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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO
FORM 10
ON
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
GRANT PRIDECO, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 76-0312499
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1450 LAKE ROBBINS DRIVE
SUITE 600
THE WOODLANDS, TEXAS 77380
(Address of principal executive offices) (Zip code)
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(281) 297-8500
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON WHICH EACH
TITLE OF EACH CLASS TO BE REGISTERED CLASS IS TO BE REGISTERED
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<S> <C>
Common Stock, par value $.01 per share New York Stock Exchange
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INFORMATION INCLUDED IN INFORMATION STATEMENT AND
INCORPORATED IN FORM 10 BY REFERENCE
ITEM 1. BUSINESS.
See attached information statement under headings "Answers to Certain
Questions Regarding the Spinoff", "The Spinoff" and "Business".
ITEM 2. FINANCIAL INFORMATION.
See attached information statement under headings "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Financial
Statements".
ITEM 3. PROPERTIES.
See attached information statement under heading "Business".
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See attached information statement under heading "Security Ownership of
Certain Beneficial Owners and Management".
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
See attached information statement under heading "Management".
ITEM 6. EXECUTIVE COMPENSATION.
See attached information statement under heading "Management".
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See attached information statement under headings "Relationship Between
Grant Prideco and Weatherford After the Spinoff", "Management" and "Certain
Relationships and Related Transactions".
ITEM 8. LEGAL PROCEEDINGS.
See attached information statement under heading "Business".
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
See attached information statement under headings "The Spinoff",
"Relationship Between Grant Prideco and Weatherford After the Spinoff",
"Dividend Policy" and "Security Ownership of Certain Beneficial Owners and
Management".
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
See attached information statement under heading "Description of Grant
Capital Stock".
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
See attached information statement under heading "Liability and
Indemnification of Officers and Directors".
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ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Not applicable.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
See attached information statement under headings "Financial Statements"
and "Exhibits".
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[WEATHERFORD LOGO]
February , 2000
To the Stockholders of Weatherford International, Inc.:
The Board of Directors of Weatherford International, Inc. has authorized a
distribution to the Weatherford stockholders of all of the outstanding shares of
Grant Prideco, Inc., a wholly owned subsidiary of Weatherford. The distribution
will be made on or about , 2000, to holders of record of Weatherford
common stock at the close of business on February , 2000.
The distribution of the Grant Prideco common stock will be made on the
basis of one share of Grant Prideco common stock for each two shares of
Weatherford common stock held by a Weatherford stockholder on the record date
for the distribution. As such, if you hold 100 shares of Weatherford common
stock on the record date, you will receive 50 shares of Grant Prideco common
stock in the distribution.
Grant Prideco is the world's largest provider of drill pipe and other drill
stem products and is a leading provider of premium tubulars and connections in
North America. Grant Prideco also provides tubulars and connections for
conductors and risers for subsea wells. Following the distribution, the stock of
Grant Prideco will be traded on the New York Stock Exchange under the symbol
"GRP".
The distribution of the Grant Prideco stock to the stockholders of
Weatherford is intended to allow Weatherford and Grant Prideco to focus better
on growing their respective businesses to compete in today's highly competitive
and volatile markets. The distribution will separate the businesses of
Weatherford and Grant Prideco in a manner that reflects their different missions
and different financial, investment and operating characteristics so that each
can pursue business strategies and objectives appropriate to its specific
business. We expect the separation of the businesses to result in greater focus
of our management teams on the core strengths that make each business successful
and to allow for more effective incentives for key employees of each group. The
separation also will permit our investors, customers, lenders and other
constituencies to evaluate the respective businesses of Weatherford and Grant
Prideco on a stand-alone basis.
We are providing you the attached information statement solely for your
information. The information statement contains important information about the
distribution and important financial and other information about Grant Prideco.
No action is being requested of you. If you hold shares of Weatherford common
stock on the record date you will receive your shares of Grant Prideco stock in
the distribution.
For those of us who have been involved in the development and growth of
Grant Prideco from its inception as part of Energy Ventures, Inc., the
separation of Grant Prideco from Weatherford is not being done without some
sadness. The managements of Weatherford and Grant Prideco, however, believe that
the opportunities for growth created by the separation are significant and will
enhance stockholder value. We look forward to the successful future of both
companies as we enter the new millennium.
Sincerely,
/s/ Bernard J. Duroc-Danner
Bernard J. Duroc-Danner
President, Chief Executive Officer
and Chairman of the Board
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Weatherford International, Inc. www.weatherford.com
515 Post Oak Blvd., Suite 600
Houston, Texas 77027
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[GRANT PRIDECO LOGO]
Information Statement
Common Stock
(par value $.01 per share)
Grant Prideco, Inc. is furnishing this information statement in connection
with the spinoff by Weatherford International, Inc. of its wholly owned
subsidiary, Grant Prideco. Weatherford will make the spinoff through a
distribution to its stockholders of one share of Grant Prideco common stock for
each two shares of Weatherford common stock held by the Weatherford stockholders
on the record date for the distribution. The Board of Directors of Weatherford
has fixed the close of business on February , 2000 as the record date for the
spinoff. Grant Prideco is mailing this information statement to holders of
Weatherford common stock on or about February , 2000.
Grant Prideco is the world's largest provider of drill pipe and other drill
stem products to the oil and gas industry and is a leading provider of premium
tubulars and connections in North America. Grant Prideco also provides tubulars
and connections for conductors and risers for subsea wells. The spinoff will
result in all of the outstanding shares of Grant Prideco common stock being
distributed to holders of Weatherford common stock on a pro rata basis.
Weatherford stockholders will not pay any consideration for shares of Grant
Prideco common stock. The distribution of the Grant Prideco stock to the
Weatherford stockholders is scheduled to be made on , 2000.
Currently, there is no public market for the Grant Prideco common stock,
although we expect that a "when-distributed" trading market will develop before
the distribution date. We have applied to list the Grant Prideco common stock,
and we believe that the Grant Prideco common stock will be approved for listing,
on the New York Stock Exchange.
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NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE SPINOFF. NO
PROXIES ARE BEING SOLICITED. PLEASE DO NOT SEND US A PROXY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
Weatherford stockholders with questions related to the spinoff should
contact Investor Relations, Weatherford International, Inc., 515 Post Oak
Boulevard, Suite 600, Houston, Texas 77027, at (713) 693-4000; or the Grant
Prideco common stock transfer agent, American Stock Transfer & Trust Company, at
(800) 937-5449. American Stock Transfer & Trust Company also is acting as
distribution agent for the spinoff.
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February 2000.
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TABLE OF CONTENTS
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ANSWERS TO CERTAIN QUESTIONS REGARDING THE SPINOFF.......... 1
SUMMARY HISTORICAL FINANCIAL DATA........................... 4
RISK FACTORS................................................ 5
The IRS May Treat the Transaction as Taxable to
Weatherford and Its Stockholders if Representations
Weatherford and Grant Prideco Made to the IRS Were
Inaccurate or if Weatherford and Grant Prideco Do Not
Comply with the Undertakings Made to the IRS........... 5
We Generally Will be Responsible for Taxes if the Spinoff
is Determined to be Taxable............................ 5
Weatherford Will Provide No Future Financial Support to
Us..................................................... 5
Weatherford and Grant Prideco Will Have a Business
Relationship After the Spinoff and Conflicts May
Arise.................................................. 6
There Is No Current Trading Market for the Grant Prideco
Common Stock........................................... 6
The Spinoff Could Adversely Affect the Aggregate Value of
Your Investment in Weatherford Common Stock............ 7
Our Business is Materially Affected By Drilling Activity
and the Rig Count...................................... 7
An Economic Downturn Could Adversely Affect Demand for
Products and Services.................................. 7
Disruptions in Foreign Operations Could Adversely Affect
Our Income............................................. 7
THE SPINOFF................................................. 9
Reasons for the Spinoff................................... 9
Distribution Agent........................................ 10
Manner of Effecting the Spinoff........................... 10
Results of the Spinoff.................................... 11
Listing and Trading of the Grant Prideco Common Stock..... 11
Federal Income Tax Consequences of the Spinoff............ 11
Conditions; Termination................................... 12
Reason for Furnishing this Information Statement.......... 13
RELATIONSHIP BETWEEN GRANT PRIDECO AND WEATHERFORD AFTER THE
SPINOFF................................................... 13
Distribution Agreement.................................... 13
Pre-Spinoff Contributions.............................. 14
The Weatherford Note and Contribution of Debt.......... 14
Employment Matters; Treatment of Outstanding Stock
Options and Restricted Stock.......................... 14
Adjustment and Substitution of Existing Weatherford
Stock Options....................................... 14
Treatment of Outstanding Restricted Stock............ 16
Payments under Weatherford Nonqualified Deferred
Compensation Plans.................................. 16
Additional Actions................................... 17
Terms and Conditions of the Spinoff.................... 17
Allocation of Liabilities and Indemnities.............. 17
Tax Allocation Agreement.................................. 17
Transition Services Agreement............................. 18
Preferred Supplier Agreement.............................. 18
Policies and Procedures for Addressing Conflicts.......... 19
ACCOUNTING TREATMENT........................................ 19
DIVIDEND POLICY............................................. 19
SELECTED HISTORICAL FINANCIAL DATA.......................... 20
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 21
Forward-Looking Statements............................................... 21
Market Trends and Outlook................................................ 22
Results of Operations.................................................... 24
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.. 24
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.. 27
Other Charges.......................................................... 30
Acquisitions............................................................. 31
Liquidity and Capital Resources.......................................... 32
Tax Matters.............................................................. 34
Recent Accounting Pronouncements......................................... 34
Year 2000 Matters........................................................ 34
Quantitative and Qualitative Market Risk Disclosures..................... 35
Foreign Currency Risk.................................................. 35
Interest Rates......................................................... 35
BUSINESS..................................................................... 36
General.................................................................. 36
Market Trends and Outlook................................................ 36
Growth Strategy.......................................................... 37
Drill Stem Products...................................................... 37
Drill Pipe............................................................. 38
Drill Collars.......................................................... 38
Heavyweight Drill Pipe and Other Drill Stem Products................... 38
Premium Tubulars and Engineered Connections.............................. 38
Premium Tubulars and Connections....................................... 39
Premium Casing......................................................... 39
Couplings.............................................................. 39
Accessories and Insulated Tubing....................................... 39
Conductors and Risers for Subsea Structures............................ 39
Other.................................................................. 39
Raw Materials............................................................ 39
Properties............................................................... 40
Patents.................................................................. 41
Backlog.................................................................. 41
Insurance................................................................ 41
Federal Regulation and Environmental Matters............................. 41
Employees................................................................ 42
Litigation............................................................... 42
Principal Executive Offices.............................................. 42
MANAGEMENT................................................................... 43
Board of Directors and Committees of the Board of Grant Prideco.......... 43
Director Compensation.................................................... 44
Fees................................................................... 44
Grant Prideco, Inc. 1999 Non-Employee Director Stock Option Plan....... 44
Director Deferred Compensation Plan.................................... 45
Executive Officers of Grant Prideco...................................... 45
Executive Compensation................................................... 46
Stock Option Grants in Fiscal 1999....................................... 47
Aggregated Option Exercises in Fiscal 1999 and December 31, 1999 Option
Values................................................................. 47
Benefit Plans............................................................ 47
Grant Prideco, Inc. 1999 Employee Stock Option and Restricted Stock
Plan................................................................ 47
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<TABLE>
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Grant Prideco, Inc. Executive Deferred Compensation Plan.............................................. 48
Grant Prideco, Inc. Foreign Executive Deferred Compensation Plan...................................... 48
Grant Prideco, Inc. 401(k) Savings Plan............................................................... 48
Employment Agreements and Change-of-Control Arrangements................................................. 49
Compensation Committee Interlocks and Insider Participation.............................................. 50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 52
DESCRIPTION OF GRANT PRIDECO CAPITAL STOCK................................................................. 52
General.................................................................................................. 52
Grant Prideco Common Stock............................................................................... 52
Voting Rights......................................................................................... 52
Dividend Rights....................................................................................... 53
Liquidation Rights and Other Provisions............................................................... 53
Grant Prideco Preferred Stock............................................................................ 53
No Preemptive Rights..................................................................................... 53
Business Combinations with Interested Stockholders....................................................... 53
Nomination of Directors.................................................................................. 54
Transfer Agent and Registrar............................................................................. 54
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS.................................................... 54
Exculpation of Monetary Liability........................................................................ 54
Indemnification.......................................................................................... 54
INDEPENDENT PUBLIC ACCOUNTANTS............................................................................. 55
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 55
FINANCIAL STATEMENTS....................................................................................... F-1
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ANSWERS TO CERTAIN QUESTIONS REGARDING THE SPINOFF
The following answers certain questions you may have regarding the spinoff.
We encourage you to read this information statement carefully and completely.
References in this information statement to "Grant Prideco", "we", "us" or the
"Company" include Grant Prideco, Inc. and its subsidiaries (after giving effect
to the transactions contemplated in connection with the spinoff), except where
the context otherwise requires. References in this information statement to
"Weatherford" include Weatherford International, Inc. and its consolidated
subsidiaries (other than Grant Prideco), except where the context otherwise
requires.
Q: WHAT IS THE SPINOFF?
A: Grant Prideco currently is a wholly owned subsidiary of Weatherford. At the
close of business on March , 2000, Weatherford will distribute all of the
shares of Grant Prideco common stock to the Weatherford stockholders as a
non-cash distribution, resulting in Grant Prideco becoming an independent,
publicly-owned company.
Q: WHO WILL RECEIVE GRANT PRIDECO COMMON STOCK?
A: Holders of Weatherford common stock as of the close of business on
February , 2000 will receive Grant Prideco common stock.
Q: WHEN WILL THE SPINOFF OCCUR?
A: The spinoff will occur on March , 2000.
Q: HOW MANY SHARES OF GRANT PRIDECO COMMON STOCK WILL I RECEIVE?
A: You will receive one share of Grant Prideco common stock for each two
shares of Weatherford common stock you hold as of the close of business on
the record date. We estimate that Weatherford will distribute approximately
54.4 million shares of Grant Prideco common stock (based on the number of
shares of Weatherford common stock outstanding on December 31, 1999). The
shares to be distributed will constitute all of the outstanding shares of
Grant Prideco common stock immediately after the spinoff.
Q: WHEN WILL I RECEIVE SHARES OF GRANT PRIDECO COMMON STOCK?
A: On the distribution date, Weatherford will deliver certificates
representing the shares of Grant Prideco common stock to the distribution
agent for distribution. The distribution agent will mail certificates
representing the shares of Grant Prideco common stock to holders of
Weatherford common stock as soon as practicable thereafter. See "The
Spinoff -- Manner of Effecting the Spinoff".
Q: WHO IS ACTING AS THE DISTRIBUTION AGENT?
A: American Stock Transfer & Trust Company.
Q: SHOULD I SEND IN MY WEATHERFORD STOCK CERTIFICATES FOR EXCHANGE?
A: No. Holders of Weatherford common stock should not send stock certificates
to Weatherford, Grant Prideco or the distribution agent. See "The
Spinoff -- Manner of Effecting the Spinoff".
Q: WILL THERE BE A TRADING MARKET FOR GRANT PRIDECO COMMON STOCK AFTER THE
SPINOFF? WILL GRANT PRIDECO HAVE A TRADING SYMBOL?
A: There is currently no public market for the Grant Prideco common stock. We
have applied to list the shares of Grant Prideco common stock on the New
York Stock Exchange under the trading symbol "GRP". See "The
Spinoff -- Listing and Trading of the Grant Prideco Common Stock".
Q: WHY IS WEATHERFORD SPINNING OFF GRANT PRIDECO?
A: Weatherford is spinning off Grant Prideco to allow Weatherford and Grant
Prideco to focus better on growing their respective businesses to compete
in today's highly competitive and volatile markets. We expect the spinoff
to allow each company to develop its own strategy for growth and to fund
that growth with its own capital resources without internal competition for
financial and other resources. The objective of the spinoff is to allow
Weatherford to continue its current strategy of becoming a major provider
of products and services used to enhance reservoir recovery and complete
oil and gas wells while allowing Grant Prideco to expand in the tubular and
drilling markets by leveraging off its leading position as the world's
largest provider of drill pipe and other drill stem products. We believe
that given current
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market conditions, these objectives could not be achieved other than
through a separation of Grant Prideco from Weatherford. See "The
Spinoff -- Reasons for the Spinoff".
Q: WHAT ARE GRANT PRIDECO'S OPERATIONS? WHICH OPERATIONS WILL WEATHERFORD
RETAIN?
A: Grant Prideco conducts Weatherford's drilling products business. This
business includes the manufacturing and sale of drill pipe and other drill
stem products to the oil and gas industry, the provision of premium tubular
and connections and the provision of tubulars and connections for
conductors and risers for subsea applications. Weatherford will retain its
downhole and well intervention services business, its completion products
and services business, its artificial lift systems business and its
compression services business.
Q: HOW WILL GRANT PRIDECO BE CAPITALIZED AFTER THE SPINOFF?
A: Before the spinoff, we will issue a $100 million unsecured subordinated
note to Weatherford. Weatherford will then contribute to us substantially
all remaining intercompany indebtedness that we owe to Weatherford. We also
will grant to Weatherford a $15 million drill stem purchase credit. We
currently are negotiating with potential lenders to establish a secured
credit facility that would provide us with up to $75 million for working
capital purposes, of which we expect $30 million to $50 million to be
available to us initially. Following the spinoff, we will have outstanding
approximately $36 million in indebtedness (exclusive of the drill stem
credit) including capitalized leases relating to obligations we previously
incurred from third parties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Relationship Between
Grant Prideco and Weatherford After the Spinoff -- Distribution
Agreement -- The Weatherford Note and Contribution of Debt" and the
Financial Statements.
Q: CAN WEATHERFORD DECIDE NOT TO GO THROUGH WITH THE SPINOFF?
A: Yes. Weatherford can cancel the spinoff for any reason at any time before
it is effected. See "The Spinoff -- Conditions; Termination".
Q: WILL I BE TAXED ON THE SHARES OF GRANT PRIDECO THAT I RECEIVE IN THE
SPINOFF?
A: Weatherford has conditioned the spinoff on the receipt of a favorable
ruling from the Internal Revenue Service to the effect that, for United
States federal income tax purposes, the spinoff generally will be tax-free
to Weatherford stockholders. The tax ruling will not address state, local
or foreign tax consequences that may apply to Weatherford stockholders. You
should consult your tax advisor as to the particular tax consequences to
you of the spinoff.
Q: WILL WEATHERFORD BE TAXED ON THE SPINOFF?
A: The tax ruling that Weatherford is seeking requests confirmation that
Weatherford generally should not recognize income, gain or loss as a result
of the spinoff. The requested tax ruling will be based on representations
made by Weatherford and Grant Prideco, the accuracy of which are critical
to the spinoff qualifying as a tax-free distribution. See "The
Spinoff -- Federal Income Tax Consequences of the Spinoff".
Q: WHAT WILL BE THE RELATIONSHIP BETWEEN WEATHERFORD AND GRANT PRIDECO AFTER
THE SPINOFF?
A: Weatherford will not own any stock of Grant Prideco after the spinoff.
Before the spinoff, Grant Prideco and Weatherford will enter into
agreements with respect to relationships and transactions between Grant
Prideco and Weatherford after the spinoff. These agreements include:
- Distribution Agreement, providing for, among other things, (1) the
spinoff and the division between Weatherford and us of certain assets and
liabilities, (2) the issuance by us of a $100 million note to Weatherford
and a $15 million drill stem purchase credit and the cancellation of
substantially all remaining intercompany indebtedness, (3) the allocation
of responsibilities with respect to employee benefit plans, employee
compensation, and other labor and employment matters, (4) the terms and
conditions of the spinoff and (5) the material indemnification
provisions.
- Tax Allocation Agreement, providing for the allocation between
Weatherford and us of tax liabilities that relate to periods before and
after the distribution date. This agreement will provide that we
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generally will be responsible for any taxes relating to the spinoff other
than in certain circumstances involving a change of control of
Weatherford.
- Preferred Supplier Agreement, pursuant to which we will sell drill pipe
and related products to Weatherford as Weatherford's primary supplier at
prices not higher than the lowest price at which we sell those products
to similarly situated third parties. Weatherford will agree to purchase
at least 70% of its drill stem purchases from us for a period of three
years, subject to certain exceptions. Weatherford will be able to apply
its $15 million drill stem credit for purchases under this agreement.
- Transition Services Agreement, pursuant to which Weatherford will provide
us with certain services on a temporary basis.
Q: WILL WEATHERFORD AND GRANT PRIDECO HAVE ANY COMMON DIRECTORS OR OFFICERS?
HOW WILL CONFLICTS OF INTEREST BE AVOIDED?
A: Grant Prideco and Weatherford will share five common directors. In
addition, Bernard Duroc-Danner, President, Chief Executive Officer and
Chairman of the Board of Weatherford, will serve as Chairman of the Board
of Grant Prideco, and Curtis Huff, Senior Vice President and General
Counsel of Weatherford, will serve as Vice President and Interim General
Counsel of Grant Prideco. Grant Prideco and Weatherford will each adopt
policies and procedures to be followed by the board of directors of each
company to limit the involvement of these common directors in potential
conflict situations, including requiring them to abstain from voting as a
director of either Grant Prideco or Weatherford on certain matters that
present a potential conflict of interest between the two companies and
providing for the outside directors of each company to control the decision
making process in certain situations. We believe that such potential
conflict situations will be minimal. See "Relationship Between Grant
Prideco and Weatherford After the Spinoff -- Policies and Procedures for
Addressing Conflicts".
Q: WHAT ELSE SHOULD I BE CONCERNED ABOUT WITH RESPECT TO THE SPINOFF AND
HOLDING AN INVESTMENT IN GRANT PRIDECO?
A: You should read this entire information statement carefully. You should
read the sections entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Forward-Looking Statements" in evaluating whether and for how
long you should retain an investment in Grant Prideco common stock received
in the spinoff.
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SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth certain historical combined financial data
of Grant Prideco. This information has been prepared as if we had been a
stand-alone company for the periods presented. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Combined Financial Statements and the Notes
thereto (the "Financial Statements"). The following information may not be
indicative of our future operating results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues................................................... $286,370 $646,454 $630,021 $367,336 $167,616
Operating Income (Loss).................................... (33,014)(a) 112,884(b) 115,436 46,322 15,238
Net Income (Loss).......................................... (33,511)(a) 65,720(b) 61,514 23,588 3,059
Pro Forma Earnings (Loss) Per Share:(c)
Basic.................................................... (0.66) 1.35 1.28 0.53 0.08
Diluted.................................................. (0.66) 1.34 1.26 0.52 0.08
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets................................................ $734,575 $738,314 $662,598 $396,693 $237,854
Long-Term Debt.............................................. 24,276 9,265 27,387 3,432 2,591
Subordinated Note to Weatherford............................ 100,000 100,000 100,000 100,000 51,425
Stockholder's Equity........................................ 453,856 445,211 332,722 164,220 104,094
</TABLE>
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(a) Includes a charge of $9.5 million, $6.1 million net of tax, relating to the
decision to terminate our manufacturing arrangement in India, of which $7.8
million involved a purchase deposit that we will not be able to use and
$1.7 million in equipment in India that we do not believe we will be able
to recover.
(b) Includes $35.0 million, $22.8 million net of tax, of other charges relating
to a reorganization and rationalization of our business in light of our
industry conditions for the year ended December 31, 1998.
(c) We have calculated our pro forma earnings per share using our pro forma
basic and diluted weighted average shares outstanding for each of the
periods presented. In calculating our pro forma basic weighted average
shares, we have adjusted Weatherford's historical basic weighted average
shares outstanding for the applicable period to reflect the number of
shares that would have been outstanding at the time assuming a distribution
of one share of our common stock for each two shares of Weatherford common
stock. Our pro forma diluted weighted average shares reflect an estimate of
the potential dilutive effect of common stock equivalents. This estimate is
calculated based on Weatherford's dilutive effect of stock options and
restricted stock divided by two. The effect of stock options and restricted
stock is not included in the diluted weighted average shares computation
for periods in which a loss occurs because to do so would have been
anti-dilutive.
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RISK FACTORS
In addition to the other information contained in this information
statement, recipients of Grant Prideco common stock should carefully consider
the following information.
THE IRS MAY TREAT THE TRANSACTION AS TAXABLE TO WEATHERFORD AND ITS STOCKHOLDERS
IF REPRESENTATIONS WEATHERFORD AND GRANT PRIDECO MADE TO THE IRS WERE INACCURATE
OR IF WEATHERFORD AND GRANT PRIDECO DO NOT COMPLY WITH THE UNDERTAKINGS MADE TO
THE IRS.
The spinoff is conditioned on Weatherford receiving a favorable ruling from
the IRS to the effect that, for United States federal income tax purposes, the
spinoff generally will be tax-free to Weatherford and its stockholders. It is
possible that Weatherford and its stockholders could be subject to a material
amount of taxes as a result of the spinoff if the representations and
undertakings Grant Prideco and Weatherford made to the IRS in connection with
obtaining the proposed tax ruling are determined to be inaccurate. In addition,
under the Internal Revenue Code of 1986, as amended, and Treasury regulations
promulgated thereunder (including proposed regulations), the spinoff could be
determined to be taxable if within two years following the spinoff there were to
be a change of control of either Weatherford or Grant Prideco and Weatherford
and Grant Prideco were not able to rebut the presumption that the change in
control was contemplated at the time of the spinoff. For a description of
material United States federal income tax consequences to Weatherford
stockholders of the spinoff, see "The Spinoff -- Federal Income Tax Consequences
of the Spinoff".
WE GENERALLY WILL BE RESPONSIBLE FOR TAXES IF THE SPINOFF IS DETERMINED TO BE
TAXABLE.
Under the terms of the Distribution Agreement, we will be responsible and
liable to Weatherford for any and all corporate-level taxes or liabilities
incurred by Weatherford relating to the spinoff except to the extent the spinoff
is determined to be taxable as a result of a change of control of Weatherford
following the spinoff. Our obligation and liability will apply under all other
circumstances, regardless of the reason for the spinoff being determined to be
taxable. This liability would extend to circumstances within the control of
Weatherford as well as circumstances under which it is alleged or determined
that there was a breach or misrepresentation, negligent or otherwise, by
Weatherford in connection with the proposed tax ruling. We also will be
restricted under the Tax Allocation Agreement from engaging in certain
transactions without the consent of Weatherford that could affect the taxability
of the spinoff unless Weatherford receives a supplemental tax ruling or an
acceptable tax opinion. For a summary of Weatherford's and Grant Prideco's
obligations in connection with obtaining the tax ruling and potential tax
liabilities if the transaction is held to be taxable, see "Relationship Between
Grant Prideco and Weatherford After the Spinoff -- Tax Allocation Agreement".
WEATHERFORD WILL PROVIDE NO FUTURE FINANCIAL SUPPORT TO US.
We cannot assure you that we will generate or have available to us
sufficient funds to fund our planned expenditures and meet our obligations to
pay principal and interest on our debt following the spinoff. Further, we cannot
assure you that we will be able to secure sufficient debt or equity financing to
fund our growth strategy.
Weatherford has no obligation to support us financially after the spinoff.
As a result, we will need to secure and maintain our own credit facilities. As a
smaller company engaged in a volatile sector of the oil and gas industry, the
cost of capital to us is expected to be greater than that which we paid as a
Weatherford subsidiary. Financing in our industry also is illiquid at this time,
and the long-term debt markets are expensive for companies of our size and
credit.
Our strategy envisions growth through acquisitions. We expect to finance
future acquisitions through a combination of the issuance of additional equity
and debt financing. Additional equity issuances will be dependent on the nature
of the opportunity that arises and the anticipated accretion or dilution from
the acquisition to our stockholders. We expect any debt financing would
initially be in the form of high-yield notes or debentures. Under the terms of
the $100 million note that we will issue to Weatherford, the proceeds from any
new financing (other than working capital borrowings and equity financings
issued as part of an acquisition) generally must first be applied to the
repayment of the Weatherford note. This repayment
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obligation could affect the amount and terms of any third party debt financing
that would be available to us. The Weatherford note will limit our ability to
incur new debt, engage in certain acquisitions and investments and make
distributions to our stockholders.
In connection with the spinoff, we currently are negotiating with potential
lenders to establish a credit facility that would provide us with up to $75
million for working capital purposes, of which we expect $30 to $50 million to
be available to us initially. We expect that this facility would be secured by
our domestic inventory and receivables and guaranteed by our domestic
subsidiaries. This facility also would place limits on our ability to incur new
debt, engage in certain acquisitions and investments, invest in our foreign
operations, grant liens and make distributions to our stockholders.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Relationship Between Weatherford and Grant Prideco
After the Spinoff" and the Financial Statements.
WEATHERFORD AND GRANT PRIDECO WILL HAVE A BUSINESS RELATIONSHIP AFTER THE
SPINOFF AND CONFLICTS MAY ARISE.
The terms of the agreements between Weatherford and Grant Prideco were not
negotiated on an arm's-length basis and were proposed by Weatherford as our sole
stockholder. As a result, the terms of those agreements, in particular the
Distribution Agreement, the Tax Allocation Agreement, the Preferred Supplier
Agreement and the Weatherford note, may not reflect the terms that would have
been provided to us from an unrelated third party. Weatherford as our sole
stockholder has ratified the terms of these agreements, and we have acknowledged
that the agreements will constitute our valid obligations.
Persons associated with Weatherford also will have a continuing
relationship with Grant Prideco. Five current directors of Weatherford, Messrs.
Bernard J. Duroc-Danner, Sheldon B. Lubar, William E. Macaulay, Robert K. Moses,
Jr. and Robert A. Rayne, will be named directors of Grant Prideco. These
directors will represent a majority of our initial Board of Directors of Grant
Prideco. In addition, Mr. Duroc-Danner, President, Chief Executive Officer and
Chairman of the Board of Directors of Weatherford, will serve as our Chairman of
the Board and Curtis W. Huff, Senior Vice President and General Counsel of
Weatherford, will serve as our Vice President and Interim General Counsel.
The persons currently associated with Weatherford were asked to serve as
directors or officers of Grant Prideco because of their experience and knowledge
of us and our businesses. Although each of them will have a fiduciary obligation
to both Weatherford and Grant Prideco, we cannot assure you that no conflicts of
interest will arise with them or Weatherford relating to Weatherford and Grant
Prideco after the spinoff. Weatherford and Grant Prideco will each adopt
policies and procedures to be followed by their respective board of directors to
limit the involvement of Messrs. Duroc-Danner, Lubar, Macaulay, Moses and Rayne
in conflict situations, including requiring them to abstain from voting as a
director of either Grant Prideco or Weatherford on certain matters that present
a potential conflict of interest between the two companies. See "Relationship
Between Grant Prideco and Weatherford After the Spinoff".
THERE IS NO CURRENT TRADING MARKET FOR THE GRANT PRIDECO COMMON STOCK.
There currently is no public market for our common stock. Although we
expect our common stock to be listed on the New York Stock Exchange following
the spinoff, we cannot predict the prices at which our common stock will trade
after the spinoff. We expect that a large number of holders of our common stock
may sell their shares shortly after the spinoff due to the investment objectives
and requirements of those holders. Until our common stock is fully distributed
and an orderly market develops, we believe the prices at which our common stock
will trade will fluctuate significantly. The trading price of our common stock
will be influenced by a variety of factors, including our operating results and
liquidity of the market for our common stock, investor perception of Grant
Prideco, the industry in which we operate and general and economic market
conditions. See "The Spinoff -- Listing and Trading of the Grant Prideco Common
Stock".
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THE SPINOFF COULD ADVERSELY AFFECT THE AGGREGATE VALUE OF YOUR INVESTMENT IN
WEATHERFORD COMMON STOCK.
Following the spinoff, the trading prices of our common stock and
Weatherford common stock will not necessarily be related. The combined trading
prices of our common stock and Weatherford common stock after the spinoff may be
less than the trading price of Weatherford common stock immediately before the
spinoff. As a result of the spinoff, we expect the trading price range of
Weatherford common stock to be lower than the trading price range of Weatherford
common stock immediately before the spinoff. See "The Spinoff -- Listing and
Trading of the Grant Prideco Common Stock".
OUR BUSINESS IS MATERIALLY AFFECTED BY DRILLING ACTIVITY AND THE RIG COUNT.
A material decline in either prices or drilling activity would negatively
impact our future results. Our business is materially dependent on the level of
drilling activity worldwide. During 1997 and the first half of 1998, we
benefitted from an increase in drilling activity that resulted in strong demand
for our drill pipe and other drill stem products. When drilling activity
declined in the second half of 1998 and 1999, our business fell significantly.
In general, we believe that our drill stem business trails changes in the rig
count by six to nine months. The worldwide monthly rig count for each month in
1999 did not surpass the rig count for the corresponding month of 1998 until
October, and the rig counts since October 1999 have been well below the average
rig count in 1997. This suggests that our drill stem business may not recover
until later this year and will not recover completely unless rig counts continue
to rise. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
AN ECONOMIC DOWNTURN COULD ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS AND
SERVICES.
The economic downturn that began in Asia in 1997 affected the economies in
other regions of the world, including South America and the former Soviet Union,
and contributed to the decline in the price of oil and the level of drilling
activity. Although the economy in the United States has experienced one of its
longest periods of growth in recent history, the continued strength of the
United States economy cannot be assured. If the United States or European
economies were to begin to decline or if the economies of South America or Asia
were to experience further material problems, the demand and price for oil and
gas and our products and services again could adversely affect our revenues and
income.
DISRUPTIONS IN FOREIGN OPERATIONS COULD ADVERSELY AFFECT OUR INCOME.
Our operations in certain locations outside the United States, including
Mexico, India, China and Indonesia, are subject to various political and
economic conditions existing in such countries that could disrupt operations.
These risks include (1) currency fluctuations and potential devaluations in most
countries, in particular those in South America and Asia, (2) currency
restrictions in China and India and limitations on repatriation of profits in
various countries in South America and Asia and (3) political instability in
countries such as Indonesia, India, Mexico, Venezuela, the former Soviet Union
and China. Disruptions may occur in our foreign operations and losses may occur
that will not be covered by insurance.
Oil Country Tubular Limited ("OCTL") manufactures drill pipe and other
products for us under a long-term exclusive manufacturing arrangement. Over the
years, we have provided OCTL with a substantial amount of raw materials,
inventory and working capital for the products it manufactures for us. Our
business in India through our relationship with OCTL has been adversely affected
by the downturn of the economies in the eastern hemisphere and is subject to
various political and economic risks as well as financial and operational risks
with respect to OCTL.
As of December 31, 1999, OCTL owed us approximately $25.1 million for prior
advances made by us to it and we had assets in India with a book value of
approximately $1.7 million. In 1999, we substantially curtailed our purchases
from OCTL, and in December of 1999, we decided to terminate our existing
manufacturing relationship with OCTL and seek an alternative arrangement for the
recovery of our prior advances. We are currently discussing with OCTL a
restructuring of our relationship that would allow OCTL to repay our prior
advances in cash, equity in OCTL or product from OCTL.
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Our decision to terminate our existing arrangement with OCTL and seek an
alternative structure resulted in our writing off a $7.8 million product deposit
previously paid to OCTL and approximately $1.7 million in property and equipment
currently located at the OCTL facility. The write off was due to the anticipated
inability to utilize the deposit and recover the equipment following the
termination of the arrangement. Our remaining exposure in India is approximately
$17.3 million consisting of unpaid receivables and advances made to assist OCTL
in its working capital needs as part of our manufacturing arrangement with it.
Based on financial information of OCTL known to us and our general knowledge of
the business and assets of OCTL, OCTL would appear to have a sufficient asset
and equity value to allow for a restructuring of its remaining $17.3 million in
debt owed to us through a combination of cash, equity of OCTL or product from
OCTL. There is, however, uncertainty as to how much, if any, of the amounts owed
to us by OCTL will ultimately be collected. Accordingly, there can be no
assurance that we will be able to fully realize on the amounts owed to us by
OCTL or that additional charges relating to India will not be required in the
near term as the negotiation and collection process continues.
We have entered into an agreement with Voest-Alpine Stahlrohr Kindberg GmbH
& Co. K.G., an entity of which we currently own 50.01%, to purchase 45,000
tonnes of tubulars for the twelve months ending July 2000, and 60,000 tonnes per
year for the next three years. Our future results could be adversely affected if
we are unable to use or resell these tubulars. In addition, we have agreed to be
responsible for paying any "anti-dumping" duties in the United States on the
resale of these tubulars, which could affect our ability to resell the tubulars
in the United States.
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THE SPINOFF
REASONS FOR THE SPINOFF
The spinoff is intended to allow Weatherford and Grant Prideco to focus
better on growing their respective businesses to compete in today's highly
competitive and volatile markets. We expect the spinoff to allow each company to
develop its own strategy for growth and to fund that growth with its own capital
resources without internal competition for financial and other resources. The
objective of the spinoff is to allow Weatherford to continue its current
strategy of becoming a major provider of products and services used to enhance
reservoir recovery and complete oil and gas wells while allowing Grant Prideco
to expand in the tubular and drilling markets by leveraging off its position as
the world's largest provider of drill pipe and other drill stem products. We
believe that given current market conditions, these objectives could not be
achieved other than through a separation of Grant Prideco from Weatherford.
The decision to effect the spinoff was triggered by the significant changes
that have occurred in the oil and gas industry during the last year and a half.
During this period, the industry has experienced what we believe to have been
one of the most fundamental economic and structural changes ever seen in the
industry. These changes were caused in part by a precipitous drop in the
worldwide price of oil in 1998 and a related fall in the North American and
international rig counts. During the latter part of 1998 and through the first
half of 1999, our industry saw oil prices range from a high of $17.89 per barrel
to a low of $10.44 per barrel and the North American and international rig
counts range from a high of 1,059 and 732, respectively, to a low of 534 and
591, respectively.
The decline and volatility in oil prices and drilling activity resulted in
record low drilling activity by Weatherford's and Grant Prideco's customers
throughout the world and wholesale reductions in field activity and capital
spending in many regions, in particular Canada, the United States and the Far
East. These conditions led to large layoffs and cost reductions in the industry,
an unprecedented consolidation among the major oil companies and what we believe
to be a long-term change in the competitive landscape in the industry.
It is against this background that Weatherford undertook a review of our
businesses and prospects and our relationship with Weatherford's other
businesses to determine the best way to achieve long-term growth. In analyzing
our future prospects, Weatherford's board concluded that for us to continue to
grow and prosper, we would need to pursue new opportunities and acquisitions in
the tubular and drilling segments of the industry. Although we believe that many
opportunities exist for us to grow in these areas, we have not been able to take
full advantage of these opportunities as part of Weatherford due to the capital
cost that would be necessary to do so and Weatherford's focus on reservoir and
production enhancement and investments in technology to compete in today's cost
conscious environment. In general, additional material investments in our
businesses were considered to be inconsistent with the strategic direction and
focus of Weatherford's other businesses.
Over the past year, we have been presented with certain acquisition and
combination opportunities for growth in the tubular segment of the industry that
would have required Weatherford to invest substantial amounts of cash in our
businesses or for us to issue our own stock to fund the acquisition. While we
believe those opportunities would have been desirable for us, they generally
were inconsistent with the strategic direction of Weatherford's other
businesses. Those opportunities also had to compete against other opportunities
Weatherford was pursuing during the market downturn that had generally lower
costs of capital and potentially higher growth rates. Because of these
limitations and constraints on capital and a related desire by Weatherford to
remain focused on reservoir recovery enhancement, we were not able to take
advantage of those opportunities.
Following the spinoff, we intend to actively pursue acquisitions and other
opportunities for growth in our core businesses, including:
- Additional acquisitions where desirable including investments in
integration such as our investment in Voest-Alpine Stahlrohr Kindberg
GmbH & Co. K.G. in the third quarter of 1999;
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- The addition of new tubular and thread technologies;
- International expansion;
- The addition of new products and services that are complementary to our
existing products and services;
- The investment in new tubular and connection technologies and joint
venture projects such as our titanium drill pipe project with RTI Energy
Systems, Inc. and our connection project for expandable tubing; and
- The investment in additional subsea products and services.
We intend to finance these acquisitions and growth opportunities through a
combination of internally generated capital, equity issuances and incurrences of
debt where deemed prudent or appropriate. Any issuances of equity will depend
upon the opportunity and circumstances. We will incur debt only where we
consider the terms to be appropriate.
The separation of our businesses from Weatherford also is intended to allow
us to reduce various conflicts that have arisen over the past year between our
businesses and certain of Weatherford's other businesses. In particular, many of
our customers are competitors of Weatherford and have been reluctant to support
our businesses when the benefit of that support inured to Weatherford as a
competitor. We believe that a separation of our businesses from Weatherford
should reduce these conflicts and benefit both of our businesses.
DISTRIBUTION AGENT
The distribution agent is American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005.
MANNER OF EFFECTING THE SPINOFF
The general terms and conditions relating to the spinoff are set forth in
the Distribution Agreement between Weatherford and Grant Prideco.
Weatherford will effect the spinoff on the distribution date by delivering
certificates evidencing shares of our common stock to the distribution agent for
distribution to holders of record of Weatherford common stock as of the close of
business on the record date. The spinoff will be made on the basis of one share
of our common stock for each two shares of Weatherford common stock outstanding
as of the close of business on the record date. The total number of shares of
our common stock to be distributed will depend on the number of shares of
Weatherford common stock outstanding on the record date. The shares of our
common stock will be fully paid and non-assessable and the holders thereof will
not be entitled to preemptive rights. See "Description of Grant Prideco Capital
Stock".
THE DISTRIBUTION AGENT WILL MAIL CERTIFICATES REPRESENTING SHARES OF OUR
COMMON STOCK TO WEATHERFORD STOCKHOLDERS AS SOON AS PRACTICABLE AFTER THE
DISTRIBUTION DATE. HOLDERS OF WEATHERFORD COMMON STOCK SHOULD NOT SEND
CERTIFICATES TO GRANT PRIDECO, WEATHERFORD OR THE DISTRIBUTION AGENT. THE
DISTRIBUTION AGENT WILL MAIL THE STOCK CERTIFICATES REPRESENTING SHARES OF OUR
COMMON STOCK AS SOON AS PRACTICABLE AFTER THE DISTRIBUTION DATE. WEATHERFORD
STOCK CERTIFICATES WILL CONTINUE TO REPRESENT SHARES OF WEATHERFORD COMMON STOCK
AFTER THE SPINOFF IN THE SAME AMOUNT SHOWN ON THOSE CERTIFICATES.
No holder of Weatherford common stock will be required to pay any cash or
other consideration for the shares of our common stock received in the spinoff
or to surrender or exchange shares of Weatherford common stock to receive shares
of our common stock. No fractional shares of our common stock will be issued in
the spinoff. Any fractional shares of our common stock will be rounded up to the
nearest whole.
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RESULTS OF THE SPINOFF
We will be a separate public company after the spinoff and will continue to
own and operate our drilling products and tubular businesses. The number and
identity of the holders of our common stock immediately after the spinoff likely
will be substantially the same as the number and identity of the holders of
Weatherford common stock on the record date. Immediately after the spinoff, we
expect to have approximately 3,110 holders of record of our common stock and
approximately 54.4 million shares of our common stock outstanding based on the
number of record holders and outstanding shares of Weatherford common stock as
of the close of business on December 31, 1999. We will determine the actual
number of shares of our common stock to be distributed as of the record date.
The spinoff will not affect the number of outstanding shares of Weatherford
common stock or any rights of Weatherford stockholders. For certain information
regarding the options to purchase our common stock that will be outstanding
after the spinoff, see "Relationship Between Grant Prideco and Weatherford After
the Spinoff -- The Distribution Agreement -- Employment Matters; Treatment of
Outstanding Stock Options and Restricted Stock".
LISTING AND TRADING OF THE GRANT PRIDECO COMMON STOCK
We have applied to list our common stock on the New York Stock Exchange
under the ticker symbol "GRP". We anticipate that our common stock will be
approved for listing by the distribution date, and that trading may commence on
a "when-distributed" basis before the spinoff. On the trading day following the
date that the distribution agent mails certificates for our common stock,
"when-distributed" trading of our common stock and Weatherford common stock will
end and ordinary trading will begin. The New York Stock Exchange will not
approve any trading of our common stock until the Securities and Exchange
Commission has declared our registration statement in respect of our common
stock effective, which is expected to occur before the distribution date.
There currently is no public market for our common stock. Although we
expect our common stock to be listed on the New York Stock Exchange following
the spinoff, we cannot predict the prices at which our common stock will trade
after the spinoff. We expect that a large number of holders of our common stock
may sell their shares shortly following the spinoff due to their investment
objectives and requirements. Until our common stock is fully distributed and an
orderly market develops, we believe the prices at which our common stock will
trade will fluctuate significantly. The trading price of our common stock will
be influenced by a variety of factors, including our operating results, the
depth and liquidity of the market for our common stock, investor perception of
Grant Prideco, the industry in which we operate and general and economic market
conditions.
FEDERAL INCOME TAX CONSEQUENCES OF THE SPINOFF
The following is a summary of the material United States federal income tax
consequences relating to the spinoff. The summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder, and interpretations of the Code and Treasury regulations
by the courts and the IRS, all as they exist as of the date of this document.
TAX MATTERS ARE COMPLICATED, AND THE TAX CONSEQUENCES OF THE SPINOFF TO YOU
MAY DEPEND ON THE FACTS OF YOUR OWN SITUATION. WE URGE YOU TO CONSULT YOUR OWN
TAX ADVISORS FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES TO YOU OF THE
SPINOFF, PARTICULARLY IF YOU ARE SUBJECT TO SPECIAL TREATMENT UNDER THE UNITED
STATES FEDERAL INCOME TAX LAWS, SUCH AS IF YOU ARE A TAX-EXEMPT ENTITY,
NON-RESIDENT ALIEN INDIVIDUAL, FOREIGN ENTITY, FOREIGN TRUST OR ESTATE OR
BENEFICIARY THEREOF, PERSON WHO ACQUIRED SUCH WEATHERFORD STOCK PURSUANT TO THE
EXERCISE OF EMPLOYEE STOCK OPTIONS OR OTHERWISE AS COMPENSATION, INSURANCE
COMPANY OR DEALER IN SECURITIES, OR IF YOU DO NOT HOLD YOUR WEATHERFORD COMMON
STOCK AS A CAPITAL ASSET. THIS SUMMARY DOES NOT ADDRESS STATE, LOCAL OR FOREIGN
TAX CONSEQUENCES.
Weatherford and Grant Prideco have requested a ruling from the IRS to the
effect that, for United States federal income tax purposes, the spinoff will
qualify under Section 355 of the Code as a distribution that is
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generally tax-free to Weatherford and its stockholders. Although rulings
generally are binding on the IRS, Weatherford will not be able to rely on the
tax ruling if any factual representations Weatherford and Grant Prideco made to
the IRS prove to be incorrect or untrue in any material respect or if
Weatherford and Grant Prideco do not comply with any undertakings they made to
the IRS. We are not aware of any facts or circumstances that would cause any
such representations to be incorrect or untrue in any material respect.
If Weatherford completes the spinoff and, notwithstanding the tax ruling,
the spinoff is held to be taxable for United States federal income tax purposes,
both Weatherford and its stockholders that receive our common stock could be
subject to a material amount of taxes as a result of the spinoff. The amount of
taxes to which Weatherford would be subject will be based on the difference
between our aggregate market value immediately following the spinoff and
Weatherford's tax basis in our common stock at the time of the spinoff (which
Weatherford estimates will be approximately $400 million). We will be liable to
Weatherford for any such corporate-level taxes incurred by Weatherford, except
to the extent those taxes are attributable to a change of control of Weatherford
following the spinoff. For a description of Weatherford's and Grant Prideco's
obligations in connection with obtaining the tax ruling and potential tax
liabilities if the spinoff is held to be taxable, see "Relationship Between
Grant Prideco and Weatherford After the Spinoff -- Tax Allocation Agreement".
We expect that the tax ruling will provide that for United States federal
income tax purposes:
- No gain or loss will be recognized by, and no amount will be included in
the income of, the Weatherford stockholders upon their receipt of shares
of our common stock in the spinoff.
- The aggregate basis of our common stock and the Weatherford common stock
in the hands of each Weatherford stockholder after the spinoff will equal
the aggregate basis of the Weatherford common stock held by such
Weatherford stockholder immediately before the spinoff, allocated between
our common stock and the Weatherford common stock in proportion to their
respective fair market values.
- The holding period of our common stock received from Weatherford by each
Weatherford stockholder in the spinoff will include the holding period of
the Weatherford common stock held by such Weatherford stockholder
immediately before the spinoff, provided that such Weatherford
stockholder held the Weatherford common stock as a capital asset on the
date of the spinoff.
We expect that the tax ruling will not address tax basis issues with
respect to holders of Weatherford common stock who have blocks of Weatherford
common stock with different per share tax bases. Those holders are urged to
consult their tax advisors regarding the possible tax basis consequences to them
of the spinoff.
United States Treasury regulations require each Weatherford stockholder
that receives shares of our common stock in the spinoff to attach to the
holder's United States federal income tax return for the year in which such
stock is received a detailed statement of data demonstrating the applicability
of Section 355 of the Code to the spinoff. Within a reasonable time after the
spinoff, Weatherford will provide Weatherford stockholders and Weatherford
stockholders who receive our common stock in the spinoff with the information
necessary to comply with this requirement, and will provide information
regarding the allocation of tax basis described above.
We urge you to consult your tax advisors as to the particular tax
consequences to you of the spinoff, including the application of state, local
and foreign tax laws and any changes in federal tax laws that occur after the
date of this document.
CONDITIONS; TERMINATION
The Distribution Agreement provides that Weatherford may decline to
consummate the spinoff if:
- The transfers of assets and liabilities contemplated by the Distribution
Agreement to occur prior to the spinoff are not consummated in all
material respects.
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- Our new board of directors is not elected as of the spinoff and our
certificate of incorporation and the bylaws, as each will be in effect
after the spinoff, are not effective as of the spinoff.
- The registration statement of which this information statement is a part
is not declared effective.
- Weatherford does not receive the tax ruling or if it is withdrawn.
- We do not enter into the agreements, instruments, understandings,
assignments or other arrangements contemplated by the Distribution
Agreement, including the Tax Allocation Agreement, the Transition
Services Agreement and the Preferred Supplier Agreement. See
"Relationship Between Grant Prideco and Weatherford After the Spinoff".
- Our common stock is not approved for listing on the New York Stock
Exchange.
Weatherford's board may waive any of these conditions in its discretion.
Weatherford, however, has advised us that it would not waive the condition of a
tax ruling, the registration of our stock under the Exchange Act or the
execution by us of the material agreements contemplated by the Distribution
Agreement. YOU ALSO SHOULD BE AWARE THAT EVEN IF ALL OF THESE CONDITIONS ARE
SATISFIED, WEATHERFORD'S BOARD HAS THE RIGHT TO ABANDON, DEFER OR MODIFY THE
TERMS OF THE SPINOFF AT ANY TIME BEFORE THE DISTRIBUTION DATE. See "Relationship
Between Grant Prideco and Weatherford After the Spinoff".
REASON FOR FURNISHING THIS INFORMATION STATEMENT
We are providing this information statement solely to provide information
to Weatherford stockholders who will receive our common stock in the spinoff. It
is not an inducement or encouragement to buy or sell any securities of
Weatherford or Grant Prideco. We believe the information contained in this
information statement is accurate as of the date set forth on the cover page.
Changes may occur after that date, and neither Grant Prideco nor Weatherford
will update the information except in the normal course of their respective
public disclosure practices.
RELATIONSHIP BETWEEN GRANT PRIDECO AND WEATHERFORD
AFTER THE SPINOFF
On or before the distribution date, we will enter into various agreements
with Weatherford to govern certain of the ongoing relationships between
Weatherford and us after the spinoff and to provide for an orderly transition to
the status of two separate companies. These agreements will be approved and
ratified by Weatherford as our sole stockholder before the spinoff. A summary of
the material provisions of these agreements follows. The terms of these
agreements are subject to change before the spinoff. The forms of agreements
summarized in this section are included as exhibits to our registration
statement of which this information statement forms a part, and the following
summaries are qualified in their entirety by reference to the agreements as
filed.
DISTRIBUTION AGREEMENT
Before the spinoff, we will enter into a Distribution Agreement with
Weatherford that will:
- Set forth the steps to be taken to separate our business from the
remaining Weatherford businesses, which will result in our business being
conducted by us and our wholly owned subsidiaries.
- Provide for our issuance of the $100 million Weatherford note and
Weatherford's contribution to us of substantially all remaining
intercompany indebtedness we owe to Weatherford.
- Provide for allocations of responsibilities with respect to employee
benefit plans, employee compensation, and other labor and employment
matters, including the satisfaction of obligations to issue stock upon
the exercise of prior Weatherford options.
- Set forth the terms and conditions of the spinoff.
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- Provide for certain indemnities of Weatherford by us with respect to
matters involving our business.
Pre-Spinoff Contributions
The Distribution Agreement will outline certain corporate transactions to
be taken immediately before the spinoff, which transactions will result in our
business being wholly within Grant Prideco. The information in this information
statement gives effect to these transactions.
The Weatherford Note and Contribution of Debt
As of December 31, 1999, we owed Weatherford approximately $494.7 million.
We incurred this indebtedness for various purposes including (1) the funding of
approximately $275.0 million for our acquisitions with cash and stock provided
by Weatherford, (2) $129.6 million for purchases of capital equipment for
manufacturing and (3) $90.1 million for funding of working capital and third
party debt requirements.
Before the spinoff, we will issue an unsecured subordinated note to
Weatherford in the amount of $100 million. Weatherford will then contribute to
us substantially all remaining intercompany indebtedness that we owe to
Weatherford. We also will grant to Weatherford a $15 million drill stem purchase
credit. The Weatherford note will bear interest at an annual rate of 10%.
Interest payments will be due quarterly, and principal and all unpaid interest
will be due no later than December 31, 2001. If we complete a debt or equity
financing (whether public or private, but excluding working capital borrowings
under our proposed credit facility and any equity issued in connection with a
business combination) while the Weatherford note is outstanding, we generally
will be required to use a portion of the net proceeds of that financing to repay
any amount outstanding under the Weatherford note as of the time we complete
that financing. The Weatherford note will be subordinated to our proposed credit
facility. The terms of the drill stem purchase credit are described under
"Preferred Supplier Agreement". We expect to refinance the Weatherford note as
soon as practicable when market conditions permit.
Employment Matters; Treatment of Outstanding Stock Options and Restricted
Stock
The Distribution Agreement will allocate certain responsibilities with
respect to employee compensation, benefit and labor matters. The allocation of
responsibility and adjustments to be made pursuant to the Distribution Agreement
is substantially consistent with the existing benefits provided to Weatherford
employees under Weatherford's various compensation plans. We will be required to
provide participants in certain of Weatherford's deferred compensation plans
with shares of our common stock. We also will be required to provide to the
holders of certain of Weatherford's options shares of our common stock on the
exercise of Grant Prideco options granted in partial substitution of those
options.
Adjustment and Substitution of Existing Weatherford Stock Options
As of December 31, 1999, there were outstanding options and warrants to
purchase an aggregate of 7,048,323 shares of Weatherford common stock under
various Weatherford employee and director option plans and agreements. The
holders of these options include both employees who will be employed by us and
employees who will be employed by Weatherford after the spinoff. Included in
these options were options to purchase an aggregate of 5,335,000 shares of
Weatherford common stock granted under Weatherford's 1998 Employee Stock Option
Plan, which was adopted in September 1998, and 360,000 shares subject to
Weatherford director options and warrants granted in September 1998. Of the
options to purchase 5,335,000 shares of Weatherford common stock granted under
Weatherford's 1998 Employee Stock Option Plan, options to purchase 951,000
shares of Weatherford common stock were held by employees who will be primarily
employed by us. The options and warrants granted to employees and directors in
September 1998 and thereafter generally vest only after three years from the
date of grant. All other outstanding options are either fully or partially
vested.
14
<PAGE> 23
Under the terms of the Distribution Agreement, the outstanding Weatherford
options and warrants will be adjusted as follows:
Options Granted Prior to September 1998. All outstanding options granted
prior to September 1998 will be adjusted to provide the holder with the right to
purchase both a share of Weatherford common stock and one half of a share of our
common stock. The adjusted exercise price of the outstanding Weatherford options
and the related Grant Prideco options will be a function of the relative market
price of our common stock after giving effect to the spinoff and the value of
the Weatherford common stock before giving effect to the spinoff, with those
values to be determined as described in the table below. This adjustment is
intended to assure that each holder will have the opportunity after the spinoff
to obtain the same number of shares of Weatherford common stock and our common
stock at the same aggregate exercise price as if that option holder had
exercised the Weatherford option in full immediately before giving effect to the
spinoff. The Weatherford options will be administered by the Weatherford
compensation committee, and the substitute Grant Prideco options will be issued
and administered by our compensation committee under a new Grant Prideco
employee stock option plan. We will provide to the option holders the shares of
our common stock required to be issued to them on exercise of their substitute
Grant Prideco options.
Options Granted in September 1998 and Thereafter. All Weatherford options
or warrants granted in September 1998 and thereafter were granted under
Weatherford's 1998 Employee Stock Option Plan or as part of a one time grant
made to Weatherford directors in September 1998. Under the terms of the
Weatherford 1998 plan and the Weatherford director grants, all outstanding
options and warrants granted thereunder will be adjusted to provide the holder
with the right to purchase only shares of common stock of either Weatherford or
Grant Prideco depending upon which company primarily employs the employee. The
adjustment will provide for both a new exercise price and number of shares
subject to option. The new exercise price will be based on the relationship of
the value of one-half of a share of our common stock after the spinoff to the
value of the Weatherford common stock before the spinoff. The number of shares
subject to option will be calculated by dividing the new exercise price into the
aggregate exercise price of the holder's option prior to the spinoff. The
formulas, which are set forth below, are intended to tie the future value of the
option to the company that employs the option holder and to maintain the
economic value of the option to the holder before and after the spinoff.
<TABLE>
<S> <C> <C> <C>
Weatherford Employee and Director Option Adjustments:
W-G
New Exercise Price: E( --- )
W
E
New Number of Weatherford Shares Subject to Option: N( --- )
P(w)
Grant Prideco Employee Option Adjustments:
2G
New Exercise Price: E( --- )
W
E
New Number of Grant Prideco Shares Subject to Option: N( --- )
P(g)
</TABLE>
15
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
Where E = The original exercise price of the Weatherford option.
N = The original number of shares of Weatherford common stock
subject to the Weatherford option.
G = One half of the market value of a share of Grant Prideco
common stock. The market value of a share of Grant Prideco
common stock initially will be based on the average of the
high and low trading prices on the NYSE on the first full
trading date after "when-distributed" trading begins.
Following 30 consecutive trading days after
"when-distributed" trading begins, for options remaining
outstanding on that date, the market value of a share of
Grant Prideco common stock will be based on the average of
the last sales price per share on the NYSE for each of the
30 consecutive trading days beginning on the date
"when-distributed" trading begins.
W = The market value per share of Weatherford common stock as of
the close of market on the last trading day before
"when-distributed" trading begins.
P(w) = The adjusted exercise price of the Weatherford option
determined in accordance with the first formula above.
P(g) = The exercise price of the new Grant Prideco option
determined in accordance with the third formula above.
</TABLE>
Except for the above adjustments, the terms of Weatherford's outstanding
options will remain substantially the same as those in effect before the
spinoff, provided that employment with either Grant Prideco or Weatherford will
satisfy any condition to continuing employment where discontinued employment
would cause the options to terminate. The adjusted Weatherford options will be
administered by the Weatherford compensation committee and the substitute Grant
Prideco options will be issued and administered by our compensation committee
under a new Grant Prideco employee stock option plan. We will provide to the
option holders the shares of our common stock required to be issued to them by
our compensation committee and the substitute Grant Prideco options will be
issued and administered by our compensation committee under a new Grant Prideco
employee stock option plan. We will provide to the option holders the shares of
our common stock required to be issued to them on the exercise of their options
and Weatherford will provide the shares of Weatherford common stock required to
be issued to them on exercise of those options.
Treatment of Outstanding Restricted Stock
Holders of restricted Weatherford common stock will receive one share of
restricted Grant Prideco common stock for each two shares of restricted
Weatherford common stock they hold. The restricted Grant Prideco common stock
will be subject to the same restrictions as the applicable restricted
Weatherford common stock.
Payments under Weatherford Nonqualified Deferred Compensation Plans
As of December 31, 1999, there were accrued deferred compensation
liabilities with respect to an aggregate of 515,569 shares of Weatherford common
stock under the Weatherford International, Inc. Executive Deferred Compensation
Stock Ownership Plan, the Weatherford International, Inc. Foreign Executive
Deferred Compensation Stock Plan and the Weatherford International, Inc.
Deferred Compensation Plan for Non-Employee Directors (the "Weatherford Deferred
Compensation Plans"). Upon the spinoff, the accounts of all participants in the
Weatherford Deferred Compensation Plans will be adjusted so that the accounts
will be deemed to be credited with one non-monetary unit equal to one share of
our common stock for every two non-monetary units equal to two shares of
Weatherford common stock that are then deemed credited to the accounts. When
benefits become distributable under the Weatherford Deferred Compensation Plans,
we will issue directly to the participants the number of shares of our common
stock deemed credited to their accounts, as adjusted under the antidilution
provisions of the Weatherford Deferred Compensation Plans and as adjusted by any
dividends on shares of our common stock.
16
<PAGE> 25
Additional Actions
Effective as of the spinoff, we will assume responsibility for liabilities
and obligations as of the distribution date for medical and dental plan coverage
and for vacation and welfare plans with respect to employees who will be
employees of Grant Prideco or its subsidiaries on or after the distribution
date. We will be responsible for reimbursing Weatherford for all self-insured
amounts under Weatherford's policies to the extent such amounts relate to
current or past employees of Grant Prideco and its businesses.
The Distribution Agreement will provide that the spinoff will not
constitute a termination of employment for employees who will continue to be
employees of Grant Prideco or Weatherford after the spinoff. Therefore, those
employees who continue to be employed by Grant Prideco or Weatherford after the
spinoff will not be deemed severed from employment from Weatherford or any of
its subsidiaries for purposes of any policy, plan, program or agreement that
provides for the payment of severance, salary, continuation, vesting or similar
benefits based on periods of past service. Weatherford and Grant Prideco
employees also will be entitled to service credit for any period of employment
with the other company before the distribution date or for five years following
the distribution date.
Terms and Conditions of the Spinoff
The Distribution Agreement outlines the terms and conditions of the spinoff
as described under the heading "The Spinoff -- Conditions; Termination".
Allocation of Liabilities and Indemnities
Subject to certain exceptions, the Distribution Agreement will provide for
an express assumption of liabilities by us and is designed to allocate,
effective as of the distribution date, financial responsibility for the
liabilities arising out of or in connection with our business. We also will
indemnify Weatherford for matters involving (1) our business, including the
business of our and our subsidiaries' predecessors, regardless of whether those
matters are historical or arise in the future, and (2) the spinoff, including
any claims by stockholders relating to the spinoff or the transactions related
thereto.
The Distribution Agreement also will provide that by the distribution date
our certificate of incorporation and bylaws will be substantially in the forms
included in our registration statement as exhibits, and that Grant Prideco and
Weatherford will elect the persons indicated herein as our directors. See
"Description of Grant Prideco Capital Stock".
The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses in connection with
the spinoff will be charged to Weatherford.
TAX ALLOCATION AGREEMENT
We and our subsidiaries have historically been included in Weatherford's
consolidated group (the "consolidated group") for United States federal income
tax purposes as well as in consolidated, combined or unitary groups that include
Weatherford and/or a number of its subsidiaries (a "combined group") for state,
local and foreign income tax purposes.
We will enter into a Tax Allocation Agreement with Weatherford in
connection with the spinoff. Under the Tax Allocation Agreement, we generally
will make payments to Weatherford such that, with respect to tax returns for any
taxable period in which we or any of our subsidiaries are included in the
consolidated group or any combined group, the amount of taxes to be paid by us
will be determined, subject to adjustments, as if we and each of our
subsidiaries included in the consolidated group or combined group filed our own
consolidated, combined or unitary tax return. Weatherford, however, will have
the future benefit of any tax losses incurred by us prior, as a part of a
consolidated return with Weatherford, to the Distribution Date and we will be
required to pay Weatherford an amount of cash equal to any such tax benefit
utilized by us to the extent those benefits are not utilized by Weatherford. We
generally will be responsible for any taxes related to tax returns that include
only us and our subsidiaries.
17
<PAGE> 26
The Tax Allocation Agreement allocates responsibility between Weatherford
and us for preparing and filing tax returns and controlling and contesting
audits and tax proceedings. Weatherford will be primarily responsible for
preparing and filing any tax return with respect to the consolidated group or
any combined group. We will be primarily responsible for preparing the portion
of any such tax return that relates exclusively to us or any of our
subsidiaries. We generally will be responsible for preparing and filing any tax
returns that include only us and our subsidiaries. Weatherford will be primarily
responsible for controlling and contesting any audit or other tax proceeding
relating to the consolidated group or any combined group. We have the right to
participate in any audit or tax proceeding. We may not, however, enter into any
settlement or compromise or make any decision in connection with any audit or
tax proceeding without the approval of Weatherford and its subsidiaries.
Disputes arising between Weatherford and us relating to matters covered by the
Tax Allocation Agreement are subject to resolution through specific dispute
resolution provisions.
We were included in the consolidated group for periods in which Weatherford
beneficially owned at least 80% of the total voting power and value of our
outstanding stock. We will cease to be included in the consolidated group
following the spinoff. Each member of a consolidated group for United States
federal income tax purposes is jointly and severally liable for the United
States federal income tax liability of each other member of the consolidated
group. Accordingly, although the Tax Allocation Agreement allocates tax
liabilities between Weatherford and us, for any period that we were included in
the consolidated group, we could be liable if any United States federal income
tax liability was incurred, but not discharged, by any other member of the
consolidated group.
We have agreed with Weatherford that we will not take any action
inconsistent with any information, covenant or representation provided to the
IRS in connection with obtaining the tax ruling and have further agreed to be
liable for any taxes arising from a breach of that agreement. In addition, we
have agreed that, during the three-year period following the spinoff, we will
not engage in transactions that could adversely affect the tax treatment of the
spinoff, unless we obtain a supplemental tax ruling from the IRS or a tax
opinion acceptable to Weatherford of nationally recognized tax counsel to the
effect that the proposed transaction would not adversely affect the tax
treatment of the spinoff. Moreover, we will be liable to Weatherford for any
corporate level taxes incurred by Weatherford as a result of the spinoff, except
to the extent the taxes arise as a result of a change of control of Weatherford.
Our indemnity obligation would include indemnification where the taxes are
attributable to specified actions or failures to act by us, or to specified
transactions involving us following the spinoff, including the acquisition of
our common stock by any person or persons.
TRANSITION SERVICES AGREEMENT
We will enter into a Transition Services Agreement with Weatherford for a
period of one year from the distribution date pursuant to which Weatherford will
provide to us certain services requested by us for the conduct of our business.
The fee for these services will be based on a cost-plus-10% basis. Subject to
termination provisions of the agreement, Grant Prideco and Weatherford will be
free to obtain services from outside vendors or may develop an in-house
capability to provide these services. The transition services to be provided
under this agreement may include accounting, tax, treasury services, insurance
and risk management, and management information systems.
PREFERRED SUPPLIER AGREEMENT
We will enter into a Preferred Supplier Agreement with Weatherford pursuant
to which Weatherford will agree for at least a three year period to purchase at
least 70% of its requirements of drill stem products from us. The price for
those products will be at a price not greater than that at which we sell to
similarly situated customers. Weatherford's obligation to purchase will not
apply when:
- we are unable to assure Weatherford of our ability to deliver products to
the location and at the time specified by Weatherford,
- the sale would be illegal,
18
<PAGE> 27
- we are unable to assure Weatherford of our ability to meet product
specifications,
- we are unable to meet expedited delivery requirements,
- Weatherford is required to use local content,
- Weatherford's customer specifies a competitor,
- we do not accept an order, or
- we breach the Preferred Supplier Agreement.
Under this agreement, we will provide Weatherford with a $15 million purchase
credit that Weatherford will be entitled to apply against its purchases under
the agreement, subject to a limitation of the application of the credit to no
more than 20% of any single purchase.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The ongoing relationship between Weatherford and us may present certain
conflict situations for Messrs. Duroc-Danner, Lubar, Macaulay, Moses and Rayne.
We and Weatherford have adopted appropriate policies and procedures to be
followed by the board of directors of each company to limit the involvement of
Messrs. Duroc-Danner, Lubar, Macaulay, Moses and Rayne (or such executive
officers and other directors having a significant ownership interest in the
companies) in potential conflict situations, including matters relating to
contractual relationships or litigation between Weatherford and us. These
procedures require Messrs. Duroc-Danner, Lubar, Macaulay, Moses and Rayne (or
such executive officers and other directors having a significant ownership
interest in the companies) to abstain from voting as directors of each company
with respect to matters that involve a material conflict of interest between the
companies. Whether or not a material conflict of interest situation exists will
be determined on a case-by-case basis depending on such factors as the dollar
value of the matter, the degree of personal interest of Messrs. Duroc-Danner,
Lubar, Macaulay, Moses and Rayne (or such executive officers and other directors
having a significant ownership interest in the companies) in the matter and the
likelihood that resolution of the matter has significant strategic, operational
or financial implications for our business. We believe these conflicts will be
minimal.
ACCOUNTING TREATMENT
Our historical financial statements present our financial position, results
of operations and cash flows as if we were a separate entity for all periods
presented. Weatherford's historical basis in our assets and liabilities has been
carried over and, in accordance with generally accepted accounting principles,
allocations of certain Weatherford costs have been made.
DIVIDEND POLICY
We presently intend to retain earnings for use in our business and do not
anticipate paying cash dividends in the foreseeable future. The terms of our
$100 million note to Weatherford also will prohibit us from paying any dividends
or distributions to our stockholders for so long as the note is outstanding. We
also expect that our ability to declare and pay dividends will be limited by our
credit facilities.
19
<PAGE> 28
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain historical combined financial data
of Grant Prideco. This information has been prepared as if we had been a
stand-alone company for the periods presented. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements. The following
information may not be indicative of our future operating results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues................................................... $286,370 $646,454 $630,021 $367,336 $167,616
Operating Income (Loss).................................... (33,014)(a) 112,884(b) 115,436 46,322 15,238
Net Income (Loss).......................................... (33,511)(a) 65,720(b) 61,514 23,588 3,059
Pro Forma Earnings (Loss) Per Share:(c)
Basic.................................................... (0.66) 1.35 1.28 0.53 0.08
Diluted.................................................. (0.66) 1.34 1.26 0.52 0.08
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets................................................ $734,575 $738,314 $662,598 $396,693 $237,854
Long-Term Debt.............................................. 24,276 9,265 27,387 3,432 2,591
Subordinated Note to Weatherford............................ 100,000 100,000 100,000 100,000 51,425
Stockholder's Equity........................................ 453,856 445,211 332,722 164,220 104,094
</TABLE>
- ---------------
(a) Includes a charge of $9.5 million, $6.1 million net of tax, relating to the
decision to terminate our manufacturing arrangement in India, of which $7.8
million involved a purchase deposit that we will not be able to use and
$1.7 million in equipment in India that we do not believe we will be able
to recover.
(b) Includes $35.0 million, $22.8 million net of tax, of other charges relating
to a reorganization and rationalization of our business in light of our
industry conditions for the year ended December 31, 1998.
(c) We have calculated our pro forma earnings per share using our pro forma
basic and diluted weighted average shares outstanding for each of the
periods presented. In calculating our pro forma basic weighted average
shares, we have adjusted Weatherford's historical basic weighted average
shares outstanding for the applicable period to reflect the number of
shares that would have been outstanding at the time assuming a distribution
of one share of our common stock for each two shares of Weatherford common
stock. Our pro forma diluted weighted average shares reflect an estimate of
the potential dilutive effect of common stock equivalents. This estimate is
calculated based on Weatherford's dilutive effect of stock options and
restricted stock divided by two. The effect of stock options and restricted
stock is not included in the diluted weighted average shares computation
for periods in which a loss occurs because to do so would have been
anti-dilutive.
20
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our results of operations and current
financial position on a stand-alone basis. This discussion should be read in
conjunction with the Financial Statements.
FORWARD-LOOKING STATEMENTS
This information statement contains statements relating to our future
results, including certain projections and business trends, which constitute
"forward-looking statements". Certain risks and uncertainties may cause actual
results to be materially different from projected results contained in
forward-looking statements in this information statement and in our other
disclosures. These risks and uncertainties include, but are not limited to,
those described in "Risk Factors" and the following:
Any unexpected material changes in oil and gas prices or other market
trends that would impact drilling activity would likely affect the
forward-looking information contained in this information statement. Our results
for 1999 were materially and adversely affected by the downturn in the industry
that began in 1998. Although we currently expect that our results for 2000 will
show an improvement over 1999 due to the recent increase in oil prices and
drilling activity and a general industry view that market conditions have
bottomed out and are beginning to recover, the oil and gas industry is extremely
volatile and subject to change based on political and economic factors outside
our control.
Our estimates as to future results and industry trends described in this
information statement are based on assumptions regarding the future prices of
oil and gas, the North American and international rig counts and their effect on
the demand and pricing of our products and services. In analyzing the market and
its impact on us for 2000, we have made the following assumptions:
- The recent increase in the price of oil will result in modest
improvements in drilling activity in the first half of 2000 and an
improvement in activity of between 10% and 20% by the second half of
2000.
- Oil prices will average over $20 per barrel for West Texas Intermediate
crude.
- Average natural gas prices for 2000 will remain at or near their current
levels.
- World demand for oil will be up only slightly.
- Drilling activity will increase slightly beyond normal demand as oil
companies seek to replace and produce reserves that were not replaced or
produced in 1999.
- North American and international rig counts will improve, with increases
in the international rig count following the North American rig count
increase by around six months. In 2000, we have made our internal budgets
based upon an average rig count for North America of around 1,040 and the
average international rig count of around 630.
- Demand for drill pipe and other drill stem products will gradually
increase during 2000, with the strongest increases occurring in the
second half of 2000. Demand for premium tubulars will continue to
increase steadily during the year as drilling activity increases and
distributors restock inventories.
- Pricing for many of our products and services will continue to be subject
to pricing pressures due to industry consolidations and competition.
Pricing improvements will occur only as expected demand comes closer to
supply.
- No worldwide recession or material downturn in the United States economy
will occur.
- Our currency hedges and revenue/expense matching procedures will
adequately mitigate any material fluctuations in currency exchange rates
involving countries in which we conduct operations.
- That there will be no material changes in global trading policies.
- That there will be no unexpected litigation involving us or unexpected
results in our existing litigation.
21
<PAGE> 30
- That there will be no unexpected events or incurrences for which we are
responsible that are not covered by insurance.
- That we will not incur additional general and administrative expenses
materially exceeding our current estimates associated with the spinoff
and our becoming a stand-alone public company.
We have based these assumptions on various macro-economic factors, and actual
market conditions could vary materially from those assumed. We also have assumed
that no additional charges will be necessary for our exposure in India, which is
subject to uncertainty.
MARKET TRENDS AND OUTLOOK
Our business is materially dependent on drilling activity and the
associated demand for our drill stem products and production tubulars and
connections. Beginning in late 1996, we began experiencing improvements in our
markets due to more stable pricing of oil and natural gas and increased drilling
activity. This improvement in demand, combined with prior consolidations in our
industry, resulted in a substantial increase in the demand for our drill pipe
and other drill stem and tubular products as well as increases in pricing for
many of our products. For most of 1997 and the first half of 1998, our drill
pipe manufacturing facilities operated at or near full capacity and we invested
capital to expand our capacity and international presence. These improved market
conditions resulted in our revenues almost doubling and our operating profit,
before depreciation and amortization, increasing from approximately $58.8
million in 1996 to approximately $142.5 million in 1997. We also had a product
backlog in excess of $359.8 million as we entered into 1998.
Beginning in 1998, the price of oil began to fall. This decline in the
price was attributable to a number of factors. The most significant of the
factors were:
- A drop in demand due to the downturn in Asian and other developing
economies;
- An excess supply of oil due to increased production by most of the oil
exporting countries;
- Concerns over future production from Iraq; and
- The impact of prior exploration efforts and large reserve discoveries.
During 1998, the price of oil ranged from a high of $17.62 per barrel of
West Texas Intermediate crude to a low of $10.44 per barrel of West Texas
Intermediate crude. The North American rig count also fell from a high in 1998
of 1,508 rigs to a low in 1998 of 854 rigs. The international rig count, which
typically trails the domestic rig count by a number of months, fell in 1998 from
a high of 819 to a low of 671. In 1999, the price of oil hit an historical low
of $11.07 per barrel and the North American and international rig counts reached
historical lows of 534 and 556, respectively.
The following table sets forth certain information with respect to oil and
natural gas prices and the United States and international rig counts for the
periods reflected:
<TABLE>
<CAPTION>
HENRY HUB NORTH AMERICAN INTERNATIONAL
WTI OIL(1) GAS(2) RIG COUNT(3) RIG COUNT(3)
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
December 31, 1999........................... $25.60 $ 2.33 1,202 595
December 31, 1998........................... 11.28 1.945 895 671
December 31, 1997........................... 18.32 2.264 1,499 819
December 31, 1996........................... 25.39 2.757 1,195 810
</TABLE>
- ---------------
(1) Price per barrel, as of December 31, 1999, 1998, 1997 and 1996 -- Source:
Applied Reasoning, Inc.
(2) Price per MMBtu as of December 31, 1999, 1998, 1997 and 1996 -- Source: Oil
World
(3) Average rig count for months ended December 31, 1999, 1998, 1997 and
1996 -- Source: Baker Hughes Rig Count
22
<PAGE> 31
The downturn in the industry that began in 1998 led our customers to
substantially curtail their drilling and exploration activity during the second
half of 1998 and 1999. This decline in activity resulted in substantially lower
purchases of capital equipment used for the exploration and drilling of oil, in
particular, drill pipe and other drill stem products we manufacture. We also
were impacted by customers and distributors reducing their inventories of
premium tubular products in light of market conditions and customers cancelling
and delaying orders to reduce costs. Indicative of the impact of the downturn,
we estimate that worldwide drill pipe demand for 1999 was less than five million
feet compared to more than ten million feet during each of 1997 and 1998. As of
September 30, 1999, our product backlog declined to approximately $58.7 million.
Our manufacturing facilities were also operating at less than 30% utilization.
In light of the adverse market conditions facing us, we elected to reduce
substantially the operations at our manufacturing facilities in 1999 to avoid
producing excess supplies of inventory in the market. This decision impacted our
1999 results by creating large unabsorbed costs for the operation of our
manufacturing facilities at extremely low utilization levels. These unabsorbed
costs combined with lower sales resulted in our operating at a loss for 1999.
Our revenues and operating loss for the fourth quarter of 1999 were $89.6
million and $17.3 million, respectively. We recorded a net loss for the year
ended December 31, 1999, of $33.5 million. This loss included a pre-tax
writedown of $9.5 million relating to our manufacturing arrangement with OCTL in
India due to a decision by us to terminate that arrangement. In addition,
although our fourth quarter revenues were up from the third quarter, our
operating loss was higher due to lower margin tubular sales. The increase in
sales is an indication of the beginning of a recovery as distributors have begun
restocking their inventories. We expect our first quarter 2000 results to
improve over our third and fourth quarters as demand for our products increases,
in particular the demand for our premium tubulars and connections. Drill stem
sales are also expected to increase based on current order activity.
Recently, the price of oil has increased due to members of the Organization
of Petroleum Exporting Countries reducing production in compliance with
production quotas. Although oil prices have been higher for a number of months,
the increased prices have not yet translated to materially higher drilling
activity. However, orders for drill stem products and other premium tubular
products are increasing, and we expect that demand will continue to improve
absent another material decline in oil prices. From August to December, 1999, we
averaged approximately $36 million per month in new orders compared to
approximately $20 million per month for the first seven months of 1999. We
currently expect that demand for our drill pipe and other drill stem products
will slowly improve during 2000, with most of the improvement occurring in the
second half of 2000. We expect that results will be significantly better in 2000
than they were in 1999. Nevertheless, demand for all of our products continues
to be highly dependent upon drilling activity and the price of oil and natural
gas and any material decline in the price of oil and natural gas or drilling
activity could result in a further delay in the recovery in our industry.
In July 1999, we acquired a 50.01% ownership interest in Voest-Alpine
Stahlrohr Kindberg GmbH & Co KG in Austria. Our investment in Voest-Alpine is
reported on the equity method of accounting. Voest-Alpine owns a tubular mill in
Austria with a capacity of approximately 300,000 metric tons that is capable of
supplying a large portion of our green tube requirements in the United States.
In addition, we entered into a long-term green tube supply contract with
Voest-Alpine. The impact of this investment and supply contract should benefit
us as the market recovers by providing us with a reliable source of raw
materials which is expected to significantly reduce the cost of our raw material
and provide us a 50% profit participation in Voest-Alpine's business.
As noted above, we recently decided to terminate our manufacturing
arrangement with OCTL in India. This decision was made in light of the current
market and difficulties arising from the political situation between India and
countries where OCTL's principal customers reside. This decision resulted in our
need to write off a $7.8 million deposit previously paid to OCTL for future
products and $1.7 million of our equipment located in India. We are currently
seeking to collect approximately $17.3 million in receivables and advances
provided by us to OCTL through a combination of cash, equity of OCTL and
products from OCTL. We are in discussions with OCTL regarding this matter and
are unable to predict the outcome of these discussions.
23
<PAGE> 32
Based on financial information of OCTL known to us and our general
knowledge of the business and assets of OCTL, OCTL would appear to have a
sufficient asset and equity value to allow for a restructuring of its remaining
$17.3 million in debt owed to us through a combination of cash, equity of OCTL
or product from OCTL. There is, however, uncertainty as to how much, if any, of
the amounts owed to us by OCTL will ultimately be collected. Accordingly, there
can be no assurance that we will be able to fully realize on the amounts owed to
us by OCTL or that additional charges relating to India will not be required in
the near term as the negotiation and collection process continues.
Our future results of operations also will be affected by the spinoff and
our becoming a stand-alone public company. In preparation for the spinoff, we
have added additional financial, accounting, legal and other administrative
personnel who will have responsibility for matters historically provided by
Weatherford on our behalf. We also will incur additional costs associated with
complying with our public-company reporting requirements and being listed on the
New York Stock Exchange. Although our historical results of operations include
an overhead allocation from Weatherford, we anticipate that the annual overhead
costs that will be incurred by us following the spinoff will exceed the annual
historical overhead allocations from Weatherford by approximately $4.0 million.
Looking forward into 2000, we currently expect that demand for our drill
stem and premium and other tubular products should increase in 2000 as drilling
and completion activity picks up. Premium tubular orders are continuing to
improve and there has recently been an increase in the level of inquires and
orders for drill stem products. The improvement in the market, however, is
expected to be gradual over the year, with the largest increases currently
expected to occur in the second half of the year. Accordingly, our results for
2000 will be dependent on the speed and strength of the recovery. We, however,
believe that the market for our products is improving and that absent another
down-turn in the industry, operating results should improve steadily during the
year.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Our business was severely impacted during the year ended December 31, 1999
by the decline in worldwide drilling activity that began in 1998. Our revenues
for 1999 were down by approximately 56% from the relatively high levels recorded
in 1998. Our product backlog declined during 1999 due to lower drilling
activity. This backlog fell to as low as $34.8 million during the third quarter
of 1999. At December 31, 1999, our product backlog was $60.4 million compared to
backlog of $88.9 million at December 31, 1998.
The following chart sets forth additional data regarding our results for
the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $286,370 $646,454
Gross Profit................................................ 24,101 166,420(b)
Gross Profit %.............................................. 8.4% 25.7%
Selling, General and Administrative Attributable to
Segments.................................................. $ 31,104 $ 31,986
Corporate General and Administrative........................ 16,138 15,367
Operating Income (Loss)..................................... (33,014)(a) 112,884(b)
EBITDA(c)................................................... (2,500)(a) 144,057(b)
</TABLE>
- ---------------
(a) Includes a charge of $9.5 million relating to the decision to terminate our
manufacturing arrangement in India, of which $7.8 million involved a
purchase deposit that we will not be able to use and $1.7 million for
equipment in India that we do not believe we will be able to recover.
24
<PAGE> 33
(b) Includes merger and other charges of $35.0 million, comprised of $5.1
million for facility closures and exit costs, $0.2 million of severance and
related costs, $28.5 million for the write-off of inventory and $1.2
million for the write-down of equipment. The write-off of inventory is
classified as cost of sales.
(c) EBITDA is calculated by taking operating income (loss) and adding back
depreciation and amortization. We have included an EBITDA calculation here
because when we look at the performance of our businesses, we give
consideration to their EBITDA. Calculations of EBITDA should not be viewed
as a substitute to calculations under GAAP, in particular cash flows from
operations, operating income and net income. In addition, EBITDA
calculations by our company may not be comparable to those of another
company.
Material items affecting our results for 1999 compared to 1998 were:
- The decrease in revenues from 1998 to 1999 reflects our customers'
reduced drilling and exploration activity, the consumption of excess
drill pipe from idle rigs and the reduction of inventories held by
customers and distributors.
- Sales of premium tubulars and connections were materially down due to
reduced offshore activity, lower distributor purchases and a decline in
tubular processing activity.
- Unfavorable product mix due to higher sales of lower margin casing and
tubular sales.
- Revenues and gross profit in 1998 benefitted from sales from backlog
notwithstanding a general decline in market conditions that began in
early 1998.
- A $9.5 million writedown associated with the decision to terminate our
manufacturing arrangement with OCTL.
- High fixed costs associated with our manufacturing operations and plant
under utilization.
- Gross profit, gross profit percentages and operating income declined for
1999 compared to 1998, due to lower sales volume, pricing pressure and
high fixed costs associated with the manufacturing operations.
- In December 1998, we acquired from Tubos de Acero de Mexico, S.A. (TAMSA)
93% of the outstanding shares of T.F. de Mexico, which owned the
manufacturing facility in Veracruz, Mexico that we were operating under a
capital lease arrangement. As part of the consideration we paid in the
acquisition, we sold the international rights, excluding Canada, to our
Atlas Bradford tubular connection line for carbon grade tubular to TAMSA
through a license arrangement. This license resulted in our sale of all
of our rights, effective upon the closing of this transaction. We
retained no obligations with respect to the development, maintenance or
improvement of the Atlas Bradford connection line for the international
market, and TAMSA has no obligation to give us any additional
consideration for this license. Any future support by Grant Prideco is
provided on a fee basis. The rights we sold through this license
arrangement had a fair value of $9.0 million. As a result, in December
1998 we recorded $9.0 million in revenues to recognize the sale of our
international rights to the Atlas Bradford connection line. The income
associated with this sale benefitted 1998 by $9.0 million compared to
1999 results.
- We are in the early stages of consolidating three of our U.S.
manufacturing plants into our Navasota, Texas manufacturing facility and
also two of our foreign manufacturing plants into one foreign
manufacturing plant. We expect the consolidation to reduce operating
costs through the creation of greater efficiencies and to reduce our
selling, general and administrative expenses by reducing administrative
personnel. This consolidation is expected to benefit both the drill stem
products and premium tubulars and engineered connections segments through
an increase of manufacturing capacity utilization and lower plant
operating costs.
- Selling, general and administrative costs attributable to segments for
1999 decreased primarily due to cost reductions related to the premium
tubulars and engineered connections segment, which were partially offset
by increased amortization of goodwill of $1.2 million.
25
<PAGE> 34
- Our corporate general and administrative expenses for 1999 increased 5%
as compared to 1998 due primarily to increased corporate overhead charges
from Weatherford and higher corporate and overhead costs relating to the
addition of staff in anticipation of the spin-off.
- Our effective tax rate on our loss from continuing operations for 1999
was 25.2%, due primarily to non-deductible goodwill expense.
Drill Stem Products. Our drill stem products segment was most affected by
the decline in worldwide drilling activity in 1998 and 1999. Revenues for 1999
were down by approximately 65% from the record high levels reported in 1998.
The following chart sets forth additional data regarding the results of our
drill stem products segment for 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $142,732 $410,840
Gross Profit................................................ 15,187 115,196(b)
Gross Profit %.............................................. 10.6% 28.0%
Selling, General and Administrative......................... $ 13,248 $ 12,169
Operating Income (Loss)..................................... (7,934)(a) 96,844(b)
EBITDA...................................................... 7,185(a) 113,615(b)
</TABLE>
- ---------------
(a) Includes a charge of $9.5 million, $6.1 million net of tax, relating to the
decision to terminate our manufacturing arrangement in India, of which $7.8
million involved a purchase deposit that we will not be able to use and $1.7
million in equipment in India that we do not believe we will be able to
recover.
(b) Includes merger and other charges of $35.0 million, comprised of $5.1
million for facility closures and exit costs, $0.2 million of severance and
related costs and $28.5 million for write-off of inventory. The write-off of
inventory is classified as cost of sales.
Material items affecting the results of our drill stem products segment for
1999 compared to 1998 were:
- The decrease in revenues from 1998 to 1999 reflects the overall decline
in drilling activity and the consumption of excess drill pipe from idle
rigs.
- Revenues and gross profit for 1999 were negatively affected by the
continued weak demand for our products and resulting unabsorbed fixed
costs associated with the manufacturing facilities operating at extremely
low utilization levels. These factors resulted in an operating loss of
$7.9 million.
- The $9.5 million writedown associated with the decision to terminate our
manufacturing arrangement in India.
- For 1998, revenues and gross profit for this segment benefitted from
sales from backlog notwithstanding a general decline in market conditions
that began in early 1998.
- The unabsorbed manufacturing costs for 1999 were somewhat reduced by
Weatherford purchases of drill pipe of $28.6 million.
- Selling, general and administrative costs for 1999 increased due
primarily to goodwill amortization associated with the acquisition of
T.F. de Mexico in December 1998.
Premium Tubulars and Engineered Connections. Our premium tubulars and
engineered connections segment was severely impacted by the decline in worldwide
drilling activity in 1998 and 1999. Revenues for 1999 were down by approximately
39% from 1998.
26
<PAGE> 35
The following chart sets forth additional data regarding the results of our
premium tubulars and engineered connections segment for 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $143,638 $235,614
Gross Profit................................................ 8,914 51,224
Gross Profit %.............................................. 6.2% 21.7%
Selling, General and Administrative......................... $ 17,856 $ 19,817
Operating Income (Loss)..................................... (8,942) 31,407
EBITDA...................................................... 5,359 44,716
</TABLE>
Material items affecting the results of our premium tubulars and engineered
connections segment for 1999 and 1998 were:
- The decline in revenues reflected the impact of a large reduction in
distributor and direct sales in light of market conditions. Revenue
declines also reflected a substantial drop in riser and conductor sales
by XL Systems due to a decline in offshore activity.
- Our mix of tubular products was less favorable in 1999 compared to 1998
due to drop in demand for premium tubulars associated with market
conditions.
- Gross profit, gross profit percentages and operating income declined due
to lower sales volume and unabsorbed fixed costs associated with the low
utilization levels at the manufacturing operations.
- Our 1998 results include the benefit from the license granted by us to an
affiliate of Tubos de Acero de Mexico, S.A. having a fair value of $9.0
million discussed above.
- The selling, general and administrative costs attributable to this
segment declined 10% for 1999 compared to 1998 due to cost reductions
implemented during the first half of 1999 in response to market
conditions.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Our results for 1998 compared to 1997 reflected improved market conditions
during the first half of 1998. During the first half of 1998, our operations
benefitted from strong demand and pricing as well as a large backlog going into
the second half of 1998. As the year progressed, demand declined and prices
began to soften. This decline in demand and prices, however, did not materially
affect the results due to the backlog that existed during the year.
Our results for 1998 also included a $35.0 million charge associated with
the market changes that occurred during 1998. Excluding these charges, our
results for 1998 were significantly higher due to the higher margins and prices
we received on our sales during 1998 compared to 1997. The higher margins and
prices reflected improved demand during the first half of 1998 and that our
facilities were operating at near capacity.
27
<PAGE> 36
The following chart sets forth additional data regarding our results for
1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $646,454 $630,021
Gross Profit................................................ 166,420(a) 158,242
Gross Profit %.............................................. 25.7% 25.1%
Selling, General and Administrative Attributable to
Segments.................................................. $ 31,986 $ 29,903
Corporate General and Administrative........................ 15,367 12,903
Operating Income............................................ 112,884(a) 115,436
EBITDA...................................................... 144,057(a) 142,487
</TABLE>
- ---------------
(a) Includes merger and other charges of $35.0 million, comprised of $5.1
million for facility closures and exit costs, $0.2 million of severance and
related costs, $28.5 million for the write-off of inventory and $1.2
million for the write-down of equipment. The write-off of inventory is
classified as cost of sales.
Material items affecting our results for 1998 compared to 1997 were:
- The increase in revenues for 1998 reflects the benefit of sales from
backlog from 1997 and the first half of 1998.
- In December 1998, we acquired from Tubos de Acero de Mexico, S.A. (TAMSA)
93% of the outstanding shares of T.F. de Mexico, which owned the
manufacturing facility in Veracruz, Mexico that we were operating under a
capital lease arrangement. As part of the consideration we paid in the
acquisition, we sold the international rights, excluding Canada, to our
Atlas Bradford tubular connection line for carbon grade tubular to TAMSA
through a license arrangement. This license resulted in our sale of all
of our rights, effective upon the closing of this transaction. We
retained no obligations with respect to the development, maintenance or
improvement of the Atlas Bradford connection line for the international
market, and TAMSA has no obligation to give us any additional
consideration for this license. Any future support by Grant Prideco is
provided on a fee basis. The rights we sold through this license
arrangement had a fair value of $9.0 million. As a result, in December
1998 we recorded $9.0 million in revenues to recognize the sale of our
international rights to the Atlas Bradford connection line.
- Sales in the second half of 1998 decreased by 21.2% as compared to the
first half of 1998.
- Increased sales of drill stem products offset reduced sales of premium
tubulars and connections.
- Lower sales of premium tubulars and connections reflected the more
immediate impact of the tubular and connection market due to industry
changes and lower activity in sales of drill stem products.
- Improved gross profit, before charges of $28.5 million, significantly
benefitted from lower average costs associated with higher production
volumes during the first half of 1998. The second half of 1998 reflected
a shift in the sales mix from higher margin product sales to lower margin
product sales.
- Selling, general and administrative expenses attributable to segments
increased as a percentage of revenues from 4.7% in 1997 to 4.9% in 1998.
The increase reflects $1.4 million of goodwill amortization associated
with the 1997 acquisitions.
- Corporate general and administrative expenses increased as a percentage
of revenues from 2.0% in 1997 to 2.4% in 1998. Information systems costs
increased to $5.6 million in 1998 from $3.5 million in 1997 as a result
of an increase in the number of users, as well as costs associated with
system conversions, including those related to Year 2000 compliance.
28
<PAGE> 37
- Operating income improved from $115.4 million in 1997 to $147.8 million,
before charges of $35.0 million, in 1998 due to strong demand and sales
from backlog from 1997 and the first half of 1998.
Drill Stem Products. The following chart sets forth additional data
regarding the results of our drill stem products segment for 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $410,840 $333,716
Gross Profit................................................ 115,196(a) 102,618
Gross Profit %.............................................. 28.0% 30.8%
Selling, General and Administrative......................... $ 12,169 $ 10,699
Operating Income............................................ 96,844(a) 91,919
EBITDA...................................................... 113,615(a) 105,604
</TABLE>
- ---------------
(a) Includes merger and other charges of $35.0 million, comprised of $5.1
million for facility closures and exit costs, $0.2 million of severance and
related costs, $28.5 million for the write-off of inventory and $1.2
million for the write-down of equipment. The write-off of inventory is
classified as cost of sales.
Material items affecting the results of our drill stem products segment for
1998 compared to 1997 were:
- The increase in revenues for 1998 reflects the benefit of sales from
backlog from 1997 and the first half of 1998. Backlog as of December 31,
1997 was $319.8 million.
- Sales in the second half of 1998 decreased by 12.4% as compared to the
first half of 1998.
- Improved gross profit, before charges of $28.5 million, significantly
benefitted from lower average costs associated with higher production
volumes during the first half of 1998. The second half of 1998 reflected
a shift in the sales mix from higher margin product sales to lower margin
product sales.
- Selling, general and administrative expenses decreased as a percentage of
revenues from 3.2% in 1997 to 3.0% in 1998. The decrease reflects a
higher revenue base.
Premium Tubulars and Engineered Connections. The following chart sets forth
additional data regarding the results of our premium tubulars and engineered
connections segment for 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Revenues.................................................... $235,614 $296,305
Gross Profit................................................ 51,224 55,624
Gross Profit %.............................................. 21.7% 18.8%
Selling, General and Administrative......................... $ 19,817 $ 19,204
Operating Income............................................ 31,407 36,420
EBITDA...................................................... 44,716 48,938
</TABLE>
Material items affecting the results of our premium tubulars and engineered
connections segment for 1998 compared to 1997 were:
- Revenues declined in the second half of 1998 by 34.7% as compared to the
first half of 1998, due to a decrease in demand as distributors'
inventories fell in light of prevailing market conditions.
29
<PAGE> 38
- Gross profit benefitted from lower average costs associated with higher
production volumes during the first quarter of 1998, however the gross
profit was adversely impacted by the sharp decline in demand during the
second quarter of 1998.
- In December 1998, we acquired from Tubos de Acero de Mexico, S.A. (TAMSA)
93% of the outstanding shares of T.F. de Mexico, which owned the
manufacturing facility in Veracruz, Mexico that we were operating under a
capital lease arrangement. As part of the consideration we paid in the
acquisition, we sold the international rights, excluding Canada, to our
Atlas Bradford tubular connection line for carbon grade tubular to TAMSA
through a license arrangement. The rights we sold through this license
arrangement had a fair value of $9.0 million. As a result, in December
1998 we recorded $9.0 million in revenues to recognize the sale of our
international rights to the Atlas Bradford connection line.
- Selling, general and administrative expenses increased as a percentage of
revenues from 6.5% in 1997 to 8.4% in 1998 primarily due to a lower
revenue base. Selling, general and administrative expenses increased by
$1.2 million as a result of a full year of expenses associated with TA
Industries, Inc.
- Operating income declined from $36.4 million in 1997 to $31.4 million in
1998 primarily due to lower revenues and high fixed costs associated with
our manufacturing facilities.
Other Charges
In 1998, our drill stem segment incurred $35.0 million in charges relating
to the reorganization and rationalization of our businesses in light of
declining industry conditions and the merger between EVI, Inc. ("EVI") and
Weatherford Enterra, Inc. ("WII"). In the second quarter of 1998, we incurred
$7.0 million of these charges in accordance with our formalized plan, which
reflected costs associated with the merger between EVI and WII and the effects
of the beginning of the downturn in the industry. Following a further
deterioration in the markets that we serve, and accordingly we incurred an
additional $28.0 million charge in the fourth quarter of 1998. These charges
reflected additional reductions in operations and an attempt to align our cost
structure with current demand. All such costs had been fully expended as of
December 31, 1998, accordingly no accruals remained on the Combined Balance
Sheet as of December 31, 1998. No adjustments to the initial estimates were
required. The net after-tax effect of these charges was $22.8 million.
The following chart summarizes our other charges in 1998.
<TABLE>
<CAPTION>
SECOND FOURTH
QUARTER QUARTER REMAINING
1998 1998 BALANCES AT
CHARGE CHARGE UTILIZED DECEMBER 31, 1998
------- ------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Facility Closures and Exit Costs(1)...... $4,250 $ 850 $ 5,100 $ --
Severance and Related Costs(2)........... 200 -- 200 --
Inventory Write-off(3)................... 2,500 26,000 28,500 --
Asset Write-down(4)...................... -- 1,150 1,150 --
------ ------- ------- -------
Total.......................... $6,950 $28,000 $34,950 $ --
====== ======= ======= =======
</TABLE>
(1) The facility and exit costs were $5.1 million, all of which were
expended by December 31, 1998. The $4.3 million of costs accrued in the
second quarter related primarily to the elimination of duplicative
manufacturing facilities as a result of the reorganization and
rationalization of our businesses following the merger of WII and EVI
and the downturn in the industry. In the fourth quarter an additional
$0.8 million was accrued to further align our costs in response to the
significant decline in market conditions. The costs related primarily
to the (i) closure of the Channelview, Texas facility, (ii) the closure
of the sales location in the U.K. and a Houston, Texas administrative
location, and (iii) exit costs for certain operations at the Edmonton,
Canada, Pearland, Texas and Bryan, Texas facilities. The Pearland,
Texas facility was a location of WII prior to the merger. The Bryan,
Texas,
30
<PAGE> 39
the Channelview, Texas and Edmonton, Canada manufacturing facilities,
the U.K. sales location and a Houston, Texas administrative location
were EVI locations prior to the merger.
(2) The severance and related costs included in our second quarter charge
were $0.2 million for approximately 60 employees specifically
identified, with terminations completed in the second half of 1998.
(3) We reported the inventory write-off of $28.5 million as cost of sales.
The second quarter inventory write-off of $2.5 million resulted from
the elimination of certain products at the time of the merger of WII
and EVI and due to the declining industry conditions. The fourth
quarter inventory write-off of $26.0 million related to the significant
decline in market conditions.
(4) The write-down of assets was $1.2 million in the fourth quarter of
1998. The charge related to the write-down of equipment as a result of
the rationalization of product lines and the specific identification of
assets held for sale. The identified equipment had a net book value of
$0.6 million as of December 31, 1998. The effect of suspending
depreciation is $0.2 million annually. The equipment was originally
projected to be sold in 1999, but because of market conditions we have
not been able to dispose of the equipment to date. We currently expect
to dispose of these assets in 2000.
In the fourth quarter of 1996, we adopted a plan to close our Bastrop,
Texas tool joint manufacturing facility. In connection with this decision, we
incurred a charge of $4.3 million associated with the facility closing and
relocation of equipment from this facility. Of the $4.3 million, we expensed as
incurred $2.8 million in the fourth quarter of 1996, for costs associated with
these activities, including costs relating to the relocation of equipment from
our Bastrop facility to other facilities. The remaining $1.5 million was accrued
as part of the $4.3 million charge for exit costs that were incurred by June
1997 which related to the closure of the facility. These costs include $0.9
million for the exit costs associated with the disposition of the facility and
$0.6 million for severance and related costs. In connection with this facility
closure, the employment of approximately 200 employees was terminated, of which
approximately 105 were terminated in 1996 and the remaining in the first half of
1997. Severance and related costs were $0.2 million and $0.6 million in 1996 and
the first half of 1997, respectively. The closure of the Bastrop facility was
completed by June 1997 and all accrued exit costs had been expended. No
adjustments to the initial estimates were required.
ACQUISITIONS
On October 27, 1999, we acquired an additional 27% interest in H-Tech, an
Indonesia-based drill pipe manufacturer with facilities located on Batam Island.
We previously held a 27% interest in H-Tech and with this purchase we own a
controlling 54% interest in H-Tech. The purchase price for the acquisition was
$6.0 million.
On October 1, 1999, the Company acquired Drill Pipe Industries, Inc., a
manufacturer of drill stem products, for $1.4 million in cash and a $1.4 million
non-interest bearing note which was repaid in January 2000.
On August 25, 1999, we acquired Louisiana-based Petro-Drive, Inc., for 0.3
million shares of Weatherford common stock and assumed debt of approximately
$3.5 million. Petro-Drive's offerings include conductors, connections and
installation services and equipment. Under the terms of the acquisition, if any
former shareholder of Petro-Drive elects to sell any of the shares of
Weatherford common stock and the corresponding shares of Grant Prideco common
stock received by the shareholder between August 2000 and August 2001 at a
combined sale price of less than $36.50, we will be obligated to pay to the
shareholder an additional amount of cash equal to the deficit. In January 2000,
we exercised our option to acquire the facility leased by Petrodrive for
approximately $1.6 million.
On July 23, 1999, we acquired a 50.01% interest in the Voest-Alpine
Stahlrohr Kindberg GmbH & Co. KG for approximately $32.6 million, of which we
paid approximately $8.0 million in cash, and we will pay the
31
<PAGE> 40
remainder over a period of up to seven years. We paid our first principal
installment of $1.5 million of this amount during January 2000. Voest-Alpine
produces high quality seamless tubulars in Austria.
On July 7, 1999, we acquired Texas Pup, Inc., a manufacturer of premium and
API pup joints and utility boring drill pipe, for 105,000 shares of Weatherford
common stock and assumed debt of approximately $1.7 million.
On May 31, 1999, we acquired Texas Pipe Works, Inc., a manufacturer of API
couplings, for approximately $1.7 million in cash and 50,000 shares of
Weatherford common stock.
On May 31, 1999, we acquired InterOffshore Services, Pte., a manufacturer
of drilling tool accessories, for approximately $2.1 million in cash.
In December 1998, we acquired from Tubos de Acero de Mexico, S.A. (TAMSA)
93% of the outstanding shares of T.F. de Mexico, which owned the manufacturing
facility in Veracruz, Mexico that we were operating under a capital lease
arrangement. As part of the consideration we paid in the acquisition, we sold
the international rights, excluding Canada, to our Atlas Bradford tubular
connection line for carbon grade tubular to TAMSA through a license arrangement.
The total consideration given was $59.0 million comprised of $48.5 million in
debt (which was repaid in March 1999), cash of $1.5 million and a $9.0 million
license to the international rights of our Atlas Bradford thread line. The
rights we sold through this license arrangement had a fair value of $9.0
million. As a result, in December 1998 we recorded $9.0 million in revenues to
recognize the sale of our international rights to the Atlas Bradford connection
line.
On February 12, 1998, we acquired Drill Tube International, Inc., a
manufacturer of drill pipe and other drill stem products, for $29 million. The
consideration we paid in the acquisition consisted of $9 million in cash and a
contractual purchase credit obligation to manufacture and deliver products to
the seller over a two year period. Under our contract with the sellers, we were
required to provide product to the sellers at a notional price of $16 million.
The fair value of the products to be delivered to the sellers was $20 million.
Accordingly, a liability of $20 million was recorded as of the date of the
acquisition. As products are delivered under this commitment the liability is
reduced. As of December 31, 1999 and 1998, the contractual purchase credit
balance was $0 and $8 million, respectively.
On August 25, 1997, we acquired XLS Holding, Inc., a provider of premium
connections for conductors, risers and other offshore structure components. We
accounted for the acquisition as a pooling of interests. The consideration we
paid consisted of approximately 0.9 million shares of Weatherford common stock.
On July 23, 1997, we acquired Rotary Drilling Tools, a manufacturer of
drill collars and accessories, for approximately $3.3 million in cash.
On July 18, 1997, we acquired Coastal Tubular Inc., a manufacturer of API
threads and thread connections, for approximately $3.3 million in cash.
On April 14, 1997, we acquired TA Industries, Inc. for approximately $44.1
million in cash and $19.7 million of assumed debt. TA designs, manufactures and
markets premium and API couplings and accessories under the brand names Texas
Arai and Tube-Alloy.
The acquisitions discussed above, with the exception of XLS Holding, Inc.,
were accounted for using the purchase method of accounting. The results of
operations of all acquisitions, excluding XLS Holding, Inc., are included in our
Combined Statements of Operations from their respective dates of acquisition.
The 1999, 1998 and 1997 acquisitions are not material to us individually or in
the aggregate for each applicable year. Our historical financial statements have
been restated to reflect the historical results of operations of XLS Holding,
Inc. in accordance with the pooling of interest method of accounting.
LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Weatherford, our liquidity and capital resources
historically have been provided from cash flow from operations and cash provided
to us by Weatherford. As an independent entity following the spinoff, our
liquidity and capital resources will depend upon our cash flow from operations
and our ability to raise capital from third parties.
At December 31, 1999, we had cash and cash equivalents of $6.2 million and
working capital of $164.6 million. We also had $3.7 million in restricted cash
related to our 54% interest in H-Tech that is
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<PAGE> 41
subject to dividend and distribution restrictions. For 1999, our net cash flow
from operations was $65.2 million and reflected a reduction in working capital
needs. Our net cash flow from operating activities for 1998 was approximately
$10.7 million and reflected uses of cash for working capital purposes and delays
in collections of receivables relating to the downturn in the market.
We currently expect to expend approximately $20.9 million for
non-acquisition related capital expenditures during 2000, of which approximately
$5.5 million relate to our manufacturing consolidation projects, $8.8 million of
which relate to maintaining the existing equipment base and $6.6 million of
which is discretionary for improvements to our various facilities. We also
estimate that our required principal and interest payments for our outstanding
debt to be approximately $12.0 million for 2000, of which $2.9 million was
recently paid. At current operating levels, our businesses generate only
marginal levels of excess cash flow. We have, however, taken a number of steps
to reduce our operating cost structure. We currently expect that our operations
will generate sufficient cash flow in 2000 to satisfy all required capital
expenditures and debt service requirements. We expect to finance additional
acquisitions and expansions from cash flow from operations due to improved
market conditions or through a combination of the issuance of additional equity
and debt financing.
We currently intend to seek the placement of between $100.0 million and
$200.0 million of long-term debt in the private or public market during the year
2000. The terms of this financing will depend upon market conditions. We
currently expect to file a universal shelf registration statement with the SEC
that could be used for this purpose. Although we expect to pursue the financing
during the year, there can be no assurances that such financing will occur or as
to the terms and conditions thereof.
We have an uncommitted credit facility which provides for short-term loans
for periods up to 12 months. At December 31, 1999, we had an outstanding balance
of $3.9 million under the facility. The average interest rate for borrowings
under the facility was 3.50% per annum at December 31, 1999. We also had $0.3
million of short-term notes payable with interest rates ranging up to 8.6% at
December 31, 1999.
Through Weatherford, we also have various credit facilities available only
for stand-by letters of credit and bid and performance bonds, pursuant to which
funds are available to us to secure performance obligations. We had a total of
$3.7 million of such letters of credit and bid and performance bonds outstanding
as of December 31, 1999.
We currently are negotiating with potential lenders to establish a credit
facility that would provide us with up to $75.0 million for working capital
purposes, of which we expect $30.0 to $50.0 million to be available to us
initially. This facility will also provide us with availability for stand-by
letters of credit and bid and performance bonds. We expect that this facility
would be secured by our inventory and receivables and guaranteed by our domestic
subsidiaries. This facility also would place limits on our ability to incur new
debt, engage in certain acquisitions and investments, grant liens and make
distributions to our stockholders.
Before the spinoff, we will issue an unsecured subordinated note to
Weatherford in the amount of $100.0 million. The Weatherford note will bear
interest at an annual rate of 10%. Interest payments will be due quarterly, and
principal and all unpaid interest will be due no later than December 31, 2001.
If we complete a debt or equity financing (whether public or private, but
excluding working capital borrowings under the proposed credit facility and any
equity issued in connection with a business combination) while the Weatherford
note is outstanding, we will be required to use a portion of the net proceeds of
that financing to repay any amount outstanding under the Weatherford note as of
the time we complete that financing. The Weatherford note will be subordinated
to the credit facility. We expect to refinance the Weatherford note as soon as
practicable when market conditions permit.
We currently are discussing with the Department of Energy our participation
in a consortium to develop composite drill pipe. We do not expect our
participation in this project to involve any material funding by us or our
receipt of any material funding. The development of composite drill pipe is
aimed primarily at specific niche markets where the drill pipe could be used as
a conduit for the transmission of data for directional and other drilling
applications. We do not expect the successful development of composite drill
pipe to have a material adverse impact on our traditional drill pipe business.
We also are participating in a joint project with RTI Energy Systems, Inc.
to develop titanium drill pipe. The titanium drill pipe developed under this
project was recently successfully used in its first commercial
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<PAGE> 42
project. Under our arrangement with RTI, RTI provides the titanium tubulars and
we provide the connections. We sell the products jointly. Our participation in
the project does not involve any material costs to us. We will offer the
titanium drill pipe manufactured under this project as part of our complete
drill stem product offering.
As part of our arrangement to invest in Voest-Alpine Stahlrohr Kindberg
GmbH & Co. KG, we entered into a four-year supply contract to Voest-Alpine.
Under this agreement, we agreed to purchase a minimum of 45,000 tonnes of
tubulars for the first twelve months of the agreement at a negotiated third
party price that we believe to be attractive. We also agreed to purchase 60,000
tonnes per year for the next three years at the negotiated price. The volume
requirements fixed in the supply agreement were based on our anticipated needs
for tubulars of the type manufactured by Voest-Alpine and represented less than
half of our normal worldwide requirements for this type of tubular. Because this
agreement requires us to purchase tubulars regardless of our needs, our
purchases under this agreement may be made for inventory during periods of low
demand. These types of purchases will require us to use our working capital and
expose us to risks of excess inventory during those periods. Although these
purchases could require us to expend a material amount of money, we expect that
we will be able to use or sell all of the tubular products we are required to
purchase from Voest-Alpine. Under our agreement with Voest-Alpine, we are
responsible for any "anti-dumping" duties that might be imposed on those
tubulars sold in the United States. We do not believe that any anti-dumping
duties should be imposed on any tubulars from Voest-Alpine. However, if there
were to be any such duties so imposed, our ability to resell these tubulars in
the United States would be adversely affected.
TAX MATTERS
As a result of the separation from Weatherford, we will no longer be able
to combine the results of our operations with those of Weatherford in reporting
income for United States federal income tax purposes and for income tax purposes
in some states and foreign countries. We believe this will not have a material
adverse effect on our earnings. However, under the terms of a tax allocation
agreement with Weatherford, we will not have the future benefit of any prior tax
losses or benefits, incurred as part of a consolidated return with Weatherford,
associated with our business that occur prior to the spinoff. Moreover, we will
be liable to Weatherford for any corporate level taxes incurred by Weatherford
as a result of the spinoff, except to the extent the taxes arise as a result of
a change of control of Weatherford.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133 has been amended by SFAS No. 137, which delays
the effective date to fiscal years beginning after June 15, 2000. We currently
are evaluating the impact of SFAS No. 133 on our combined financial statements.
YEAR 2000 MATTERS
The Year 2000 issue is the risk that information systems, computers,
equipment and products using date-sensitive software or containing computer
chips with two-digit date fields will be unable to process the Year 2000 date
change correctly. If not identified and corrected prior to the Year 2000,
failures could occur in our software, hardware, equipment and products and those
of our suppliers, vendors and customers that could result in interruptions in
our business.
In response to the Year 2000 issue, we prepared and implemented a plan to
assess significant Year 2000 issues and remediate any problems we identified in
our:
- information technology systems, including computer software and hardware;
and
- non-information technology systems utilizing date-sensitive software or
computer chips, including products, facilities, equipment and other
infrastructures.
All phases of the Year 2000 plan have been completed. The costs associated
with achieving Year 2000 compliance were not material to us and we have not had
any material losses from third parties to date. To
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<PAGE> 43
date, we do not know of any failures of our software, hardware, equipment or
products or those of our suppliers, vendors or customers as a result of the
occurrence of the Year 2000 date change; however, any such failure could have a
material impact on us. Because no material adverse effects from the Year 2000
have occurred, we are unable to predict the most likely worst case Year 2000
scenario. We do not believe, however, that the worst case scenario will be
material to us.
The above discussion of our efforts and expectations relating to the risks
and uncertainties associated with the Year 2000 issues and our Year 2000 plan
contain forward-looking statements. These risks and uncertainties include, but
are not limited to, unanticipated problems encountered by us and/or our
suppliers, vendors and customers.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
We currently are exposed to certain market risks arising from transactions
that we enter into in the normal course of business. These risks relate to
fluctuations in foreign currency exchange rates and changes in interest rates.
We do not believe these risks are material.
Foreign Currency Risk
We operate in countries outside of the United States and conduct a portion
of our business in currencies other than the U.S. dollar; however, most of our
international revenues are denominated in U.S. dollars. Historically, the impact
of foreign currency exchange rate fluctuations has not had a material impact on
our results of operations or financial position.
We utilize foreign currency forward contracts to hedge our exposure on firm
commitments. We enter into foreign exchange contracts only as a hedge against
existing economic exposures and not for speculative or trading purposes. Our
objective in managing our exposure to foreign currency exchange rate
fluctuations is to reduce the impact of fluctuations on earnings and cash flows.
In connection with our July 1999 acquisition of a 50.01% interest in
Voest-Alpine Stahlrohr Kindberg GmbH & Co., we incurred debt denominated in
Austrian Shilling for 319.8 million Austrian Shilling ($23.4 million as of
December 31, 1999). Principal of $9.2 million is payable over three years in six
equal installments in each January and July beginning in January 2000 and ending
in July 2002. The remaining principal balance of $15.4 million is payable over a
7 1/2-year period. To date, we have mitigated our exposure to short-term
exchange rate fluctuations in the Austrian Shilling through a hedging
arrangement Weatherford entered into on our behalf. On November 24, 1999,
Weatherford entered into a foreign currency contract maturing on January 31,
2000 to purchase 319.8 million Austrian Shillings for $23.9 million. Gains and
losses on the change in market value of Weatherford's foreign currency contract
are charged to us and recognized currently in earnings, which offsets the impact
of the change in the fair value of the Austrian Shilling denominated VA debt. As
of February 3, 2000, we have not entered into another hedging arrangement.
Although we are exposed to exchange rate fluctuations in the Austrian Shilling
subsequent to January 31, 2000, we are reviewing longer-term hedge arrangements
to mitigate this risk. If a 10% devaluation in the Austrian Shilling compared to
the U.S. dollar were to occur, the fair value of the VA debt would be increased
by approximately $2.2 million, which would be recognized in earnings.
Interest Rates
We are subject to interest rate risk on our long-term fixed interest rate
debt. We believe that significant interest rate changes will not have a material
near-term impact on our future earnings or cash flows. Excluding the
subordinated note payable to Weatherford, most of our borrowings are at variable
rates and therefore the fair value of these borrowings approximate book value.
With respect to the note to Weatherford, it is not practical to estimate the
fair market value as our borrowing rates have not yet been determined.
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<PAGE> 44
BUSINESS
GENERAL
We are an international manufacturer and supplier of products used for the
exploration and production of oil and gas. Our business is conducted through two
operating segments: (1) drill stem products and (2) premium tubulars and
engineered connections. Segment data for drill stem products and premium
tubulars and engineered connections segments is contained in Footnote 16 to the
Financial Statements. We are the world's leading provider of drill pipe and
other drill stem products. We are also a leading provider in North America for
engineered connections used for casing, production tubing and marine conductors
and subsea structures. Our drilling products are designed and engineered for
high performance and include all components of a drill stem from the rig floor
to the drill bit. We have been the innovator in the field of drill pipe and
other drill stem products for more than 20 years, and we are a leader in
connection technology used in the drilling of wells. Our Atlas Bradford division
also has been providing connection technology to the oil industry for
approximately 50 years.
Our company has grown substantially over the years through strategic
acquisitions and internal development. Our operations are conducted throughout
the world through manufacturing facilities located in the United States, Mexico,
Canada, Europe and Asia. We also have 19 sales, service and repair locations
around the world.
MARKET TRENDS AND OUTLOOK
The market conditions in which we compete have been depressed since
mid-1998 due to low oil prices and reduced drilling activity. This decline has
affected our operations in two significant ways:
- The lower rig count has reduced demand for drill stem products. The
reduction in demand is attributable to both the lower number of drilling
rigs requiring drill stem products and an increased level of stock on
hand with our customers, as drill stem products from idle rigs are made
available to other rigs.
- The decline in drilling activity has reduced the number of wells being
completed offshore. This reduction in the number of completed offshore
wells also reduces the demand for our premium casing, liner and
production tubing and connections for these products. The reduced demand
for premium tubular products also affects our accessory products.
Demand for our drill stem products for 1999 was down as much as 60% from
1998. The utilization of the excess drill stem products provided by idle rigs
also will suppress levels of demand substantially below requirements for current
drilling activity. We expect, however, that excess inventory with our customers
should, absent any further changes in the drilling markets, be substantially
diminished by the middle of the year 2000. Our premium tubulars and engineered
connections business historically has reacted faster to downturns in the
industry and has responded quicker to recoveries in the industry. This segment
was the first of our businesses to be affected by the downturn in 1998 and the
first to begin to experience improvements in demand. Demand for our premium
tubular products and connections was up in the fourth quarter of 1999 compared
to the third quarter of 1999 due to improvements in offshore drilling, the rig
count and distributors purchasing inventory. We also expect that demand for
these products will continue to improve during 2000 absent a downturn in the
market. Because the market conditions for our drilling products is heavily
dependent on drilling activity, which in turn is dependent on the price of oil
and gas, the effect of the current market conditions on our business is
extremely difficult to project and is subject to much uncertainty.
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<PAGE> 45
GROWTH STRATEGY
Our strategy for growth is to seek new opportunities in our drilling and
tubular segments. During the last year, we completed various acquisitions that
are important to our long-term growth. Those acquisitions included:
- The acquisition of a 50.01% ownership interest in Voest-Alpine Stahlrohr
Kindberg in Austria. Voest-Alpine owns a modern tubular mill in Austria
with a production capacity of approximately 300,000 tons per year. We
also entered into a long-term green tube supply agreement with
Voest-Alpine to supply a large portion of the raw materials we need for
drill pipe in the United States. The investment in Voest-Alpine provided
us with a low cost source of raw materials for our operations as well as
a platform to enter the Eastern hemisphere tubular markets.
- The acquisition of substantially all of the outstanding shares of the
Mexican entity that owned our manufacturing facility in Veracruz, Mexico
where we manufacture drill pipe and tool joint connections for drill
pipe. This acquisition expanded our drill pipe manufacturing capacity and
enhanced our ability to provide our drill pipe operations throughout the
world with low cost tool joints.
- The acquisition of Petro-Drive, Inc., a provider of conductors,
connections and installation services and equipment for the Gulf of
Mexico and other offshore markets. This acquisition has helped strengthen
our XL Systems offshore conductor and riser business by expanding its
market presence and product offering. This acquisition in conjunction
with a smaller acquisition in Singapore earlier in the year also has
provided a platform for the expansion of our conductor and riser business
internationally.
- The acquisition of an additional interest in H-Tech, an Indonesia-based
manufacturer of drill pipe for the Southeast Asian markets. This
acquisition provides us with a controlling interest in H-Tech and a
stronger presence in the important and growing Asian markets.
We also acquired during 1999 various smaller companies that have allowed us
to expand our premium coupling, pup joint and accessory businesses. Following
the spinoff, we intend to continue to actively pursue acquisitions and other
opportunities for growth. Our strategy for growth through acquisitions and
internal development will focus on:
- Lowering costs through consolidations and investments similar to our
investments in Voest-Alpine Stahlrohr Kindberg in 1999.
- Introducing and acquiring new tubular and thread technologies.
- Expanding internationally.
- Adding new products and services that are complementary to our existing
products and services.
- Investing in new tubular and connection technologies and joint venture
projects such as our titanium drill pipe project with RTI Energy Systems,
Inc. and the development of connections for expandable tubing.
- Investing in additional subsea products and services.
- Maintaining manufacturing capacity for growth.
We intend to finance future acquisitions and growth opportunities through a
combination of internally generated capital, equity issuances and incurrences of
debt where we deem prudent or appropriate. Any issuances of equity will depend
upon the opportunity and circumstances. We will only incur debt where we
consider the terms to be appropriate.
DRILL STEM PRODUCTS
Our drill stem products segment manufactures and sells a complete line of
drill stem products. Those products include primarily drill pipe, drill collars,
heavyweight drill pipe and kellys. The products offered by
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<PAGE> 46
our drill stem products segment constitute all of the components of the drill
stem used to drill a well from the rig floor to the drill bit.
We sell our drill stem products to a variety of customers including
drilling contractors, oil field equipment rental companies and oil and gas
operators. We also sell drill pipe to utility boring and water well companies as
well as distributors to those companies. Drill stem purchasing decisions are
based on quality, price, delivery and operational requirements.
A description of our principal drill stem products follows:
Drill Pipe
Drill pipe is the principal mechanical tool used in drilling for oil and
gas. We sell our drill pipe primarily to rig contractors and rental companies.
Unlike a drilling rig, drill pipe is a consumable product with a limited life
span based on usage. Our drill pipe is designed and manufactured to operate in
highly corrosive and harsh environments and is engineered to withstand extreme
operating conditions such as those that exist offshore and in deep wells.
Our drill pipe incorporates a number of proprietary designs, connections
and coatings. We recently introduced a line of drill pipe designed for extreme
drilling conditions as well as the first drill pipe manufactured using titanium
for short radius drilling. Our Drill Tube division also provides drill pipe for
the growing utility boring and water well industries. Our principal competitors
in drill pipe are Omsco, IDPA, NKK and various local manufacturers in foreign
countries. Sales of drill pipe represented approximately 26%, 56% and 39% of our
total sales during 1999, 1998 and 1997, respectively.
Drill Collars
Drill collars are used to provide weight on a drill bit to assist in the
drilling process. A drill collar is generally located directly above the drill
bit and is machined from a solid steel bar to provide the necessary weight for a
vertical well. Our principal competitors for drill collars are the same as our
competitors for drill pipe.
Heavyweight Drill Pipe and Other Drill Stem Products
Our heavyweight drill pipe is a seamless tubular product that is less rigid
than a drill collar. Heavyweight drill collars provide the transition zone
between a drill collar and the drill pipe. Heavyweight drill pipe also serves to
apply weight to a drill bit in a directional well. We also provide kellys, subs
and pupjoints (short and odd-sized tubular products). Our principal competitors
for heavyweight drill pipe and other drill stem products are Smith
International, Inc., SMFI and Omsco.
PREMIUM TUBULARS AND ENGINEERED CONNECTIONS
Our premium tubular and engineered connections segment manufactures and
sells premium production tubing, liners and casing and connections for marine
conductors and subsea structures. This segment also provides couplings and
accessories for casings and other tubular products. The term "premium" refers to
seamless tubulars with high alloy chemistry, specific molecular structure and
highly engineered connections. Our premium tubulars are sold both with and
without our proprietary Atlas Bradford(R) and other owned or licensed
connections. Our premium tubulars are used in particularly harsh environments,
such as offshore and deep natural gas wells where pressure, temperature and
corrosive elements are extreme.
Our premium tubular products and connections are sold both through
distributors and directly to operators of oil and gas wells. These products and
connections also are sold to mills and various oilfield service companies. The
principal competitors for our premium engineered connections are Hydril, Hunting
Interlock, Kawasaki and VAM. In December 1998, we licensed to TAMSA the
international rights to our Atlas Bradford connections.
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A description of our principal premium tubulars and engineered connections
products follows:
Premium Tubulars and Connections
Our Atlas Bradford division provides connection threading and related
services to oil and gas companies, tubular distributors and oilfield service
companies. Threading services provided by this division may be sold with
tubulars we provide or on tubular products provided by the customer. We believe
that Atlas Bradford is one of the largest providers of connections in North
America for premium production tubing and casing.
Premium Casing
Our TCA division is a leading provider of critical-service casing for
offshore and extreme applications. TCA offers a wide variety of sizes ranging
from 4 1/2" to 17". Products sold by TCA also are sold with our proprietary
Atlas Bradford connections. TCA also provides tubular processing services for
major tubular steel mills.
Couplings
Our Texas Arai division provides couplings used to connect premium and API
casing and tubing. Texas Arai is one of the world's largest providers of
couplings for oilfield applications. Texas Arai's couplings are provided to
mills, distributors of tubular products and end users.
Accessories and Insulated Tubing
Our Tube-Alloy division provides a variety of tubular accessories, flow
control equipment and connections used in connection with the completion of oil
and gas wells. Tube-Alloy also has developed and is marketing a proprietary line
of insulated tubing used for deepwater and extreme temperature applications.
Conductors and Risers for Subsea Structures
Our XL Systems division provides connections and installation services for
marine conductors and subsea structures. Conductors are the initial support for
new wells from which both downhole and wellhead sections attach. Conductors are
typically hammered in place at the beginning of the drilling process. We use a
proprietary wedge thread technology to connect the conductors. Our primary
competition for conductors and subsea constructors are ABB, DrillQuip and
various smaller companies.
Other
Our premium tubulars and engineered connections segment also provides
design and connection services to third parties. This group has developed
connections for expandable casing and is developing on other new tubular and
connection technology.
RAW MATERIALS
We use the following principal raw materials:
<TABLE>
<CAPTION>
PRODUCT RAW MATERIAL
- ------- ------------
<S> <C>
Drill pipe Steel billets and seamless green
tubing
Drill collars Solid steel bars
Heavyweight drill pipe Heavy walled tubes
Premium tubing and casing Seamless green tubing
</TABLE>
Our suppliers for these raw materials are the major domestic and
international steel mills, including our Voest-Alpine Kindberg affiliate. We
also have established relationships with several domestic and foreign mill
sources to provide us with these products. TAMSA in Mexico currently provides
raw materials for our Mexican and Indian operations. We have a 30-year supply
contract with TAMSA in which we have given it
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<PAGE> 48
the right to supply these operations as long as the prices are on a competitive
basis and we are not providing those supplies internally or from affiliates such
as Voest-Alpine.
PROPERTIES
The following table describes the material manufacturing and other
facilities and principal offices we currently own or lease.
<TABLE>
<CAPTION>
FACILITY PROPERTY
SIZE SIZE
LOCATION (SQ.FT.) (ACRES) TENURE UTILIZATION
-------- --------- -------- ------ -----------
<S> <C> <C> <C> <C>
Navasota, Texas 347,000 83.00 Owned Manufacture of drill pipe,
premium threaded casing,
liners and tubing
Veracruz, Mexico 303,400 42.00 Owned Manufacture of tool joints
Muskogee, Oklahoma 195,900 108.40 Owned Manufacture of TCA premium
casing
Houston, Texas 148,500 20.00 Under lease through Manufacture of Atlas
03/31/2012 for $62,180 Bradford connectors
per month; renewable
for 10 additional years
114,200 21.90 Owned Manufacture of API and
premium threaded couplings
54,500 7.00 Owned Premium threading services
and manufacture of tubular
accessories
23,150 10.0 Owned Manufacture of drill
collars, heavyweights and
kellys
31,800 10.0 Owned Heat-treat of drill
collars and kellys
The Woodlands, Texas 52,000 -- Under lease through Corporate Headquarters
10/25/2008 for $80,381
per month; renewable
for 5 additional years
Bryan, Texas 160,000 55.30 Owned Manufacture of drill pipe
Kindberg, Austria 1,614,600 101.27 Owned through our Manufacture of green tube
50.01% joint venture and casing
with Voest-Alpine
Edmonton, Alberta, 109,600 10.20 Owned Manufacture of drill pipe,
Canada premium threaded casing,
liners and tubing
Houma, Louisiana 85,000 9.40 Owned Manufacture of downhole
accessories
</TABLE>
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<TABLE>
<CAPTION>
FACILITY PROPERTY
SIZE SIZE
LOCATION (SQ.FT.) (ACRES) TENURE UTILIZATION
-------- --------- -------- ------ -----------
<S> <C> <C> <C> <C>
Broussard, Louisiana 24,600 5.64 Under lease through Provider of drivers for
08/24/2006, for $20,000 conductor installation
per month, Purchase services
option through 8/2000
Jurong, Singapore 33,600 2.67 Under lease through Manufacture of drill
08/14/2029 for $9,467 collars, accessories and
per quarter and an threading services
initial payment of $1.8
million
Beaumont, Texas 12,300 29.0 Owned Premium threading services
and manufacture of
conductors
</TABLE>
PATENTS
Many areas of our business rely on patents and proprietary technology. We
currently have more than 130 patents issued or pending. Many of our patents
provide us with competitive advantages in our markets. Although we consider our
patents and our patent protection to be an important part of our business, we do
not believe that the loss of one or more of our patents would have a material
adverse effect on our business.
BACKLOG
We had a product backlog as of December 31, 1999, 1998 and 1997 of $60.4
million, $88.9 million and $359.8 million, respectively. This backlog
represented approximately 21.1%, 13.8% and 57.1% of our total company sales for
those years. The decline in product backlog reflects current market conditions.
We also believe that sales will be materially dependent upon timing and recovery
of drilling activity.
INSURANCE
We currently participate in the insurance policies carried by Weatherford.
We have negotiated similar insurance policies for our U.S. and international
operations that will become effective on or before the spinoff. We do not
maintain political risk insurance (generally designed to cover expropriation and
nationalization exposures), but do maintain an all risk property insurance that
covers losses from insurrection, civil commotion and uprising. This insurance
does not cover losses resulting from a declared state of war.
Although we believe that we maintain insurance coverage that is adequate
for the risks involved, there is always a risk that our insurance may not be
sufficient to cover any particular loss or that our insurance may not cover all
losses. For example, while we maintain product liability insurance, this type of
insurance is limited in coverage and it is possible that an adverse claim could
arise that exceeds our coverage. Our insurance rates as a stand-alone entity may
differ from those rates obtained by Weatherford. Finally, insurance rates have
in the past been subject to wide fluctuation and changes in coverage could
result in increases in our cost or higher deductibles and retentions.
FEDERAL REGULATION AND ENVIRONMENTAL MATTERS
Our operations are subject to federal, state and local laws and regulations
relating to the energy industry in general and the environment in particular.
Environmental laws have over the years become more stringent and compliance with
such laws increases our overall cost of operations. In addition to affecting our
ongoing operations, applicable environmental laws can require us to remediate
contamination at our properties, at properties formerly owned or operated by us,
and at facilities to which we sent waste materials for treatment or disposal.
While we are not currently aware of any situation involving an environmental
claim that would likely
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<PAGE> 50
have a material adverse effect on our business, it is always possible that an
environmental claim with respect to one or more of our current businesses or a
business or property that one of our predecessors owned or used could arise that
could have a material adverse effect.
Our expenditures during 1999 to comply with environmental laws and
regulations were not material. We also believe that our costs for compliance
with environmental laws and regulations are generally within the same range with
those of our competitors. However, we can offer no assurance that our costs to
comply with environmental laws in the future will not be material.
EMPLOYEES
As of December 31, 1999, we had approximately 2,590 employees. Certain of
our operations are subject to union contracts. These contracts, however, cover
only approximately 15% of our total employees. We believe that our relationship
with our employees is good.
LITIGATION
From time to time, we may be involved in litigation relating to claims
arising out of the ordinary course of our business. We believe that there are no
claims or actions pending or threatened against us, the ultimate disposition of
which would materially adversely affect us.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 1450 Lake Robbins Drive,
Suite 600, The Woodlands, Texas 77380. Our telephone number is (281) 297-8500.
Grant Prideco was incorporated in Delaware in 1990.
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<PAGE> 51
MANAGEMENT
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF GRANT PRIDECO
Effective as of the distribution date, Grant Prideco's board of directors
will consist of nine persons. The following persons are currently expected to
serve as directors. In addition, we expect that at least one or two additional
persons will be named to our board of directors. Each director will serve until
our annual meeting of stockholders to be held in 2001.
<TABLE>
<CAPTION>
NAME AGE
- ---- ---
<S> <C>
John C. Coble............................................... 57
Bernard J. Duroc-Danner*.................................... 46
Eliot M. Fried.............................................. 66
Sheldon B. Lubar*........................................... 70
William E. Macaulay*........................................ 54
Robert K. Moses*............................................ 59
Robert A. Rayne*............................................ 50
</TABLE>
* Also a director of Weatherford.
John C. Coble will serve as Chief Executive Officer, President and Director
of Grant Prideco upon the completion of the spinoff. Mr. Coble was appointed
President of Grant Prideco in 1995. From 1989 to 1995, Mr. Coble held senior
executive positions at Weatherford and held senior executive positions at Grant
Prideco from 1981 to 1989. Prior to 1981, Mr. Coble spent 12 years with Shell
Oil Company in both marketing and financial areas. Mr. Coble graduated with a
Bachelors degree from the University of Missouri and a Masters degree from
Kellogg School of Business (Northwestern University).
Bernard J. Duroc-Danner is the President, Chief Executive Officer and
Chairman of the Board of Directors of Weatherford. Mr. Duroc-Danner has served
as President and CEO of Weatherford since May 1990. Mr. Duroc-Danner holds a
Ph.D. in economics from Wharton (University of Pennsylvania). In prior years,
Mr. Duroc-Danner held positions with Arthur D. Little and Mobil Oil Inc. Mr.
Duroc-Danner is a director of Parker Drilling Company (an oil and gas drilling
company) and Cal Dive International, Inc. (a company engaged in subsea services
in the Gulf of Mexico).
Eliot M. Fried joined Abner, Herrman & Brock Asset Management, an
independent investment management firm as of February 1, 2000. Prior to such
time, Mr. Fried was a Managing Director of Lehman Brothers, and a member of
Lehman Brothers' Investment and Capital Commitment Committees, as well as Senior
Trustee of Lehman Brothers Holdings Inc. Retirement Plan. Mr. Fried is a
director of Axsys Technologies Inc., L-3 Communications Corporation and Blount
International Inc.
Sheldon B. Lubar has been the Chairman of Lubar & Co., a private investment
company, for more than the past five years. Until February 8, 1999, Mr. Lubar
served as Chairman and Chief Executive Officer of Christiana Companies, Inc., a
diversified holding company that held shares of Weatherford common stock and
owned a company that was engaged in refrigerated and dry warehousing,
transportation and logistic services. Mr. Lubar is a director of C2, Inc.,
Ameritech Corporation, Massachusetts Mutual Life Insurance Company, Firstar
Corporation, MGIC Investment Corporation and Jefferies & Company, Inc.
William E. Macaulay has been the Chief Executive Officer of First Reserve
Corporation, a Connecticut-based-corporation that manages various investment
company funds, for more than the past five years and has served as Chairman of
First Reserve Corporation since June 1998. He is a director of Maverick Tube
Corporation (a manufacturer of oilfield tubulars, line pipe and structural
steel), National-Oilwell, Inc. (a company engaged in the design, manufacture and
sale of machinery and equipment and the distribution of products used in oil and
gas drilling production), and Cal Dive International, Inc. (a company engaged in
subsea services in the Gulf of Mexico).
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<PAGE> 52
Robert K. Moses, Jr. has been a private investor, principally in the oil
and gas exploration and oilfield services business in Houston, Texas, for more
than the past five years. He served as Chairman of the Weatherford Enterra Board
from May 1989 to December 1992.
Robert A. Rayne has been an Executive Director of London Merchant
Securities plc (property investment and development with major investments in
leisure enterprises), a United Kingdom-listed public limited company, for more
than the past five years.
Our board will have three standing committees: an Audit Committee, a
Compensation Committee and an Executive Committee. We will not have a nominating
committee.
The Audit Committee will comprise certain directors who are not employees
of Grant Prideco or any of its subsidiaries. Messrs. Fried, Lubar and Rayne will
serve initially as members of the Audit Committee. The primary functions of the
Audit Committee are:
- assessing the independence and performance of our independent and
internal auditors;
- recommending to our board the selection and discharge of our independent
auditors; and
- evaluating the adequacy of our internal accounting controls.
Our independent auditors and internal auditors will have unrestricted
access to the Audit Committee and vice versa.
The Compensation Committee will comprise certain directors who are not
employees of Grant Prideco or any of its subsidiaries. Messrs. Lubar, Moses and
Rayne will serve initially as members of the Compensation Committee. The primary
functions of the Compensation Committee are:
- recommending to our board the compensation to be paid to the directors,
officers and key employees; and
- subject to review and approval of certain matters by our full board of
directors, administering the compensation plans for our executive
officers.
Messrs. Duroc-Danner, Coble and Macaulay will serve initially as members of
the Executive Committee. The primary function of the Executive Committee is to
act on behalf of our board of directors between regularly scheduled meetings of
the board.
DIRECTOR COMPENSATION
Fees
We pay our directors who are not our employees the following fees:
- $1,000 for each board and committee meeting attended;
- $1,500 for the Committee Chairman for each committee meeting attended;
and
- $7,000 for each quarter of the year in which the person serves as a
director.
Pursuant to Grant Prideco's Director Plan, each outside director will be
granted stock options or warrants to purchase an aggregate of 60,000 shares of
our common stock. In addition, the directors will be reimbursed for their travel
expenses to and from board and committee meetings.
Grant Prideco, Inc. 1999 Non-Employee Director Stock Option Plan
Our non-employee director stock option plan is designed to encourage our
non-employee directors to obtain an equity interest in Grant Prideco. A total of
780,000 shares of Grant Prideco common stock may be subject to options under the
plan. We believe that stock ownership in Grant Prideco motivates our directors
to work toward our long-term growth and development. Under the plan,
non-employee directors, upon their
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<PAGE> 53
initial election to the board, are granted options or warrants to purchase
60,000 shares of common stock at exercise prices equal to the market price of
our common stock on the date of grant. In addition, on every third annual
meeting of our stockholders, each person who is then a non-employee director
will be granted options or warrants to purchase 60,000 shares of our common
stock at exercise prices equal to the market price of our common stock on the
date of the grant. Each person who becomes a non-employee director on the date
of the spinoff will be granted options or warrants to purchase 60,000 shares of
common stock at exercise prices equal to the market price of the common stock on
that date. The options granted under the plan generally are subject to
three-year cliff-vesting so that a non-employee director generally will not be
entitled to the options if he or she elects to leave. However, the options will
be immediately exercisable if the non-employee director dies or becomes disabled
or if there is a change in control of Grant Prideco while he or she is still a
director. The options also will be exercisable in part if the non-employee
director retires from Grant Prideco in good standing. We believe that this type
of vesting schedule provides strong incentives for creating long-term value for
Grant Prideco.
Director Deferred Compensation Plan
Under our deferred compensation plan for non-employee directors, each
non-employee director may elect to defer up to 7.5 percent of any fees paid by
us. The deferred fees are converted into non-monetary units representing shares
of common stock that could have been purchased with the deferred fees based on
the market price of common stock at the time of the deferral. If a non-employee
director elects to defer at least five percent of his fees, we will make an
additional credit to the director's account equal to the sum of (1) 7.5 percent
of the director's fees plus (2) the amount of fees deferred by the director. Our
directors may generally determine when the funds will be distributed from the
plan. The amount of the distribution will be equal to the number of units in the
director's account multiplied by the market price of the common stock at the
time of distribution. Distributions will generally be made in common stock,
except that amounts representing fractional shares will be distributed in cash.
EXECUTIVE OFFICERS OF GRANT PRIDECO
Set forth below is information with respect to the individuals who will
serve as our executive officers as of the distribution date.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Bernard J. Duroc-Danner................ 46 Chairman of the Board
John C. Coble.......................... 57 Chief Executive Officer, President and
Director
William G. Chunn....................... 66 Executive Vice President of Operations
Curtis W. Huff......................... 42 Vice President and Interim General
Counsel
Frances R. Powell...................... 45 Vice President, Chief Financial Officer
and Treasurer
</TABLE>
William G. Chunn was appointed Executive Vice President, Operations in 1995
after the merger of Grant TFW, Inc. and Prideco, Inc. Mr. Chunn served as
President, Chief Executive Officer and Director of Prideco from 1985 to 1995.
Mr. Chunn has held senior executive positions in the drill stem industry for
over 30 years.
Curtis W. Huff will serve as Vice President and Interim General Counsel for
Grant Prideco subsequent to the spinoff in addition to his current duties as
Senior Vice President, General Counsel and Secretary of Weatherford. Mr. Huff
has served as Senior Vice President, General Counsel and Secretary of
Weatherford since June 1998. Prior to that time, Mr. Huff was a partner with the
law firm of Fulbright & Jaworski L.L.P., our counsel, and held that position for
more than five years.
Frances R. Powell will serve as Vice President, Chief Financial Officer and
Treasurer of Grant Prideco after the spinoff. Ms. Powell is currently Vice
President of Accounting and Controller for Weatherford, where she has served in
this position since 1991. From 1986 to 1990, Ms. Powell served as Controller for
and held other executive positions with GulfMark Offshore, Inc.
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<PAGE> 54
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding compensation we paid for the fiscal year ended December 31, 1999 to
the individuals serving as our Chief Executive Officer and the only other
executive officer whose base salary and bonus exceeded $100,000 for fiscal 1999
(collectively, the "Named Executive Officers"). During the periods presented,
the individuals were compensated in accordance with Weatherford's plans and
policies. No compensation information is provided for Mr. Duroc-Danner, Mr. Huff
or Ms. Powell because compensation paid to those persons by Weatherford for 1999
was for their employment with Weatherford and not Grant Prideco or the portion
attributable to their employment with Grant Prideco did not exceed $100,000.
Descriptions of employment agreements to be entered into effective as of the
distribution date between Grant Prideco and certain of the Named Executive
Officers are set forth under "-- Employment Agreements and Change-of-Control
Arrangements".
All references in the tables to stock, stock options, prices and values
relate to awards of stock and stock options and historical prices of Weatherford
common stock. See "Relationship Between Grant Prideco and Weatherford After the
Spinoff -- Employment Matters; Treatment of Outstanding Stock Options and
Restricted Stock" for a discussion of how existing options and restricted stock
will be adjusted in connection with the spinoff.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- -----------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION STOCK UNDERLYING COMPENSATION
COMPENSATION($) ($)(1) ($)(1) ($)(2)(3) AWARDS($) OPTIONS(#) ($)(4)
- --------------------------- --------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
John C. Coble............................. 300,000 -- 67,500 -- -- 10,279
Chief Executive Officer,
President and Director
William G. Chunn.......................... 202,308 -- 35,701 -- -- 6,524
Executive Vice
President of Operations
</TABLE>
- ---------------
(1) Salary compensation includes amounts deferred by each executive officer
under the Weatherford Executive Deferred Compensation Stock Ownership Plan
(the "Executive Deferred Plan") described in Note 2 below. There were no
bonus amounts paid in 1999.
(2) Other Annual Compensation includes (i) the vested portion of the amount
contributed by us under the Executive Deferred Plan equal to 7.5% of each
annual officer's compensation for each year, plus (ii) the vested portion of
our matching contribution under the Executive Deferred Plan equal to 100% of
the amount deferred by the officer. Each officer can defer up to 7.5% of his
or her total salary and bonus compensation each year. Our contributions vest
over a five-year period on the basis of 20% per year from the date of
initial participation in the Executive Deferred Plan. Under the Executive
Deferred Plan, the compensation deferred by each officer and our
contributions are converted into non-monetary units equal to the number of
shares of common stock that could have been purchased at a market-based
price by the amounts deferred and contributed. Distributions are made under
the Executive Deferred Plan after an officer retires, terminates his
employment or dies. The amount of the distribution under the Executive
Deferred Plan is based on the number of vested units in the officer's
account multiplied by the market price of the common stock at that time.
Following the spinoff, the accounts of the executive officers for deferrals
made prior to spinoff will be maintained by Weatherford with the executive
being credited with both Weatherford common stock units and our common stock
units. Distributions in respect of deferrals prior to the spinoff will be
paid based on the market price of the Weatherford common stock allocated to
the account of the executive immediately prior to the spinoff and our common
stock issued as a distribution in respect of those shares. Distributions
under the Executive Deferred Compensation Plan may, at Weatherford's
election, be made in cash, stock or combination of both. We have agreed
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<PAGE> 55
to issue to participants in the Executive Deferred Compensation Plan shares
of our stock to the extent required by Weatherford to satisfy the
distribution under that plan. We also will maintain a separate Executive
Deferred Compensation Plan for our executives after the spinoff in which the
common stock accounts will be based solely on our stock and distributions
will be made by us in cash, our stock or a combination of both.
Weatherford's and our obligations with respect to the Executive Deferred
Plan are unfunded. However, Grant Prideco and Weatherford have established
grantor trusts that are subject to the claims of our creditors, into which
funds are deposited with an independent trustee that purchases shares of
common stock for the Executive Deferred Plan. As of December 31, 1999,
Messrs. Coble and Chunn had 37,975 and 10,792 units allocated to their
respective accounts.
(3) Excludes the total amount of all perquisites and other benefits that were
less than the lesser of $50,000 or 10% of the total of annual salary and
bonus of each executive officer.
(4) Represents matching contributions of $1,920 and $1,920 were made by
Weatherford in 1999 under Weatherford's 401(k) Savings Plan for each of
Messrs. Coble and Chunn, respectively, and life insurance premiums of $8,359
and $4,604 paid by Weatherford in 1999 for each of Messrs. Coble and Chunn,
respectively.
STOCK OPTION GRANTS IN FISCAL 1999
Messrs. Coble and Chunn received no Weatherford stock option grants during
fiscal 1999. For information concerning the treatment of options held by our
officers after the spinoff, see "Relationship Between Grant Prideco and
Weatherford After the Spinoff -- Distribution Agreement -- Employment Matters;
Treatment of Outstanding Stock Options and Restricted Stock".
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND DECEMBER 31, 1999 OPTION VALUES
The following table provides information related to Weatherford common
stock options exercised by the Named Executive Officers during fiscal 1999 and
the number and value of Weatherford options held at December 31, 1999.
All references in the tables to stock, stock options, prices and values
relate to awards of stock and stock options and historical prices of Weatherford
common stock. See "Relationship Between Grant Prideco and Weatherford After the
Spinoff -- Employment Matters; Treatment of Outstanding Stock Options and
Restricted Stock" for a discussion of how existing options and restricted stock
will be adjusted in connection with the spinoff.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
VALUE UPON VALUE --------------------------- ---------------------------
NAME OPTION EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John C. Coble.......... -- -- 80,400 100,000 1,766,375 2,181,250
William G. Chunn....... -- -- -- 25,000 -- 545,313
</TABLE>
- ---------------
(1) The value is based on the difference in the closing market price of the
Weatherford common stock on December 31, 1999 ($39.9375), and the exercise
price of the options. The actual value, if any, of the unexercised options
will depend on the market price of the Weatherford or Grant Prideco stock
issuable on the exercise of the options at the time of the exercise of the
options.
BENEFIT PLANS
We will maintain the following plans after the Spinoff:
Grant Prideco, Inc. 1999 Employee Stock Option and Restricted Stock Plan
We consider stock options and restricted stock to be an important incentive
to our employees to work toward the Company's long-term growth. Accordingly, we
will from time to time grant to our employees
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<PAGE> 56
(including our executive officers) options to purchase shares of Grant Prideco
common stock and awards of restricted Grant Prideco stock. The number of shares
to be granted will be based on the level and contribution of the employee. A
total of 5,000,000 shares of Grant Prideco common stock have been dedicated to
the plan. Stock options are subject to vesting over a number of years and
generally will have exercise prices equal to the market price of the common
stock at the date of grant. However, the exercise price and exercisability of
each option may be determined by the Compensation Committee of the board of
directors. Similarly, restricted stock awards will generally be subject to
certain restrictions so that an employee will not be entitled to the stock if he
or she elects to leave the Company. We believe that these types of vesting and
restrictions provide strong incentives for creating long-term value for the
Company. We intend to grant to our executive officers the number of stock
options and restricted stock that is consistent with industry standards and our
objectives towards emphasizing stock-based compensation for our senior executive
officers.
Grant Prideco, Inc. Executive Deferred Compensation Plan
We will maintain an executive deferred compensation plan to provide our key
employees with long-term incentive compensation through benefits that are linked
directly to future increases in the value of Grant Prideco common stock and that
may be realized only upon the employee's termination of employment. Under this
plan, eligible employees receive a tax deferred credit equal to 7.5 percent of
their annual compensation through a credit to an account that is converted into
non-monetary units representing the number of shares of Grant Prideco common
stock that the credited funds could purchase at an price equal to the average
closing price of our common stock during the month the amounts are credited. In
addition, as an incentive to the participants to base their deferred
compensation on increases in our common stock a portion of the compensation that
they would otherwise receive from us, the participating employees also are
offered the opportunity to defer up to 7.5 percent of their compensation to
their account under this plan, in which case we will make a matching credit
equal to the amount of the deferral by the employee. This plan provides for a
five-year vesting period with respect to credits we provide, and the ultimate
value of benefits under the plan to the participant are wholly dependent upon
the price of Grant Prideco common stock at the time the employee terminates his
employment. We believe that our deferred compensation plans are an important
component of our stock-based compensation program and align management's
interest with those of our stockholders. Under the plan, Grant Prideco intends
to create a grantor trust so that each employer may make periodic contributions
to the trust approximating the amounts credited to an employee's account. The
trustee would use these contributions to purchase our common stock in the open
market, and this stock could be used to satisfy the obligation to the employee
when due.
Grant Prideco, Inc. Foreign Executive Deferred Compensation Plan
We also will maintain an executive deferred compensation plan that will
provide our key foreign employees with long-term incentive compensation through
benefits that are directly linked to future increases in the value of the common
stock. Under this plan, eligible foreign employees receive a tax deferred credit
equal to 15 percent of their annual compensation through a credit to an account
that is converted into non-monetary units representing the number of shares of
our common stock that the contributed funds could purchase at a price equal to
the average closing price of our common stock during the month the amounts are
credited. This plan provides for a five-year vesting period with respect to
these credits, and the ultimate value of benefits under the plan to the
participant are wholly dependent upon the price of our common stock at the time
the employee terminates his employment.
Grant Prideco, Inc. 401(k) Savings Plan
We have established a 401(k) savings plan that allows eligible employees to
make before- and after-tax contributions toward their retirement security and
receive matching and discretionary contributions from us. All of our employees
are eligible to participate in the plan unless they are employees covered under
a collective bargaining agreement, leased employees, employees working outside
the United States, non-resident aliens with no United States source income or
employees participating in a retirement plan maintained outside the United
States. An eligible employee may elect to defer up to 16 percent of his or her
compensation on a
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<PAGE> 57
before-tax basis. After a year of service, we will match half of up to six
percent of a participant's before-tax deferrals, and the participant will be
able to share in any discretionary contributions we make. A participant's
contributions and any matching and discretionary contributions we make will be
vested immediately. Participants may invest their accounts in various investment
funds offered under the plan. A participant may withdraw certain funds from his
or her account in the case of a financial hardship or on or after age 59 1/2,
and may withdraw his or her after-tax and/or rollover contributions at any time.
Loans are also available to participants under the plan. Distributions of a
participant's before- and after-tax contributions and our contributions may be
made when the participant dies, becomes disabled, retires or terminates
employment. We believe that financial security is often the main factor for
determining the quality of life during retirement, and this plan provides our
employees with the opportunity to effectively save toward long-term financial
goals.
EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL ARRANGEMENTS
We currently expect to enter into an employment agreement with each of Mr.
Coble and Ms. Powell as our executive officers. These employment agreements will
be in lieu and in substitution of the employment agreements that Mr. Coble and
Ms. Powell have with Weatherford. We expect that each employment agreement will
have a term of three years and be renewable annually. Under the terms of these
employment agreements, if we terminate the executive's employment for any reason
other than "cause" or "disability" or if the executive terminates his or her
employment for "good reason", as defined in the employment agreements, the
executive will be entitled to receive an amount equal to the sum of (1) three
times the executive's current annual base compensation plus the highest bonus
paid by Grant Prideco or Weatherford to the executive during the three years
prior to the year of termination, (2) any accrued salary or bonus (pro-rated to
the date of termination), (3) an amount payable as if all retirement plans were
vested, (4) the amount that would have been contributed as our match under our
401(k) plan and our executive deferred plan for three years and (5) the
executive's car allowance for three years. Under the employment agreements,
"cause" is defined as the willful and continued failure to perform the
executive's job after written demand is made by the Chief Executive Officer or
the board or the willful engagement in illegal conduct or gross misconduct.
Termination by the executive for "good reason" is generally defined as (A) a
material reduction in title and/or responsibilities of the executive, (B)
certain relocations of the executive or (C) any material reduction in the
executive's benefits. In addition, under such circumstances, all stock options
and restricted stock granted to the executive will vest automatically. The
executive also would have the right to surrender for such cash all such options
unless to do so would cause a transaction otherwise eligible for pooling of
interests accounting treatment under Accounting Principles Board Opinion No. 16
to be ineligible for such treatment, in which case the executive would receive
shares of common stock equal in value to the cash he or she would have received.
All health and medical benefits would also be maintained after termination for a
period of three years provided the executive makes his or her required
contribution. Under the Deficit Reduction Act of 1984, certain severance
payments that exceed a certain amount could subject both us and the executive to
adverse U.S. federal income tax consequences. Each of the employment agreements
provides that we would be required to pay the executive a "gross up payment" to
insure that the executive receives the total benefit intended by the employment
agreement. The base compensation payable to Mr. Coble and Ms. Powell under the
employment agreements are $400,000 and $225,000, respectively.
It is also expected that Mr. Coble and Ms. Powell will be granted options
to purchase an additional 200,000 and 50,000 shares of Grant Prideco common
stock, respectively, effective as of the spinoff. The exercise price of those
options will be equal to the fair market value of the Grant Prideco common stock
at the time of the spinoff.
Upon the spinoff, we expect to enter into a change of control agreement
with Mr. Chunn. Under this agreement, he will be provided with certain benefits
if there is both a change of control of Grant Prideco and is subsequently
terminated for any reason other than for "cause" or elects to terminate his
employment for "good reason" within two years after a change of control. A
change of control is defined generally as an acquisition by a person or group of
persons of at least 50% of our outstanding common stock. Under his agreement, if
there is a change of control of Grant Prideco, we would agree that his base
salary would not decrease unless there was a company-wide salary reduction, Mr.
Chunn would continue to be eligible for an
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<PAGE> 58
annual bonus under our incentive plan applicable to other key employees and if
we are not the surviving entity in a change of control, the surviving company
would be required to issue substantially similar options in replacement of any
Grant Prideco options held by him. "For cause" under Mr. Chunn's change of
control agreement will be defined to be the failure by him to perform his job
after written notice from us, engaging in illegal conduct or misconduct, a
conviction of a crime involving moral turpitude, a misappropriation of funds,
disparagement of us or our management or other cause determined by our board of
directors in good faith. "Good reason" will be defined in Mr. Chunn's change of
control agreement as a material reduction in responsibility or benefits.
If, following a change of control, Mr. Chunn's employment is terminated by
us for any reason other than cause or Mr. Chunn's employment is terminated by
him for good reason, he would be entitled to two years base salary plus two
years bonus, and all of his outstanding options will vest.
We also expect to enter into employment agreements with each of Messrs.
Duroc-Danner and Huff in connection with the services they will provide to us.
In each case, the term of their employment will be for a period of three years
and will be renewable annually. The base compensation to be paid to Mr.
Duroc-Danner will be $150,000 per year and the base compensation to be paid to
Mr. Huff will be $100,000 per year. Messrs. Duroc-Danner and Huff also will be
granted options to purchase 200,000 and 120,000 shares, respectively, of Grant
Prideco common stock at an exercise price equal to the fair market value of the
Grant Prideco common stock at the time of the spinoff. These options will vest
three years from the date of grant, subject to acceleration in the event of a
change of control or termination of employment for any reason other than for
cause. Messrs. Duroc-Danner and Huff will provide services to us only on a
part-time basis from time to time as we may reasonably require to assist us in
the development and implementation of our strategic initiatives. Their services
also would be subject to their commitments to Weatherford. Mr. Huff also will
serve as Interim General Counsel of Grant Prideco until such time as a full time
General Counsel may be named. The employment agreements with Messrs.
Duroc-Danner and Huff also will be substantially similar to the employment
agreements with Mr. Coble and Ms. Powell.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before the spinoff, we had no Compensation Committee. As of the spinoff,
the Compensation Committee of our board will consist of Messrs. Lubar, Moses and
Rayne. Messrs. Lubar, Moses and Rayne also comprise the compensation committee
of Weatherford's board.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Because the spinoff will be on the basis of one share of our common stock
distributed for each two shares of Weatherford common stock owned on the record
date, each Weatherford stockholder will own at the distribution date the same
percentage of the issued and outstanding Grant Prideco common stock as that
stockholder owns of Weatherford common stock.
The following table sets forth certain information regarding the
anticipated beneficial ownership of our common stock by persons we anticipate
will own beneficially more than 5% of our outstanding common stock as of the
distribution date, based upon the actual holdings of Weatherford common stock as
of December 31, 1999.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF PERCENT OF
BENEFICIAL OWNER NUMBER OF SHARES(1) OUTSTANDING SHARES
------------------- ------------------- ------------------
<S> <C> <C>
FMR Corp.(2)
82 Devonshire Street
Boston, Massachusetts 02109.............................. 5,783,670 10.6%
</TABLE>
- ---------------
(1) This information is based on information furnished by each stockholder or
contained in filings made with the Securities and Exchange Commission. The
persons listed have sole voting and dispositive power for their shares of
common stock, unless otherwise noted.
50
<PAGE> 59
(2) Fidelity Management & Research Company ("Fidelity"), a wholly owned
subsidiary of FMR Corp. ("FMR"). FMR and a registered investment adviser, is
the beneficial owner of 4,731,070 shares as a result of acting as investment
adviser to various registered investment companies (the "Funds"). Fidelity
Management Trust Company ("FMTC"), a wholly owned subsidiary of FMR, is the
beneficial owner of 1,052,600 shares as a result of serving as investment
manager of various institutional accounts. Edward C. Johnson 3d, FMR's
Chairman and principal stockholder, FMR, through its control of Fidelity,
and the Funds each has sole power to dispose of the 4,731,070 shares owned
by the Funds. Mr. Johnson and FMR, through its control of FMTC, each has
sole power to dispose of 1,052,600 shares owned by the institutional
accounts and sole power to vote or direct the voting of 944,250 of such
shares. Members of Mr. Johnson's family and trusts for their benefit are the
predominant owners of Class B shares of common stock of FMR. Mr. Johnson
owns 12.0% and Abigail P. Johnson, Mr. Johnson's wife and a Director of FMR,
owns 24.5% of the voting stock of FMR. The Johnson family and all other
Class B shareholders have entered into a shareholders' voting agreement
under which all Class B shares will be voted in accordance with the majority
vote of Class B shares. Through their ownership of voting common stock and
the shareholders' voting agreement, members of the Johnson family may be
deemed, under the Investment Company Act of 1940, to form a controlling
group as to FMR.
All of the figures in this table and the footnotes for shares of our common
stock have been derived based upon the hypothetical assumption that the record
date and the distribution date were December 31, 1999, so as to reflect what the
beneficial ownership of Grant Prideco common stock would have been at that time.
Actual ownership on the distribution date may vary substantially from that shown
in the table. The following table sets forth information with respect to the
shares of our common stock that we anticipate will be beneficially owned by each
director of Grant Prideco, each Named Executive Officer, and by all directors
and executive officers of Grant Prideco as a group effective as of the
distribution date. Each person has sole voting and investment power for the
shares shown below, unless otherwise noted.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF SHARES
BENEFICIALLY OWNED AS OF DECEMBER 31, 1999
----------------------------------------------
NUMBER OF RIGHT TO PERCENT OF
NAME SHARES OWNED ACQUIRE(1) OUTSTANDING SHARES
---- ------------ ---------- ------------------
<S> <C> <C> <C>
John C. Coble......................................... -- 40,200 *
Bernard J. Duroc-Danner............................... 45,206 315,000 *
Eliot M. Fried........................................ 10,000 -- *
Sheldon B. Lubar(2)................................... 373,485 15,000 *
William E. Macaulay(3)................................ 1,013,717 5,000 3.2%
Robert K. Moses, Jr.(4)............................... 212,192 5,000 *
Robert A. Rayne(5).................................... 140 10,000 *
William G. Chunn...................................... 19,403 -- *
Curtis W. Huff(6)..................................... 35,500 16,667 *
Frances R. Powell..................................... 477 20,500 *
All officers and directors as a group (10 persons).... 1,710,120 427,367 5.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Shares of common stock that can be acquired through stock options
exercisable through November 29, 1999.
(2) Includes 177,557 shares held by his wife, over which he has no voting or
dispositive power and as to which he disclaims beneficial ownership. Also
includes 13,671 shares held in trusts for his grandchildren, of which he is
the trustee and has voting and dispositive power.
(3) Includes 3,309 shares held by his wife, over which he has no voting or
dispositive power and as to which he disclaims beneficial ownership, and
2,938 shares held in the name of a trust for his daughters. Includes
1,003,750 shares owned beneficially by First Reserve Corporation. Mr.
Macaulay is Chairman and Chief Executive Officer of First Reserve. Mr.
Macaulay disclaims beneficial ownership of the shares of common stock
beneficially owned by First Reserve.
51
<PAGE> 60
(4) Includes an aggregate of 21,375 shares held in various trusts for Mr. Moses'
family, of which Mr. Moses is the trustee and has sole voting and
dispositive power. Excludes (i) an aggregate of 24,937 shares held in
various trusts for Mr. Moses' children, (ii) 879 shares held in a trust for
Mr. Moses' son and (iii) 297 shares held by Mr. Moses' adult son supported
by him. Mr. Moses has no voting or dispositive power over these excluded
shares. Mr. Moses disclaims beneficial ownership of all of the
above-described shares.
(5) Excludes 270,000 shares beneficially owned by London Merchant Securities
plc, of which Mr. Rayne serves as Executive Director. Mr. Rayne disclaims
beneficial ownership of all of these shares.
(6) Includes 28,125 restricted shares that vest over a three-year period through
June 2002.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective as of the spinoff, Grant Prideco and Weatherford will have five
common directors. Mr. Huff, Senior Vice President and General Counsel of
Weatherford, will serve as our Vice President and Interim General Counsel. Mr.
Duroc-Danner, President, Chief Executive Officer and Chairman of the Board of
Weatherford, will serve as our Chairman of the Board. We will enter into several
agreements with Weatherford in connection with the spinoff, including the
Distribution Agreement, the Tax Allocation Agreement, the Transition Services
Agreement and the Preferred Supplier Agreement. We will also issue a $100
million note to Weatherford. See "Relationship Between Grant Prideco and
Weatherford After the Spinoff".
DESCRIPTION OF GRANT PRIDECO CAPITAL STOCK
GENERAL
Our authorized capital stock as of the spinoff will consist of 150 million
shares of our common stock and 10 million shares of preferred stock, par value
$.01 per share, of which, approximately 54.4 million shares of our common stock
will be issued and outstanding and owned by Weatherford. No shares of our
preferred stock will be issued or outstanding. All of these issued and
outstanding shares of our common stock will be distributed to holders of
Weatherford common stock in the spinoff. Following the spinoff, Weatherford will
not own any of our common stock other than in trust for employee benefit plans.
All of the shares of our common stock issued in the spinoff will be validly
issued, fully paid and nonassessable.
GRANT PRIDECO COMMON STOCK
Voting Rights
Holders of our common stock will be entitled to one vote for each share on
all matters voted on by stockholders. Our common stock will possess all voting
power of Grant Prideco, except as otherwise required by law or provided in any
resolution adopted by our board designating any series of Grant Prideco
preferred stock. The shares of our common stock will not have cumulative voting
rights.
Although the holders of our common stock are generally entitled to vote for
the approval of amendments to our certificate of incorporation, the voting
rights of the holders of our common stock are limited with respect to certain
amendments to our certificate of incorporation that affect only the holders of
our preferred stock. Specifically, subject to the rights of any outstanding
shares of any series of our preferred stock, our certificate of incorporation
may be amended from time to time in any manner that would solely modify or
change the relative powers, preferences and rights and the qualifications or
restrictions of any issued shares of any series of our preferred stock then
outstanding with the only required vote or consent for approval of such
amendment being the affirmative vote or consent of the holders of a majority of
the outstanding shares of the series of our preferred stock so affected,
provided that the powers, preferences and rights and the qualifications and
limitations or restrictions of such series after giving effect to such amendment
are no greater than the powers, preferences and rights and qualifications and
limitations or restrictions permitted to be fixed and determined by the board of
directors with respect to the establishment of any new series of shares of our
preferred stock pursuant to the authority vested in the board of directors as to
such matters.
52
<PAGE> 61
Dividend Rights
Subject to any preferential or other rights of any outstanding series of
our preferred stock that our board may designate, and subject to contractual
restrictions contained in our debt agreements, holders of our common stock will
be entitled to such dividends as may be declared from time to time by our board
from funds legally available therefor. See "Dividend Policy".
Liquidation Rights and Other Provisions
Subject to the prior rights of creditors and the holders of any of our
preferred stock that may be outstanding from time to time, the holders of our
common stock are entitled in any liquidation, dissolution or winding up to share
pro rata in the distribution of all remaining assets.
Our common stock is not liable for any calls or assessments and is not
convertible into any other securities. Our certificate of incorporation will
provide that the private property of the stockholders shall not be subject to
the payment of corporate debts. There are no redemption or sinking fund
provisions applicable to our common stock.
GRANT PRIDECO PREFERRED STOCK
Our board will be authorized to issue shares of preferred stock, in one or
more series, and to fix the voting powers, designations, preferences and
relative, participating, optional and other special rights, qualifications,
limitations or restrictions of such shares, subject to the Delaware General
Corporation Law. No shares of our preferred stock will be issued in connection
with the spinoff.
NO PREEMPTIVE RIGHTS
No holder of any stock of Grant Prideco of any class authorized at the
distribution date will have any preemptive right to subscribe to any securities
of Grant Prideco of any kind or class.
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
As a Delaware corporation, we are subject to Section 203 of the Delaware
General Corporation Law. In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the time such person became an interested stockholder unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced (excluding stock held by directors who are also
officers of the corporation and by employee stock plans that do not
provide employees with the rights to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer); or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder.
Under Section 203, the restrictions described above also do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if
such extraordinary transaction is approved or not opposed by a majority of the
53
<PAGE> 62
directors who were directors prior to any person becoming an interested
stockholder during the previous three years or were recommended for election or
elected to succeed such directors by a majority of such directors.
NOMINATION OF DIRECTORS
Our bylaws establish an advance notice procedure with regard to the
nomination, other than by or at the direction of the board or a committee
thereof, of candidates for election as directors.
This nomination procedure requires that a stockholder give advance written
notice, in proper form, of a planned nomination for the board to the Secretary
of Grant Prideco. The requirements as to the form and timing of that notice,
which are specified in our bylaws, are not inconsistent with the requirements of
the Securities Exchange Act of 1934 for a stockholder proposal. If a person is
not nominated in accordance with this nomination procedure, that person will not
be eligible for election as a director.
Although our bylaws do not give the board any power to approve or
disapprove stockholder nominations for the election of directors, our bylaws may
have the effect of precluding a nomination for the election of directors at a
particular meeting if the proper procedures are not followed and may discourage
a third party from soliciting proxies to elect its own slate of directors or
otherwise attempting to obtain control of Grant Prideco, even if that
solicitation or attempt might be beneficial to us and our stockholders.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent of our common stock will be American Stock
Transfer & Trust Company.
LIABILITY AND INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Delaware law and our certificate of incorporation and bylaws include
provisions designed to limit the liability of our officers and directors and, in
certain circumstances, to indemnify our officers and directors against certain
liabilities. These provisions are designed to encourage qualified individuals to
serve as our officers and directors.
EXCULPATION OF MONETARY LIABILITY
Under Delaware law, a corporation may include provisions in its certificate
of incorporation that relieve its directors of monetary liability for breaches
of their fiduciary duty to the corporation, except under certain circumstances,
including
- a breach of the director's duty of loyalty,
- acts or omissions of the director not in good faith or which involve
intentional misconduct or a knowing violation of law,
- the approval of an improper payment of a dividend or an improper purchase
by the corporation of the corporation's stock or
- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation will provide that our directors are not
liable to us or our stockholders for monetary damages for breach of their
fiduciary duty, subject to the restrictions above. These limitations of
liability may not affect claims arising under the federal securities laws.
INDEMNIFICATION
Under Section 145 of the Delaware General Corporation Law and our bylaws,
we are obligated to indemnify our present and former directors and officers and
may indemnify other employees and individuals against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement in connection
54
<PAGE> 63
with specified actions, suits or proceedings, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation, a "derivative action"), if the person to whom indemnity is granted
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to our best interests, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
A similar standard of care is applicable in the case of derivative actions,
except that indemnification extends only to expenses (including attorneys' fees)
incurred in connection with defense or settlement of such an action, and the
Delaware General Corporation Law requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to Grant Prideco.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and officers and controlling persons pursuant to
the foregoing provisions, we have been advised that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
INDEPENDENT PUBLIC ACCOUNTANTS
Our board will select before the end of fiscal 2000 an independent
accounting firm to audit our financial statements for the year ending December
31, 2000. Arthur Andersen LLP has served as independent accountants of Grant
Prideco and Weatherford through the periods covered by the financial statements
included in this information statement.
WHERE YOU CAN FIND MORE INFORMATION
We will file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934. You may inspect those reports, proxy statements
and other information at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Regional Offices of the SEC at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and 7 World Trade Center, New York, New York
10048. Please call the SEC at 1-800-SEC-0300 for further information about the
public reference rooms. You may also obtain copies of those materials from the
Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC maintains a site on the Internet at WWW.SEC.GOV that contains these
reports, proxy and information statements and other information regarding
Weatherford. You can also inspect and copy those reports, proxy and information
statements and other information at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005, on which our common stock is
expected to be listed.
We have filed with the SEC a registration statement on Form 10 that
includes this information statement. This information statement is only a part
of that registration statement and does not contain all of the information in
our registration statement. For further information on us and our common stock,
please review our registration statement and the exhibits that are filed with
it. Statements made in this information statement that describe documents may
not necessarily be complete. We recommend that you review the documents that we
have filed with our registration statement to obtain a more complete
understanding of those documents.
All documents that we file pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 after the date of this information
statement will be deemed to be incorporated in this information statement by
reference and will be a part of this information statement from the date of the
filing of the document. Any statement contained in a document incorporated or
deemed to be incorporated by reference in this information statement will be
deemed to be modified or superseded for purposes of this information statement
to the extent that a statement contained in this information statement or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference in this information statement
55
<PAGE> 64
modifies or supersedes that statement. Any statement that is modified or
superseded will not constitute a part of this information statement, except as
modified or superseded.
We will provide without charge to each person, including any beneficial
owner, to whom a copy of this information statement has been delivered, upon
written or oral request, a copy of any or all of the documents incorporated by
reference in this information statement, other than the exhibits to those
documents, unless the exhibits are specifically incorporated by reference into
the information that this information statement incorporates. You should direct
a request for copies to Weatherford at 515 Post Oak Boulevard, Suite 600,
Houston, Texas 77027, Attention: Secretary (telephone number: (713) 693-4000).
If you have any other questions regarding us, please contact our Investor
Relations Department in writing (1450 Lake Robbins Drive, Suite 600, The
Woodlands, Texas 77380) or by telephone ((281) 297-8500).
We intend to furnish holders of our common stock with annual reports
containing consolidated financial statements audited by an independent public
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial statements.
56
<PAGE> 65
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Financial Statements of Grant Prideco
Report of Independent Public Accountants.................. F-2
Combined Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Combined Statements of Operations for the years ended
December 31, 1999, 1998, and 1997...................... F-4
Combined Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-5
Combined Statements of Stockholder's Equity for the years
ended December 31, 1999, 1998 and 1997................. F-6
Notes to Combined Financial Statements.................... F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grant Prideco, Inc.:
We have audited the accompanying combined balance sheets of the drilling
product businesses of Weatherford International, Inc. (a Delaware corporation)
(Grant Prideco), as of December 31, 1999 and 1998, and the related combined
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 combined financial position of Grant Prideco as of
December 31, 1999 and 1998, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
January 28, 2000
F-2
<PAGE> 67
GRANT PRIDECO
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 6,204 $ 6,070
Restricted Cash........................................... 3,658 --
Accounts Receivable, Net of Allowance for Uncollectible
Accounts of $500 and $366 at December 31, 1999 and
1998................................................... 77,650 129,019
Inventories............................................... 173,904 186,267
Current Deferred Tax Asset................................ 6,197 10,785
Other Current Assets...................................... 4,425 18,155
-------- --------
272,038 350,296
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Machinery and Equipment................................... 224,225 197,552
Land, Buildings and Other Property........................ 81,390 86,350
-------- --------
305,615 283,902
Less: Accumulated Depreciation............................ 98,906 74,908
-------- --------
206,709 208,994
-------- --------
GOODWILL, NET............................................... 187,765 162,464
INVESTMENT IN UNCONSOLIDATED AFFILIATES..................... 37,453 6,848
OTHER ASSETS................................................ 30,610 9,712
-------- --------
$734,575 $738,314
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-Term Borrowings and Current Portion of Long-Term
Debt................................................... $ 14,710 $ 52,881
Accounts Payable.......................................... 47,459 41,377
Accrued Wages and Benefits................................ 6,277 4,427
Current Deferred Tax Liability............................ 7,144 8,231
Customer Advances......................................... 18,503 5,248
Purchase Credit........................................... -- 8,000
Other Accrued Liabilities................................. 13,308 24,104
-------- --------
107,401 144,268
-------- --------
SUBORDINATED NOTE TO WEATHERFORD............................ 100,000 100,000
LONG-TERM DEBT.............................................. 24,276 9,265
DEFERRED INCOME TAXES....................................... 44,533 24,838
MINORITY INTEREST........................................... 886 --
OTHER LONG-TERM LIABILITIES................................. 3,623 14,732
COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDER'S EQUITY.................................. 453,856 445,211
-------- --------
$734,575 $738,314
======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 68
GRANT PRIDECO
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES.................................................... $286,370 $646,454 $630,021
-------- -------- --------
COSTS AND EXPENSES:
Cost of Sales............................................. 262,269 480,034 471,779
Selling, General and Administrative Attributable to
Segments............................................... 31,104 31,986 29,903
Corporate General and Administrative...................... 14,638 14,407 11,983
Equity (Income) Loss in Unconsolidated Affiliates......... 419 (267) --
Weatherford Charges....................................... 1,500 960 920
Nonrecurring Charges...................................... 9,454 6,450 --
-------- -------- --------
319,384 533,570 514,585
-------- -------- --------
OPERATING INCOME (LOSS)..................................... (33,014) 112,884 115,436
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest Expense.......................................... (4,093) (4,758) (5,726)
Weatherford Interest Expense.............................. (7,250) (7,250) (7,250)
Other, Net................................................ (138) 4,692 (396)
-------- -------- --------
(11,481) (7,316) (13,372)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (44,495) 105,568 102,064
PROVISION (BENEFIT) FOR INCOME TAXES........................ (11,199) 39,848 40,550
-------- -------- --------
NET INCOME (LOSS) BEFORE MINORITY INTEREST.................. (33,296) 65,720 61,514
MINORITY INTEREST........................................... (215) -- --
-------- -------- --------
NET INCOME (LOSS)........................................... $(33,511) $ 65,720 $ 61,514
======== ======== ========
Pro Forma Earnings (Loss) Per Share:
Basic..................................................... $ (0.66) $ 1.35 $ 1.28
======== ======== ========
Diluted................................................... $ (0.66) $ 1.34 $ 1.26
======== ======== ========
Pro Forma Weighted Average Shares:
Basic..................................................... 50,622 48,533 48,026
======== ======== ========
Diluted................................................... 50,622 48,879 48,781
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 69
GRANT PRIDECO
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)......................................... $(33,511) $65,720 $61,514
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided By Operating Activities:
Non-Cash Portion of Other Nonrecurring Charges............ 9,454 30,500 --
Depreciation and Amortization............................. 30,514 31,173 27,051
Deferred Income Tax Provision (Benefit)................... 9,531 (4,513) 14,944
Equity (Income) Loss in Unconsolidated Affiliates......... 419 (267) --
Gain on Asset Disposal.................................... -- (1,226) --
Sale of Technology License................................ -- (9,000) --
Change in Assets and Liabilities, Net of Effects of
Businesses Acquired:
Accounts Receivable.................................... 41,072 13,308 (40,922)
Inventories............................................ 10,944 (22,878) (52,686)
Other Current Assets................................... 8,919 (13,812) (1,375)
Accounts Payable....................................... 18,927 (57,091) 11,964
Accrued Current Liabilities............................ (32,291) (10,730) (12,871)
Other Assets........................................... (703) (1,215) (1,456)
Customer Advances...................................... 13,255 2,344 2,904
Purchase Credit........................................ (8,000) (8,000) --
Other, Net............................................. (3,290) (3,586) 805
-------- ------- -------
Net Cash Provided by Operating Activities.............. 65,240 10,727 9,872
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Businesses, Net of Cash Acquired........... (15,072) (17,400) (50,847)
Capital Expenditures for Property, Plant and Equipment.... (19,046) (38,102) (34,813)
Proceeds on Sale of Assets................................ -- 6,023 --
-------- ------- -------
Net Cash Used by Investing Activities.................. (34,118) (49,479) (85,660)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on Debt, Net................................... (54,225) (6,990) (22,778)
Stockholder's Investment.................................. 23,237 43,609 105,466
-------- ------- -------
Net Cash Provided (Used) by Financing Activities....... (30,988) 36,619 82,688
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 134 (2,133) 6,900
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 6,070 8,203 1,303
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 6,204 $ 6,070 $ 8,203
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 70
GRANT PRIDECO
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN
CURRENCY TOTAL
STOCKHOLDER'S RETAINED TRANSLATION STOCKHOLDER'S
INVESTMENT EARNINGS ADJUSTMENT EQUITY
------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................... $150,168 $ 19,122 $ (5,070) $164,220
Total Comprehensive Income (Loss)............ -- 61,514 (2,360) 59,154
Stockholder's Contribution................... 109,348 -- -- 109,348
-------- -------- -------- --------
Balance of December 31, 1997................... 259,516 80,636 (7,430) 332,722
Total Comprehensive Income (Loss)............ -- 65,720 (5,908) 59,812
Stockholder's Contribution................... 51,928 749 -- 52,677
-------- -------- -------- --------
Balance at December 31, 1998................... 311,444 147,105 (13,338) 445,211
Total Comprehensive Loss..................... -- (33,511) (17) (33,528)
Stockholder's Contribution................... 42,173 -- -- 42,173
-------- -------- -------- --------
Balance at December 31, 1999................... $353,617 $113,594 $(13,355) $453,856
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 71
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS
1. WEATHERFORD INTERNATIONAL INC.'S PROPOSED SPINOFF OF ITS DRILLING PRODUCTS
DIVISION
On October 22, 1999, the Board of Directors of Weatherford International,
Inc. ("Weatherford" or "Stockholder") authorized the spinoff of its drilling
products businesses (the "Company" or "Grant Prideco") to its shareholders as an
independent, publicly-traded company (the "Distribution"). The drilling products
businesses will be transferred to Grant Prideco, Inc. from Weatherford. The
Distribution is subject to a tax ruling by the Internal Revenue Service that
would allow it to be tax-free to shareholders subject to U.S. Federal income
taxes and appropriate stock market conditions. Immediately following the
Distribution, Weatherford will no longer have an equity investment in Grant
Prideco, however, Grant Prideco will have a $100.0 million unsecured
subordinated note to Weatherford due no later than December 31, 2001 and a $15
million drill stem credit obligation to Weatherford. Weatherford will also
remain liable on certain existing contingent liabilities relating to Grant
Prideco which were not able to be released, terminated or replaced prior to the
Distribution date ("unreleased contingent liabilities"). Grant Prideco will
fully indemnify Weatherford for any payments made under the unreleased
contingent liabilities.
Basis of Presentation
The combined financial statements reflect the results of operations of
Weatherford's drilling products businesses that will be transferred to Grant
Prideco, Inc. from Weatherford. The combined financial statements have been
prepared using the historical bases in the assets and liabilities and historical
results of operations related to Grant Prideco, except as noted herein. The
combined financial statements include allocations ("carve-outs") of general and
administrative corporate overhead costs of Weatherford to Grant Prideco and
direct costs of services provided by Weatherford for the benefit of Grant
Prideco (See Note 15). Management believes such allocations are reasonable;
however, the costs of these services charged to Grant Prideco are not
necessarily indicative of the costs that would have been incurred if Grant
Prideco had performed these functions as a stand-alone entity. Subsequent to the
Distribution, Grant Prideco will perform these functions using its own resources
or purchased services and will be responsible for the costs and expenses
associated with the management of a public corporation.
The financial information included herein may not necessarily reflect the
combined results of operations, financial position, changes in stockholder's
equity and cash flows of Grant Prideco in the future or what they would have
been had it been a separate, stand-alone entity during the periods presented.
The combined financial statements included herein do not reflect any changes
that may occur in the financing of Grant Prideco as a result of the
Distribution.
Nature of Operations
The Company manufactures and supplies drill pipe and drilling tools,
premium connectors and associated high grade tubular and marine connectors used
in the exploration and production of oil and natural gas.
Principles of Combination
Intercompany transactions and balances between Grant Prideco's businesses
have been eliminated. The Company accounts for its 50% or less-owned affiliates
using the equity method. The minority's interest in H-Tech (46%) is included in
the balance sheets and statements of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
F-7
<PAGE> 72
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are valued using the first-in, first-out ("FIFO") method and
are stated at the lower of cost or market.
Property Plant and Equipment
Property, plant and equipment is carried at cost. Maintenance and repairs
are expensed as incurred. The costs of renewals, replacements and betterments
are capitalized. Depreciation on fixed assets is computed using the
straight-line method over the estimated useful lives for the respective
categories. The Company evaluates potential impairment of property, plant and
equipment and other long-lived assets on an ongoing basis and reduces the
carrying value whenever events or circumstances effecting the carrying amounts
indicate that amounts may not be fully recoverable. The useful lives of the
major classes of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
LIFE
------------
<S> <C>
Machinery and equipment................................ 3 - 20 years
Buildings and other property........................... 5 - 40 years
</TABLE>
Intangible Assets and Amortization
The Company's intangible assets are comprised primarily of goodwill and
identifiable intangible assets, principally patents and technology licenses. The
Company periodically evaluates goodwill and other intangible assets, net of
accumulated amortization, for impairment based on the undiscounted cash flows
associated with the asset compared to the carrying amount of that asset.
Management believes that there have been no events or circumstances which
warrant revision to the remaining useful life or which affect the recoverability
of any intangible assets. Goodwill is being amortized on a straight-line basis
over the lesser of the estimated useful life or 40 years. Other identifiable
intangible assets, included as a component of other assets, are amortized on a
straight-line basis over the years expected to be benefited, ranging from 5 to
15 years.
Amortization expense for goodwill and other intangible assets was
approximately $6.1 million, $5.8 million and $3.4 million for the years ended
December 31, 1999, 1998, and 1997, respectively. Accumulated amortization for
goodwill at December 31, 1999 and 1998 was $11.7 million and $7.1 million,
respectively.
Foreign Currency Translation
The functional currency for most of the Company's international operations
is the applicable local currency. Results of operations for foreign subsidiaries
with functional currencies other than the U.S. dollar are translated using
average exchange rates during the period. Assets and liabilities of these
foreign subsidiaries are translated into U.S. dollars using the exchange rates
in effect at the balance sheet date, and the resulting translation adjustments
are included in stockholder's equity. Currency transaction gains and losses are
reflected in income for the period.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts only as a hedge against
existing economic exposures, and not for speculative or trading purposes. These
contracts reduce exposure to currency movements affecting specific existing
assets and liabilities denominated in foreign currencies. The future value of
these contracts and related currency positions are subject to offsetting market
risks resulting from foreign currency exchange rate volatility. The
counterparties to the Company's foreign exchange contracts are creditworthy
multinational commercial banks. Management believes that the risk of
counterparty nonperformance is immaterial. At December 31, 1999, Weatherford had
a contract maturing on January 31, 2000 to
F-8
<PAGE> 73
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
purchase Austrian Shillings equivalent to $23.9 million. Gains and losses on the
change in market value of the contract are recognized currently in earnings. As
of February 3, 2000, we have not entered into another hedging arrangement.
Although we are exposed to exchange rate fluctuations in the Austrian Shilling
subsequent to January 31, 2000, we are reviewing longer-term hedge arrangements
to mitigate this risk.
Accounting for Income Taxes
The accompanying financial statements have been prepared under Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes
assuming Grant Prideco was a separate entity. Under SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
In connection with the Distribution, Grant Prideco and Weatherford will
enter into a tax allocation agreement (the "Tax Allocation Agreement"). Under
the terms of the Tax Allocation Agreement, Grant Prideco, will be responsible
for all taxes and associated liabilities relating to the historical businesses
of Grant Prideco. The Tax Allocation Agreement will also provide that any tax
liabilities associated with the spinoff shall be assumed and paid by Grant
Prideco subject to certain exceptions relating to changes in control of
Weatherford. The Tax Allocation Agreement will further provide that in the event
there is a tax liability associated with the historical operations of the
Company that is offset by a tax benefit of Weatherford, Weatherford will apply
the tax benefit against such tax liability and will be reimbursed for the value
of such tax benefit when and as Weatherford would have been able to otherwise
utilize that tax benefit for its own businesses.
As Weatherford manages its tax position on a consolidated basis, which
takes into account the results of all of its businesses, the Company's effective
tax rate in the future could vary from its historical effective rates. Grant
Prideco's future effective tax rate will largely depend on its structure and tax
strategies as a separate, independent company.
Revenue Recognition
The Company recognizes revenue as products are shipped or accepted by the
customer. Customer advances or deposits are deferred and recognized as revenue
when the Company has met all of its performance obligations related to the sale.
Pro Forma Earnings Per Share
Pro forma earnings per share has been calculated using Grant Prideco's pro
forma basic and diluted weighted average shares outstanding for each of the
periods presented. Grant Prideco's pro forma basic weighted average shares have
been calculated by adjusting Weatherford's historical basic weighted average
shares outstanding for the applicable period to reflect the number of Grant
Prideco shares that would have been outstanding at the time assuming the
distribution of one share of Grant Prideco common stock for each two shares of
Weatherford common stock. Grant Prideco's pro forma diluted weighted average
shares reflect an estimate of the potential dilutive effect of common stock
equivalents. Such estimate is calculated based on Weatherford's dilutive effect
of stock options and restricted stock divided by two. The effect of stock
options and restricted stock is not included in the diluted computation for
periods in which a loss occurs because to do so would have been anti-dilutive.
Recent Accounting Requirements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS No. 133 has been amended by SFAS No. 137,
F-9
<PAGE> 74
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
which delays the effective date to fiscal years beginning after June 15, 2000.
We are currently evaluating the impact of SFAS No. 133 on the Company's combined
financial statements.
2. INVENTORIES
Inventories by category are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Raw materials, components and supplies...................... $ 93,980 $126,559
Work in process............................................. 15,720 17,060
Finished goods.............................................. 64,204 42,648
-------- --------
$173,904 $186,267
======== ========
</TABLE>
Work in process and finished goods inventories include the cost of
materials, labor and plant overhead.
3. ACQUISITIONS
On October 27, 1999, the Company acquired an additional 27% interest in
H-Tech, an Indonesia-based drill pipe manufacturer with facilities located on
Batam Island, for $6.0 million in cash. The Company previously held a 27%
interest in H-Tech and with this purchase owns a controlling 54% interest in
H-Tech. The results of operations of H-Tech have been consolidated in our
results of operations from November 1, 1999. Prior to November 1, 1999, our
investment in H-Tech was accounted for under the equity method. The results of
operations of H-Tech prior to November 1, 1999 were not material to the
Company's results of operations; therefore, pro forma financial information is
not presented.
On October 1, 1999, the Company acquired Drill Pipe Industries, Inc., a
manufacturer of drill stem products, for $1.4 million in cash and a $1.4 million
non-interest bearing note which was repaid in January 2000.
On August 25, 1999, the Company acquired Louisiana-based Petro-Drive, Inc.,
for 0.3 million shares of Weatherford common stock and assumed debt of
approximately $3.5 million. Petro-Drive's offerings include conductors,
connections and installation services and equipment. If any of the former
Petro-Drive shareholders sell any shares of Weatherford common stock and the
corresponding shares of Grant Prideco common stock between August 2000 and
August 2001 at a combined price of less than $36.50, the Company will be
obligated to pay cash to these persons equal to the amount of such deficit. In
January 2000, we exercised our option to acquire the facility leased by
Petro-Drive for approximately $1.6 million.
On July 23, 1999, the Company acquired a 50.01% interest in the
Voest-Alpine Stahlrohr Kindberg GmbH & Co. KG ("VA") for approximately $32.6
million, of which approximately $8.0 million was paid in cash and the remainder
is to be paid over a period of up to 7.5 years. VA produces high quality
seamless tubulars in Austria. The Company's investment in Voest-Alpine is
reported on the equity method of accounting.
On July 7, 1999, the Company acquired Texas Pup, Inc., a manufacturer of
premium and API pup joints (odd-sized tubular products) and utility boring drill
pipe, for 0.1 million shares of common stock of Weatherford and assumed debt of
approximately $1.7 million.
On May 31, 1999, the Company acquired Texas Pipe Works, Inc., a
manufacturer of API couplings, for approximately $1.7 million in cash and 50,000
shares of Weatherford common stock.
On May 31, 1999, the Company acquired InterOffshore Services, Pte., a
manufacturer of drilling tool accessories, for approximately $2.1 million in
cash.
F-10
<PAGE> 75
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1998, the Company acquired from Tubos de Acero de Mexico, S.A.
("TAMSA") 93% of the outstanding shares of T.F. de Mexico, which owned the
manufacturing facility in Veracruz, Mexico that the Company was operating under
a capital lease arrangement. The total consideration given was $59.0 million
comprised of $48.5 million in debt (which was repaid in March 1999), cash of
$1.5 million and a $9.0 million license to the international rights of the
Company's Atlas Bradford thread line. The Company sold the international rights,
excluding Canada, to its Atlas Bradford tubular connection line to TAMSA through
a license arrangement that resulted in a sale of all of the Company's rights
which became effective upon the closing of this transaction. The Company
retained no obligations with respect to the development, maintenance or
improvement of the Atlas Bradford connection line for carbon grade tubular for
the international market and TAMSA has no obligation to give any additional
consideration for this license. Any future support by Grant Prideco is provided
on a fee basis. The rights sold through this license arrangement had a fair
value of $9.0 million. As a result, in December 1998 the Company recorded $9.0
million in revenues to recognize the sale of the international rights to the
Atlas Bradford connection line.
On February 12, 1998, the Company acquired Drill Tube International, Inc.,
a manufacturer of drill pipe and other drill stem products, for $29 million. The
consideration paid in the acquisition consisted of $9 million in cash and a
contractual purchase credit obligation to manufacture and deliver products to
the seller over a two year period. Under the Company's contract with the
Sellers, the Company was required to provide product to the Sellers at a
notional price of $16 million. The fair value of the products to be delivered to
the Sellers was $20 million. Accordingly, a liability of $20 million was
recorded as of the date of the acquisition. As products are delivered under this
commitment the liability is reduced. As of December 31, 1999 and 1998, the
contractual purchase credit balance was $0 and $8 million, respectively.
On August 25, 1997, the Company acquired XLS Holding, Inc. ("XL"), a
provider of premium connections for conductors, risers and other offshore
structure components. The acquisition was accounted for as a pooling of
interests and the consideration paid consisted of approximately 0.9 million
shares of Weatherford common stock. The accompanying financial statements
include the results of XL for all periods presented.
The separate results of Grant Prideco, XL and the combined company were as
follows:
<TABLE>
<CAPTION>
JANUARY 1 TO
AUGUST 25,
1997
---------------
(IN THOUSANDS)
<S> <C>
Revenues:
Grant Prideco............................................. $376,030
XL........................................................ 18,306
--------
Combined.................................................. $394,336
========
Net Income (Loss):
Grant Prideco............................................. $ 40,924
XL........................................................ (5,514)
--------
Combined.................................................. $ 35,410
========
</TABLE>
On July 23, 1997, the Company acquired Rotary Drilling Tools ("RDT"), a
manufacturer of drill collars and accessories, for $3.3 million in cash.
On July 18, 1997, the Company acquired Coastal Tubular Inc. ("Coastal"), a
manufacturer of API threads and thread connections, for approximately $3.3
million in cash.
F-11
<PAGE> 76
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On April 14, 1997, the Company acquired TA Industries, Inc. ("TA") for
approximately $44.1 million in cash and $19.7 million of assumed debt. TA
designs, manufactures and markets premium and API couplings and accessories
under the brand names Texas Arai and Tube-Alloy.
The acquisitions discussed above, with the exception of XL, were accounted
for using the purchase method of accounting. The results of operations of all
acquisitions, excluding XL, are included in the Combined Statements of
Operations from their respective dates of acquisition. The 1999, 1998 and 1997
acquisitions are not material to the Company individually or in the aggregate
for each applicable year.
4. SHORT-TERM BORROWINGS
In connection with the October 1, 1999 acquisition of Drill Pipe
Industries, Inc., the Company issued a non-interest bearing note payable of $1.4
million due in January 2000. This note was subsequently paid in January 2000.
The Company has an uncommitted credit facility which provides for
short-term loans for periods up to 12 months. At December 31, 1999, the Company
had an outstanding balance of $3.9 million under the facility. The average
interest rate for borrowings under the facility was 3.50% per annum at December
31, 1999. The Company also has $0.3 million of short-term notes payable with
interest rates ranging up to 8.6%.
The Company, through Weatherford, also has various credit facilities
available only for stand-by letters of credit and bid and performance bonds,
pursuant to which funds are available to the Company to secure performance
obligations. The Company had a total of $3.7 million of such letters of credit
and bid and performance bonds outstanding as of December 31, 1999.
In December 1998, the Company acquired 93% of the stock of the company that
owned the Veracruz, Mexico facility. As part of the consideration for the
acquisition the Company issued a note payable of $48.5 million due in March of
1999 with an effective interest rate of 7.0%. This note was subsequently paid in
March 1999.
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Long-term loan, interest at prime less .025%, due March
2001...................................................... $ 3,750 $ 6,750
Long-term loan, interest at 6 month EURIBOR, due 2002....... 8,757 --
Long-term loan, interest at 6 month EURIBOR, due 2007....... 14,595 --
Capital lease obligations under various agreements.......... 4,459 5,114
Other....................................................... 1,825 1,832
------- -------
33,386 13,696
Less: amounts due in one year............................... 9,110 4,431
------- -------
$24,276 $ 9,265
======= =======
</TABLE>
F-12
<PAGE> 77
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of scheduled long-term debt maturities by year
(in thousands):
<TABLE>
<S> <C>
2000....................................................... $ 9,110
2001....................................................... 6,664
2002....................................................... 5,924
2003....................................................... 2,884
2004....................................................... 3,225
Thereafter................................................. 5,579
-------
$33,386
=======
</TABLE>
In connection with the July 1999 acquisition of a 50.01% interest in VA,
the Company incurred debt in the amount of $24.6 million (the "VA Debt"). The VA
Debt bears interest at a rate equal to the six month EURIBOR rate. Principal of
$9.2 million is payable over three years in six equal installments beginning in
January 2000 and in each July and January thereafter until July 2002. The
remaining principal balance of $15.4 million shall be paid over a 7.5 year
period out of the annual dividend payable to the Company as a shareholder in VA.
If the total principal balance has not been repaid by the fifth anniversary of
the closing date of the acquisition, the remaining unpaid principal shall be
paid in five equal semi-annual installments beginning on December 1, 2004.
Interest on the VA Debt is payable every six months beginning January 2000. The
interest rate as of December 31, 1999 was 3.52% per annum.
The Company is expected to have a capital structure different from the
capital structure in the combined financial statements and accordingly, interest
expense is not necessarily indicative of the interest expense that the Company
would have incurred as a separate, independent company or will incur in future
periods.
Capital Lease
In 1997, the Company effected a major expansion of its Veracruz, Mexico
tool joint manufacturing facility. As a result of this expansion, the Company
recorded a capital lease obligation of approximately $16.3 million. In December
1998, this Veracruz facility was purchased through the acquisition of 93% of the
outstanding shares of the company that owned the Veracruz, Mexico facility,
which extinguished the capital lease.
6. SUBORDINATED NOTE TO WEATHERFORD
In connection with the Distribution, the Company will issue an unsecured
subordinated note in the amount of $100.0 million. The Weatherford note will
bear interest at an annual rate of 10%. Interest payments will be due quarterly,
and principal and all unpaid interest will be due no later than December 31,
2001. If the Company completes a debt or equity financing (whether public or
private, but excluding working capital borrowings under the credit facility and
any equity issued in connection with a business combination) while the
Weatherford note is outstanding, the Company generally will be required to use a
portion of the net proceeds of that financing to repay any amount outstanding
under the Weatherford note as of the time the Company completes that financing.
The Weatherford note will be subordinated to the credit facility. The Company
expects to refinance the Weatherford note as soon as practicable when market
conditions permit.
Weatherford interest expense shown in the combined financial statements
reflects the interest expense associated with the $100.0 million indebtedness
for each period presented based on Weatherford's average long-term debt rates
for the applicable periods. As of December 31, 1999, the effective interest rate
was 7.25%. It is not practical to estimate the fair market value of the
subordinated note payable to Weatherford as borrowing rates available to the
Company have not been determined.
F-13
<PAGE> 78
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDER'S EQUITY
Changes in stockholder's equity represent net income and comprehensive net
income of the Company plus net transfers between the Company and Weatherford.
8. OTHER CHARGES
Drill pipe and other products are manufactured for the Company by Oil
Country Tubular Limited ("OCTL") in India under a long-term exclusive
manufacturing arrangement. Although the Company has sought to minimize the risks
of this operation through a manufacturing agreement rather than owning a local
manufacturing operation, it has provided OCTL with a substantial amount of raw
materials, inventory and working capital for the products OCTL manufactures for
the Company. The Company's business in India through its relationship with OCTL
has been adversely affected by the downturn of the economies in the eastern
hemisphere and is subject to various political and economic risks as well as
financial and operational risks with respect to OCTL.
As of December 31, 1999, OCTL owed us approximately $25.1 million for prior
advances made by the Company to it and the Company had assets in India with a
book value of approximately $1.7 million. In 1999, the Company substantially
curtailed our purchases from OCTL, and in December of 1999, the Company decided
to terminate our existing manufacturing relationship with OCTL and seek an
alternative arrangement for the recovery of our prior advances. The Company is
currently discussing with OCTL a restructuring of our relationship that would
allow OCTL to repay our prior advances in cash, equity in OCTL or product from
OCTL.
The decision to terminate the Company's existing arrangement with OCTL and
seek an alternative structure resulted in our writing off a $7.8 million product
deposit previously paid to OCTL and approximately $1.7 million in property and
equipment currently located at the OCTL facility. The write off was due to the
anticipated inability to utilize the deposit and recover the equipment following
the termination of the arrangement. The Company's remaining exposure in India is
approximately $17.3 million consisting of unpaid receivables and advances made
to assist OCTL in its working capital needs as part of the Company's
manufacturing arrangement with it. Based on financial information of OCTL known
to the Company and the Company's general knowledge of the business and assets of
OCTL, OCTL would appear to have a sufficient asset and equity value to allow for
a restructuring of its $17.3 million in debt to us through a combination of
cash, equity or product. There is, however, uncertainty as to how much, if any,
of the amounts owed to us by OCTL will ultimately be collected. Accordingly,
there can be no assurance that the Company will be able to fully realize on the
amounts owed to the Company by OCTL or that additional charges relating to India
will not be required in the near term as the negotiation and collection process
continues. The $17.3 million in unpaid receivables and advances owed to us is
classified as "Other Assets" in the accompanying Combined Balance Sheet as of
December 31, 1999.
In 1998, the Company's drill stem segment incurred $35.0 million in charges
relating to the reorganization and rationalization of Grant Prideco's businesses
in light of declining industry conditions and the merger between EVI, Inc.
("EVI") and Weatherford Enterra, Inc. ("WII"). Of these charges, $7.0 million
was incurred in the second quarter of 1998 in accordance with the Company's
formalized plan, and reflected costs associated with the merger between EVI and
WII and the effects of the beginning of a downturn in the industry. Following a
further deterioration in the markets which the Company serves, an additional
$28.0 million charge was incurred in the fourth quarter of 1998. These charges
reflected additional reductions in operations and an attempt to align the cost
structure of the Company with its then current demand. All such costs had been
fully expended as of December 31, 1998, accordingly no accruals remained on the
Combined
F-14
<PAGE> 79
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Balance Sheet as of December 31, 1998. No adjustments to the initial estimates
were required. The net after-tax effect of these charges was $22.8 million.
<TABLE>
<CAPTION>
SECOND FOURTH
QUARTER QUARTER REMAINING
1998 1998 UTILIZED BALANCES AT
CHARGE CHARGE IN 1998 DECEMBER 31, 1998
------- ------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Facility Closures and Exit Costs(1)...... $4,250 $ 850 $ 5,100 $ --
Severance and Related Costs(2)........... 200 -- 200 --
Inventory Write-off(3)................... 2,500 26,000 28,500 --
Asset Write-down(4)...................... -- 1,150 1,150 --
------ ------- ------- -------
Total.......................... $6,950 $28,000 $34,950 $ --
====== ======= ======= =======
</TABLE>
- ---------------
(1) The facility and exit costs were $5.1 million, all of which have been
expended by December 31, 1998. The $4.3 million of costs accrued in the
second quarter related primarily to the elimination of duplicative
manufacturing facilities as a result of the reorganization and
rationalization of the Company's businesses following the merger of EVI and
WII and the downturn in the industry. In the fourth quarter an additional
$0.8 million was accrued to further align the Company's costs in response to
the significant decline in market conditions. The costs related primarily to
the (i) closure of the Channelview, Texas facility, (ii) closure of the
sales location in the U.K. and a Houston, Texas administrative location and
(iii) exit costs for certain operations at the Edmonton, Canada, Pearland,
Texas and Bryan, Texas facilities. The Pearland, Texas facility was a
location of WII prior to the merger. The Bryan, Texas, the Channelview,
Texas and the Edmonton, Canada manufacturing facilities, the U.K. sales
location and the Houston, Texas administrative location were EVI locations
prior to the merger.
(2) The severance and related costs included in the Company's second quarter
charge were $0.2 million for approximately 60 employees specifically
identified, with terminations completed in the second half of 1998.
(3) The inventory write-off of $28.5 million was reported as cost of sales. The
second quarter inventory write-off of $2.5 million resulted from the
elimination of certain products at the time of the merger between EVI and
WII and due to the declining industry conditions. The fourth quarter
inventory write-off of $26.0 million related to the significant decline in
market conditions.
(4) The write-down of assets was $1.2 million in the fourth quarter of 1998. The
charge relates to the write-down of equipment as a result of the
rationalization of product lines and the specific identification of assets
held for sale. The identified equipment had a net book value of $0.6 million
as of December 31, 1998. The effect of suspending depreciation is $0.2
million annually. The equipment was originally projected to be sold in 1999,
but because of market conditions the Company has not been able to dispose of
the equipment to date. The Company currently expects to dispose of these
assets in 2000.
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1999,
$3.7 million of cash was restricted.
Cash paid for interest and income taxes (net of refunds) was as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Interest paid.............................................. $4,565 $4,768 $5,349
Income taxes paid, net of refunds.......................... 2,294 1,779 474
</TABLE>
F-15
<PAGE> 80
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For the year ended December 31, 1997, there were noncash investing
activities of $28.3 million relating to capital leases (See Note 5).
The following summarizes investing activities relating to acquisitions (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Fair value of assets, net of cash acquired............. $ 46,539 $12,133 $63,213
Goodwill............................................... 29,073 58,644 56,198
Total liabilities...................................... (42,892) (53,377) (68,564)
Weatherford common stock issued........................ (17,648) -- --
-------- ------- -------
Cash consideration, net of cash acquired............... $ 15,072 $17,400 $50,847
======== ======= =======
</TABLE>
10. STOCK-BASED COMPENSATION
Stock Option Plans
Various employees of the Company were granted stock options under
Weatherford's 1998 Employee Stock Option Plan (the "1998 Plan"). The total
number of options granted to the Grant Prideco employees under the 1998 Plan was
951,000 at December 31, 1999. Under the terms of the 1998 Plan, the options
granted to the Grant Prideco employees are to be converted into options to
solely acquire Grant Prideco's common stock (the "Grant Prideco Common Stock").
As a result, the Company has adopted the Grant Prideco Employee Stock Option
Plan under which options would be granted to the employees of Grant Prideco in
substitution of the Weatherford options granted under the 1998 Plan. Under the
terms of the 1998 Plan, the options to be granted to the Grant Prideco employees
will be determined based on the relative market price of Grant Prideco Common
Stock to the stock of Weatherford prior to the Distribution. The exercise price
for the options to be granted to the Grant Prideco employees will be the
historical option price multiplied by a percentage equal to the percentage that
the value of the Grant Prideco Common Stock represents to the value of the
Weatherford stock prior to the spinoff. The number of shares that will be
subject to the options will also be adjusted so that each option holder will be
entitled to purchase a number of shares of Grant Prideco Common Stock having the
same aggregate exercise price of the prior 1998 Plan options held by the option
holder.
Employees, as well as the directors of Weatherford, also hold various
options to purchase shares of Weatherford that were granted prior to September
1998. It is anticipated that these options will be divided into options to
purchase Weatherford common stock and Grant Prideco Common Stock, with the
exercise price allocated between the Weatherford common stock and the Grant
Prideco Common Stock based on the relative market value of the shares following
the spinoff. All other terms will remain the same. In connection with the
Distribution, the Company will agree to issue to the holders of those options
the number of shares of Grant Prideco Common Stock issuable upon the exercise of
those options. Similarly, Weatherford will agree to issue to the employees of
Grant Prideco who hold options to purchase Weatherford common stock the number
of shares of Weatherford common stock subject to the options held by those
employees. At December 31, 1999, there were 1,353,323 options granted under
these various plans. The Company cannot currently determine the number of shares
its common stock that will be subject to substitute awards after the
Distribution.
Executive Deferred Compensation Plan
Weatherford and the Company each have maintained an Executive Deferred
Compensation Stock Ownership Plan ("EDC Plan"). Prior to the Distribution,
participants in the EDC Plan had a right to receive shares of Weatherford common
stock upon termination of their employment based on the deferred amounts placed
in an account for them. Under the EDC Plan, in the event of a dividend or
special distribution to the
F-16
<PAGE> 81
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
shareholders of Weatherford, the accounts of the employees are to represent a
right to receive the consideration provided through the spinoff or dividend. As
a result, upon the spinoff, participants in the EDC Plan will be entitled to
receive shares of both Weatherford common stock and Grant Prideco Common Stock
in respect of amounts deferred by the participants prior to the Distribution.
Participants will only be entitled to receive shares in respect of amounts
deferred subsequent to the Distribution of Weatherford or the Company, depending
upon which company they are employed with.
In order to satisfy the obligations of Weatherford and Grant Prideco under
the EDC Plan, Weatherford and Grant Prideco have established a Grantor Trust to
fund the benefits under the EDC Plan. The funds provided to the trust are
invested by a trustee independent of Weatherford and Grant Prideco primarily in
shares of common stock of Weatherford, which is purchased by the trustee in the
open market. The trustee of the EDC Plan will agree to waive the trust's receipt
of any shares of Grant Prideco common stock to be issued to the trust in respect
of the shares of Weatherford common stock held by the trust in consideration of
the Company's agreement to issue directly to the participants in the EDC Plan
any shares of Grand Prideco common stock that may be required to be issued to
them upon distribution of amounts under the plan. Shares of stock are held by
the trustee as part of the Trust to satisfy the obligations of Weatherford and
Grant Prideco to the employees of Weatherford and Grant Prideco. A separate
trust will be established by Grant Prideco following the Distribution in which
only shares of the Company will be purchased for satisfaction of future
obligations under a new Executive Deferred Compensation Stock Ownership Plan to
be adopted by Grant Prideco. The assets of these trusts are available to satisfy
the claims of all general creditors of Weatherford and Grant Prideco in the
event of a bankruptcy or insolvency.
11. RETIREMENT AND EMPLOYEE BENEFIT PLANS
Weatherford has defined contribution plans covering certain of the
Company's employees. The Company's expenses related to these plans totaled $0.7
million, $0.6 million and $0.8 million in 1999, 1998 and 1997, respectively.
Grant Prideco plans to adopt similar plans.
12. INCOME TAXES
The domestic and foreign components of earnings (loss) before income taxes
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic............................................. $(40,690) $ 93,767 $ 66,021
Foreign.............................................. (3,805) 11,801 36,043
-------- -------- --------
Total earnings (loss) before income
taxes.................................... $(44,495) $105,568 $102,064
======== ======== ========
</TABLE>
F-17
<PAGE> 82
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
U.S. federal and state income taxes.................. $(14,030) $37,249 $22,638
Foreign.............................................. (6,700) 7,112 2,968
-------- ------- -------
(20,730) 44,361 25,606
-------- ------- -------
Deferred
U.S. federal......................................... 4,099 (1,170) 4,105
Foreign.............................................. 5,432 (3,343) 10,839
-------- ------- -------
9,531 (4,513) 14,944
-------- ------- -------
Total income tax provision (benefit)......... $(11,199) $39,848 $40,550
======== ======= =======
</TABLE>
The following is a reconciliation of income taxes at the U.S. Federal
income tax rate of 35% to the effective provision for income taxes reflected in
the Combined Statements of Operations:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory rates.......... $(15,573) $36,949 $35,721
Effect of foreign income tax, net...................... 65 (361) 1,191
Foreign Sales Corporation benefit...................... -- (308) (308)
Foreign loss not benefited............................. 1,014 -- --
Non-deductible expense................................. 1,934 1,014 3,099
State and local income taxes net of U.S. Federal income
tax benefit.......................................... 1,214 2,554 847
Other.................................................. 147 -- --
-------- ------- -------
Provision (benefit) for income taxes................... $(11,199) $39,848 $40,550
======== ======= =======
</TABLE>
Deferred tax assets and liabilities are recognized for the estimated future
tax effects of temporary differences between the tax basis of an asset or
liability and its reported amount in the financial statements. The measurement
of deferred tax assets and liabilities is based on enacted tax laws and rates
currently in effect in each of the jurisdictions which the Company has
operations.
At December 31, 1999, the Company had net operating loss carryforwards
("NOL's") for tax purposes of approximately $7.7 million, which were not
incurred as part of a consolidated return with Weatherford. These NOL's expire
in the years 2007 through 2010. Under the terms of a tax allocation agreement to
be entered into between the Company and Weatherford, the Company will not have
the future benefits of any prior tax losses, incurred as part of a consolidated
return with Weatherford, associated with the Company's business that occur prior
to the spinoff.
F-18
<PAGE> 83
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are classified as current or noncurrent
according to the classification of the related asset or liability for financial
reporting. The components of the net deferred tax asset (liability) were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Domestic and foreign operating losses..................... $ 2,708 $ 1,204
Accrued liabilities and reserves.......................... 407 9,537
Inventory basis differences............................... -- 754
Goodwill and other intangibles............................ 573 --
-------- --------
Total deferred tax asset.......................... 3,688 11,495
-------- --------
Deferred tax liabilities:
Property and equipment and other.......................... (44,533) (31,403)
Inventory basis differences............................... (1,928) --
Goodwill.................................................. -- (2,376)
-------- --------
Total deferred tax liability...................... (46,461) (33,779)
-------- --------
Net deferred tax liability................................ $(42,773) $(22,284)
======== ========
</TABLE>
13. DISPUTES, LITIGATION AND CONTINGENCIES
Litigation and Other Disputes
The Company is aware of various disputes and potential claims and is a
party in various litigation involving claims against the Company, some of which
are covered by insurance. Based on facts currently known, the Company believes
that the ultimate liability, if any, which may result from known claims,
disputes and pending litigation, would not have a material adverse effect on the
Company's combined financial position or its results of operations with or
without consideration of insurance coverage.
Insurance
The Company is self-insured through participation in Weatherford's
insurance policy for employee health insurance claims and is self-insured for
workers' compensation claims for certain of its employees. The amounts in excess
of the self-insured levels are fully insured. Self-insurance accruals are based
on claims filed and an estimate for significant claims incurred but not
reported. Although the Company believes that adequate reserves have been
provided for expected liabilities arising from its self-insured obligations, it
is reasonably possible that management's estimates of these liabilities will
change over the near term as circumstances develop.
Weatherford will remain liable on certain existing contingent liabilities
relating to Grant Prideco's businesses which were not able to be released,
terminated or replaced prior to the Distribution Date. Grant Prideco will also
fully indemnify Weatherford for any payments made under the unreleased
contingent liabilities.
14. COMMITMENTS
Operating Leases
The Company is committed under various noncancelable operating leases which
primarily relate to office space and equipment. Total lease expense incurred
under noncancelable operating leases was approximately
F-19
<PAGE> 84
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$7.2 million, $3.8 million and $1.9 million for the years ended December 31,
1999, 1998 and 1997, respectively.
Future minimum rental commitments under these noncancelable operating
leases are as follows (in thousands):
<TABLE>
<S> <C>
2000...................................................... $ 3,389
2001...................................................... 2,892
2002...................................................... 2,702
2003...................................................... 2,465
2004...................................................... 2,405
Thereafter................................................ 12,887
-------
$26,740
=======
</TABLE>
Other Commitments
At the time of the December 1998 acquisition by the Company of 93% of
TAMSA, the Company entered into a 30 year supply contract with TAMSA. Under the
supply contract, TAMSA has been given the right to supply certain of the
Company's operations as long as the prices are on a competitive basis. This
supply agreement does not obligate the Company to make purchases from TAMSA for
any location other than Mexico and India nor restrict the Company's right to
make purchases without offering a right to purchase the materials from TAMSA to
the extent those purchases are made from affiliates of the Company such as
Voest-Alpine.
As part of the arrangement to invest in Voest-Alpine Stahlrohr Kindberg
GmbH & Co. KG, the Company entered into a four-year supply contract with
Voest-Alpine. Under this agreement, the Company agreed to purchase a minimum of
45,000 tonnes of tubulars for the first twelve months of the agreement at a
negotiated third party price that the Company believed to be attractive. The
Company also agreed to purchase 60,000 tonnes per year for the next three years
at the negotiated price.
Grant Prideco maintains consignment purchase arrangements with various
suppliers whereby suppliers' inventory is held on site at the Company's
manufacturing facilities. Under the terms of these arrangements, the Company
pays to the supplier an inventory stocking fee on the consignment inventory and
has an obligation to purchase the inventory under certain circumstances. As of
December 31, 1999, the Company had closed-ended purchase commitments maturing
within the next six months of approximately $3.0 million and open-ended purchase
commitments of approximately $22.1 million.
15. RELATED PARTY TRANSACTIONS
Sales
Weatherford purchases drill pipe and other related products from Grant
Prideco. The amounts purchased by Weatherford for the years ended December 31,
1999, 1998 and 1997 were $28.6 million, $9.6 million and $7.7 million,
respectively. Such sales represent Grant Prideco's cost. The sales to
Weatherford have been eliminated from the accompanying combined financial
statements.
Weatherford Overhead Charges
Weatherford overhead charges represent corporate overhead costs incurred by
Weatherford in providing services to the Company based on the time devoted to
Grant Prideco. These services include accounting, tax, treasury and risk
management services. Such allocation is included in the accompanying Combined
Statements of Operations as Weatherford Charges.
F-20
<PAGE> 85
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Weatherford Direct Services
Grant Prideco was allocated $5.6 million, $5.6 million and $3.5 million of
costs related to Weatherford's information systems function for the years ended
December 31, 1999, 1998 and 1997, respectively. Information systems allocation
charges were allocated based on direct support provided, equipment usage and
number of system users and are included in corporate general and administrative
expense in the accompanying Combined Statements of Operations.
Tax Allocation Agreement
The Company and Weatherford intend to enter into a Tax Allocation Agreement
in connection with the spinoff (see Note 1).
Transition Services Agreement
The Company intends to enter into a transition services agreement with
Weatherford for a period of one year from the Distribution date. Under the
agreement, Weatherford will provide certain services requested by the Company.
The fee for these services will be based on a cost-plus 10% basis. The
transition services to be provided under this agreement may include accounting,
tax, finance and legal services, employee benefit services, information
services, management information systems and may include any other similar
services.
Preferred Supplier Agreement
The Company intends to enter into a preferred supplier agreement with
Weatherford pursuant to which Weatherford will agree for at least a three-year
period to purchase at least 70% of its requirements of drill stem products from
Grant Prideco. The price for those products will be at a price not greater than
that which the Company sells to its best similarly situated customers.
Weatherford will be entitled to apply against its purchases a drill stem credit
granted to it in the amount of $15 million, subject to a limitation of the
application of the credit to no more than 20% of any purchase.
16. SEGMENT INFORMATION
Business Segments
The Company operates through two business segments: Drill Stem Products and
Premium Tubulars and Engineered Connections. The drill stem products segment
manufactures drill pipe, drill collars and heavyweight drill pipe and the
premium tubulars and engineered connections segment manufactures premium
production tubulars, liners, casing and connections for marine conductors and
subsea structures. The Company's products are used in the exploration and
production of oil and natural gas.
Financial information by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS:
Drill Stem......................................... $142,732 $410,840 $333,716
Premium Tubulars................................... 143,638 235,614 296,305
-------- -------- --------
$286,370 $646,454 $630,021
======== ======== ========
</TABLE>
F-21
<PAGE> 86
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
EBITDA, BEFORE OTHER CHARGES(a):
Drill Stem(b)...................................... $ 16,639 $148,565 $105,604
Premium Tubulars................................... 5,359 44,716 48,938
Corporate.......................................... (15,044) (14,274) (12,055)
-------- -------- --------
$ 6,954 $179,007 $142,487
======== ======== ========
OTHER NONRECURRING CHARGES:
Drill Stem(c)...................................... $ 9,454 $ 34,950 $ --
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Drill Stem......................................... $ 15,119 $ 16,771 $ 13,685
Premium Tubulars................................... 14,301 13,309 12,518
Corporate.......................................... 1,094 1,093 848
-------- -------- --------
$ 30,514 $ 31,173 $ 27,051
======== ======== ========
EQUITY INCOME (LOSS) IN UNCONSOLIDATED AFFILIATES:
Drill Stem......................................... $ (419) $ 267 $ --
======== ======== ========
OPERATING INCOME (LOSS):
Drill Stem(c)...................................... $ (7,934) $ 96,844 $ 91,919
Premium Tubulars................................... (8,942) 31,407 36,420
Corporate.......................................... (16,138) (15,367) (12,903)
-------- -------- --------
$(33,014) $112,884 $115,436
======== ======== ========
CAPITAL EXPENDITURES FOR PROPERTY, PLANT AND
EQUIPMENT:
Drill Stem......................................... $ 12,127 $ 16,670 $ 19,956
Premium Tubulars................................... 6,716 20,698 14,468
Corporate.......................................... 203 734 389
-------- -------- --------
$ 19,046 $ 38,102 $ 34,813
======== ======== ========
NON-CASH PORTION OF OTHER NONRECURRING CHARGES:
Drill Stem......................................... $ 9,454 $ 30,500 $ --
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
TOTAL ASSETS(d)
Drill Stem......................................... $437,281 $457,709 $374,923
Premium Tubulars................................... 294,591 279,706 286,418
Corporate.......................................... 2,703 899 1,257
-------- -------- --------
$734,575 $738,314 $662,598
======== ======== ========
</TABLE>
- ---------------
(a) The Company evaluates performance and allocates resources based on EBITDA,
which is calculated as operating income (loss) adding back depreciation and
amortization, excluding the impact of other charges. Calculations of EBITDA
should not be viewed as a substitute to calculations under GAAP, in
particular operating income and net income. In addition, EBITDA
calculations by one company may not be comparable to another company.
F-22
<PAGE> 87
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Includes inventory write-downs of $28.5 million for the year ended December
31, 1998, which have been classified as cost of sales in the accompanying
Combined Statements of Operations.
(c) Includes a charge of $9.5 million relating to the decision to terminate our
manufacturing arrangement in India for the year ended December 31, 1999.
Includes $35.0 million of other charges relating to the reorganization and
rationalization of our business in light of our industry conditions for the
year ended December 31, 1998.
(d) Certain assets that are not directly attributable to a segment have been
allocated to the segments primarily based upon revenues generated.
Foreign Operations and Export Sales
Financial information by geographic segment for each of the three years
ended December 31, 1999 is summarized below. Revenues are attributable to
countries based on the location of the entity selling products. Long-lived
assets are long term assets excluding deferred tax assets.
<TABLE>
<CAPTION>
UNITED LATIN
STATES CANADA AMERICA OTHER TOTAL
-------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Revenues................................. $247,428 $15,610 $ 6,091 $17,241 $286,370
Long-lived assets........................ 331,813 17,663 83,269 27,085 459,830
1998
Revenues................................. $552,375 $31,925 $ 9,327 $52,827 $646,454
Long-lived assets........................ 276,374 18,399 76,559 16,686 388,018
1997
Revenues................................. $509,451 $45,080 $15,716 $59,774 $630,021
Long-lived assets........................ 228,754 19,713 44,399 18,487 311,353
</TABLE>
Major Customers and Credit Risk
Substantially all of the Company's customers are engaged in the exploration
and development of oil and gas reserves. The Company's drill pipe and related
products are sold primarily to rig contractors, operators and rental companies.
The Company's premium tubulars and connections are sold primarily to operators
and distributors. This concentration of customers may impact the Company's
overall exposure to credit risk, either positively or negatively, in that
customers may be similarly affected by changes in economic and industry
conditions. The Company performs ongoing credit evaluations of its customers and
does not generally require collateral in support of its trade receivables. The
Company maintains reserves for potential credit losses, and actual losses have
historically been within the Company's expectations. Foreign sales also present
various risks, including risks of war, civil disturbances and governmental
activities that may limit or disrupt markets, restrict the movement of funds or
result in the deprivation of contract rights or the taking of property without
fair consideration. Most of the Company's foreign sales, however, are to large
international companies or are secured by letter of credit or similar
arrangements.
In 1999, 1998 and 1997, there was no individual customer who accounted for
10% of combined revenues.
F-23
<PAGE> 88
GRANT PRIDECO
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tabulation sets forth unaudited quarterly financial data for
1999 and 1998.
<TABLE>
<CAPTION>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1999
Revenues............................ $ 81,303 $ 56,622 $ 58,851 $ 89,594 $286,370
Gross Profit........................ 11,359 7,284 456 5,002 24,101
Nonrecurring Charges................ -- -- -- 9,454(a) 9,454
Selling, General and
Administrative(b)................ 11,512 11,208 12,140 12,382 47,242
Operating (Loss).................... (153) (3,924) (11,684) (17,253)(a) (33,014)
Net (Loss).......................... (2,230) (4,727) (10,443) (16,111)(a) (33,511)
Pro Forma (Loss) Per Share(c)
Basic............................ (0.05) (0.10) (0.21) (0.29) (0.66)
Diluted.......................... (0.05) (0.10) (0.21) (0.29) (0.66)
1998
Revenues............................ $189,713 $172,002 $160,117 $124,622 $646,454
Gross Profit........................ 55,487 54,264(a) 47,893 8,776(a) 166,420
Selling, General and
Administrative(b)................ 11,292 11,039 12,174 12,848 47,353
Nonrecurring Charges................ -- 4,450(a) -- 2,000(a) 6,450
Operating Income (Loss)............. 44,195 38,775(a) 35,742 (5,828)(a) 112,884
Net Income (Loss)................... 25,496 23,832(a) 20,515 (4,123)(a) 65,720
Pro Forma Earnings (Loss) Per
Share(c)
Basic............................ 0.53 0.49 0.42 (0.08) 1.35
Diluted.......................... 0.52 0.49 0.42 (0.08) 1.34
</TABLE>
- ---------------
(a) The Company incurred $9.5 million of pre-tax nonrecurring charges, $6.1
million net of tax, in the fourth quarter of 1999 relating to the decision
to terminate our manufacturing arrangement in India. The Company incurred
$7.0 million and $28.0 million of pre-tax nonrecurring charges in the
second and fourth quarters of 1998, respectively. The effect of these
charges, net of tax, in the second and fourth quarters was $4.5 million and
$18.3 million, respectively. Of these charges, $2.5 million and $26.0
million related to the write-off of inventory in the second and fourth
quarters, respectively, and have been classified as cost of sales in the
accompanying Combined Statements of Operations.
(b) Includes Weatherford overhead charges of $250,000 in each of the quarters
ended March 31, 1999 and June 30, 1999, $500,000 in each of the quarters
ended September 30, 1999 and December 31, 1999 and $240,000 per quarter for
the year ended December 31, 1998, respectively.
(c) Pro forma earnings per share has been calculated using Grant Prideco's pro
forma basic and diluted weighted average shares outstanding for each of the
periods presented. Grant Prideco's pro forma basic weighted average shares
have been calculated by adjusting Weatherford's historical basic weighted
average shares outstanding for the applicable period to reflect the number
of Grant Prideco shares that would have been outstanding at the time
assuming the distribution of one share of Grant Prideco common stock for
each two shares of Weatherford common stock. Grant Prideco's pro forma
diluted weighted average shares reflect an estimate of the potential
dilutive effect of common stock equivalents. Such estimate is calculated
based on Weatherford's dilutive effect of stock options and restricted
stock divided by two. The effect of stock options and restricted stock is
not included in the diluted weighted average shares computation for periods
in which a loss occurs because to do so would have been anti-dilutive.
F-24
<PAGE> 89
SIGNATURE
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.
GRANT PRIDECO, INC.
By: /s/ FRANCES R. POWELL
----------------------------------
Frances R. Powell
Vice President and Chief Financial
Officer
Date: February 4, 2000
<PAGE> 90
EXHIBIT INDEX
<TABLE>
<C> <S>
*2.1 -- Form of Distribution Agreement, dated as of ,
2000, between Weatherford and Grant
*3.1 -- Form of Restated Certificate of Incorporation of Grant
*3.2 -- Form of Restated Bylaws of Grant
*4.1 -- Form of Subordinated Promissory Note to Weatherford
*10.1 -- Form of Distribution Agreement, dated as of ,
2000, between Weatherford and Grant (filed as Exhibit
2.1)
*10.2 -- Form of Tax Allocation Agreement, dated as of ,
2000, between Weatherford and Grant
*10.3 -- Form of Transition Services Agreement, dated as of
, 2000, between Weatherford and Grant
*10.4 -- Form of Preferred Supplier Agreement, dated as of
, 2000, between Weatherford and Grant
*10.5 -- Form of Grant Prideco, Inc. 1999 Employee Stock Option
and Restricted Stock Plan
*10.6 -- Form of Grant Prideco, Inc. 1999 Non-Employee Director
Stock Option Plan
*10.7 -- Form of Grant Prideco, Inc. Individual Stock Option
Agreement
*10.8 -- Form of Grant Prideco, Inc. Foreign Executive Deferred
Compensation Plan
*10.9 -- Form of Grant Prideco, Inc. Executive Deferred
Compensation Plan
*10.10 -- Form of Grant Prideco, Inc. Deferred Compensation Plan
for Non-Employee Directors
*10.11 -- Form of Grant Prideco, Inc. 401(k) Savings Plan
*10.12 -- Investment Agreement, dated as of April 29, 1999, by and
between Grant Prideco, Inc. and Voest-Alpine Schienen
GmbH & Co KG
*10.13 -- Operating Agreement, dated as of July 23, 1999, by and
between Grant Prideco, Inc. and Voest-Alpine Schienen
GmbH & Co KG
+*10.14 -- Supply Agreement, dated as of July 23, 1999, by and
between Voest-Alpine Stahlrohr Kindberg GmbH & Co KG and
Grant Prideco, Inc.
*10.15 -- Manufacturing and Sales Agreement, dated as of January 1,
1996, by and between Grant Prideco, S.A. and Oil Country
Tubular Limited
*10.16 -- Stock Purchase Agreement, dated as of June 19, 1998, by
and among Weatherford, Pridecomex Holding, S.A. de C.V.,
Tubos de Acero de Mexico S.A. and Tamsider S.A. de C.V.
+*10.17 -- Master Technology License Agreement, dated as of June 19,
1998, by and between Grant Prideco, Inc. and DST
Distributors of Steel Tubes Limited
*10.18 -- Agreement, dated as of November 12, 1998, by and between
Tubos de Acero de Mexico, Tamsider S.A. de C.V., DST
Distributors of Steel Tubes Limited, Techint Engineering
Company, Weatherford, Grant Prideco, Pridecomex Holding,
S.A. de C.V. and Grant Prideco, S.A. de C.V.
*10.19 -- Agreement, dated as of December 1, 1998, by and between
Tubos de Acero de Mexico, Tamsider S.A. de C.V.,
Weatherford and Pridecomex Holding, S.A. de C.V.
*21.1 -- List of Subsidiaries of Grant (giving effect to the
Spinoff)
27.1 -- Financial Data Schedule
27.2 -- Financial Data Schedule
27.3 -- Financial Data Schedule
27.4 -- Financial Data Schedule
</TABLE>
- ---------------
* previously filed
+ confidential treatment requested.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS 12-MOS 9-MOS 6-MOS
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<PERIOD-START> JAN-01-1999 JAN-01-1999 JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1999 MAR-31-1999 DEC-31-1998 SEP-30-1998 JUN-30-1998
<CASH> 1,201 4,795 6,070 4,907 8,463
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 79,531 97,715 129,385 152,093 162,391
<ALLOWANCES> 392 350 366 315 525
<INVENTORY> 181,800 189,343 186,267 241,090 224,262
<CURRENT-ASSETS> 280,192 308,710 350,296 421,909 416,833
<PP&E> 293,198 290,049 283,902 275,208 265,641
<DEPRECIATION> 86,906 80,938 74,908 78,893 72,685
<TOTAL-ASSETS> 675,523 697,660 738,314 764,156 760,604
<CURRENT-LIABILITIES> 73,408 70,951 144,268 130,040 157,409
<BONDS> 107,064 108,288 109,265 124,735 125,484
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 0 0 0 0
<OTHER-SE> 456,966 480,772 445,211 461,945 425,263
<TOTAL-LIABILITY-AND-EQUITY> 675,523 697,660 738,314 764,156 760,604
<SALES> 137,925 81,303 646,454 521,832 361,715
<TOTAL-REVENUES> 137,925 81,303 646,454 521,832 361,715
<CGS> 119,282 69,944 480,034 364,188 251,964
<TOTAL-COSTS> 119,282 69,944 480,034 364,188 251,964
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 5,389 2,652 12,008 9,121 6,150
<INCOME-PRETAX> (9,175) (2,707) 105,568 113,676 80,521
<INCOME-TAX> (2,218) (477) 39,848 43,833 31,193
<INCOME-CONTINUING> (6,957) (2,230) 65,720 69,843 49,328
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<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (6,957) (2,230) 65,720 69,843 49,328
<EPS-BASIC> (0.14) (0.05) 1.35 0.72 0.51
<EPS-DILUTED> (0.14) (0.05) 1.34 0.71 0.51
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<TABLE> <S> <C>
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<S> <C> <C> <C> <C> <C>
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<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 168,707 143,851 130,238 122,356 110,547
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<INVENTORY> 194,623 186,248 164,667 156,079 117,842
<CURRENT-ASSETS> 392,903 351,245 318,575 303,317 239,807
<PP&E> 262,047 254,482 249,423 211,787 163,697
<DEPRECIATION> 67,614 61,642 56,921 45,805 41,383
<TOTAL-ASSETS> 731,708 662,598 631,142 568,770 427,252
<CURRENT-LIABILITIES> 171,622 156,199 143,455 152,370 99,194
<BONDS> 126,230 127,387 138,204 112,160 103,236
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 0 0 0 0
<OTHER-SE> 377,397 332,722 314,203 269,859 195,090
<TOTAL-LIABILITY-AND-EQUITY> 731,708 662,598 631,142 568,770 427,252
<SALES> 189,713 630,021 454,479 286,388 126,532
<TOTAL-REVENUES> 189,713 630,021 454,479 286,388 126,532
<CGS> 134,226 471,779 347,238 224,438 96,447
<TOTAL-COSTS> 134,226 471,779 347,238 224,438 98,447
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 3,130 12,976 9,749 6,245 2,815
<INCOME-PRETAX> 41,665 102,064 67,528 36,779 19,546
<INCOME-TAX> 16,169 40,550 27,794 15,173 8,041
<INCOME-CONTINUING> 25,496 61,514 39,734 21,606 11,505
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 25,496 61,514 39,734 21,606 11,505
<EPS-BASIC> 0.53 1.28 0.83 0.45 0.24
<EPS-DILUTED> 0.52 1.26 0.82 0.45 0.24
<FN>
</FN>
</TABLE>
<TABLE> <S> <C>
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<CASH> 6,204
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<PP&E> 302,981
<DEPRECIATION> 93,345
<TOTAL-ASSETS> 734,575
<CURRENT-LIABILITIES> 107,401
<BONDS> 124,276
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 734,575
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<TOTAL-REVENUES> 286,370
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<TOTAL-COSTS> 262,269
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<INTEREST-EXPENSE> 11,343
<INCOME-PRETAX> (44,495)
<INCOME-TAX> (11,199)
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<NET-INCOME> (33,511)
<EPS-BASIC> (.66)
<EPS-DILUTED> (.66)
</TABLE>
<TABLE> <S> <C>
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<PERIOD-TYPE> 9-MOS
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<PERIOD-START> JAN-01-1999
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<PP&E> 305,615
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<BONDS> 126,499
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 720,097
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<TOTAL-REVENUES> 196,776
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</TABLE>
