (or enter into any transaction which is
designed to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to cash
settlement or otherwise) by OEI or any affiliate of OEI or any person in privity
with OEI or any affiliate of OEI) directly or indirectly, or announce the
offering of, any other shares of Common Stock or any securities convertible
into, or exchangeable for, shares of Common Stock; PROVIDED, HOWEVER, that OEI
may issue Common Stock (i) in connection with acquisitions; (ii) pursuant to
awards under OEI's 1998 Incentive Plan and Employee Stock Purchase Plan; and
(iii) pursuant to the exercise of warrants outstanding as of the Closing, and
its stockholders (other than directors and officers of OEI and those of its
stockholders who are beneficial owners of 5% or more of the Common Stock) may
sell shares of Common Stock to the extent such share were acquired on the
exercise of employee stock options.
(g) OEI will not take, directly or indirectly, any action designed to
or which has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or manipulation of
the price of any security of OEI to facilitate the sale or resale of the
Securities.
(h) OEI agrees to pay the costs and expenses relating to the following
matters: (i) the preparation, printing or reproduction and filing with the
Commission of the Registration Statement (including financial statements and
exhibits thereto), each Preliminary Prospectus, the Prospectus, and each
amendment or supplement to any of them; (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for counting and
packaging) of such copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with the
offering and sale of the Securities; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Securities,
including any stamp or transfer taxes in connection with the original issuance
and sale of the Securities; (iv) the printing (or reproduction) and delivery of
this Agreement, any blue sky memorandum and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of the
Securities; (v) the registration of the Securities under the Exchange Act and
the listing of the Securities on the New York Stock Exchange; (vi) any
registration or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating to such
registration and qualification); (vii) any filings required to be made with the
National Association of Securities Dealers, Inc. (including filing fees and the
reasonable fees and expenses of counsel for the Underwriters relating to such
filings); (viii) the transportation and other expenses incurred by or on behalf
of OEI representatives in connection with presentations to prospective
purchasers of the Securities; (ix) the fees and expenses of OEI's, Petrocon's
and each Company's accountants and the fees and expenses of their respective
counsel (including local and special
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counsel); and (x) all other costs and expenses incident to the performance by
OEI, Petrocon and each Company of its respective obligations hereunder.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of OEI contained herein as of the
Execution Time, the Closing Date and any settlement date pursuant to Section 3
hereof, to the accuracy of the statements of OEI made in any certificates
pursuant to the provisions hereof, to the performance by OEI of its obligations
hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective prior to the
Execution Time, unless the Representatives agree in writing to a later time, the
Registration Statement will become effective not later than (i) 6:00 PM New York
City time on the date of determination of the public offering price, if such
determination occurred at or prior to 3:00 PM New York City time on such date or
(ii) 9:30 AM on the Business Day following the day on which the public offering
price was determined, if such determination occurred after 3:00 PM New York City
time on such date; if filing of the Prospectus, or any supplement thereto, is
required pursuant to Rule 424(b), the Prospectus, and any such supplement, will
be filed in the manner and within the time period required by Rule 424(b); and
no stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been instituted
or threatened.
(b) The mergers of Petrocon and the Companies with the subsidiaries of
OEI (the "Mergers") have been completed substantially in accordance with the
terms of those certain Agreements and Plans of Reorganization, each dated April
10, 1998, by and among OEI and Petrocon and the Companies and certain other
parties (collectively, the "Reorganization Agreements"), without the waiver or
modification of any material term or condition thereof.
(c) OEI shall have furnished to the Representatives the opinion of
Porter & Hedges, L.L.P., counsel for OEI, dated the Closing Date and addressed
to the Representatives, to the effect that:
(i) each of OEI and its subsidiaries has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full corporate
power and authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
and is duly qualified to conduct its business and is in good standing in
each jurisdiction or
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place where the nature of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified
would not, individually or in the aggregate, result in a Material Adverse
Effect, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus;
(ii) the outstanding shares of capital stock of each of OEI and its
subsidiaries have been duly and validly authorized and issued, are fully
paid and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of such subsidiaries
are owned by OEI either directly, or indirectly through one of the other
subsidiaries, free and clear of any perfected security interest and, to
the best knowledge of such counsel after due inquiry, any other security
interest, claim, lien or encumbrance of any kind;
(iii) each of the Reorganization Agreements (which have been filed with
the Commission as exhibits to the Registration Statement) has been duly
authorized, executed and delivered by OEI and constitutes the valid and
binding obligation of OEI; the Mergers as described in the Prospectus have
been completed and to the best knowledge of such counsel do not constitute
any violation, breach or default (or an event which with notice or lapse
of time or both could become a default) under any material contract,
agreement or other obligation or give rise to any right of termination,
amendment, acceleration or cancellation of any such contract, agreement or
other obligation of OEI and its subsidiaries, or to their knowledge,
Petrocon and its subsidiaries and each Company and its subsidiaries, and
to the best knowledge of such counsel, all the necessary consents or
waivers have been obtained for the Mergers;
(iv) the authorized, issued and outstanding capital stock of OEI
conforms in all material respects to the description thereto set forth
under the caption "Capitalization" in the Prospectus as of the date of the
Prospectus and as adjusted, as of the date hereof, giving effect to the
Mergers; the capital stock of OEI conforms in all material respects to the
description thereof contained in the Prospectus; the outstanding shares of
Common Stock have been duly and validly authorized and issued and are
fully paid and nonassessable; the Securities have been duly and validly
authorized, and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be duly issued free of any
statutory, preemptive or other rights, fully paid and nonassessable; the
Securities are duly listed, and admitted and authorized for trading,
subject to official notice of issuance and evidence of satisfactory
distribution, on the New York Stock Exchange; the certificates for the
Securities are in valid and sufficient form; the holders of outstanding
shares of capital stock of OEI are not entitled to preemptive or other
rights to subscribe for the Securities; and, except as set forth in the
Prospectus, to the best knowledge of such counsel, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
rights to convert any obligations into or exchange any securities for,
shares of capital stock of or ownership interests in OEI are outstanding;
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<PAGE>
(v) there is no pending, or to the best knowledge of such counsel,
threatened action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving OEI or
its subsidiaries, Petrocon or its subsidiaries or any Company or its
subsidiaries or its or their property of a character required to be
disclosed in the Registration Statement, which is not adequately disclosed
in the Prospectus, and to the best knowledge of such counsel there is no
franchise, contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to be filed as
an exhibit thereto, which is not described or filed as required; and the
statements in the Prospectus under the heading "Risk Factors -- Government
Regulation"; "Business -- Government Regulation"; "The Company -- Summary
of the Terms of the Pending Acquisitions," "Management" and "Description
of Capital Stock," insofar as such statements constitute summaries of the
legal matters, documents or proceedings referred to therein, fairly
present, in all material respects, the information called for with respect
to such legal matters, documents and proceedings and fairly summarize, in
all material respects, the matters referred to therein;
(vi) the Registration Statement has become effective under the Act; any
required filing of the Prospectus and any supplements thereto, pursuant to
Rule 424(b), have been made in the manner and within the time period
required by Rule 424(b); to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been
issued, no proceedings for that purpose have been instituted or threatened
and the Registration Statement and the Prospectus (other than the
financial statements and other financial information contained therein, as
to which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
rules thereunder; and, such counsel has no reason to believe that on the
Effective Date or at the Execution Time, the Registration Statement
contains or contained any untrue statement of a material fact or omitted
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus as of its date and on the Closing Date includes any untrue
statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (in each case,
other than the financial statements and other financial information
contained therein, as to which such counsel need express no opinion);
(vii) this Agreement has been duly authorized, executed and delivered
by OEI;
(viii) OEI is not and, after giving effect to the offering and sale of
the Securities and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as defined in the
Investment Company Act of 1940, as amended;
(ix) no consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under
the Act, such as may be
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required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the Securities by the Underwriters in the
manner contemplated in this Agreement and in the Prospectus and such other
approvals (specified in such opinion) as have been obtained;
(x) neither the issue and sale of the Securities, nor the consummation
of any other of the transactions herein contemplated nor the fulfillment
of the terms hereof will conflict with, result in a breach or violation of
or imposition of any lien, charge or encumbrance upon any property or
assets of OEI and its subsidiaries pursuant to, (i) the charter or by-laws
of OEI and its subsidiaries, (ii) to the best knowledge of counsel, the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which OEI and its subsidiaries is a party or
bound or to which its or their property is subject, or (iii) to the best
knowledge of counsel, any statute, law, rule, regulation, judgment, order
or decree applicable to OEI and its subsidiaries of any court, regulatory
body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over OEI and its subsidiaries or any of its
or their properties; and
(xi) Except as set forth in the Prospectus (exclusive of any supplement
thereto) and the Registration Statement, no holders of securities of OEI
have rights to the registration of such securities under the Registration
Statement.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
Texas, the General Corporation Law of the State of Delaware, or the Federal laws
of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they believe to
be reliable (and shall so state in their opinion to the Underwriters) and who
are satisfactory to counsel for the Underwriters, (B) as to matters involving
Petrocon and its subsidiaries and the Companies and their respective
subsidiaries, as applicable, upon the opinions of , and (C) as to matters of
fact, to the extent they deem proper, on certificates of responsible officers of
OEI and public officials; PROVIDED that the Underwriters and their counsel may
rely on such opinions and that such counsel shall state that the opinion of any
other counsel is in form and scope satisfactory to such counsel and it believes
that they are justified in relying on such opinions. Copies of all such opinions
and certificates shall be furnished to counsel to the Underwriters on the
Closing Date. References to the Prospectus in this paragraph (c) include any
supplements thereto at the Closing Date. The opinion of such counsel shall be
rendered to the Underwriters at the request of OEI and shall so state therein.
(d) The Representatives shall have received the opinions of counsel of
Petrocon and of each of the Companies addressed to the Underwriters in the
respective form attached hereto as Exhibit A.
(e) The Representatives shall have received from Morgan, Lewis & Bockius
LLP,
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counsel for the Underwriters, such opinion or opinions, dated the Closing Date
and addressed to the Representatives, with respect to the issuance and sale of
the Securities, the Registration Statement, the Prospectus (together with any
supplement thereto) and other related matters as the Representatives may
reasonably require, and OEI shall have furnished to such counsel such documents
as they request for the purpose of enabling them to pass upon such matters. The
opinion or opinions of such counsel shall be rendered to the Underwriters at the
request of OEI and shall so state therein.
(f) OEI shall have furnished to the Representatives a certificate of OEI,
signed by the Chairman of the Board or the President and the principal financial
or accounting officer of OEI, dated the Closing Date, to the effect that the
signers of such certificates have carefully examined the Registration Statement,
the Prospectus, any supplements to the Prospectus and this Agreement and that:
(i) the representations and warranties of OEI contained in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and OEI
has complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to OEI's knowledge, threatened;
(iii) Except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), since the date of the most recent
financial statements included in the Prospectus (exclusive of any
supplement thereto), there has been no Material Adverse Effect, whether or
not arising from transactions in the ordinary course of business; and
(iv) the Mergers have been completed substantially in accordance with
the terms of the Reorganization Agreements, without the waiver or
modification of any material term or condition thereof.
(g) At the Execution Time and at the Closing Date, Arthur Andersen LLP
shall have furnished to the Representatives letters, dated respectively as of
the Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants within the meaning of the Act and the applicable published rules and
regulations thereunder and that they have performed a review of the unaudited
interim financial information of OEI for the three-month periods ended March 31,
1998 and 1997, and as at March 31, 1998, in accordance with Statement on
Auditing Standards No. 71 and stating in effect that:
(i) in their opinion, the audited financial statements and financial
statement schedules and pro forma financial statements included in the
Registration Statement and the Prospectus and reported on by them comply
as to form in all material respects with the
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applicable accounting requirements of the Act and the related published
rules and regulations;
(ii)on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings "Summary
Historical and Pro Forma Combined Financial Data" and "Selected Historical
and Pro Forma Combined Financial Data"; reading the latest unaudited
financial statements made available by OEI and its subsidiaries; their
limited review , in accordance with standards established under Statement
on Auditing Standards No. 71, of the unaudited interim financial
information for the three-month period ended, March 31, 1998, and as at
March 31, 1998; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with respect to
the comments set forth in such letter; a reading of the minutes of the
meetings of the stockholders and directors of OEI and its subsidiaries,
Petrocon and its subsidiaries and the Companies and their respective
subsidiaries; and inquiries of certain officials of each of OEI, Petrocon
and the Companies who have responsibility for financial and accounting
matters of OEI, Petrocon and the Companies as to transactions and events
subsequent to December 31, 1997, nothing came to their attention which
caused them to believe that:
(1) any unaudited financial statements included in the Registration
Statement and the Prospectus do not comply as to form in all material
respects with applicable accounting requirements of the Act and with
the published rules and regulations of the Commission with respect to
Registration Statements on Form S-1; and said unaudited financial
statements are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements included in the Registration Statement and
the Prospectus;
(2) with respect to the period subsequent to December 31, 1997,
there were any changes, at a specified date not more than five days
prior to the date of the letter, in the long-term debt, capital stock
or any decrease in the stockholders' equity or working capital of OEI
and its subsidiaries, Petrocon and its subsidiaries and the Companies
and their respective subsidiaries as compared with the amounts shown on
the December 31, 1997 balance sheets included in the Registration
Statement and the Prospectus, or for the period from December 31, 1997
to such specified date there were any decreases, as compared with the
fiscal quarter ended December 31, 1997 in net revenues or income before
income taxes or in total or per share amounts of net income of OEI and
its subsidiaries', Petrocon and its subsidiaries' or the Companies and
their respective subsidiaries' operating income, net interest income,
or net interest income after provision for loan losses, except in all
instances for changes or decreases set forth in such letter, in which
case the letter shall be accompanied by an explanation by OEI, Petrocon
and the Companies, as applicable, as to the significance
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thereof unless said explanation is not deemed necessary by the
Representatives;
(3) the information included in the Registration Statement and
Prospectus in response to Regulation S-K, Item 301 (Selected Financial
Data), Item 302 (Supplementary Financial Information), Item 402
(Executive Compensation) and Item 503(d) (Ratio of Earnings to Fixed
Charges) is not in conformity with the applicable disclosure
requirements of Regulation S-K, or does not agree with the
corresponding amounts in the audited financial statements from which
such amounts were derived;
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
OEI and its subsidiaries, Petrocon and its subsidiaries and each of the
Companies and their respective subsidiaries, if any) set forth in the
Registration Statement and the Prospectus, including the information set
forth under the caption "Summary Historical and Pro Forma Combined
Financial Data" and "Selected Historical and Pro Forma Combined Financial
Data" in the Prospectus, agrees with the accounting records of OEI and its
subsidiaries, Petrocon and its subsidiaries and the Companies and their
respective subsidiaries, if any, excluding any questions of legal
interpretation; [Discuss with Arthur Andersen how to describe the
procedures they have agreed to apply to the annual historical financial
statements of Petrocon and its subsidiaries for the years ended December
31, 1994 and 1995 that appear in the selected financial table.] and that
they are not aware of any material modifications that should be made to
those statements for them to be in conformity with generally accepted
accounting principles; and
(iv) on the basis of a reading of the unaudited pro forma combined
financial statements included in the Registration Statement and the
Prospectus (the "pro forma combined financial statements"); carrying out
certain specified procedures; making inquiries of certain officials of
OEI, Petrocon and the Companies who have responsibility for financial and
accounting matters about the basis for their determination of the pro
forma adjustments and whether the pro forma combined financial statements
comply as to form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X; comparing the historical
financial information for OEI, Petrocon and the Companies included in the
pro forma combined financial statements with the historical financial
statements contained in the Prospectus and finding them to be in
agreement; and proving the arithmetic accuracy of the application of the
pro forma adjustments to the historical amounts in the pro forma financial
statements, nothing came to their attention which caused them to believe
that the pro forma financial statements do not comply as to form in all
material respects with the applicable accounting requirements of Rule
11-02 of Regulation S-X or that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of such
statements.
References to the Prospectus in this paragraph (g) include any supplement
thereto at the
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date of the letter.
OEI shall have received from Arthur Andersen LLP (and furnished to the
Representatives) a report with respect to a review of unaudited interim
financial information of OEI for the quarters ending March 31, 1997 and 1998, in
accordance with Statement on Auditing Standards No. 71.
(h) The Representatives shall have received on each Closing Date a
certificate, including exhibits thereto, addressed to the Representatives and
dated such Closing Date, of the Secretary or an Assistant Secretary of OEI,
signed in such officer's capacity as such officer, as to the (i) certificate of
incorporation and bylaws of OEI, (ii) resolutions authorizing the execution and
delivery of the Registration Statement, the Prospectus and the offering of the
Shares, this Agreement and the performance of the transactions contemplated by
this Agreement, (iii) the form of Common Stock certificate and the number of
shares of Common Stock outstanding and (iv) incumbency of the person or persons
authorized to execute and deliver the Registration Statement, this Agreement and
any other documents contemplated by the offering of the Securities.
(i) The Representatives shall have received on each Closing Date (i)
certificates of the Secretaries of State of each State where OEI and its
subsidiaries, Petrocon and its subsidiaries and each of the Companies and their
respective subsidiaries, as applicable, is incorporated and doing business as to
the good standing of OEI and its subsidiaries, Petrocon and its subsidiaries and
each of the Companies and their respective subsidiaries, qualification of OEI
and its subsidiaries, Petrocon and its subsidiaries and each of the Companies
and their respective subsidiaries to do business as a foreign corporation, if
applicable, and filing of annual reports and (ii) copies of all charter
documents of OEI and its subsidiaries, Petrocon and its subsidiaries and each of
the Companies and their respective subsidiaries certified by the Secretary of
State of the state of such corporation's incorporation.
(j) Subsequent to the Execution Time or, if earlier, the dates as of which
information is given in the Registration Statement (exclusive of any amendment
thereof) and the Prospectus (exclusive of any supplement thereto), there shall
not have been (i) any change or decrease specified in the letter or letters
referred to in paragraph (e) of this Section 6 or (ii) any change, or any
development involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of OEI and its
subsidiaries, Petrocon and its subsidiaries or the Companies and their
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto) the effect of which, in any
case referred to in clause (i) or (ii) above, is, in the sole judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectus (exclusive of any supplement thereto).
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(k) OEI, Petrocon and the Companies shall deliver to the Representatives
on each Closing Date such other documents as the Representatives shall
reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of such
cancellation shall be given to OEI in writing or by telephone or facsimile
confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the office Porter & Hedges, L.L.P., counsel for OEI, at 700
Louisiana, 35th Floor, Houston, Texas, on the Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof or because of any refusal,
inability or failure on the part of OEI to perform any agreement herein or
comply with any provision hereof other than by reason of a default by any of the
Underwriters, OEI will reimburse the Underwriters severally through Salomon
Smith Barney on demand for all out-of-pocket expenses (including reasonable fees
and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities.
8. INDEMNIFICATION AND CONTRIBUTION. (a) OEI agrees to indemnify and hold
harmless each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the meaning of
either the Act or the Exchange Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement for the registration of the Securities
as originally filed or in any amendment thereof, or in any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and agrees to reimburse each such indemnified
party, as incurred, for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that OEI will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made therein in reliance upon and in conformity
with written information furnished to OEI by or on behalf of any Underwriter
through the Representatives specifically for inclusion therein. This indemnity
agreement will be
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in addition to any liability which OEI may otherwise have.
(b) Each Underwriter severally and not jointly agrees to indemnify and
hold harmless OEI, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls OEI within the meaning of
either the Act or the Exchange Act, to the same extent as the foregoing
indemnity to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to OEI by or on behalf of such
Underwriter through the Representatives specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any Underwriter may otherwise have. OEI
acknowledges that the statements set forth in the last paragraph of the cover
page regarding delivery of the Securities, the legend in block capital letters
on page 2 related to stabilization, syndicate covering transactions and penalty
bids and, under the heading "Underwriting," (i) the sentences related to
concessions and reallowances and (ii) the paragraph related to stabilization,
syndicate covering transactions and penalty bids in any Preliminary Prospectus
and the Prospectus constitute the only information furnished in writing by or on
behalf of the several Underwriters for inclusion in any Preliminary Prospectus
or the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); PROVIDED, HOWEVER, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to
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employ separate counsel at the expense of the indemnifying party. An
indemnifying party will not, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 8 is unavailable or insufficient to hold harmless an indemnified
party for any reason, OEI and the Underwriters severally agree to contribute to
the aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which OEI and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative benefits
received by OEI on the one hand and by the Underwriters on the other from the
offering of the Securities; PROVIDED, HOWEVER, that in no case shall any
Underwriter (except as may be provided in any agreement among underwriters
relating to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the Securities
purchased by such Underwriter hereunder. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, OEI and the
Underwriters severally shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of OEI on
the one hand and of the Underwriters on the other in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by OEI shall be deemed to
be equal to the total net proceeds from the offering (before deducting expenses)
received by it, and benefits received by the Underwriters shall be deemed to be
equal to the total underwriting discounts and commissions, in each case as set
forth on the cover page of the Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information provided by OEI on the one hand or the
Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. OEI and the Underwriters agree that it would not
be just and equitable if contribution were determined by pro rata allocation or
any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls OEI within the meaning of either the
Act or the Exchange Act, each officer of OEI who shall have signed the
Registration Statement and each director of OEI shall have the same rights to
contribution as OEI, subject in each case to the applicable terms and conditions
of this paragraph (d).
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9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall fail
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter or
OEI. In the event of a default by any Underwriter as set forth in this Section
9, the Closing Date shall be postponed for such period, not exceeding five
Business Days, as the Representatives shall determine in order that the required
changes in the Registration Statement and the Prospectus or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Underwriter of its liability, if any, to OEI and
any nondefaulting Underwriter for damages occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to OEI prior to
delivery of and payment for the Securities, if at any time prior to such time
(i) trading in OEI's Common Stock shall have been suspended by the Commission or
the New York Stock Exchange or trading in securities generally on the New York
Stock Exchange shall have been suspended or limited or minimum prices shall have
been established on such Exchange, (ii) a banking moratorium shall have been
declared either by Federal or New York State authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war or other calamity or crisis the
effect of which on financial markets is such as to make it, in the sole judgment
of the Representatives, impractical or inadvisable to proceed with the offering
or delivery of the Securities as contemplated by the Prospectus (exclusive of
any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective agreements,
representations, warranties, indemnities and other statements of OEI or its
officers and of the Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of any Underwriter or OEI or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and effective
only on receipt, and, if sent to the Representatives, will be mailed, delivered
or telefaxed to the Salomon
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Smith Barney General Counsel (fax no.: (212) 816-7912) and confirmed to the
General Counsel, Salomon Smith Barney, at 388 Greenwich Street, New York, New
York, 10013, Attention: General Counsel, with a copy mailed, delivered or
telefaxed to Morgan, Lewis & Bockius, LLP, at 101 Park Avenue, New York, New
York, 10178-0060, (fax no. (212) 309-6273), Attention: Stephen P. Farrell; or,
if sent to OEI, will be mailed, delivered or telefaxed to 2727 North Loop West,
Suite 400, Houston, Texas, 77009, (fax no. (409) 840-2338) and confirmed to it
at 2727 North Loop West, Suite 400, Houston, Texas 77009, Attention: Chief
Financial Officer, with a copy mailed, delivered or telefaxed to Porter &
Hedges, L.L.P., 700 Louisiana, 35th Floor, Houston, Texas, 77002, (fax no. (713)
226-0204), Attention: James M. Harbison, Jr.
13. SUCCESSORS. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 8 hereof, and no other
person will have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies
are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the
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rules and regulations of the Commission promulgated thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus referred to
in paragraph 1(a) above and any preliminary prospectus included in the
Registration Statement at the Effective Date that omits Rule 430A
Information.
"Prospectus" shall mean the prospectus relating to the Securities that is
first filed pursuant to Rule 424(b) after the Execution Time or, if no
filing pursuant to Rule 424(b) is required, shall mean the form of final
prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement referred to
in paragraph 1(a) above, including exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the Execution Time,
in the form in which it shall become effective) and, in the event any
post-effective amendment thereto or any Rule 462(b) Registration Statement
becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as
provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration statement
and any amendments thereto filed pursuant to Rule 462(b) relating to the
offering covered by the initial registration statement.
"Salomon Smith Barney" shall mean Smith Barney Inc.
[Signature page follows.]
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If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among OEI
and the several Underwriters.
Very truly yours,
OEI INTERNATIONAL, INC.
By:________________________________
Name: M.L. Burrow
Title: Chairman and Chief Executive
Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
SMITH BARNEY INC.
CIBC OPPENHEIMER CORP.
SANDERS MORRIS MUNDY INC.
By: SMITH BARNEY INC.
By:___________________
Name:
Title:
For themselves and the other
several Underwriters named
in Schedule I to the
foregoing Agreement.
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SCHEDULE I
UNDERWRITERS
Number of Firm
Shares to be
NAME Purchased
Smith Barney, Inc.
CIBC Oppenheimer Corp.
Sanders Morris Mundy Inc.
Total _____________
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SCHEDULE II
FORM OF LOCK-UP AGREEMENT
OEI International, Inc.
Public Offering of 4,300,000 Shares
of Common Stock
, 1998
Smith Barney Inc.
CIBC Oppenheimer Corp.
Sanders Morris Mundy Inc.
As Representatives of the several Underwriters,
c/o Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
The undersigned understands that you and certain other firms propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
"Shares") of Common Stock, par value $0.001 per share (the "Common Stock"), of
OEI International, Inc. ("OEI") and that the Underwriters propose to reoffer the
Shares to the public.
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that without the prior written consent of Smith Barney
Inc. the undersigned will not directly or indirectly (and, except as may be
disclosed in the Prospectus, will not announce or disclose any intention to)
sell, offer to sell, solicit an offer to buy, contract to sell, grant any option
to purchase, or otherwise transfer or dispose of, any shares of Common Stock, or
any securities convertible into or exercisable or exchangeable for Common Stock,
for a period of [two years] after the date of the final Prospectus relating to
the offering of the Shares to the public by the Underwriters. Prior to the
expiration of such period, the undersigned will not announce or disclose any
intention to do anything after the expiration of such period which the
undersigned is
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prohibited, as provided in the preceding sentence, from doing during such
period.
The undersigned agrees that the provisions of this agreement shall be
binding also upon the successors, assigns, heirs and personal representatives of
the undersigned.
In furtherance of the foregoing, OEI and , its Transfer Agent, are hereby
authorized to decline to make any transfer of securities if such transfer would
constitute a violation or breach of this letter agreement.
It is understood that, if the Underwriting Agreement does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
and delivery of the Shares, you will release [me/us] from [my/our] obligations
under this letter agreement.
Very truly yours,
[SIGNATURE OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER]
[NAME AND ADDRESS]
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EXHIBIT A
Form of Opinion of Counsel to the Founding Companies
[Letterhead of Counsel to Founding Company]
_____________, 1998
OEI International, Inc.
2727 North Loop West, Suite 400
Houston, Texas 77008
Smith Barney Inc.
CIBC Oppenheimer Corp.
Sanders Morris Mundy Inc.
as Representatives of the several Underwriters
c/o Salomon Smith Barney
333 West 34th Street
New York, New York 10001
Gentlemen:
We have acted as counsel to ____________________, a _________________
corporation (the "COMPANY"), and ________________, _______________ and
_______________ (collectively, the "STOCKHOLDERS"), in connection with the
Agreement and Plan of Reorganization dated as of _______________, 1998 (the
"ACQUISITION AGREEMENT"), by and among OEI International, Inc., a Delaware
corporation ("OEI"), _________ Acquisition, Inc., a ______________ corporation
("NEWCO"), the Company and the Stockholders. This opinion is delivered to you
pursuant to Section 7.04(a)(ii)(B)(2) of the Acquisition Agreement and Sections
_____ and ____ of the Underwriting Agreement dated _______________, 1998 (the
"UNDERWRITING AGREEMENT"), by and between OEI and Smith Barney Inc., CIBC
Oppenheimer Corp. and Sanders Morris Mundy Inc., individually and as
representatives of the several underwriters named in Schedule A thereto.
Capitalized terms used and not otherwise defined herein have the meanings given
to them in the Acquisition Agreement.
We have examined the originals, or copies certified or otherwise
identified to our satisfaction, of (i) the Acquisition Agreement, (ii) the
[Articles] [Certificate] of Merger dated
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_____________ __, 1998, with respect to the Merger between Newco and the
Company, (iii) the Lock-Up Agreements dated as of ___________, 1998, executed by
the respective Stockholders in favor of the Underwriters (the "Lock-Up
Agreements"), (iv) the Employment Agreement[s] dated as of __________ ___, 1998,
between the Company and [each of]
(the "Employment Agreement[s]"), (v) the Charter Documents, each as amended to
date, of the Company, (vi) corporate records of the Company including minute
books as furnished to us by the Company, (vii) certificates of public officials
and of representatives of the Company, and (viii) such statutes and other
instruments and documents as we have deemed appropriate as a basis for the
opinions hereinafter expressed.
In rendering the following opinions, we have relied on the respective
representations and warranties of the Stockholders and the Company contained in
the Acquisition Agreement and in certificates of the Stockholders and of
officers of the Company with respect to the accuracy of the factual matters that
form the basis for any of the opinions contained herein. In making our
examination, we have assumed, without independent investigation, that all
signatures on documents examined by us are genuine, all documents submitted to
us as originals are authentic and all documents submitted to us as certified or
photostatic copies of original documents conform to those original documents and
all those original documents are authentic. In addition, we have assumed the due
authorization, execution and delivery of all documents referred to herein by the
parties thereto other than the Stockholders and the Company and the due
authority of all persons executing such documents except the Stockholders and
the persons executing those documents on behalf of the Company.
On the basis of the foregoing, and subject to the assumptions, limitations
and qualifications hereinafter set forth, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State [Commonwealth] of _____________ and
has all requisite corporate power and authority to own and operate its
properties, to lease the properties it operates under lease and to conduct its
business as currently conducted. [The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction outside
the State [Commonwealth] of _______________ in which the failure to so qualify
would have a material adverse effect on its business.][The Company is not
required to be qualified as a foreign corporation to do business in any
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business.] To our knowledge, the Company is not in violation of
any provision of its Charter Documents.
2. The Company has all requisite corporate power and authority to execute,
deliver and perform its obligations under the Acquisition Agreement and to
effectuate the Merger and the other transactions contemplated thereby to be
effected at or prior to the Closing. The execution and delivery of the
Acquisition Agreement by the Company, and the performance by the Company of its
obligations under the Acquisition Agreement, have been duly authorized by all
necessary corporate action and proceedings required under its Charter Documents
and
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applicable Governmental Requirements, including all actions required to be taken
by the Stockholders [stockholders of the Company, IF LESS THAN ALL ARE SIGNING
THE ACQUISITION AGREEMENT] to approve the Merger. Each Stockholder has the legal
capacity to execute, deliver and perform such Stockholder's obligations under
the Acquisition Agreement, the Lock-Up Agreement to which such Stockholder is a
party, and the Employment Agreement to which such Stockholder is a party, if
any.
3. [Each subsidiary of the Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
_____________ and has all requisite corporate power and authority to own and
operate its properties, to lease the properties it operates under lease and to
conduct its business as currently conducted. [Each subsidiary of the Company is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction outside the State of _______________ in which the failure
to so qualify would have a material adverse effect on its business.] [No such
subsidiary is required to be qualified as a foreign corporation to do business
in any jurisdiction in which the failure to so qualify would have a material
adverse effect on its business.] To our knowledge, no such subsidiary is in
violation of any provision of its Charter Documents.] [THIS PARAGRAPH 3 TO BE
INCLUDED FOR GEI AND PETROCON ONLY.]
[4. The issued and outstanding capital stock of each subsidiary of the
Company is as represented by the Company and the Stockholders in Section 4.06 of
the Disclosure Statement, and each share of such stock has been duly authorized
and validly issued, is fully paid and nonassessable and is owned by the Company
directly or indirectly through wholly owned subsidiaries, free and clear of any
Lien or, to our knowledge, any pending or threatened claim.] [THIS PARAGRAPH 4
TO BE INCLUDED FOR GEI AND PETROCON ONLY.]
5. The Acquisition Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as
enforceability may be subject to the effect of (a) any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally, (b) general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law) and
(c) any implied covenant of good faith and fair dealing. The Acquisition
Agreement has been duly executed and delivered by the Stockholders and
constitutes the legal, valid and binding obligation of the Stockholders,
enforceable against the Stockholders in accordance with its terms, except as
enforceability may be subject to the effect of (a) any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally, (b) general principles of equity (regardless of
whether enforceability is considered in a proceeding in equity or at law) and
(c) any implied covenant of good faith and fair dealing. The Lock-Up Agreements
to which the respective Stockholders are parties, have been duly executed and
delivered by the Stockholder party thereto and constitute the legal, valid and
binding obligation of that Stockholder, enforceable against that Stockholder in
accordance with its terms, except as enforceability may be subject to the effect
of (a) any applicable
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bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, (b) general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity or
at law and (c) any implied covenant of good faith and fair dealing. The
Employment Agreement[s] to which [ is a party][ , , and , respectively, are
parties] [has][have each] been duly executed and delivered by the Stockholder
party thereto and constitutes the legal, valid and binding obligation of that
Stockholder, enforceable against that Stockholder in accordance with its terms,
except as enforceability may be subject to the effect of (a) any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, (b) general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity or
at law) and (c) any implied covenant of good faith and fair dealing.
6. Neither the execution, delivery and performance of the Acquisition
Agreement nor the consummation of the transactions contemplated thereby do or
will (a) violate, breach or constitute a default (or an event which with notice
or lapse of time or both could become a default) under (i) any Charter Document
of the Company [or any of its Subsidiaries], (ii) any Governmental Requirement
applicable to the Company [or any of its Subsidiaries] or by which [its property
is] [their respective properties are] bound, or (iii) any Material Agreement of
the Company [or any of its Subsidiaries] known to us or (b) cause or result in
the loss by the Company [or any Subsidiary] of a material benefit under, or give
rise to the imposition of, or afford any Person the right to obtain, any Lien
upon any property or assets of the Company [or any of its Subsidiaries] (or upon
any revenues, income or profits of the Company [or any of its Subsidiaries]
therefrom) pursuant to any such Material Agreement or any right of termination,
amendment, acceleration or cancellation of any Material Agreement. The
execution, delivery and performance in accordance with its terms by any
Stockholder of the Acquisition Agreement, the Lock-Up Agreement to which that
Stockholder is a party and the Employment Agreement to which that Stockholder is
a party, and the consummation of the transactions contemplated thereby do not
and will not, (a) violate or conflict with any Governmental Requirement
applicable to any of the Stockholders, (b) breach or constitute a default under
any material agreement or instrument known to us to which any Stockholder is a
party or by which any Stockholder or any of the shares of Company Capital Stock
owned by any Stockholder are bound or subject or (c) result in the creation or
imposition of, or afford any Person the right to obtain, any Lien upon any
property or assets of any Stockholder (or upon any revenues, income or profits
of any Stockholder therefrom) or the Company [or any of its Subsidiaries]
pursuant to any such agreement or instrument.
7. Except for the filing of the [Articles] [Certificate] of Merger with
the [Secretary of State] of the State [Commonwealth] of , no Governmental
Approvals are required to be obtained, and no reports or notices or filings with
any Governmental Authority are required to be made, by the Company or any
Stockholder for the execution, delivery or performance by the Company of the
Acquisition Agreement, the enforcement against the Company and the Stockholders
of their respective obligations thereunder or the effectuation of
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the Merger or the other transactions contemplated thereby to be effected at or
prior to the Closing.
8. To our knowledge, except pursuant to the Acquisition Agreement, there
are no existing options, warrants, subscriptions or other rights to purchase or
securities convertible into or exchangeable for, the capital stock of the
Company [or any of its Subsidiaries]. To our knowledge, except as disclosed
pursuant to the Acquisition Agreement, neither the Company nor any Stockholder
is a party to or bound by any agreement, instrument, contract, obligation,
commitment or understanding of any character, except for the Acquisition
Agreement, relating to the sale, assignment, conveyance, encumbrance, transfer
or delivery of any capital stock of the Company [or any of its subsidiaries] or
all or substantially all the assets of the Company.
9. To our knowledge, there is no pending or threatened Litigation that (a)
questions the validity of the Acquisition Agreement, any Lock-Up Agreement or
any Employment Agreement or any action taken or to be taken by the Company or
any Stockholder in connection with the Acquisition Agreement, any Lock-Up
Agreement or any Employment Agreement, at law or in equity, before or by any
Governmental Authority or before any arbitrator or (b) if adversely determined,
would have a material adverse effect (i) on the condition (financial or other),
earnings, business, operations or prospects of the Company [and its
Subsidiaries, taken as a whole], (ii) on the ability of the Company to perform
its obligations under the Acquisition Agreement or (iii) on the ability of any
Stockholder to perform his [or her] obligations under the Acquisition Agreement,
the Lock-Up Agreement to which that Stockholder is a party or that Stockholders'
Employment Agreement.
10. Immediately prior to the Effective Time: (a) the authorized Capital
Stock of the Company consisted of __________ shares of common stock, par value
$_____ per share, of which _____ shares were issued and outstanding; (b) all
such outstanding shares of Capital Stock of the Company were (i) duly authorized
and validly issued in accordance with the applicable Governmental Requirements
of the State of _______________ and the Charter Documents of the Company, (ii)
fully paid and nonassessable, (iii) not issued in violation of any preemptive
rights, rights of first refusal or other similar rights, and (iv) to our
knowledge, were issued in compliance with the applicable provisions of federal
and state securities laws; (c) except as disclosed pursuant to the Acquisition
Agreement, no shares of Capital Stock of the Company were held in the treasury
of the Company; and (d) the Stockholders owned all the issued and outstanding
shares of Capital Stock of the Company free and clear, to our knowledge, of any
Lien or adverse claim.
11. The [Articles] [Certificate] of Merger complies with the applicable
law of the State [Commonwealth] of _______________ and, following the filing
thereof by the Surviving Corporation with the [Secretary of State] of the State
[Commonwealth] of _______________ and the payment of all applicable filing fees
with respect thereto, the Merger will be effective at the Effective Time. [Upon
the Effective Time, no former stockholder of the Company will be entitled to
exercise any rights as a dissenting stockholder with respect to the Merger.]
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[IMMEDIATELY PRECEDING SENTENCE FOR GEI, PS&S AND W-I ONLY.]
In the opinions set forth above, phrases such as "to our knowledge,"
"known to us" and those with equivalent wording refer to the conscious awareness
of information by the lawyers of this Firm who have prepared this opinion,
signed this letter or been actively involved in assisting and advising the
Company and the Stockholders in connection with the negotiation, execution and
delivery of the Acquisition Agreement and related matters, without any
independent investigation by any lawyer of this Firm.
The opinions expressed in paragraph 1 [and paragraph 3] as to the
qualification and good standing of [each of] the Company [and its Subsidiaries]
as a foreign corporation are based solely on our review of certificates of
public officials of the relevant jurisdiction.] The Acquisition Agreement
provides, except where otherwise specifically provided, that it is to be
governed by and construed and enforced in accordance with the substantive laws
of the State [Commonwealth] of _______________. For purposes of our opinions
expressed in paragraph 5 above, we have assumed, with your approval, that the
laws of the State of Texas are identical to the laws of the State [Commonwealth]
of _______________, and no opinion is expressed herein as to any matter governed
by any law other than the laws of the State [Commonwealth] of _______________
and the federal laws of the United States of America, each as in effect on the
date hereof.
The opinions expressed in paragraph 5 above are subject to the
additional qualification that we express no opinion as to the enforceability of
(a) any severability or reformation provisions contained in the Acquisition
Agreement, any Lock-Up Agreement or any Employment Agreement, (b) any provisions
in the Acquisition Agreement, any Lock-Up Agreement or the Employment Agreement
which purport to entitle a party to indemnification in respect of any matter
arising under any securities laws or to the extent indemnification in respect of
any matter would otherwise be against public policy, (c) any provisions of the
Acquisition Agreement, any Lock-Up Agreement or any Employment Agreement
purporting to establish a right to enforce a covenant or restriction by
injunctions or restraining orders or (d) any provisions of the Acquisition
Agreement, any Lock-Up Agreement or any Employment Agreement that have the
effect of prohibiting oral amendments or waivers of any provisions of those
documents.
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This opinion and the matters addressed herein are as of the date hereof,
and we undertake no, and hereby disclaim any, obligation to advise you of any
change in any matter set forth herein occurring after the date hereof. This
opinion is being furnished to you for use solely in connection with the
transactions being consummated pursuant to the Acquisition Agreement and the
Underwriting Agreement. No other use or distribution of this opinion may be made
without our prior written consent, except that this opinion may be provided to
and relied upon by _____________, as Agent, and the other [Lenders] parties to
the [Credit Agreement] dated
, 1998 with OEI.
Very truly yours,
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AMENDED AND RESTATED EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
OEI INTERNATIONAL, INC.
OEI INTERNATIONAL, INC., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is OEI International, Inc. and the name
under which the Corporation was originally incorporated is "ONE ENGINEERING,
INC." The date of filing its original Certificate of Incorporation with the
Secretary of State of the State of Delaware was September 4, 1998.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of this
corporation pursuant to Sections 228, 242 and 245 of the General Corporation Law
of the State of Delaware ("DGCL") as follows:
ARTICLE I
NAME
The name of the corporation is OEI International, Inc. (the "Corporation")
ARTICLE II
REGISTERED OFFICE/AGENT
The registered office of the Corporation in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company.
ARTICLE III
PURPOSES
The purposes of the Corporation are to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
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ARTICLE IV
CAPITAL STOCK
The aggregate number of shares of all classes of stock which the
Corporation shall have authority to issue is 41,000,000 shares, consisting of:
(i) 40,000,000 shares of common stock, par value $.001 per share (the "Common
Stock"), and (ii) 1,000,000 shares of preferred stock, par value $.001 per share
(the "Preferred Stock"). Shares of any class of capital stock of the Corporation
may be issued for such consideration and for such corporate purposes as the
Board of Directors of the Corporation (the "Board of Directors") may from time
to time determine. Each share of Common Stock shall be entitled to one vote.
A. PREFERRED STOCK. The Preferred Stock may be divided into and issued
from time to time in one or more series as may be fixed and determined by the
Board of Directors. The relative rights and preferences of the Preferred Stock
of each series shall be such as shall be stated in any resolution or resolutions
adopted by the Board of Directors setting forth the designation of the series
and fixing and determining the relative rights and preferences thereof (a
"Directors' Resolution"). The Board of Directors is hereby authorized to fix and
determine the powers, designations, preferences, and relative, participating,
optional or other rights, including, without limitation, voting powers, full or
limited, preferential rights to receive dividends or assets upon liquidation,
rights of conversion or exchange into Common Stock, Preferred Stock of any
series or other securities, any right of the Corporation to exchange or convert
shares into Common Stock, Preferred Stock of any series or other securities, or
redemption provision or sinking fund provisions, as between series and as
between the Preferred Stock or any series thereof and the Common Stock, and the
qualifications, limitations or restrictions thereof, if any, all as shall be
stated in a Directors' Resolution, and the shares of Preferred Stock or any
series thereof may have full or limited voting powers, or be without voting
powers, all as shall be stated in a Directors' Resolution. Except where
otherwise set forth in the Directors' Resolution providing for the issuance of
any series of Preferred Stock, the number of shares comprising such series may
be increased or decreased (but not below the number of shares then outstanding)
from time to time by like action of the Board of Directors. The shares of
Preferred Stock of any one series shall be identical with the other shares in
the same series in all respects except as to the dates from and after which
dividends thereon shall cumulate, if cumulative.
B. REACQUIRED SHARES OF PREFERRED STOCK. Shares of any series of any
Preferred Stock that have been redeemed (whether through the operation of a
sinking fund or otherwise), purchased by the Corporation, or which, if
convertible or exchangeable, have been converted into, or exchanged for, shares
of stock of any other class or classes or any evidences of indebtedness shall
have the status of authorized and unissued shares of Preferred Stock and may be
reissued as a part of the series of which they were originally a part or may be
reclassified and reissued as part of a new series of Preferred Stock or as part
of any other series of Preferred Stock, all subject to the conditions or
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restrictions on issuance set forth in the Directors' Resolution providing for
the issuance of any series of Preferred Stock and to any filing required by law.
C. INCREASE IN AUTHORIZED PREFERRED STOCK. The number of authorized shares
of Preferred Stock may be increased or decreased by the affirmative vote of the
holders of a majority of the stock of the Corporation entitled to vote without
the separate vote of holders of Preferred Stock as a class.
ARTICLE V
EXISTENCE
The existence of the Corporation is to be perpetual.
ARTICLE VI
NO PREEMPTIVE RIGHTS
No stockholder shall be entitled, as a matter of right, to subscribe for
or acquire additional, unissued or treasury shares of any class of capital stock
of the Corporation whether now or hereafter authorized, or any bonds, debentures
or other securities convertible into, or carrying a right to subscribe to or
acquire such shares, but any shares or other securities convertible into, or
carrying a right to subscribe to or acquire such shares may be issued or
disposed of by the Board of Directors to such persons and on such terms as in
its discretion it shall deem advisable.
ARTICLE VII
NO CUMULATIVE VOTING
At each election of directors, every stockholder entitled to vote at such
election shall have the right to vote in person or by proxy the number of shares
owned by him for as many persons as there are directors to be elected and for
whose election he has a right to vote. No stockholder shall have the right to
cumulate his votes in any election of directors.
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ARTICLE VIII
NO STOCKHOLDER ACTION WITHOUT A MEETING
Except as otherwise required by law, special meetings of the stockholders
of the Corporation may be called only by the Chairman of the Board, the Chief
Executive Officer, the President, the Board of Directors by the written order of
a majority of the entire Board of Directors, or by such other persons as may be
set forth in the Bylaws of the Corporation (the "Bylaws"); PROVIDED, HOWEVER
that from and after the first date as of which the Corporation has a class or
series of capital stock registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), any action required or permitted to be taken by
the stockholders of the Corporation must be effected at an annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders, and a special meeting of stockholders
of the Corporation may be called only by the Chairman of the Board, the Chief
Executive Officer, the President or the Board of Directors by the written order
of a majority of the entire Board of Directors, and not by the stockholders
except as otherwise provided by law or the Bylaws.
ARTICLE IX
BOARD OF DIRECTORS
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. In addition to the authority and powers
conferred upon the Board of Directors by the DGCL or by the other provisions of
this Certificate of Incorporation (this "Certificate of Incorporation"), the
Board of Directors is hereby authorized and empowered to exercise all such
powers and do all such acts and things as may be exercised or done by the
Corporation, subject to the provisions of the DGCL, this Certificate of
Incorporation and the Bylaws; PROVIDED, HOWEVER, that no Bylaws hereafter
adopted by the stockholders of the Corporation, or any amendments thereto, shall
invalidate any prior act of the Board of Directors that would have been valid if
such Bylaws or amendment had not been adopted.
A. NUMBER, ELECTION AND TERMS OF DIRECTORS. The number of directors which
shall constitute the whole Board of Directors shall be fixed from time to time
by a majority of the directors then in office and shall be divided into three
classes: Class I, Class II and Class III; PROVIDED, HOWEVER, that from and after
the first date as of which the Corporation has a class or series of capital
stock registered under the Exchange Act, the number of directors which shall
constitute the whole Board of Directors shall be not less than three. Each
director shall serve for a term ending on the third annual meeting following the
annual meeting at which such director was elected; PROVIDED, HOWEVER, that the
directors first elected to Class I shall serve for a term expiring at the annual
meeting next following the end of the calendar year 1998, the directors first
elected to Class II shall serve for
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a term expiring at the annual meeting next following the end of the calendar
year 1999, and the directors first elected to Class III shall serve for a term
expiring at the annual meeting next following the end of the calendar year 2000.
Each director shall hold office until the annual meeting at which such
director's term expires and, the foregoing notwithstanding, shall serve until
his successor shall have been duly elected and qualified or until his earlier
death, resignation or removal.
At such annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board of Directors shall have designated one or more directorships whose terms
then expires as directorships of another class in order to more nearly achieve
equality of number of directors among the classes.
In the event of any changes in the authorized number of directors, each
director then continuing to serve shall nevertheless continue as a director of
the class of which he is a member until the expiration of his current term, or
his prior death, resignation or removal. The Board of Directors shall specify
the class to which a newly created directorship shall be allocated.
Election of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
B. REMOVAL OF DIRECTORS. No director of the Corporation shall be removed
from office as a director by vote or other action of the stockholders or
otherwise except for cause, and then only by the affirmative vote of the holders
of at least two-thirds of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of
directors, voting together as a single class. Except as may otherwise be
provided by law, cause of removal of a director shall be deemed to exist only
if: (i) the director whose removal is proposed has been convicted, or where a
director is granted immunity to testify where another has been convicted, of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (ii) such director has been found by the affirmative
vote of a majority of the entire Board of Directors at any regular or special
meeting of the Board of Directors called for that purpose or by a court of
competent jurisdiction to have been grossly negligent or guilty of misconduct in
the performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which mental
incompetency directly affects his ability as a director of the Corporation.
C. VACANCIES. Newly created directorships resulting from any increase in
the number of directors and any vacancies on the Board of Directors resulting
from death, resignation, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor
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shall have been elected and qualified or until his earlier death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
ARTICLE X
INDEMNIFICATION
A. MANDATORY INDEMNIFICATION. Each person who at any time is or was a
director or officer of the Corporation, and is threatened to be or is made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative (a
"Proceeding"), by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, member,
employee, trustee, agent or similar functionary of another domestic or foreign
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other for-profit or non-profit enterprise, whether the basis of
a Proceeding is an alleged action in such person's official capacity or in
another capacity while holding such office, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the DGCL, or any
other applicable law as may from time to time be in effect (but, in the case of
any such amendment or enactment, only to the extent that such amendment or law
permits the Corporation to provide broader indemnification rights than such law
prior to such amendment or enactment permitted the Corporation to provide),
against all expense, liability and loss (including, without limitation, court
costs and attorneys' fees, judgments, fines, excise taxes or penalties, and
amounts paid or to be paid in settlement) actually and reasonably incurred or
suffered by such person in connection with a Proceeding, and such
indemnification shall continue as to a person who has ceased to be a director or
officer of the Corporation or a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise, and shall inure to the benefit of such person's heirs, executors and
administrators. The Corporation's obligations under this Section A include, but
are not limited to, the convening of any meeting, and the consideration of any
matter thereby, required by statute in order to determine the eligibility of any
person for indemnification.
B. PREPAYMENT OF EXPENSES. Expenses incurred by a director or officer of
the Corporation in defending a Proceeding shall be paid by the Corporation in
advance of the final disposition of such Proceeding to the fullest extent
permitted by, and only in compliance with, the DGCL or any other applicable laws
as may from time to time be in effect, including, without limitation, any
provision of the DGCL which requires, as a condition precedent to such expense
advancement, the delivery to the Corporation of an undertaking, by or on behalf
of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or
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officer is not entitled to be indemnified under Section A of this Article X or
otherwise. Repayments of all amounts so advanced shall be upon such terms and
conditions, if any, as the Corporation's Board of Directors deems appropriate.
C. VESTING. The Corporation's obligation to indemnify and to prepay
expenses under Sections A and B of this Article X shall arise, and all rights
granted to the Corporation's directors and officers hereunder shall vest, at the
time of the occurrence of the transaction or event to which a Proceeding
relates, or at the time that the action or conduct to which such Proceeding
relates was first taken or engaged in (or omitted to be taken or engaged in),
regardless of when such Proceeding is first threatened, commenced or completed.
Notwithstanding any other provision of this Certificate of Incorporation or the
Bylaws of the Corporation, no action taken by the Corporation, either by
amendment of this Certificate of Incorporation or the Bylaws of the Corporation
or otherwise, shall diminish or adversely affect any rights to indemnification
or prepayment of expenses granted under Sections A and B of this Article X which
shall have become vested as aforesaid prior to the date that such amendment or
other corporate action is effective or taken, whichever is later.
D. ENFORCEMENT. If a claim under Section A or Section B or both Sections A
and B of this Article X is not paid in full by the Corporation within thirty
(30) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit in a court of competent
jurisdiction against the Corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall also be entitled to
be paid the expense of prosecuting such claim. It shall be a defense to any such
suit (other than a suit brought to enforce a claim for expenses incurred in
defending any Proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the DGCL or other applicable law to indemnify the claimant for the amount
claimed, but the burden of proving such defense shall be on the Corporation. The
failure of the Corporation (including its Board of Directors, independent legal
counsel, or stockholders) to have made a determination prior to the commencement
of such suit as to whether indemnification is proper in the circumstances based
upon the applicable standard of conduct set forth in the DGCL or other
applicable law shall neither be a defense to the action nor create a presumption
that the claimant has not met the applicable standard of conduct. The
termination of any Proceeding by judgment, order, settlement, conviction, or
upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal Proceeding, had reasonable cause
to believe that his conduct was unlawful.
E. NONEXCLUSIVE. The indemnification provided by this Article X shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any statute, bylaw, other provisions of
this Certificate of Incorporation, agreement, vote of stockholders
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or disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
F. PERMISSIVE INDEMNIFICATION. The rights to indemnification and
prepayment of expenses which are conferred to the Corporation's directors and
officers by Sections A and B of this Article X may be conferred upon any
employee or agent of the Corporation if, and to the extent, authorized by the
Board of Directors.
G. INSURANCE. The Corporation shall have power to purchase and maintain
insurance, at its expense, on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise against any expense, liability or loss asserted against such person
and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the
provisions of this Article X, the Corporation's Bylaws, the DGCL or other
applicable law.
H. IMPLEMENTING ARRANGEMENTS. Without limiting the power of the
Corporation to procure or maintain insurance or other arrangement on behalf of
any of the persons as described in Section G of this Article X, the Corporation
may, for the benefit of persons eligible for indemnification by the Corporation,
(i) create a trust fund, (ii) establish any form of self-insurance, (iii) secure
its indemnity obligation by grant of a security interest or other lien on the
assets of the Corporation, or (iv) establish a letter of credit, guaranty or
surety arrangement.
ARTICLE XI
LIMITED DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or to its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this Article XI shall not eliminate or limit
the liability of a director: (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, as it may hereafter be amended from
time to time, for any unlawful payment of a dividend or unlawful stock purchase
or redemption, or (iv) for any transaction from which the director derived an
improper personal benefit.
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If the DGCL is amended to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended. No amendment to or repeal of this Article
XI will apply to, or have any effect on, the liability or alleged liability of
any director of the Corporation for or with respect to any acts or omissions of
the director occurring prior to such amendment or repeal.
ARTICLE XII
BYLAWS
The Board of Directors is expressly authorized to adopt, amend or repeal
the Bylaws of the Corporation, or adopt new Bylaws, without any action on the
part of the stockholders, except as may be otherwise provided by applicable law
or the Bylaws of the Corporation.
ARTICLE XIII
ARRANGEMENTS WITH CREDITORS
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof, or on the application of
any receiver or receivers appointed for the Corporation under Section 291 of
Title 8 of the Delaware Code, order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If the majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders, of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
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IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
of OEI International, Inc. is executed by its Vice President this 8th day of
April, 1998.
/s/ Tracy H. Cohen
--------------------------------------
Tracy H. Cohen, Vice President
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EXHIBIT 3.2
BYLAWS
OF
OEI INTERNATIONAL, INC.
(FORMERLY ONE ENGINEERING, INC.)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of OEI International,
Inc. (the "Corporation") will be in Houston, Texas. The Board of Directors of
the Corporation (the "Board of Directors") may elect to relocate the principal
office of the Corporation from time to time as it shall deem necessary and
proper.
Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places within or without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders will be
held at the principal office of the Corporation, or at such other place within
or without the State of Delaware as may be determined by the Board of Directors
and stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
Section 2. ANNUAL MEETINGS. An annual meeting of Stockholders shall be
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as may be designated by resolution of the
Board of Directors from time to time; provided that each successive annual
meeting shall be held on a date within 13 months after the date of the preceding
annual meeting. Only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder of the Corporation. For
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, no
less than 60 days nor more than 180 days prior to the anniversary date of the
immediately preceding annual meeting; PROVIDED, HOWEVER, that in the event that
the date of the annual meeting is changed by more than 30 days from such
anniversary date, notice by the stockholder to be timely must be received not
later than the close of business on the tenth day following the earlier of the
date on which a written
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statement setting forth the date of such meeting was mailed to stockholders or
the date on which it is first disclosed to the public. A stockholder's notice to
the Secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting: (a) a brief description of the business desired
to be brought before the annual meeting, (b) the name and address, as they
appear on the Corporation's books, of the stockholder proposing such proposal,
(c) the class and number of shares of the Corporation that are beneficially
owned by the stockholder, and (d) any material interest of the stockholder in
such business. In addition, if the stockholder's ownership of shares of the
Corporation, as set forth in the notice, is solely beneficial, documentary
evidence of such ownership must accompany the notice. Notwithstanding anything
else in these Bylaws to the contrary, no business shall be conducted at an
annual meeting except in accordance with the procedures set forth in this
Section 2. The presiding officer of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that any business that was not
properly brought before the meeting is out of order and shall not be transacted
at the meeting.
Section 3. NOTICE OF ANNUAL MEETING. Written or printed notice of the
annual meeting, stating the place, day and hour thereof, will be served upon or
mailed to each stockholder entitled to vote thereat at such address as appears
on the books of the Corporation, not less than ten days nor more than sixty days
before the date of the meeting.
Section 4. SPECIAL MEETING. Except as otherwise required by law or the
Certificate of Incorporation, special meetings of the stockholders of the
Corporation may be called only by the Chairman of the Board of Directors (the
"Chairman of the Board"), the Chief Executive Officer, the President, the Board
of Directors by the written order of a majority of the entire Board of Directors
or upon the written request of stockholders owning not less than two-thirds of
the shares of capital stock of the Corporation issued, outstanding and entitled
to vote at such meeting delivered to the President or Secretary that states the
purpose or purposes of the proposed meeting.
Section 5. NOTICE OF SPECIAL MEETING. Written notice of a special
meeting of stockholders, stating the place, day and hour and purpose or purposes
thereof, will be served upon or mailed to each stockholder entitled to vote
thereat at such address as appears on the books of the Corporation, not less
than ten days nor more than sixty days before the date of the meeting.
Section 6. BUSINESS AT SPECIAL MEETING. Business transacted at all
special meetings will be confined to the purpose or purposes stated in the
notice.
Section 7. STOCKHOLDER LIST. At least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, will be prepared by the
Secretary. Such list, for a period of ten days prior to such meeting, will be
kept on file at the registered office of the Corporation and will be subject to
inspection by any stockholder at any time during usual business hours. Such list
will also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any stockholder during the whole time of
the meeting.
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Section 8. QUORUM. The holders of at least one-half of the shares of
capital stock issued and outstanding and entitled to vote thereat, represented
in person or by proxy, will constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
law, the Certificate of Incorporation or these Bylaws. If, however, such quorum
is not present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, represented in person or by proxy, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
any such adjourned meeting at which a quorum is represented, any business may be
transacted which might have been transacted at the meeting as originally
notified.
Section 9. VOTING. Unless otherwise provided by law, the Certificate of
Incorporation or these Bylaws, each stockholder will have one vote for each
share of stock having voting power, registered in his name on the books of the
Corporation. When a quorum is present at any meeting, the vote of the holders of
a majority of the shares having voting power represented in person or by proxy
will decide any question brought before such meeting, unless the question is one
upon which, by express provision of law, the Certificate of Incorporation or
these Bylaws, a different vote is required, in which case such express provision
will govern and control the decision of such question. In the case of a matter
submitted for a vote of the stockholders as to which a stockholder approval
requirement is applicable under the stockholder approval policy of any stock
exchange or quotation system on which the capital stock of the Corporation is
traded or quoted, the requirements under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any provisions of the Internal Revenue Code, in
each case for which no higher voting requirement is specified by the DGCL, the
Certificate of Incorporation or these Bylaws, the vote required for approval
shall be the requisite vote specified in such stockholder approval policy, the
Exchange Act or Internal Revenue Code provision, as the case may be (or the
highest such requirement if more than one is applicable). Unless otherwise
provided in the Certificate of Incorporation or these Bylaws in accordance with
the DGCL, directors shall be elected by a plurality of the votes cast by the
holders of outstanding shares of capital stock of the Corporation entitled to
vote in the election of directors at a meeting of stockholders at which a quorum
is present.
Section 10. PROXIES. At any meeting of the stockholders every
stockholder having the right to vote will be entitled to vote in person, or by
proxy appointed by an instrument in writing subscribed by such stockholder or
his duly authorized attorney in fact and bearing a date not more than eleven
months prior to said meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation will be
managed by a Board of Directors. The Board of Directors may exercise all such
powers of the Corporation and do all such lawful acts and things as are not by
law, by the Certificate of Incorporation or these Bylaws directed or required to
be exercised or done by the stockholders.
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Section 2. NUMBER OF DIRECTORS. The number of directors which
constitute the whole Board of Directors will be no more than twelve, as such
number shall be determined by resolution of the Board of Directors from time to
time; PROVIDED, HOWEVER, that no decrease in the number of directors shall have
the effect of shortening the term of any incumbent director; PROVIDED FURTHER,
HOWEVER, that from and after the first date as of which the Corporation has a
class or series of capital stock registered under the Exchange Act, the number
of directors which shall constitute the whole Board of Directors shall be not
less than three.
Section 3. NOMINATION. Only persons who are nominated in accordance
with the procedures set forth in these Bylaws shall be eligible to serve as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders (a) by or at the direction
of the Board of Directors or (b) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
Section 3, who shall be entitled to vote for the election of directors at the
meeting and who complies with the notice procedures set forth in this Section 3.
Nominations by stockholders shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an annual meeting, not less than
60 days nor more than 180 days prior to the first anniversary of the preceding
year's annual meeting; PROVIDED, HOWEVER, that in the event that the date of the
annual meeting is changed by more than 30 days from such anniversary date,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the earlier of the date on which a
written statement setting forth the date of such meeting was mailed to
stockholders or the date on which it is first disclosed to the public, and (b)
in the case of a special meeting at which directors are to be elected, not later
than the close of business on the tenth day following the earlier of the date on
which a written statement setting forth the date of such meeting was mailed to
stockholders or the date on which it is first disclosed to the public. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Exchange Act (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to the stockholder giving the notice
(i) the name and address, as they appear on the Corporation's books, of such
stockholder and (ii) the class and number of shares of the Corporation which are
beneficially owned by such stockholder and which are owned of record by such
stockholder; and (c) as to the beneficial owner, if any, on whose behalf the
nomination is made, (i) the name and address of such person and (ii) the class
and number of shares of the Corporation which are beneficially owned by such
person. At the request of the Board of Directors, any person nominated by the
Board of Directors for election as a director shall furnish to the Secretary of
the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
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The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Section 3 and he shall so
declare to the meeting, and the defective nomination shall be disregarded.
Section 4. ELECTION AND TERM. Subject to the requirements of the
Certificate of Incorporation, the directors of each class shall be elected at
the annual meeting of stockholders, except as provided in Section 5, and each
director elected shall hold office until the expiration of his term and until
his successor shall be elected and shall qualify. Directors need not be
residents of Delaware or stockholders of the Corporation.
Section 5. VACANCIES. If any vacancy occurs in the Board of Directors
caused by death, resignation, retirement, disqualification, or removal from
office of any director, or otherwise, or if any new directorship is created by
an increase in the authorized number of directors, a majority of the directors
then in office, though less than a quorum, or a sole remaining director, may
choose a successor or fill the newly created directorship; and a director so
chosen shall hold office until his term expires and until his successor shall be
duly elected and shall qualify, unless sooner displaced.
Section 6. RESIGNATION; REMOVAL. Any director may resign at any time.
Unless otherwise prescribed by law or the Certificate of Incorporation, a
director may be removed from office only for cause and then only by the
affirmative vote of the holders of at least a majority of the voting power of
all outstanding shares of capital stock of the Corporation generally entitled to
vote in the election of directors, voting together as a single class. Except as
may otherwise be provided by law, cause of removal of a director shall be deemed
to exist only if: (i) the director whose removal is proposed has been convicted,
or where a director is granted immunity to testify where another has been
convicted, of a felony by a court of competent jurisdiction and such conviction
is no longer subject to direct appeal; (ii) such director has been found by the
affirmative vote of a majority of the entire Board of Directors at any regular
or special meeting of the Board of Directors called for that purpose or by a
court of competent jurisdiction to have been grossly negligent or guilty of
misconduct in the performance of his duties to the Corporation in a matter of
substantial importance to the Corporation; or (iii) such director has been
adjudicated by a court of competent jurisdiction to be mentally incompetent,
which mental incompetency directly affects his ability as a director of the
Corporation.
ARTICLE IV
MEETINGS OF THE BOARD
Section 1. FIRST MEETING. The Board of Directors may hold its first
meeting for the purpose of organization and the transaction of business, if a
quorum is present, immediately after and at the same place as the annual meeting
of the stockholders, and no notice of such meeting shall be necessary; or the
Board of Directors may meet at such place and time as is fixed by the consent in
writing of all the directors.
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Section 2. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held at such time and place either within or without the State of
Delaware and with such notice or without notice as is determined from time to
time by the Board of Directors.
Section 3. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President or the Chairman of the Board on one days notice
to each director, either personally or by mail or telegram. Special meetings
will be called by the President or the Chairman of the Board in like manner and
on like notice upon the written request of a majority of the Board of Directors.
Section 4. QUORUM AND VOTING. At all meetings of the Board of
Directors, a majority of the directors will be necessary and sufficient to
constitute a quorum for the transaction of business; and the act of a majority
of the directors present at any meeting at which there is a quorum will be the
act of the Board of Directors, except as may be otherwise specifically provided
by law, the Certificate of Incorporation or these Bylaws. If a quorum is not
present at any meeting of directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
Section 5. TELEPHONE MEETINGS. The Board of Directors may hold meetings
in any manner permitted by law. Without limitation, at any meeting of the Board
of Directors, a director may attend by telephone, radio, television, interactive
media or similar means of communication by means of which all participants can
hear each other which permits him to participate in the meeting, and a director
so attending will be deemed present at the meeting for all purposes including
the determination of whether a quorum is present.
Section 6. ACTION BY WRITTEN CONSENT. Any action required or permitted
to be taken by the Board of Directors or any committee of the Board of Directors
under applicable statutory provisions, the Certificate of Incorporation, or
these Bylaws, may be taken without a meeting if a consent in writing, setting
forth the action so taken, is signed by all the members of the Board of
Directors or such committee, as the case may be, and filed with the minutes of
the meetings of the Board of Directors or such committee, as the case may be.
ARTICLE V
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The Board of Directors may
establish an Audit Committee and a Compensation Committee, and may establish an
Executive Committee and such other committees as may be established by
resolution of a majority of the whole Board of Directors. Each of such
committees shall consist of one or more members of the Board of Directors and
shall have a chairman that is selected by the Board of Directors. Members of
committees of the Board of Directors shall be elected annually by vote of a
majority of the Board of Directors. The Chief Executive Officer shall be an
ex-officio nonvoting member of each committee (except the Audit and Compensation
Committees) of which he is not an official voting member. With respect to any
committee (including the Audit and Compensation Committees) of which the Chief
Executive
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Officer is not an official voting member, the Chief Executive Officer shall be
given notice of all committee meetings at the same time notice is given to
committee members, and the Chief Executive Officer shall be afforded the
opportunity to speak at the committee meeting. Presence of a majority of the
committee members (not counting any ex-officio nonvoting members) shall
constitute a quorum. Committees may act by majority vote of the voting members
present at a meeting. Each of such committees shall have and may exercise such
of the powers of the Board of Directors in the management of the business and
affairs of the Corporation as may be provided in these Bylaws or by resolution
of the Board of Directors. Each of such committees may authorize the seal of the
Corporation to be affixed to any document or instrument. The Board of Directors
may designate one or more directors as alternate members of any such committee,
who may replace any absent or disqualified member at any meeting of such
committee. Meetings of committees may be called by the chairman of the committee
by written, telegraphic or telephonic notice to all members of the committee and
the Chief Executive Officer and shall be at such time and place as shall be
stated in the notice of such meeting. Any member of a committee may participate
in any meeting by means of conference telephone or similar communications
equipment. In the absence or disqualification of a member of any committee the
chairman of such committee may, if deemed advisable, appoint another member of
the Board of Directors to act at the meeting in the place of the disqualified or
absent member. The chairman of the committee may fix such other rules and
procedures governing conduct of meetings as he shall deem appropriate.
Section 2. EXECUTIVE COMMITTEE. The Board of Directors, by resolution
adopted by a majority of the whole Board of Directors, may designate two or more
directors to constitute an Executive Committee, which committee, to the extent
provided in such resolution, will have and may exercise all of the authority of
the Board of Directors in the business and affairs of the Corporation, and may
have power to authorize the seal of the Corporation to be affixed to all papers
which may require it, except where action by the Board of Directors is specified
by law. The Executive Committee will keep regular minutes of its proceedings and
report the same to the Board of Directors when required.
Section 3. AUDIT COMMITTEE. The Audit Committee shall consist of not
less than two members of the Board of Directors. The Audit Committee shall be
responsible for recommending to the entire Board of Directors engagement and
discharge of independent auditors of the financial statements of the
Corporation, shall review the professional service provided by the independent
auditors, shall review the independence of independent auditors, shall review
with the auditors the plan and results of the auditing engagement, shall
consider the range of audit and non-audit fees, shall review the adequacy of the
Corporation's system of internal audit controls, shall review the results of
procedures for internal auditing and shall consult with the internal auditor of
the Corporation with respect to all aspects of the Corporation's internal
auditing program. In addition, the Audit Committee shall direct and supervise
special investigations as deemed necessary by the Audit Committee.
Section 4. COMPENSATION COMMITTEE. The Compensation Committee shall
consist of not less than two members of the Board of Directors. The Compensation
Committee shall recommend to the Board of Directors the compensation to be paid
to officers and key employees of the
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Corporation and the compensation of the Board of Directors. Except as otherwise
provided in any specific plan adopted by the Board of Directors, the
Compensation Committee shall be responsible for administration of executive
compensation plans, stock option plans and other forms of direct or indirect
compensation of officers and key employees, and each member of the Compensation
Committee shall have the power and authority to execute and bind the Corporation
to such documents, agreements and instruments related to such plans and
compensation as are approved by the Compensation Committee. In the alternative,
the Compensation Committee may authorize any officer of the Corporation to
execute such documents, agreements and instruments on behalf of the Corporation.
In addition, the Compensation Committee shall review levels of pension benefits
and insurance programs for officers and key employees.
Section 5. OTHER COMMITTEES. The Board of Directors may similarly
create other committees for such terms and with such powers and duties as the
Board of Directors deems appropriate except as provided to the contrary by law,
the Certificate of Incorporation, or these Bylaws.
Section 6. ADVISORY DIRECTORS. The Board of Directors may, by majority
vote, appoint one or more advisory directors. Advisory directors shall serve at
the Board of Directors' convenience solely to advise the Board of Directors, and
shall have no formal responsibilities. No advisory director shall be entitled to
vote at meetings of the Board of Directors, nor shall any advisory director be
counted when determining whether there is a quorum at meetings of the Board of
Directors. Advisory directors shall not be, by virtue of their position as
advisory directors, agents of the Corporation, and they shall not have the power
to bind the Corporation.
ARTICLE VI
COMPENSATION OF DIRECTORS
Directors, as such, shall receive such compensation for their services
and such reimbursement of expenses as shall be determined by the Board of
Directors.
ARTICLE VII
NOTICES
Section 1. METHODS OF NOTICE. Whenever any notice is required to be
given to any stockholder or director under the provisions of any law, the
Certificate of Incorporation or these Bylaws, it will not be construed to
require personal notice, but such notice may be given in writing by mail
addressed to such stockholder or director at such address as appears on the
books of the Corporation, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail with postage
thereon prepaid. Notice to directors may also be given by telegram, by
facsimile, by telephone or in person, and notice given by such means shall be
deemed given at the time it is delivered.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be
given to any stockholder or director under the provisions of any law, the
Certificate of Incorporation or these
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Bylaws, a waiver thereof in writing signed by the person or persons entitled to
said notice, whether before or after the time stated therein, will be deemed
equivalent to the giving of such notice. Attendance at any meeting will
constitute a waiver of notice thereof except as otherwise provided by law.
ARTICLE VIII
OFFICERS
Section 1. EXECUTIVE OFFICERS. The officers of the Corporation will
consist of President, Vice President, Treasurer, and Secretary, each of whom
shall be elected by the Board of Directors. The Board of Directors may also
elect a Chairman of the Board, a Chief Executive Officer, additional vice
presidents, and one or more assistant secretaries and assistant treasurers. Any
two or more offices may be held by the same person.
Section 2. ELECTION AND QUALIFICATION. The Board of Directors at its
first meeting after each annual meeting of stockholders will elect the
President, one or more Vice Presidents, a Secretary and a Treasurer, none of
whom need be a member of the Board of Directors.
Section 3. OTHER OFFICERS AND AGENTS. The Board of Directors may elect
or appoint such other officers, assistant officers and agents as it deems
necessary, who will hold their offices for such terms and shall exercise such
powers and perform such duties as determined from time to time by the Board of
Directors.
Section 4. SALARIES. The salaries of all officers of the Corporation
will be fixed by the Board of Directors except as otherwise directed by the
Board of Directors.
Section 5. TERM, REMOVAL AND VACANCIES. The officers of the Corporation
will hold office until their resignation or their successors are chosen and
qualify. Any officer, agent or member of the Executive Committee elected or
appointed by the Board of Directors may be removed at any time by the Board of
Directors; PROVIDED, HOWEVER, that such removal shall be without prejudice to
the contract rights, if any, of such removed party. If any such office becomes
vacant for any reason, the vacancy will be filled by the Board of Directors.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at meetings of the Board of Directors and stockholders
and shall have such other powers and duties as may from time to time be
prescribed by duly adopted resolutions of the Board of Directors.
Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer, if one
is elected, shall preside at meetings of the Board of Directors and stockholders
if there is no Chairman of the Board, and shall supervise and have overall
responsibility for the business, administration and operations of the
Corporation. In general, he shall perform all duties as from time to time may be
assigned to him by the Board of Directors. He shall from time to time make such
reports of the affairs of the Corporation as the Board of Directors may require.
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Section 8. PRESIDENT. The President shall, subject to the Board of
Directors, have general executive charge, management and control of the
properties and operations of the Corporation in the ordinary course of its
business with all such powers with respect to such responsibilities including
the powers of general manager; and the president shall see that all orders and
resolutions of the Board of Directors are carried into effect. The president
shall have such other powers and duties as may from time to time be prescribed
by duly adopted resolution of the Board of Directors.
Section 9. VICE PRESIDENT. The Vice Presidents in the order determined
by the Board of Directors will, in the absence or disability of the President,
perform the duties and exercise the powers of the President, and will perform
such other duties as the Board of Directors and President may prescribe.
Section 10. SECRETARY. The Secretary will attend all meetings of the
Board of Directors and all meetings of the stockholders and record all votes and
the minutes of all proceedings in a book to be kept for that purpose and will
perform like duties for the standing committees when required. He will give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and will perform such other duties as may be
prescribed by the Board of Directors and President. He will keep in safe custody
the seal of the Corporation and, when authorized by the Board of Directors,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an assistant secretary.
Section 11. ASSISTANT SECRETARIES. The assistant secretaries in the
order determined by the Board of Directors will perform, in the absence or
disability of the Secretary, the duties and exercise the powers of the Secretary
and will perform such other duties as the Board of Directors and President may
prescribe.
Section 12. TREASURER. The Treasurer will have the custody of the
corporate funds and securities and will keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and will
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He will disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and will
render to the Board of Directors and President, whenever they may require it, an
account of all of his transactions as Treasurer and of the financial condition
of the Corporation.
Section 13. ASSISTANT TREASURERS. The Assistant Treasurers in the order
determined by the Board of Directors, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer and will
perform such other duties as the Board of Directors and President may prescribe.
Section 14. OFFICER'S BOND. If required by the Board of Directors, any
officer will give the Corporation a bond (to be renewed as the Board of
Directors may require) in such sum and with such surety or sureties as is
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation,
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retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the Corporation.
ARTICLE IX
SHARES AND STOCKHOLDERS
Section 1. CERTIFICATES REPRESENTING SHARES. The certificates
representing shares of capital stock of the Corporation will be numbered and
entered in the books of the Corporation as they are issued. They will exhibit
the holder's name and number of shares and will be signed by the Chief Executive
Officer, President or Vice-President and the Secretary or an Assistant
Secretary. The signature of any such officer may be facsimile if the certificate
is countersigned by a transfer agent or registered by a registrar, other than
the Corporation itself or an employee of the Corporation. In case any officer
who has signed or whose facsimile signature has been placed upon such
certificate has ceased to be such officer before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such officer
at the date of its issuance.
Section 2. TRANSFER OF SHARES. Upon surrender to the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it will be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books. Notwithstanding
the foregoing, no transfer will be recognized by the Corporation if such
transfer would violate federal or state securities laws, the Certificate of
Incorporation, or any stockholders' agreements which may be in effect at the
time of the purported transfer. The Corporation may, prior to any such transfer,
require an opinion of counsel to the effect that any such transfer does not
violate applicable securities laws requiring registration or an exemption from
registration prior to any such transfer.
Section 3. FIXING RECORD DATE. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of stockholders for any other proper purpose, the
Board of Directors may provide that the stock transfer books be closed for a
stated period but not to exceed, in any case, sixty days. If the stock transfer
books are closed for the purpose of determining stockholders entitled to notice
of or to vote at a meeting of stockholders, such books must be closed for at
least ten days immediately preceding such meeting. In lieu of closing the stock
transfer books, the Board of Directors may fix in advance a date as the record
date for any such determination of stockholders, such date, in any case, to be
not more than sixty days and, in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders, or stockholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, will be the record date
for such determination of stockholders. When a determination of stockholders
entitled to vote at any meeting of stockholders has been made as herein
provided, such determination will apply to any
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adjournment thereof except where the determination has been made through the
closing of stock transfer books and the stated period of closing has expired.
Section 4. REGISTERED STOCKHOLDERS. The Corporation is entitled to
recognize the exclusive right of a person registered on its books as the owner
of the share to receive dividends, and to vote as such owner, and for all other
purposes as such owner; and the Corporation is not bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it has express or other notice thereof, except
as otherwise provided by the laws of Delaware.
Section 5. LOST CERTIFICATE. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such lost
or destroyed certificate or certificates, or his legal representatives, to
advertise the same in such manner as it shall require and/or give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
ARTICLE X
GENERAL
Section 1. DIVIDENDS. The Board of Directors may from time to time
declare, and the Corporation pay, dividends on its outstanding shares of capital
stock in cash, in property, or in its own shares, except when the declaration or
payment thereof would be contrary to law, the Certificate of Incorporation or
these Bylaws. Such dividends may be declared at any regular or special meeting
of the Board of Directors, and the declaration and payment will be subject to
all applicable provisions of law, the Certificate of Incorporation and these
Bylaws.
Section 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve fund to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Board of Directors may determine to be in the
interest of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
Section 3. DIRECTORS' ANNUAL STATEMENT. The Board of Directors will
present at each annual meeting and when called for by vote of the stockholders
at any special meeting of the stockholders, a full and clear statement of the
business and condition of the Corporation.
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Section 4. CHECKS. All checks or demands for money and notes of the
Corporation will be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 5. CORPORATE RECORDS. The Corporation will keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of its stockholders giving the names and
addresses of all stockholders and the number and class of shares held by each.
All other books and records of the Corporation may be kept at such place or
places within or without the State of Delaware as the Board of Directors may
from time to time determine.
Section 6. SEAL. The corporate seal will have inscribed thereon the
name of the Corporation. The seal may be used by causing it or a facsimile
thereof to be impressed, affixed or reproduced.
Section 7. AMENDMENT. The Board of Directors shall have the power to
make, alter, amend and repeal the Bylaws. Any Bylaws made by the Board of
Directors under the powers conferred hereby may be altered, amended or repealed
by the directors or by the stockholders; PROVIDED, HOWEVER, that the Bylaws
shall not be altered, amended or repealed and no provision inconsistent
therewith shall be adopted by stockholder action without the affirmative vote of
at least two-thirds of the voting power of the then outstanding shares entitled
to vote generally in the election of directors, voting together as a single
class.
Section 8. INDEMNIFICATION. Each director, officer and former director
or officer of the Corporation, and any person who may have served or who may
hereafter serve at the request of the Corporation as a director or officer of
another corporation in which it owns shares of capital stock or of which it is a
creditor, is hereby indemnified by the Corporation against expenses actually and
necessarily incurred by him in connection with the defense of any action, suit
or proceeding in which he is made a party by reason of being or having been such
director or officer, except in relation to matters as to which he shall be
adjudged in such action, suit or proceeding to be liable for negligence or
misconduct in the performance of duty. Such indemnification will not be deemed
exclusive of any other rights to which such director, officer or other person
may be entitled under any agreement, vote of stockholders, or otherwise. Without
limitation, nothing in this section shall limit any indemnification provisions
in the Certificate of Incorporation.
Adopted October 9, 1997.
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EXHIBIT 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of __________________, 1998, among OEI International, Inc., a Delaware
corporation ("OEI"), and each person listed on the signature pages of this
Agreement under the caption "STOCKHOLDERS" (each a "STOCKHOLDER" and,
collectively, the "STOCKHOLDERS").
WHEREAS, pursuant to various acquisition agreements entered into with OEI
(collectively, the "ACQUISITION AGREEMENTS"), each of the Stockholders has
received on the date hereof shares of common stock, par value $.001 per share,
of OEI ("COMMON STOCK"); and
WHEREAS, in order to induce the Stockholders to enter into their
respective Acquisition Agreements, OEI has agreed to provide registration rights
on the terms set forth in this Agreement for the benefit of the Stockholders;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. The following capitalized terms shall have the meanings
assigned to them in this Section 1 or in the parts of this Agreement referred to
below:
ANNUAL DEMAND PERIOD: the period in any year after the second anniversary
of the date of this Agreement, which follows the date that is 91 days after the
end of OEI's immediately preceding fiscal year.
CODE: the Internal Revenue Code of 1986, as amended, and any successor
thereto.
COMMISSION: the Securities and Exchange Commission, and any successor
thereto.
DEMAND REGISTRATION: as defined in Section 3.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended, and any
successor thereto, and the rules and regulations thereunder.
EXEMPT OFFERING: as defined in Section 2.
REGISTRABLE COMMON: shares of Common Stock that were issued to the
Stockholders pursuant to the Acquisition Agreements, and any additional shares
of Common Stock issued or distributed in respect of any other shares of
Registrable Common by way of a stock dividend or distribution or stock split or
in connection with a combination of shares, recapitalization,
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reorganization, merger, consolidation or otherwise. For purposes of this
Agreement, shares of Registrable Common will cease to be Registrable Common when
and to the extent that (i) a registration statement covering such shares has
been declared effective under the Securities Act and such shares have been
disposed of pursuant to such effective registration statement, (ii) such shares
are sold pursuant to Rule 144 or become saleable under Rule 144(k), or (iii)
such shares have been otherwise transferred to a person or entity that is not a
Stockholder, other than pursuant to Section 11.
REGISTRATION NOTICE: as defined in Section 2.
REQUESTING HOLDERS: as defined in Section 3.
RESTRICTED PERIOD: as defined in Section 3.
RULE 144: Securities Act Rule 144 (or any similar or successor provision
under the Securities Act).
SECURITIES ACT: the Securities Act of 1933, as amended, and any successor
thereto, and the rules and regulations thereunder.
SELLING STOCKHOLDER: as defined in Section 12.
2. PIGGYBACK REGISTRATION RIGHTS. At any time after the second anniversary
of the date of this Agreement and before December 31, 2002, whenever OEI
proposes to register any Common Stock for its own account under the Securities
Act for an underwritten public offering for cash, other than a registration
relating to the offering or issuance of shares in connection with (i) employee
compensation or benefit plans or (ii) one or more acquisition transactions under
a Registration Statement on Form S-4 or Form S-1 under the Securities Act (or a
successor to Form S-4 or Form S-1) (any such offering or issuance being an
"EXEMPT OFFERING"), OEI will give each Stockholder written notice of its intent
to do so (a "REGISTRATION NOTICE") at least 20 days prior to the filing of the
related registration statement with the Commission. Such notice shall specify
the approximate date on which OEI proposes to file such registration statement
and shall contain a statement that the Stockholders are entitled to participate
in such offering and shall set forth the number of shares of Registrable Common
that represents the best estimate of the lead managing underwriter (or if not
known, OEI) that will be available for sale by the holders of Registrable Common
in the proposed offering. If OEI shall have delivered a Registration Notice,
each Stockholder shall be entitled to participate on the same terms and
conditions as OEI in the public offering to which the Registration Notice
relates and to offer and sell shares of Registrable Common therein only to the
extent provided in this Section 2. Each Stockholder desiring to participate in
such offering shall notify OEI no later than ten days following receipt of the
Registration Notice of the aggregate number of shares of Registrable Common that
such Stockholder then desires to sell in the public offering. Each Stockholder
desiring to participate in the public offering may include shares of Registrable
Common in the registration statement relating to such offering, to the extent
that the inclusion of such shares shall not reduce the number of shares of
Common Stock to be offered and sold by OEI to be included
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therein. If the lead managing underwriter selected by OEI for a public offering
determines that marketing factors require a limitation on the number of shares
of Registrable Common to be offered and sold in such offering, there shall be
included in the offering only that number of shares of Registrable Common, if
any, requested to be included in the offering that such lead managing
underwriter reasonably and in good faith believes will not jeopardize the
success of the offering, PROVIDED, HOWEVER, that if the lead managing
underwriter determines that marketing factors require a limitation on the number
of shares of Registrable Common to be offered and sold as aforesaid and so
notifies OEI and any requesting Stockholder in writing, the number of shares of
Registrable Common to be offered and sold by holders desiring to participate in
the offering, shall be allocated among such holders on a PRO RATA basis based on
their holdings of Registrable Common. OEI shall have the right at any time to
reduce the number of shares requested by any Stockholder to be included in such
registration to the extent that OEI reasonably concludes that inclusion of such
shares is likely to jeopardize the non-recognition status under the Code of any
acquisition transaction consummated pursuant to any of the Acquisition
Agreements; PROVIDED, HOWEVER, that any determination to exclude shares from any
such registration pursuant to this provision shall be based on advice of tax
counsel to OEI or its independent accountants.
3. DEMAND REGISTRATION RIGHTS. At any time after the period ending on the
second anniversary of the date of this Agreement (the "RESTRICTED PERIOD") and
before December 31, 2002, the holders of at least 51% of the shares of
Registrable Common then outstanding may request (the Stockholders making such
request are herein referred to as the "REQUESTING HOLDERS") in writing that OEI
file a registration statement under the Securities Act covering the registration
of all or, if less than all, at least one million, of the shares of Registrable
Common then held by such Stockholders (a "DEMAND REGISTRATION"). Within ten days
of the receipt of such request, OEI shall give written notice of such request to
all other Stockholders and shall use its best efforts to effect as soon as
practicable the registration under the Securities Act in accordance with Section
4 hereof (including without limitation, the execution of an undertaking to file
post-effective amendments) of all shares of Registrable Common which the
Stockholders request be registered, PROVIDED, HOWEVER, that (i) OEI shall not be
obligated to cause a registration statement respecting a Demand Registration to
(a) be initially filed sooner than ten days prior to the beginning of an Annual
Demand Period, or (b) become effective under the Securities Act as of any time
that is not within, an Annual Demand Period, (ii) OEI shall not be obligated to
effect a Demand Registration if it is not eligible to use Form S-3 under the
Securities Act, and (iii) OEI shall be obligated to effect only one Demand
Registration pursuant to this Section 3. In connection with a Demand
Registration, the holders of a majority of shares of Registrable Common included
in such Demand Registration, in their sole discretion, shall determine whether
(a) to proceed with, withdraw from or terminate such offering, (b) to select,
subject to the approval of OEI (which approval shall not be unreasonably
withheld), a managing underwriter or underwriters to administer such offering,
(c) to enter into an underwriting agreement for such offering, and (d) to take
such actions as may be necessary to close the sale of Registrable Common
contemplated by such offering, including waiving any conditions to closing such
sale that may not have been fulfilled. If such holders exercise their discretion
under this paragraph to terminate a proposed Demand Registration, the terminated
Demand Registration shall not constitute the Demand Registration under this
Section 3, if the determination to terminate such Demand Registration (i)
follows the exercise by OEI of any of its rights provided by the last two
paragraphs of this Section 3
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or (ii) results from a material adverse change in the condition (financial or
other), results of operations, prospects or properties of the Company.
Notwithstanding the foregoing, a registration will not count as the Demand
Registration under this Section 3 until such registration has become effective
and unless either (i) the Requesting Holders are able to register and sell all
of the shares of Registrable Common requested by them to be included in such
registration or (ii) such registration statement has remained effective for at
least 90 days.
Notwithstanding the preceding paragraph, if OEI shall furnish to the
Requesting Holders a certificate signed by the President of OEI stating that, in
the good faith judgment of the Board of Directors of OEI, it would be
detrimental to OEI and its stockholders if such registration statement were to
be filed and it is therefore beneficial to defer the filing of such registration
statement, OEI shall have the right to defer such filing for a period of not
more than 90 days after receipt of the request of the Requesting Holders. OEI
shall promptly give notice to the holders of Registrable Common at the end of
any delay period under this paragraph.
Notwithstanding the preceding two paragraphs, if at the time of any
request by the Requesting Holders for a Demand Registration, OEI has fixed plans
to file within 90 days after such request for the sale of any of its securities
in a public offering under the Securities Act (other than an Exempt Offering),
no Demand Registration shall be initiated under this Section 3 until 90 days
after the effective date of such registration unless OEI is no longer proceeding
diligently to effect such registration; PROVIDED that OEI shall provide the
holders of Registrable Common the right to participate in such public offering
pursuant and subject to Section 2.
4. REGISTRATION PROCEDURES. In connection with registrations under
Sections 2 and 3, and subject to the terms and conditions contained therein, OEI
shall:
(a) use its best efforts to prepare and file with the Commission as
soon as reasonably practicable, a registration statement with respect to
the Registrable Common and use its best efforts to cause such registration
to promptly become and remain effective for a period of at least 120 days
(or such shorter period during which holders shall have sold all
Registrable Common which they requested to be registered or such shares
become saleable under Rule 144(k));
(b) prepare and file with the Commission such amendments (including
post-effective amendments) to such registration statement and supplements
to the related prospectus to reflect appropriately the plan of
distribution of the securities registered thereunder until the completion
of the distribution contemplated by such registration statement or for so
long thereafter as a dealer is required by law to deliver a prospectus in
connection with the offer and sale of the shares of Registrable Common
covered by such registration statement and/or as shall be necessary so
that neither such registration statement nor the related prospectus shall
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and so that such registration statement
and the related prospectus will otherwise comply with applicable legal
requirements;
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<PAGE>
(c) provide to any Stockholder requesting to include shares of
Registrable Common in such registration statement and a single counsel for
all holders of Registrable Common requesting to include shares of
Registrable Common in such registration statement, which counsel shall be
selected by the holders of a majority of shares of Registrable Common
requested to be included in such registration statement and shall be
reasonably satisfactory to OEI, an opportunity to review and provide
comments with respect to such registration statement (and any
post-effective amendment thereto) prior to such registration statement (or
post-effective amendment) becoming effective;
(d) use its best efforts to register and qualify the Registrable
Common covered by such registration statement under applicable securities
or "Blue Sky" laws of such jurisdictions as the holders shall reasonably
request for the distribution of the Registrable Common;
(e) take such other actions as are reasonable and necessary to
comply with the requirements of the Securities Act;
(f) furnish such number of prospectuses (including preliminary
prospectuses) and documents incident thereto as a Stockholder from time to
time may reasonably request;
(g) provide to any Stockholder requesting to include Registrable
Common in such registration statement and any managing underwriter
participating in any distribution thereof, and to any attorney, accountant
or other agent retained by such Stockholder or managing underwriter,
reasonable access to appropriate officers and directors of OEI to ask
questions and to obtain information reasonably requested by any such
Stockholder, managing underwriter, attorney, accountant or other agent in
connection with such registration statement or any amendment thereto;
PROVIDED, HOWEVER, that (i) in connection with any such access or request,
any such requesting persons shall cooperate to the extent reasonably
practicable to minimize any disruption to the operation by OEI of its
business and (ii) any records, information or documents shall be kept
confidential by such requesting persons, unless (A) such records,
information or documents are in the public domain or otherwise publicly
available or (B) disclosure of such records, information or documents is
required by court or administrative order or by applicable law (including,
without limitation, the Securities Act);
(h) notify each Stockholder and the managing underwriters
participating in the distribution pursuant to such registration statement
promptly (i) when OEI is informed that such registration statement or any
post-effective amendment to such registration statement becomes effective,
(ii) of any request by the Commission for an amendment or any supplement
to such registration statement or any related prospectus, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness
of such registration statement or of any order preventing or suspending
the use of any related prospectus or the initiation or threat of any
proceeding for that purpose, (iv) of the suspension of the qualification
of any shares of Registrable Common included in such registration
statement for sale in any
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<PAGE>
jurisdiction or the initiation or threat of a proceeding for that purpose,
(v) of any determination by OEI that any event has occurred which makes
untrue any statement of a material fact made in such registration
statement or any related prospectus or which requires the making of a
change in such registration statement or any, related prospectus in order
that the same will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and (vi) of the completion
of the distribution contemplated by such registration statement if it
relates to an offering by OEI;
(i) in the event of the issuance of any stop order suspending the
effectiveness of such registration statement or of any order suspending or
preventing the use of any related prospectus or suspending the
qualification of any shares of Registrable Common included in such
registration statement for sale in any jurisdiction, use its best efforts
to obtain its withdrawal;
(j) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, but not later than
fifteen months after the effective date of such registration statement, an
earnings statement covering the period of at least twelve months beginning
with the first full fiscal quarter after the effective date of such
registration statement, which earnings statement shall satisfy the
provisions of Section 11 (a) of the Securities Act;
(k) use reasonable diligence to cause all shares of Registrable
Common included in such registration statement to be listed on any
securities exchange (including, for this purpose, the Nasdaq National
Market) on which the Common Stock is then listed at the initiation of OEI;
(l) use reasonable diligence to obtain an opinion from legal counsel
(which may include the General Counsel of OEI) in customary form and
covering such matters of the type customarily covered by opinions as the
underwriters, if any, may reasonably request;
(m) provide a transfer agent and registrar for all such Registrable
Common not later than the effective date of such registration statement;
(n) enter into such customary agreements (including an underwriting
agreement in customary form) as the underwriters, if any, may reasonably
request in order to expedite or facilitate the disposition of such shares
of Registrable Common; and
(o) use reasonable diligence to obtain a "comfort letter" from OEI's
independent public accountants in customary form and covering such matters
of the type customarily covered by comfort letters as the underwriters, if
any, may reasonably request. As used in this Section 4 and elsewhere
herein, the term "underwriters" does not include any Stockholder.
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<PAGE>
5. UNDERWRITING AGREEMENT. In connection with each registration pursuant
to Section 2 or 3 covering an underwritten registered public offering, OEI and
each participating Stockholder agree to enter into a written agreement with the
managing underwriter in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of OEI's size and investment stature, including
provisions for indemnification by OEI and each Selling Stockholder as more fully
described in Section 12.
6. AVAILABILITY OF RULE 144. Notwithstanding anything contained herein to
the contrary, (including Sections 2 and 3), OEI shall not be obligated to
register shares of Registrable Common or maintain effectiveness of any
registration statement covering Registrable Common held by any Stockholder when
the resale provisions of Rule 144(k) are available to such Stockholder or such
Stockholder is otherwise entitled to sell the shares of Registrable Common held
by him or her in a brokerage transaction without registration under the
Securities Act and without limitation as to volume or manner of sale or both.
7. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Commission which may permit the sale of the
shares of Registrable Common held by the Stockholders to the public without
registration, OEI agrees to:
(a) make and keep public information available (as those terms are
understood and defined in Rule 144) at all times from and after 90 days
following the effective date of the registration statement;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of OEI under the
Securities Act and the Exchange Act at any time that it is subject to such
reporting requirements;
(c) so long as a Stockholder owns any shares of Registrable Common,
furnish to the Stockholder forthwith upon request a written statement by
OEI as to its compliance with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act (at any time that it is subject to
such reporting requirements), a copy of the most recent annual or
quarterly report of OEI, and such other reports and documents filed in
accordance with such reporting requirements as a Stockholder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing a Stockholder to sell any such securities without
registration; and
(d) if required by the transfer agent and registrar for the Common
Stock, use reasonable diligence to obtain an opinion from legal counsel
(which may include the General Counsel of OEI) addressed to such transfer
agent and registrar, with respect to any sale of shares of Registerable
Common pursuant to Rule 144 (or, at the option of OEI, pay the reasonable
fees and expenses of legal counsel retained by a Stockholder to provide
such an opinion).
8. MARKET STANDOFF.
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(a) In consideration of the granting to Stockholders of the
registration rights pursuant to this Agreement, each Stockholder agrees
that, for so long as such Stockholder holds shares of Registrable Common
which are not part of a registration as permitted by Sections 2 and 3,
such Stockholder will not sell, transfer or otherwise dispose of,
including without limitation through put or short sale arrangements, such
shares of Registrable Common in the ten days prior to the effectiveness of
any registration (other than relating to an Exempt Offering) of Common
Stock for sale to the public and for up to 90 days following the
effectiveness of such registration.
(b) Except for Exempt Offerings or in connection with the
acquisition by OEI of another company or business, OEI shall not offer to
sell or sell any shares of capital stock of OEI during the 90-day period
immediately following the commencement of an underwritten public offering
of shares of Registrable Common pursuant to a Demand Registration.
9. REGISTRATION EXPENSES. All expenses incurred in connection with any
registration, qualification and compliance under this Agreement (including,
without limitation, all registration, filing, qualification, legal, printing and
accounting fees, and including all reasonable fees of one counsel acting on
behalf of all holders of the securities being registered in such registration)
shall be borne by OEI. All underwriting commissions and discounts applicable to
shares of Registrable Common included in the registrations under this Agreement
shall be borne by the holders of the securities so registered PRO RATA on the
basis of the number of shares so registered. Subject to the foregoing, all
expenses incident to OEI's performance of or compliance with this Agreement,
including, without limitation, all filing fees, fees and expenses of compliance
with securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel in connection with Blue Sky qualifications of the
Registrable Common), printing expenses, messenger and delivery expenses,
internal expenses (including, without limitation, all salaries and expenses of
OEI's officers and employees performing legal or accounting duties), the fees
and expenses applicable to shares of Registrable Common included in connection
with the listing of the securities to be registered on each securities exchange
(including, for this purpose, the Nasdaq National Market) on which similar
securities issued by OEI are then listed at the initiation of OEI, registrar and
transfer agents' fees and fees and disbursements of counsel for OEI and its
independent certified public accountants, Securities Act liability insurance of
OEI and its officers and directors (if OEI elects to obtain such insurance), the
fees and expenses of any special experts retained by OEI in connection with such
registration and fees and expenses of other persons retained by OEI and incurred
in connection with each registration hereunder (but not including, without
limitation, any underwriting fees, discounts or commissions attributable to the
sale of Registrable Common, and transfer taxes, if any), will be borne by OEI.
10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No holder of Registrable
Common may participate in any underwritten registration hereunder unless such
holder (a) agrees to sell such holder's securities on the basis provided in any
underwriting arrangements approved by the persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, custody agreements, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting arrangements.
8
<PAGE>
11. TRANSFER OF REGISTRATION RIGHTS; ADDITIONAL GRANTS OF REGISTRATION
RIGHTS. The registration rights provided to the holders of Registrable Common
under Sections 2 and 3 hereof may not be transferred to any other person or
entity, except to another Stockholder or pursuant to the laws of descent and
distribution; PROVIDED, HOWEVER, that such transferees are bound by and subject
to the terms and conditions contained herein. The Company may, without the prior
consent of the Stockholders, extend the registration rights provided for in this
Agreement to additional persons or entities who become holders of Common Stock
subsequent to the date of this Agreement by entering into one or more addenda to
this Agreement with any such stockholders, and, upon execution of any such
addenda, any stockholder that is a party thereto shall thereafter be a
"Stockholder" for purposes of this Agreement and any shares of Common Stock
referred to therein as such shall be shares of "Registrable Common" for purposes
of this Agreement. Nothing herein shall limit the ability of OEI to grant to any
person or entity any registration or similar rights in the future with respect
to Common Stock or other securities of OEI (whether pursuant to the foregoing
provision or otherwise).
12. INDEMNIFICATION AND CONTRIBUTION.
(a) INDEMNIFICATION BY THE COMPANY. To the extent permitted by law,
OEI agrees to indemnify and hold harmless each Stockholder who sells
shares of Registrable Common in a registered offering pursuant to either
Section 2 or Section 3 (a "SELLING STOCKHOLDER"), from and against any and
all losses, claims, damages, liabilities and expenses (including
reasonable legal expenses) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus relating to the Registrable Common or
in any amendment or supplement thereto or in any related preliminary
prospectus, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or expenses arise out of, or are
based upon, any such untrue statement or omission or allegation thereof
based upon information furnished in writing to OEI by such Selling
Stockholder or on such Selling Stockholder's behalf expressly for use
therein. Notwithstanding the foregoing, OEI's indemnification obligations
with respect to any preliminary prospectus shall not inure to the benefit
of any Selling Stockholder or underwriter with respect to any loss, claim,
damage, liability (or actions in respect thereof) or expense arising out
of or based on any untrue statement or alleged untrue statement or
omission or alleged omission to state a material fact in such preliminary
prospectus, in any case where (i) a copy of the prospectus used to confirm
sales of shares of Registrable Common was not sent or given to the person
asserting such loss, claim, damage or liability at or prior to the written
confirmation of the sale to such person and (ii) such untrue statement or
alleged untrue statement or omission or alleged omission was corrected in
such prospectus.
(b) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by a Selling Stockholder of notice of any claim or the commencement of any
action or proceeding brought or asserted against such Selling Stockholder
in respect of which indemnity may be sought from OEI, such Selling
Stockholder shall notify OEI in writing of the claim or the commencement
of that action or proceeding; PROVIDED, HOWEVER, that the failure to so
notify
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OEI shall not relieve OEI from any liability that it may have to the
Selling Stockholder otherwise than pursuant to the indemnification
provisions of this Agreement. If any such claim or action or proceeding
shall be brought against a Selling Stockholder and such Selling
Stockholder shall have duly notified OEI thereof, OEI shall have the right
to assume the defense thereof, including the employment of counsel. Such
Selling Stockholder shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Selling
Stockholder unless (i) OEI has agreed to pay such fees and expenses or
(ii) the named parties to any such action or proceeding include both such
Selling Stockholder and OEI, and such Selling Stockholder shall have been
advised by counsel that there may be one or more legal defenses available
to such Selling Stockholder which are different from or additional to
those available to OEI, in which case, if such Selling Stockholder
notifies OEI in writing that it elects to employ separate counsel at the
expense of OEI, OEI shall not have the right to assume the defense of such
action or proceeding on behalf of such Selling Stockholder; it being
understood, however, that OEI shall not, in connection with any one such
action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses
of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for all Selling Stockholders. OEI shall not be
liable for any settlement of any such action or proceeding effected
without OEI's written consent.
(c) INDEMNIFICATION BY HOLDERS OF REGISTRABLE COMMON. In connection
with any registration in which a Selling Stockholder is participating,
such Selling Stockholder will furnish to OEI in writing such information
and affidavits as OEI reasonably requests for use in connection with any
related registration statement or prospectus. To the extent permitted by
law, each Selling Stockholder agrees to indemnify and hold harmless OEI,
its directors and officers who sign the registration statement relating to
shares of Registrable Common offered by such Selling Stockholder and each
person, if any, who controls OEI within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from OEI to such Selling Stockholder, but only
with respect to information concerning such Selling Stockholder furnished
in writing by such Selling Stockholder or on such Selling Stockholder's
behalf expressly for use in any registration statement or prospectus
relating to shares of Registrable Common offered by such Selling
Stockholder, or any amendment or supplement thereto, or any related
preliminary prospectus. In case any action or proceeding shall be brought
against OEI or its directors or officers, or any such controlling person,
in respect of which indemnity may be sought against such Selling
Stockholder, such Selling Stockholder shall have the rights and duties
given to OEI, and OEI or its directors or officers or such controlling
persons shall have the rights and duties given to such Selling
Stockholder, by the preceding paragraph. Each Selling Stockholder also
agrees to indemnify and hold harmless any underwriters of the Registrable
Common, their partners, officers and directors and each person who
controls such underwriters (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act) on substantially the
same basis as that of the indemnification of OEI provided in this Section
12(c). Notwithstanding anything to the contrary herein, in no event shall
the amount paid or
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payable by any Selling Stockholder under this Section 12(c) exceed the
amount of proceeds received by such Selling Stockholder from the offering
of the Registrable Common.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 12 is unavailable to any indemnified party in respect of any
losses, claims, damages, liabilities or expenses referred to herein, then
each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities and expenses in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party and the indemnified parties in connection with the
actions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by such indemnified party or indemnified parties and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. OEI and the Selling
Stockholders agree that it would not be just and equitable if contribution
pursuant to this Section 12(d) were determined by PRO RATA allocation or
by any other method of allocation that does not take account of the
equitable considerations referred to in this Section 12(d). No person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. If
indemnification is available under this Section 12, the indemnifying
parties shall indemnify each indemnified party to the full extent provided
in Sections 12(a) and (c) without regard to the relative fault of said
indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 12(d).
13. MISCELLANEOUS
(a) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not
be given, unless OEI has obtained the written consent of holders of at
least 51% of the shares of Registrable Common then outstanding.
(b) NOTICES. All notices and other communications provided for or
permitted hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or sent by telex or telecopy, or
registered or certified mail (return receipt requested), postage prepaid,
or courier to the parties at the following addresses (or at such other
address for any party as shall be specified by like notice), PROVIDED that
notices of a change of address shall be effective only upon receipt
thereof. Notices sent by mail shall be effective when answered back,
notices sent by telecopier shall be effective when receipt is
acknowledged, and notices sent by courier guaranteeing next day delivery
shall be effective
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on the next business day after timely delivery by the courier. Notices
shall be sent to the following addresses:
(i) if to a Stockholder, at the most current address given by
such Stockholder to OEI in a writing making specific reference to
this Agreement;
(ii) if to OEI, at the following address:
OEI International, Inc.
2727 North Loop West, Suite 400
Houston, Texas 77008
Attn: M. L. Burrow
Telecopy: (713) 880-6300
with copies to: Porter & Hedges, L.L.P.
700 Louisiana, 35th Floor
Houston, Texas 77002-2764
Attn: James M. Harbison, Jr.
Telecopy: (713) 226-1331
(c) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the heirs, executors, administrators,
successors and assigns of each of the parties.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(e) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(f) SECTION REFERENCES. Unless the context requires otherwise,
references in this Agreement to "Sections" are to Sections of this
Agreement.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED
WHOLLY WITHIN THAT STATE.
(h) SEVERABILITY. If any one or more of the provisions contained
herein, or the application thereof in any circumstances, is held invalid,
illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect
and of the remaining provisions contained herein shall not be in any way
impaired
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thereby, it being intended that all the rights and privileges of the
Stockholders shall be enforceable to the fullest extent permitted by law.
(i) ENTIRE AGREEMENT; TERMINATION. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. This
Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter. This Agreement, except the
provisions of Section 12 (which shall survive until the expiration of the
applicable statutes of limitations) and this Section 13, shall terminate
and be of no further force or effect on December 31, 2001.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
OEI:
OEI INTERNATIONAL, INC.
By:_____________________________
M. L. Burrow
Chief Executive Officer
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STOCKHOLDERS:
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
14
EXHIBIT 5.1
May 22, 1998
OEI International, Inc..
2727 North Loop West, Suite 400
Houston, Texas 77009
Re: Opinion as to Legality of Common Stock of OEI International, Inc.
Gentlemen:
We have examined the certificate of incorporation and bylaws, both as
amended to date, and the corporate proceedings of OEI International, Inc., a
Delaware corporation ("Company"), relating to the registration under the
Securities Act of 1933, as amended, of 4,945,000 shares of Common Stock, $.001
par value, which are being registered on behalf of the Company and have made
such other examinations as we deem necessary in the premises, and from such
examinations we are of the opinion that:
1. The Company is a validly organized and existing corporation under the
laws of the State of Delaware.
2. The certificates for the Common Stock of the Company are in due and
proper form; and the up to 4,945,000 shares (consisting of 4,300,000 firm shares
and up to 645,000 additional shares contingently issuable upon exercise of the
underwriters' over allotment option) of Common Stock to be sold by the Company
will, when issued pursuant to the Underwriters Agreement, be validly issued,
fully paid and non-assessable outstanding securities of the Company.
We consent to the use of this opinion and the reference to our firm in the
Registration Statement and Prospectus.
Very truly yours,
/s/ Porter & Hedges, L.L.P.
PORTER & HEDGES, L.L.P.
EXHIBIT 21.1
Subsidiaries of OEI International, Inc.(1)
SUBSIDIARY STATE OF ORGANIZATION
- ---------- ---------------------
Petrocon Engineering, Inc. (2) Texas
Petrocon Engineering of Louisiana, Louisiana
Inc. (3)
Petrocon Systems, Inc. (3) Texas
Petrocon Technologies, Inc. (3) Texas
Petrocon Construction Resources, Inc. (3) Texas
Triangle Engineers and Constructors, Texas
Inc. (3)
RPM Engineering, Inc. (3) Louisiana
Alliance Engineering, Inc. (3) Texas
Petrocon FSC, Ltd. (3) U.S. Virgin Islands
Paulus, Sokolowski and Sartor, Inc. (2) New Jersey
Gulsby Engineering, Inc. (2) Texas
Gulsby International Engineers, U.S. Virgin Islands
Limited (3)
W-Industries, Inc. (2) Texas
Chemical & Industrial Engineering, Inc. (2) Kentucky
- ------------------------------------
(1) List of subsidiaries as of the closing of the Offering and the Pending
Acquisitions.
(2) Represents a first-tier subsidiary.
(3) Represents a second-tier subsidiary.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
May 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF PETROCON ENGINEERING, INC. AND SUBSIDIARIES AS
OF MARCH 31, 1998 AND THE YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 657
<SECURITIES> 0
<RECEIVABLES> 16,279
<ALLOWANCES> (76)
<INVENTORY> 0
<CURRENT-ASSETS> 21,913
<PP&E> 11,872
<DEPRECIATION> 5,210
<TOTAL-ASSETS> 42,808
<CURRENT-LIABILITIES> 25,462
<BONDS> 0
0
0
<COMMON> 1,531
<OTHER-SE> 13,172
<TOTAL-LIABILITY-AND-EQUITY> 42,808
<SALES> 25,915
<TOTAL-REVENUES> 25,915
<CGS> 20,521
<TOTAL-COSTS> 24,314
<OTHER-EXPENSES> 65
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386
<INCOME-PRETAX> 1,151
<INCOME-TAX> 414
<INCOME-CONTINUING> 737
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
