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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Offshore Tool & Energy Corporation
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 63-1210539
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
300 St. Francis Street, Mobile, Alabama 36602
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(Address of Principal Executive Offices) (Zip Code)
(334) 432-4472
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(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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___________________ ________________________________________
___________________ ________________________________________
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value
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(Title of class)
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ITEM 1. BUSINESS
Offshore Tool & Energy Corporation ("Company") was incorporated in
Delaware on August 20, 1998. On November 17, 1998, we acquired all of the
outstanding membership interests of Aero International, L.L.C., a Louisiana
limited liability company ("Aero"), and all of the assets and liabilities of
International Tool & Supply, plc, a publicly-held company incorporated under the
laws of England ("ITS"), including its principal operating subsidiaries, ITS
Investments, Inc. and ITS Holding Limited (the "ITS Subsidiaries").
Aero was organized in 1997 to acquire the principal operating assets
of the American Aero Crane division of Weatherford Enterra U.S., Limited
Partnership (the "American Aero Cranes business unit"), which manufactures and
services cranes used in the marine and offshore oil and gas industries.
Effective May 31, 1998, Aero acquired the assets and related liabilities of
Titan Industries, Inc., also a manufacturer and servicer of offshore and marine
cranes (the "Titan business unit"). Effective May 31, 1998, IPC Industries, Inc.
contributed the assets and related liabilities of the Mobile Pulley & Machine
Works division of IPC Industries, Inc. (the "Mobile Pulley business unit"),
and the assets and related liabilities of the Mobile Pulley Marine Services
division of Mobile Pulley Marine Services, Inc. (the "Mobile Marine business
unit"), to Aero for cash and preferred member interests of Aero. The Mobile
Pulley and Mobile Marine business units manufacture, fabricate and repair
component and replacement parts used in the marine and offshore oil and gas
industries. The operations of the American Aero Cranes and the Titan business
units of Aero constitute our Crane Division; the operations of the Mobile Pulley
and Mobile Marine business units of Aero constitute our Marine Equipment
Division; the operations of ITS Investments, Inc. constitute our Engineered
Systems Division; and the operations of ITS Holdings Limited constitute our
Drilling Services Division.
Our executive offices are located at 300 St. Francis Street, Mobile,
Alabama 36602, telephone (334) 432-4472.
Crane Division
Our Crane Division designs, manufactures, rebuilds, services and
provides replacement parts for cranes for marine and offshore oil and gas
drilling and production applications. These applications include offshore
platforms, offshore mobile drilling rigs, floating dry-docks, dockside and
shipboard services. The Crane Division also offers crane repair, overhaul and
refurbishment services. The principal manufacturing operations of the Crane
Division are located at our facilities in Theodore, Alabama. We also have crane
manufacturing yards in Covington, Louisiana and Houston, Texas.
The revenues of the Crane Division totaled $36,368,000 or approximately 69%
of our total revenues during the year ended December 31, 1998. Before our
acquisition of the Mobile Pulley and the Mobile Marine business units in June,
1998, the only business of Aero was the crane manufacturing and service
business.
Manufacturing and Design
The Crane Division manufactures pedestal-mounted hydraulic cranes.
Currently, the Crane Division offers four series of cranes, the Baymaster,
Gulfmaster and Oceanmaster, which are sold under the American Aero Cranes brand,
and the Titan, which is sold under the Titan brand. Cranes are built by the
Crane Division on customer order pursuant to customer specification within the
design allowances of the series selected by the customer. The series of cranes
offered by the Company are described further below.
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<TABLE>
<CAPTION>
Crane Series Boom Lengths Lift Capacity Applications
<S> <C> <C> <C>
Baymaster 20-60 feet up to 40 tons Used when space consideration and ease of
operation are critical
Suited to small or unmanned production platforms
Gulfmaster 50-120 feet 15-40 tons Combines control features associated with smaller
cranes and safety systems and sophistication
associated with larger cranes
Suited to 4-pile production platforms
Oceanmaster 200-600 feet 20-200 tons Designed for deep water extremes with widely
spaced boom fittings providing greater resistance
to side-loads in harsh environments
Used on 8-pile platforms, drilling rigs, floating
production vessels and floating dry docks
Titan 20-180 feet 5-120 tons Designed and built for small or unmanned
production platforms and for platforms in deep
water extremes
</TABLE>
In filling customer orders, the Crane Division purchases certain
components (for example, engines, winches, and bearings), fabricates the
structural crane components and assembles, blasts and paints the cranes. Our
cranes are manufactured in accordance with American Petroleum Institute
specifications. The components of each crane are built of high-strength, low
alloy steel for both durability and ease of repair. The primary raw material
used in the manufacturing operations is plate steel, which is available to us
from several competitive sources. The component parts that we purchase are
usually stock items that are readily available from industry parts sources.
The five person engineering and technical staff of the Crane Division
designs cranes to the specifications of customers, and develop new crane designs
for the Company. The engineering staff utilizes computer aided design
technology.
Servicing and Parts
The Crane Division provides crane service and inspection from eight
service centers located in Nigeria, Malaysia, Singapore, Houston, Texas,
Theodore, Alabama and Houma, Intracoastal City and Covington, Louisiana. Each
service center is staffed with experienced technicians and mechanics and stocked
with spare parts, tools and equipment. The Crane Division also offers
preventive maintenance services to crane owners and operators. The Crane
Division has master service agreements with many of its customers. The
agreements may be terminated by either party by giving 30 days written notice.
Rental Operations
The Crane Division has seven cranes available for rental in the Gulf
of Mexico and three available for rental in Malaysia. All of the rental cranes
are designed for use on a variety of platforms with substructures and beams that
allow rapid assembly and dismantling.
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Marketing and Customers
The primary markets for our cranes are the Gulf Coast region of the
United States and offshore drilling and production centers worldwide, with sales
approximately split between domestic and international markets. Typically,
offshore crane customers submit specifications and bid forms to competing crane
manufacturing companies. We are on the bid lists of most of the major marine
and offshore crane purchasers. We employ four sales representatives for
domestic and international Crane Division sales, and we also retain agents to
represent the Crane Division in international markets.
The customers of the Crane Division are primarily international
offshore platform construction companies, and independent and major oil and gas
exploration and production companies. The operations of the Crane Division are
not materially dependent upon the business of any one customer. The operations
of the Crane Division would be adversely affected, however, if we were removed
from the bid lists of our historical customers.
Competition
Both the offshore crane manufacturing business and crane servicing
business are highly competitive, with numerous competitors. In recent years the
crane manufacturing market has been characterized by over-capacity, which has
resulted in substantial pressure on pricing and operating margins. Crane
manufacturers compete on the basis of price, delivery schedules, reliability and
service. Crane service and repair companies compete primarily on the basis of
availability, accessibility of parts and quality of workmanship.
Backlog
At March 31, 1999, our backlog of firm crane orders was $1,638,315.
At March 31, 1998, before the acquisition of Titan, our backlog was $8,896,789.
We expect that the backlog will be filled during the current fiscal year.
Facilities
We lease the primary manufacturing and service facility of the Crane
Division located in Theodore, Alabama on approximately 11 acres of land. This
facility has approximately 40,700 square feet of manufacturing space under roof.
We also own a crane manufacturing and service facility in Covington, Louisiana
located on approximately 26 acres of land with approximately 39,500 square feet
of work area under roof. We also own a facility in Houston, Texas, which is
used by the Crane Division for servicing and limited manufacturing. This
facility consists of one manufacturing building with approximately 12,000 square
feet of manufacturing area under roof and approximately 5,000 square feet of
open air servicing facilities on approximately 8 acres of land. Also, we own a
facility in Houma, Louisiana with approximately 9,500 square feet of work area
under roof and lease a facility of approximately 4,000 square feet in
Intracoastal City, Louisiana for crane repair services. We also lease
facilities for servicing and repair in Warri, Nigeria, and in Malaysia and
Singapore, and we lease a sales office in New Orleans, Louisiana.
Trademarks
We own several trademarks registered with the United States Patent and
Trademark Office and which are used in conjunction with the business of the
Crane Division, including trademarks for "Baymaster", "Gulfmaster", "American
Aero" and "Oceanmaster", and we have pending a federal
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trademark application for the trademark "Titan". The term of a United States
trademark registration is 20 years, which is renewable perpetually for
additional 20 year terms for so long as the owner continues to use the
trademark.
Marine Equipment Division
The Mobile Pulley business unit of the Marine Equipment Division is
the oldest dredging equipment manufacturer in the United States, with operations
dating from 1892. The Marine Equipment Division designs, manufactures,
fabricates and assembles original equipment, and component and replacement parts
used in the dredging, marine, offshore oil and gas and mining industries, such
as gears, winches, ball joints, pumps, valves and fittings. The principal
operations of the Marine Equipment Division are conducted at our facility
located in Mobile, Alabama. Smaller fabrication and machining facilities are
located on Pinto Island in Mobile, Alabama and at two vessel dry docks located
along the Mobile River in Mobile, Alabama.
The revenues of the Marine Equipment Division totaled $14,997,000 or
approximately 28% of our total revenues during the year ended December 31, 1998.
The Mobile Pulley and Mobile Marine business units constituting the Marine
Equipment Division were contributed by their respective parents to Aero
effective May 31, 1998, and seven months of the Division's operations are
reflected in our 1998 fiscal year financial statements.
Manufacturing and Design
At our Mobile, Alabama facility, the Marine Equipment Division designs
and manufactures customized pumps, cutter-heads and ball joint products for the
dredging and mining industries. We design most of the pumps manufactured by the
Marine Equipment Division to customer requirements. At our Pinto Island
facility, the Marine Equipment Division manufactures components for dredging
companies and the shipyard industry, including pontoons, valve thrusters for
semi-submersible drilling rigs, lifeboat platforms, gas compressors and cable
drums. The Marine Equipment Division also performs repairs to marine vessels at
its dry dock facilities.
The Marine Equipment Division has a five person engineering and
technical staff which meets with customers to develop product specifications.
The engineers create unique designs utilizing, wherever possible,
characteristics taken from earlier designs of similar products supplied to the
customer. The engineering department maintains an extensive library of original
designs and files. The designs are translated into wooden patterns by
experienced craftsmen. We maintain over 7,000 patterns in storage that can be
used to manufacture replacement parts for our customers. Our ownership of these
unique patterns give us a competitive advantage in supplying replacement parts
to our customers.
Marketing and Customers
The primary market for the manufactured products of the Marine
Equipment Division is the United States dredging industry. The Marine Equipment
Division also sells dredging equipment overseas, primarily in Holland and
Belgium, and to the Suez Canal Authority. Historically, domestic sales have
accounted for approximately 80% of the revenues of the Mobile Pulley business
unit of the Marine Equipment Division. The Marine Equipment Division markets
its fabrication capacities to the dredging industry and the Gulf Coast region
shipyard industry. The Marine Equipment Division has a sales staff of six
persons, three of which make sales calls on domestic customers. We also retain
agents to represent the Marine Equipment Division in international markets. The
Marine Equipment Division has historically been materially dependent on the
business of several large dredging companies.
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Competition
The business of manufacturing components for the dredging industry is
competitive. There are four major domestic manufacturers of dredging equipment,
including the Company. Competition for dredge equipment orders is based on
price, manufacturing schedules and reliability. If an order is for custom
replacement equipment, the availability of the pattern used in the original
manufacture of the equipment is an additional competitive factor. The
competition for fabrication and repair work is extremely fragmented, and very
competitive, and is largely based on price, availability and workmanship.
The principal manufacturing customers of the Marine Equipment Division
are domestic and overseas dredging companies. The fabrication and repair
customers of the Marine Equipment Division include dredging companies and
shipyards operating domestically.
Backlog
At March 31, 1999, the Marine Equipment Division had a backlog of firm
orders of $7,159,407. The Marine Equipment Division was not a division of the
Company at the corresponding date in 1997. The Company expects that the backlog
will be filled during the current year.
Facilities
The Marine Equipment Division's principal facility is located on
approximately 25 acres in Mobile, Alabama. These facilities include a foundry
and a machine shop, each with approximately 100,000 square feet under roof. We
also lease a fabrication and machining facility with approximately 25,000 square
feet of work area under roof with water access on Pinto Island in Mobile,
Alabama. We also own two dry docks, with capabilities of servicing vessels with
a maximum length of 120 feet and 100 feet, respectively, located at a leased
facility with approximately 300 feet of waterfront dock space on the Mobile
River in Mobile, Alabama.
Patents
We hold the following patents material to the business of the Marine
Equipment Division.
U.S. Patent
Number Description Expiration
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4,443,030 Ball Joint 2001
4,891,893 Cutterhead Tooth Assembly 2007
5,379,535 Replaceable Excavating Tooth
Assembly 2012
5,526,593 Replaceable Adapter 2013
Engineered Systems Division
The Engineered Systems Division manufactures enhanced oil recovery ("EOR")
and oil and gas production equipment, and industrial water treatment equipment,
and it provides custom fabrication services to the refining, petrochemical and
oilfield industries. The operations of the Engineered Systems Division are
conducted from our facilities located in Katy, Texas.
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We acquired ITS Investments, Inc., the operations of which constitute the
Engineered Systems Division, on November 17, 1998, and approximately six weeks
of the Division's operations are reflected in our 1998 fiscal year financial
statements. Total revenues of the Engineered Systems Division reflected in our
1998 fiscal year financial statements are $937,000.
Manufacturing and Design
The Engineered Systems Division designs, manufactures and installs EOR
injection equipment and ancillary products which are used to inject steam, gas,
water or dilutants into subsurface oil and gas formations for the retrieval of
low gravity crude oil. The Engineered Systems Division also manufactures a
range of oil and gas production and pipeline gathering and transmission
equipment, including multiphase production separators, wellhead test separators,
free water knockout equipment, gas dehydration packages, indirect fired heaters,
pressure regulating components and metering skids. In addition, the Engineered
Systems Division manufactures, installs, retrofits and services industrial water
treatment systems. Products include deaereators and demineralizers, systems for
ion exchange, waste neutralization, waste water treatment, boiler feed water and
purified water for industrial processes. The Engineered Systems Division also
undertakes custom fabrication services.
The primary raw material used in the manufacturing and fabrication
operations of the Engineered Systems Division is plate steel, which is readily
available to us from a number of sources. Purchased components such as pumps,
burners, controls, switches and instruments are ordered from third party
manufacturers and vendors with whom we have established relationships.
Alternative sources of supply are available to us for all purchased components.
The Engineered Systems Division has an engineering and design staff of
twelve persons who design EOR equipment to meet customer requirements and
develop advanced EOR technology.
Marketing and Customers
The principal market areas for the EOR equipment manufactured by the
Engineered System Division are California, Venezuela, Russia, Canada, Brazil and
China, all of which have significant deposits of low gravity crude oil, which is
difficult to recover by traditional drilling methods. The water treatment
equipment of the Engineered Systems Division is marketed to oil and gas drilling
and production companies worldwide, and to domestic engineering firms. The
custom fabrication services of the Engineered Systems Division are marketed
primarily to the refining, petrochemical and offshore and onshore oilfield
industries.
Typically, EOR and water treatment equipment customers submit
specifications and bid forms to competing manufacturers. The Company is on the
bid list of most of the existing customers for EOR equipment. The water
technology equipment of the Engineered Systems Division is not widely recognized
in its respective industry. The Engineered Systems Division has a sales staff
of four persons for domestic sales of the Engineered Systems Division, and it
retains agents to represent the Division in international markets.
An EOR equipment order typically includes multiple large EOR vessels for
steam injection of multiple wells in an area characterized by low gravity oil,
and each such order is material to the operations of the Engineered Systems
Division. Although the operations of the Engineered Systems Division are not
dependent upon the business of any one customer, the Division would be adversely
affected if it were removed from the bid lists of customers for EOR equipment.
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Competition
There are several competitors in the manufacture of EOR equipment. Due to
conditions in the oil and gas markets (see "Dependence on Oil and Gas Industry
and Governmental Appropriations" below in this Item 1), EOR equipment orders are
substantially depressed and competition for scarce orders is significant.
Competition in the EOR market is based primarily on price and reliability.
There are a number of competitors in the water treatment equipment industry
which have much greater financial resources and industry recognition than the
Engineered Systems Division, and we have experienced difficulty in penetrating
these markets.
Backlog
At March 31, 1999, the Engineered Services Division had a backlog of firm
orders of $772,484. The Engineered Systems Division was not a division of the
Company at the corresponding date in 1998. We expect that the current backlog
will be filled during the 1999 fiscal year.
Facilities
We own the manufacturing facilities of the Engineered Systems Division
located on approximately 8.6 acres near Katy, Texas. The facilities include
approximately 70,000 square feet of manufacturing area under roof.
Drilling Services Division
The Drilling Services Division designs, manufactures or assembles, sells
and leases certain proprietary environmental services product lines to the
offshore oil and gas and marine industries. The operations of the Drilling
Services Division are conducted from facilities located in Aberdeen, Scotland,
Houston, Texas, Singapore and Port Harcourt, Nigeria.
We acquired ITS Holdings Limited, our subsidiary whose operations
constitute the Drilling Services Division, on November 17, 1998, and
approximately six weeks of the Division's operations are reflected in our 1998
fiscal year financial statements. Total revenues of the Drilling Services
Division reflected in our 1998 fiscal year financial statements were
$590,000.
Products
The Drilling Services Division has five product lines. The Aberlan line
includes the LRU Liquid Recovery Unit, a portable vacuum system for the recovery
of spilled fluids on offshore rigs and land locations; Sludge Gulper and Rig Vac
for the recovery of fluids and sludges with high solids contents such as those
found in mud pits and rig drainage systems; VPW and GRACO, which are high
pressure wash systems for cleaning in offshore and shipyard locations such as
drill floors and pit rooms; and Expo Clean Zone One, a hot water high pressure
water system.
The Scavenger product line consists of mobile waste compaction systems,
designed to use minimal deck space on drilling and production platforms. The
Scavenger is marketed in three separate models, each with optional attachments
and each designed for different applications. The largest Scavenger has a 30
cubic foot compaction bin; the mini Scavenger has a 10 cubic foot bin; and the
Recycler has a 4 X 10 foot bin.
The SECO mud mixing and shearing system is a low pressure, high volume
shearing system which reduces the time required to prepare drilling fluids.
This system is effective in remote drilling
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locations when the costs of transporting chemicals and drilling fluids is high.
SECO systems are used both offshore and onshore to enhance the mixing and
shearing capabilities of existing mud systems.
The Drilling Services Division offers an integrated waste compaction to
incineration system package which disposes of waste generated from both offshore
and land based drilling operations. Bags from the Division's Scavenger trash
compactors are collected from customers and taken to incinerators manufactured
by the Division. In addition, in 1998 the Drilling Services Division developed
the DSD System, which separates oil from mud drill cuttings and permits the
incineration of the cuttings at a rate of up to 3 tons per hour. The Drilling
Services Division has one incineration system operating in Nigeria and has
another in Abu Dhabi that will be operational in May 1999.
The STS product line is a filtering screen for use on the Shale Shakers of
drilling rigs. The screens act as a sieve for removing large cuttings from the
well. The screens are mounted over a support cradle which is fitted into a
Shale Shaker basket. The screen, when torn beyond repair through solids
abrasion, is discarded and replaced by a new one.
Product Development and Intellectual Property
The Drilling Services Division employs an engineer who maintains a
development program for new and existing products. We hold or have applied for
the following patents material to the Drilling Services Division.
Patent
Number Description Expiration or Filing Date
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0162074 (U.K.) Liquid Recovery Unit 2004
4,691407 (U.S.) Liquid Recovery Unit 2004
GB98/103134 (U.K.) Incinerator Apparatus Pending - October 20, 1997
GB98/103355 (U.K.) Filtering Screen Pending - November 10, 1997
In addition, we also hold limited rights of use with respect to the patent for
the DSD System, which is owned by a third party. We also hold under English law
a number of trademarks used in connection with the business of the Drilling
Services Divisions, including the marks "Aberlan", "Hippo", "LRU", "Sludge
Gulper", "Rig Vac", "VPW", "SECO", "Polygater" and "Scavenger".
Marketing and Customers
The primary markets for the products of the Drilling Services Division are
the oil and gas production areas of the North Sea, the Far East, the Americas,
including the United States Gulf Coast, Venezuela and West Africa. Sales are
conducted from the offices of the Drilling Services Division located in
Aberdeen, Scotland (three sales personnel), Singapore (one sales person),
Houston, Texas (one sales person) and Port Harcourt, Nigeria (one sales person).
The customers of the Drilling Services Division are major and independent
oil and gas exploration and production companies. The operations of the
Drilling Services Division are not dependent upon the business of one customer.
Competition
There is a limited market for the specialized products of the Drilling
Services Division and the number of direct competitors is relatively small,
ranging from one to several depending upon the product
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line and the geographic area. The products of the Drilling Services Division
compete with all the numerous ancillary products offered to the oil and gas
drilling and production industries for inclusion in the exploration and
production operating budgets of its customers. Competition for products such as
those marketed by the Drilling Services Division is based primarily on price and
service.
Facilities
The Drilling Services Division operates from four facilities. We lease the
Aberdeen, Scotland facility, which is the headquarters of the Drilling Services
Division and is responsible for supplying the Division's products in the
European market. The Aberdeen facility consists of approximately 3,600 square
feet of warehouse space and approximately 2,410 square feet of office space.
The Singapore facility supports all the Drilling Services Division's products in
the Far East region. We lease this facility, which consists of warehouse,
workshop and office space. Our leased facilities in Port Harcourt, Nigeria, are
the base for all sales, rentals and services of the Drilling Services Division
in Nigeria. The incineration and servicing facilities are located at Onne,
Nigeria. The facilities of the Engineered Systems Division in Houston, Texas
and Houma, Louisiana provide support for the Division's product lines in the
Americas, including the United States and Venezuela.
Environmental Compliance
Compliance by the Company with federal, state and local environmental
protection laws and regulations do not have a material effect on the capital
expenditures, earnings and competitive position of the Company of any of its
divisions. The Company has no plans for material capital expenditures for
environmental control facilities.
Dependence on Offshore Oil and Gas Industry and Governmental Appropriations
The operations of the Crane Division and the Drilling Services Division are
substantially affected by the level of offshore drilling and production
activities of the oil and gas industry, which is substantially affected by
prevailing market prices of oil and gas. The decline in the market price of oil
during the last year has significantly reduced the level of offshore oil and gas
exploration and has adversely impacted the business of the Crane Division and
the Drilling Services Division.
The operations of the Engineered Systems Division are also substantially
affected by the price of oil, since the cost of the recovery of oil by EOR
equipment is greater than the cost of recovery by traditional drilling methods.
The decline in the market price of oil during the last year has adversely
impacted the industry for the recovery of low gravity oil, and the business of
the Engineered Systems Division.
Most dredging in United States waters is funded by the United States Army
Corps of Engineers. The extent of dredging activity is therefore affected by
Congressional appropriations to the United States Army Corps of Engineers. A
reduction of dredging activities due to a reduction in appropriations or for
other reasons would have an adverse impact on the operations of the Marine
Equipment Division.
Employees
At March 31, 1999, the Company had 487 employees.
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Financial Information About Segments
See the information presented in note 14 to the Consolidated Financial
Statements of the Company included in Item 13.
Financial Information About Geographical Areas
See the information presented in note 14 to the Consolidated Financial
Statements of the Company included in Item 13.
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL INFORMATION
The following table presents selected historical consolidated financial
data for Offshore Tool & Energy Corporation and the Company's predecessor,
American Aero Cranes, a division of Weatherford Enterra U.S., Limited
Partnership (the "Predecessor"). The financial information has been derived
from the Company's and Predecessor's audited financial statements as of and for
the years ending December 31, 1998, 1997, 1996 and 1995. The financial
information as of and for the year ending 1994 has been derived from the
unaudited financial data of the Predecessor. As this table only contains
selected financial data, it should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
Company Predecessor
Year September 19, January 1,
Ended 1998 to 1998 to Year Ended December 31
December 31, December September ---------------------------
1998(1) 31, 1997(2) 18, 1997(3) 1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
Historical Statement of
Operations Data (in thousands, except per share data)
Revenues $52,892 $11,020 $24,395 $23,696 $17,891 $16,444
Gross profit 11,047 1,681 2,096 2,702 1,274 1,059
Operating income (loss) 3,370 858 814 625 (613) (725)
Net income (loss) 1,297 670 527 406 (399) (725)
Pro forma net income per
common share (4) 0.02 -- -- -- -- --
Other Financial Data
EBITDA(6) 4,218 868 1,107 964 (207) (477)
Balance Sheet Data
Total assets 72,428 17,925 15,517 13,022 6,742 6,197
Long term debt 44,168 8,881 -- -- -- --
</TABLE>
_________________________________
(1) Includes the operations of the Marine Equipment Division beginning May 31,
1998, and the operations of the Engineered Systems Division and the Drilling
Services Division beginning November 17, 1998. See Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
(2) Period from the date of the acquisition by Aero International, L.L.C. of the
American Aero Cranes business unit from Weatherford Enterra U.S., Limited
Partnership, to year end. Includes the
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operations of the Titan business unit beginning on November 5, 1997, the
date of its acquisition by Aero.
(3) Periods during which the American Aero Cranes business unit was operated as
a division of Weatherford Enterra U.S., Limited Partnership
(4) Pro forma net income per share is calculated by dividing net income by the
pro forma weighted average shares outstanding. Pro forma net income has been
computed assuming the Company was a taxable entity for the entire year ended
December 31, 1998. Pro forma weighted average shares outstanding has been
calculated as if the 29,500,000 shares of Common Stock issued to the Aero
Holders were outstanding for the entire year and as if the 20,500,000 shares
of Common Stock issued to the stockholders of ITS were outstanding from
November 17, 1998, the date of the Company's acquisition of the ITS
Subsidiaries. Basic and diluted net income per share were not materially
different for the years presented.
(5) Earnings before interest expense, income taxes, depreciation and
amortization. The Company calculates EBITDA as operating income plus
depreciation and amortization. EBITDA should not be considered as
an alternative to net income or any other measure of operating performance
calculated in accordance with generally accepted accounting principles.
EBITDA is widely used by financial analysts as measures of financial
performance. The Company's measurement of EBITDA may not be comparable to
similarly titled measures reported by other companies.
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The following unaudited pro forma statement of operations present the
combined operations of the Company, the Marine Equipment Division, and the ITS
Subsidiaries as if the acquisition of the Marine Equipment Division and the ITS
Subsidiaries had occurred as of January 1, 1998. The unaudited pro forma
statement of operations has been derived from the application of pro forma
adjustments to the historical financial statements. The pro forma financial
information does not purport to represent the actual results of operations of
the Company had the acquisition actually occurred as of January 1, 1998 or
project the future results of operations of the Company.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------- Year Ended
Marine December 31,
The Equipment ITS 1998
Company Division Subsidiaries Adjustments Total
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(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Pro Forma Statement of
Operations
Net sales
Manufacturing $28,642 $7,951 $ 8,494 $45,087
Service and other 24,250 1,470 2,854 28,574
--------------------------------------------------------------------------------------
Total net sales 52,892 9,421 11,348 73,661
--------------------------------------------------------------------------------------
Cost of sales
Manufacturing 24,531 7,292 6,572 $ 96(1) 38,491
Service and other 17,314 944 389 18,647
--------------------------------------------------------------------------------------
Total cost of sales 41,845 8,236 6,961 96 57,138
--------------------------------------------------------------------------------------
Gross profit 11,047 1,185 4,387 (96) 16,523
Selling, general, and
administrative expenses 7,677 1,185 5,304 227(2) 14,393
--------------------------------------------------------------------------------------
Income from operations 3,370 0 (917) (323) 2,130
Other income, net 38 11 17 0 66
Interest expense 1,944 259 187 1,650(3) 4,040
--------------------------------------------------------------------------------------
Income (loss) before taxes 1,464 (248) (1,087) (1,973) (1,844)
Income tax expense
(benefit) 167 0 102 (269)(4) 0
--------------------------------------------------------------------------------------
Net income (loss) $ 1,297 $ (248) $(1,189) $(1,704) $(1,844)
======================================================================================
Pro forma shares 50,000,000
Pro forma basic and
diluted loss per share $ (0.04)
============
</TABLE>
___________________________
(1) Represents additional depreciation resulting from the recording of property
and equipment of the Marine Equipment Division and ITS Subsidiaries at fair
values.
(2) The Marine Equipment Division and the ITS Subsidiaries acquisitions have
been accounted for using the purchase method of accounting. The preliminary
purchase price allocations for these acquisitions are based on available
information and certain assumptions that management believes are reasonable.
Total goodwill recognized for these transactions is approximately $14,122.
Based on a 40 year estimated life for goodwill, amortization would have been
approximately $353. The adjustment represents pro forma goodwill
amortization less amounts recorded in the historical financial statements of
$126.
12
<PAGE>
(3) Reflects additional interest expense in connection with additional debt
incurred from the acquisitions of the Marine Equipment Division and the ITS
Subsidiaries. Based on assumed principal balances outstanding for the year
ended of approximately $47,816 and a weighted average interest rate of
approximately 8.4%, pro forma interest expense would be approximately
$4,040. The adjustment represents pro forma interest expense less amounts
recorded in the historical financial statements of approximately $2,390.
(4) Adjusts effective tax to zero as the Company would have incurred a loss for
the pro forma period. No benefit has been recognized relating to possible
loss carryforwards associated with pro forma statement of operations as it
is inconclusive as to whether future periods would be benefited.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Information" above in this Item 2 and the financial statements and the
notes thereto included elsewhere in this registration statement.
Overview
On November 17, 1998, the Company, which had no prior operating history,
acquired (i) Aero International, L.L.C. and (ii) substantially all the assets
and liabilities of International Tool & Supply plc, including ITS Investments,
Inc. and ITS Holdings Limited (the "ITS Subsidiaries"), the principal operating
subsidiaries of International Tool & Supply plc, in exchange for Common Stock
and other consideration. As a result of the acquisition, the Company acquired
four business segments, (a) the Crane Division, comprised of the American Aero
Cranes and the Titan business units of Aero, (b) the Marine Equipment Division,
comprised of the Mobile Pulley and the Mobile Marine business units of Aero, (c)
the Engineered Systems Division, comprised of the ITS Investments, Inc. business
unit and (d) the Drilling Services Division, comprised of the ITS Holdings
Limited business unit. Upon completion of the acquisition, the former owners of
Aero received a controlling interest in the Company, and Aero's management team
assumed control of the Company. As a result, the acquisition was accounted for
as an acquisition of the ITS Subsidiaries by Aero under the purchase method of
accounting. Accordingly, the Company's financial statements and other financial
information, including the information in this section, reflect the historical
operations of Aero for periods and dates prior to the acquisition.
Effective May 31, 1998, IPC Industries, Inc. contributed the assets and
related liabilities of the Mobile Pulley and Machine Works division of IPC
Industries, Inc. and substantially all the assets and related liabilities of the
Mobile Pulley Marine Services division of Mobile Pulley Marine Services, Inc. to
Aero for cash and preferred member interests of Aero. These acquisitions were
accounted for under the purchase method of accounting and the results of
operations of the Mobile Pulley and the Mobile Marine business unit are included
in Aero's financial statements as of the date of the acquisition.
Also effective May 31, 1998, Aero acquired the assets and liabilities of
Titan Industries, Inc. Because Aero and Titan Industries, Inc. were under common
control on the date of the acquisition, Aero's financial statements have been
restated to include the operations of the Titan business unit since November 6,
1997, the date both Aero and Titan Industries, Inc. came under common control.
On September 18, 1997, Aero, which had no prior operating history, acquired
American Aero Cranes, a division of Weatherford Enterra U.S., Limited
Partnership.
Thus, the financial statements of the Company include (i) the results of
operations of the American Aero Cranes business unit for the year ended December
31, 1996, (ii) the results of operations of the American Aero Cranes business
unit for the period from January 1, 1997 to September 18, 1997,
13
<PAGE>
(iii) the results of operations of Aero for the period from September 18, 1997
to December 31, 1997, which include the results of operations of the Titan
business unit commencing on November 6, 1997, and (iv) the results of operations
of Aero for the year ended December 31, 1998, which include the operations of
the Mobile Pulley and Mobile Marine business units commencing on May 31, 1998,
and the results of operations of the ITS Subsidiaries commencing on November 17,
1998. For analytical purposes, the results of operations of the American Aero
Cranes business unit for the period from January 1, 1997 to September 18, 1997
and the results of operations of Aero for the period from September 18, 1997 to
December 31, 1997 have been combined in the comparison below of the Company's
results of operations for the year ended December 31, 1996 to the year ended
December 31, 1997.
Results of Operations
Comparison of Results of Operations for the Years Ended December 31, 1998 and
1997
Revenues. Total revenues of the Company for 1998 were $52.9 million, an
increase of $17.5 million, or 49.4% compared to 1997. The increase was
attributable to the acquisition of the Marine Equipment Division and the ITS
Subsidiaries. Revenues from the respective dates of acquisition included in the
Company's financial statements for the Marine Equipment Division business units
and the ITS Subsidiaries were $15 million and $1.5 million, respectively.
Crane manufacturing revenues for 1998 were $12.7 million, a decrease of
$1.9 million, or 13.0% compared to 1997. The decrease in manufacturing revenue
over the period was a result of the general downturn in the oil and gas industry
with the price of oil dropping to a ten-year low in the second half of 1998. In
addition, the Company incurred significant downtime in connection with the
relocation of its principal crane manufacturing facility from Houston, Texas to
Theodore, Alabama as manufacturing capabilities were suspended for approximately
four weeks. The Company's service revenues for 1998 were $23.7 million, an
increase of $3.0 million, or 14.5% compared to 1997. The resulting increase was
primarily due to the increased focus on marketing and customer service during
1998.
Cost of Revenues. Total cost of revenues of the Company for 1998 was $41.8
million, an increase of $10.2 million, or 32.3% compared to 1997. The increase
was attributable to the acquisition of the Marine Equipment Division and the ITS
Subsidiaries. Cost of revenues from the respective dates of acquisition included
in the Company's financial statements for the Marine Equipment Division and the
ITS Subsidiaries were $11.6 million and $0.9 million, respectively.
Cost of revenues for new crane manufacturing for 1998 was $12.3 million, a
decrease of $4.1 million, or 25.0% compared to 1997. This reduction is primarily
the result of the relocation of the American Aero Crane manufacturing facility
to Theodore, Alabama from Houston, Texas, and efforts by the Company to reduce
workforce at both the American Aero Cranes and Titan business units. Cost of
revenues for services for 1998 was $17.0 million, an increase of $1.4 million,
or 9.0% compared to 1997. The increase primarily resulted from the corresponding
increase in revenue and related direct costs resulting from the increased
activity. As a percentage of revenue, total cost of revenue was 80.5% for 1998,
compared to 89.3% for 1997.
Gross Profit. Gross profit of the Company for 1998 was $11.0 million, an
increase of $7.3 million, or 197.3% compared to 1997. The resulting increase
was attributable to the acquisitions of the Marine Equipment Division and the
ITS Subsidiaries. Gross profit from the respective dates of acquisition included
in the Company's financial statements for the Marine Equipment Division and the
ITS Subsidiaries was $3.4 million and $0.6 million, respectively.
14
<PAGE>
Gross profit for new crane manufacturing for 1998 was $0.4 million, an
increase in gross profit of $2.1 million, or 123.5% compared to 1997. The
increase was attributable to efficiencies achieved by the Company in operating
the Crane Division as compared to its prior owner, as well as the elimination of
certain overhead costs previously associated with the Crane Division during the
period it was a division of a large public company. Gross profit from crane
services for 1998 was $6.6 million, an increase of $1.1 million, or 20.0%
compared to 1997. The resulting increase was attributable to the continued focus
of the Company on increasing service revenues, which have historically been
directly related to gross profit of the division.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
Revenues. The Company's manufacturing revenues for 1997 were $14.7
million, an increase of $7.3 million, or 98.7% compared to 1996. The increase
in manufacturing revenue over the period was a result of the increased platform
construction worldwide, which was driven by favorable demand for oil and gas.
The Company's crane service revenues for 1997 were $20.8 million, an increase of
$4.5 million, or 27.6% compared to 1996. The increase resulted primarily from
the general upturn in the oil and gas industry and new activity in the Gulf of
Mexico directed to deepwater oil and gas production projects. Additionally, the
infrastructure presently used in offshore production is aging, thereby
increasing service revenues.
Cost of Revenue. Cost of revenue for new crane manufacturing for 1997 was
$16.4 million, an increase of $7.4 million, or 82.2% compared to 1996. Cost of
revenue for services for 1997 was $15.3 million, an increase of $3.2 million, or
26.5% compared to 1996. The increase primarily resulted from the corresponding
increase in revenue and related direct costs resulting from the increased
activity. As a percentage of revenue, total cost of revenue was 89.3% for 1997,
compared to 88.6% for 1996.
Gross Profit. Gross loss for new crane manufacturing for 1997 was $1.7
million, a decrease in the gross loss of $0.1 million, or 5.5% compared to 1996.
The resulting loss was attributable to the inability of the American Aero Cranes
division to reduce its overhead costs as a division of Weatherford Enterra U.S.,
Limited Partnership. Gross profit from crane services for 1997 was $5.5
million, an increase of $1.2 million, or 27.9% compared to 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1998 were $7.7 million, an increase of $5.6 million,
or 264.7% compared to 1997. As a percentage of revenue, selling, general and
administrative expenses were 14.5% in 1998 compared to 5.9% in 1997. The
resulting increase was due to the acquisition of the Marine Equipment Division
and the ITS Subsidiaries. Additionally, the Company incurred additional overhead
expenses in order to manage accounting, finance, benefits, and other functions
of the operating divisions. Also, the Company became a U.K. publicly-traded
entity during 1998 and incurred certain legal and accounting costs as a result.
Selling, general and administrative expenses in 1997 were $2.1 million, an
increase of $0.03 million, or 1.4% compared to 1996. As a percentage of revenue,
selling, general and administrative expenses were 5.9% in 1997 compared to 8.8%
in 1996. The increase was a result of the acquisition of the American Aero
Cranes business unit effective September 18, 1997 and the hiring of additional
personnel to perform functions previously performed by personnel of Weatherford
Enterra U.S., Limited Partnership.
Depreciation and amortization in 1998 was $0.8 million, an increase of $0.5
million, or 166.7% compared to 1997. The increase was attributable to the
acquisition of the Marine Equipment Division and the ITS Subsidiaries. The
Company moved its crane manufacturing facility to Mobile, Alabama from Theodore,
Texas and incurred capital expenditures to improve and maintain various
facilities.
15
<PAGE>
Additionally, the Company incurred a significant increase in amortization
expense as a result of the above referenced acquisitions during the year.
Depreciation and amortization in 1997 was $0.3 million, a decrease of $0.03
million, or 11.1% compared to 1996.
Income Taxes
Prior to its acquisition by the Company, Aero was a limited liability
company, and was treated as a partnership for federal income tax reporting
purposes. As such, the taxable income or loss of Aero was included in the
individual income tax returns of the members. Accordingly, no accounts for
deferred income taxes or provisions for current or deferred income taxes prior
to the acquisition, have been included in the accompanying financial statements
of Aero, except for states which do not recognize limited liability companies as
partnerships and tax those entities as corporations.
The Company is a corporation and, as such, commencing on November 18, 1998,
the Company began providing for income taxes based on Statements of Financial
Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes." SFAS No.
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. In accordance with SFAS No. 109, the Company
recognized deferred tax expense for those deferred tax liabilities and assets
with future tax consequences upon the change in taxable status.
Liquidity and Capital Resources
During 1998, net cash used in operating activities by the Company was $1.3
million. Cash used in operating activities in 1998 consisted of the net negative
change in accrued liabilities of $4.0 million, net negative change in
inventories of $1.2 million, and the net positive change in accounts receivable
of $2.8 million. Net cash used in investing activities was $2.2 million.
Principal uses of cash consisted of $5.5 million of capital expenditures,
including the relocation of a crane manufacturing facility from Houston, Texas
to Theodore, Alabama. This was offset by $3.1 million in cash acquired from the
acquisition of the ITS Subsidiaries. Net cash provided by financing activities
was $5.0 million due to issuance of long-term debt. At December 31, 1998, the
Company had working capital of $16.5 million and long-term debt of $44.2
million.
During 1997, net cash used in operating activities by the Company was $1.0
million. Net cash used in operating activities in 1997 consisted of the net
increase in inventories of $2.4 million, and the net decrease in accounts
receivable of $5.2 million. Net cash used in investing activities was $8.5
million. Principal uses of cash consisted of $0.7 million of capital
expenditures and $8.8 million for the acquisition of Aero. Net cash provided by
financing activities was $9.8 million due to issuance of long-term debt. At
December 31, 1997, the Company had working capital of $10.0 million and long-
term debt of $8.9 million.
On June 30, 1998, the Company entered into a $40 million loan facility (the
"Loan Facility") with a bank group. The Loan Facility is secured by all the
assets of the Company, excepting certain assets owned by the ITS Subsidiaries,
and consists of a revolving credit facility, capital expenditures loan facility
and fixed asset facility. The following describes each of these facilities.
Revolving Credit Facility. The revolving credit facility allows for the
borrowing of funds up to $40.0 million less the sum of (a) the borrowing base,
as defined, (b) amounts due under the capital
16
<PAGE>
expenditure loan facility, and (c) amounts due under the fixed asset facility.
The principal balance and accrued interest become due on the termination date of
the facility, June 20, 2001.
Capital Expenditure Loan Facility. The capital expenditure loan facility
allows for the borrowing of funds up to 90% of the sum of (a) the appraised
liquidation value of eligible equipment and (b) the appraised value of eligible
real estate. The principal advanced shall be reduced monthly based on a seven-
year amortization beginning July 1, 1998.
Fixed Asset Loan Facility. The fixed asset loan facility allows for the
advances of funds up to 80% of the related total actual cost of property, plant
and equipment, as defined. The principal is reduced monthly based on a seven-
year amortization beginning July 1, 1998.
Interest on the Loan Facility accrues at a rate per annum selected by the
borrower from either the prime rate plus an applicable margin or LIBOR plus an
applicable margin. The applicable margin is determined based on the Company's
earnings before interest, taxes, amortization or accretion, and depreciation.
The Loan Facility contains certain restrictive covenants, including
financial covenants. The most restrictive financial covenants include, among
others, minimum interest coverage, as defined; minimum capital, as defined;
consecutive quarterly earnings criteria, as defined; limitations on capital
expenditures, and limitations on the ability of the Company to incur additional
liens, debt, or distributions to members. At December 31, 1998, the weighted
average interest rate on borrowings under the Loan Facility was 6.64% and
approximately $3.4 million was committed to letters of credit. The outstanding
balance at December 31, 1998 and December 31, 1997 was $18.1 million, $4.2
million, respectively.
In connection with the acquisition of Aero and ITS Subsidiaries, the Company
issued the following debt securities.
Senior Notes. The Company issued an aggregate of $1.0 million of promissory
notes ("Senior Notes") in partial consideration for the acquisition of Aero.
The Senior Notes are unsecured and accrue interest at 10%, which is payable
quarterly in arrears. Principal and all accrued and unpaid interest are payable
on November 17, 2000, provided that the holders have the right to accelerate the
due date in the event the Company receives in excess of $5,000,000 in (a) net
proceeds from a sale of securities or (b) proceeds from new or increased credit
facilities.
Series B Junior Subordinated Notes. The Company issued an aggregate of $4.0
million of Series B Junior Subordinated Notes ("Junior Notes") in partial
consideration for the acquisition of Aero. The Junior Notes bear interest at 7%
per year and mature in December 2003. The Junior Notes are unsecured and are
subordinate to the Loan Facility, the Series A Subordinated Debentures and the
Senior Notes. Prepayment is at the option of the Company at any time at par
plus accrued interest to the prepayment date. The Junior Notes are convertible
into Common Stock at any time before maturity at the rate of $0.75 per share.
Series A Subordinated Debentures. The Company issued $5.5 million of its
Series A Subordinated Debentures in partial consideration for the acquisition of
Aero and sold $9.5 million of Series A Subordinated Debentures for cash to
partially fund the acquisition of Aero. The Series A Subordinated Debentures
pay interest at 12% per year and mature in December 2003. The debentures are
unsecured and are subordinate to the Loan Facility and the Senior Notes.
Prepayment is at the option of the Company at any time at par plus accrued and
unpaid interest to the prepayment date. The Debentures were issued with
6,250,000 detachable Series A Increasing Warrants to purchase Common Stock at
$0.63
17
<PAGE>
per share. The number of Series A Increasing Warrants outstanding is subject to
increase in certain circumstances. See Item 11, "Common Stock Subject to
Warrants and Conversion Rights."
In July of 1998, the Company financed the acquisition of a new crane
manufacturing facility in Mobile, Alabama and related equipment and improvements
through an issuance by the Industrial Development Board of Mobile County,
Alabama of $2 million of industrial development bonds. The interest on the bonds
adjusts monthly and the bonds are payable in full on July 1, 2013. The interest
rate on the bonds at December 31, 1998 was 3.5%. The bonds are secured by a
letter of credit issued under the Loan Facility.
Year 2000 Issues
The Company has assessed issues regarding its computer accounting and other
systems' compliance capabilities to process transactions beginning with "Year
2000." The Company has retained a computer consultant to (a) identify
significant systems and assess potential "Year 2000" issues relating to those
systems; (b) renovate, repair, and replace noncompliant systems, software, and
hardware; and (c) test and validate all systems, software, and hardware.
Additionally, the Company has contacted critical software vendors to assess
potential "Year 2000" issues. Those vendors have assured the Company that their
software is "Year 2000" compliant. With respect to proprietary components of
vendor's software, the Company is relying on the vendor's representations. The
Company believes all computer accounting systems of the Company and its
operating divisions are "Year 2000" compliant, excepting the Engineered Systems
Division and the Titan business unit.
The conversion of the Engineered Systems Division computer accounting
software package to a later generation software package that is "Year 2000"
compliant is estimated to cost approximately $75,000, inclusive of software and
hardware procurement, installation, customization of certain purchase and sales
modules, and user training. It is believed this project will be completed and
operational during the quarter ending September 30, 1999. The conversion of the
Titan business unit computer accounting software package to a later generation
software version that is "Year 2000" compliant is estimated to cost
approximately $25,000, inclusive of software and hardware procurement,
installation, customization, and user training. It is believed this project
will be completed and operational during the quarter-ended September 30, 1999.
The Company's assessment of the potential implication of broad based non-
compliance with "Year 2000" by its customers and suppliers has not been
completed at this date. A significant number of the Company's customers are
large international and U.S. domestic oil and gas and dredging companies who
typically maintain their systems on the leading edge of technology. From contact
with a limited number of customers, the Company believes that "Year 2000" non-
compliance should not be a major concern. Isolated problems could occur for
smaller customers as a result of delays in processing the Company's billings for
services and products, the payment for which could conceivably be delayed and
cause isolated cash flow problems.
18
<PAGE>
The Company has contingency plans in the event of unforeseen difficulties to
minimize any disruptions, including continuing to monitor potential implications
from broad-based non-compliance by customers and vendors.
There can be no assurance that all necessary modifications will be identified
and corrected or that unforeseen difficulties or costs will not arise. The
Company believes that the failure of third parties to address their "Year 2000"
problems in a timely manner present the greatest likelihood of the Company not
being "Year 2000" compliant. Such failure could materially adversely impact the
Company's operations, the estimated cost of the "Year 2000" plan and the target
dates for completion. The effect of non-compliance by third parties is not
determinable at this time. The Company could be subject to litigation for
computer systems failure, including equipment shutdown or failure to properly
date business records or process transactions. The amount of potential
liability, and lost revenue cannot be reasonably estimated at this time.
Recent Accounting Standards
In June, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which is effective for fiscal
years beginning After June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company is currently evaluating what effect, if any, this statement will have on
the Company's financial statements. The Company will adopt this statement no
later than January 1, 2000.
ITEM 3. PROPERTIES
The Company incorporates herein by reference the information set forth in
Item 1 under "Crane Division--Facilities"; "Marine Equipment Division--
Facilities"; "Engineered Systems Division--Facilities"; "Drilling Services
Division--Facilities". All of the owned real estate utilized by the Crane and
the Marine Equipment Divisions is mortgaged as security for the Loan Facility.
For a description of the Loan Facility see Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Our lease payments for the Theodore, Alabama manufacturing facility
of the Crane Division fund the principal and interest payments on a $2,000,000
industrial revenue bond issue. The bonds mature on July 1, 2013, and we have
the option to purchase the property for a nominal price upon payment in full of
the bonds. The Katy, Texas facility utilized by the Engineered Systems Division
is encumbered by a Deed of Trust to a bank.
19
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the common stock, $0.01 value of the Company ("Common Stock") as of
March 31, 1999, as to (i) all persons known by the Company to be the beneficial
owner of more than 5% of the Common Stock, (ii) each director of the Company,
(iii) each executive officer of the Company whose 1998 compensation by the
Company is disclosed in Item 6, and (iv) all directors and executive officers of
the Company as a group. The address of all the named persons is the business
address of the Company's principal executive offices, 300 St. Francis Street,
Mobile, Alabama 36602, unless otherwise noted, and each named person has sole
voting and investment powers with respect to such person's Common Stock, unless
otherwise noted.
Stockholders Number of Shares Percentage
------------ ---------------- ----------
IPC Industries, Inc. (1) 18,612,316 29.39
McGowin I. Patrick, Jr. (2) 19,185,833 29.71
Clifton C. Inge, Jr. (3) 19,185,833 29.71
Thomas W. Pritchard(4) 8,447,083 13.08
Byron A. Adams, Jr.(4) 8,447,083 13.08
Sidro S.A.(5) 3,287,789 5.09
Westpool Investment Trust plc(6) 7,242,573 11.21
Robert A. Rayne(7) 7,484,976 11.59
Bernard J. Duroc-Danner(8) 3,119,705 4.83
Simon Edward Callum Miller -- --
All directors and executive officers as a
group (9 persons) 39,282,597 60.82
---------- ------
TOTALS 51,017,469 78.99
___________________
(1) Shares shown reflect warrants to purchase 1,718,750 shares and
convertibility rights to acquire 2,586,666 shares of Common Stock. IPC
Industries, Inc. shares voting and investment powers with Messrs. Patrick
and Inge with respect to all the shares shown. Messrs. Patrick and Inge
each own 50% of the common stock of IPC Industries, Inc.
(2) Shares shown include 18,612,916 shares beneficially owned by IPC
Industries, Inc., of which Mr. Patrick is a 50% owner, and 572,917 shares
beneficially owned by IPC Investments, Inc., of which Mr. Patrick is a 50%
owner. Mr. Patrick shares with IPC Industries, Inc. and IPC Investments,
Inc. investment and voting powers with respect to the shares held by those
companies, respectively, and also shares such voting and investment power
with Clifton C. Inge, Jr., who is also a 50% owner of each company.
(3) Shares shown include 18,612,916 shares beneficially owned by IPC
Industries, Inc., of which Mr. Inge is a 50% owner, and 572,917 shares
beneficially owned by IPC Investments, Inc., of which Mr. Inge is a 50%
owner. Mr. Inge shares with IPC Industries, Inc. and IPC Investments, Inc.
investment and voting powers with respect to the shares held by those
companies, respectively, and also shares such voting and investment powers
with McGowin I. Patrick, Jr., who is also a 50% owner of each company.
(4) Shares shown reflect convertibility rights to acquire 1,293,333 shares.
(5) The address of Sidro S.A. is 38 Rue de Naples, 1050 Brussels, Belgium.
(6) The address of Westpool Investment Trust is Carlton House, 33 Robert Adam
Street, London WIM 5AH. Shares shown reflect warrants to purchase 2,291,666
shares. Westpool Investment Trust plc shares voting and investment powers
with respect to the shares shown with Robert A. Rayne.
20
<PAGE>
(7) Shares shown include 7,242,573 shares beneficially owned by Westpool
Investment Trust plc, of which Mr. Rayne is a director and a controlling
person.
(8) Shares shown reflect warrants to purchase 1,250,000 shares.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert A. Rayne 50 Director and Chairman of the Board of Directors
Clifton C. Inge, Jr. 35 Director and Chief Executive Officer and Director
McGowin I. Patrick, Jr. 35 Director, President and Chief Operating Officer
Byron A. Adams, Jr. 39 Director and Executive Vice President--Business Development
W. Steven McKenzie 45 Executive Vice President--Operations
William L. Wann, Jr. 30 Vice President--Finance and Compliance and Secretary
Jefferson D. Larry 32 Vice President--Accounting and Administration
Bernard J. Duroc-Danner 45 Director
Simon Edward Callum Miller 46 Director
</TABLE>
Byron A. Adams, Jr. became a director of the Company on August 20,
1998 and Executive Vice-President--Development on October 1, 1998. Previously,
Mr. Adams had been Executive Vice President of Aero International, L.L.C. since
June, 1998, and between February, 1998 and June, 1998 Mr. Adams had been
President of Aero International, L.L.C., and between September, 1997 and
February, 1998, Mr. Adams had been President of American Aero Cranes, L.L.C., a
subsidiary of Aero. From 1981 to 1997, Mr. Adams was manager of sales and
marketing for Oil & Gas Rental Service, Inc., Morgan City, Louisiana, which is
engaged in the rental of offshore supply vessels, drill pipe, blowout preventers
and other offshore oilfield materials.
Bernard J. Duroc-Danner became a director of the Company on August 20,
1998. Mr. Duroc-Danner is President and Chief Executive Officer of Weatherford
International, Inc., a publicly-held oilfield service and equipment company.
Previously, Mr. Duroc-Danner served as President and Chief Executive Officer of
EVI, Inc., a predecessor of Weatherford International, Inc. which Mr. Duroc-
Danner founded in 1987. Mr. Duroc-Danner is also a director of Parker Drilling
Company, a publicly-held contract oil and gas drilling company, and Cal Dive
International, Inc., a publicly-held subsea services company.
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Clifton C. Inge, Jr. has been a director of the Company since August
20, 1998 and Chief Executive Officer since October 1, 1998. Mr. Inge is an
owner and the Chief Executive Officer of IPC Industries, Inc., Mobile, Alabama,
a holding company with investments in industrial concerns, and had been an owner
and the Chief Executive Officer of Aero International, L.L.C. On November 17,
1998, Aero International, L.L.C. was acquired by the Company. See Item 7.
Jefferson D. Larry has been Vice-President--Accounting and
Administration of the Company since October 1998. Previously, Mr. Larry had
served since 1996 as corporate controller for IPC Industries, Inc., Mobile,
Alabama, since 1996, and from 1989 until 1996 he was accounting manager for
Masland Carpets, Inc., Saraland, Alabama.
W. Steven McKenzie has been Executive Vice President--Operations of
the Company since October 1, 1998. Previously, Mr. McKenzie had been Executive
Vice President--Operations for IPC Industries, Inc. since September, 1997. From
February, 1996 until September, 1997, Mr. McKenzie was director of human
resources for IPC Industries, Inc. and between 1994 and 1996 Mr. McKenzie was a
general contractor and the owner of a machine shop in Saraland, Alabama. Before
1994, Mr. McKenzie, a mechanical engineer, had 20 years experience in
manufacturing management.
Simon Edward Callum Miller has been a director of the Company since
February 1, 1999. He is Executive Chairman of Dunedin Capital Partners Ltd,
investment managers of Dunedin Enterprise Investment Trust PLC, Edinburgh,
Scotland, a publicly-held investment trust of whom he is a director. From 1987
to 1991, Mr. Miller was Chief Executive Officer and from 1991-1994 Executive
Chairman of Ferrum Holdings PLC, Staffordshire, England, a publicly-held
engineering company. Mr Miller also serves as a Non-Executive Director of two
other publicly held UK companies, Emess PLC, a lighting manufacturer and Goshawk
Insurance Holdings PLC, an insurance company.
McGowin I. Patrick, Jr. has been a Director of the Company since
August 20, 1998, and President and Chief Operating Officer since October, 1998.
Mr. Patrick is an owner and President and Chief Operating Officer of IPC
Industries, Inc., Mobile, Alabama, a holding company with interests in
industrial concerns, and had been an owner and the President and Chief Operating
Officer of Aero International, L.L.C. On November 17, 1998, Aero was acquired
by the Company. See Item 7.
Robert A. Rayne has been a director of the Company since August 20,
1998, and Chairman of the Board of Directors since November 16, 1998. Mr.
Rayne, a resident of London, England, has been Joint Managing Director of London
Merchant Securities PLC, a publicly-held investment company, since June 1, 1998.
Previously, since October, 1983, Mr. Rayne had served as Investment Director of
London Merchant Securities PLC. Mr. Rayne also serves as a director of First
Leisure Corporation plc, a publicly-held English company engaged in the
entertainment business, Golden Rose Communications plc, a publicly-held English
company engaged in the radio broadcasting business, and Weatherford
International, Inc., a publicly-held oilfield service and equipment company.
William L. Wann, Jr. has been Secretary of the Company since December
21, 1998, and Vice President--Finance and Compliance since March 15, 1999.
Previously, Mr. Wann had served as a corporate finance analyst with IPC
Industries, Inc. since April, 1998. From 1995 to 1998, Mr. Wann, a certified
public accountant, was a mergers and acquisitions manager for Smith Dukes &
Buckalaw, LLP,
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a public accounting firm in Mobile, Alabama, and from 1993 to 1995 he was a
senior tax consultant with the public accounting firm of Ernst & Young, LLP,
Birmingham, Alabama.
ITEM 6. EXECUTIVE COMPENSATION
Executive Compensation and Employment Agreements
The Company was organized on August 20, 1998 and did not have any
assets or operations until November 17, 1998. The total compensation awarded
to, earned by or paid to Clifton C. Inge, Jr., the Chief Executive Officer of
the Company, in 1998 was $24,322. None of the executive officers of the Company
were awarded or earned or were paid compensation in excess of $100,000 during
1998.
The Company has entered into employment agreements with Messrs. Inge,
McGowin I. Patrick, Jr., Byron A. Adams, Jr. and W. Steven McKenzie effective
November 11, 1998. The annualized base salary of each of the executive officers
under the employment agreements is $200,000. Effective February 1, 1999, the
named executive officers agreed to salary reductions to lower the Company's
compensation costs. The 1999 base salary of Messrs. Patrick, Inge and Adams will
be $140,000, and the 1999 base salary of Mr. McKenzie will be $185,000. Each
employment agreement is for a one year term that is automatically renewed
annually for an additional one year term, unless terminated as provided in the
agreement. The Company may terminate each employment agreement for "cause" or
"disability" as defined in the agreements, without payment of compensation. In
the event of termination by the Company for a reason other than death,
disability or cause, however, the Company is required to give one year's prior
notice or pay one year's annual salary to the discharged executive officer in a
lump sum. The executive officer may terminate the employment agreement at any
time, provided that if the executive officer terminates the agreement for
"cause", as defined in the agreement, the executive officer is entitled to
continue to receive his salary through the end of the current term of
employment. The employment agreements also provide for the award of bonuses upon
the Company meeting certain performance criteria.
Director Compensation
Excepting Mr. Simon Edward Callum Miller, none of the directors of the
Company receives any compensation for services as directors. The Company has
agreed to pay Mr. Miller $20,000 per year as compensation for serving as a
director of the Company. All of the directors are reimbursed by the Company for
all ordinary and necessary expenses incurred in attending any meeting of the
Board of Directors or any committee thereof or otherwise incurred in their
capacity as directors.
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Company did not have a Compensation
Committee in 1998. McGowin I. Patrick, Jr., President and Chief Operating
Officer and a director of the Company, participated in deliberations with the
Board of Directors concerning executive officer compensation.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 31, 1998, Titan Industries, Inc. sold substantially all
of its assets and liabilities to Aero International, L.L.C. for (a) the payment
of certain indebtedness of Titan Industries, Inc. totaling $1,822,015 and (b)
Aero's promissory note in the principal amount of $675,978 (the "Titan Note").
All of the outstanding common stock of Titan Industries, Inc. is owned by IP
Capital Corporation (48.5%), Thomas W. Pritchard (24.25%), Byron A. Adams, Jr.
(24.25%) and W. Steven McKenzie (3%). The amount of interest on the Titan Note
accrued during the period from May 31, 1998 to December 31, 1998 was
approximately $33,799. The monthly interest that will accrue on the Titan Note
is $5,658. The Titan Note is subordinate to all other indebtedness of Aero and
is due and payable on demand. Titan Industries, Inc. (formerly Titan
Acquisitions, Inc.) had acquired the assets of Titan Industries, Inc. on
November 5,
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1997 for $2,250,000. Management of the Company believes that the price paid for
the Titan business unit by Aero represents the fair market value of the business
unit, if sold in an arms' length transaction.
Effective May 31, 1998, IPC Industries, Inc. sold the assets and
liabilities of its Mobile Pulley business unit to Aero in consideration for (a)
the issuance and delivery by Aero to IPC of $9 million par amount of preferred
member interests in Aero, bearing dividends at the rate of 5% per annum, (b) the
payment of $2 million cash and (c) the assumption of debt in the approximate
amount of $5,700,000. McGowin I. Patrick, Jr. and Clifton C. Inge, Jr. each own
50% of the outstanding common stock of IPC. Management believes that the price
paid for the Mobile Pulley business unit represents the fair market value of the
business unit, if sold in an arms' length transaction.
Effective May 31, 1998, Mobile Pulley Marine Services, Inc. sold
substantially all of its assets to Aero International, L.L.C. in consideration
for (a) the issuance and delivery by Aero to Mobile Pulley Marine Services, Inc.
of $3 million par amount of preferred member interests in Aero, bearing
dividends at the rate of 5% per annum, (b) the payment of $1 million cash and
(c) the assumption of liabilities in the approximate amount of $2,250,000.
Messrs. Patrick and Inge each own 50% of the outstanding common stock of IPC
Investments, Inc. (formerly Mobile Pulley Marine Services, Inc.). Management
believes that the price paid for the Mobile Marine business unit represents the
fair market value of the business unit, if sold in an arms' length transaction.
In 1998, the Company paid approximately $102,000 to Mobile Bayair,
L.L.C., in payment for the use of an airplane owned by Mobile Bayair, L.L.C. IP
Capital Corporation owns two-thirds of the outstanding limited liability company
member interest in Mobile Bayair, L.L.C. Messrs. Patrick and Inge each own 50%
of the outstanding common stock of IP Capital Corporation. The usage fees paid
by the Company in 1998 consisted of the payment of two-thirds of the fixed costs
incurred by Mobile Bayair, L.L.C. in the ownership of the airplane, and all
variabe costs incurred in the actual usage of the airplane by the Company.
Commencing in March, 1999, Mobile Bayair, L.L.C. and the Company agreed that the
Company would pay Mobile Bayair, L.L.C. only for actual usage of the airplane at
a fixed rate of $750 per hour. The Company believes that this rate is consistent
with market prices for charted airplanes.
On June 1, 1998, the Company purchased two dry docks from IP Capital
Corporation for $900,000 cash. Management believes that the price paid by the
Company for the dry docks represents the fair market value of the dry docks, if
sold in an arms' length transaction. The dry docks were acquired by IP Capital
Corporation in June 1997 for $250,000 each.
Aero International, L.L.C. paid approximately $224,501 to IPC
Industries, Inc. during 1998, and Titan Industries, Inc. paid approximately
$15,905 to IPC during 1998, in reimbursement of certain overhead allocations
charged to Aero and to Titan Industries, Inc. by IPC for the period from January
1, 1998 through May 31, 1998, relating to the operations of Aero and Titan
Industries, Inc. while they were under the common control. Management believes
these charges were fairly allocated to Aero and to Titan Industries, Inc. and
that they represent the fair market value of the services rendered, if
contracted on an arms' length basis.
The Company has an outstanding receivable from American Mulcher Parts,
L.L.C. in the amount of approximately $353,853 for sales made to American
Mulcher Parts, L.L.C. during 1998 by Mobile Pulley Marine Services, Inc.,
substantially all the assets and liabilities of which were acquired by the
Company effective May 31, 1998. American Mulcher Parts, L.L.C. is a wholly-
owned subsidiary of IPC Investments, Inc. (formerly Mobile Pulley Marine
Services, Inc.).
Aero and Titan Industries, Inc. paid $255,727 and $80,096,
respectively, to IPC Industries, Inc. during 1998 for the provision of medical
insurance coverage for the employees of Aero and Titan Industries, Inc. from
January 1, 1998 to May 31, 1998, during which time Aero and Titan Industries,
Inc. were under common control.
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The Company has liabilities in the approximate amounts of $209,274 and
$69,758 payable to IPC Industries, Inc. and to IPC Investments, Inc. (formerly
Mobile Pulley Marine Services, Inc.), respectively. These payables constitute
the preferred member dividends payable to IPC and IPC Investments, Inc. during
the period from May 31, 1998 to November 17, 1998 under the $9 million and $3
million of preferred member interests issued by Aero to IPC and to Mobile Pulley
Marine Services, Inc., respectively, for (a) the transfer by IPC to Aero of the
Mobile Pulley business unit effective May 31, 1998, and (b) the transfer by
Mobile Pulley Marine Services, Inc. to Aero of the Mobile Marine business unit
effective May 31, 1998.
IPC Industries, Inc. is indebted to the Company in the amount of
approximately $113,000 for expenses paid by Aero International, L.L.C. on behalf
of IPC during the transition period after the May 31, 1998 acquisition by Aero
of the Titan, Mobile Pulley and Mobile Marine business units that had been under
common control.
In 1997 and 1998, Aero paid investment advisory fees totaling $175,000
to IP Capital Corporation for services rendered in connection with Aero's
acquisition of the American Aero Cranes business unit and the Titan business
unit. In the opinion of management the fees paid by Aero fairly represent the
value of the services rendered.
In connection with the acquisition of Aero by the Company, the Company
issued its promissory notes in the aggregate principal amount of $1 million to
the following persons:
Holder Amount
------ -------
IPC Industries, Inc. $485,000
Byron A. Adams, Jr. 242,500
Thomas W. Pritchard 242,500
W. Steven McKenzie 30,000
For the period from November 17, 1998 until December 31, 1998, the aggregate
interest accrued on the Senior Notes was $12,222. The monthly interest that
will accrue on the Notes during 1999 is $8,333. The Senior Notes mature on
November 17, 2002. For additional information concerning the Senior Notes, see
Item 2, "Management's' Discussion and Analysis of Financial Condition and
Results of Operations of Offshore Tool & Energy Corporation--Liquidity and
Capital Resources," and Item 10.
Also in connection with the acquisition of Aero by the Company, the
Company issued its Series B Junior Subordinated Notes in the aggregate principal
amount of $4 million to the persons named below. The table below also sets
forth the interest accrued on the Junior Notes from November 17, 1998 to
December 31, 1998, and the interest that will accrue on the Junior Notes during
1999. Interest on the Junior Notes is payable semiannually on June 1 and
December 1 of every year, commencing June 1, 1999. The Junior Notes mature on
December 1, 2003.
Holder Amount Interest 1998 Interest 1999
------ ------- ------------- -------------
IPC Industries, Inc. $1,940,000 $16,220 $135,800
Byron A. Adams, Jr. 970,000 8,110 67,900
Thomas W. Pritchard 970,000 8,110 67,900
W. Steven McKenzie 120,000 1,003 8,400
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For additional information concerning the Junior Notes, see Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Offshore Tool & Energy Corporation--Liquidity and Capital
Resources," and Item 10.
On November 17, 1998, the Company issued $14 million of its Series A
Subordinated Debentures to the persons named below. The table below also sets
forth the interest accrued on the Debentures held by the named persons from
November 17, 1998 to December 31, 1998, and the interest that will accrue on the
Debentures held by the named persons during 1998. Interest on the Debentures is
payable semiannually on June 1 and December 1 of even year, commencing on June
1, 1999. The Debentures mature on December 1, 2003.
Holder Amount Interest 1998 Interest 1999
------ ---------- ------------- -------------
Westpool Investment Trust plc $5,500,000 $78,833 $660,000
IPC Industries, Inc. 4,125,000 59,125 495,000
Bernard J. Duroc-Danner 3,000,000 43,000 360,000
IPC Investments, Inc. 1,375,000 19,708 120,000
Westpool Investment Trust plc is an affiliate of Mr. Robert A. Rayne. For
additional information concerning the Debentures, see Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Offshore Tool & Energy Corporation--Liquidity and Capital Resources," and Item
10.
ITEM 8. LEGAL PROCEEDINGS
Harold A. Landry v. Aero International, L.L.C. , et al., Civil Action No.
99-10587, 22d Judicial District Court for the Parish of St. Tammany, State of
Louisiana, was instituted on February 11, 1999. Mr. Landry asserts that Aero
breached a consulting contract with him and seeks compensation under the
contract, damages and attorney's fees. In the alternative, Mr. Landry alleges
that the consulting agreement compensation was part of the purchase price or
otherwise was a basis for the sale by Landry of all the outstanding shares of
Titan Industries, Inc. Under the alternative plea, Mr. Landry seeks recission
of the sale, damages and attorney's fees. Aero has filed a dilatory exception
to the action which has not yet been set for hearing by the court.
Aero International, L.L.C. v. Timothy O'Neill and Alan Schaeffer, Cause No.
98-54573 in the District Court of Harris County, Texas, 215th Judicial District,
was instituted November 11, 1998. Aero alleges that two former employees of the
Crane Division engaged in certain wrongful conduct, including misappropriation
of trade secrets, breach of non-competition agreements and tortious
interference, and seeks damages, attorney's fees and injunctive relief. The
former employees have filed an answer denying Aero's allegations and asserting
that the employment agreements they entered into with Aero's predecessor,
Weatherford Enterra, U.S., Limited Partnership, are void. The parties to the
action are currently conducting discovery.
The Company is involved in various routine legal proceedings primarily
involving claims for personal injury which the Company believes are incidental
to the conduct of its business. While the outcome of these legal proceedings
cannot be predicted with certainty, management believes that the outcome of the
proceedings, if adversely determined, would not have a material adverse effect
on the Company's business or financial condition.
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ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER INFORMATION.
Market Information
There is no United States market for the Company's Common Stock. The Common
Stock is admitted to trading on the Alternative Investment Market ("AIM"),
London, England, an interdealer quotation market maintained by the London Stock
Exchange. As of April 29, 1999, 50,000,000 shares of Common Stock were
outstanding and there were 2,267 record holders of the Common Stock. A total
of 14,583,333 additional shares of Common Stock are subject to the issuance upon
the exercise of outstanding warrants and convertibility rights. Of the
50,000,000 shares of Common Stock outstanding, approximately 31,521,483 shares
are subject to the restrictions of Rule 144 under the Securities Act of 1933, as
amended ("Securities Act").
Dividends
The Company has not paid any dividends on its Common Stock. The Company is
prohibited from declaring or paying dividends on its Common Stock under the
terms of the Loan Facility described in Item 2, under "Discussion and Analysis
of Financial Condition and Results of Operations of Offshore Tool & Energy
Corporation--Liquidity and Capital Resources." Dividends on the Common Stock are
also substantially restricted by the Company's Series A Subordinated Debenture
Indenture (the "Indenture") under which $15,000,000 of the Company's Series A
Subordinated Debentures are outstanding. The Indenture provides that such
dividends may not exceed an amount which is determined by the application of a
complex formula based on 50% of the Company's consolidated net income, subject
to certain credits and deductions. In addition, dividends are restricted by the
Note Agreement under which the Company's Series B Junior Subordinated Notes are
outstanding. The Note Agreement provides that such dividends may not exceed 50%
of the consolidated after tax income of the Company. See Item 2, "Management's'
Discussion and Analysis of Financial Condition and Results of Operations of
Offshore Tool & Energy Corporation--Liquidity and Capital Resources."
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The following information is provided as to all securities sold by the
Company within the last three years which were not registered under the
Securities Act.
Common Stock
Effective November 17, 1998, the Company (a) sold 20,500,000 shares of
Common Stock to International Tool & Supply plc, a publicly-traded English
corporation, in exchange for the assets of ITS pursuant to a Plan of Liquidation
of ITS under to which such shares were distributed to the public stockholders of
ITS (the "ITS Stockholders"), and (b) sold 29,500,000 shares of Common Stock to
the IPC Industries, Inc. and Messrs. Byron A. Adams, Jr., Thomas W. Pritchard
and W. Steven McKenzie, the owners of the common membership interests of Aero
International, L.L.C. (the "Aero Holders"), in partial consideration for the
exchange for all the outstanding common member interests of Aero. The sale and
exchange with the ITS Stockholders were made without registration in reliance
upon Regulation S, except that the sale and exchange of an aggregate of
2,021,483 shares of Common Stock with three shareholders of ITS who were U.S.
persons were made without registration in reliance upon Rule 506 of Regulation D
and Section 4(2) of the Securities Act. The U.S. persons were Mr. Bernard J.
Duroc-Danner, a director of the Company, Mr. Howard Wolf, former Non-Executive
Chairman of ITS, and Mr. Richard W. Webb, a resident of Houston, Texas. The
sale and exchange with the Aero Holders were
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made without registration in reliance upon Rule 506 of Regulation D and Section
4(2) of the Securities Act.
Series A Subordinated Debentures and Series A Increasing Warrants
Effective November 17, 1998, the Company sold $9,500,000 principal amount
of its Series A Subordinated Debentures to Westpool Investment Trust plc,
Bernard J. Duroc-Danner and to certain officers of Jefferies and Company, Inc.,
and sold $5,500,000 principal amount of the Debentures to IPC Industries, Inc.
and Mobile Pulley Marine Services, Inc. in exchange for all of the outstanding
preferred membership interests of Aero. Issued pro rata with the Debentures
were 6,250,000 detachable Series A Increasing Warrants to purchase Common Stock
at the price of $0.63 per share. The sale of the Debentures and the Series A
Increasing Warrants were made without registration in reliance upon Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
Series B Junior Subordinated Notes
Effective November 17, 1998, the Company sold $4,000,000 principal amount
of its Series B Junior Subordinated Notes ("Notes") to the Aero Holders in
partial consideration for the exchange by the Aero Holders of all the
outstanding common membership interests of Aero. The Notes are convertible into
shares of Common Stock at the ratio of $0.75 per share. The sale and exchange
of the Notes was made without registration in reliance upon Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
Senior Notes
Effective November 17, 1998, the Company sold $1,000,000 principal amount
of its promissory notes to the Aero Holders in partial consideration for the
exchange of all the outstanding common member interests of Aero. The sale and
exchange of the Senior Notes was made without registration in reliance upon Rule
506 of Regulation D and Section 4(2) of the Securities Act.
Series B Warrants
Effective November 17, 1998, the Company sold and issued to Jefferies and
Company, Inc. 3,000,000 Series B Warrants to purchase Common Stock at the price
of $1.26 per share. The Series B Warrants were paid to Jefferies and Company,
Inc. as compensation for services rendered in connection with the Company's
acquisition of Aero and the ITS Subsidiaries. The sale of the Series B Warrants
was made without registration in reliance upon Rule 506 of Regulation D and
Section 4(2) of the Securities Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
General
The Company's Certificate of Incorporation authorizes the issuance of
105,000,000 shares of capital stock, consisting of 100,000,000 shares of Common
Stock, $0.01 par value, and 5,000,000 shares of Preferred Stock, $1.00 par
value. At March 31, 1999, 50,000,000 shares of Common Stock were issued and
outstanding, and no shares of the Company's preferred stock were outstanding.
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Common Stock
The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The Board of Directors are elected annually and serve one-year
terms. Any director, or the entire Board of Directors, may be removed at any
time at a meeting of the stockholders called for such purpose by a majority of
the Common Stock present in person or represented at such meeting.
Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock are entitled to participate pro rata in such dividends
as may be declared in the discretion of the Board of Directors out of the funds
legally available therefor. Holders of Common Stock are entitled to share
ratably in the net assets of the Company on liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. Holders of Common Stock do not have
preemptive rights to purchase shares of stock of the Company. Shares of Common
Stock are not subject to any redemption provisions and are not convertible into
any other securities of the Company. All outstanding shares of Common Stock are
fully paid and non-assessable.
Common Stock Subject to Warrants and Conversion Rights
The Company has a total of 14,583,333 authorized but unissued shares of
Common Stock subject to issuance upon the exercise of outstanding warrants and
conversion rights.
The Company has outstanding 6,250,000 Series A Increasing Warrants. Each
Series A Warrant entitles the holder to purchase one share of Common Stock at
$0.63 per share until November 18, 2005. The warrant price and the number of
shares of Common Stock issuable upon exercise of the Series A Warrants are
subject to adjustment in certain circumstances, including the event of a stock
dividend, a stock split, special distributions, reorganization, a merger of the
Company or the sale of any Common Stock for less than 90% of its then current
market value. The number of outstanding Series A Warrants in the hands of the
holders thereof are subject to automatic increases as follows: (a) if all of
the Company's outstanding Series A Subordinated Debentures are not fully paid by
May 17, 2000, the total number of Series A Warrants outstanding on that date
will be increased to an amount equal to the product of such outstanding Warrants
multiplied by 1.15; (b) if all the outstanding Debentures are not paid in full
by November 17, 2001, the Series A Warrants then outstanding will be increased
to an amount equal to the product of such outstanding Warrants multiplied by
1.173413; and (c) if all the outstanding Debentures are not paid in full by
November 17, 2002, the Series A Warrants then outstanding will be increased to
an amount equal to the product of such outstanding debentures multiplied by
1.148481.
The Company has outstanding 3,000,000 Series B Warrants. Each Series B
Warrant entitles the holder to purchase one share of Common Stock at the
exercise price of $1.26 per share, until November 18, 2003. The exercise price
and the number of shares of Common Stock issuable upon exercise of the Series B
Warrants are subject to adjustment in certain circumstances, including the event
of a stock dividend, a stock split, a special distribution, a reorganization, a
merger of the Company or the sale of any Common Stock for less than 90% of its
then current market value.
Holders of the Company's Series B Junior Subordinated Notes are entitled to
convert, at any time prior to the maturity of the Notes, the indebtedness
represented by the Notes into shares of Common Stock at the conversion price of
$0.75 per share. At March 31, 1999, there were $4,000,000 aggregate principal
amount of Notes outstanding, convertible into 5,333,333 shares of Common Stock.
The Notes mature on December 1, 2003.
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Registration Rights
In connection with the acquisition for the Company of Aero and the ITS
Subsidiaries, the Company issued an aggregate of 29,500,000 shares of Common
Stock to IPC Industries, Inc., Byron A. Adams, Jr., Thomas W. Pritchard and W.
Steven McKenzie ("Aero Holders"), and issued to Jefferies and Company, Inc. its
Class B Warrants to purchase 3,000,000 shares of Common Stock. The shares of
Common Stock held by the Aero Holders, the Class B Warrants and the shares of
Common Stock underlying the Class B Warrants are "restricted" securities within
the meaning of Rule 144 of the Securities and Exchange Commission. Consequently,
such securities may not be resold unless they are registered under the
Securities Act, or are sold pursuant to an applicable exemption from
registration, such as Rule 144. The Company has granted to the Aero Holders and
to Jefferies and Company, Inc. certain registration rights with respect to the
Common Stock held by the Aero Holders and the Common Stock underlying the Class
B Warrants, including the right, subject to certain conditions and limitations,
to demand registration of the Common Stock and to include the Common Stock in
certain registrations proposed by the Company.
Certain Charter and Bylaw Provisions
Certain provisions of the Company's Certificate of Incorporation and Bylaws
are intended to enhance the likelihood of continuity and stability in the Board
of Directors of the Company and in its policies, but might have the effect of
delaying or preventing a change in control of the Company and may make more
difficult the removal of incumbent management even if such transactions could be
beneficial to the interests of stockholders. Set forth below is a summary
description of such provisions:
Number of Directors; Filling Vacancies. The Certificate of Incorporation
provides that the number of directors may be fixed from time to time in the
Bylaws. Currently, the Bylaws provide that the number of directors shall be
six. Any vacancy on the Board of Directors, whether through an increase in the
number of authorized directors in the Bylaws (which may be approved by the Board
of Directors) or the death, resignation or removal of a director, may be filled
only by the majority vote of the remaining directors (even if the number of
remaining directors is less than the number required for a quorum), and any
director so appointed shall serve until the next stockholders' meeting held for
the election of directors and his or her successor is duly elected and
qualified. Directors may be removed only by the stockholders at a special
meeting called for such purpose by the affirmative vote of 50% of the voting
stock of the Company present or represented at the meeting. The stockholders
may elect at such meeting the successor or successors to any directors so
removed.
Advance Notice of Intention to Nominate a Director. The Bylaws permit a
stockholder to nominate a person for election as a member only if (a) the
nominating stockholder has been the beneficial owner of at least 1% of the
Company's outstanding voting stock for at least one year and (b) written notice
of such stockholder's intent to make a nomination has been given to the
Secretary of the Company not less than 60 days nor more than 270 days prior to
the anniversary of the annual meeting held for the immediately preceding year
(subject to certain adjustments if the annual meeting date is changed by more
than 30 days from the date of the prior annual meeting). This provision also
requires that the stockholder's notice set forth, among other things, a
description of all arrangements or understandings between the nominee and the
stockholder pursuant to which the nomination is to be made or the nominee is to
be elected and such other information regarding the nominee as would be required
to be included in a proxy statement filed pursuant to the proxy rules
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), had the nominee been nominated by the Board of Directors of the Company,
and be accompanied by the written consent of the nominee to serve as a director
and the nominee's affidavit certifying that the nominee meets the qualifications
to be a director. Any nomination that fails to comply with these requirements
will be disqualified.
30
<PAGE>
Stockholders' Right to Call Special Meeting. The Bylaws provide that
special meetings of the stockholders may only be called by the stockholders upon
the written request of at least 35% of the voting stock of the Company.
Adoption and Amendment of Bylaws. The Certificate of Incorporation
provides that the Bylaws may be amended or repealed by either a majority vote of
the Board of Directors or the holders of at least 80% of the voting stock of the
Company present or represented at a meeting of the stockholders. Any provisions
amended or repealed by the stockholders may be re-amended or re-adopted by the
Board of Directors.
Amendment of Certain Provisions of the Charter. Under Delaware law, unless
a corporation's certificate of incorporation specifies otherwise, a
corporation's certificate of incorporation may be amended by the affirmative
vote of the holders of a majority of the voting power of each class of stock
entitled to vote thereon. The Company's Certificate of Incorporation requires
the affirmative vote of not less than 80% of the voting stock of the Company
present or represented at a meeting of the stockholders to amend, alter or
repeal certain provisions of the Company's Charter with respect to (i) the
classification, filling of vacancies and removal of the Board of Directors, (ii)
amendments to the Bylaws, (iii) certain provisions relating to limitation of
liability of directors and indemnification of directors and (iv) any amendments
to the provisions relating to this requirement in the Certificate of
Incorporation.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and Bylaws provide that, to the fullest
extent permitted by the General Corporation Law of the State of Delaware, the
directors and officers of the Company shall be indemnified and shall be advanced
expenses in connection with actual or threatened proceedings and claims against
the directors arising out of their status as such. The Company has entered into
indemnification agreements with each of its directors that provide for
indemnification and expense advancement to the directors to the fullest extent
permitted under the General Corporation Law of the State of Delaware. The
Company has also purchased and maintains insurance to indemnify directors and
officers of the Company against expense and liability for covered claims made
against such persons in their capacity as directors or officers.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Regulation S-X follow:
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Offshore Tool & Energy Corporation:
We have audited the accompanying consolidated balance sheets of OFFSHORE TOOL &
ENERGY CORPORATION (a Delaware corporation, formerly Aero International, L.L.C.)
and subsidiaries as of December 31, 1997 and 1998 and the related consolidated
statements of operations, changes in equity, and cash flows for the period from
September 19, 1997 to December 31, 1997 and for the year ended December 31, 1998
and the consolidated statements of operations, changes in equity, and cash flows
for the year ended December 31, 1996 and for the period from January 1, 1997 to
September 18, 1997 of AMERICAN AERO CRANES (the Predecessor, formerly a division
of Weatherford Enterra US, Limited Partnership). These financial statements are
the responsibility of the Company's and the Predecessor's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of ITS Holdings, Ltd.,
whose statements reflect total assets and total revenues of 9% and 1%,
respectively, of the consolidated totals as of and for the year ended December
31, 1998. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for those entities, is based solely on the report of the other auditors.
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.
Our audits also include examining, on a test basis, evidence supporting the
translation of ITS Holdings, Ltd. financial statements from the Companies Act
1985 to generally accepted accounting principles. We believe that our audits
and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Offshore Tool & Energy Corporation and subsidiaries as
of December 31, 1997 and 1998 and the results of their operations and their cash
flows for the period from September 19, 1997 to December 31, 1997 and the year
ended December 31, 1998 and the Predecessor's results of its operations and its
cash flows for the year ended December 31, 1996 and for the period from January
1, 1997 to September 19, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN
Atlanta, Georgia
March 19, 1999
F-1
<PAGE>
ITS HOLDINGS LIMITED
REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF ITS HOLDINGS LIMITED IN RESPECT OF
THE PERIOD FROM 18 NOVEMBER 1998 TO 31 DECEMBER 1998
We have audited the financial statements on pages four to eight which have been
prepared under the historical cost convention (as modified by the revaluation of
certain fixed assets) and the accounting policies set out on page six.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page two the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgements made
by the directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair value of the state
of the groups' affairs as at 31 December 1998 and of its profit for the period
then ended and have been properly prepared in accordance with the Companies Act
1985.
Acumen Accountants and Advisors Limited
Registered Auditors
Bon Accord House
Riverside Drive
ABERDEEN
AB11 7SI. Date: 15 April 1999
F-2
<PAGE>
OFFSHORE TOOL & ENERGY CORPORATION
(FORMERLY AERO INTERNATIONAL, L.L.C.)
AMERICAN AERO CRANES
(FORMERLY A DIVISION OF WEATHERFORD ENTERRA US, LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 345,000 $ 1,830,000
Accounts receivable, net of allowance for doubtful accounts of
$418,000 and $859,000 at December 31, 1997 and 1998,
respectively 11,670,000 16,241,000
Inventories 4,692,000 11,359,000
Note receivable 0 1,500,000
Other current assets 426,000 1,478,000
----------- -----------
Total current assets 17,133,000 32,408,000
PROPERTY, PLANT, AND EQUIPMENT, net 691,000 25,030,000
GOODWILL, net of accumulated amortization 0 13,997,000
OTHER ASSETS 101,000 993,000
----------- -----------
Total assets $17,925,000 $72,428,000
=========== ===========
</TABLE>
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS'/MEMBERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,914,000 $ 4,676,000
Accrued liabilities 3,609,000 10,057,000
Deferred revenue 944,000 279,000
Current maturities of long-term debt 679,000 862,000
----------- -----------
Total current liabilities 7,146,000 15,874,000
EXCESS OF NET ASSETS ACQUIRED OVER PURCHASE PRICE, net (note 3) 128,000 0
LONG-TERM DEBT, net of current maturities 8,881,000 43,941,000
----------- -----------
Total liabilities 16,155,000 59,815,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (notes 4, 10, and 12)
SHAREHOLDERS'/MEMBERS' EQUITY (Notes 2 and 9):
Preferred stock, $1 par value, 5,000,000 shares authorized,
none issued 0 0
Common stock, $.01 par value, 100,000,000 shares authorized,
50,000,000 shares issued and outstanding at December 31, 1998 0 500,000
Additional paid-in capital 0 11,922,000
Warrants 0 461,000
Members' equity 1,000,000 0
Retained earnings (deficit) 770,000 (228,000)
Accumulated other comprehensive loss 0 (42,000)
----------- -----------
Total shareholders'/members' equity 1,770,000 12,613,000
----------- -----------
Total liabilities and shareholders'/members' equity $17,925,000 $72,428,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
OFFSHORE TOOL & ENERGY CORPORATION
(FORMERLY AERO INTERNATIONAL, L.L.C.)
AMERICAN AERO CRANES
(FORMERLY A DIVISION OF WEATHERFORD ENTERRA US, LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------ ----------------------------------
FOR THE FOR THE PERIOD FROM FOR THE PERIOD FROM FOR THE
YEAR ENDED JANUARY 1, 1997 SEPTEMBER 19, 1997 YEAR ENDED
DECEMBER 31, TO SEPTEMBER 18, TO DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------- ------------------- ------------------- -----------
<S> <C> <C> <C> <C>
NET SALES:
Manufacturing $ 7,389,000 $ 9,809,000 $ 4,841,000 $ 28,642,000
Service and other 16,307,000 14,586,000 6,179,000 24,250,000
------------ ------------ ----------- ------------
Total net sales 23,696,000 24,395,000 11,020,000 52,892,000
------------ ------------ ----------- ------------
COST OF SALES:
Manufacturing (8,953,000) (11,415,000) (4,949,000) (24,531,000)
Service and other (12,041,000) (10,884,000) (4,390,000) (17,314,000)
------------ ------------ ----------- ------------
Total cost of sales (20,994,000) (22,299,000) (9,339,000) (41,845,000)
------------ ------------ ----------- ------------
GROSS PROFIT 2,702,000 2,096,000 1,681,000 11,047,000
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (2,077,000) (1,282,000) (823,000) (7,677,000)
------------ ------------ ----------- ------------
INCOME FROM OPERATIONS 625,000 814,000 858,000 3,370,000
OTHER INCOME, net 0 0 0 38,000
INTEREST EXPENSE (1,000) (3,000) (209,000) (1,944,000)
------------ ------------ ----------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 624,000 811,000 649,000 1,464,000
PROVISION FOR INCOME TAXES (Note 3) (218,000) (284,000) (29,000) (167,000)
------------ ------------ ----------- ------------
NET INCOME $ 406,000 $ 527,000 $ 620,000 $ 1,297,000
============ ============ =========== ============
INCOME BEFORE PROVISION FOR INCOME TAXES $ 649,000 $ 1,464,000
PRO FORMA PROVISION FOR INCOME TAX (275,000) (680,000)
----------- ------------
PRO FORMA NET INCOME $ 374,000 $ 784,000
=========== ============
PRO FORMA BASIC AND DILUTED EARNINGS PER SHARE $ 0.02
============
PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING 32,063,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
OFFSHORE TOOL & ENERGY CORPORATION
(FORMERLY AERO INTERNATIONAL, L.L.C.)
AMERICAN AERO CRANES
(FORMERLY A DIVISION OF WEATHERFORD ENTERRA US, LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
CLASS B PREFERRED
COMMON STOCK MEMBERSHIP UNITS ADDITIONAL
DIVISIONAL --------------------- ------------------------ PAID-IN
EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ---------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR:
BALANCE, DECEMBER 31, 1996 $10,165,000 0 $ 0 0 $ 0 0
Advances from Weatherford, net 3,201,000 0 0 0 0 0
Net income 527,000 0 0 0 0 0
----------- ---------- -------- -------- ------------ -----------
BALANCE, SEPTEMBER 18, 1997 $13,893,000 0 $ 0 0 $ 0 0
=========== ========== ======== ======== ============ ===========
- -------------------------------------------------------------------------------------------------------------------------
COMPANY:
CONTRIBUTION OF MEMBERS AT FORMATION $ 0 0 $ 0 0 $ 0 $ 0
Acquisition of common controlled
company (Note 2) 0 0 0 0 0 0
Net income 0 0 0 0 0 0
----------- ---------- -------- -------- ------------ -----------
BALANCE, DECEMBER 31, 1997 0 0 0 0 0 0
Aero Reorganization (Note 2) 0 0 0 960,000 12,000,000 0
Tax withdrawals of former Aero 0
members 0 0 0 0 0 0
ITS Acquisition and Reorganization
(Note 2) 0 50,000,000 500,000 (960,000) (12,000,000) 16,922,000
Distributions to former shareholders
of Aero (Note 2) 0 0 0 0 0 (5,000,000)
Net income 0 0 0 0 0 0
Other comprehensive loss--foreign
currency translation adjustment, net
of income taxes of $27,000 0 0 0 0 0 0
----------- ---------- -------- -------- ------------ -----------
BALANCE, DECEMBER 31, 1998 $ 0 50,000,000 $500,000 0 $ 0 $11,922,000
=========== ========== ======== ======== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED
MEMBERS' (DEFICIT) COMPREHENSIVE
WARRANTS EQUITY EARNINGS LOSS TOTAL
----------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR:
BALANCE, DECEMBER 31, 1996 $ 0 0 $ 0 0 $10,165,000
Advances from Weatherford, net 0 0 0 0 3,201,000
Net income 0 0 0 0 527,000
----------- ---------- -------- -------- -----------
BALANCE, SEPTEMBER 18, 1997 $ 0 0 $ 0 0 $13,893,000
=========== ========== ======== ======== ===========
- -----------------------------------------------------------------------------------------------------------
COMPANY:
CONTRIBUTION OF MEMBERS AT FORMATION $ 0 $1,000,000 $ 0 0 $ 1,000,000
Acquisition of common controlled
company (Note 2) 0 0 150,000 0 150,000
Net income 0 0 620,000 0 620,000
----------- ---------- -------- -------- ------------
BALANCE, DECEMBER 31, 1997 0 1,000,000 770,000 0 1,770,000
Aero Reorganization (Note 2) 0 0 (850,000) 0 11,150,000
Tax withdrawals of former Aero
members 0 0 (1,445,000) 0 (1,445,000)
ITS Acquisition and Reorganization
(Note 2) 461,000 (1,000,000) 0 0 4,883,000
Distributions to former shareholders
of Aero (Note 2) 0 0 0 0 (5,000,000)
Net income 0 0 1,297,000 0 1,297,000
Other comprehensive loss--foreign
currency translation adjustment, net
of income taxes of $27,000 0 0 0 (42,000) (42,000)
----------- ---------- -------- -------- -----------
BALANCE, DECEMBER 31, 1998 $ 461,000 $ 0 $(228,000) $ (42,000) $12,613,000
=========== ========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
OFFSHORE TOOL & ENERGY CORPORATION
(FORMERLY KNOWN AS AERO INTERNATIONAL, L.L.C.)
AMERICAN AERO CRANES
(FORMERLY A DIVISION OF WEATHERFORD ENTERRA US, LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------- --------------------------------
FOR THE FOR THE PERIOD FROM FOR THE PERIOD FROM FOR THE
YEAR ENDED JANUARY 1, 1997 SEPTEMBER 19, 1997 YEAR ENDED
DECEMBER 31, TO SEPTEMBER 18, TO DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 406,000 $ 527,000 $ 620,000 $ 1,297,000
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation, amortization, and accretion 339,000 293,000 10,000 848,000
Deferred tax (benefit) provision 0 0 (29,000) 29,000
Gain on sale of property, plant, and equipment (69,000) (55,000) 0 (36,000)
Net change in accounts receivable (2,275,000) (4,976,000) (205,000) 2,760,000
Net change in inventories (2,224,000) 50,000 2,309,000 (1,192,000)
Net change in other current assets (39,000) 39,000 (197,000) (347,000)
Net change in accounts payable 355,000 409,000 (549,000) (655,000)
Net change in accrued liabilities 409,000 376,000 382,000 (4,014,000)
----------- ----------- ----------- ------------
Net cash (used in) provided by
operating activities (3,098,000) (3,337,000) 2,341,000 (1,310,000)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired 0 0 427,000 3,140,000
Acquisition of Predecessor, net of cash acquired 0 0 (8,801,000) 0
Purchases of property, plant, and equipment (2,206,000) (425,000) (231,000) (5,491,000)
Proceeds from sale of property, plant,
and equipment 196,000 558,000 0 142,000
Decrease in other assets 0 0 0 36,000
----------- ----------- ----------- ------------
Net cash (used in) provided by investing
activities (2,010,000) 133,000 (8,605,000) (2,173,000)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of members at formation 0 0 1,000,000 0
Issuance of long-term debt 0 0 14,904,000 30,734,000
Payments on long-term debt 0 0 (9,232,000) (17,509,000)
Payment of preferred membership interest 0 0 0 (6,500,000)
Tax withdrawals of former Aero members 0 0 0 (1,445,000)
Debt issuance costs 0 0 (63,000) (305,000)
Advances from Weatherford, net 5,110,000 3,201,000 0 0
----------- ----------- ----------- ------------
Net cash provided by financing activities 5,110,000 3,201,000 6,609,000 4,975,000
----------- ----------- ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 0 0 0 (7,000)
----------- ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,000 (3,000) 345,000 1,485,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,000 4,000 0 345,000
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,000 $ 1,000 $ 345,000 $ 1,830,000
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
OFFSHORE TOOL & ENERGY CORPORATION
(FORMERLY AERO INTERNATIONAL, L.L.C.)
AMERICAN AERO CRANES
(FORMERLY A DIVISION OF WEATHERFORD ENTERRA US, LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Offshore Tool & Energy Corporation (the "Company"), headquartered in Mobile,
Alabama, provides a range of equipment and services for oil and gas, marine,
and industrial applications worldwide. The Company, through its wholly owned
subsidiaries, specializes in the construction and repair of offshore cranes;
the manufacture of equipment and component parts of the offshore oil and gas,
dredging, marine, and mining industries; the manufacture of engineered
systems for enhanced oil recovery projects; and the marketing and servicing
of a range of oil and gas production and environmental products. The Company
operates four manufacturing and four service facilities positioned along the
United States gulf coast from Houston, Texas, to Mobile, Alabama. In
addition, the Company operates service and repair centers located in Nigeria,
Malaysia, and Scotland.
The Company was formed on August 20, 1998 expressly for the purpose of
acquiring all the common and preferred membership interests of Aero
International, LLC ("Aero") and substantially all the assets of International
Tool & Supply, plc ("ITS"). Prior to August 20, 1998, the Company had no
operations. On November 17, 1998, the operations of Aero and ITS were
acquired by the Company in an exchange for common shares (Note 2).
2. ACQUISITIONS AND REORGANIZATION
ACQUISITION OF AERO OPERATIONS
On September 18, 1997, American Aero Cranes LLC ("American"), a wholly owned
subsidiary of Aero, purchased substantially all of the operating assets and
assumed certain liabilities of American Aero Cranes (the "Predecessor"), a
division of Weatherford Enterra US, Limited Partnership ("Weatherford").
Aero and American were formed in Louisiana as limited liability companies
expressly for the purpose of completing the acquisition.
The purchase price was comprised of cash consideration of approximately
$8,801,000 and a promissory note issued to Weatherford in the amount of
approximately $1,613,000. Additionally, Aero incurred acquisition costs of
approximately $384,000 and accrued costs of approximately $929,000 relating
to the relocation of the acquired manufacturing facility from Houston, Texas,
to Mobile, Alabama, the consolidation of the Singapore and Malaysia
facilities, and other acquisition-related expenses. The cash consideration
was
F-8
<PAGE>
funded through the issuance of debt and available cash from the initial
equity contribution of Aero.
The acquisition was accounted for as a purchase in accordance with Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations."
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their respective estimated fair values at the
date of acquisition. The result of the allocation was an excess of net
assets acquired over purchase price and, as such, the recorded value of
noncurrent assets was reduced to zero.
AERO REORGANIZATION
Effective May 31, 1998, Aero, through American, acquired the assets and
liabilities of Titan Industries, Inc. ("Titan"). The acquisition of Titan
was accounted for similar to a pooling of interests under APB Opinion No. 16
as Aero and Titan are under common shareholder control. As such, the
financial statements of Aero have been restated to include Titan's operations
since the date both companies came under common control (November 6, 1997),
and Titan's assets and liabilities were transferred to Aero at historical
cost. The purchase price was comprised of a promissory note of approximately
$676,000 payable to the former shareholders of Titan and was accounted for as
a dividend.
Also effective May 31, 1998, IPC Industries ("IPC") and Mobile Pulley Marine
Services Inc. contributed certain assets and liabilities of its operating
subsidiaries, Mobile Pulley & Machine Works ("MPMW") and Mobile Pulley Marine
Services ("MPMS"), respectively, in exchange for $3,000,000 cash and 960,000
Class B preferred membership units (the "Class B Units") with an aggregate
face value of $12,000,000. These acquisitions were accounted for as
purchases in accordance with APB Opinion No. 16 and accordingly, the purchase
price has been allocated to the assets acquired and liabilities assumed based
on their respective estimated fair values at the date of acquisition. The
excess of the purchase price over the fair value of net assets acquired,
allocated to goodwill, was $7,006,000 and is being amortized on a straight-
line basis over 40 years. The results of operations of MPMW and MPMS are
included in the Company's financial statements as of the date of acquisition.
Following the above acquisitions (the "Aero Reorganization"), American was
renamed Aero International, LLC, and Aero was renamed Aero Holdings, LLC.
Subsequently, Aero International, LLC was merged with and into Aero Holdings
LLC and the name Aero Holdings, LLC was changed to Aero International, LLC.
Also in connection with the Aero Reorganization, the Company refinanced its
debt pursuant to a new loan agreement.
ITS ACQUISITION AND REORGANIZATION
On November 17, 1998, the operations of ITS and Aero were acquired by the
Company (the "ITS Acquisition and Reorganization"). In exchange for the
assets and related liabilities of the primary operating subsidiaries of ITS,
the Company issued 20,500,000 common shares. In exchange for the common and
preferred membership interests of Aero, the Company issued 29,500,000 of
common shares, $1,000,000 aggregate principal unsecured 10% notes (the
"Senior Notes"), and $4,000,000 of Series B Junior Subordinated Notes (the
"Junior Notes"), $5,500,000 of Series A Subordinated Debentures (the
"Debentures"), and $6,500,000 in cash. As Aero was deemed the acquiror under
the
F-9
<PAGE>
provisions of APB No. 16, the Senior Notes and Junior Notes were treated
as distributions to the Aero common members.
In connection with the ITS Acquisition and Reorganization, the Company issued
3,000,000 Series B warrants ("Series B Warrants") to certain third-party
advisors for services rendered related to the Acquisition. In accordance
with APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants," the Company has recorded the Series B Warrants
at the fair value of the services rendered as transactions costs, and has
included the warrants as a component of shareholders' equity. Also, in
connection with the ITS Acquisition and Reorganization, the Company issued
$9,500,000 of Debentures for cash to two former shareholders of ITS and
unrelated third parties.
The ITS Acquisition and Reorganization was accounted for as a purchase in
accordance with APB Opinion No. 16. Aero was deemed the acquiror and, as
such, the purchase price has been allocated to ITS' assets acquired and
liabilities assumed based on their respective estimated fair values at the
date of acquisition. The value of the stock issued to ITS' shareholders was
approximately $16,422,000, and the Company incurred transaction costs of
approximately $2,650,000. The excess of the purchase price over the fair
value of net assets acquired, allocated to goodwill, was $7,116,000 and is
being amortized on a straight-line basis over 40 years. The results of
operations of ITS are included in the Company's financial statements as of
the date of acquisition. Concurrent with the acquisition, ITS underwent a
voluntary solvent liquidation and the Company listed its common stock on the
Alternative Investment Market ("AIM") of the London Stock Exchange (Note 9).
Unaudited condensed pro forma results of operations, which give effect to the
Aero Reorganization (excluding the Titan acquisition, as the Aero financial
statements have been restated to include Titan's operations from the date
both companies came under common shareholder control) and the ITS Acquisition
and Reorganization (operations of ITS have been included since April 1, 1998
in the pro forma information below) as if both transactions had occurred on
January 1, 1998, are presented below. The unaudited pro forma amounts
reflect acquisition-related purchase accounting adjustments, including
adjustments to depreciation and amortization expense and interest expense on
acquisition debt and certain other adjustments, together with related income
tax effects. The unaudited pro forma financial information does not purport
to be indicative of either the results of operations that would have occurred
had the acquisitions taken place at the beginning of the period presented or
of future results of operations.
<TABLE>
<CAPTION>
PRO FORMA
1998
-----------
(Unaudited)
<S> <C>
Net sales $73,661
Loss from continuing operations before income taxes (1,844)
Net loss (1,844)
Net loss per basic and diluted share of common stock $ (0.04)
</TABLE>
F-10
<PAGE>
3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts and
results of its subsidiaries. All material intercompany transactions and
accounts have been eliminated in consolidation. The carrying amounts of
assets and liabilities in the accompanying financial statements reflect the
effects of the purchase accounting adjustments made in connection with the
Aero Reorganization and ITS Acquisition and Reorganization.
The statements of operations of the Company contain the results of operations
of Titan since the period both companies came under common control. The
statements of operation of the Company also include the results of operations
of MPMW, MPMS, and ITS as of the date of their respective acquisition.
PREDECESSOR BASIS OF PRESENTATION
The Predecessor operated as a division of Weatherford and includes the marine
crane manufacturing and service businesses of Weatherford. Certain
liabilities and expenses, including debt and interest expense, were
maintained and accounted for by Weatherford and were not allocated to the
Predecessor. Additionally, interest expense and interest income on debt or
assets carried at Weatherford not directly charged or credited to the
Predecessor have not been included in the accompanying financial statements.
Certain corporate, general, and administrative expenses of Weatherford have
been allocated to the Predecessor on a basis which, in the opinion of the
Predecessor's management, is reasonable. However, such expenses are not
necessarily indicative of, nor is it practical for the Predecessor's
management to estimate, the level of expenses which might have been incurred
had the Predecessor operated as a single, independent company (Note 12).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 disclosure 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash and cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable potentially subject the Company to concentrations of
credit risk. The Company performs ongoing credit evaluations of their
customers' financial condition and have established an allowance for doubtful
accounts based on the expected collectibility of
F-11
<PAGE>
all accounts receivable. The Company believes their allowance for doubtful
accounts is adequate to cover any potential losses on their credit risk
exposure.
At December 31, 1997 and 1998, accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Trade accounts receivable $12,088,000 $16,040,000
Affiliate 0 134,000
Other 0 926,000
----------- -----------
12,088,000 17,100,000
Less allowance for doubtful accounts 418,000 859,000
----------- -----------
Accounts receivable $11,670,000 $16,241,000
----------- -----------
</TABLE>
INVENTORIES
In accordance with APB Opinion No. 16, profits and losses related to
inventories purchased by the Company attributable to the production and
service efforts of the Predecessor have been included in the value of such
inventories. As such, the initial period after acquisition resulted in a
lower amount of profit than normally would have been expected. Cost of sales
for the year ended December 31, 1997 includes purchased profits of
approximately $207,000.
Inventories are valued at the lower of cost or market, cost being determined
on the first-in, first-out method. At December 31, 1997 and 1998,
inventories of the Company consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Raw materials $4,465,000 $ 5,544,000
Work in process 1,217,000 4,857,000
Finished goods 0 1,717,000
---------- -----------
5,682,000 12,118,000
Less reserve for inventory obsolescence (990,000) (759,000)
---------- -----------
Total $4,692,000 $11,359,000
========== ===========
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT
Additions, improvements, and renewals significantly adding to the asset value
or extending the life of the asset are capitalized. Ordinary maintenance and
repairs not extending the physical or economic lives of the plant and
equipment are charged to expense as incurred. The Company and the
Predecessor use the straight-line method to depreciate property and
equipment. Estimated useful lives are as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------- -----------
<S> <C> <C>
Buildings 20-30 years 39 YEARS
Furniture and fixtures 5 years 5 YEARS
Computer equipment 5 years 5 YEARS
Machinery and equipment 7-20 years 5-20 YEARS
</TABLE>
EXCESS OF NET ASSETS ACQUIRED OVER PURCHASE PRICE
The excess of net assets acquired over purchase price resulted from the
acquisition of the Predecessor. Accretion for the period from September 19,
1997 to December 31, 1997 was $7,000. During 1998, the Company incurred a
previously unrecorded liability related to the preacquisition period and
applied the ultimate payment of such liability against the excess of net
assets acquired over purchase price in accordance with APB No. 16.
PRODUCT AND SERVICE WARRANTIES
Products manufactured by the Company and the Predecessor are warranted for a
period of one year commencing at the time of acceptance. The estimated cost
of such warranties is accrued at the time of sale and is reflected as a
component of cost of sales in the accompanying statements of operations.
Warranty costs were approximately $175,000 for the year ended December 31,
1996, approximately $245,000 and $105,000 for the periods from January 1,
1997 to September 18, 1997 and September 19, 1997 to December 31, 1997,
respectively, and approximately $25,000 for the year ended December 31, 1998.
NOTE RECEIVABLE
A note receivable aggregating $1,500,000 at December 31, 1998 was acquired by
the Company in connection with the ITS Acquisition. The note bears interest
at 8% and matures in November 1999.
REVENUE RECOGNITION
The Company and the Predecessor use the completed contract method of revenue
recognition for its short-term contracts. Manufacturing revenues are
recognized when the goods are accepted by the customer as ready for delivery.
Service revenues are recognized when the services are complete. Progress
billings collected before completion of the contract are defined and
reflected as deferred revenue in the accompanying consolidated balance
sheets.
Revenues on long-term contracts are recognized using the percentage-of-
completion method. Under this method, revenue is recognized based on the
percentage that the cost of the work completed bears to the estimated total
cost of the contract. Estimated total costs are reviewed monthly and revised
as necessary, with profit recognition adjusted accordingly. In the period in
which estimates indicate that a contract will result in a loss, the entire
amount of the estimated loss is recognized. The amount of revenue recognized
under the percentage-of-completion method is included in trade accounts
receivable at December 31, 1998.
F-13
<PAGE>
INCOME TAXES
The Predecessor's tax accounts are included in the consolidated income tax
returns filed by Weatherford. The Predecessor and Weatherford entered into
an agreement which allocates certain income tax liabilities, benefits, and
credits to the Predecessor. Under the arrangement, the Predecessor is liable
to Weatherford for its recorded income tax expense computed by applying an
agreed-upon rate, which management feels approximates the statutory rate, to
the Predecessor's pretax income.
Aero, prior to the ITS Acquisition and Reorganization by the Company, was a
limited liability company and, therefore, was treated as a partnership for
federal income tax reporting purposes. As such, the taxable income or loss
of Aero is included in the individual tax returns of its members.
Accordingly, no accounts for deferred income taxes or provisions for current
or deferred income taxes, prior to the ITS Acquisition and Reorganization,
have been included in the accompanying financial statements of Aero, except
for states which do not recognize limited liability companies as partnerships
and tax these entities as C corporations. As Titan is a C corporation, the
taxes associated with Titan have been included since the companies came under
common control.
Effective November 17, 1998, the Company terminated its limited liability
company status and became a taxable entity. Concurrent with this election,
the Company began providing for income taxes based on Statements of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS
No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. In accordance with SFAS No. 109, the
Company recognized deferred tax expense for those deferred tax liabilities
and asset with expected future tax consequences (Note 11) upon the change in
taxable status. Pro forma provision for income taxes included on the
consolidated statements of operations have been computed as if the Company
was a taxable entity for the period from September 19, 1997 to December 31,
1997 and for the year ended December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheets for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value due to the immediate or short-term maturity of these financial
instruments. In the opinion of management, total long-term debt recorded in
the accompanying balance sheets approximates fair value based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using current exchange rates in effect at the
balance sheet date and revenues and expenses are translated at average
monthly exchange rates. The resulting adjustments are recorded as a separate
component of accumulated comprehensive income, net of related income taxes in
shareholders' equity.
F-14
<PAGE>
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity during a period,
except those resulting from investment by owners and distribution to owners,
in a financial statement for the period in which they are recognized. Other
comprehensive loss includes only foreign currency translation adjustments.
The calculation of comprehensive income is as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------- ----------------------------------
FOR THE FOR THE PERIOD FROM FOR THE PERIOD FROM FOR THE
YEAR ENDED JANUARY 1,1997 SEPTEMBER 19, 1997 YEAR ENDED
DECEMBER 31, TO SEPTEMBER 18, TO DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
------------ ------------------- ------------------- ------------
<S> <C> <C> <C> <C>
Net income $ 406,000 $ 527,000 $ 620,000 $ 1,297,000
Other comprehensive loss 0 0 0 (42,000)
--------- --------- --------- -----------
Comprehensive income $ 406,000 $ 527,000 $ 620,000 $ 1,255,000
========= ========= ========= ===========
</TABLE>
PRO FORMA EARNINGS PER SHARE
Pro forma basic earnings per share is calculated by dividing pro forma net
income available to common shareholders by the pro forma weighted average
number of common shares outstanding for the year presented. Pro forma
weighted average shares outstanding was computed assuming the shares issued
to the former Aero members' in the ITS Acquisition and Reorganization were
outstanding since January 1, 1998 and the shares issued to the ITS
shareholders' were outstanding since November 17, 1998, the date of the ITS
Acquisition by Aero. Pro forma diluted earnings per share reflects the
potential dilution that could occur if securities and other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity. At December 31, 1998, there were 3,000,000 Series B Warrants and
6,250,000 Series A increasing warrants (the "Series A Increasing Warrants")
issued and outstanding at antidilutive prices. Furthermore, there were
approximately 5,333,000 potential dilutive shares associated with the
conversion of the Junior Notes which were deemed antidilutive for earnings
per share purposes.
RECLASSIFICATIONS
Certain amounts in the financial statements and notes have been reclassified
to conform with the current year presentation.
F-15
<PAGE>
4. PROPERTY, PLANT, AND EQUIPMENT
At December 31, 1997 and 1998, property, plant, and equipment of the Company
consisted of the following:
COMPANY
-----------------------------
1997 1998
--------- -----------
Land $ 92,000 $ 1,342,000
Buildings 214,000 9,255,000
Furniture and fixtures 35,000 261,000
Machinery and equipment 175,000 14,386,000
Construction in progress 190,000 556,000
--------- -----------
706,000 25,800,000
Less accumulated depreciation 15,000 770,000
--------- -----------
$ 691,000 $25,030,000
========= ===========
Depreciation expense (included in cost of sales and selling, general, and
administrative expenses) was approximately $339,000 for the year ended
December 31, 1996, $293,000 for the period from January 1, 1997 to September
18, 1997, $15,000 for the period from September 19, 1997 to December 31,
1997, and $674,000 for the year ended December 31, 1998.
The Company leases equipment and certain facilities under noncancelable
operating lease agreements which expire in various years through October
2003. Rental expenses under these leases amounted to approximately $340,000
for the year ended December 31, 1998.
Future minimum rental commitments under all noncancelable operating lease
agreements, excluding lease agreements that expire within one year, are as
follows as of December 31, 1998:
1999 $ 666,000
2000 366,000
2001 166,000
2002 63,000
2003 24,000
----------
$1,285,000
==========
5. GOODWILL
The Aero Reorganization and the ITS Acquisition and Reorganization resulted
in goodwill of approximately $14,122,000. Goodwill is being amortized on a
straight-line basis over 40 years. Amortization of goodwill (included in
selling, general, and administrative expense) was approximately $126,000 for
the year ended December 31, 1998. The Company periodically evaluates the
realizability of goodwill based on expectations of nondiscounted
F-16
<PAGE>
cash flows and operating income for each subsidiary having a material
goodwill balance. In the opinion of management, no impairment of goodwill
exists at December 31, 1998.
6. ACCRUED LIABILITIES
Accrued liabilities of the Company at December 31, 1997 and 1998 consisted
of the following:
COMPANY
-----------------------------
1997 1998
----------- -----------
Accrued insurance $ 0 $ 1,333,000
Accrued interest 89,000 803,000
Accrued salaries and wages 110,000 1,115,000
Accrued commissions 397,000 841,000
Accrued acquisition cost 0 1,673,000
Accrued member tax distribution 0 1,000,000
Accrued warranty costs 251,000 345,000
Accrued moving costs 960,000 0
Other 1,802,000 2,947,000
----------- -----------
$ 3,609,000 $10,057,000
=========== ===========
7. LONG-TERM DEBT
On June 30, 1998, the Company entered into a $40,000,000 loan facility (the
"New Facility") with a bank. The New Facility is secured by certain assets
of the Company and consists of a revolving credit facility, a capital
expenditures loan facility, and a fixed-asset facility. The following
describes each of these credit facilities:
REVOLVING CREDIT FACILITY
The revolving credit facility allows for the borrowing of funds up to
$40,000,000 less the sum of (a) the borrowing base, as defined, (b)
amounts due under the capital expenditures loan facility, and (c)
amounts due under the fixed asset facility. The principal balance and
accrued interest become due on the termination date of the facility,
June 20, 2001.
CAPITAL EXPENDITURES LOAN FACILITY
The capital expenditures loan facility allows for the borrowing of
funds up to 90% of the sum of (i) the appraised liquidation value of
eligible equipment and (ii) the appraised value of eligible real
estate. The principal is advances shall be reduced monthly based on a
seven-year amortization beginning July 1, 1998.
F-17
<PAGE>
FIXED-ASSET LOAN FACILITY
The fixed-asset loan facility allows for the advances of funds up to
80% of the related total actual cost of property, plant, and equipment,
as defined. The principal is reduced monthly based on a seven-year
amortization beginning July 1, 1998.
Interest on each of these facilities accrues at a rate per annum selected by
the borrower from either the prime rate plus an applicable margin or LIBOR
plus an applicable margin. The applicable margin is determined based on the
Company's earnings before interest, taxes, amortization or accretion, and
depreciation.
The New Facility contains certain restrictive covenants, including financial
covenants. The most restrictive financial covenants include, among other
things, minimum interest coverage, as defined; minimum capital, as defined;
consecutive quarterly earnings criteria, as defined; limitations on capital
expenditures; and limitations on the ability of the Company to incur
additional liens, debt, or distributions to members.
At December 31, 1998, the weighted average interest rate on borrowings under
the New Facility was 6.64% and approximately $3,390,000 was committed under
letters of credit. At December 31, 1998, the Company had available
borrowings under the New Facility of approximately $19,150,000.
Furthermore, in connection with the Aero Reorganization, the Company entered
into a $676,000 promissory note with the former shareholders of Titan
Industries, Inc. (the "Titan Note"). The Titan Note bears interest at 10%
per year, is payable on demand, and is subordinated to the New Facility.
Additionally, in connection with the ITS Acquisition and Reorganization, the
Company entered into the following debt agreements:
SENIOR NOTES
The $1,000,000 Senior Notes are unsecured and are transferable. The
Senior Notes accrue interest at 10%, which is payable quarterly in
arrears. Principal and all accrued and unpaid interest are payable on
November 17, 2000. The holders have the right, upon notice, to
accelerate the due date. The holders are afforded no voting or dividend
rights. Holders are entitled, in the event of a winding-up, to receive
payment in preference to holders of common stock, the Debentures, and
the Junior Notes.
SERIES A SUBORDINATED DEBENTURES
The $15,000,000 Debentures pay interest semiannually at 12% per year
and mature in December 2003. The Debentures are unsecured and are
subordinate to the New Facility and the Senior Notes. Repayment is at
the option of the Company at any time at par plus accrued and unpaid
interest to the repayment date. The Debentures were issued with
detachable 6,250,000 Series A Increasing Warrants (Note 9).
F-18
<PAGE>
The Debentures issued included detachable warrants which have been
included as a component of shareholders' equity based on their fair
market value of $231,000 and treated as a warrant discount of the
associated debt. The discount is being amortized on the straight-line
method, which does not materially differ from the effective interest
rate method, over the life of the debt.
SERIES B JUNIOR SUBORDINATED NOTES
The $4,000,000 Junior Notes bear interest payable semiannually at 7%
per year and mature in December 2003. The Junior Notes are unsecured
and are subordinate to the Debentures. Repayment is at the option of
the Company at any time at par plus accrued interest and unpaid
interest to the repayment date, subject to a right of the holder to
take repayment in common stock at $0.75 per share.
In connection with the purchase of the Predecessor, American entered into
an $11,700,000 loan agreement (the "Agreement") with a bank. The Agreement
was secured by all the assets of Aero and consisted of a revolving credit
facility, term loan facility, capital expenditures loan facility, and
bridge loan facility. The balances outstanding on the Agreement were paid
off in connection with the issuance of the New Facility.
In connection with the purchase of Titan, American assumed the outstanding
balance of a $2,355,000 loan agreement with a bank. The agreement was
secured by all the assets of Titan and consisted of a revolving credit
facility and a term loan facility. The balances outstanding on the
agreement were paid off in connection with the issuance of the New
Facility.
Additionally, in connection with the purchase of the Predecessor, American
entered into a $1,613,000 promissory note (the "Weatherford Note") with
Weatherford. The Weatherford Note is subordinate to all other indebtedness
of the Company. The principal and interest are payable in three annual
installments beginning September 18, 2003 and accrue interest at an annual
rate of 6.23%.
At December 31, 1997 and 1998, the Company's long-term debt consisted of
the following:
1997 1998
---------- -----------
Revolving credit facility $4,150,000 $18,123,000
Term loan facility, interest payable at the
prime rate plus applicable margin 975,000 0
Bridge loan, interest payable at the prime
rate plus applicable margin 700,000 0
Revolving credit facility of Titan, interest
payable at LIBOR plus 2.25% 986,000 0
F-19
<PAGE>
1997 1998
---------- -----------
Term loan facility of Titan, interest payable
at LIBOR plus 2.25% $1,136,000 $ 0
Series B Junior Subordinated Notes 0 4,000,000
Series A Subordinate Debentures, net of
Series A Increasing Warrants' discount of $227,000 0 14,773,000
Senior Notes 0 1,000,000
Titan Note 0 676,000
Promissory note, payable in monthly installments
of principal and interest of $12,234, interest
payable at 10.75% 0 489,000
Promissory note, payable in monthly installments
of principal and interest of $15,967, interest
payable at bank's prime rate (8.5% at December 31, 1998) 0 1,875,000
Industrial Development Revenue Bonds, payable in full
on July 1, 2013, plus interest payable monthly at an
adjustable rate (3.5% at December 31, 1998),
collateralized by certain property and equipment 0 2,000,000
Weatherford note 1,613,000 1,613,000
Other 0 254,000
9,560,000 44,803,000
---------- -----------
Less current maturities 679,000 862,000
---------- -----------
$8,881,000 $43,941,000
========== ===========
The principal maturities of long-term debt are as follows:
1999 $ 862,000
2000 1,203,000
2001 18,300,000
2002 296,000
2003 19,618,000
Thereafter 4,751,000
-----------
$45,030,000
===========
F-20
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Arising in the ordinary course of its activities, the Company is defending
or has been threatened with various claims and litigation. In the opinion of
management, these proceedings will not have a significant adverse effect on
the Company's financial condition, operations, or liquidity. The Company has
been indemnified by Weatherford for certain contingencies occurring during
the period when the Predecessor was owned by Weatherford.
The Company has entered into employment agreements with certain executive
officers of the Company. These agreements, which are substantially similar,
provide for compensation to the officers in the form of annual base salaries
and bonuses based on earnings. The employment agreements also provide for
severance benefits upon the occurrence of certain events, including a change
in control, as defined.
Approximately 24% of the Company's total labor force is covered by
collective bargaining agreements. There are no collective bargaining
agreements expiring within one year.
9. EQUITY
On November 18, 1998, in connection with the ITS Acquisition and
Reorganization, the Company listed shares of its common stock on the AIM
(the "Offering"). There were no proceeds from the listing as the shares were
issued and listed in connection with the ITS Acquisition and Reorganization.
Prior to the Offering, there was no public market for the Company's common
stock.
MEMBERS' EQUITY
Aero operated as a limited liability company with four members until the ITS
Acquisition and Reorganization (Note 2) on November 17, 1998. Prior to this,
the ownership rights and obligations were determined under an operating
agreement. Among other items, the operating agreement defined the amount of
initial capital contributions, allocation of income, and distributions to
its members. The members surrendered their membership interest for the
Senior Notes, common stock of the Company, and the Junior Notes.
CLASS B UNITS
The Class B Units were issued under the Aero operating agreement in exchange
for the assets and liabilities of MPMW and MPMS, and have a stated value of
$12.50 per unit. The holders have preferences concerning dividends and upon
the liquidation, dissolution, or winding up of the Company. The holders of
the Class B Units have no voting rights, and are eligible for conversion
into common units beginning July 1, 2000. All of the Class B Units were
redeemed by the holders in connection with the ITS Acquisition and
Reorganization (Note 2).
PREFERRED STOCK
The Company's board of directors has the authority to issue up to 5,000,000
shares of preferred stock as well as to fix dividends, voting and conversion
rights, redemption
F-21
<PAGE>
provisions, liquidation preference, and other rights and restrictions. As of
December 31, 1998, there was no preferred stock issued and outstanding.
STOCK OPTION PLAN
The Company instituted the Offshore Tool & Energy Corporation Stock
Incentive Plan (the "Stock Incentive Plan") during fiscal 1998 which allows
the issuance of grants or awards of incentive stock options, appreciation
rights, restricted common stock, performance awards, and dividend equivalent
rights to officers, directors who are also employees, key management
employees, and persons affiliated with the Company. The Company can issue up
to 5,000,000 shares of the Company's common stock. As of December 31, 1998,
there were no options granted or issued.
WARRANTS
In connection with the ITS Acquisition and Reorganization, the Company
issued detachable 6,250,000 Series A Increasing Warrants exercisable at
$0.63 in connection with the Debentures. If the Debentures are not repaid 18
months after the reorganization date, the original warrants remaining
outstanding on such date will be increased by the factor 1.15 and
distributed on a pro rata basis. If the Debentures are not repaid 36 months
after issuance, the warrants outstanding on such date will be increased by
the factor 1.174 and distributed on a pro rata basis to the holders of the
debentures. If the Debentures are not repaid 48 months after issuance, the
warrants outstanding on such date will be increased by a the factor 1.148
and distributed on a pro rate basis. If none of the Debentures are repaid in
48 months, a total of approximately 9,687,000 Series A Warrants will be
issued. All warrants expire seven years after issuance.
Furthermore, the Company issued 3,000,000 Series B Warrants in connection
with the AIM listing to certain third-party advisors in lieu of payment for
services. The Series B Warrants have an exercise price of $1.26 and expire
after 5 years of issuance. The Series B Warrants afford the holders no
voting or dividend rights and have no rights upon dissolution or winding up
of the Company. In accordance with APB No. 14 , the Company has included the
warrants as a component of shareholders' equity at the fair value of the
services rendered.
10. EMPLOYEE BENEFIT PLAN
In connection with the Aero Reorganization, the Company established the Aero
International, L.L.C. 401(k) Plan (the "Plan"). The Plan covers
substantially all nonunion employees. Eligible employees may contribute
certain amounts of their annual compensation, as defined by the Plan. The
Company has the option to match eligible contributions up to a certain
percentage, as defined by the Plan and within the limitations established in
the Internal Revenue Code. During 1998, the Company made matching
contributions of $187,000.
In connection with the Aero Reorganization, the Company began making
contributions for a certain number of the Company's employees covered by
union-sponsored, collectively bargained, multiemployer pension and health
and welfare benefit plans. The Company contributed and charged to expense
approximately $67,000 during 1998 for these plans.
F-22
<PAGE>
These contributions are determined in accordance with the provisions of
negotiated labor contracts and are generally based on the number of man-
hours worked.
11. INCOME TAXES
The following summarizes the components of income tax provision for the
period from September 18, 1997 to December 31, 1997 and for the year ended
December 31, 1998:
1997 1998
--------- ---------
Current:
Federal $ (49,000) $ (90,000)
State (9,000) (48,000)
Foreign 0 0
--------- ---------
Total current (58,000) (138,000)
--------- ---------
Deferred:
Federal 24,000 (25,000)
State 5,000 (4,000)
Foreign 0 0
--------- ---------
Total income tax provision $ (29,000) $(167,000)
========= =========
The provision for the period from September 18, 1997 to December 31, 1997
and for the year ended to December 31, 1998 for income taxes differs from
the amounts computed by applying federal statutory rates due to the
following:
1997 1998
--------- ----------
Provision computed at the federal
statutory rate $ (25,000) $ (498,000)
State income taxes, net of federal
income tax benefit (3,000) (68,000)
Income from Aero 0 876,000
Change in valuation allowance 0 (495,000)
Amortization of nondeductible goodwill 0 (14,000)
Earnings in jurisdictions taxed at rates
different from the statutory U.S. federal rate 0 4,000
Other, net (1,000) 28,000
--------- ----------
Total income tax provision $ (29,000) $ (167,000)
========= ==========
F-23
<PAGE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and December 31, 1998 is as
follows:
1997 1998
--------- ------------
Deferred tax assets:
Reserve for inventory obsolescence $ 162,000 $ 296,000
Warranty reserve 14,000 134,000
Depreciation 7,000 0
Reserve for doubtful accounts 11,000 335,000
Accrued medical benefits 0 506,000
Tax carryforwards 0 12,987,000
Other 17,000 811,000
--------- -----------
Total gross deferred tax assets 211,000 15,069,000
--------- -----------
Deferred tax liabilities:
Prepaids currently deductible 0 (170,000)
Depreciation and amortization 0 (19,000)
Other (3,000) 0
--------- -----------
Total gross deferred tax assets (3,000) (189,000)
--------- -----------
Valuation allowance 0 (14,880,000)
--------- -----------
Net deferred tax assets $ 208,000 $ 0
========= ===========
The Company has certain tax carryforwards available to offset future income
taxes, subject to certain restrictions and limitations, consisting of net
operating losses that expire from 2002 to 2018, foreign tax credits that
expire from 2000 to 2001, percentage of depletion credits, and alternative
minimum tax credits that have no expiration dates.
The Company maintained a valuation reserve related to its carryforwards due
to the uncertainty of the timing of future regular taxable income to utilize
such carryforwards and deferred tax assets.
12. RELATED-PARTY TRANSACTIONS
PREDECESSOR TRANSACTIONS
Weatherford provided services to and incurred costs for the benefit of the
Predecessor. Certain services that include, but are not limited to, property
and casualty insurance coverage under the Weatherford insurance program;
administrative services; management information services; employee benefits
administration; environmental consultation and administration; central
purchasing; legal, tax, accounting and reporting services; and treasury
management have been allocated to the Predecessor.
The allocations of the costs and expenses for the services described above
were based on methods that the Predecessor's management believes are
reasonable. The actual costs incurred by the Company in the future to
replace the services provided and the costs paid by Weatherford may differ
from allocated amounts due to differences in scale, organizational
structure, management structure, and other factors.
F-24
<PAGE>
Net sales by the Predecessor to related parties and allocated costs from
related parties to the Predecessor are as follows:
JANUARY 1, 1997
DECEMBER 31, TO SEPTEMBER 18,
1996 1997
------------ ----------------
Net sales to related parties $ 889,000 $ 304,000
--------- ---------
Allocated costs from Weatherford:
Cost of sales $ 651,000 $ 39,000
--------- ---------
Selling, general, and
administrative expenses $ 516,000 $ 370,000
========= =========
Net sales to related parties are comprised primarily of crane sales and
crane rental revenues by the Predecessor. Crane sales and rental rates are
at a level the Predecessor's management deems to be market rates.
For all years presented, the Predecessor has participated in Weatherford's
cash management program, under which the Predecessor's cash needs were
funded by Weatherford and the Predecessor's excess cash was transferred to
Weatherford. Such funding and transfers are included in advances from
Weatherford, net, in divisional equity in the accompanying statements of
divisional equity.
COMPANY TRANSACTIONS
Prior to May 31, 1998, IPC, a former equity holder of Aero, provided certain
management services for the benefit of the Company. For these services, IPC
charged a management fee based on 1.5% of sales. For the period from
September 19, 1997 to December 31, 1997 and for the year ended December 31,
1998, IPC charged the Company approximately $141,000 and $240,000,
respectively. Also, IPC provided other services including, but not limited
to, insurance, medical coverage, and benefits administration for which IPC
is reimbursed. During the period from September 19, 1997 to December 31,
1997 and for the year ended December 31, 1998, the Company incurred
approximately $486,000 and $336,000, respectively, in expenses relating to
these services and at December 31, 1997 had approximately $279,000, payable
to IPC.
Furthermore, the Company has accrued membership interest payable to IPC and
IPC Investment, Inc. related to the Class B Units issued at the Aero
Reorganization and subsequently exchanged for common stock of the Company at
the ITS Acquisition and Reorganization of approximately $279,000 at December
31, 1998. The Company also entered into a bill of sale with IP Capital for
certain property. The Company paid approximately $900,000 for this property
during the year.
The Company has a receivable from IPC for approximately $113,000 at
December 31, 1998 related to certain fees paid by the Company on behalf of
IPC at the Aero Reorganization.
MPMS provided certain services related to the construction and service of
Aero's products. During the period from September 19, 1997 to December 31,
1997, Aero incurred
1998
F-25
<PAGE>
approximately $151,000 in expenses relating to these services. From January
1, 1998 to May 31, 1998 (date of MPMS acquisition), Aero incurred
approximately $96,000 in expenses related to these services.
IP Capital Corporation, a company owned by the shareholders of IPC, charged
the Company an investment advisory fee of $175,000. The fee was paid for
services rendered in connection with the negotiations of the sale of the
Predecessor to the Company and the Titan acquisition. The fees were included
in the transaction costs associated with the purchases of the Predecessor
and Titan and in the opinion of management fairly represent the value of
services provided.
The Company has a payable to the former members of Aero of $1,000,000 at
December 31, 1998 for the members' portion of the income withdrawal from
Aero from January 1, 1998 to November 17, 1998.
The Company had sales during the period from June 1, 1998 to December 1,
1998 of approximately $354,000 to American Mulcher Parts, LLC, an entity
controlled by two shareholders of the Company. At December 31, 1998, the
Company had a receivable of $354,000 related to these sales.
Weatherford provided certain services for the Company, including the use of
office space and a manufacturing facility located in Houston, Texas. The
Company reimbursed Weatherford for these services. The Company incurred
approximately $602,000 in expenses relating to these services and at
December 31, 1997 had approximately $174,000 payable to Weatherford. The
Company also provided services to Weatherford. During the period from
September 19, 1997 to December 31, 1997, the Company had sales of
approximately $221,000 and at December 31, 1997 had receivables of
approximately $281,000 due from Weatherford. Included in the receivables is
approximately $60,000 relating to expenses reimbursable from Weatherford.
13. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, one customer accounted for 11% of net
sales of the Predecessor, and for the period from September 19, 1997 to
December 31, 1997, one customer accounted for 11% of net sales of the
Company. For the period from January 1, 1997 to September 18, 1997 and for
the year ended December 31, 1998, there were no customers which accounted
for more than 10% of total revenues.
14. SEGMENT REPORTING
During fiscal 1998, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting selected information
about operating segments in interim financial reports issued to
stockholders.
Prior to May 31, 1998, the Company had only one reportable segment: the
Crane Division. Subsequent to the Aero Reorganization and ITS Acquisition
and Reorganization, the
F-26
<PAGE>
Company had four reportable segments: the Crane Division, the Marine Equipment
Division, the Engineered Systems Division, and the Drilling Services Division.
The Crane Division engineers, manufacturers, rebuilds, and provides replacement
parts for cranes for marine applications. The Marine Equipment Division
manufacturers component and replacement parts used in the offshore oil and gas,
dredging, marine, and mining industries. The Engineered Systems Division
manufacturers and markets enhanced oil recovery equipment, oil and gas
production equipment, oil field and industrial water treatment equipment, and
provides custom fabrication services. The Drilling Service Division provides
products which assist in the prevention of pollution and environmental damage.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Total revenues represent sales to
unaffiliated customers. All intercompany transactions have been eliminated. The
Company evaluates a segment's performance based on earnings before income
taxes, depreciation, and amortization ("EBITDA"). EBITDA is considered a key
financial measurement in the industries that the Company operates.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Most of the
businesses were acquired as a unit, and the management at the time of the
acquisition was retained.
<TABLE>
<CAPTION>
Marine Engineered Drilling
Crane Equipment Systems Services
Division Division Division Division Corporate Total
----------- ----------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998:
Net sales to customers $36,368,000 $14,997,000 $ 937,000 $590,000 $ 0 $52,892,000
EBITDA 3,499,000 2,357,000 (113,000) 98,000 (1,623,000) 4,218,000
Interest expense 882,000 787,000 23,000 4,000 248,000 1,944,000
Depreciation and
amortization expense 240,000 408,000 57,000 69,000 74,000 848,000
Other income (expense) 26,000 (26,000) 38,000 0 0 38,000
Income (expense) before
provision for income
taxes 2,403,000 1,136,000 (155,000) 25,000 (1,945,000) 1,464,000
Capital expenditures, net
of disposal 4,591,000 897,000 (22,000) 19,000 6,000 5,491,000
</TABLE>
F-27
<PAGE>
Geographic financial information for the period from September 19, 1997
to December 31, 1997 and for the year ended December 31, 1998 are as
follows:
FOR THE
FOR THE PERIOD FROM YEAR ENDED
SEPTEMBER 19, 1997 DECEMBER 31,
TO DECEMBER 31, 1997 1998
-------------------- ------------
Revenues:
United States $ 9,886,000 $ 46,630,000
United Kingdom 0 310,000
Asia 733,000 2,766,000
Africa 401,000 2,554,000
Other 0 632,000
------------ ------------
$ 11,020,000 $ 52,892,000
============ ============
Long-lived assets:
United States $ 792,000 $ 35,944,000
United Kingdom 0 3,375,000
Asia 0 210,000
Africa 0 491,000
------------ ------------
$ 792,000 $ 40,020,000
============ ============
Revenues are attributed to the respective countries based on the
location of the services provided and the location of customers for
manufactured goods.
15. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------- ------------------------------------
FOR THE FOR THE PERIOD FROM FOR THE PERIOD FROM FOR THE
YEAR ENDED JANUARY 1, 1997 SEPTEMBER 19, 1997 YEAR ENDED
DECEMBER 31 TO SEPTEMBER 18, TO DECEMBER 31, DECEMBER 31,
1996 1997 1997 1998
---------------- -------------------- ------------------- -------------
<S> <C> <C> <C> <C>
Income taxes paid $ 218,000 $ 0 $ 0 $ 298,000
Interest paid 1,000 3,000 109,000 1,230,000
Common stock issued in
connection with
businesses acquired 0 0 0 50,000,000
Liabilities assumed in
connection with
business acquired 0 0 3,798,000 22,387,000
Debentures issued in
exchange for Class B Units 0 0 0 5,500,000
Distribution paid through
issuance of Senior and
Junior Notes 0 0 0 5,000,000
</TABLE>
F-28
<PAGE>
16. SUBSEQUENT EVENT
On March 9, 1999, the Company issued 2,750,000 stock options to certain
employees and third-party investors under the Stock Incentive Plan. The
options were issued at fair market value at date of grant and fully vest
three years from date of grant. The options expire six years from the
date of grant.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Offshore Tool & Energy Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in OFFSHORE TOOL & ENERGY
CORPORATION'S 1998 annual report to stockholders and this Form 10, and have
issued our report thereon dated March 19, 1999. Our audit was made for the
purpose of forming an opinion on those financial statements taken as a whole.
The schedule listed in Item 13 of this Form 10 is the responsibility of the
Company's management, is presented for purposes of complying with the Securities
and Exchange Commission's rules, and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN
Atlanta, Georgia
March 19, 1999
F-30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITS plc:
We have audited the accompanying combined balance sheets of ITS Investments,
Inc. (a Texas corporation), and ITS Holdings Limited (an England corporation)
and their respective subsidiaries (collectively, the ITS Subgroup) as of March
31, 1997 and 1998 and the related combined statements of income, shareholder's
equity and cash flows for the three years in the period ended March 31, 1998.
These financial statements are the responsibility of the ITS Subgroup's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the ITS
Subgroup as of March 31, 1997 and 1998 and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN
Houston, Texas
May 29, 1998
F-31
<PAGE>
THE ITS SUBGROUP
COMBINED BALANCE SHEETS
MARCH 31, 1997 AND 1998 AND SEPTEMBER 30, 1998
ASSETS
<TABLE>
<CAPTION>
September 30,
1997 1998 1998
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS: $ 5,432,000 $ 3,662,000 $ 4,015,000
Cash and temporary cash investments 650,000 650,000 650,000
Short-term investments
Accounts receivable, net of allowance for doubtful accounts of
$409,000, $365,000 and $429,000 at March 31, 1997 and 1998,
and September 30, 1998, respectively 12,107,000 7,018,000 4,473,000
4,049,000 2,534,000 735,000
Inventory 1,024,000 538,000 2,415,000
Prepaid expenses and other ----------- ----------- -----------
23,262,000 14,402,000 12,288,000
Total current assets
PROPERTY, PLANT, AND EQUIPMENT, at cost: 332,000 1,968,000 2,180,000
Land and buildings 4,461,000 6,144,000 7,291,000
Equipment (1,323,000) (1,634,000) (2,114,000)
Less accumulated depreciation and amortization ----------- ----------- -----------
3,470,000 6,478,000 7,357,000a
1,500,000 1,500,000 1,500,000
NOTE RECEIVABLE
10,677,000 7,052,000 6,542,000
OTHER ASSETS, net ----------- ----------- -----------
$38,909,000 $29,432,000 $27,687,000
Total assets =========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,129,000 $ 1,055,000 $ 126,000
Accounts payable 5,544,000 2,176,000 572,000
Accrued expenses 7,112,000 3,313,000 4,681,000
Debenture due affiliate 2,500,000 2,200,000 2,100,000
Short-term borrowings 407,000 502,000 510,000
----------- ----------- -----------
Total current liabilities 17,692,000 9,246,000 7,989,000
LONG-TERM DEBT, less current maturities 588,000 2,466,000 2,305,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock 4,048,000 5,298,000 5,298,000
Additional paid-in capital 17,002,000 17,002,000 17,002,000
Accumulated deficit (379,000) (4,579,000) (4,897,000)
Cumulative translation adjustment (42,000) (1,000) (10,000)
----------- ----------- -----------
Total shareholder's equity 20,629,000 17,720,000 17,393,000
----------- ----------- -----------
Total liabilities and shareholder's equity $38,909,000 $29,432,000 $27,687,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-32
<PAGE>
THE ITS SUBGROUP
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1996, 1997, AND 1998
AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
Six Months Ended
September 30,
---------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES $12,820,000 $20,766,000 $28,957,000 $14,899,000 $ 9,911,000
OPERATING EXPENSES:
Cost of sales 9,181,000 15,305,000 21,369,000 10,792,000 6,395,000
General and administrative 3,363,000 4,901,000 5,620,000 2,861,000 3,169,000
Management fees, affiliate 166,000 181,000 174,000 87,000 0
Depreciation and amortization 543,000 855,000 1,214,000 218,000 480,000
----------- ----------- ----------- ----------- -----------
Total operating expenses 13,253,000 21,242,000 28,377,000 13,958,000 10,044,000
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (433,000) (476,000) 580,000 941,000 (133,000)
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest and other income 832,000 272,000 250,000 100,000 147,000
Interest and other expense (16,000) (118,000) (422,000) (199,000) (223,000)
Interest paid to affiliates (545,000) (276,000) (193,000) (144,000) (109,000)
Gain from sale of assets 93,000 0 0 0 0
Earnings from investments in affiliated
companies 0 0 86,000 26,000 0
----------- ----------- ----------- ----------- -----------
364,000 (122,000) (279,000) (217,000) (185,000)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS (69,000) (598,000) 301,000 724,000 (318,000)
INCOME TAX EXPENSE 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS (69,000) (598,000) 301,000 724,000 (318,000)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
environmental services operations (92,000) (656,000) (676,000) (676,000) 0
Loss from operations of discontinued oil
field supply operations (net of foreign
income tax expense of $99,000
for the year ended March 31, 1998) (1,661,000) (408,000) (171,000) 393,000 0
Loss from disposition of assets of discontinued
environmental services operations 0 0 (44,000) (44,000) 0
Loss from disposition of assets of discontinued
oil field supply operations 0 0 (3,610,000) 0 0
Income from discontinued operations of oil
field services operations 1,428,000 0 0 0 0
----------- ----------- ----------- ----------- -----------
NET LOSS $ (394,000) $(1,662,000) $(4,200,000) $ 397,000 $ (318,000)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-33
<PAGE>
THE ITS SUBGROUP
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
PAID-IN TRANSLATION ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
---------- ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 6,971,000 $ 2,047,000 $14,503,000 $ 0 $(22,548,000) $(5,998,000)
Issuance of shares 24,000,000 24,000,000 0 0 0 24,000,000
Net loss 0 0 0 0 (394,000) (394,000)
---------- ------------ ----------- ----------- ------------ -------------
BALANCE, MARCH 31, 1996 30,971,000 26,047,000 14,503,000 0 (22,942,000) 17,608,000
Redemption of shares (24,225,000) (24,225,000) 0 0 24,225,000 0
Issuance of shares 2,235,000 2,226,000 2,499,000 0 0 4,725,000
Currency exchange difference 0 0 0 (42,000) 0 (42,000)
Net loss 0 0 0 0 (1,662,000) (1,662,000)
---------- ------------ ----------- ----------- ------------ -------------
BALANCE, MARCH 31, 1997 8,981,000 4,048,000 17,002,000 (42,000) (379,000) 20,629,000
Issuance of shares 1,250,000 1,250,000 0 0 0 1,250,000
Currency exchange difference 0 0 0 41,000 0 41,000
Net loss 0 0 0 0 (4,200,000) (4,200,000)
---------- ------------ ----------- ----------- ------------ -------------
BALANCE, MARCH 31, 1998 10,231,000 $ 5,298,000 $17,002,000 $ (1,000) $ (4,579,000) $17,720,000
========== ============ =========== =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
THE ITS SUBGROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1997, AND 1998
AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
Six Months Ended
September 30,
---------------------------
1996 1997 1998 1997 1998
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (394,000) $ (1,662,000) $(4,200,000) $ 484,000 $ (318,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 543,000 855,000 1,214,000 218,000 480,000
Gain on sale of assets, net (93,000) 0 0 0 0
Foreign currency translation 0 (42,000) 41,000 63,000 (9,000)
Loss on disposition of supply division 0 0 3,610,000 0 0
Loss on disposition of environmental division 0 0 44,000 44,000 0
Changes in operating accounts:
Accounts receivable, net (5,569,000) (2,470,000) 3,932,000 (2,057,000) 2,545,000
Inventory (425,000) (1,622,000) (1,090,000) (4,563,000) 1,799,000
Prepaid expenses and other 18,000 (831,000) 353,000 (6,592,000) (1,877,000)
Other assets, net 355,000 511,000 31,000 227,000 510,000
Accounts payable 813,000 (594,000) (3,323,000) 249,000 (1,604,000)
Accrued expenses (2,110,000) 1,842,000 (2,768,000) 9,410,000 1,368,000
------------ ------------ ----------- ----------- -----------
Net cash used in operating activities (6,862,000) (4,013,000) (2,156,000) (2,517,000) 2,894,000
------------ ------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term investments 0 1,011,000 0 0 0
Proceeds from sale of property, plant and equipment 454,000 0 129,000 0 0
Purchase of property, plant and equipment (1,029,000) (2,074,000) (4,850,000) (1,511,000) (1,359,000)
Purchase of intangible assets 0 0 (518,000) 0 0
Acquisition of company, net of cash acquired (1,247,000) (286,000) 0 0 0
Deferred consideration on prior-year acquisition (8,525,000) 0 0 0 0
Prior-year acquisition price adjustment (100,000) 0 0 0 0
Net cash received from sale of supply division 0 0 2,436,000 0 0
------------ ------------ ----------- ----------- -----------
Net cash received from sale of environmental division 0 0 1,340,000 0 0
------------ ------------ ----------- ----------- -----------
Net cash used in investing activities (10,447,000) (1,349,000) (1,463,000) (1,511,000) (1,359,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (13,060,000) (1,194,000) (2,619,000) 0 (1,190,000)
Borrowings of long-term debt 0 947,000 4,736,000 1,786,000 0
Proceeds from revolving loan 2,050,000 1,518,000 0 79,000 8,000
Payments on revolving loan (4,000,000) 0 (1,518,000) 0 0
Issuance of additional shares of common stock 24,000,000 4,725,000 1,250,000 0 0
Redemption of share capital 0 (24,225,000) 0 0 0
Conversion of reserves 0 24,225,000 0 0 0
------------ ------------ ----------- ----------- -----------
Net cash provided by financing activities 8,990,000 5,996,000 1,849,000 1,865,000 (1,182,000)
------------ ------------ ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS (8,319,000) 634,000 (1,770,000) (2,163,000) 353,000
CASH AND TEMPORARY CASH INVESTMENTS, beginning of year 13,117,000 4,798,000 5,432,000 5,432,000 3,662,000
------------ ------------ ----------- ----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS, end of year $ 4,798,000 $ 5,432,000 $ 3,662,000 $ 3,269,000 $ 4,015,000
============ ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
THE ITS SUBGROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1996, 1997, AND 1998
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of ITS Investments,
Inc. ("Investments"), and ITS Holdings Limited, both wholly owned
subsidiaries of International Tool & Supply Company plc ("ITS plc"), and
their wholly owned subsidiaries (collectively referred to as the "ITS
Subgroup"). All material intercompany balances and transactions have been
eliminated in combination.
BUSINESS
The ITS Subgroup provides services and supplies primarily to international
oil and gas companies. The ITS Subgroup was structured into four separate
divisions: the supply division provides procurement and logistical services
to the energy industry; the engineering division offers engineering, design
and fabrication services to the oil and gas industry and provides
manufacturing, installation and servicing of industrial water treatment
systems; the environmental division supplies products, equipment and services
designed for the containment and cleanup of oil spills; and the drilling
services division leases and sells oil field drilling equipment as well as
provides environmental management systems and services. The environmental
division was sold in September 1997 and the supply division was sold in
January 1998. The results for these divisions which were sold are reflected
in discontinued operations for the years ended March 31, 1996, 1997, and
1998.
REVENUE RECOGNITION
The ITS Subgroup's revenues are derived from the engineering division and
drilling services division. Revenues from engineering contracts are
recognized when the services are performed and billable under the terms of
the applicable contract. The balances billed but not paid by customers
pursuant to retainage provisions in installation contracts will be due upon
completion of the contracts and acceptance by the customer. Based on the ITS
Subgroup's experience with similar contracts in recent years, the retention
balance at each balance sheet date will be collected within the subsequent
fiscal year.
Revenues from drilling services consisted of rental income and sales
revenues. Rental income is recognized based on rental contracts, and sales
revenues are recorded at the time of shipment of products.
F-36
<PAGE>
COST OF SERVICES
Cost of services represents direct labor and associated costs, materials,
supervisory personnel and equipment and depreciation.
WARRANTY COSTS
For certain contracts, the ITS Subgroup warrants project life up to a year
after installation. A reserve for warranty costs is recorded based upon the
historical level of warranty claims and management's estimate of future
costs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect (a) the reported amounts of assets and liabilities, (b)
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (c) the reported amounts of
revenues and expenses recognized during the periods presented. The ITS
Subgroup reviews all significant estimates affecting their combined financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Adjustments made with respect to the
use of estimates often relate to improved information not previously
available. Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of financial statements.
CASH AND TEMPORARY CASH INVESTMENTS
The ITS Subgroup considers all highly liquid debt instruments purchased with
a maturity of three months or less to be temporary cash investments.
SHORT-TERM INVESTMENTS
The ITS Subgroup's short-term investments of $650,000 at March 31, 1997 and
1998 represent certificates of deposit which are used as collateral for
letters of credit issued to the ITS Subgroup's workers' compensation
insurance providers and are stated at cost, which approximates market.
INVENTORY VALUATION
Investments values its inventory using the moving average method while ITS
Holdings Limited and their subsidiaries value their inventory using the
first-in, first-out method. Both are reported at the lower of cost or
market.
WORK IN PROCESS
Revenues and costs applicable to steam generator production are recognized as
the units are produced. Work in process is included as a component of
accounts receivable. The ITS Subgroup had $478,000 and $1,066,000 work in
process in accounts receivable at March 31, 1997 and 1998, respectively.
F-37
<PAGE>
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the ITS Subgroup to
concentrations of credit risk consist principally of temporary cash
investments, short-term investments and trade receivables. The ITS Subgroup
restricts investment of temporary cash investments and short-term investments
to financial institutions with high credit ratings.
The ITS Subgroup's revenues are derived principally from uncollateralized
sales to customers in the oil and gas industry. This industry concentration
has the potential to impact the ITS Subgroup's exposure to credit risk,
either positively or negatively, because the customers may be similarly
affected by changes in economic or other conditions. Management of the ITS
Subgroup believes that consolidated accounts receivable are well diversified,
thereby reducing potential credit risk to the ITS Subgroup and that
allowances for doubtful accounts are adequate.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost. Depreciation of assets is
computed primarily using the straight-line method with three- to 30-year
lives for leasehold improvements, buildings and improvements, and machinery
and equipment. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized.
NOTE RECEIVABLE
The ITS Subgroup acquired its note receivable through the disposal of certain
operating assets as discussed in Note 2. The note bears interest at 8
percent and matures in November 1999.
OTHER ASSETS
As of March 31, 1998, other assets consist primarily of goodwill, investments
in joint ventures in China and Russia and other intangible assets. Goodwill
represents the excess of the aggregate price paid by the ITS Subgroup in
acquisitions of businesses accounted for as purchases over the fair market
value of the net tangible assets acquired. Goodwill is amortized using the
straight-line method over a period of 15 years. The ITS Subgroup presents
other assets net of accumulated amortization and accounts for the investment
in the joint ventures using the cost method of accounting for the Russian
joint venture and the equity method of accounting for the Chinese joint
venture. Amortization expense related to other assets other than goodwill is
computed using the straight-line method over estimated lives of five to 10
years.
The ITS Subgroup owns a 34 percent interest in a joint venture based in China
under the name Shanghai ITS Oil Producing & Steam Generator Engineering
Company, Ltd. The ITS Subgroup's investment in the joint venture is
accounted for using the equity method. The investment balance was at
$338,000 and $418,000 as of March 31, 1997 and 1998, respectively. Income
from this investment totaled $86,000 for the year ended March 31,
F-38
<PAGE>
1998, and none for the years ended March 31, 1997 and 1996. Sales to this
Chinese joint venture totaled $1.1 million, $4.4 million and $7.9 million for
the years ended March 31, 1996, 1997, and 1998, respectively.
The ITS Subgroup owns a 50 percent interest in a joint venture based in
Russia under the name A/O Steampal ITS. The ITS Subgroup's investment in the
joint venture is accounted for using the cost method, and is not material.
SALES TO SIGNIFICANT CUSTOMERS
For the two years ended March 31, 1998, sales to the joint venture represent
a significant portion of the ITS Subgroup's revenues. Additionally, during
the year ended March 31, 1998, sales to two of the ITS Subgroup's largest
customers accounted for approximately 20 percent and 10 percent of the ITS
Subgroup's total operating revenues. No other customers individually
accounted for more than 10 percent of revenues in 1998. During the year
ended March 31, 1997, no other customers individually accounted for more than
10 percent of the revenues. During the year ended March 31, 1996, no
customers individually accounted for more than 10 percent of the revenues in
1996.
INCOME TAXES
The ITS Subgroup 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.
FOREIGN CURRENCY TRANSLATION
The ITS Subgroup's UK offices and their foreign local offices in Singapore
and Nigeria maintain their books and records in local currencies. Assets and
liabilities of these operations are translated into U.S. dollars at the
exchange rate in effect at the end of each accounting period, and income
statement accounts are translated at the average exchange rate prevailing
during the period. Gains and losses resulting from such translation are
reported as a separate component of shareholder's equity. Gains and losses
from transactions in foreign currencies are reported in other income and are
not significant.
SHARE REPURCHASE SCHEME
Investments is obligated under a 1992 agreement with shareholders to pay $4
per share consideration in exchange for the surrender of their shares of ITS
Investments, Inc., common stock. As of March 31, 1998, the ITS Subgroup
maintained a cash balance of $82,000 in a separate bank account to fund the
purchase of shares, which have not been surrendered.
F-39
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Values of Financial Instruments," and
SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments," require the disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. Management believes that the carrying value of the ITS Subgroup's
financial instruments approximates fair value.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was issued in 1997 and
requires the presentation of comprehensive income in an entity's financial
statements for fiscal years beginning after December 15, 1997. Comprehensive
income represents all changes in equity of an entity during the reporting
period, including net income and charges directly to equity that are excluded
from net income. The components of comprehensive income are presented within
the combined statements of shareholder's equity. The adoption of SFAS No.
130 had no material effect on the ITS Subgroup's reported combined financial
position or combined results of operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 provides revised
disclosure guidelines for segments of an enterprise based on a management
approach to defining operating segments and requires compliance for fiscal
years beginning after December 15, 1997. The ITS Subgroup has adopted the
reporting disclosures as required by SFAS No. 131 (see Note 13).
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The effect of initial application of this
SOP should be reported as the cumulative effect of a change in accounting
principle, as described in Accounting Principles Board (APB) Opinion No. 20,
"Accounting Changes." The ITS Subgroup does not believe that the adoption of
SOP 98-5 will have a material impact on the combined financial statements.
UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the unaudited combined statements of income and
cash flows for the six months ended September 30, 1997 and 1998 and the
unaudited combined balance sheet as of September 30, 1998 include all
adjustments (which include only normal recurring adjustments) necessary to
present the financial position and results of operations and cash flows for
those periods in accordance with generally accepted accounting principles.
2. ACQUISITIONS AND DISPOSALS
Effective December 1, 1994, the ITS Subgroup acquired ITS (US) Holdings Inc.,
formerly known as International Tool & Supply Company, Inc. (ITS (US)
Holdings), a Delaware corporation, through the purchase of all issued and
outstanding shares of ITS (US) Holdings. In consideration for the 1,000
shares of ITS (US) Holdings issued and outstanding, the ITS Subgroup paid
$7,535,000, including $5,750,000 cash and 20,000,000 ITS plc ordinary shares
with a market value of $1,785,000. During the year ended March 31, 1996, the
ITS Subgroup made a $100,000 payment in consideration for cancellation of a
contingent earn-out relating to a Russian supply contract.
The acquisition of ITS (US) Holdings has been accounted for as a purchase,
and the results of operations for ITS from December 1, 1994, and thereafter
have been included in the ITS
F-40
<PAGE>
Subgroup's combined statements of income. Goodwill of $7,460,000 representing
the excess of the purchase price over the carrying value of the net assets
was generated through the ITS (US) Holdings acquisition.
Effective June 12, 1996, the ITS Subgroup acquired the operations of both
H-O-H Systems, Inc., and H-O-H Services, Inc. (collectively, H-O-H), for a
purchase price of $250,000 and assumed debt of approximately $812,000. This
transaction was accomplished through the acquisition of certain assets and
assumption of certain liabilities of these entities. H-O-H Systems, Inc.,
provides design and fabrication of industrial water treatment equipment, as
well as the fabrication of steam generation equipment. H-O-H Services, Inc.,
installs and services industrial water treatment equipment sold by H-O-H
Systems, Inc., as well as other equipment manufacturers.
The acquisition of H-O-H has been accounted for as a purchase, and the
results of these operations from June 13, 1996, and thereafter have been
included in the ITS Subgroup's combined statements of income. Goodwill of
$2,002,000 through March 31, 1997, representing the excess of the purchase
price over the carrying value of the net assets was generated through the
H-O-H acquisition. In connection with the H-O-H acquisition discussed above,
liabilities were assumed as follows:
Fair value of assets acquired, net of cash acquired $ 1,631,000
Goodwill 2,002,000
Cash paid, net of cash acquired (286,000)
Liabilities assumed (3,347,000)
The pro forma statement of income data below gives effect to the H-O-H
acquisition as if the acquisition occurred on April 1, 1995.
YEAR ENDED MARCH 31
-----------------------------
1996 1997
-------- --------
Revenues $21,096,000 $21,742,000
Income (loss) from continuing operations 247,000 (2,061,000)
Net loss (147,000) (3,125,000)
On September 25, 1997, the ITS Subgroup sold substantially all of the
operating assets of the ITS Environmental Services, Inc., division for
$1,340,000 in cash, net of transaction costs. This transaction involved the
disposal of the ITS Subgroup's environmental services segment. Accordingly,
the operating results of the environmental services segment have been
classified as discontinued operations for the years ended March 31, 1998,
1997, and 1996, presented in the combined financial statements of the ITS
Subgroup.
On January 2, 1998, the ITS Subgroup sold substantially all of the operating
assets of the ITS Supply & Logistics, Inc., division, which included
operating units in Scotland, Venezuela and Peru, for $2,500,000 in cash, net
of transaction costs. This transaction involved the disposal of the ITS
Subgroup's oil field supply segment and was acquired by former officers of
the ITS Subgroup and ITS plc (see Note 7). Accordingly, the operating
results of the oil field supply segment have been classified as discontinued
operations for
F-41
<PAGE>
the years ended March 31, 1998, 1997, and 1996, presented in the combined
financial statements of the ITS Subgroup. As discussed above, ITS Subgroup
acquired ITS (US) Holdings on December 1, 1994, under the purchase method of
accounting, resulting in goodwill recognition of $7,460,000. At the time of
acquisition, ITS (US) Holdings had three divisions: supply and logistics,
engineered systems and drilling services. Periodically, the ITS Subgroup
evaluates the reliability of goodwill under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The ITS Subgroup reduced goodwill by $3,560,000 in connection with the sale
of the supply and logistics division. This loss is included in the loss from
disposition of assets of discontinued oil field supply operations. While
substantially all of the operating assets of the supply division were sold,
there were $964,000 in assets and $222,000 in liabilities remaining at March
31, 1998.
The ITS Subgroup incurred a prepayment penalty related to the early
extinguishments of its working capital line of credit. The penalty amounted
to $50,000 and was recognized in the discontinued operations of the oil field
supply operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
ESTIMATED
USEFUL MARCH 31
LIVES --------------------
IN YEARS 1997 1998
---------- -------- --------
Machinery and equipment 5-10 $ 4,456 $ 6,144
Buildings and improvements 30 337 1,968
------- -------
Total 4,793 8,112
Less accumulated depreciation (1,323) (1,634)
------- -------
Property and equipment, net $ 3,470 $ 6,478
======= =======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Other assets consist of the following (in thousands):
MARCH 31
---------------------
1997 1998
------ ------
Goodwill, net $ 9,978 $5,599
Investments in affiliated companies 338 418
Intangible assets 0 513
Other, net 361 522
------- ------
$10,677 $7,052
======= ======
F-42
<PAGE>
Goodwill presented on the above table is net of accumulated amortization of
$1,152,000, $1,909,000, and $1,706,000 as of March 31, 1996, 1997, and 1998,
respectively. Amortization expense related to other assets for the years
ended March 31, 1996, 1997, and 1998, was $661,000, $779,000, and $498,000,
respectively.
Accrued expenses consist of the following (in thousands):
1997 1998
------ ------
Commissions accrual $ 558 $ 785
Warranty accrual 258 234
Accrued compensation and benefits 262 249
Workers' compensation claims reserve 801 684
Accrued parts and supplies 3,713 0
Other accrued expenses 1,520 1,361
------ ------
Total $7,112 $3,313
====== ======
5. DEBT AND SUBORDINATED DEBT
As of March 31, 1997 and 1998, debt, including capital leases, consisted of
the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Revolving working capital line of credit, interest 12.50%, collateralized by
receivables $ 1,518,000 $ 0
Bank note, interest at prime, maturing in May 1998, collateralized by
inventory and receivables 500,000 775,000
Bank note, interest at prime plus 2%, maturing in March 2003, collateralized
by equipment and receivables 636,000 555,000
Bank note, interest at 8.5%, maturing in September 2020, collateralized by
land, buildings and building improvements 0 1,900,000
Capitalized financing lease payable in monthly installments of principal and
interest, maturing from September 1998 through January 2001, interest rates
ranging from 7.43% through 16.81%, collateralized by equipment 63,000 291,000
----------- -----------
2,717,000 3,521,000
Less current maturities (2,129,000) (1,055,000)
----------- -----------
Long-term debt, less current maturities $ 588,000 $ 2,466,000
=========== ===========
</TABLE>
F-43
<PAGE>
As of March 31, 1997 and 1998, current notes payable consisted of the
following:
1997 1998
------ ------
Bank note, interest at prime plus 3%, maturing in
August 1998 and 1997, collateralized by equipment $407,000 $502,000
In January 1991, Investments entered into a seven-year subordinated debenture
agreement with ITS plc. The principal amount of the debenture was
$7,000,000, maturing in December 1998. As of March 31, 1998, $2,200,000 was
outstanding under this debenture. Interest accrues at 10 percent annually,
which is payable quarterly. The debenture is classified as a current
liability for all periods due to the control by ITS plc.
The aggregate annual maturities of long-term debt and capital lease
obligations, including the subordinated debenture, during the five years
following March 31, 1998, and thereafter are as follows:
1999 $3,167,000
2000 237,000
2001 178,000
2002 163,000
2003 175,000
Thereafter 1,713,000
Under the terms of the credit agreements, Investments must provide certain
financial information and adhere to certain financial and negative covenants.
Investments must provide certain lenders, within 90 days of its fiscal year-
end balance sheets, income statements and supporting schedules, audited by a
certified public accountant acceptable to the lenders with a written opinion
of such accountant. The 90-day financial statement requirement was not
satisfied by the ITS Subgroup. A waiver was obtained for this 90-day
financial statement requirement stating that this requirement is deemed to be
satisfied immediately upon delivery to the lenders of the audited financial
statements of the ITS Subgroup. Investments further agrees that it will not
allow its ratio of current assets to current liabilities to be less than 1:1.
As of March 31, 1998, Investments had pledged $405,000 of inventory as
security under various credit facilities.
In addition, included within short term borrowings is $502,000
((Pounds)300,000) relating to the J.J. Woodhouse debenture which bears
interest at 3% over base rate and is secured by the assets of ITS Drilling
Services Limited.
The debenture was initially taken out in August 1996 for a twelve month
period. The debenture was renewed in August 1997 and again on August 6,
1998. The loan is repayable on August 6, 1999, or earlier under penalty of
one month's interest.
F-44
<PAGE>
6. LEASES
Property and equipment accounts include the following amounts for leases that
have been capitalized:
MARCH 31
-----------------------
1997 1998
------ ------
Equipment $ 60,000 $50,000
Less accumulated depreciation (40,000) (3,000)
-------- -------
Net property and equipment $ 20,000 $47,000
======== =======
The net present value of future minimum lease payments is reflected as a
component of long-term debt. The following table sets forth future minimum
lease payment obligations under capital leases as of March 31, 1998:
Fiscal year:
1999 $ 74,000
2000 22,000
2001 3,000
--------
Minimum lease payments 99,000
Less amounts representing interest (5,000)
--------
Net present value of future minimum lease payments 94,000
Less current maturities (70,000)
--------
Long-term obligations at March 31, 1998 $ 24,000
========
At March 31, 1998, the ITS Subgroup was obligated under a noncancelable
operating lease for office space which expires on June 30, 1999.
Additionally, the ITS Subgroup was obligated under various long-term
noncancelable operating leases covering certain equipment. These agreements
generally range from two to five years. Included in the combined statements
of income for the years ended March 31, 1996, 1997, and 1998 are operating
lease rental expenses of $311,000, $406,000 and $391,000, respectively.
F-45
<PAGE>
Future minimum lease payments required as of March 31, 1998, under operating
leases are presented in the following table:
<TABLE>
<CAPTION>
FACILITY EQUIPMENT TOTAL
RENTALS RENTALS RENTALS
-------- --------- -------
<S> <C> <C> <C>
Fiscal year:
1999 $219,000 $26,000 $245,000
2000 55,000 15,000 70,000
2001 0 7,000 7,000
2002 0 0 0
2003 0 0 0
-------- ------- --------
Total minimum payments required $274,000 $48,000 $322,000
======== ======= ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The ITS Subgroup is exposed to a number of asserted and unasserted potential
claims in the normal course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
ITS Subgroup's combined financial position or results of operations.
As previously announced, on January 2, 1998, the ITS Subgroup's wholly owned
subsidiary, International Tool & Supply Inc., sold the supply division and
certain related assets, to a company formed by Kendal Gladys and Charles
Hipp, who at that stage were directors of ITS Subgroup and ITS plc (ITS).
Mr. Gladys was also a director of International Tool & Supply Company, Inc.
ITS subsequently discovered that immediately thereafter Messrs. Gladys and
Hipp sold their interests on to a third party at a price which the Directors
believe represented a substantial profit. As a result, on February 3, 1998,
ITS commenced a legal action against Messrs. Gladys and Hipp in Harris County
Court, Texas. The action alleges that Gladys and Hipp defrauded ITS and the
ITS Shareholders and breached fiduciary duties owed to the Company by failing
to disclose their arrangement to immediately resell the supply division.
On January 2, 1998, the supply division was sold to Gladys and Hipp for $2.5
million. The business was resold on the same day to La Salle Cattle Co. for
approximately $5 million, who in turn resold the business on the same day to
Boots and Coots for approximately $6 million.
ITS has claimed it is entitled to recover the full profit achieved from the
sale. On April 22, 1998, Messrs. Gladys and Hipp filed a counterclaim
against ITS and a third party petition against the Directors (except Mr.
O'Brien), Hugh Mumford (a former Director) and Bernard Duroc-Danner (who the
counterclaimants allege acted as a shadow director of ITS) for inter alia,
fraud and breach of contract. The Directors believe that the counterclaim
lacks any merit and was filed solely in an attempt to divert attention from
the actions of Messrs. Gladys and Hipp. ITS and the Directors intend to
vigorously defend the claim.
F-46
<PAGE>
On September 1, 1998, ITS assigned to ITS Investments Inc. all of ITS' rights
and duties in prosecuting and defending the litigation. As of the same date,
ITS Investments Inc. has indemnified the directors of ITS and Mr. Mumford in
relation to the expenses which they have incurred and will incur in relation
to the proceedings.
The assets to be transferred by ITS pursuant to the Scheme include the issued
shares in ITS Investments Inc. ITS Investments Inc. has agreed to indemnify
ITS, and the Company has agreed to indemnify ITS and the Liquidators, in
respect of any liabilities incurred by them in connection with the
litigation.
8. CASH FLOWS
The combined statements of cash flows segregate transactions between
operating activities, discontinued operations, investing activities and
financing activities and identify the ITS Subgroup's sources and uses of
cash. Temporary cash investments were approximately $3,311,000, $800,000,
and $130,000 at March 31, 1996, 1997, and 1998, respectively.
Supplemental disclosure of cash flow information for the years ended March
31, 1996, 1997, and 1998, is as follows:
1996 1997 1998
------ ------ ------
Cash paid during the period for interest $748,000 $454,000 $466,000
The ITS Subgroup did not make any cash payments for income taxes during 1996,
1997, or 1998.
Supplemental schedule of noncash investing and financing activities is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Purchase of H-O-H, net of cash acquired:
Receivables $ 0 $ (820,000) $ 0
Inventory 0 (285,000) 0
Property, plant and equipment 0 (490,000) 0
Other assets 0 (36,000) 0
Goodwill 0 (2,002,000) 0
Liabilities 0 3,347,000 0
----------- ----------- -----------
Cash paid $ 0 $ (286,000) $ 0
=========== =========== ===========
Purchase of ABASCO, net of cash acquired:
Inventory $ (905,000) $ 0 $ 0
Property, plant and equipment (213,000) 0 0
Other assets (129,000) 0 0
----------- ----------- -----------
Cash paid $(1,247,000) $ 0 $ 0
=========== =========== ===========
</TABLE>
F-47
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Sale of supply division:
Fixed assets $ 0 $ 0 $ 586,000
Receivables 0 0 1,157,000
Inventory 0 0 1,670,000
Prepaids and other current assets 0 0 133,000
Goodwill 0 0 3,560,000
Liabilities assumed by purchaser 0 0 (1,060,000)
Loss on sale of supply division 0 0 (3,610,000)
----------- ----------- -----------
Cash received $ 0 $ 0 $ 2,436,000
=========== =========== ===========
Sale of environmental division:
Fixed assets $ 0 $ 0 $ 320,000
Inventory 0 0 935,000
Other assets 0 0 129,000
Loss on sale of environmental division 0 0 (44,000)
----------- ----------- -----------
Cash received $ 0 $ 0 $ 1,340,000
=========== =========== ===========
</TABLE>
9. INCOME TAXES:
Total income tax expense differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes. The reasons
for these differences for the tax years ended March 31, 1996, 1997, and 1998,
are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Income (loss) from continuing operations before taxes $(69,000) $(598,000) $301,000
-------- --------- --------
Income tax expense (benefit) at statutory rate $(15,000) $(207,000) $ 52,000
Nondeductible expenses 25,000 21,000 20,000
Change in valuation allowance pertaining to continuing operations and other (864,000) 16,000 (234,000)
State taxes (benefit), net of federal income tax benefit 16,000 (15,000) 11,000
Foreign taxes 47,000 9,000 18,000
Expiration of general business credit 791,000 176,000 53,000
Expiration of capital loss carryforwards 0 0 80,000
-------- --------- --------
Income tax expense from continuing operations 0 0 0
Discontinued operations:
Discontinued operations, income tax expense 0 0 99,000
-------- --------- --------
Net income tax expense $ 0 $ 0 $ 99,000
-------- --------- --------
</TABLE>
F-48
<PAGE>
The tax effect of significant temporary differences representing income tax
assets and liabilities for the years ended March 31, 1997 and 1998 are as
follows:
1997 1998
----------- -----------
Intangible assets $ 2,833,000 $ 1,331,000
Property, plant and equipment 230,000 386,000
----------- -----------
Total gross deferred income tax liabilities 3,063,000 1,717,000
----------- -----------
Bad debt reserve 151,000 123,000
Workers' compensation claims reserve 296,000 253,000
Reserve for discontinued operations 29,000 87,000
Inventory write-downs 102,000 20,000
Vacation accrual 32,000 4,000
Accrued health claims 14,000 8,000
Warranty reserve 95,000 87,000
----------- -----------
Total deferred tax assets, current 719,000 582,000
----------- -----------
Federal net operating loss carryforwards 5,955,000 6,188,000
State net operating loss carryforwards 25,000 43,000
Foreign net operating loss carryforwards 1,406,000 1,528,000
Percentage depletion carryforwards 808,000 808,000
Capital loss carryforwards 87,000 0
General business credit carryforwards 224,000 170,000
Alternative minimum tax credit carryforwards 338,000 338,000
----------- -----------
Total deferred tax assets, long-term 8,843,000 9,075,000
----------- -----------
Total gross deferred income tax assets 9,562,000 9,657,000
Less valuation allowance (6,499,000) (7,940,000)
----------- -----------
Net deferred income tax assets 3,063,000 1,717,000
----------- -----------
Net deferred income tax liability $ 0 $ 0
=========== ===========
The ITS Subgroup has tax carryforwards scheduled to expire as follows:
EXPIRATION
AMOUNT DATE
-------- ---------
Net operating losses $18,200,992 2003-2013
Percentage depletion 2,183,364 None
General business credits 170,323 1999-2001
Alternative minimum tax credits 338,390 None
Foreign net operating losses 5,322,958 None
Foreign net operating losses 553,494 1999-2001
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Valuation
allowances have been provided as a result of uncertainties surrounding the
ability to utilize carryforwards prior to their expiration dates.
F-49
<PAGE>
10. RELATED-PARTY TRANSACTIONS
As discussed in Note 6, the ITS Subgroup leases office space from a company
which is owned by Kase Lawal, a shareholder and director of ITS plc. Rent
expense was $293,000, $240,000, and $217,000 for the years ended March 31,
1996, 1997, and 1998, respectively. The ITS Subgroup also had sales to other
affiliates totaling $439,000, $380,000, and $702,000 for the years ended
March 31, 1996, 1997, and 1998, respectively. Pricing between the ITS
Subgroup and affiliates is on a negotiated basis per sale. Included in the
accounts receivable balance was an intercompany receivable of $76,000 due
from ITS plc at March 31, 1998. At March 31, 1997, the accounts payable
balance included $246,000 due from ITS plc.
A shareholder and director of ITS plc is a partner in a law firm which
provides services to the ITS Subgroup. Amounts paid to this law firm totaled
$111,000, $79,000, and $132,000 for the years ended March 31, 1996, 1997, and
1998, respectively. In addition, a retainer fee of $24,000 was paid during
1997 to a company owned by a shareholder and director of ITS plc for services
provided by the affiliated company's in-house legal counsel.
11. ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES
Historically, ITS Holdings Limited and Investments have been charged a
portion of the ITS plc administrative expense based on an estimate of the
chief executive's payroll costs in respect of time spent on the operating
divisions. As the ITS Holdings Limited finance director has also carried out
a group consolidation function, a charge has been made to ITS plc in respect
of this work based on an estimate of payroll costs. These charges have been
reflected as management fees on the income statements.
During the years ended March 31, 1996, 1997, and 1998, ITS plc charged as
management fees $166,000, $181,000, and $174,000, respectively, which have
been excluded from general and administrative expenses and presented on a
separate line in these financial statements.
Included in losses from discontinued operations is a portion of Investments'
general and administrative expenses that are allocated to the supply division
and environmental division based on certain estimates including historic
expense as a percentage of Investments' total general and administrative
expenses, as calculated using the following methods:
a. Percentage of total square footage for office rental expense.
b. Insurance policy rates on revenues and property values for insurance
expenses.
c. Volume of activities for accounting department expenses.
d. Amount of telephone usage for telephone expenses.
e. Percentage of employees for personnel department expenses.
F-50
<PAGE>
Based on historic trends, the use of these methods resulted in the supply
division being responsible for an average of 58% and the environmental
division being responsible for an average of 14% of Investments' total
general and administrative expenses. This percentage was applied
consistently for the periods presented.
12. COMMON STOCK
Common stock issued and outstanding as of March 31, 1998, is combined between
Investments and ITS Holdings Limited and consists of the following:
INVESTMENTS
Common stock, par value $.10 per share; 25,000,000 shares authorized;
5,481,000 shares issued and outstanding.
ITS HOLDINGS LIMITED
Common stock, par value $1 per share; 25,500,000 shares authorized; 4,750,000
shares issued and outstanding.
13. BUSINESS SEGMENTS
The ITS Subgroup has two geographic operating divisions, one operating in the
United Kingdom (the UK Region) and the other in the United States (the U.S.
Region). The UK Region, headquartered in Aberdeen, Scotland, provides
environmental management systems and services in the drilling services
industry. The customer base for the UK Region is primarily major oil
companies. The main operating companies and support centers for all rentals,
sales and services of the division are located in Scotland, Nigeria, and
Singapore. The U.S. Region, headquartered in Houston, Texas, manufactures
and sells enhanced oil recovery equipment, oil and gas production equipment
and water treatment equipment and provides custom fabrication services in the
engineered systems industry. The U.S. Region also leases and sells oil field
drilling equipment in the drilling services industry. The primary customers
of the U.S. Region have been the national oil companies in China, Brazil,
Russia, Canada, and Venezuela.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
--------------------------------------------
UK REGION U.S. REGION COMBINED
--------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues $1,833 $10,987 $12,820
Interest revenues 26 806 832
Interest expense 16 545 561
Depreciation and amortization 344 199 543
Current assets 1,439 16,172 17,611
Total assets 4,273 26,315 30,588
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
--------------------------------------------
UK REGION U.S. REGION COMBINED
--------- ----------- --------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating revenues $3,211 $17,555 $20,766
Interest revenues 48 224 272
Interest expense 46 348 394
Depreciation and amortization 395 460 855
Current assets 3,439 19,823 23,262
Total assets 7,119 31,790 38,909
YEAR ENDED MARCH 31, 1998
---------------------------------------------
UK REGION U.S. REGION COMBINED
--------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues $4,420 $24,537 $28,957
Interest revenues 20 230 250
Interest expense 112 503 615
Depreciation and amortization 673 541 1,214
Current assets 2,965 11,437 14,402
Total assets 8,534 20,898 29,432
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
ITS plc intends to enter into a definitive agreement which will result in the
acquisition of the ITS Subgroup by Offshore Tool & Energy Corporation (OTEC)
subject to inter alia, the approval of the shareholders of ITS plc and the
admission of the entire ordinary share capital of OTEC to the Alternative
Investment Market of the London Stock Exchange.
OTEC will acquire, in addition to the ITS Subgroup, certain other assets and
liabilities of ITS plc including the action by ITS plc against two former
directors, their counterclaim against ITS plc (see Note 7) and certain
contingent liabilities of ITS plc relating to indemnifications given to
Schlumberger BV in connection with tax assessments of certain former
subsidiaries, principally in Angola, Egypt, Gabon, Malaysia, Singapore, and
Norway.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO IPC INDUSTRIES, INC. AND
MOBILE PULLEY MARINE SERVICES, INC.:
We have audited the accompanying combined balance sheets of MOBILE PULLEY &
MACHINE WORKS (a division of IPC Industries, Inc.) AND MOBILE PULLEY MARINE
SERVICES (a division of Mobile Pulley Marine Services, Inc., formerly MP Field
Services, Inc.) as of December 31, 1996 and 1997 and the related combined
statements of earnings, divisional equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Companies'
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 Mobile Pulley & Machine Works
and Mobile Pulley Marine Services as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN
Atlanta, Georgia
October 1, 1998
F-53
<PAGE>
MOBILE PULLEY & MACHINE WORKS
(A DIVISION OF IPC INDUSTRIES, INC.)
AND MOBILE PULLEY MARINE SERVICES
(A DIVISION OF MOBILE PULLEY MARINE SERVICES, INC.,
FORMERLY MP FIELD SERVICES, INC.)
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 169,504 $ 181,032 $ 155,871
Accounts receivable, net 4,828,704 4,550,898 5,505,858
Inventories 2,936,934 4,268,104 4,724,603
Other current assets 108,154 375,993 307,733
----------- ----------- -----------
Total current assets 8,043,296 9,376,027 10,694,065
PROPERTY, PLANT, AND EQUIPMENT, NET 3,803,881 5,176,816 5,483,240
----------- ----------- -----------
Total assets $11,847,177 $14,552,843 $16,177,305
=========== =========== ===========
LIABILITIES AND COMBINED DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,113,628 $ 1,161,241 $ 1,809,064
Accrued liabilities 1,065,616 1,798,047 2,033,256
----------- ----------- -----------
Total current liabilities 2,179,244 2,959,288 3,842,320
LONG-TERM DEBT 5,254,745 6,423,784 7,311,692
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 6, and 8)
COMBINED DIVISIONAL EQUITY 4,413,188 5,169,771 5,023,293
----------- ----------- -----------
Total liabilities and combined divisional equity $11,847,177 $14,552,843 $16,177,305
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-54
<PAGE>
MOBILE PULLEY & MACHINE WORKS
(A DIVISION OF IPC INDUSTRIES, INC.)
AND MOBILE PULLEY MARINE SERVICES
(A DIVISION OF MOBILE PULLEY MARINE SERVICES, INC.,
FORMERLY MP FIELD SERVICES, INC.)
COMBINED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED ---------------------
------------------------ MARCH 31, MARCH 31,
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $21,097,402 $21,523,257 $4,525,956 $6,036,544
COST OF SALES 17,520,679 18,117,801 3,650,706 5,044,195
----------- ----------- ---------- ----------
GROSS PROFIT 3,576,723 3,405,456 875,250 992,349
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 2,186,846 2,053,601 473,065 611,393
----------- ----------- ---------- ----------
NET EARNINGS FROM OPERATIONS 1,389,877 1,351,855 402,185 380,956
INTEREST EXPENSE 472,895 411,197 102,730 169,205
OTHER INCOME, NET 97,491 44,925 8,405 8,050
LOSS ON DISPOSAL OF EQUIPMENT 22,602 0 0 0
----------- ----------- ---------- ----------
NET EARNINGS $ 991,871 $ 985,583 $ 307,860 $ 219,801
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-55
<PAGE>
MOBILE PULLEY & MACHINE WORKS
(A DIVISION OF IPC INDUSTRIES, INC.)
AND MOBILE PULLEY MARINE SERVICES
(A DIVISION OF MOBILE PULLEY MARINE SERVICES, INC.,
FORMERLY MP FIELD SERVICES, INC.)
COMBINED STATEMENTS OF DIVISIONAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMBINED
DIVISIONAL
EQUITY
------------
<S> <C>
BALANCE, DECEMBER 31, 1995 $3,421,317
Net earnings 991,871
----------
BALANCE, DECEMBER 31, 1996 4,413,188
Net earnings 985,583
Advances to Parents, net (229,000)
----------
BALANCE, DECEMBER 31, 1997 $5,169,771
==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-56
<PAGE>
MOBILE PULLEY & MACHINE WORKS
(A DIVISION OF IPC INDUSTRIES, INC.)
AND MOBILE PULLEY MARINE SERVICES
(A DIVISION OF MOBILE PULLEY MARINE SERVICES, INC.,
FORMERLY MP FIELD SERVICES, INC.)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED ----------------------
------------------- MARCH 31, MARCH 31,
1996 1997 1997 1998
----------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 991,871 $ 985,583 $ 307,860 $ 219,801
----------- ----------- ----------- ---------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 339,249 497,188 133,191 149,309
Loss on sale of equipment, net 22,602 0 0 0
Change in operating assets and liabilities:
Accounts and notes receivable (648,412) 277,806 1,894,671 (954,960)
Inventories 260,297 (1,331,170) (1,047,728) (456,499)
Other current assets (33,865) (267,839) (118,396) 68,260
Accounts payable (1,248,251) 47,613 169,445 647,823
Accrued liabilities 672,114 732,431 (223,512) 735,209
----------- ----------- ----------- ---------
Total adjustments (636,266) (43,971) 807,671 (310,858)
----------- ----------- ----------- ---------
Net cash provided by operating activities 355,605 941,612 1,115,531 (91,057)
----------- ----------- ----------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (781,955) (1,665,308) (210,347) (455,733)
Pattern additions (47,275) (220,483) 0 0
Proceeds from disposal of equipment 70,000 15,668 0 0
----------- ----------- ----------- ---------
Net cash used in investing activities (759,230) (1,870,123) (210,347) (455,733)
----------- ----------- ----------- ---------
FINANCING ACTIVITIES:
Net borrowings on revolving line of credit 465,598 1,169,039 (830,619) 887,908
Net advances to parents 0 (229,000) 0 (366,279)
----------- ----------- ----------- ---------
Net cash provided by (used in) financing
activities 465,598 940,039 (830,619) 521,629
----------- ----------- ----------- ---------
NET INCREASE IN CASH 61,973 11,528 74,365 (25,161)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 107,531 169,504 169,504 181,032
----------- ----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 169,504 $ 181,032 $ 244,069 $ 155,871
=========== =========== =========== =========
CASH PAID FOR INTEREST $ 522,173 $ 877,927 $ 108,373 $ 173,634
=========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of this combined statements.
F-57
<PAGE>
MOBILE PULLEY & MACHINE WORKS
(A DIVISION OF IPC INDUSTRIES, INC.)
AND MOBILE PULLEY MARINE SERVICES
(A DIVISION OF MOBILE PULLEY MARINE SERVICES, INC.,
FORMERLY MP FIELD SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BUSINESS
Mobile Pulley & Machine Works ("MPMW"), a division of IPC Industries, Inc.
("IPC"), is a manufacturer of dredging equipment sold primarily to domestic
dredging and mining companies, with limited sales to foreign customers. MPMW
also provides repair and rework services and has limited nondredging
equipment sales to original equipment manufacturers, including steel and
pulp and paper equipment.
Mobile Pulley Marine Services ("MPMS"), a division of Mobile Pulley Marine
Services, Inc. (formerly MP Field Services, Inc.), is a manufacturer of
marine and industrial metal fabrications and a provider of customer on-site
repair, maintenance, and dry dock services, primarily to domestic companies
in the dredging industry.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements of MPMS and MPMW (collectively the "Company") have
been presented on a combined basis due to common control and ownership of
their respective parents. All material intercompany transactions have been
eliminated.
The accompanying financial statements include the assets, liabilities,
revenues, and direct expenses of the Company. Certain corporate, general,
and administrative expenses of IPC have been allocated to the Company on a
basis which, in the opinion of management, is reasonable. However, such
expenses are not necessarily indicative of, nor is it practical for
management to estimate, the level of expenses which might have been incurred
had the Company been operated as separate, independent companies.
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
F-58
<PAGE>
reported amounts of assets and liabilities and disclosure 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable potentially subject the Company to concentrations of
credit risk. The Company performs ongoing credit evaluations of its
customers' financial conditions and has established allowances for doubtful
accounts based on the expected collectibility of all accounts receivable.
The Company believes its allowance for doubtful accounts is adequate to cover
any potential losses on its credit risk exposure. As of December 31, 1996
and 1997, the Company had an allowance for doubtful accounts of $53,860 and
$35,860, respectively.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
on the first-in, first-out method. As of December 31, 1996 and 1997,
inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Raw materials $ 900,954 $1,000,244
Work in process 452,094 949,911
Finished goods 1,583,886 2,317,949
---------- ----------
$2,936,934 $4,268,104
========== ==========
</TABLE>
Included in raw materials are $520,428 and $568,544 of supplies at December
31, 1996 and 1997, respectively.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost, less accumulated
depreciation. Additions, improvements, and renewals significantly adding to
the asset value or extending the life of the asset are capitalized. Ordinary
maintenance and repairs not extending the physical or economic lives of the
plant and equipment are charged to expense as incurred. The Company uses
straight-line methods to depreciate property and equipment. Estimated useful
lives are as follows:
F-59
<PAGE>
Buildings and improvements 10 to 40 years
Machinery and equipment 3 to 30 years
Patterns 14 years
Office furniture, fixtures, and equipment 5 to 25 years
Data processing equipment 3 to 5 years
REVENUE RECOGNITION
The Company uses the completed contract method of revenue recognition. Under
this method of accounting, no revenue is recognized until the product is
accepted by the customer as being ready for delivery or services are
completed. Progress billings collected before completion of the contract are
defined and reflected as deferred revenues, a component of accrued
liabilities in the accompanying balance sheets.
INCOME TAX STATUS
MPMW and MPMS, as divisions of their respective parents, are not taxable
entities. The respective parents of both divisions have elected S
corporation status for income tax reporting purposes. The taxable income or
loss of S corporations are includable in the individual tax returns of the
stockholders. Accordingly, no accounts for deferred income taxes or
provisions for current or deferred income taxes have been included in the
accompanying combined financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheets for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value due to the immediate or short-term maturity of these financial
instruments. In the opinion of management, total long-term debt recorded in
the accompanying balance sheets approximates fair value based on the
borrowing rates currently available to the Company for loans with similar
terms and average maturities.
UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the unaudited statements of income and cash
flows for the three months ended March 31, 1997 and 1998 and the unaudited
balance sheet as of March 31, 1998 include all adjustments (which include
only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for those periods in
accordance with generally accepted accounting principles.
F-60
<PAGE>
3. PROPERTY, PLANT, AND EQUIPMENT
At December 31, 1996 and 1997, property, plant, and equipment consisted of
the following:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Land $ 57,524 $ 84,145
Buildings and improvements 365,038 371,661
Machinery and equipment 3,184,956 4,202,302
Patterns 889,472 1,109,955
Construction in progress 5,555 595,465
---------- -----------
4,502,545 6,363,528
Less accumulated depreciation and
amortization (698,664) (1,186,712)
---------- -----------
$3,803,881 $ 5,176,816
========== ===========
</TABLE>
MPMW leases certain manufacturing equipment, data processing equipment, and
automobiles under noncancelable operating leases. Rent expense was $178,959
and $268,402 for the years ended December 31, 1996 and 1997, respectively.
As of December 31, 1997, the future minimum payments on these leases were as
follows:
1998 $197,834
1999 189,862
2000 128,310
2001 37,784
--------
$553,790
========
4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accrued settlement costs $ 255,000 $ 75,000
Accrued medical costs 0 150,000
Deferred revenue 0 294,000
Other 810,616 1,279,047
---------- ----------
$1,065,616 $1,798,047
========== ==========
</TABLE>
5. LONG-TERM DEBT
IPC provides financing to the Company through revolving lines of credit it
has with a bank. These credit facilities are secured by substantially all
the assets of MPMS and MPMW and bear interest at the prime rate (8.5% at
December 31, 1997).
F-61
<PAGE>
6. LEGAL MATTERS
The Company is a defendant in certain legal proceedings arising in the
normal course of business. In the opinion of the Companies' management, the
ultimate outcome of these legal proceedings will not have a material adverse
effect on the financial position of the Company.
7. EMPLOYEE BENEFIT PLAN
IPC sponsors the Mobile Pulley & Machine Works, Inc. Nonbargaining Employee
Savings 401(k) Plan (the "Plan"), which MPMS employees also participate. The
Plan covers substantially all nonunion employees. Eligible employees of the
Company may contribute certain amounts of their annual compensation, as
defined by the Plan. The Company has the option to match eligible
contributions up to a certain percentage, as defined by the Plan and within
the limitations established in the Internal Revenue Code. During 1996 and
1997, the Company made matching contributions of $60,648 and $54,599,
respectively.
8. RELATED-PARTY TRANSACTIONS
IPC provides services to and incurs costs for the benefit of the Company.
Certain services that include, but are not limited to, property and casualty
insurance coverage under IPC's insurance program, administrative services,
management information services, employee benefits administration,
environmental consultation and administration, accounting and reporting
services, and treasury management have been allocated to the Company. IPC
charged the Company $72,363 and $612,806 for the years ended December 31,
1996 and 1997, respectively.
The allocations of the costs and expenses for the services described above
were based on methods that management believes are reasonable. The actual
costs incurred by the Company in the future to replace the services provided
and the costs paid by IPC will differ from allocated amounts due to
differences in scale, organizational structure, management structure, and
other factors.
The Company provides services to Aero International, LLC, a company whose
equity holders include IPC. These services are priced at a level management
believes to be market rates. Total services for the year ended December 31,
1997 were $196,644. Such amounts included in accounts receivable at December
31, 1997 was $56,893.
9. SIGNIFICANT CUSTOMERS
For the years ended December 31, 1996 and 1997, the Company had one customer
who accounted for 10% and 16%, respectively, of sales. The related
receivables from this customer were $663,517 and $1,069,878 at December 31,
1996 and 1997, respectively.
F-62
<PAGE>
10. SUBSEQUENT EVENT
Effective May 31, 1998 the assets and related liabilities of the Company
were purchased by American Aero Cranes, LLC. The transaction will be
accounted for as a purchase and, as such, the purchase price will be
allocated based on the fair market value of the assets acquired.
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Titan Industries, Inc.:
We have audited the accompanying balance sheets of TITAN INDUSTRIES, INC. (a
Louisiana corporation) as of June 30, 1996 and 1997 and the related statements
of operations, changes in stockholders' equity, and cash flows for the years
then ended and for the period from July 1, 1997 to November 5, 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 the Titan Industries, Inc. As
of June 30, 1996 and 1997 and the results of its operations and its cash flows
for the years then ended and for the period from July 1, 1997 to November 5,
1997.
ARTHUR ANDERSEN
Atlanta, Georgia
October 1, 1998
F-64
<PAGE>
TITAN INDUSTRIES, INC.
BALANCE SHEETS
JUNE 30, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
---------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 12,175 $ 245,535
Accounts receivable, net (Note 3) 1,891,370 1,169,444
Inventories, net 1,752,267 967,110
Other current assets 313,020 160,859
--------- ---------
Total current assets 3,968,832 2,542,948
PROPERTY, PLANT, AND EQUIPMENT, NET 608,863 607,193
--------- ---------
Total assets $4,577,695 $ 3,150,141
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,106,677 $ 216,803
Accrued liabilities 159,370 259,116
Deferred revenue 638,288 441,039
Notes payable 604,924 0
--------- ---------
Total current liabilities 2,509,259 916,958
COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, 8, AND 9)
STOCKHOLDERS' EQUITY:
Predecessor common stock, no par value; 100,000 shares authorized and 100
shares issued at June 30, 1997; no shares authorized, issued, or outstanding
at December 31, 1997 30,500 30,500
Retained earnings 2,037,936 2,202,683
--------- ---------
Total stockholders' equity 2,068,435 2,233,183
--------- ---------
Total liabilities and stockholders' equity $4,577,695 $ 3,150,141
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-65
<PAGE>
TITAN INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
AND FOR THE PERIOD FROM JULY 1, 1997 TO NOVEMBER 5, 1997
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JULY 1, 1997 TO
JUNE 30 NOVEMBER 5,
--------------------------- -----------------
1996 1997 1997
------------ ---------- ----------------
<S> <C> <C> <C>
NET SALES:
CRANES $ 3,587,881 $ 5,004,603 $ 527,485
SERVICE 1,707,799 1,965,295 923,412
----------- ----------- -----------
5,295,680 6,969,898 1,450,897
----------- ----------- -----------
COST OF SALES:
CRANES (3,816,762) (4,385,906) (447,055)
SERVICE (867,235) (1,095,665) (609,488)
----------- ----------- -----------
(4,683,997) (5,481,571) (1,056,543)
----------- ----------- -----------
Gross profit 611,683 1,488,327 394,354
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (1,160,541) (1,225,964) (303,581)
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (548,858) 262,363 90,773
INTEREST INCOME (EXPENSE) 4,728 40 14
OTHER INCOME, NET 7,932 8,344 6,689
----------- ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES (536,198) 270,747 97,476
BENEFIT (PROVISION) FOR INCOME TAXES 206,000 (106,000) (38,000)
----------- ----------- -----------
NET (LOSS) INCOME $ (330,198) $ 164,747 $ 59,476
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
TITAN INDUSTRIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
AND FOR THE PERIOD FROM JULY 1, 1997 TO NOVEMBER 5, 1997
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, June 30, 1995 100 30,500 2,368,134 2,398,634
Net loss 0 0 (330,198) (330,198)
---------- --------- ---------- ----------
Balance, June 30, 1996 100 30,500 2,037,936 2,068,436
Net income 0 0 164,747 164,747
---------- --------- ---------- ----------
Balance, June 30, 1997 100 30,500 2,202,683 2,233,183
Net income 0 0 59,476 59,476
---------- --------- ---------- ----------
Balance, November 5, 1997 100 $30,500 $2,262,159 $2,292,659
========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-67
<PAGE>
TITAN INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
AND FOR THE PERIOD FROM JULY 1, 1997 TO NOVEMBER 5, 1997
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED FROM
JUNE 30 JULY 1, 1997 TO
------------------------ NOVEMBER 5,
1996 1997 1997
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (330,198) $ 164,747 $ 59,476
----------- --------- ---------
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
(Gain) loss from sale of equipment (849) 3,152 8,050
Depreciation and amortization 79,899 74,173 23,122
Deferred income taxes 11,000 (41,000) (7,000)
Net change in receivables (740,430) 721,926 132,796
Net change in inventories (1,040,704) 785,157 (622,893)
Net change in other current assets (82,787) 193,706 9,704
Net change in accounts payable 839,561 (889,874) 256,289
Net change in accrued liabilities and deferred revenue 679,391 (97,503) 186,184
----------- --------- ---------
Total adjustments (254,919) 749,737 (13,748)
----------- --------- ---------
Net cash (used in) provided by operating activities (585,117) 914,484 45,728
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of equipment (23,063) (76,200) (14,593)
Proceeds from sale of equipment 850 0 0
----------- --------- ---------
Net cash provided by (used in) investing activities (22,213) (76,200) (14,593)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 549,553 0 0
Repayment of long-term debt 0 (604,924) 0
----------- --------- ---------
Net cash provided by (used in) financing activities 549,553 (604,924) 0
----------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (57,777) 233,360 31,135
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,952 12,175 245,535
----------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,175 $ 245,535 $ 276,670
----------- --------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 14,928 $ 38,861 $ 0
----------- --------- ---------
Net cash paid (refunded) for income taxes $ (131,701) $(217,433) $ 178,000
=========== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-68
<PAGE>
TITAN INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1997
1. ACQUISITION
On November 5, 1997, Titan Acquisition Company ("TAC") purchased all of the
outstanding shares of common stock of Titan Industries, Inc. (the
"Company"). TAC was incorporated in Louisiana and was utilized for the
purpose of acquiring all of the outstanding common stock of the Predecessor.
The purchase price comprised a cash payment of $2,235,000.
2. NATURE OF THE BUSINESS
The Company and manufactures and services marine cranes primarily for the
oil and gas industry. The Company's manufacturing and service center is
located in Covington, Louisiana.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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
disclosure 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable potentially subject the Company to concentrations of
credit risk in its accounts receivable. The Company performs ongoing credit
evaluations of their customers' financial condition and have established an
allowance for doubtful accounts based upon the expected collectability of
all accounts receivable. The Company believes its allowance for doubtful
accounts is adequate to cover any potential losses on its credit risk
exposure. As of June 30, 1996 and 1997, the Company had an allowance for
doubtful accounts of $21,000.
F-69
<PAGE>
INVENTORIES
Inventories are valued at the lower of cost or market, cost being determined
on the first-in, first-out method. At June 30, 1996 and 1997, inventories
consisted of the following:
1996 1997
---------- ----------
Raw materials $ 811,948 $ 892,767
Work in progress 1,149,039 299,343
---------- ----------
1,960,987 1,192,110
Less reserve for inventory obsolescence 208,720 225,000
---------- ----------
Total $1,752,267 $ 967,110
========== ==========
PROPERTY, PLANT, AND EQUIPMENT
Additions, improvements, and renewals significantly adding to the asset value
or extending the life of the asset are capitalized. Ordinary maintenance and
repairs not extending the physical or economic lives of the plant and
equipment are charged to expense as incurred. The Company uses the straight-
line method to depreciate property and equipment. Estimated useful lives are
as follows:
PREDECESSOR COMPANY
----------- -------
Buildings 40 years 40 years
Machinery and equipment 10 years 10 years
Furniture and fixtures 5 years 5 years
Vehicles 5 years 5 years
PRODUCT AND SERVICE WARRANTIES
Products and services are warranted by the Company for a period of one year
commencing at the time of acceptance. The estimated cost of such warranties
is accrued at the time of sale and is reflected in cost of sales in the
accompanying statements of operations.
REVENUE RECOGNITION
The Company uses the completed contract method of revenue recognition. Crane
revenues are recognized when the cranes are accepted by the customer as being
ready for delivery. Service revenues are recognized when the services are
substantially complete. Progress billings collected before completion of the
contract are defined and reflected as deferred revenue in the accompanying
balance sheets.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the determination of deferred income taxes
using the liability method, under which deferred tax assets and liabilities
are determined based on the difference between
F-70
<PAGE>
the financial accounting and tax bases of assets and liabilities. Deferred
tax assets or liabilities at the end of each period are determined using the
currently enacted regular tax rate expected to apply to the taxable income in
the periods in which the deferred tax asset or liability is expected to be
settled or realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying balance sheets for cash and
cash equivalents, accounts receivable, and accounts payable approximate fair
value due to the immediate or short-term maturity of these financial
instruments.
4. PROPERTY, PLANT, AND EQUIPMENT
At June 30, 1996 and 1997, property, plant, and equipment consisted of the
following:
1996 1997
---------- ----------
Land and improvements $ 111,714 $ 96,147
Buildings 406,000 431,928
Machinery and equipment 430,920 480,586
Furniture and fixtures 70,428 70,428
Vehicles 158,665 129,629
---------- ----------
1,177,727 1,208,718
Less accumulated depreciation and
amortization 568,864 601,525
---------- ----------
$ 608,863 $ 607,193
========== ==========
F-71
<PAGE>
5. INCOME TAXES
The (provision) benefit for federal and state income taxes in the
accompanying statements of operations consisted of the following components:
YEAR ENDED PERIOD FROM
JUNE 30 JULY 1, 1997 TO
------------------ NOVEMBER 5,
1996 1997 1997
-------- -------- --------
Current income taxes:
Federal $184,000 $(124,000) $ (38,000)
State 33,000 (23,000) (7,000)
-------- -------- --------
217,000 (147,000) (45,000)
-------- -------- --------
Deferred income taxes:
Federal (10,000) 34,000 6,000
State (1,000) 7,000 1,000
-------- -------- --------
(11,000) 41,000 7,000
-------- -------- --------
Total (provision) benefit $206,000 $(106,000) $ (38,000)
======== ======== ========
The (provision) benefit for income taxes differs from the amounts computed by
applying the federal statutory rates due to the following:
YEAR ENDED PERIOD FROM
JUNE 30 JULY 1, 1997 TO
------------------- NOVEMBER 5,
1996 1997 1997
-------- --------- --------
Tax (provision) benefit at
the federal statutory rate (at 34%)
$182,000 $ (92,000) $(33,000)
State income taxes, net of federal
benefit
27,000 (11,000) (4,000)
Nondeductible expenses (3,000) (3,000) (1,000)
-------- --------- --------
Total benefit (provision) $206,000 $(106,000) $(38,000)
======== ========= ========
F-72
<PAGE>
The effects of temporary differences which create deferred tax assets
(liabilities) at June 30, 1996 and 1997 are as follows:
1996 1997
-------- --------
Deferred tax assets:
Inventory $ 91,000 $141,000
Warranty reserve 18,000 14,000
Allowance for doubtful accounts 8,000 8,000
Depreciation 0 0
Other 31,000 11,000
-------- --------
Total deferred assets 148,000 174,000
-------- --------
Deferred tax liabilities:
Depreciation (36,000) (37,000)
Other (18,000) 0
-------- --------
Total deferred liabilities (54,000) (37,000)
-------- --------
Net deferred tax assets $ 94,000 $137,000
======== ========
6. LEGAL MATTERS
In the ordinary course of its activities, the Company is involved in certain
litigation and claims. In the opinion of management, these proceedings will
not have a significant adverse effect on the Company's financial condition,
operations, or liquidity.
7. SIGNIFICANT CUSTOMERS
During the fiscal year ended June 30, 1996, revenues from the Company's three
largest customers represented 20.2%, 13.2%, and 11.7%, respectively, of total
revenues.
During the fiscal year ended June 30, 1997, revenues from the Company's three
largest customers represented 22.5%, 16.4%, and 10%, respectively, of total
revenues.
During the period from July 1, 1997 to November 5, 1997, revenues from the
Company's two largest customers represented 12.8% and 10.2%, respectively, of
total revenues.
8. SUBSEQUENT EVENTS
Effective May 31, 1998 the assets and related liabilities of the Company were
purchased by American Aero Cranes, LLC. Subsequent to the acquisition,
Titan's debt was refinanced by the acquiror. The transaction will be
accounted for similar to a pooling of interests as the companies are under
common control. As such, the assets acquired will be transferred at
historical cost.
F-73
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. The following financial statements are filed as
part of this registration statement.
Offshore Tool & Energy Corporation:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the year ended December 31, 1996 and
for the periods from January 1, 1997 to September 18, 1997 and September
19, 1997 to December 31, 1997 and for the year ended December 31, 1998
Consolidated Statements of Changes in Equity for the year ended December 31,
1996 and for the periods from January 1, 1997 to September 18, 1997 and
September 19, 1997 to December 31, 1997 and for the year ended December 31,
1998
Consolidated Statements of Cash Flows for the year ended December 31, 1996 and
for the periods from January 1, 1997 to September 18, 1997 and September
19, 1997 to December 31, 1997 and for the year ended December 31, 1998
Notes to Consolidated Financial Statements
The ITS Subgroup
Report of Independent Public Accountants
Combined Balance Sheets as of March 31, 1997 and 1998 and September 30, 1998
Combined Statements of Income for the years ended March 31, 1996, 1997, and
1998 and for the six months ended September 30, 1997 and 1998
Combined Statements of Stockholder's Equity for the years ended March 31,
1996, 1997, and 1998
Combined Statements of Cash Flows for the years ended March 31, 1996, 1997,
and 1998 and for the six months ended September 30, 1997 and 1998
Notes to Combined Financial Statements
Mobile Pulley & Machine Works and Mobile Pulley Marine Services
Report of Independent Public Accountants
Combined Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998
(unaudited)
Combined Statements of Earnings for the years ended December 31, 1996 and 1997
and for the three months ended March 31, 1997 and 1998 (unaudited)
Combined Statements of Divisional Equity for the years ended December 31, 1996
and 1997
Combined Statements of Cash Flows for the years ended December 31, 1996 and
1997 and for the three months ended March 31, 1997 and 1998 (unaudited)
Notes to Combined Financial Statements
Titan Industries, Inc.
Report of Independent Public Accountants
Balance Sheets as of June 30, 1996 and 1997
Statements of Operations for the years ended June 30, 1996 and 1997 and for
the period from July 1, 1997 to November 5, 1997
Statements Changes in Stockholders' Equity for the years ended
June 30, 1996 and 1997 and for the period from July 1, 1997 to
November 5, 1997
Statements of Cash Flows for the years ended June 30, 1996 and
1997 and for the period from July 1, 1997 to November 5, 1997
Notes to Financial Statements
(b) Exhibits. The following exhibits are filed as part of this
registration statement.
Exhibit Number Description
- -------------- -----------
3(a)(i)* Certificate of Incorporation of Offshore Tool & Energy
Corporation
3(a)(ii)* Certificate of Amendment to Certificate of Incorporation
3(b)* Second Amended and Restated Bylaws of Offshore Tool &
Energy Corporation
4* Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
copies of the Series A Subordinated Debenture Indenture
of the Company and the Series B Junior Subordinated Note
Agreement of the Company are not being filed. The
Company agrees to furnish copies of such agreements to
the Commission upon request.
10(a)(i)* Agreement and Plan of Share Exchanges dated as of
October 1, 1998 by and among Offshore Tool & Energy
Corporation, International Tool & Supply plc, Aero
International, L.L.C., and certain Aero Holders named
therein
10(a)(ii)* First Amendment dated November 6, 1998 to Agreement and
Plan of Share Exchanges
10(b)(i)* Loan Agreement dated as of June 30, 1998 by and among
Aero International, L.L.C.. American Aero Cranes,
L.L.C., and National Canada Finance Corp.
10(b)(ii)* Acknowledgment dated April 27, 1999 under Loan Agreement
10(c)* Asset Purchase Agreement dated September 18, 1997 by and
among Weatherford Enterra U.S., Limited Partnership,
Weatherford U.S., Inc. and American Aero Cranes, L.L.C.
10(d)* Asset Purchase Agreement dated June 30, 1998 by and
between Titan Industries, Inc. and American Aero Cranes,
L.L.C.
_______________________
* Filed previously.
32
<PAGE>
10(e)* Capital Contribution Agreement dated June 30, 1998 by
and among IPC Industries, Inc., American Aero Cranes,
L.L.C. and Aero International, L.L.C.
10(f)* Capital Contribution Agreement dated June 30, 1998 by
and among Mobile Pulley Marine Services, Inc., American
Aero Cranes, L.L.C. and Aero International, L.L.C.
10(g)* Form of Indemnity Agreement dated November 17, 1998 by
and between Offshore Tool & Energy Corporation and each
of Robert A. Rayne, Bernard J. Duroc-Danner, McGowin I.
Patrick, Jr., Clifton C. Inge, Jr. and Byron A. Adams,
Jr., and dated February 1, 1999 betwen Offshore Tool &
Energy Corporation and Simon Edward Callum Miller (filed
pursuant to Instruction 2 to Item 601 of Regulation S-K.
All executed agreements are identical except as to the
identity of the counterparty)
10(h)* Registration Rights Agreement dated November 17, 1998 by
and among Offshore Tool & Energy Corporation and IPC
Industries, Inc., Byron A. Adams, Jr., W. Steven
McKenzie and Thomas W. Pritchard
10(i)* Registration Rights Agreement dated November 17, 1998 by
and between Offshore Tool & Energy Corporation and
Jefferies and Company, Inc.
10(j)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and McGowin
I. Patrick, Jr.
10(k)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and Clifton
C. Inge, Jr.
10(l)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and Byron A.
Adams, Jr.
10(m)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and W. Steven
McKenzie
10(n)* Offshore Tool & Energy Corporation Stock Incentive Plan
dated November 17, 1998
10(o)* Lease Agreement dated as of July 1, 1998 by and between
Industrial Development Board of Mobile County and Aero
International, L.L.C.
12 Statement re Computation of Ratios
21* List of Subsidiaries
27* Financial Data Schedule
____________________________
* Filed previously.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 13, 1999 By: /s/ McGowin I. Patrick, Jr.
-------------------------------
McGowin I. Patrick, Jr.
President and Chief Operating Officer
34
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
3(a)(i)* Certificate of Incorporation of Offshore Tool & Energy
Corporation
3(a)(ii)* Certificate of Amendment to Certificate of Incorporation
3(b)* Second Amended and Restated Bylaws of Offshore Tool &
Energy Corporation
4* Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
copies of the Series A Subordinated Debenture Indenture
of the Company and the Series B Junior Subordinated Note
Agreement of the Company are not being filed. The
Company agrees to furnish copies of such agreements to
the Commission upon request.
10(a)(i)* Agreement and Plan of Share Exchanges dated as of
October 1, 1998 by and among Offshore Tool & Energy
Corporation, International Tool & Supply plc, Aero
International, L.L.C., and certain Aero Holders named
therein
10(a)(ii)* First Amendment dated November 6, 1998 to Agreement and
Plan of Share Exchanges
10(b)(i)* Loan Agreement dated as of June 30, 1998 by and among
Aero International, L.L.C.. American Aero Cranes,
L.L.C., and National Canada Finance Corp.
10(b)(ii)* Acknowledgment dated April 27, 1999 under Loan Agreement
10(c)* Asset Purchase Agreement dated September 18, 1997 by and
among Weatherford Enterra U.S., Limited Partnership,
Weatherford U.S., Inc. and American Aero Cranes, L.L.C.
10(d)* Asset Purchase Agreement dated June 30, 1998 by and
between Titan Industries, Inc. and American Aero Cranes,
L.L.C.
10(e)* Capital Contribution Agreement dated June 30, 1998 by
and among IPC Industries, Inc., American Aero Cranes,
L.L.C. and Aero International, L.L.C.
10(f)* Capital Contribution Agreement dated June 30, 1998 by
and among Mobile Pulley Marine Services, Inc., American
Aero Cranes, L.L.C. and Aero International, L.L.C.
10(g)* Form of Indemnity Agreement dated November 17, 1998 by
and between Offshore Tool & Energy Corporation and each
of Robert A. Rayne, Bernard J. Duroc-Danner, McGowin I.
Patrick, Jr., Clifton C. Inge, Jr. and Byron A. Adams,
Jr., and dated February 1, 1999 between Offshore Tool &
Energy Corporation and Simon Edward Callum Miller
(filed pursuant to Instruction 2 to Item
________________________
* Filed previously.
35
<PAGE>
601 of Regulation S-K. All executed agreements are
identical except as to the identity of the counterparty)
10(h)* Registration Rights Agreement dated November 17, 1998 by
and among Offshore Tool & Energy Corporation and IPC
Industries, Inc., Byron A. Adams, Jr., W. Steven
McKenzie and Thomas W. Pritchard
10(i)* Registration Rights Agreement dated November 17, 1998 by
and between Offshore Tool & Energy Corporation and
Jefferies and Company, Inc.
10(j)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and McGowin
I. Patrick, Jr.
10(k)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and Clifton
C. Inge, Jr.
10(l)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and Byron A.
Adams, Jr.
10(m)* Employment Agreement dated November 17, 1998 by and
between Offshore Tool & Energy Corporation and W. Steven
McKenzie
10(n)* Offshore Tool & Energy Corporation Stock Incentive Plan
dated November 17, 1998
10(o)* Lease Agreement dated as of July 1, 1998 by and between
Industrial Development Board of Mobile County and Aero
International, L.L.C.
12 Statement re Computation of Ratios
21* List of Subsidiaries
27* Financial Data Schedule
_________________________
* Filed previously.
36
<PAGE>
Exhibit 12
Offshore Tool & Energy Corporation
Computation of Consolidated Earnings to Fixed Charges
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the For the
period from period from
1998 9/18/97-12/31/97 1/1/97 - 9/17/97 1996 1995 1994
--------- ---------------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Income 1,297,000 620,000 527,000 406,000 (399,000) (725,000)
Provision for income taxes 167,000 29,000 284,000 218,000 - -
--------- ------- ------- -------- --------- --------
Earnings before provision for income
taxes 1,464,000 649,000 811,000 624,000 (399,000) (725,000)
--------- ------- ------- -------- --------- --------
Fixed charges:
Interest expense 1,944,000 209,000 3,000 1,000 - -
Interest portion of rentals 68,000 120,400 - - - -
--------- ------- ------- -------- --------- --------
Total fixed charges 2,012,000 329,400 3,000 1,000 - -
--------- ------- ------- -------- --------- --------
Earnings before provision for income
taxes and fixed charges 3,476,000 978,400 814,000 625,000 (399,000) (725,000)
========= ======= ======= ======= ========= ========
Ratio of earnings to fixed charges 1.73x 1.51x 271.33x 625.0x - -
========= ======= ======= ======= ========= ========
</TABLE>
